Abstract
Beginning in 2008, the Cuban leadership recognized the need for change in its economic policy to overcome the legacy of the Special Period and the shortcomings of the economic model that prevailed until 1989. A product of widespread grassroots discussion, the guidelines for economic and social policy approved in 2011 include a greater role for market relations and nonstate property in the management of the economy. They also identify a new area of cooperative, mixed, and private property alongside of state ownership, promote decentralization of management and the participation of workers in this process, and place greater emphasis on personal consumption in the incentive system. The implementation of these changes is already having an effect on economic indicators, among them a significant reduction in imports, a decrease in gross fixed capital formation, a reduction of the budget deficit, and an increase in labor productivity. More complex and decisive changes can be expected in the years to come.
A partir de 2008, la dirigencia cubana reconoció la necesidad de un cambio en su política económica para superar el legado del Período Especial y las deficiencias del modelo económico que prevaleció hasta 1989. Un producto de la discusión popular generalizada, las pautas de la política económica y social aprobada en 2011 incluyen un mayor papel de las relaciones de mercado y de la propiedad no estatal en el manejo de la economía. También identifican una nueva área de la propiedad cooperativa, mixta y privada junto a la propiedad estatal, promueven la descentralización de la gestión y la participación de los trabajadores en este proceso, y ponen mayor énfasis en el consumo personal en el sistema de incentivos. La implementación de estos cambios ya está teniendo un efecto en los indicadores económicos, entre ellos una reducción significativa de las importaciones, la disminución de la formación bruta del capital fijo, una reducción del déficit presupuestario, y un aumento en la productividad del trabajo. En los próximos años se pueden esperar cambios más complejos y decisivos.
Keywords
The construction of socialism has historically been conceptualized as a pathway into the unknown, and the Cuban case is no exception. In the same years that produced the revolutionary triumph in Cuba, an intense debate was developing over the economic reforms to be instituted in order to overcome the weaknesses already identified in the predominant Soviet socialist model. This debate had repercussions in Cuba through the discussions initiated by Che Guevara between 1963 and 1964 with regard to the validity of the law of value and the role of the market in the construction of socialism, especially under the conditions of underdevelopment that characterized Cuba in those years (see Guevara, 2004). It became clear that the search for an optimal socioeconomic model under those conditions confronted obstacles beyond those found in more developed European socialist countries.
In effect, Cuba confronted a structural deformation of its economy, based on sugar production, with an agriculture characterized by mostly foreign-owned large estates that were dependent on the U.S. market and on conditions that impeded the diversification of the economy. At the same time, the social backwardness—illiteracy, illness, unemployment, and inequality—associated with this economic reality sharply contrasted with a pattern of consumption that replicated that of U.S. society without the minimal economy required to sustain it. This engendered a limitless unsatisfied demand. Finally, the Cuban economy had to struggle to overcome underdevelopment in the context of the U.S. economic blockade, which imposed—in addition to a heavy economic burden—habits of management characteristic of a wartime economy, very far from efficient administration. 1
Under these conditions, the Cuban Revolution was prevented from acquiring the resources indispensable for its development solely from domestic savings and required to take on an enormous social debt. As in the majority of countries, it was only through external financing (in this case from the socialist countries, particularly the Soviet Union) that it would be possible to initiate the indispensable structural change at the same time as ensuring basic social services and compensating for some of the negative effects of the U.S. blockade. Writers such as Carmelo Mesa-Lago (2012: 36–37) have calculated that the flow of resources coming from the USSR amounted to US$65,119 million from 1960 to 1990. This figure was reached, however, by considering as a subsidy all the prices paid by the USSR, which diverged from those on the world market by US$39,390 million. The calculation did not take into account the benefits obtained by the USSR by paying for Cuban products at prices that were lower than their domestic costs or the fact that the prices paid for Cuban exports between 1976 and 1986 only compensated for price increases in Soviet products, keeping the relation of exchange constant (see Rodríguez, 2011b).
