The State of the Cuban Economy: Divergent Views of Economists From Inside Cuba

At thew recently concluded 20th Annual Meeting of the Association for the Study of the Cuban Economy, Joaquín Pujol reported  on the state of the Cuban Economy as seen by economists from within Cuba.  Joaquín Pujol, “Cuba at the Crossroads in the 21st. Century” The Cuban Economy as seen by economists within the island and other observers, paper presented at the ASCE Annual Meeting July 30, 2010, Miami, Florida. The paper is worth a careful read.  It suggests that Cuban economists, and importantly some close to the Cuban state apparatus, have begun to suggest the need for structural changes in the Cuban economy.  Here are some highlights:

Omar Everleny Pérez Villanueve, an economics professor at the University of La Habana and senior economist at the Center for the Study of the Cuban Economy in Havana, suggests that macro-economic trends since the start of the global financial crisis has"brought about serious macroeconomic imbalances." Pujol, supra.

According to him, the economy had shown a high rate of growth in the period 2001-2008 as a result of the income generated by the export of professional services-- especially of medical doctors, a recuperation of investment in construction and transportation, and a rise in energy production. The high rate of growth reported by the authorities (an average annual increase of around 6%) is a reflection of the new methodology adopted by the authorities to calculate the gross domestic product (Note: A methodology that is unique to Cuba and differs from the one used in the rest of the world. Cuba has not published details of how these estimates are made). For 2009 the growth of GDP, on this basis, is estimated at 1.4 %, and a similar or lower level is expected for 2010. (Pujol, supra).

Everleny criticizes the economic growth model grounded in the export and barter of labor services, which, he suggests, has reached a peak of development and will likely slow.  Id.  Moreover other industrial sectors have been unable to take advantage of markets  because of an inability to increase production.  Infrastructure investment is too costly given the priorities of the state in other sectors, and sugar has become an increasingly less significant sector of the economy. Id. "According to Everleny, Cuba must stop going from crisis to crisis, with solutions thought up on the spur of the moment, and advance towards a development strategy that includes a wide range of simultaneous measures, from monetary policy to those directly related to industrial and agricultural production."  Id.

Though Everleny did not, I note that over the last several months, it has been reported that despite Fidel Castro's opposition to ethanol, and an initial politically successful campaign against Brazil's focus on the use of sugar for the production of ethanol (see Larry Catá Backer, Fidel Castro, Hugo Chavez, and the Response to the U.S. Brazil Deal on Ethanol Production, Law at the End of the Day March 3, 2007)), the Cuban state is now in discussion with Brazilian producers for what may be a massive investment in Cuban sugar capacity for the production of ethanol for world markets.  Nicholas Elledge, Cuba's Sweet Success May Come from an Ethanol Future, The Cutting Edge, Nov. 2, 2009.  "There are insistent rumours that President Raúl Castro has invited Brazilian experts to consider the possibility of attracting investors from the South American largest economy and a world power in sugar cane production and bio-fuels from sugar cane." Cuba--Sugar Farms Open For Foreign Investment, Meat Trade Daily, May 16, 2010.

Armando Nova González "is a professor in the EconomicsDepartment and researcher at the Center for the Study of the Cuban Economy (Centro de Estudios de la Economía Cubana) at the University of Havana. A specialist in Cuban agricultural economics with a doctoral degree in economics from the University of Havana, Professor Nova has held posts in the Citrus Group of the Ministry of Agriculture and the Central Planning Board and the National Economy Research Institute." Pujol, supra. He suggests some substantial changes in the management of the agricultural sector. These include centralizing all agricultural supervision within a single ministry of agriculture, while reducing the scope of agricultural regulation, especially at the local level. He points to a system in which the state provides overall direction but permits substantial autonomy at the local level between producers and consumers. "Of course, the market cannot be left totally to its own devices, but should be regulated by means of economic mechanisms, so that the plan and the market are compatible. One of the measures being implemented that could lead to structural changes in agriculture is, in fact, the establishment of shops where small farmers can buy what they need directly, instead of having to use the centralized distribution system that has been in place. " Id.  He would also open the agricultiural sector to more foreign investment for the traditionally sound reason that this might serve as a method for technology transfer.

