132
CHAPTER IV. FOREIGN ECONOMIC RELATIONS
A. CHARACTERIZATION OF THE CRISIS
In 1989, the trend in the Cuban economy pointed toward stagnation. The collapse of the socialist
economies acted as a catalyst for an inevitable restructuring process, given that the development
model was doubly worn out due to external and internal causes. The breakup of the CMEA trade
networks led to the search for other markets for Cuban exports: if in 1989, 80% of total trade was
with the socialist countries, in 1994 this was reduced to 12% (around 10% of this with the
Russian Federation)1. This redirecting of trade meant a deterioration of more than 45% in the
relationship of the terms of trade between 1990 and 1993.
This loss of foreign-currency revenue in and the interruption of soft
financingapproximately 700 million rubles annuallyhad substantial negative consequences
for the functioning of the Cuban economy. When it became impossible to acquire the same
amount of imported inputs, export production collapsed. The disorganization of the old marketing
channels and the gradual substitution of new markets also had a bearing on this. Between 1989
and 1993, export volume fell 52%, which meant a 74% drop in the purchasing power of exports.
In contrast to the adjustment in the early 1960s, the almost total absence of foreign
financing (influenced by the U.S. embargo and the payment moratorium to the Paris Club) has
created enormous obstacles to offsetting the effects of the crisis, slowing down the structural
transformation of production.
Although the effects of the loss of production revenue were not fully reflected until 1991,
in subsequent years the reduction of the unit value of exports and the disappearance of foreign
financing led to the collapse of Cuba’s import volume, which totaled almost 70% between 1989
and 1992. In the 1989-1993 period, purchases of goods abroad fell annually to an average rate of
29%. In some cases, the declines were impressive: machinery and transportation material (44%),
animal and vegetable oils and lards (30%), as well as fuels and lubricants (28%).
In fact, imports of goods and services declined more than exports: US$3.32 billion dollars
from 1990 to 1991 and US$2.36 billion dollars between 1991 and 1993, against US$2.38 billion
dollars and US$1.60 billion dollars in foreign sales. This reduced the trade balance from US$2.55
billion dollars in 1990 to US$372 million dollars in 1993.
The most important loss occurred in the value of sugar exports, which fell close to 83%
between 1990 and 1993, representing more than 50% of the total loss of foreign revenue. It
should also be noted that between 1990 and 1992 the amount of sugar exported was reduced only
15%, while its value plunged almost 72%, reflecting the strong deterioration of international
sugar prices. In a second phase, the cumulative effect of the lack of imported inputs in the sugar
1
If import figures of the socialist countries were not reduced more, it is because of the dependence on inputs, spare
parts and other goods related to the use of technology derived from those countries.
133
sector determined (1993) that the volume placed abroad was 40% lower than that of the previous
year.
The effect on GDP was powerful: official estimates report decreases of 9.5%, 9.9% and
13.6% during 1991, 1992 and 1993, respectively. However, it should be recalled that when using
the official exchange rate and reflecting the adjustment of the relationship of the terms of trade of
goods and services, these figures overestimate the loss in the generation of direct added value
which, overall, probably did not exceed 20%, as reported by official figures2.
The impact of the emergency policy on the external sector will now be discussed. In
particular, the rationing of foreign currency and fuel inputs, foreign restrictions, the
“dollarization” of the economy and the country’s foreign-exchange and tariff policies. The
foreign-debt problem is also discussed and matters of stabilization, foreign transactions, balance
of payments, as well as the terms of trade are dealt with in depth. The reconstruction process of
the external sector is then broached, with special reference to export promotion, to the country’s
plans for economic transition and its insertion in the international markets, to family remittances,
to foreign direct investment, to new markets, the embargo and related negotiations. Further on,
other policies on foreign financing are discussed, such as those related to supply and import
substitution. Finally, some preliminary ideas are outlined for a possible strategy toward easing
the stranglehold on the external sector.