In addition, along with other socialist countries, Cuba tried to accelerate changes by adopting a strategy of import-substitution industrialization between 1961 and 1963, but this did not find the equilibrium required to succeed. The creation of the conditions necessary for industrial development, beginning with growth in agriculture and sugar production, between 1964 and 1975 was followed by industrialization in the framework of the international socialist division of labor that lasted until 1989.
However, the process of socialist construction in Cuba was also conceived as a profound transformation of the social relations of production. The economic policy that accompanied this process went through various stages focused on the pursuit of a combination of economic and social elements that would produce real integrated development. Throughout the first 30 years of the Revolution, Cuba tried different paths revolving around the management of monetary-market relations in a context of strong political commitment and social solidarity. Essentially, it tried to achieve a higher level of human development without overlooking the material requirements for this task and the contradictions that emerged in this process.
The process involved phases of strong pressure from political mobilization, which in its most extreme moments engendered idealistic conceptions of development (1966–1970). Similarly, there were periods in which—seeking the required economic rationality—economic incentives (again in their more extreme applications) opened the way for the copying of the Soviet self-financing system, which had negative consequences (1976–1985) (Rodríguez, 1990). The search for an appropriate synthesis of those approaches, beginning with the fact that politics should take priority in socialism and economic factors should be conceived as necessary but not sufficient for a better society, marked the path of an experiment rife with difficulties but instructive for society. As long as it was possible to combine domestic effort with international solidarity on the basis of a philosophy of development put into practice on a world scale only by socialism, a growth rate averaging 4.4 percent was achieved, and this provided the resources necessary to achieve a high level of social development and an incipient structural transformation of the economy.
Whatever the strengths and weaknesses of Cuban economic policy, the creation of the minimal conditions for a certain level of development was suddenly halted by the disappearance of the USSR and of the European socialist countries between 1989 and 1991. This catastrophe hurled the country into an unprecedented economic crisis, referred to in Cuba as the Special Period, exacerbated by the intensification of the U.S. economic blockade and the shortcomings of the Cuban economic model. Faced with this situation, the country adopted a strategy for resisting the effects of the crisis at the least possible social cost and reinserting the Cuban economy into the international economy, relying on political consensus to make this possible.
The impact of the crisis caused the gross domestic product (GDP) to decline by 34.8 percent between 1990 and 1993; imports decreased by 75 percent, and enormous inflationary pressure was unleashed when the fiscal deficit grew to 33 percent and the money supply increased to 66 percent of GDP, with a consequent expansion of the informal economy. A sharp decline in investment and labor productivity accompanied this, along with an intensification of social tensions associated with an acute deterioration of the population’s standard of living. The measures taken to confront this crisis involved important changes in the social relations of production marked by the contraction of social property—viewed as state property—and the expansion of the nonstate economy (including mixed, cooperative, and private property) in the course of a limited opening to the market. Despite external pressures on Cuba to take the path toward capitalism, the changes instituted were conceived at the time as an inevitable but not irreversible step backward.
Going against most prognostications and despite serious problems, the Cuban economy managed to halt the crisis and begin a process of gradual recovery beginning in 1994–1995, but this recovery came at a high cost. The GDP of 1989 was recovered only in 2004, representing 15 years of lost growth for the country; disinvestment in all sectors of the economy was very high, with the rate of accumulation declining from an average of 26 percent to 17 percent in the 1990s; and real wages were well below precrisis levels while income distribution measured by the Gini coefficient went from 0.25 to an estimated 0.40 (Brundenius, 2009; Ferriol and Castiñeiras, 2004; Rodríguez, 2011a). Lastly, while the modifications in the economic policy during the 1990s were adopted to counteract the effects of the crisis, they did not constitute integral economic reform, and therefore many of the problems already present in the Cuban economic model of the 1980s remained substantially unchanged.
