The economic challenge
INTRODUCTION - OVER the past four years the state of the Cuban economy has gone from bad to worse. The ever-worsening relations with both the developed capitalist coun tries and the former Soviet bloc and the tightening of the United States embargo on the other have deeply disorganized production. The lack of fuel and other essential raw materials, of spare parts for factories and machines provided by East German or Czechoslovak
International Viewpoint #245 May 1993
IN the second half of the
1980s, The Cuban economy entered a period of powerful internal tensions summed up by the most firms which often no longer exist has progressively paralyzed Cuban industry and agricultubasic economic indicators
The 1993 sugar crop will probably be down on recent years and it is sugar exports that pay
— at first, by a slowdown for oil imports. Transport and distribution have been seriously affected and electricity shorin growth, then stagnation, tages have made it hard to store food in warehouses and refrigeration centres. The populaand in the last two years by tion is increasingly affected by these developments.
sharp falls in production.
More and more people are suffering from lack of food. Owing to the lack of imported grains and fodder, chickens can no longer be fed and are dying. Currently, Cubans have the right to no more than a few eggs per person per month, children over seven years old no longer
JULIO CARRANGA VALDES get milk and adults no more meat. Cases of vitamin deficiency have been detected and
T
HE combined pressure of
The aim of the current economic opening - trying to attract foreign capital, the creation of three factors - a decline in joint enterprises and the development of tourism is to reinsert Cuba in the world market.
the efficiency of the domestic
This is extremely difficult. The development of biotechnology, for example, of which Cuba economy, a deterioration in has made a priority, is running up against the obstruction of the pharmaceutical multinationals which are not inclined to allow Cuban vaccines and AIDS testing kits access to markets economic relations with the capitalist world and the former Soviet bloc, and an ever-more aggressive policy on the party
At the same, time this economic orientation engenders all kinds of tension and inequality.
of the United States — has plunged the
Against this background, the US is stepping up its pressure in the hope of bringing down the
Cuban economy into a crisis expressed not regime in the short term Thus, there is no likelihood that Clinton will lift the embargo. The only by sharp falls in annual output but
European Community, meanwhile, has acted with consummate hypocrisy. Using the prealso by big economic imbalances.
text of human rights — which evidently do not include the right of young children to adequa-
This situation has imposed continuous te nutrition and of the sick to proper health care — the EC's foreign ministers assembled in reductions, delays and dislocations in sup-
Copenhagen along with the the 13 foreign ministers of the Group of Rio hoped to issue a plies from abroad. This first affected the condemnation of the Cuban regime. However, their initiative was blocked by the Mexican machine tool industry and light industry delegation, which said that Cuba had nothing to do with the stated aims of the conference.
and then spread to the whole economy.
The pitiless pressure on this small island, whose crime is to embody firm resistance to the
The tremendous impact of the contraction will of the world's most powerful country is beginning to disgust many people, in the first of foreign trade on the national economic place in Latin America where significant solidarity movements have arisen, and in the US situation can be better grasped if we itself. Medicines are being sent to Cuba from the latter country in open violation of the remember that the coefficient of imported embargo. Support for Cuba is also being organized in some European countries.
supplies to internal demand in Cuba is over
No secondary considerations must stand in the way of our solidarity with a people struggling
50%.1 for its dignity. The effort to crush Cuba takes place in the name of principles that are res-
Despite the difficulties, the 1985-89 pected nowhere else - not in Haiti, Venezuela or Brazil and certainly not in Morocco or period saw a programme of investments
Saudi Arabia without mentioning China, which has been granted most favoured nation staallowing a 31% growth in basic funds in this period. Nonetheless, we have to bear
We publish below, as a part of our economics dossier, a shortened version of a survey of three things in mind:
the Cuban economic crisis which appeared in the Cuban review Cuaderos de Nuestra a) The 1986-90 five-year plan saw a
America at the end of 1992. - Janette Habel * growth in the proportion of investment in the non-productive sector compared to the previous five-year period from 16.6% to
20.2%2 b) In the present situation of tightening up of foreign trade, and with the economy to a large extent dependent and disintegrated, actual production is not determined by the productive capacity physically available, but by the ability to import raw materials and other needed products.
c) The 1986-90 period saw an overall fall in the efficiency of investments. A calre as tractors and sugar depots break down.
they control.
tus by the US government. culation of the response in terms of production to investment between the 1981-85 and 1986-90 periods reveals a drop of 53 centavos in production per peso of investment in the most recent period.