Graph IV.1. Cuba: Foreign Trade in Goods
(Millions of dollars)
10 000
8 000
Accelerated
growth
Stagnation
CMEA
collapse
Crisis
Recession
Recovery
6 000
Imports
4 000
2 000
Exports
0
-2 000
-4 000
1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Balance of Trade
Source: CEPAL, based on official data and CEPAL estimates
2
As shown, exports represented around 30% of GDP and the corresponding revenue surpassed by more than 50%
that would have been obtained at world market prices. Here, there is an implicit external subsidy that does not
correspond to the internal generation of added value.
134
B.
THE EMERGENCY POLICY AND ITS RESULTS
As has been mentioned, the collapse of Cuban economic relations with the countries integrating
the now defunct CMEA had a stronger repercussion than that experienced during the crisis in the
thirties. It is estimated that in the 1929-1933 period, GDP fell almost one-third, while trade
declined close to 75%. Although in the 1989-1993 period these indicators show similar
deterioration, it would be necessary to take into account the repercussion of Cuba’s current
reentry in the international markets. Contrary to what would have occurred in a conventional
stabilization program undertaken in a market economyin which the relative price of tradable
goods would have increased, leading to a redirecting of production with dislocations in the
productive structure, employment and the distribution of income3the policy of the Cuban
government consisted in lengthening the adjustment periods in order to safeguard equity,
maintaining the exchange rate and rationing available foreign currency. The cost of these
measures discouraged production of tradable goods, allowing the unfavorable effects on exports
to spread in a different way to the production of goods for domestic consumption and to have a
parallel foreign-currency market, that is, to deepen the duality of the economic structure and the
markets.
The high content of imported inputs in production and the rigidities of business
administration led to low competitiveness, amplifying the disadvantages facing Cuba in its
attempt to reenter the new, unknown international scenario. The shortage of foreign currency
caused a decline in economic activity, leading to a vicious circle: the lack of foreign inputs
limited production of both exportable goods and import substitutes, accentuating the shortage of
foreign currency itself.
1.
Rationing of foreign currency and fuel inputs
When the soft financing from the CMEA disappeared and the Western capital markets remained
closed, the trade deficit had to be reduced from US$2.6 billion dollars (1989) to slightly more
than US$300 million dollars (1994). Given the shortage of foreign currency, the Ministry of the
Economy and Planning opted to allot it directly. To date, budgets are prepared that control the
cash flow in foreign currency of each state, and the funds contributed by net generators are
transferred to net users.
In the case of the productive sector, only producers of tradable goods and services have
access to available foreign-currency allocations. This allocation mechanism is a significant
improvement over the previous method in which all the producers received foreign currency, as
the material balances demanded them. In the past, price and quality considerations exerted weak
pressure on production decisions, while today the need to optimize the use of convertible
currencies fixes a de facto value on them that reflects their relative shortage.
The planning priorities were given to imports of food, fuel products and inputs for the
manufacture of exportable goods, particularly in detriment of machinery and equipment. This
resulted in the paralysis of many activities and a cumulative decrease of 20 percentage points in
3
The Latin-American experience is very rich in this respect.
135
investment with respect to GDP. The effects of this on productive efficiency will be perceived
more forcibly when economic reactivation deepens and the use of installed capacity coefficients
increases.
The shortage of foreign currency determined that the availability of oil in 1992 and 1993
contracted to half, compared to 1989. As a result, GDP fuel intensity had to decrease, which had
a significant effect on electric power generation (which dropped 26.8% during the 1990-1993
period) and on cement production (which decreased 72.1% in the same period)4. Such an effect
can also be seen in the gradual decline in the production of sugar, meats, vegetables and citrus
products in 1993 and 1994.
In general, during the 1989-1993 period the shortage of imported inputs severely affected
production both for the domestic and foreign markets. Consequently, exports were reduced
worsening the situation, in such a way that sugar dropped 49%, nickel 42%, final molasses 73%
and alcoholic beverages 61%.
The oil supply rose as of 1994 and its cumulative growth of more than 25% between 1993
and 1998 was due mainly to a threefold increase in extraction nationwide. A relative recovery is
also evident in the exported volume of raw sugar and a considerable increase in nickel.
2.