Pedro Monreal González, a professor and researcher at the Center for Research on the International Economy of the University of La Habana continues to assert that the Cuban economy requires a radical change in its current model of development.  Pujol, supra.  Like other economists within the Cuban academic sector, radical restructuring is based on notions of industrialization via export substitution, a traditional pre-globalization response of developing states to macro economic challenges.  Yet it is also a position that may operate in contra to Cuban state policy of global engagement via ALBA.  See Larry Catá Backer and Augusto Molina, Globalizing Cuba:  ALBA and the Construction of Socialist Global Trade Systems, Proceedings of the 19th Annual Meeting of the Association for the Study of the Cuban Economy, July 2009.  Monreal does suggest that both structural reforms (transformations that modify the organization of the economy) and economic reforms (changes that can be made within the existing framework) are both required.  Pujol, supra.

In his view, three fundamental structural reforms would have to be implemented to bring about the revitalization of the Cuban economy, (1) the introduction of pricing mechanisms that would allow a proper calculation of the costs and rates of returns of the activities so as to have an impact on the economic processes, (2) the adoption of appropriate incentives for the individuals and enterprises to be willing to carry on with the economic activities, and (3) the establishment of mechanisms that will help turn around situations to encourage innovations in its widest sense, so as to transform the existing disequilibrium into new opportunities that bring about a solution to the existing problems. (Pujol, supra).

These could take the form of monetary unification, exchange rate modification, restructuring of salary policies, elimination of subsidies in some sectors, creating incentives to increase labor productivity, and administrative reorganization.

Pavel Vidal Alejandro, another economics professor at the University of La Habana and a researcher at the Center for the Study of the Cuban Economy in Havana has focused on the banking and finance sectors.    He would see the state eliminate the dual currency system, the complications from working in multiple currencies with foreign investors and the imposition of a floating exchange rate.  He would see a return to the liberalization policies of the special period of the early 1990s and echoing Raúl Castro, would also advocate shrinking the size of the public sector to generate more productive economic activity.  He praises the direction of the reforms of Raúl Castro. "While these changes do not cover all the needed transformations and do not involve a substantial modification of the Cuban economic model, they merit to be pointed out. The main structural changes have been: a liberalization of certain types of individual consumptions, the turning over of the exploitation for some lands to private individuals and a certain liberalization of the labor market." Pujol, supra.  But he criticizes the speed of reform, and its reluctance to open the economy to private initiative and argues for greater foreign investment. 

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To American ears all of this might suggest a move toward political as well as structural readjustment, or even a suggestion of instability. But that ideologically motivated  analysis would be dangerously wrong.  What the reports do suggest is that, like the United States after 2007, national economists, faced with a financial crisis, have begun to discuss ways that the economy (and its direction) ought to be restructured within the confines of the political framework of the state.  There is as much revolutionary potential here as in the now successful proposals within the United States for the purchase of General Motors and AIG, or the massive transfer of public wealth to private banks, both radical departures from conventional American political-economics in their own right.   Understood in their own right, and within the political ideological framework from which they emerge,  these summaries do suggest the possibility for flexibility in the structuring of the Cuban economy going forward without triggering revolution.  For those who might think that economic restructuring is a golden road to political revolution in Cuba, these summaries serve as a reminder that it may well be possible for the structure of the Cuban economy to change, (like that of China  after 1979) and change substantially, without requiring radical changes to the political ideology of the state.   

