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It is more than a year since Fidel Castro fell ill, and no signs of major policy shifts toward market liberalization have emerged under the leadership of his younger brother Raúl. Yet, beneath the calm surface, a debate is taking place at different levels of Havana’s government, among prominent Cuban scholars, and even among ordinary people over potential reforms aimed to address the island’s crucial economic problems and enhance living conditions for all Cubans.
A national debate on economic reforms in Cuba is not something new. Cuban authorities have already launched similar grass-roots discussions on market economics in the late 1980s and mid-1990s amid periods of recession or deep crisis. Both processes did eventually lead to considerable changes and the introduction of some capitalist-style measures. The novelty this time is that Raúl Castro is encouraging a much broader debate on the shortcomings and failings of the socialist system in order to devise effective ways to translate the current macroeconomic growth into tangible benefits for the Cuban population. Having raised public expectations for change by blasting key problems that anger many Cubans such as high food prices and chronic infrastructure deficiencies, Raúl is widely expected to deliver concrete reforms at this point.
That makes all the more important to understand the current situation of the Cuban economy and identify both the areas of progress and those of greatest weakness that would require substantial improvements in the future.
Macroeconomic performance
Cuba’s macroeconomic performance has been remarkable in the past two years, mainly fueled by booming revenues from exports of professional services (primarily medical ones) under special agreements with Venezuela and the dynamism of the internal demand attributed to public investment and private consumption. Soft credits from China and rising nickel revenues (despite stagnant production) were additional stimulating factors.
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The installation ofthousands of container-sizeddiesel generators purchasedfrom Spain, Germany and South Korea virtually putan end to daily blackoutsthat have recently plaguedthe island. |
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Albeit using a new calculation method that substantially inflates the value of its economy by adding an undisclosed value-added to subsidized social services such as healthcare and education, Cuba reported a GDP growth of 11.8% in 2005 and 12.5% in 2006. Even the CIA and the Economist Intelligence Unit (EIU), presumably using the traditional GDP formula designed for market economies, put the island’s growth, respectively, at 8% in 2005 and 10% in 2006. As for 2007, the EIU reports that the surge in public investment has continued, but economic expansion (estimated at 7% for the full year) has been tempered by a slowdown in international tourism and a reduced general contribution from the external sector.
Role of Venezuela
Until recently, revenues from international tourism and remittances captured through sales in state-owned dollar stores represented the most important sources of hard currency for the Cuban government. Gross earnings from tourism, which increased from $243 million in 1990 to $2.4 billion in 2005, were flat in 2006. To make things worse, a 4.3% drop in tourist arrivals last year has gathered pace in 2007. Remittances from abroad, estimated at more than $1.1 billion in 2004, have likely suffered a decline since then (30% according to some unofficial sources) as a result of the Bush administration’s new restrictions on Cuban American travel and money transfers to Cuba introduced in June 2004. However, record foreign exchange earnings and other material payoffs (oil-for-doctors exchanges, joint investments, and credit availability) under bilateral agreements with the government of Hugo Cháavez have now converted Venezuela into Cuba’s main economic lifeline and engine of growth.
Since 2000, Cuba has been paying for vital imports of cut-rate Venezuelan oil (98,000 barrels of high quality crude per day) with medical and educational services. There are currently an estimated 32,000 Cuban doctors, nurses and other healthcare personnel stationed abroad, mostly staffed in medical clinics and other social programs in Venezuela. Moreover, Cuba has greatly benefited from the launch, in late 2004, of the program Operation Miracle, financed by Chávez, under which Cuban doctors are providing free eye surgery to patients from several Latin American and African countries.
Just to give an idea about Venezuela’s crucial role in the Cuban economy, exports of professional services generated about 39% (approximately $3.5 billion) of Cuba’s total hard currency revenues in 2005, replacing tourism as the island’s top foreign exchange earner and bringing in more revenues than exports of all goods combined. Cuban authorities claimed that exports of professional services peaked at $5 billion in 2006, but the latest official figures suggest they experienced only a slight increase from 2005.
Public investment
There is little doubt that Cuba’s current macroeconomic bonanza has produced some clear benefits for the island’s population. Leaving aside oil supplies from Caracas, a significant share of Cuba’s thriving foreign exchange earnings has been committed to purchasing food and other consumer products from Venezuela and China, thus increasing the offer of goods through the rationing system. Even more important, greater resources have been devoted to upgrading infrastructure and machinery, including $1 billion on an energy grid and hundreds of millions on housing, hospital and school facilities, roads, waterworks, and transportation.
The installation of thousands of container-sized diesel generators purchased from Spain, Germany and South Korea virtually put an end to daily blackouts that have recently plagued the island. The launch of a new housing program resulted in the construction and renovation of 111,373 homes in 2006, even though about two-thirds (78,000) were built by Cuban citizens with the state providing material and expertise. Finally, the arrival of locomotives and a fleet of new buses from China for inter-provincial routes as well as new contracts for further bus purchases from China, Brazil, and Belarus signaled Cuba’s commitment to at least begin to tackle the severe problems of its transportation sector.
