LATIN AMERICAN SPECIAL — Cuban economy needs major shot in

It is oft-forgotten that Cuba’s economy did not enter the current crisis in good trim.

Between 1986 and 1990, Cuba’s gross social product (GSP) declined by an average of 0.2% per annum, while population growth exceeded 1% per annum. This gradual but important decline in per capita growth since the mid-1980s highlights an important factor in understanding the inefficiencies and poor performance of the Cuban economy: a continued over-reliance on central management.

However, 1990 was the watershed in the Cuban economy. Since the collapse of preferential trade arrangements with COMECON in 1990, Cuban GSP has shrunk by an estimated 50%.

Analysts are now generally in agreement that the best prospect for 1994 is zero growth. Such stabilization will not reflect, however, the fruit of careful economic policy so much as the fact that 1993 was a year in which nearly everything that could go wrong for the Cuban economy, did so. Cuban sugar exports fell by nearly two-thirds from the previous year’s level (and trade analysts foresee only a modest improvement for the coming year). Production of nickel, Cuba’s third largest hard currency earner, was constrained by a 6-year low in international nickel prices — a low yet to see much of an upswing.

Food production continued to fall. According to a nutritionist with the French aid agency Medecin Sans Frontieres, in February, 1993, Cuban rations provided only 900 calories and 18 grams of protein a day, less than half of what an adult generally requires.

As the official economy ground to a halt, the decline was mirrored by the continuing erosion of the value of the peso (as the government printed paper money to finance its growing budget deficit) and by the proliferation of black markets. Cuba’s second economy may now account for as much as 70% of all retail transactions.

The only bright spot in 1993 was tourism. Yet, while tourism continued to grow, net tourist revenues, the hard currency that actually sticks to the country, will reach only 40% of the projected US$6 million of gross tourist receipts to be taken in 1993.

In 1989, Cuba imported more than US$8 billion in goods. Many of these goods were Soviet-made and perhaps worth less, in real terms, than US$8 billion. Yet, even so, Cuban researchers have estimated that the economy requires at least US$4 billion in imports to function “normally,” and in 1993 Cuba will not be able to finance more than US$1.8 billion in imports. Cuban tourism is therefore not, and is unlikely to ever be, able to fully bridge the gap. The government’s response to the crisis has so far been inadequate and seemingly more geared to political than economic survival. Reforms have been limited to the external sector. Foreign investment has been welcomed, although the flow remains sluggish, in part due to the continued closure of the U.S. market to goods or commodities produced in Cuba. It is also a truism that there are a number of other more attractive destinations for foreign investors around the world, with less risk.

In addition, certain Cuban export enterprises have been semi-privatized, that is to say they have been encouraged to operate as profit-generating firms but with the state as sole shareholder. Only recently have hesitant reforms begun to be extended to the internal sector.

In July, Cuba’s continuing scarcity of foreign exchange prompted the authorities to recognize an unofficial but increasing dollar-stream of cash into, and within, the island. These dollars derived from tourism (and the tips that tourism inevitably generates) and from Cuban-Americans who, responding to the plight of their, relatives and friends, have sent, and continue to send an estimated US$300 million in cash and goods to the island each year.

In September, the authorities also legalized self-employment in about 100 different activities, form watch-repairs to hairdressing. Supplies, not abundant, have to be bought from the state. But the legalization also contains two, more important, provisos. First, Cubans are not allowed to hire workers. Second, trade and distribution remains illegal.

This last proviso represents a continued effort made by the Cuban government, ostensibly to “avoid at all costs the excessive proliferation of intermediaries or parasites who seek to enrich themselves with other peoples’ work”. Yet, as international experience has shown time and time again, trade and services are the two sectors least productive under state control and, by the same token, also those areas where markets work best.

Both of these reforms were based on the principal “if you can’t beat them, join them,” and should best be understood as concessions to already widespread practices, rather than genuine openings. The legalization of the holding of dollars represented a belated recognition that Cuba had become, in many respects, a de facto dollar economy. The legalization of self-employment was in turn a tacit recognition that, as many factories had closed or drastically reduced their work week, an increasing number of Cubans were unemployed and, in order to make ends meet, had already moved into self-employment, but illegally, on the black market.

Most importantly, however, and most recently, the Cuban authorities have begun what might prove to be a substantial shake-up of the state agricultural sector. State farmers are to be allowed to farm their own plots of land and sell what they produce for profit, even if what they produce can only be sold to the state at fixed prices, and they can only grow what the state allows them to.

The main point of this reform is not to boost rural incomes, but to introduce drastically needed efficiency. On state farms in 1989, for example, harvesting losses for vegetables alone amounted to 225 kg per hectare. And in 1991, up to 60% of the production of certain goods were lost between farms and Havana outlets because of poor distribution. The local (and long-awaited, but so far frustrated) outcome of this reform would be the re-establishment of Cuba’s free farmer’s markets that flourished so (perhaps too) successfully in the mid-1980s. In the meantime, a shortage of rural labor is likely to bedevil the program; Cuba has a predominantly urban population. At the close of 1993, the Cuban government found that it could no longer provide those services on which it has traditionally prided itself, especially basic health coverage. The agricultural reform described above points to an increased awareness of the need to improve the productivity of Cuba’s internal economy, especially in agriculture. Food must be put onto Cuban tables. The continued longevity of the current government may well stand on the success of achieving this end.

Only in one other country in the history of Latin America have exports shrunk so quickly and so much as Cuba’s have in the 1990s. (That country was Chile, during the years of the Great Depression. Chile’s recovery then, however, was predicated on a rapid and steep rise in the international prices of goods and commodities that it exported.)

It looks unlikely that a similar window will open to Cuba today as the world, and the patterns of trade that now characterize it, move towards the end of the millennium.

— This article, written by John Paul Rathbone of La Sociedad Economica, appeared in a recent issue of “The Canadian Ibero American Trade Report,” published in Toronto.