The Economic Legacy of the Special Period
By the middle of the past decade, the country had overcome some of the negative effects of the Special Period, but serious structural problems remained unresolved. Among the achievements were the following: the recovery of the GDP of 1989 (although its composition was biased toward the tertiary sector, which came to represent 81 percent of the total); the partial restoration of internal financial equilibrium after the fiscal deficit, which had been 3–4 percent of GDP, was reduced to reasonable terms and the money supply, which had been over 40 percent of GDP (a rate reflective of unresolved inflationary pressures), was reduced; increased enrollment in higher education, with 19 percent of the labor force being university graduates; and some improvement in energy efficiency and the effectiveness of investment, although the latter was still below what was needed.
At the same time, the unresolved problems of the Special Period reflected serious inadequacies, among them an unsustainable balance-of-payments deficit, a low level of economic efficiency and labor productivity, very limited increases in agricultural and industrial growth, with some sectors still below precrisis levels, significant restrictions on consumption and visible inequality in income distribution, excessive centralization and bureaucracy, and insufficient participation by workers in decision making. 2
When the international economic crisis hit in 2007–2008, the country confronted a critical financial situation, with an insupportable increase in food and energy prices and the accumulated effects of the Special Period’s unresolved problems. It was apparent by 2007 that a more fundamental transformation of economic policy was required, starting with two of the most important obstacles: the balance-of-payments deficit and economic inefficiency. “Since 2005, the economy’s limitations in tackling the deficit in the financial account of the balance of payments, retaining transfers abroad, and the large amount of maturing debt became evident, all of which caused great tension in managing the economy” (PCC, 2011: 7; see Vidal, 2012). Between 2000 and 2008, labor productivity increased 42 percent while the average wage increased 74 percent. This trend was maintained in 2009 and only began to reverse itself in 2010. Thus the crisis contributed to increasing the deficit in the balance of payments after 2008, when an accumulated deterioration of 15 percent in the purchasing power of exports could already be noted, representing US$10,900 billion from 1997 to 2009. The hardening of the U.S. blockade with the measures adopted by the George W. Bush administration in May 2004 could be added to this scenario, creating an impact of US$104 billion in the years leading up to 2009.The hurricanes that devastated the country between 1998 and 2008, causing US$20,564 billion in damage, should also be taken into consideration. Finally, the repayment of the foreign debt became extremely complicated under these circumstances, given that it amounted to US$12,310 million in 2009, representing 19.8 percent of GDP, 25 percent of it with maturity dates between 2010 and 2015 (ONEI, 2012). 3
At the same time, the preceding few years had seen a decline in economic efficiency, expressed by the lower productivity apparent in the above-mentioned growth rate of 42 percent between 2000 and 2008. Among the factors that influenced these results were the decapitalization of the economy derived from the Special Period, the lack of macroeconomic equilibrium, and deficiencies in the management of the economy. In this connection, it is worth emphasizing the excessive centralization of economic administration and the complex circumstances imposed by the dual currency in place since 1993.
Creating the Conditions for Sustainable Development
Beginning in 2008, the Cuban leadership recognized the need for a change in economic policy to overcome the legacy of the Special Period and the shortcomings of the economic model that had prevailed until 1989. From the strategy of resisting the crisis and responding to the new economic realities that had prevailed since 1990 it shifted to a more complex strategy of creating the conditions for sustainable development in the short term. It adopted the term “updating the Cuban economic model” for the intended changes, emphasizing that the transformations would take place within the framework of socialism and thus avoiding the term “economic reform,” which could imply a transition to a market economy. In reality, the proposals were more than an “update,” involving substantial changes in the administration of property and important changes in social relations.
The product of widespread grassroots discussion, the economic and social policy guidelines approved in 2011 involve a set of fundamental transformations. First, they recognize a greater role for monetary-market relations and nonstate property in the management of the economy, in which planning would nevertheless predominate. This decision recognizes an objective reality, taking into account the country’s modest level of development and the fact that socially more efficient economic administration does not depend on a high level of centralization or a restriction to state property. It does, however, require concentration of effort on the part of the public sector on the promotion of sectors that have greater potential of development for the country.