External restriction, dollarization of the economy and foreign-exchange policy
A number of adjustment mechanisms of the balance of payments were centered on restrictions on
the supply of goods destined for domestic consumption. Certainly, monetization of the fiscal
deficit, price freezing and the shortage of goods broadened the gap of unmet demand. In a first
instance, and in view of the absence of merchandise, the availability of currency in circulation
translated into an increase in bank deposits and in dollars acquired in the black market. The
shortage of foreign currency, excess liquidity and uncertainty made the unofficial exchange rate
go from seven pesos per dollar at the end of 1990 to 134 by the middle of 1994. However, while
the recession heightened, remittances from abroad increased, representing substantial capital
inflow, which tended to moderate the former. Nevertheless, funds were hoarded in homes
because of the shortage of goods and the impossibility of channeling convertible funds to the
banking system.
In order to counteract these trends, the government implemented various legal and
monetary measures to facilitate the circulation of the dollar and its use as a means of payment.
The resulting deposits of convertible currency allowed the socialization of its use and eased, to
some extent, the shortage of foreign currency. As a result of the steps taken to reorganize
domestic finances, the exchange rate posted a downward trend as of 1995, registering a price of
about 20-22 pesos per dollar for the two-year period of 1998-1999.
The opening process to foreign trade required modification of various aspects of
economic strategy. Some mechanisms of the centralized planning system were displaced with the
4
The ration-booklet system that protected consumption of the majority of the population is one reason why the
decrease in cement production is greater than that of electric power generation.
136
creation of a decentralized sector comprised of companies and activities operating in dollars.
These measures allowed for the fluctuation of prices of tradable goods without altering the
official exchange rate, although it also led to a duality in the economy, in employment and in the
distribution of income (González, 1995).
i)
On the one hand, there is a sector that produces goods and services destined for the
domestic market, which operates in Cuban pesos and continues to be controlled by
central planning mechanisms; for example, agriculture, which includes the sugar
sector and education and health services. Companies in the traditional sector that
sell at regulated prices frequently receive preferential tax and tariff treatment,
acquiring a good part of their inputs with subsidies so as to cover the deficit from
also selling at subsidized prices.
ii)
On the other hand, a sector focused on foreign markets is consolidating itself (part
of the second economy) and operates in foreign currency. It is free to acquire
inputs in that currencyexcept for the labor forceand sells products that must
meet international quality and price standards. In this way, the distribution of
foreign currency to the population is constrained and the scarce funds are
concentrated in government priorities; therefore, possibly moderating the
deterioration in the distribution of income. This sphere includes tourism and the
production of goods destined for the foreign market. Efforts toward import
substitution and supply of the domestic market have also been undertaken.
Up to now, companies linked to the foreign-currency circuit make use of a specialized
mechanism for strengthening exports and harnessing foreign currency. Little by little, they are
also being used to change the modus operandi of the economy. However, connections between
the two spheres are still weak, both from the standpoint of production and the managerial culture.
The producer of tradable goods operates in international or domestic markets and is not obligated
to acquire inputs in the domestic market, save for a few strategic products such as fuel.
Nevertheless, in some cases this helps national producers achieve international quality and price
standards; to the extent that companies in the protected sector are willing to carry out the
necessary transformation and choose to produce for the export market, they may operate in
foreign currency. This process is strengthened by granting credit and is aided by improving
quality. It is estimated that in 1999, the banking system granted loans of over US$1.3 billion
dollars to productive companies, compared to US$1 billion dollars the year before. But
systematizing import substitution by this means has not yet been achieved, nor has a sufficiently
comprehensive industrial policy been integrated.
3.
Tariff policy
Tariffs play a secondary role in Cuban foreign trade, since the State reserves the right to
quantitative control of most transactions: its composition and value continue to reflect central
decisions even when the operating functions have been decentralized among numerous
companies. However, since State-owned enterprises focused on foreign trade have grown in
number from 50 to over 300—many of them with mixed-ownership capital—tariffs are beginning
to grow in importance.
137
As a founding member of the General Agreement of Tariffs and Trade (GATT) and now
of the World Trade Organization (WTO), Cuba has introduced increasingly lower and less
dispersed taxes. Tariff revisions during 1990, 1992 and 1996 have reduced the average general
tariff level from 51.5% to 16.9%, and that applied to those countries with which it has reached
most-favored-nation accords, from 17.7% to 10.7%.