An important part of this problem is the result of the factors mentioned above, but these are reinforced by domestic inefficiency since until 1989 imports remained at a fairly satisfactory level. Indeed, 1989 is the record year for imports in the history of Cuba.3 The sharp cuts began in 1990. Imports from the West fell by about 30% between 1986 and 1988 but those from the socialist countries - the lion's share -only contracted by 1.44% in 1988. In 1990 1. INIE, Situación actual de la economia cubano, March 1992 2. Estimate of the Comité Estatal de Estadisticas (CEE), Anuario Estadístico, 1989 3. CEE, Anuario Estadístico, 1989
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DOSSIER
20 International Viewpoint 1245 May 1993 both indicators rose before plummeting in 1991.
The conscious effort after 1986, and in particular after 1989, was to deal with clear signs of a stagnation of material production and at the same time step up investment. This caused serious financial imbalances.
During the last five-year plan (198690) a proportion of the increase in the economically active population - around 600,000 people4 — had to be inefficiently absorbed into work to prevent a growth in unemployment. This, obviously, reinforced the negative impact of under-employment on the productivity of labour. The present five-year plan will see some 300,000 more people enter the labour market.
Towards the end of 1990 a more restrictive employment policy was in force, implying a certain level of structural unemployment. The inequalities created by this phenomenon were moderated by the social security system at an annual cost of 1,200m pesos. While this enabled a more equitable distribution of income, it did not change the impact of the imbalances produced by a high level of wages and social waste at a time of sharp falls in the production of goods of services.
Between 1985 and 1989 alone, wages plus social security grew by 1,450m pesos while supplies of goods and services grew by 465m.5 About half the difference was offset by official price rises, but the remainder meant an increase in the money supply, which, naturally, meant increased labour indiscipline and an expansion of the black economy. Real wages fell by an estimated 4% between 1985 and 1989, before experiencing a much sharper decline between 1990 and 1992.
The 1989-91 period saw a 47% growth in the quantity of money in circulation while in the same period retail trade declined by about 30%.
Total liquidity by the end of 1991 has been estimated at 6,125m pesos, only 53% of it in the form of savings. One aspect of the current excess liquidity is that is not spread evenly across the population but has been mainly acumulated by small groups including black market speculators. In 1989, some 70% of savers had less than 200 pesos in their accounts and 30% more. Logically, possession of money hoarded outside the banking system is even more concentrated. It is certain that this problem got worse between 1990-92.
This limits the posibility of taking effective measures of reducing the amount of money in circulation through price rises, since these would strike at the incomes of those dependent on wages — that is people usually on low incomes. Thus a more comprehensive approach is needed, combining taxes, wage controls and new ways to encourage saving and so on.
The circle of fundamental economic imbalances is completed by the foreign trade deticit - running at an average of $2.000m between 1986 and 1989 with a foreign hard currency debt of $6,500m in 1990, excluding the debt to the Soviet Union. The budget deficit for 1990 has been calculated at 1,071m pesos.
In recent years, the Cuban economy has been caught in a vice: on the one hand, a fall in hard currency income, a doubling of the debt to the West and the cutting off of credit after 1986 and on the other the disintegration of the advantageous relations with the socialist bloc. This double pressure has reinforced the effects of the US blockade which has lasted now for thirty years and has been tightened in recent years.
In October 1992, the US president signed the Torricelli law aimed at strangling Cuba's efforts to reorganize its foreign trade. The law was widely condemned by the international community for its extraterritorial character and its violations of international law. Nonetheless, it has stepped up the pressure on the Cuban econo-
According to the estimates of Cuba's National Institute of Economic Research (INIE), the blockade has directly cost Cuba $30,000m in the past thirty years.
Such a horrible external framework presents a small economy, poor in natural resources and with problems of eficiency with massive challenges. The structural character of the situation requires the Cuban government to speed up its strategy for economic development. A period of emergency and active resistance has opened, full of tensions and challenges. The Cuban government called this period a " special period for a time of peace".
