Part II

C. The Widening External Disequilibria

All Eastern European countries and those that made up the former Soviet Union have canceled their economic assistance programs and their barter trade with Cuba since 1989. Additionally, the terms of trade are now less favorable to Cuba. Sugar and n ickel are purchased at world market prices rather than at the heavily subsidized prices of the previous period. Cuba is suffering a harsh external shock together with a tightening of the U.S. trade embargo as a consequence of the Cuban Democracy Act of 1 992 ("Torricelli Bill"), which attempts to stop offshore subsidiaries of U.S. companies from doing business with Cuba and bars ships that dock in Cuba from entering U.S. ports for 180 days thereafter. The authorities have not shown the ability to adapt t o the increasingly competitive global environment (NAFTA and WTO). Cuba's exports are narrowly concentrated in agriculture and mining. The shortage of hard currency, already serious before the present crisis, is now critical. The international reserves are virtually depleted.

There has been a dramatic compression in imports. In 1992 import capacity was 28 percent of that in 1989 and in 1993 there was a further decline to 25 percent, which is damaging to the population, since consumption levels have depended heavily on im ported commodities. In 1994 imports increased, but were still at 30 percent of the 1989 level. Oil imports decreased from 13 million tons in 1989 to 6 million tons in 1992 and 5 million tons in 1993.

The fuel crisis has taken a heavy toll on production. There are widespread power blackouts and low industrial capacity utilization. Sugar exports have continued to shrink due to a shortage of spare parts, lack of adequate fertilization, breakdowns in the sugar transportation system, and lack of fuel for field operations and mill boilers. Furthermore, key economic activities are facing a run down of capital resulting from a cut-off of imports.

Shrinking foreign exchange has hampered both current production and capital formation, since domestic production of goods requires imported intermediate goods (oil, spare parts, raw materials, fertilizers, herbicides) while foreign-made capital goods are an essential component in most investment projects, especially those necessary to generate new exports. Produce rots in the fields because there are few trucks available to move it to urban markets. The situation in key activities is characterized by a slump as a result of the external shock and the drastic failure and inadequacy of balance of payments and investment policies.

The lack of sound money has its counterpart in the dollar gap that is due to a gross overvaluation of the Cuban peso. The official exchange rate is CU$1=US$1, with CU$1.32=US$1 for some tourism-related transactions, but as of January 1995, the black market exchange rate was CU$50=US$1. Although holding dollars was illegal for Cuban citizens until July 1993, a persistent process of "dollarization" had already been underway as Cubans began accumulating dollars as protection against high inflation and as a means of savings (because of the inflation differentials given a fixed exchange rate) and to have indirect access to special shops that carry imported goods, because of the lack of consumer goods in government stores, as well as loss of confidence i n the peso, and increasing inflationary pressures in the black market. In a way dollarization was a spontaneous market-induced demand-side monetary reform.

In per capita terms, Cuba is the most indebted country in the world. Cuba has a solvency problem, not a liquidity problem. Only interest on foreign loans could consume about half of Cuba's export earnings. Principal and interest arrears in servici ng the substantial and unmanageable hard-currency foreign debt (probably now close to US$12 billion) have made Cuba a pariah to commercial creditors, suppliers, and foreign governments. In 1986, Cuba's creditors refused to roll over short-term loans and Cuba suspended interest payments. The country now lacks basic commercial credit for trade transactions and is in default on most of its debt obligations. As of December 1994, the value of U.S. claims awarded by the U.S. Foreign Claims Settlement Commiss ion (FCSC) was approximately US$5.6 billion. Cuba is "off the books" for the main credit-rating agencies, meaning that no credit rating is currently being calculated. The country's risk premium (financial as well as political) is one of the two or three highest in the world, which explains the extremely high rate of return and other conditions currently being offered to foreign investors (e.g., long-term concessions and tax holidays). London-based Euromoney magazine in its latest country list (Septembe r 1994) classified Cuba 167th, the lowest of all transition economies.

Since 1989 the government has been actively pursuing a policy of promoting and diversifying exportable products and markets to receive them. As part of this strategy, it launched an aggressive campaign to attract foreign private investment in joint ventures with Cuban state enterprises, based on Decree-Law 50 of 1982, together with an "advantageous" special labor relations law enacted in 1990 ‹Resolution 14/90‹ that applies exclusively to international tourist facilities and further limits labor rights in the self-proclaimed "Workers' and Farmers' State" (Estado de Obreros y Campesinos).

