CUBA’S ECONOMIC CONUNDRUM
Cuba’s slow recovery from an economic crisis in which living standards have become more austere than at any time in the revolution’s 36-year history was based on the introduction of significant elements of capitalism. The social and political consequences of this remain unclear.
By Manuel Pastor and Andrew Zimbalist
Strawberry and Chocolate, Cuba’s official entrant in the 1995 Academy Awards, tells the story of a militant young Communist and his emerging friendship with a counterrevolutionary gay artist who longs to leave the island. When we saw the film debut in Cuba in December, 1993, there were two noteworthy moments of audience reaction. One occurred at the end of the film when the two men embraced. This drew what was at first a hesitant, then a thundering ovation in apparent recognition of the complex contradictions of Cuban contemporary life and the need to move past rigid socialist dogma regarding homosexuality, the desire to leave the country, and the unquestioned authority of party precepts and officials. The second moving moment for the audience occurred earlier in the film when the gay would-be emigrant served the militant Communist and a female friend a steaming hot roast turkey. During the last several years of austerity, few Cubans in the audience had seen such a feast, and the applause was of longing as well as of envy.
The two points of profound audience contact with the film-around change and around food-suggest the most basic elements of contemporary Cuban life. With a dramatically shrunken level of output and skyrocketing underemployment, Cuban living standards are more austere than at any time in the revolution’s 36-year history. The mass exodus of the summer of 1994 reflected the difficulties many Cubans have increasingly encountered in making ends meet in the wake of collapsed Soviet support. At the same time, Cuba has finally begun a process of economic reform which portends a transition to a very different system. The leadership has gone far beyond its early phase of cautiously courting foreign private investment. The holding of dollars by Cuban citizens has been decriminalized, state farms have been turned into cooperatives, the legal space for self-employment has been expanded, and agricultural commodities are being sold in markets where demand and supply, rather than a govemment plan, set the price. There is now an acceptance of significant elements of capitalism, with political and economic consequences that remain unclear.
The current crisis in Cuba was triggered by trade shocks from the fall of the Soviet Union and the earlier dismembering of the socialist trading system. While the Cuban revolution had been successful at attaining high health and educational standards, the economy remained nearly as dependent externally as it was prior to 1959. Between 1984 and 1989, 77% of exports were attributable to a single commodity, sugar, and nearly 70% of import-export trade was with a single country, the Soviet Union.[1]
This trade structure, particularly the relationship with the Soviet Union, had helped to shield Cuba from the macroeconomic shocks that had buffeted much of Latin America in the early 1980s. While Latin America as a whole managed to grow by less than one percent a year from 1982 to 1985, the Cuban economy expanded at a healthy 5.1% annual clip.[2] In contrast to the rest of the region, Cuba’s export markets were guaranteed by bilateral (often barter) contracts; the terms of trade, especially the relative prices of sugar and oil, were tilted in Cuba’s favor; and any trade deficit Cuba experienced with the Soviet Union was subject to a ruble-financing mechanism that essentially let the country run persistent deficits (and pile unpayable debt on unpayable debt). Adding up just the terms of trade and deficit-financing mechanisms, Soviet subsidies amounted to about 22% of Cuban disposable income between 1980 and 1987.[3]
The disappearance of Soviet largesse and the general collapse of the socialist trading system were particularly important because the revolution had also failed to alter another characteristic typical of a developing economy: the heavy reliance on imported capital goods and intermediate goods-like oil-for which there were few domestic substitutes. In such an economy, both long-run and short-run growth are largely determined by the ability to obtain such key imports. Thus, it was especially problematic when Cuba found its import bill shrink by over 70% between 1989 and 1993, a trend provoked by both the nearly 70% fall in exports and the decision of the Soviet Union to stop automatically covering Cuban trade deficits. Despite strenuous efforts to conserve on import use in order to protect production levels, Cuban national output still fell by more than 50% over the period.
Between 1989 and 1993, the Cuban government responded to the macroeconomic crisis with what might be termed a sectoral strategy. It sought to raise import capacity and hence restore growth by earning foreign exchange in an expanded tourism industry, and by promoting biotechnological exports. The government also tried to move the country closer to agricultural self-sufficiency in order to limit food imports, thus saving foreign exchange for more critical capital and intermediate goods. To that end, the government invested in irrigation, expanded import-substituting agriculture, and used “mobilized” urban labor in the countryside. The country also relaxed restrictions on foreign investment, hoping to both relieve the short-term foreign-exchange shortage and stir long-term growth.