This becomes less clear, though, when one considers the views of the Cuban independent economist Oscar Espinoza Chepe.  Ponencia enviada por el Lic Oscar Espinosa Chepe a la XX Conferencia de la Asociación para el estudio de la economía cubana celebrada en Miami, Florida los días 29, 30, 31 de agosto de 2010.   The view is substantially less circumspect than others within Cuba.  Chepe suggests that the current economic difficulties of Cuba and the reduction of the standard of living, are proof tof the failure of the economic model of the last fifty years  and perhaps the incentive necessary to produce a consensus for change ("Esta conferencia se efectúa en un momento crucial en la historia de nuestro país; cuando empeora drásticamente la situación económica, y en consecuencia el nivel de vida de la población, lo que ratifica el fracaso absoluto del modelo de desarrollo vigente durante más de 50 años. Quizás por ello, la conciencia ciudadana ha madurando considerablemente, y existe consenso sobre la necesidad de cambios para labrar una Cuba reconciliada y sin exclusiones. ").  Id. 

Chepe notes the levels of reductions in domestic output with scarcity in the agricultural sector, a 21% drop in exports,  a drop in sugar production, a large drop in the production of extractables, and a small rise in electric production. Id.  He questions the official reports of an increase in agricultural production, transport, communications and tourism, and an unemployment figure of 1.7%. Id.  With respect to unemployment, Chepe suggested that taking Raúl Castro at his word in public remarks, the real unemployment rate is likely closer to 20%.  Id. ("cuando en abril pasado el presidente Raúl Castro anunció que sobra más de un millón de trabajadores, lo que sobrepasa el 20,0% de la fuerza de trabajo ocupada (5,1 millones de trabajadores)." Id.).

These diminished performance indicators then suggest the implausibility of real growth in the state service sector, a significantly important political sector for Cuban foreign policy. Thus:

Iguales dudas surgen con los incrementos reportados en varios servicios, en particular Ciencia e Innovación Tecnológica (10,7%), Educación (1,5%) y Salud Pública y Asistencia Social (3,4%), ya de por sí sobrevaluados por una metodología distinta a la establecida por los organismos internacionales. Esos sectores deben haber sido muy golpeados por la falta de recursos energéticos e insumos, en particular materias primas para la producción de medicamentos, y en la educación por la nueva política de reducir drásticamente las escuelas internas en el campo. Id.

On the other hand, the exportation of services, a critical component of Cuba's global engagement through ALBAa, increased slightly by 4.6%.  Id. ("Como se conoce, juega un papel decisivo la exportación de fuerza de trabajo calificada, fundamentalmente médicos y personal paramédico a Venezuela, lo que podría modificarse negativamente en cualquier momento, dada la delicada situación política allí." Id.).  Yet, Chepe also worries about Venezuela's situation, since its support is vital to the Cuban economy.  Id.  ("A todo lo anterior se añade una gran incertidumbre sobre la situación en Venezuela, envuelta en serias dificultades económicas y políticas, lo que podría incidir negativamente en la estratégica colaboración bilateral, de la cual depende la economía cubana." Id.).

But the unemployment and exportation of services sectors must be understood within a potentially disastrous demographic profile.  Cuba's population, like that of many advance states, is aging.  And its productive population is seeking to maximize individual welfare by emigrating.  The resulting pressure on services provision supported by a shrinking working age population could be challenging, though that challenge may be masked by employing some of the 20% of able bodied workers currently un- or under-employed.  Id.  Yet because of low productivity, among the lowest reported globally according to Chepe, even this may not be enough.  Id.  Despite a reported population increase in 2009, long term trends point downward.  Id.  It is no surprise, then, that the funds devoted to pensions has increased, though the government has taken steps to reduce the rate of increase by, among other things, increasing the age of retirement to 65 years for men and 60 for women.  Id.   But these palliatives only delays the inevitable--the need to increase productivity and economic activity among the masses.  Id. ("La verdadera solución estaría en crear las condiciones para lograr la elevación de los niveles de productividad y liberar la creatividad de los ciudadanos, pero actualmente resulta imposible debido a la falta de estímulos laborales, en especial los bajos salarios. " Id.).  Chepe suggests the need for a reorganization of the labor sector, not merely to augment productivity but to reduce corruption.  Id.   Corruption has increased disrespect for law and authority and permeated all levels of society.  Id.  ("Ya los robos no se limitan a los almacenes, las empresas y las unidades presupuestadas; los hurtos se realizan en las torres de transmisión eléctrica, donde son sustraídos los perfiles, con peligro de derrumbe de las misma; traviesas y raíles de las líneas de ferrocarril, bancos para sentarse y otros elementos de las paradas de los ómnibus y el no pago en ellos, y así sucesivamente sin excluir sonados escándalos que involucran a altas esferas del gobierno, como sucedió recientemente con la empresa Río Zaza sobre lo cual el gobierno no ha dado todavía explicaciones." Id.).