The recent exodus of August 1994 is likely to severely affect foreign investment in general and tourism investment in particular and could determine the beginning of the terminal crisis of Cuban socialism because it is likely to cripple the main sour ces of foreign exchange: foreign investment and the expansion of tourism. The exodus has created an unfavorable external image and led to mass cancellations from the key Spanish tourist market. Dollar remittances from the U.S. will decline somewhat as a result of the recent prohibition but not disappear, because Cuban expatriates in the U.S. are finding alternative ways to send resources to their relatives in need through third countries.

D.The Tyranny of the Internal Blockade

Cuba is a Stalinist-style, totalitarian state with a collectivized economy, run by a rigid and unyielding military dictatorship in which almost all political power and economic decision-making is centralized at the very top, beyond the reach of voter s and the discipline of the market place. There is a fusion of military, economic and political power. The legislature, the National Assembly of People's Power, meets twice a year in two-day sessions without adequate staff, so it is really a rubber stam p for whatever is presented by the executive. The formal private sector is minuscule, with extensive and intensive public ownership of property in all productive sectors: only 8 percent of agricultural land is in private hands and there are 150,000 repai r and personal services shops. The civil society is very poorly developed, providing almost no organized counterweight to the pervasive and weighty influence of the state. The country is run with an iron fist by a single party that refuses to submit to free elections with opposition parties and to allow trained economists and qualified managers to design and implement economic policies.

There is intolerance and no space for open (or public) debate, dissent or even disagreement, because the leadership is extremely hostile to public criticism of its many errors and failures. In a totalitarian system, it is risky for anyone to express openly his/her points of view, and those who disagree often suffer severe consequences. Although the regime attributed it to trafficking and embezzlement, it seems clear that General Arnaldo Ochoa was executed and several top officials imprisoned in 198 9 because they were promoting perestroika and glasnost for Cuba. Carlos Aldana was summarily removed from his post on the Council of Ministers in 1993 for promoting some kind of liberalization. Cuba is virtually closed to new ideas from th roughout the world. However, after the Fourth Congress of the Communist Party held in October 1991, there has been an increasing demand for decentralization and democratization of intellectual life.

Although the experiment in extreme socialism is widely discredited in Cuba, government officials, and other with vested interest in the status quo have tried to preserve the fundamental features of the command socialist regime to retain party control over the economy and have exploited fears of the costs of the transition to a market economy. Distortions create rents, which in turn create rigidities and resistance to change. Cuban news conduct a continuous and systematic campaign painting a dire pi cture of economic problems of the former socialist countries. The message to ordinary Cubans is clear and unambiguous: the transition to capitalism is long and painful. They also argue that the economy might soon reach bottom and start to recover, and p lace virtually the entire blame for the country's misfortunes on the U.S. trade embargo ‹which provides an excuse for the domestic distress and helps reinforce the cohesion of the power structure‹ and on the demise of the Soviet Union and the so cialist bloc.

The insufficient authorized "free" markets, private entrepreneurship, free choice of work, and private property have placed the economy in a straitjacket, but are considered by those in power to be the symbols of the stability and continuity of the s ocialist model. The pervasive sense of corruption, fraud and privilege among high-ranking public officials (the nomenklatura), which are inherent components of the socialist system due to its lack of accountability, have been long standing sources of popular discontent and widespread denunciation, which worsening scarcities ‹evidenced by a severe nutritional crisis as traditional systems of management and control break down‹ have seriously aggravated. Most of the consume r items traded on the black market are stolen, misappropriated or diverted from state-owned enterprises or government distribution channels. This has brought about a moral and ethical decay and lawlessness that is disintegrating the society. Economic su rvival depends on black marketing, speculation, connections and bribery. Enterprising members of the nomenklatura have been given ample opportunity to enrich themselves ‹via cooperating with foreign investors in joint ventures with local entr epreneurs who have been acting illegally, better housing, and other assorted perks.