However, there are risks involved, since although the intention of not developing a capitalist model is explicit, measures that allow for the neutralization of the negative consequences of the market need to be adopted. This is especially important in dealing with the emergence of income not earned through socially useful work, the promotion of monetary income as a priority for workers, and the increase in social differentiation. In this regard, indirect mechanisms of control of the nonstate economy through fiscal, commercial, and financial policy will be decisive, among them policies for attenuating the effects of social differentiation stemming from income derived from sources other than work and the political mobilization and public control that should play an essential role.
Secondly, while the fundamental role of state ownership as the key driving force of development is reiterated, a new area of cooperative, mixed, and private property is identified (PCC, 2011: 10):
The management model recognizes and promotes, in addition to the socialist state enterprise, which is the principal form in the national economy, the methods for anticipated foreign investment in the law (mixed enterprises, contracts of international economic association, among others), cooperatives, small farmers, usufructuaries, renters, the self-employed, and other kinds of workers, all of which, together, should contribute to increased efficiency.
This distinction between property and forms of management assumes a clear identification of economic mechanisms that ensure that the earnings through nonstate operators with the usufruct of state property do not accumulate as capital. 4
Thirdly, the separation between state and business functions is promoted, together with decentralization of state economic management of companies and territories, ensuring the participation of workers in this process. In this regard, the guidelines highlight the need to ensure that this participation materializes in the decision-making process in production and services, where unions and structures of grassroots power at the local level can play a fundamental role.
Lastly, greater emphasis is placed on personal consumption in incentive mechanisms, and social consumption is rationalized, especially with regard to generalized subsidies and undue gratuities. In this connection, an adequate account of the rates and proportions of the proposed changes is indispensable to ensure that social solidarity and equality are maintained, improving the situation of the socially disadvantaged, while a more direct link is established between satisfying needs and remuneration for work.
Transformation of economic and social policy of this magnitude requires some time, but the popular pressure resulting from the acute shortages of the Special Period requires rapid change and greater visibility of its positive impacts in the short term. Taking into account that the main obstacles to takeoff are the balance-of-payments deficit and low labor productivity, a very intelligent policy is required to overcome these obstacles and engage the population in making the required adjustments, achieving the political consensus necessary to support its costs in the short term.
To achieve these objectives, the implementation of the current economic and social policies began with the elimination of a series of prohibitions and a flexibilization of the relations between the state and the population while establishing the organizational and institutional bases for solving the most pressing problems. This has required special attention to agricultural production, which has been stimulated since 2008 by grants of the free use of idle lands calculated at more than 2.3 million hectares (around 35 percent of the country’s arable land) of which more than 1.5 million hectares have already been distributed. The liberalization of the management of production and commerce has also been initiated both for cooperatives and for private farmers, and procurement prices have been raised.
Simultaneously, the regulations for self-employed workers, whose numbers tripled between 2010 and the first semester of 2013, amounting to 436,342 workers to date, have been eased. Similarly, in July 2013 the creation of nonagricultural cooperatives, with major emphasis on the commerce and service sectors, was authorized. Together with the opening up of employment in the nonstate sector, 5 this has gradually reduced underemployment in the public sector. Finally, a new tax law has been introduced and a new migration law has been implemented, with profound political and social repercussions. Some of the most immediate effects of these decisions can be seen in Table 1. These figures show the efforts to rebalance the economy financially through the sustained reduction of state expenditures even as the money supply increased. With regard to the balance of payments, a relatively significant reduction of imports took place and the trade deficit was transformed to a surplus. 6 At the same time, a decrease in gross fixed capital formation was recorded in response to the need for additional resources and greater efficiency in the investment process. 7
Economic Indicators (% of GDP), 2008–2012
Source: ONEI (2013), Pérez (2013), and author’s estimates.