Balance of payments and Cuba's external debt remain objects of grave concern. Cuba has frozen the repatriation of foreign accounts in Cuban banks causing some difficulties.  In any case, foreign investment continued to suffer reductions, a trend commencing in 2008.  Cuba's foreign debt conceivably places it among the most indebted states.  It is not surprising that Cuba remains a strong advocate of sovereign repudiation.  See Larry Catá Backer, Odious Debt Wears Two Faces: Systemic Illegitimacy, Problems and Opportunities in Traditional Odious Debt Conceptions in Globalized Economic Regimes, Duke Law School, Law & Contemporary Problems, Vol. 70, 2007.  Larry Catá Backer, Ideologies of Globalization and Sovereign Debt: Cuba and the IMF, Pennsylvania State International Law Review, Vol. 24, 2006.   Balance of payments and external debt problems are magnified by internal economic contraction, with a 21.4% reduction in exports and a 37.4% reduction in imports.  Chepe, supra.  Chepes suggests that the economic situation will not improve in 2010.  

And the solution?  Substantial economic changes as the first step in a transformation of the Cuban state with a movement toward greater toleration of ideological differences.

Somos de la opinión que las reformas en una primera etapa tendrían un peso económico fuerte, pero no podrán dejar a un lado cuestiones políticas esenciales como la liberación total de los presos políticos pacíficos, el cese de la represión a los opositores/disidentes, y la ratificación de los Pactos de Derechos Políticos y Civiles, y de Derecho Económico, Social y Cultural, así como debe eliminarse la absurda prohibición de que los cubanos podamos viajar sin restricciones al exterior y regresar a voluntad, sin olvidar el derecho a la información –incluido el acceso a Internet- y de emitir libremente opiniones. Id.

Though these changes ought to be internally driven--no outside interference, Chepe concedes the importance of international solidarity, especially among Cubans living abroad.  Id. And the Embargo must end.  Id.  

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Two distinct economic visions have been presented.  One tends to separate the economic problems faced by Cuba from reform of the political sectors.  The other suggests an inevitable conflation of politics and economics.  Each of these perspectives is ideologically packed.  But that is to be expected.  But they are not irreconcilable. Both views share important points of commonality.  Foremost is a distinct distaste for outside interference in the pace and outcomes of change.  While external solidarity is important, projections of power from abroad and the reconstruction of Cuban economic and political life to suit the policy needs of any other state (and not just the United States in this case) are likely to more deeply entrench political and economic inflexibility that will do neither the Cuban state apparatus or its people any good.  Second is the need for substantial economic restructuring.  Labor markets reforms, foreign investments, devolution of authority to engage in economic activities, real rises in productivity and a great fear of the corrosive effects of corruption  are shared. The difference is in the ends of such restructuring.  For some that leads inevitably to political change--a view belied by the possibility of substantial economic change without political revolution in China and Viet-Nam, but supported by the histories of post Soviet Eastern Europe.  For others, economic and political flexibility might be achieved without replacing the current state apparatus or the fundamental principles on whcih it is ordered.   Yet Marxist Leninist states can also take a variety of forms and retain the core of their ideological basis.  While the mixture of views is combustible, it need not be.