The state controls most economic resources, allocates them through rigid and highly centralized planning, has almost complete monopoly over foreign trade, and distributes goods and services to the population through a rationing system that provides a fertile ground for administrative corruption because there is a widening gap between official prices and free and black market prices. Inefficiency in government is pervasive. There are extensive and comprehensive bureaucratic constraints and controls for state enterprises and the production and distribution of agricultural goods. All significant changes and major decisions are delayed. There are excessive, irrational, rigid and complex norms and regulations for every activity, lack of goods and fact or markets, of legal market contracts and transactions, and an absence of such concepts as individual freedom, self-responsibility and managerial efficiency; therefore, lack of incentives and myriad distortions to efficient economic behavior are basic, su bstantial and widespread.

Political credentials govern managerial promotions and appointments, producing widespread dissatisfaction of middle-managers and technicians and demoralization among younger professionals. The government has largely ignored human rights, governance and the physical environment. There is a systemic disfunction, unaccountability and illegitimacy of the public sector. Abysmally inefficient economic structures and large monopolistic and oligopolistic state enterprises ("consolidados" or trusts controlled by the corresponding central ministry) dominate production and the structure and organization of distribution. Cuban collectivization is broad and deep; consequently, millions of microeconomic relations simply do not exist and the state, which is inherently incapable of managing them, is even more so at a time of major dislocations.

The structure of prices bears little relation to costs of production and to relative scarcities and opportunity costs, and the exchange rate is extremely distorted; they do not promote a good allocation and utilization of resources. Reliance on mora l stimuli and unpaid voluntary work (labor mobilization techniques) in defense of socialism and the motherland leads to low labor productivity that the present crisis has exacerbated. The financial market is fragile, narrow, underdeveloped and passive, w ith the Banco Nacional (Central Bank) and its branch offices playing the role of rudimentary commercial banks and with very negative real interest rates. Unions are political organizations whose major task is to transmit and explain government dir ectives to workers and ensure that party policies are implemented at the level of enterprises, with emphasis placed mainly on the need for rigid discipline at the work-place.

III.Main Economic Policy Measures and Reforms Adopted since 1990 to Face the Crisis

"Some say that if these measures have to be taken we are already late. They argue that this process of collective discussion is a delay that unnecessarily protracts the implementation of measures which will help solve our problems ."

‹ Renato Recio, Cuba News, February 1994, p.11. ‹

"We have not renounced socialism as our common objective....We have to be ready to conduct necessary changes to adapt to present world conditions ‹without renouncing our ideas and without renouncing our objectives."

‹ Fidel Castro, Time, February 20, 1995, p.58. ‹

The Cuban economic system virtually ground to a halt from 1989 through 1993. At first, the authorities only promoted joint ventures with previously banned foreign private investors vigorously, reoriented international links based on tourism and biot echnology, professed to encourage self-sufficiency in agricultural goods (the autarkic Food Program), adopted harsh austerity measures to adjust to lower levels of consumption and productive employment, and exhorted ordinary Cubans to work harder than eve r as a means to forestall or altogether avoid the implementation of reforms. By July 1993 it was clear that this strategy of using old methods for dealing with new shocks was unrealistic and unworkable, because the macroeconomic environment became unsust ainable with a very weak supply response. Futile reliance on dogmatism resulted in lost time and exacerbated the crisis.

The continuing major decline of GSP, including a historically low sugar crop in 1993 (4.2 million tons), and the increasingly competitive world economy finally forced the introduction of some ground-breaking but improvised, cautious and modest elemen ts of a stabilization program and market economy. The reforms involve merely changes within the system and are very slow paced (see Tables 3 and 4). A distinguishing feature of the Cuban reforms is the attempt by the leadership to preserve the extreme socialist character of the economy.

The principal reforms enacted since 1990 are:

• Reduction of the fiscal deficit, through
  
  

  ‹partial price adjustment in alcoholic beverages and tobacco, agricultural products, public services, medicines, oil, and school lunches; and
  

  ‹reorganization of the administrative apparatus to reduce the staff involved in the state oversight of the economy, the other ministries, and the armed forces.

• Dollarization of the economy, i.e., legalization of possession and circulation of foreign exchange and relaxation of restrictions on travel and remittances by Cuban expatriates.

• Promotion of foreign investment in the form of joint ventures with widening and deepening relaxation in allowed areas of activities and terms and conditions.

• (Re)Authorization for own-account work by individuals, i.e. limited steps toward private sector activity in the services sector allowed in 135 trades, crafts and services.