Each strategy has proved problematic. While the total value of biotechnology and pharmaceutical exports, now approaching $200 million, is officially projected to rise to a billion dollars or more by decade’s end, this would be a lengthy process and would still not be enough to lift Cuba out of its economic doldrums. Moreover, biotech’s potential to solve the external constraint is limited both because it is a big consumer of foreign exchange and because of the market power of competitive multinational pharmaceutical companies.[4] Food self-sufficiency was an unrealistic dream, particularly given the failure until recently to alter ownership patterns and hence the material incentives for increasing domestic output. In addition, even an optimistic projection of agricultural growth would allow the country to recover no more than 5% of the 1989 import capacity.[5] Tourism did grow steadily, with gross revenues rising from $165 million in 1989 to over $850 million in 1994.[6] But the industry also has a high import content, and the reappearance of privileged foreigners and hungry Cubans has aggravated political contradictions and tensions.
As for the attempt to encourage foreign investors, the government reported over 150 foreign-Cuban joint ventures by late 1994, comprising over $1.5 billion in value. The most spectacular investments have come from the United States’ NAFTA partner, Mexico, including the sale of 49% of the country’s telephone system to Grupo-Domos from Monterrey.[7] Still, the bulk of the activity has been in tourism, often with risk-driven rates of return that allowed foreigners to recoup their entire investment in less than three years. And since investors naturally wish to extract these extraordinary profits in dollars, the foreign-exchange relief has been less than needed. Foreign investment, in short, has so far been unable to reactivate the economy.
Hanging like a black cloud over the adjustment process has been the U.S. trade embargo which was initially imposed in 1960, then tightened in 1962 to include the barring of trade in food and medicine and the denial of aid to any country trading with Cuba. The so-called Cuban Democracy Act of 1992 took an already extreme U.S. policy and cranked it up a notch. The trade embargo was extended to overseas subsidiaries of U.S. firms which accounted for about 18% of Cuba’s 1992 hard-cuffency imports. Further, ships that had docked in Cuba in the previous six months were banned from U.S. ports. Cuba has therefore been unable to tap its natural market for both exports and tourists. A reputable estimate by one Cuban economist suggests that non-enforcement of the 1992 act and just a partial lifting of the embargo could quickly produce a doubling of import capacity and a 25% hike in Cuban national income.[8] Such a shift toward moderation in U.S. Cuba policy, however, seems to have been foreclosed both by the Clinton Administration and by Republicans in Congress.
Meanwhile, the last two years have brought substantial and often unnoticed policy changes in Cuba. Starting in 1993, the government began to back off from its combination of sectoral strategies and purist politics. The main themes of change have involved introducing more market mechanisms and fashioning institutions that resemble private property. For example, recognizing the effective importance of the U.S. greenback, particularly in the active black markets for goods unavailable in state-owned stores, the Cuban government depenalized the use of the U.S. dollar in the summer of 1993 and set up a series of parallel shops where local Cubans could buy imported consumer goods. The resulting influx of family remittances to support austerity-burdened Cubans was one reason the United States chose to cut off this flow of cash as part of its response to the “refugee crisis” of 1994.[9]
In addition, two significant measures intended to tap private initiative were introduced in 1994. Most state farms were transformed into worker-run cooperatives; while the property is still formally in state hands, use rights were deeded permanently to the coops. Restrictions on self-employment were also eased. While a variety of professionals, such as doctors, were prevented from striking out on their own, many urban workers displaced by the crisis were given the opportunity to sell their services, and some even managed to hire others by charging them a nominal fee to be part of a “self-employment coop.” Most recently, the government, once again acknowledging black-market activity, lifted restrictions and permitted small family-run restaurants.
The most politically sensitive and significant move came in late 1994 with the resurrection of farmers’ markets which allowed agricultural producers to sell food-stuffs at unregulated prices. These markets were first introduced in the early 1980s, then banned in 1986. when the Cuban leadership, especially President Fidel Castro, began to express concerns about profiteering. To reverse course once again and permit the reintroduction of markets took significant persuasion, including a lengthy experiment in which certain key cities, including Matanzas, first tried out the markets with great consumer enthusiasm. The national spread of such markets has been a resounding success, reflected in part by the tripling in the black-market value of the Cuban peso as the local currency suddenly found a new use-the purchase of previously non-available foodstuffs.