Economic Challenges
Despite notable improvements, several crucial problems of the Cuban economy remain unresolved. Cuban agricultural production decreased by more than 30% between 2004 and 2006, with citrus products, beans, and vegetables experiencing the highest drops. The decline in virtually all staple crops was mirrored by a 24.6% reduction of sales (and pressure on prices) in free farmers’ markets during this period.
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A remarkable macroeconomicperformance, significant progressin electricity services andhousing construction, and someimprovements in food availability are good news for Cuba |
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Havana’s authorities have attributed the recent poor agricultural performance to the damage caused by hurricanes and the effects of a devastating drought, especially in the central and eastern regions of the island. Natural calamities were indeed major harmful factors, but the downward production also underscores key problems in the organization of Cuban agriculture and is particularly worrisome if we consider that about one-half of the land previously under sugar was transferred to other uses following the 2002 restructuring of the sugar sector. Even the production of rationed food crops such as roots and tubers (potato, sweet potato, and taro) that receive prioritized treatment from the government in terms of inputs, and should therefore be less affected by drought, suffered significant worsening during the 2004-2006 period. A positive development is that harvests of most crops, helped by higher levels of rainfall, have reportedly shown some recovery in 2007.
But the two areas of greatest weakness of the Cuban economy are large inefficiencies in state enterprises and the deplorable conditions of the island’s main infrastructures. The poor economic performance of most government-run businesses is mainly the result of over-centralization, red tape, mismanagement, and widespread illegalities.
As for infrastructures, the replacement of large old power plants with small diesel generators has improved the conditions of Cuba’s energy sector. Yet, the electrical grid and the overall energy infrastructure remain in a poor state and will require substantial new investments in the future. Chronic deficiencies in housing and transportation will also raise the need for sustained investment efforts to upgrade. The house-building program has a long way to go before clearing the huge deficit of homes in Cuba. A 2005 report by the National Housing Institute revealed that 500,000 new homes were needed and 43% of the current stock was either in mediocre or poor shape. And even the optimistic transportation plan recently put forward by the Castro government expects to reach the same conditions of 1989 by 2012. Interestingly, the total number of passengers transported in 2006, mostly by public buses and taxies, was about the same as in 1966, when the Cuban population stood at just 8 million, roughly 3.2 million less than its current size.
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What will Raul do?
Considering Cuba’s growing dependence on Venezuela, and the fact that Hugo Chávez has just won reelection to another six-year term, it is likely that Raúl Castro will retain close ties with Caracas and avoid major policy changes that could jeopardize such profitable relationship. There are nonetheless a few significant areas where he could differ greatly from Fidel.
Less prone to engage in ideological battles than his brother, more attentive to practical concerns and better economic management, and more willing to delegate responsibilities, Raúl will presumably attempt to stimulate development by expanding the island’s productive base, increasing efficiency, and creating more jobs with higher salaries. This would be done without renouncing to the usual calls for more discipline and control. Indeed, new rules for all Cuban state enterprises aimed to strengthen order, educate workers, and deal with |
lack of discipline and illegalities in the performance of labor took effect in April 2007, followed by the introduction of similar rules for managers and executives a few months later.
Decentralizing measures and new investments in Cuba’s agricultural sector should receive high priority in any reform process. After all, it was Raúl Castro who pushed for the re-opening of free farmers’ markets in 1994, allowing Cuban growers to sell their surplus crops at market prices after the state found itself unable to pay farm subsidies. Stressing the need to increase food production and reduce imports (an astounding 84% of all rationed food on the island is imported), Raúl has recently tripled what the state pays for cattle, milk, and other farm products, and cleared bureaucratic hurdles that often prevented growers from getting paid and caused crops to rot. Currently, approximately 39% of all Cuban land that was destined to agriculture and livestock activities after the 2002 restructuring of the sugar industry remains unexploited.
Also known for having adopted some minor market-driven measures within the Cuban military, Raúl is expected to favor material over moral incentives, increase managerial autonomy in small and medium-sized state firms, and perhaps relax some restrictions on the activities of both joint ventures with foreign partners and private entrepreneurs. This would essentially reverse the process of re-centralization of the Cuban economy launched by Fidel Castro in mid-2003.
Conclusion
A remarkable macroeconomic performance, significant progress in electricity services and housing construction, and some improvements in food availability are good news for Cuba. Major challenges include a declining agricultural production, a downturn in international tourism, pervasive inefficiencies and misconducts in state enterprises, a massive housing shortage, and a highly deficient transportation sector.
Given this situation, something more than a few cosmetic changes may be on their way in Cuba under Raúl Castro’s rule. However, the new Cuban leader will likely avoid a rapid and sweeping transformation of the current socialist economic system and opt for the introduction of some gradual and limited market reforms aimed to translate the current macroeconomic bonanza into actual development, improve living standards, and guarantee popular support for his government.
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