It would seem then that neither the tariffs nor the GATT or WTO escape clauses have
been used to contribute to the adjustment of the foreign accounts during the emergency period.
This is attributed particularly to the planned restriction of foreign acquisitions, limited by almost
no external financing, with a very high concentration in purchases of fuel and food. However, in
the 1996 tariff revision, criteria announcing the expansion of the traditional tariff policy functions
were introduced, which are consistent with the measures of market liberalization and foreigntrade transactions. In effect, high tariffs were set on luxury products, susceptible to domestic
substitution and nonessential for consumption by the general population. In contrast, low tariffs
were set on raw materials and higher ones on finished products, while purchases of popular
consumer goods are tariff-free (Associated Consultants, 1996). At the same time, industrial parks
are beginning to be created in the free zones.
On the other hand, tariffs are beginning to have an important fiscal function, to the extent
that foreign transactions are being conducted by decentralized, mixed-capital or foreign-owned
companies operating in the country. Although they still have little weight in the State budget
income (representing no more than 3% of the total), tariff contributions to tax collection rose
from 242 million pesos in 1993 to 428.3 million pesos in 1996. In the two following years, they
show a drop (they stood at 361 million pesos in 1998) due to tariff reductions and the breakdown
of imports, which would have been biased to products with lower tariffs. It should be noted that,
as of 1996, Cuba has started to charge for services in the handling of merchandise at the border
(rates for port arrival and on customs services) seeking to improve financing of the country’s
customs service. In more recent years (1997 and 1998), with the operation of free zones and the
adoption of a franchise and tariff reimbursement regime, new mechanisms are being adopted for
trade and customs operations, the effects of which, both fiscal and those related to economic
activity and employment, will begin to be perceived in the future.
The linkage of the tariff policy with a gradual liberalization of the market will further
boost imports, particularly if a low-tariff level with an overvalued exchange rate persists. In
contrast, the domestic promotion of efficient industrial connections will tend to exert an opposite
effect.
4.
Foreign debt
Since 1986, a large part of interest payments and amortization of foreign debt was
suspended. During the adjustment period, both credit to suppliers and to those associated with
exportable production financing were covered. To date, renegotiations have been carried out
regarding loans in convertible currencies with several countries such as Japan, Italy, the United
Kingdom, Belgium, Spain and Canada, and talks began with the Paris Club. In 1998, the total
foreign debt rose to US$11.2 billion dollars, excluding that of countries of the now defunct
CMEA (see chart IV.1). Although the moratorium implied an easing in the balance of payments,
138
this has seriously obstructed access to foreign-capital markets and has forced the use of onerous
short-term financing, whose margins reflect the risks perceived in those markets.
Chart IV.1
CUBA: TOTAL FOREIGN-DEBT STRUCTURE IN CONVERTIBLE CURRENCY, 1993-1998
1993 a/
Total foreign debt c/
Bilateral official
Intergovernmental loans
Credit for development aid
Credit for exports with government
insurance
Unilateral official
Suppliers
Financial institutions
Bank loans and deposits
Bilateral loans and of consortiums at
medium and long terms
Short-time deposits
Credits for current imports
Other loans
100
46.1
0.5
1.7
1996 a/
Percentages
100
57.7
13.2
2.1
1998 b/ (millions
of dollars)
1997 a/
1998 a/
100
57.7
14.9
2.1
100
55.7
14.3
2
11 209
6 248
1 601
220
43.9
42.4
40.7
39.5
4 426
5.0
21.3
27.4
24.5
5.4
11.4
25.2
22.6
5.1
11.5
25.4
22.6
5.1
14.9
24
23
575
1 673
2 687
2 573
11.7
10.8
11
12.2
1 362
12.9
2.8
0.3
11.7
2.7
0.3
11.6
2.8
0.3
10.8
1.0
0.2
1 211
113
27
Source: CEPAL, based on figures of the Cuban National Statistics Office (ONE).
a/ Percentages.
b/ Millions of US dollars.
c/ Debt figures in freely convertible currency do not include country's obligations with the Russian Federation and the
former CMEA members, nor other debts on which there is an agreement on the currency parity.