In most capitalist-oriented developing economics, the output shortfalls that have marked Cuba’s last five years would have provoked an acceleration of inflation. This, in turn, would have redistributed income away from the working class, and consequently dampened real demand to the appropriate market-clearing level. In Cuba, however, prices for the most part were fixed while goods remained unavailable; consumers instead accumulated cash. The state fueled the problem by running deficits on the order of 30% of GDP and printing money to cover the revenue shortfall. By late 1994, the unspent cash in people’s hands and in the banking system-the monetary overhang-amounted to nearly 100% ot national income.[10]
This monetary overhang has frightened Cuban authorities away from one policy often considered helpful in the reform of stagnant socialist economies: price liberalization. In the current context, a lifting of controls could trigger a skyrocketing of domestic prices and risk the sort of hyperinflation that has characterized the transitions in much of Eastern Europe. The farmers’ markets have helped alleviate the pressure (and make price liberalization more feasible) by sopping up part of the excess currency. The markets also prompted the previously noted improvement in the black-market value of the peso.
In addition, the state has begun to take action to correct its own finances in order to limit the new monetary growth that could fuel future inflation. New taxes, reduced subsidies to money-losing state firms, and the increase of certain key state prices allowed the government to shrink the fiscal deficit by a reported 60% between 1993 and 1994. The 1995 deficit is projected to shrink further, and the new finance minister seems quite cognizant of the threats posed by both runaway spending and the monetary overhang.
Deficit reduction, particularly when pursued by decreasing subsidies to firms, has another productive benefit. One key problem with socialist economic orga nization is that many firms face “soft” budget constraints. If costs exceed revenues, the firm simply pleads with the state for compensatory financing. Market discipline, in contrast, forces firms to be profitable and hence to improve efficiency and lower costs. In socialist societies, the market analog is a “hard” budget constraint. If costs continually exceed revenues, the firm’s managers are fired and the enterprise may be disbanded. With the current austerity, budgets are harder and efficiency may be slowly improving in the surviving state enterprises.
In any case, the economy seems to have finally bottomed out. Despite a record-low sugar harvest this year, there has been a recovery in world prices for Cuban sugar and nickel, and 1995 is likely to bring a modest uptick in economic activity. The economic and social damage wrought by the transformation is, however, profound. The much-heralded health and education systems have lost considerable resources and can no longer provide the services they once did. Meanwhile, the market has brought its usual fellow travelers to Cuba: widening inequalities, growing underemployment and unemployment, increasing crime, and the reemergence of prostitution as a state-tolerated activity for the tourist trade. This sort of recovery is hardly the vision of development the Cuban revolution had in mind either in 1959 or in the ensuing three decades.
If the economy is finally growing, where eventually will it head? Is the emergence of freer markets, hard budget constraints, and embryonic forms of private property inexorably pointing the way to a refashioned capitalism–or are these phenomena temporary detours undertaken simply to adjust to external realities? And what are the political implications of any new economic strategy for the political hold of the Communist Party?
While the nascent reforms described above are certainly important, they resemble the first time a sprout, someday to be a tree, bursts through the soil. Their significance lies in that they may signal measures yet to come. Such measures, however, could be derailed. The Cuban leadership, especially the key figure of Fidel Castro, has only grudgingly adopted the market and sometimes seems to be pining away for another Soviet oil-daddy to prop up the sagging system. Younger professionals, trained in the universities and enterprises of the revolution, are firmly committed to the idea of an extensive social safety net but are clearly in favor of both a further tilt to the market and a loosening of political control.[11] Workers, exhausted by the austerity and teased by the dollar shops and tourist lifestyle, simply long for anything that would reanimate the economy.
The reluctance of the older leadership to truly accept change-and their continued prominence in top positions of power- has made it more difficult for the so-called new professionals to fully articulate an alternalive vision for Cuba. Since the measures being implemented do not necessarily point to a final goal, policies often seem contradictory and half-hearted. To paraphrase the Cheshire Cat in Alice in Wonderland, when you don’t know where you’re going, then it doesn’t much matter which way you go.
As it is, the current strategy seems to be an attempt to echo China’s path of economic liberalization unaccompanied by the democratization of political life. The China parallel, however. should offer little comfort to any personnel hoping to retain power. Not only were the Chinese far more committed to, and conscious of, their marketizing route, but the country’s sheer size and importance in the world economy induced the United States to look past any grievances or human rights violations in order to grant it most-favored-nation status in bilateral trade. In contrast , Cuba is less sure of its direction, and U.S. policy remains largely sensitive to the preferences of the emigré community, the most powerful elements of which are bitterly opposed to any U.S.-Cuban reapprochement as long as Castro remains in power.
