Last summer, the Havana airport buzzed with traffic. Caracas had become the most connected city to Havana, with Venezuela quickly becoming one of the top senders of travelers to the island. Most of the Venezuelans arriving at the airport came to the island seeking medical attention; in the opposite direction, thousands of Cuban doctors were leaving for Venezuela. The scene signaled a new pattern of Cuba’s participation in the global economy.
Cuba’s main airport had quickly gone from being the port of entry for Europe and Canada’s sand-and-sun enthusiasts to becoming the country’s veritable hospital waiting room. Several tourist establishments began housing medical patients from Venezuela and other Latin American and Caribbean countries, while thousands of young Cubans were finding new jobs in the healthcare sector. The traditional tourist industry still remained the primary source of exchange, but it was increasingly evident that Cuba’s “professional services”—mostly in healthcare—might soon become the island’s top export activity.
This marks an important shift from just 15 years before. In 1990, the island was an exporter of sugar, minerals, other primary resources and semi-processed goods, as it had been for most of the century. But by the latter half of the 1990s, a large part of the island’s economy rested on export services in tourism. Now, the Cuban economy is undergoing yet another transformation, favoring export services with the intensive use of the island’s wealth of human capital. Among many potential explanations for this last shift, two undoubtedly stand out: a half-century of successful programs geared at the creation of human capital; and the mutually beneficial agreements between Cuba and Venezuela—which I call “the Bolivarian Matrix.”
Though it has yet to cover the totality of the two countries’ economic integration, the Bolivarian Alternative for the Americas (ALBA) is conceived as a much larger process of alternative integration for Latin America and the Caribbean, towards which it could continue to evolve. To this end, the ALBA has taken notable strides with specific, complementary advancements through the PetroCaribe and PetroSur energy agreements, the TeleSur television channel as well as programs for extending medical assistance to the poor citizens of a growing list of countries [see “Cuba’s Foreign Policy and the Promise of ALBA”].1 The Bolivarian Matrix has already made significant changes in Cuba’s international insertion, with tangible results in economic growth as well as a gamut of other economic indicators—national disposable income, balance of trade, balance of payments, foreign exchange reserves and others.
Indeed, despite record energy prices, the impact of various hurricanes, a prolonged drought and the tightening economic blockade by the U.S. government, the Cuban economy’s recovery is in full swing. Official Cuban figures, which generously calculate the impact of social services, project a 9% growth rate for 2005. And using the more conservative metrics applied by the UN’s Economic Commission on Latin America and the Caribbean (ECLAC), the growth rate would still be a healthy 5%.2
However, the economic recovery must be understood keeping in mind at least three notes of caution. First, the recovery has not—at least, not yet—completely overcome the hurdles created by the crisis of the early 1990s: the population’s relative consumption levels remain depressed, while the state of the country’s productive sectors is still deplorable. Second, the current recovery is a starting point, but is not in itself sufficient for steering the country toward the path of economic development and massive socioeconomic transformation that it needs. And last, economic reactivations—like any growth process in an underdeveloped country—are always subject to the vicissitudes of external dynamics and actors.
Despite these weaknesses, the upturn in the economic cycle registered in 2004 and especially in 2005 has had immediate impacts. The recovery’s recent acceleration—in good part courtesy of the Bolivarian Matrix—has allowed for the expansion of a series of social programs, particularly in the areas of education, health, housing, employment and social security. Many of these programs existed as part of the government’s “heterodox policies of social expenditures under conditions of restricted finances” (the phrase preferred by Cuban planning ministry officials) enacted during the most acute moments of economic crisis since the collapse of Communism in Europe. Nonetheless, it is beyond question that the Bolivarian Matrix has been the single most important factor leading to the Cuban government’s recently flourishing social programs.
Broadly speaking, the bolivarian matrix is cuba’s current vehicle for a “pro-development” pattern of international insertion. In past decades, the island’s foreign economic relations were largely based on the understanding that direct international involvement in world capitalist markets was a fundamentally precarious endeavor. In certain periods, as during the “Five-Year Plans” of the 1970s and 1980s, Cuba was relatively successful at maneuvering the international context in a way that facilitated its development. But with the collapse of the Soviet Union and accelerated globalization of the 1990s, direct international engagement became no longer an option, but a necessity.
What kind of long-term pro-development strategies, then, would suit Cuba’s particular form of underdevelopment? Cuba is in many ways a typical export economy—highly specialized in producing commodities for foreign markets, leaving only a tiny portion of production to be directed at internal markets. (Beach tourism can be considered a kind of commodity that fits this pattern.) Such excessive specialization impedes the diversification of production, sapping the country of its ability to supply its own capital goods—the machinery or tools, for example, or other things used to make more valuable, exportable products. Without a productive sector of capital goods, internal savings don’t automatically become investments, making the country structurally incapable of completing the production process on its own. Under these conditions, exports play a crucial “investment function.”