Cuba has had growing access to inter-governmental loans, which, together with export
credits guaranteed by the government, have become the main source of bilateral official
indebtedness. The new Banco Central de Cuba has restructured and conciliated its external debt
in such a way as to decrease, albeit partially, the need for commercial bank loans5.
By creditor country, the structure of Cuba's foreign debt (excluding that which still
maintains through accords and with ex-member countries of the CMEA) shows a concentration
in Japan and in European Union countries.
In 1998, the Banco Nacional de Cuba reprogrammed US$750 million dollars of its
commercial debt with 28 Japanese companies. The payments are extended up to the year 2017
and include a grace period of up to 10 years. An agreement was signed with Italy for loan
guarantees between the two countries, as well as an agreement to renegotiate Cuban short-term
5
Once the Banco Central de Cuba was created as the issuing body and chancellor of the financial and monetary
system, a process of conciliation and accounting adjustments was begun in the classification of the debt.
Consequently, the heading of intergovernmental loans was corrected so that it adequately reflects the funds obtained
by the country, which previously were included in the more general heading of credit to suppliers, when in reality the
source of these funds were governments more than supplier companies.
139
debt, which totals US$70 million dollars. Italy granted a new preferential credit line for US$80
million dollars, supported by the tourist flow and the Cuban government’s guarantee.
Moreover, access to medium-term (between two and five years) commercial financing has
eased, so that loans in the amount of US$500 million dollars were obtained during the 1997-1999
period for the purchase of equipment for the sugar agroindustry, airport construction and
communications development.
Graph IV.2. Cuba: Imports as a Percentage of Gross Domestic Product a/
(Percentages)
45
40
35
30
25
20
15
10
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
140
In this context, and given that the greater proportion of trade in goods and services and
foreign direct investment also takes place in Europe, the government ordered that as of July 1999,
the euro was the obligatory contracting currency, as well as for the payment of transactions with
the eleven member countries of the European Monetary Union. Also, the government ordered
that transactions of stock market securities contracted in dollars be undertaken in euros. With
this, it is expected that it will be possible to operate under better conditions given the use of
multiple exchange rates and currencies—as has been done up to now—at the same time reducing
the risk of operating in dollars, given the embargo dispositions of the United States with respect
to its use in transactions of third parties with Cuba.
5.
Stabilization, external transactions and balance of payments
The policies implemented in response to the collapse of the external markets and to the lack of
financing motivated the reduction of the trade deficit as stated previously. There was a notable
decrease in the share of imports with respect to GDP (at current prices) of 41% during 1985-1990
to 16% in 1995, rebounding in 1998 to 19%.
In this sense, the adjustment mechanisms have proven effective in reducing the trade
imbalance, although structural aspects of prime importance still need to be resolved. The
contraction in imports of goods has played a pivotal role, since revenue from merchandise
exports fell dramatically up to 1993, when a still incomplete rebound became noticeable. The
country’s trade situation is not completely settled, given that it is barely in the process of
reconstructing its commercial ties abroad. Latent structural weaknesses subsist. To illustrate this
point, the recovery of economic growth in the 1994-1997 period increased purchases abroad
considerably (62%) and widened the trade deficit from US$308 million dollars in 1994 to
US$746 million dollars in 1997, in view of the high elasticity of imports with respect to GDP.
Moreover, the progressive liberalization of the external transactions, together with the
appreciation of the official exchange rate, signals risks that will demand the modification of other
parameters of economic policy.
Efforts in market reconstruction can be detected by the fact that the unitary value of
exports recovered somewhat earlier than expected (1993), even when in volume it took two years
more due to production problems related to the lack of imported inputs. Sugar still represents
almost 50% of the value of exported goods and a point of concern is that the most important
customers purchase only raw sugar, which has halted expansion of the refined product supply.
The total export recovery rate has not been as dramatic as that of imports, and in the years 19971998, sales abroad decreased, in view of the persistence of the rigidities noted above. The poor
performance of the sugar sector and its repercussions on the availability of foreign currency to
finance domestic production show the still high dependence of the Cuban economy on this
activity.