Where then will Cuba head? Socialist retrenchment seems unlikely; once market incentives are introduced, it is hard to turn back. One possible strategy could center on a fuller commitment to the privatization of state property, with various stages which would first expand the realm of self-employed firms, then eventually open up a process of devolving state assets to private citizens. Such an approach could reinforce the power of island residents by giving them a property claim prior to any subsequent involvement by Miami-based investors. It also could reactivate production through the usual mechanisms of the profit motive as well as help to eliminate the monetary overhang by allowing the state to trade its property for pesos and then retire the cash. Finally, it could be done in an equitable manner if both workers and non-working citizens were provided with vouchers entitling them to a share of the privatized holdings, and if some of the proceeds were used to reverse the real social-spending cuts that have accompanied the crisis.[13]
This sort of plan would, however, reflect a somber acceptance of the reality that Cuba’s traditional model of socialism is essentially unviable in the current international economy. With Miami pressing, the United States blockading, and Castro backpedaling, such a complete shift in Cuban economic policy would be extremely difficult. As a result, the future for Cuba’s people-squeezed by austerity, their hopes dashed by the seemingly immovable political and external situation-remains unclear.
In Strawberry and Chocolate, the systemic critique is both subtle and bold. Using homosexuality as a metaphor for what cannot be accepted, the film seems to satirize the rigidity of party officials. A local party leader who encourages the young militant to form a friendship with the gay would-be emigrant in order to report on any counterrevolutionary plans is portrayed as a buffoon. The young militant, defending his friend, eventually pushes the party official down a flight of stairs and into the worn-out streets of Old Havana. When the film ended with an embrace that seemed to reach across the divides of Cuban society-straight and gay, party and dissident, state and market-a young Cuban economist turned to us and said: “See, everything has changed here. Everything is possible.”
He was referring not just to the cultural scene but also to the economy. Certainly, changes in the structure of property and the role of markets are far more dramatic than is generally acknowledged by Washington or Miami. Yet unless the speed of adjustment can be accelerated and the scope of reform generalized, Cuban society-celebrated by the left for its impressive progress in social welfare, denigrated by the right for its rejection of dependent capitalism-will continue a process of drift that merely contributes to a long-term unraveling of the potential of the country. The time for a clearer path of transition is now. Progressives should understand the failures of the past and the challenges of the present even as they attempt to combat the U.S. embargo and to maintain the political space for a more socially oriented form of development in Latin America.
ABOUT THE AUTHORS
Manuel Pastor, Jr. teaches economics and is director of the International and Public Affairs Center at Occidental College in Los Angeles. Andrew Zimbalist teaches economics at Smith College and has written extensively on the Cuban economy.
NOTES
1 . The figure 77% is based on the inflated prices paid for Cuban sugar by the former Soviet Union. At market prices, the share of sugar in Cuban exports would fall to 6065%, depending on the weighting scheme employed. See Andrew Zimbalist and Claus Brundenrus, The Cuban Economy. Measurement and Analysis of Socialist Performance (Baltimore, Johns Hopkins Press, 1989), pp. 144150. Data on the composition of trade and the degree of trade with the Soviet Union is taken from Anuario Estadístico de Cuba, 1989, the last data yearbook released by Cuban authorities. The product-by-product dependence of Cuba on the Soviet Union is even more striking. Rodríguez reports that 100% of Cuban wood, cotton, and wheat imports, 99% of oil imports, and 80% of fertilizer imports came from the Soviets. See José Luís Rodríguez, “La Economía Cubana Ante on Mundo Cambiante,” paper presented to the XVI Congress of Caribbean Studies (Havana, May, 1991), pp. 14-15. For general reviews of the reliability of Cuban data, see Jorge F. Pérez-López, “Bringing the Cuban Economy into Focus: Conceptual and Empirical Challenges,” Latin American Research Review, Vol. 26, No. 3 (Summer, 1991), pp. 7-53; and Andrew Zimbalist “Cuba’s Statistical and Price Systems: Interpretation and Reliability,” Latin American Perspectives, Vol. 15, No. 2 (Spring, 1988), pp. 31-49
2. Data on Latin American growth is from the IMF World Economic Outlook (Washington, DC: International Monetary Fund, 1987); data on Cuban growth is from Anuario Estadístico de Cuba, ?989
3. There has long been a debate about whether Soviet help constituted a subsidy and how one might calculate that. Numerous points by Cuban economists in this regard are meritorious: using world sugar prices to calculate a “Subsidy” is problematic since almost all other countries have bilateral arrangements for sugar with above-market prices; the Soviets benefited by having a guaranteed market for overpriced industrial commodities of sometimes dubious quality, and perhaps any subsidy is simply the “just” transfer of aid from North to South. Be that as it may, calculating the extent of the shock requires the use of world prices as a benchmark. See the argument in Andrew Zimbalist, “Teetering on the Brink: Cuba’s Post-CMEA Economic and Political Crisis,” Journal of Latin American Studies, Vol. 24 (May, 1992), pp. 407-418. However, we have taken some of the Cuban argument into account and corrected for Soviet overpricing following A.R.M Ritter, “The Cuban Economy in the 1990s. External Challenges and Policy Imperatives,” Journal of Inter-Amencan Studies and World Affairs, Vol. 32 (Fall, 1990), pp. 117-149.