In the last 30 years the central component of Cuba’s pattern for international insertion was through import substitution industrialization (ISI), reducing dependence on imports by replacing them with locally produced goods. Substituting imports helps diversify a nation’s productive base, including its production of capital goods, while export substitution—a much more recent development for Cuba—allows the replacement of traditional commodities with more profitable, value-added exports. Due to the structural incapacity of producing the capital goods it needs, the development strategies of a country like Cuba should include programs of both import and export substitution. Both can be complementary, despite tensions that often emerge as they essentially compete for the same limited investment resources.
Cuba has adapted its ISI model to distinct historical periods in trying to create a “pro-development” international environment. During the “Five-Year Plans”—mainly between 1975 and 1990—Cuba’s entry into the international economy was largely driven by the benefits it enjoyed from its membership in the Council of Mutual Economic Assistance (Comecon), the economic organization of Communist states. Although Cuba continued its economic relations with global capitalist markets, the vast majority of its economic ties were politically and economically determined by the preferential arrangements garnered from its Comecon membership. Comecon’s combination of trade deals, preferential prices, credits, technical assistance and the massive transfers of resources from the European bloc, created a hugely favorable context for Cuba’s development.
After the Soviet collapse, ISI remained the central plank of Cuba’s development, but having lost the assistance of Europe’s Communist states, the country’s pattern of international insertion was obviously forced to change. Cuba made a vast and quick push into the global economy, mostly by incorporating a few sectors of the economy into global value chains—value-adding activities at different stages of the supply chain. Emphasis was placed on products and services that intensively used the island’s natural resources: sugar, mining and tourism. Access to family remittances from abroad, foreign direct investment and commercial credits were other important mechanisms for Cuba’s direct move into the global economy.
This shift kept the economy afloat, even producing a slight turnaround from the very depressed levels of the early 1990s. But its long-term meaning for development is less clear. Perhaps the most significant contribution was that it caused a partial recovery and modernization of some ISI activities. Remittances and tourism, for example, helped create internal hard currency markets that, in turn, led to greater demand for national industry.
By 2002 to 2003, however, it became increasingly clear that direct engagement in the global economy was not generating an ISI process large enough to function as the centerpiece of a development strategy. Under these circumstances, export substitution presumably offered an alternative, but which new exports could drive this change? Despite Cuba’s vast pool of human capital, new exports (with few exceptions, such as the pharmaceutical industry) had failed to materialize.3
By 2004-2005 a new transformation in cuba’s model of international economic insertion had begun to emerge. In this pattern there is a dual movement, whose components coexist for the moment in almost equal proportions: direct insertion into the global economy and the Bolivarian Matrix. The first component has basically economic determinants, or a “pro-business” strategy not automatically conducive to Cuba’s national development. The latter has essentially “pro-development,” political determinants, stemming from the substantial, and somewhat abrupt, recent expansion of the bilateral Comprehensive Cooperation Agreement signed in 2000 by Cuba and Venezuela. To be sure, Cuba also has agreements with other countries (China, for instance) but they are much more limited in scope and scale than the deal with Venezuela.
The Bolivarian Matrix provides both countries the best opportunity in recent years for an international context conducive to the design and application of development strategies. Obviously, schemes of direct insertion into the global economy are also based on political considerations. But what is different about the Bolivarian Matrix are the ideological assumptions, the social interests and the quality of institutions upon which these political determinations are based.
The agreement has established mechanisms for collaboration in approximately two dozen sectors and has provided Cuba with advantages in significant areas: energy provision with preferential rates, generous credits for imports, loan concessions for investments, the creation of joint enterprises, the establishment of an expansive program for the export of Cuban medical services and the creation of protected markets for some Cuban exports, such as medical equipment and software among others.
The Bolivarian Matrix offers Cuba a chance to move from a primary export economy toward successive development-centered options. Its most positive effect in the short term is to strengthen external demand, thereby compensating for Cuba’s structural incapacities. It does so by generating immediate and stronger economic growth, allowing a greater portion of economic surpluses to be invested for the future.
More specifically, the Bolivarian Matrix expands the “investment function” of exports in the economy by spurring the growth of more valuable exports—primarily, healthcare services. It also reduces the costs of several imports, such as the preferential rates and deferred payments on energy that Venezuela provides. Cuba is also able to reduce the relative weight of exogenous factors by gaining a margin of leverage that it can use in determining export prices—through negotiations on the price of medical services, for instance. Agreements establishing medium- and long-term stabilization also mitigate the normal oscillations of foreign trade.