Tasks at three levels
The tasks for this period were set out in three levels:
1) Adjusting the economy to the new conditions;
2) Reinserting the Cuban economy in the world economy on new foundations;
3) reorganizing the domestic economy to ensure greater efficiency.
These economic objectives go together with political and security goals. The fall in living standards has increased social and political tensions. Building a consensus is much harder when the economy is declining. The US' increased belligerence in every field is based on the belief that the hour has come to wipe out the historic experience of the Cuban revolution. 6
The future depends on the capacity of the revolution's leadership and of the Cuban people to meet the challenge. Cuban society contains sufficient economic, political and moral resources but all depends on the articulation and leadership of these. The 33-year history of the revolution is one of meeting and overcoming apparently impossible challenges.
The economic problems can be set out
The first is the adjustment of the economy to existing realities. The foreign trade deficit has to be cut. Imports fell from $8,124m in 1989 to $4,090m in 1991 and probably fell a further $1,500m in
This cutback means a sharp fall in economic activity, which fell by 24% in 1991 after a 3.6% fall the previous year. 1992 may have seen a further fall of more than 15%. There is no reason to suppose that this tendency will be reversed in 1993.
These dramatic cuts in output mean a
Social consumption suffered a cut of around 980m pesos between 1985 and 1991.7 This means that social services have deteriorated. Nonetheless, even in this worst of moments for the revolution the social conquests in health, education, culture and social security are being maintained. This has a considerable political importance in the current situation. Further cuts are likely, above all through the elimination of subsidies.
Personal consumption is especially sensitive from a political point of view. An effort has been made to minimise the cutbacks here. It has been estimated that this fell by 15% between 1986 and 1990, with a sharper fall thereafter.
One of the major efforts at the present time is the development of a food production plan that will raise domestic production to ensure an adequate diet to the population based on foodstuffs that the country can produce for itself.
As a part of the effort to manage personal consumption, the policy of standardisation of basic goods provision has been stepped up. However, this policy can only be short-term to avoid the harmful effects of extreme levelling on the income and outgoings of the population, on labour productivity and on work discipline.
Gross investments fell by 43% between 1989 and 1991 a trend that has 4. Calculated by the author as part of the work for Anuario Estadístico, 1989 5. CEE, Anuaria Estadístico, 1989 6. See Pedro Monreal and Julio Carranza, 'Cuba en el actual debate político norteamericano, in Cuadernos de Nuestra América, Vol.9, No.18, La Habana, January-June 1992 7. Calculated by the author for CEE
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DOSSIER
International Viewpoint #245 May 1993 continued. This imposes an extremely precise and targeted investment policy to respond to the tensions between ensuring simple reproduction, stimulating exports, above all in non-traditional sectors and ensuring essential imports. An attempt to attain the maximum level of food self-sufficiency is an especially important objective.
### Essential imports
Given the lack of credit, ensuring essential imports means increasing exports, above all in non-traditional sectors; the bio-technologically based pharmaceuticals industry, the production of micro-electronic medical equipment and tourism. Together with traditional exports - sugar, tobacco, nickel, citrus fruits and so on.
For example, in regard to exports of pharmaceutical products and medical equipment, sales of ten million doses of the anti-meningitis vaccines to Brazil yielded $100m in 1989 and 1990 and $82m (for 15 million doses) in 1991.8 A reasonable estimate of the amount that such exports could gain in the 1995-2000 five-year period
A big research effort is being made in these fields, producing more than 160 new genetic engineering products in 1991. The biggest problem is to develop mass production and above all in terms of organizing of sales in a highly specialized and multinational sector Industrial plants are being built to respond to these problems and the sales effort is being organized via agreements with foreign firms.
A big effort is being made to develop tourism with a significant input from foreign capital. The aim is to have built some 30,000 holiday dwellings by 1995, which can acomodate more than a million tourists and bring in over $900m. 65% of these dwellings are to built using foreign money. In 1991, $290m were injected into this sector and $400m in 1992.
Tourism has the advantage of stimulating other economic sectors such as construction and building materials. These later could be exporting sectors in the future. Cuba has cement factories, three of them with an estimated annual output capacity of a million tonnes, which could find overseas outlets with the help of agreements with foreign capital. No other country in the region, apart from Mexico has such productive capacity.