• Pseudo-decentralization and pseudo-debureaucratization of economic decision-making, namely

  ‹ cooperativization of state farms and arrangements for private exploitation of non cultivated plots of less than one hectare; and
  

  ‹ decentralization of some foreign trade operations.

• Allowing market forces to influence prices.

  ‹ Reestablishment of "free" agricultural markets.
  

  ‹ Establishment of "free" industrial-artisan markets.

• Introduction of the free convertible peso.

• Bonuses for workers in some tradables.

• Establishment of a few corporate businesses.

• Freezing of savings accounts over 10,000 pesos.

< TD ALIGN=left>Perverse and adverse selection

Measures	Year Enacted	Major Objective	Scope and Design	Execution	Direct Effect Results	General Net Effect
Reduction of Fiscal Deficit	1994	Stabilization	Incomplete and Insufficient	Faulty and delayed	Insufficient and Inadequate	Positive but minor (party successful)
Dollarization of the Economy	1993	Mobilization of external resources	Wrong	According to plan	Insufficient and inadequate	P erverse and immiserizing
Promotion of Foreign Investment	1990	Mobilization of external resources	Incomplete and insufficient	Faulty	Insufficient and inadequate
(Re) Authorization for Own Account Work	1993	Expansion of aggregate supply	Incomplete and insufficient	Faulty and delayed	Insufficient and i nadequate	Positive but minor (partly successful)
Pseudo- De centralization of State Farms	1993	Expansion of aggregate supply and enterprise restructuring	Incomplete and insufficient	According to plan	Insufficient and inadequate	Positive but minor (partly successful)
Allowing Market Forces to Influence Prices	1994	Expansion of aggregate supply and restructuring	Incomplete and insufficient	Faulty and delayed	Insufficient	Positive but minor (partly successful)
Overall Package		Stabilization, mobilization of external resources, expansion of aggregate supply and enterprise restructuring	Incomplete and insufficient	Mixed, generally faulty and delayed	Insufficient and inadequate. They will not do the trick	Minor (partly successful), with some perverse, immiserizing and adverse selection elements

In 1995 there appears to have been a loss of momentum on economic reform. There have been a limited increase in the number of occupations in which own-account work is permitted and paladares, which were closed at the end of 1993, have been re legalized. Any economist knows that the first rule in stabilizing and recovering an economy is consistency, precisely the rule that has been ignored by the Cuban authorities repeatedly in dealing with the crisis.
Reforms must be deepened and extended. The existing distortions and rigidities that inhibit private sector activity and impede flexible supply responses need to be removed quickly, both to encourage a more efficient use of existing resources and, eventually, to attract new ones. Sustained improvements will not happen until the structural transformation of the economy is well advanced and the private sector, both the foreign investors and the Cuban population, have acquired enough confidence in the permanency of past reforms to step up investment in the country.

Table 4. Cuba: Impact of Policy Changes and the Collapse of the Socialist Bloc on Economic Growth

System Economic Management and Planning , 1975-1985`	Rectification of Errors 1986-1989	Collapse of Socialist Bloc 1990 1991	Special Period in Times of Peace 1992-1994
Free farmers' markets and government parallel markets.	Abolished		Reestablishment of "free" agricultural markets, Oct. 94.
Handicraft markets.	Abolished		Establishment of "free" industrial-artisian markets, Dec. 1994.
Generalized bonuses to motivate workers to increase productivity and quality and reductions in costs	Abolished		Bonuses for workers in some tradeables, May 1994.
Private enterprise in a wide range of trade and services	Abolished		(Re)authorization for own account work, Sept. 1993.
Private selling, rental and construction of housing	Abolished
Enactment of foreign investment legislation, May 1982.	No active promotion of foreign investment		Active promotion of foreign private investment, 1993-1994. Sectors and conditions have been relaxed.
Contracting of significant foreign debt.	Default on foreign obligations		Dollarization of the economy, August 1993.
Fixed exchange rate with a minor black market.			Fixed exchange rate with an expanding black market. Free convertible peso. Dec. 1994.
Quasi- fiscl balance	Increased fiscal deficit	Limited austerity measures	Reduction of fiscal deficit, May 1994.
%. Annual Change in Gross Social Product (GSP) 1976-80: 3.4 1981-85: 7.2	1986: 1.2 1987: -3.9 1988: 2.2 1989: 0.1	1990: -3.1 1991: -25.0	1992: -14.0 1993: -15.0 1994: -5.0

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