On the other hand, the balance of services shows continuous improvement during the
entire 1989-1998 period. Nonfactorial revenue more than quadrupled, while net payments grew
in such a way that the balance of services rose from a deficit (US$-213 million dollars) to a
surplus (US$1.5 billion dollars). The net payment of factor services increased 77% as a result of
141
both the repatriation of profits from foreign direct investment and interest on external liabilities,
mainly from short-term debt and debt to suppliers6.
Net current transfers became the main source of external financing. They have grown
from US$-48 million dollars in 1989 to an estimated US$820 million dollars in 1998, while the
balance in the capital account decreased from US$4.1 billion dollars to only US$413 million
dollars in the same period. For its part, the foreign direct investment inflow increased by US$54
million dollars in 1993 to US$207 million dollars in 1998. However, in the 1990s, the
international reserves have remained at meager levels, which has limited the maneuvering room
for economic policy.
6.
Evolution of the terms of trade
Up to the end of the 1980s, the terms of trade were favorable for Cuba in view of the
advantageous trade relations established with the CMEA member countries. The country sold its
core export products (sugar and nickel) at prices higher than those on the international markets
and purchased essential goods for its productive functioning, such as low-priced oil.
In contrast, in the 1990-1992 period the terms of trade deteriorated significantly, mainly
as a result of the price drop in its main export products (sugar and nickel). In view of the
disappearance of its preferential markets, in 1992 Cuba had to sell its total sugarcane harvest on
the residual market at a discount. The average price of export sugar then dropped from 51.4 cents
(US$) per kilogram in 1990 to 21.4 cents (US$) in 19927. The deterioration of the international
price of nickel also influenced the decrease in the purchasing power of exports.
Furthermore, of all the oil traditionally purchased from the extinct Soviet Union, in 1992
barely 30% was obtained from the Russian Federation through a swap for sugar. The remaining
70% was bought in the international market at a price 27% higher than that of 1990.
In the three-year period of 1993-1995, the terms of trade improved as the prices of sugar
and nickel rose, while the oil price increased only in the last of those three years. In 1996, the
terms of trade worsened from the effect of a decline in the international prices of sugar and nickel
and an increase in the prices of oil and food imported by Cuba.
In contrast to other countries of the region, the abrupt deterioration in the prices of
primary products, related to the international financial turbulence, benefited the Cuban economy
in 1997, thereby improving the terms of trade. Nevertheless, from 1998-1999 a new deterioration
of the terms of trade became apparent as a result of the decline in the prices of sugar and nickel,
although in the latter the trend was reversed by mid quotations. International oil prices declined
throughout all of 1998 and in the first quarter of 1999, but the rest of the year increased
substantially.
6
Not only do the high interest rates covered by Cuba have an influence, but also the displacement of soft financing
from the socialist area to the more expensive Western markets.
7
It should be pointed out that in 1992 close to 80% of world sugar trade was carried out in the preferential markets at
a price of 21.6 cents (US$) per pound in the United States and 25.7 cents (US$) in the European Economic
Community.
142
In brief, fluctuations in the terms of trade reflect the vulnerability of the foreign sector of
the Cuban economy in face of the current difficulties for accessing markets and the volatility of
international prices for primary goods. This would suggest the advisability of increasing and
diversifying exports, as well as strengthening the import substitution process, particularly with
regard to food products. It is estimated that the appreciable increase in national crude oil
extraction will contribute to improving trade conditions in the immediate future.
C. THE RECONSTRUCTION OF THE FOREIGN SECTOR
As was the case with the socialist economies of Eastern Europe, the Cuban growth model showed
symptoms of exhaustion prior to the collapse in 1989. In part, this is attributable to the lag in
production efficiency of the central planning systems, to the neglect in market and product
diversification in foreign trade and to reduced management autonomy in State-owned enterprises
(Easterly & Fisher, 1994). This is why Cuba can hardly advance toward self-sustained
development without accelerating the transition of the productive sector to international
efficiency standards. This requires investment to modernize manufacturing technology and,
above all, to liberalize the legal framework for the organization of productive forces so as to
strengthen managerial capacity and management autonomy.