Sugar continues to represent the backbone of the national economy. It makes up 20% of GDP, covers 50% of the cultivatable land and 80% of exports, 55% of cargo, employs 440,000 workers and meets 30% of the fuel bill. Its role in the development of the economy is crucial.
Even so, it is hoped that by 1995 some 309% of Cuban exports will be of products for which the world market is expanding.
This marks a difference from other Latin American countries that have been able to achieve high export growth rates on the basis of increased export of raw materials and foodstuffs whose future on the world market is unclear. Cuba's high levels of education give it the potential to break into high technology sectors.
However, it is hard to see how Cuba is going to re-orientate its exports to be able to pay for the imports it needs. This problem is aggravated by the need for Cuba to maintain a high level of military preparedness to meet potential US aggression. Here also the cut off of Soviet aid has placed additional burdens on the Cuban economy.
Thus, for some years, the Cuban economy will have fewer imports than it needs. This means that the pattern of high investment combined with high waste established in the years of close relationship with the socialist camp has to be radically
In figures, measures have to be taken to catch up an annual fall in production of 8,000m pesos and unleash a new dynamic of growth and development.
All the above requires an immense effort to cut back waste of all imported products, which in turn requires a general climate of economic rigour and control.
The key is oil, the import of which has fallen from 13m tons to 7m between 1989 and 1992. This has forced cuts in production throughout the economy. Thus energy saving is vital. Collaboration with foreign capital has permitted substantial energy savings in, for example, the production of nickel at a relatively low cost in investment.
An effort is also underway to find other energy sources. In some cases this means going back to the past - animals are being used in agriculture while the bicycle is becoming the normal mode of personal transport. 10
As a result of the collapse of links with the Soviet Union the building of the nuclear plant at Juraguá has been halted after the investment of 1000m pesos. This plant would have saved about three million tons of oil a year, but its running would have meant dependence on countries that are not strategic allies of Cuba.
Various foreign companies are looking for oil in Cuba. Success here would fundamentally change the country's prospects. At the same time, exploitation would demand immense time and investments. However, for the time being the country produces a mere 900,000 tons of poor quality oil a year.
In 1989, 57% of all proteins and 51% of calories were imported. A big effort is being made to improve food self-sufficiency at a time when imports of fertilisers, pesticides and so on have fallen. There has been a big increase in the agricultural labour force, massive voluntary mobilizations, wage rises for agricultural workers, the use of draught instead of machines, the application of new techniques and energy sources and an effort to increase water levels by developing the hydraulic infra-
Furthermore, some 50% of spare parts are now being produced domestically.
### Informal sector
It is also necessary to take account of the existence of a big informal economic 8. See José Luis Rodriguez, 'La economía cubana ante la cambiente coyuntura internacional", in Boletín de información sobre economía cubano, No. 1, CIEM, La Habana, January 1992 9. See La industria cubana de la biotecnología, aspectos y oportunidades para alcanzar un éxito internacional, Centro de las Naciones Unidas sobre las Empresas Transnacionales (CET), August 1991 10. In 1992 there were 500,000 bicycles in Havana for a population of 2.1 million 11. In 1991 capacity was 9,700 cubic metres, 3,000 more than in 1989.
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International Viewpoint #245 May 1993 sector whose scope has multiplied in recent years. Here a distinction has to be drawn between speculative and useful activities and the latter regularised.
One of the major changes of recent years has been the entry of foreign capital into Cuba. This has meant a change in the country's constitutional definition of property12 and made foreign enterprise a dynamic force in the economy. In 1982 law 50 was adopted to regulate foreign investment in Cuba. However this was only applied at the end of the decade.
The aim is for foreign capital to help overcome the gap between the country's resources and its performance. Among the resources are:
a) A sizeable industrial infrastructure strengthened in the past decade by the investment of 38,000m pesos, of which 35% went into industry;
b) The existence of a good physical infrastructure. the country is well-endowed with roads, bridges, airports, and electricity and telecommunications lines;
c) The existence of a highly qualified work force above all in technological, natural and medical science and a considerable scientific and technical potential.
d) Political stability resulting from an abiding consensus in favour of the revolutionary project which has developed a system of social equality and satisfaction of basic needs despite the huge difficulties placed in its way by the United States' blockade.