4. For a detailed study of the biotechnology industry, see Julie M. Feinsilver, “Will Cuba’s Wonder Drugs Lead to Political and Economic Wonders? Capitalizing on Biotechnology and Medical Exports,” Cuban Studies, No. 22, (1992), pp. 79-114. Mesa-Lago reports that biotechnology only employed 400 workers in 1990, suggesting that the direct employment impacts of a biotechnology-export drive might also be limited. See Carmelo Mesa-Lago, “The Social Safety Net in the Two Transitions,” in Transition in Cuba: New Challenges for US Policy (Miami Cuban Research Institute, Latin American and Caribbean Center, Florida International University, 1993). In Cuba After Communism (Cambriclge, MA: MIT Press, 1992), Eliana Cardoso and Ann Helwege make much of the possible reactions to a Cuban expansion on the part of multinational pharmaceutical companies, arguing that the market might be limited by this competitive response.
5. See Carmen Diana Deere, “Cuba’s Struggle for SelfSufficiency”, Monthly Review, July/August, 1991, pp 55-73. Since food imports constituted only about 10% of total imports between 1984 and 1989, even an excessively optimistic 50% curtailment in such imports would at best restore only 5% of the country’s overall 1989 import capacity. Figures on food and live-animal imports are taken from Anuario Estadístico de Cuba, 1989, pp. 274-275. For a critical analysis of the Food Program, see Carmelo Mega-Lago, “Cuba’s Economic Policies and Strategies for Confronting the Crisis,” in Carmelo Mesa-Lago, ad., Cuba After The Cold War (Pittsburgh: University of Pittsburgh Press, 1993).
6.The Cuban government projects that gross revenues from tourism will rise to over $1 billion in 1995.
7. See “Garza’s Cuba Venture,” Financial Times, May 7, 1994; “Mexico Plays Growing Role in Helping Cuba Withstand U.S. Trade Embargo,” The Wall Street Journal, August 3, 1994. “Fidel’s End Run Around Uncle Sam,” Business Week, May 9, 1994, p. 47; and “Let’s Make a Deal,” Maclean’s, May 23, 1994, pp. 22-21.
8. See Elena C. Alvarez, “Algonos Escenancs Sobre la Evolución Futura del Bloqueo,” paper presented at XVIII Congress of the Latin American Studies Association (Atlanta, March, 1994), p. 36.
9. Sep MesaLago, “Cuba: Under the Dollar Sign,” Newsletter of the Association for the Study of the Cuban Economy (December, 1993) for a discussion of this strategy of depenalization and the loosening of restraints on dollar remittances. For information on the emergence of dollar shops for Cubans, see Joel Millman, “Fidel’s New Friends,” Forbes, February 28, 1994, pp. 66-68. The stores, called diplotiendas, also attract informal service businesses such as taxis, bicycle parking, and fast food.
10. Roughly 60% of peso balances are deposited in savings accounts with the rest held as cash by the population. For a discussion of state finances, see Elena C. Alvarez, “Alguncs Escenarias Sabre la Evolución Futura del Bloqueo.”
11. These new professionals do share the leadership’s worry that a real capitalist model would have unacceptable developmental and distributional outcomes, but simultaneously lean toward d “mixed” approach that would take on market and property characteristics quite distinct from that of traditional Cuban socialism. This characterization of their approach is based both on our own interviews and contacts, and those of others, including Carmelo Mesa-Lago, “Cuba’s Economic Policies and Strategies for Confronting the Crisis,” in Carmelo Mesa-Lago, ed., Cuba After The Cold War (Pittsburgh University of Pittsburgh Press, 1993), pp. 244-245.
12. For a fuller detailing of such an alternative, see Manuel Pastor and Andrew Zimbalist, “Waiting for Change: Adjustment and Reform in Cuba,” World Development, Vol. 23, No. 5 (May, 1995).