Even though it is true that market liberalization leads to improved efficiency in
production, it is also true that it has the potential to destroy the industrial and social fabric,
especially in a period of structural transition. In order to counteract such effects, it is necessary to
govern the market with industrial, labor and education and fiscal policies, among others.
The adjustment policy of the balance of payments would not have been enough in itself to
restart the development process. Cuba simultaneously implemented a foreign-market strategy,
whose achievements have meant the increase in development opportunities. There are, therefore,
structural and institutional changes that impose different characteristics in the Cuban foreign
sector. In this respect, modifications to legislation on foreign investment and the property regime
have taken on great importance, along with the adoption of decentralized and autonomous
management systems of State-owned foreign-trade enterprises. These and other measures explain
the shifts that are taking place regarding the source and destination of Cuban foreign trade.
When analyzing the impact of the emergency policy in the foreign sector, it must be kept
in mind that, as of 1993, Cuba entered a different phase of the “Special Period”. In fact, the same
foreign variables show an important change in trend, which although not reflected in recovery,
compared to the values of 1989, does show, in general, a reversion of the drop and, in some
cases, obvious recovery.
In this second phase, an important change in the composition of trade is consolidated, in
the sense that trading partners of Asia and America gain in importance and, in view of the
disappearance of the CMEA member countries, trade moves toward partners in Western Europe.
As a destination for Cuban exports, the Russian Federation continues to be the main
individual purchaser (19% between 1994 and 1998), but countries of the European Union are
143
already surpassing it (close to 21% of the purchases of purchases of Cuban products correspond
to Germany, France, the Netherlands, Italy and the United Kingdom). In America, Canada is
recovering its position as the main buyer, followed by Mexico.
The breakdown of suppliers also shows a progressive geographic reorientation. The
Russian Federation, which up to 1993 accounted for almost 58% of purchases made by Cuba,
represented no more than 3% between 1993 and 1998. The European Union countries are the
main product suppliers to Cuba (29.9% of which 12.3% comes from Spain), mainly food and
light manufactured products. In transportation equipment and machinery, there is a certain
displacement of the traditional suppliers from the now extinct CMEA countries toward other
countries of Asia in addition to the People’s Republic of China, which maintains its position in
the Cuban market.
The import of goods structure shows a concentration in foodstuffs, fuels and capital
goods, which as a whole represent 76% and 64%, respectively, of total imports in the 1989-1993
and 1994-1997 subperiods (see chart IV.2). It should be noted that the share of imports of
investment goods dropped sharply. This is associated to the collapse of capital formation at the
beginning of the “Special Period” and to the insufficient recovery in subsequent years. Food
purchases raise their gravitation to one-fifth of the total, in part to meet the needs of tourism
demand.
Chart IV.2
CUBA: IMPORTS OF GOODS BY MAIN PRODUCTS CATEGORIES, 1989-1998
(Percentages)
Annual average % change
% breakdown
1989-1993 1993-1998 1989-1998
1989-1993 1994-1998
Total
-29.5
15.8
-7.1
100.0
100.0
Food products and live animals
Beverages and tobacco
Nonedible crude materials, except for fuels
Fuels and lubricants, minerals and related products
Animal and vegetable oils and lards
Chemical products
Manufactured articles, mainly classified according
to material
Machinery and transportation equipment
Others a/
-15.4
-19.0
-19.3
-27.8
-29.9
-25.3
-32.6
8.2
52.7
-6.1
-0.9
18.7
20.5
29.5
-3.0
15.2
-12.2
-13.9
-6.1
-2.6
-3.1
14.7
0.1
3.9
31.1
1.0
6.5
9.9
19.4
0.6
2.8
25.7
0.9
9.6
12.9
-44.3
-26.5
35.9
40.5
-8.6
5.4
29.9
3.0
19.1
8.9
Source: CEPAL, based on figures of Cuba’s National Office of Statistics (ONE, Oficina Nacional de Estadísticas).
a/ Various nonclassified manufactured articles and merchandise according to their nature.