On the other hand factors essential for realising this potential are lacking — capital, advanced technology and international markets. The opening to foreign capital is meant to bring these factors in.
However, foreign capital expects acceptable rates of profit. Existing legislation offers favourable and stable conditions, often superior to those in other countries including repatriation of profits, tax exemptions for a definite period, maximum taxes of 30% on net annual profits and taxes of 25% on incomes of Cuban workers.
One of the principles that have been defended is that of giving first option to Cuban enterprises for the provision of services and materials to companies with foreign participation. However, the inefficiency of the domestic economy has not allowed this relationship to bear full fruits.
Foreign investment has experienced relatively significant growth over recent years despite various adverse factors. Foreign capital was present first of all in tourism but since 1990 it has spread throughout the economy. By 1991, foreign investment had reached $500m from 26 countries. 13 22
Of course the influx of foreign capital into Cuba presents risks that must be anticipated and reduced. The approach to this factor must be based on the state remaining the principle director of economic activity through its control of the main variables of development. What must be avoided at all costs is a situation where all the dynamism and efficiency is concentrated in the foreign owned sector while the rest of the economy remains in the doldrums. And this is yet another reason why the reorganization of the economy under a new system of leadership which integrates and leads it organically is needed.
Here, there is an important problem that must be resolved as soon as possible. In 1986, when the dead end of the model of extensive economic growth had become apparent strong criticisms were made of the planning authorities and mechanisms responsible for developments in the 197585 period. A debate developed over whether the system was negative by its very nature or whether the issue was one of its incomplete and incoherent implementation. What is certain is that it is exhausted as a means of dealing with the new problems of today.
This leads us into fields new to the socialist experience. The basic explanation for the crisis of European socialism is the difficulty of passing from an extensive to an intensive phase of growth and finding a form of economic management that corresponds to the imperatives of socialist development. Soviet perestroika, which offered to tackle these problems, ended up under-
Starting in 1986, various measures were taken with a view to correcting the main deformations and weaknesses of the former leadership system, but no new system as such was proposed. Various governmental and academic bodies have discussed the problem and put forward proposals and have tried out various ideas in the countries enterprises and in interenterprise relations.
And now the emergency situation of the economy has narrowed horizons when it comes to working out a new system of
However, we think this task must be addressed as soon as possible. Working this out is a condition for restoring efficiency to the economy and speeding up escape
This is all the more necessary given the complication introduced by the entry of foreign capital. A new system of economic management must redefine the forms of relation between different sectors of the economy, the property regime, the levels of subordination and independence of enterprises, the role and character of planning, the functioning of the banks, legal regulation, price-formation mechanisms, the tax system, wage scales and so on.
A series of important changes have been introduced. Some 500 of the country's enterprises, 23% of the total, have gone over to a hard currency self-financing regime and a general price reform has been approved. But there is still no overall reform proposal.
One of the main planks of a new management system must be to guarantee a better relation between workers' incomes and the results of their work and management as well as the maximum possible indentification between individual, enterprise and national interests.
These re-definitions take place at an especially difficult moment of a contradictory movement between the centralisation needed to manage scarce resources and the decentralization needed for a new system.
Cuba is at a turning point in its history. The revolution begun three decades ago has been affected by international changes that oblige it to get along with a world with values and imperatives that are wholly at odds with its own. This is a huge challenge for a small under-developed country.
A hundred years of struggle
Cuba cannot stay the same when the world around it is entirely changed. The revolution has to be brought up to date and made better. We have to preserve the historic objectives of a process begun 100 years ago — national independence, social equality popular democracy and economic development.
To guarantee priority to these objectives in present conditions requires the strategic updating of the revolutionary project.
The changes needed in the sense of increased efficiency and greater popular participation in politics. Without the revolution the country will regress a hundred years in its historic conquests and its inde-
The moment demands realism and a clear assessment of the difficulties. This text has aimed to present the problems without embellishment and consider how they can be tackled. While the tasks are very difficult we must not lose sight of the country's economic, political and moral reserves and above all our people's character and history. * 12. The changes in the Constitution were approved by the National Assembly in 1992 13. See Cuba Business, Vol.7, No.2, p.7, June 1992