In sum, by favoring the substitution of exports, the Bolivarian Matrix has increased national investment and improved Cuba’s ability to set the terms of trade—both critical factors for short-term economic growth and development. What’s more, Cuba has achieved these to a greater extent than would have been possible through only a direct insertion into the global economy.
Precisely evaluating the performance of the Bolivarian Matrix from 2004 to 2005 remains difficult because public data are not yet available. Nonetheless, it seems undisputable that the Bolivarian Matrix has provided Cuba the first opportunity in the last 15 years to undertake a sustainable process of ISI. During the country’s direct insertion into the global economy in the 1990s, export substitution was possible—though not necessarily optimal—while a solid base for ISI never materialized. The long-term measure of the Bolivarian Matrix’s contribution turns on its ability to help Cuba overcome the structural limitations of an export economy by encouraging an ISI process based on the internal production of capital goods and the concomitant expansion of organizational and technological capacities.
Within the dual framework, the two main mechanisms driving Cuban development—ISI and export substitution—have different possibilities. Export substitution can occur in both components of international insertion, but the Bolivarian Matrix favors a greater role for investments in this process, encouraging a broader spectrum of new exports. A solid and vigorous ISI strategy, on the other hand, is only viable for Cuba within the context of the Bolivarian Matrix.
Moving forward, Cuba must decide on the emphasis it will put on export substitution, as well as on the methods it will use to carry it out. In the short term, Cuba will likely continue focusing on exporting service professionals—again, mostly in healthcare—but there is a lack of emerging new exports in industry, an area in which Cuba counts on a deep reservoir of human capital. Also, when one considers the emphasis placed on service-based export substitution, on the one hand, and the internal expansion of social services, on the other, it might seem that Cuba is headed in a worrisome direction—toward an over-development and dysfunctional dependence on the “tertiary,” or service, sector. Such a scenario is not inevitable, but active policy interventions would be needed to avoid it.
A significant challenge will be creating a productive sector of capital goods that takes advantage of the “internal” economies of scale resulting from the integration of the Cuban and Venezuelan markets. Coordinated industrial policies would be extremely beneficial to these processes. For example, the cooperation of productive branches of capital goods between countries allows them to bank on their complementarities while assuring that their domestic needs are met. Another challenge will be creating new value-adding industrial processes for a relatively broad spectrum of products within the Bolivarian Matrix, as well as incorporating certain industrial activities into global value chains. Again, by taking advantage of complementarities, global value chain activities can be localized. Cuba will also find it difficult to significantly reduce its import coefficient (i.e., the share of its domestic economy that’s dependent on imports), and to increase investment multipliers (the change in national income caused by each unit of investment), which helps boost both employment and income generation.
Three concrete problems must also be tackled. First, Cuba needs to address shortcomings in the domestic production of foodstuffs, a crucial aspect if it is to reduce the import coefficient. Second, the growth of internal markets will require an increase in personal incomes, which is key in creating the demand dynamics needed for industrial upgrading and the construction of a productive sector of capital goods. And last, Cuba must stimulate innovation in sectors that already count on significant amounts of internal demand—namely, production, processing and food distribution.
The prospects for development in Cuba are not self-evident. The advantages of the Bolivarian Matrix are clearly substantial, even at this early stage, but they still fall below their ultimate potential. A second stage may help correct some of Cuba’s current imbalances—the disproportionate emphasis on services, for instance—while at the same time thwart potential pitfalls like the deindustrialization and over-tertiarization of the economy. But this will only be possible if a robust plan of reindustrialization—one capable of producing new exports and, above all, capital goods—assumes the forefront of a development strategy. Only then will the country be better equipped to successfully confront whatever the international arena throws its way.
About the Author
Pedro Monreal is a research economist at the Center for International Economic Research (CIEI) at the University of Havana. Translated from the Spanish by NACLA.
Notes
1. Strictly speaking, evaluating the prospects of the ALBA—which exceeds the scope of this article—should include scenarios that contemplate its stagnation and even its disappearance. Nonetheless, this article assumes the Bolivarian Matrix will continue providing Cuba a favorable context for its international insertion, for at least the next 10 years.
2. CEPAL, “Cuba: Evolución económica durante 2004 y perspectivas para 2005,” Documento LC/MEX/L.664 (Ciudad de México, 2005).
3. Pedro Monreal and Julio Carranza, Dilemas de la globalización en el Caribe: Hacia una nueva agenda de desarrollo en Cuba (Ciudad de México: Siglo XXI Editores, 2004).