The Cuban economy was affected at the end of 2012 by the impact of Hurricane Sandy, which caused nearly US$7,000 million in damage. Therefore a set of adjustments to the goals for 2013 was adopted. The overall result for the first semester of 2013 showed 2.3 percent GDP growth, and it was believed that the rate would reach 2.5–3 percent, less than the 3.7 percent originally predicted (it actually reached 2.7 percent). During the year it was reported that the planned debt payment would be met despite the financial problems the country was facing. 8 The agreement reached with Russia in February to forgive a substantial part of the debt with the former USSR will also positively affect the external financial situation. 9
The reduction of the budget deficit was predicted to be 14.6 percent, which would bring it to 0.5 percent (it actually reached 1.2 percent) of GDP. However, this performance should be considered in the light of the fact that not making necessary expenditures and savings are not the same thing. The fact that already in 2013 49 percent of the deficit was planned to be financed with bank credit marks an important change in fiscal policy and is much more efficient than issuing currency to cover it. Finally, labor productivity was expected to increase by 4.6 percent, the highest rate achieved in a long time and a rate expected to exceed the increase in the average wage, thus contributing to controlling inflation. (The actual figure was 2.3 percent and the increase in wages 1.7 percent.)
For 2014, it was originally predicted that the economy would grow by 3.4 percent, but this rate was reduced to 2.2 percent by the shortage of foreign currency. However, the major transformation expected will occur in the area of business, with greater flexibilization in management including such measures as the possibility of using funds in currency authorized for payment to import-substituting national producers; decentralization of the sale of tangible fixed assets; authorization of the sale of idle and slow-moving inventory; permission for companies to retain the funds for the depreciation of assets, which constitute a source of financing for investments; the approval of unrated investments by organizaciónes superiores de dirección empresarial (OSDE); 10 reduction of the payroll tax to 15 % assignment of 50 percent of profits to the budget and the rest to other destinations, including certain payments to workers; self-financing of pay increases by the company; and the prohibition of planned losses.
In addition to these changes, the extension of cooperatives to the nonagricultural sector and self-employment will continue, all of which will produce a substantial transformation in the functioning of the country’s economic system. Finally, an expansion of the foreign direct investment began in September 2013 when a new special development zone was created in Mariel, a port about 50 kilometers west of Havana, and a new Law of Foreign Investments was scheduled to be approved by the National Assembly in March 2014.
Conclusions
The implementation of these changes in the Cuban economy will enter its most complex phase in 2014 because of their deep and far-reaching character.
The beginning of structural changes will stimulate an acceleration of the growth rate in the basic sectors. Rates for the next four years are predicted to fluctuate around 4 percent (EIU, 2013), but according to various analyses reaching annual growth rates of 6–8 percent in 10 years will require greater acceleration. To accomplish this it is apparent that the country needs to increase its rate of accumulation to more than 20 percent in the short term, approximately doubling the current rate. 11 Taking into account the limited capacity of domestic savings in this regard, foreign direct investment will have to be increased by establishing more favorable conditions for its development. The recent creation of a special development zone around Mariel 12 is proving to promote the conditions for a larger presence for foreign capital on the island.
At the same time, problems with regard to the country’s most pressing needs, among them raising the purchasing power of state employees and ensuring food, housing, and transport for the entire population, must be resolved in the short term to achieve a stable increase in labor productivity. In this connection, although an overall solution for these problems depends largely on the elimination of the dual currency, in the short term it will be necessary to combine an increase in wages in certain areas with a more coherent pricing policy and the granting of personalized subsidies to the most vulnerable segments of the population in the interest of maintaining the needed consensus in support of the economic policy. It is the complex but decisive changes of 2014 that will advance the frontier in updating the Cuban economic model.
Footnotes
Notes
José Luis Rodríguez is an adviser to the Center for Research on the World Economy in Havana, researcher emeritus of the Cuban Academy of Science, and professor emeritus of the University of Pinar del Río. He served as Cuba’s minister of economy and planning and vice president of the Council of Ministers from 1995 to 2009. This article draws from “Las transformaciones recientes de la economía cubana,” which appeared online in the University of New Mexico’s Cuba-1 Analysis on February 11, 2013. Margot Olavarria is a political scientist and a translator in New York City.