144
Chart IV.3
CUBA: EXPORTS OF SELECTED PRODUCTS, 1989-1997
Millions
Annual average % change
of dollars
% breakdown
1989-1993 1993-1997 1989-1997 1997 a/ 1989-1993 1994-1997 1997
Total exports of goods
Total selected products
Fresh and frozen fish and seafood
Preserved fish and seafood b/
Citric products
Fruit and vegetable preserves
96% raw value sugar
Final molasses
Bee honey
Alcoholic beverages (except wine)
Raw tobacco
Twisted tobacco
Ni+Co sinter (metal content)
Ni+Co oxide (metal content)
Ni+Co sulfur (metal content)
Medicines
Cement
Processed marble
Iron and steel
-32.0
-31.0
-14.3
-26.0
-43.9
-10.5
-33.8
-35.8
-22.0
-17.5
-17.8
5.0
-16.5
-43.2
-25.5
-43.6
126.2
-20.4
5.3
12.0
11.8
17.1
-35.9
-11.0
24.7
2.9
16.3
12.0
11.8
17.1
23.3
37.6
-34.6
30.8
71.0
25.7
-6.6
33.7
-12.7
-12.1
0.2
-30.4
-29.4
5.6
-17.4
-13.6
-6.6
-4.0
-1.9
13.8
7.2
-39.0
-1.3
-1.8
68.6
-13.8
18.6
1 819
1 734
127
...
9
23
845
9
6
13
29
127
218
3
195
47
32
0.4
52
100.0
94.3
3.1
0.0
2.2
0.3
74.5
0.5
0.2
0.3
0.9
1.9
3.0
1.6
4.1
1.1
0.1
0.0
0.4
100.0 100.0
95.4 95.3
7.2
7.0
0.0
...
0.8
0.5
1.3
1.3
50.0 46.4
0.7
0.5
0.3
0.3
0.7
0.7
1.5
1.6
5.2
7.0
10.2 12.0
0.2
0.2
10.4 10.7
3.5
2.6
1.4
1.8
0.1
0.0
2.1
2.9
Also, the structure of exports reveals changes of interest because of the consolidation of a
trend toward a growing reduction of the dependence on sugar (50% in 1997, in contrast to 75%
between 1989 and 1993). Minerals (particularly nickel, iron and steel), medicines, tobacco, fresh
and frozen fish and seafood are growing in importance.
These trends in the trading of goods are further accentuated when considering the trade in
services. In particular, foreign sales of services, essentially tourist-related and in an incipient
manner of telecommunications and other processing activities, determine that Cuba’s insertion in
the international markets and the world financial circuits has expanded significantly from 1993 to
date.
1. Export promotion
a)
Goods
Sugar has historically been the main export product. Current conditions on the international
market will probably impede reaching the export levels of 1989 (7.2 million metric tons of
sugar), but recovery of the agroindustry can translate into important additional revenue in foreign
currency. Despite the decrease in the planted and harvested area, this goal could be reached in a
145
few years by deepening the structural and institutional reforms begun in 1993 with the aim of
strengthening the managerial practices of sugarcane producers.
In another respect, the bottlenecks in the supply of imported inputs have been resolved in
some cases through financing agreements linked to export contracts that serve as a guarantee.
Noteworthy are the accords with companies that produce tobacco, rum and citric produce. This
mechanism has been extended to other exportable products.
In the case of nickel, in 1994 a trade agreement was reached with the Canadian firm
Sherrit, with whom a mixed-ownership company was formed later on so as to integrate mineral
extraction with nickel and cobalt refining at the Saskatchewan plant, also in Canada. In 1998,
there was a record production of 67,742 metric tons. Exports have recovered considerably and, in
1997, totaled US$415 million dollars, 23% of total goods.
In the fishing sector, the chartering and leasing of vessels have mitigated the shortage of
convertible currency. Thus, the gross fishing catch increased to 133,800 metric tons in 1998,
compared to 87,900 metric tons in 1994. It is estimated that exports of fishing products, which
include lobster and shrimp, rose to US$128 million dollars in 1997, compared to US$69 million
dollars in 1993. Other products increasing their share in exports are iron and steel, fruit preserves
and tobacco.
In order to take advantage of the existing capital stock, the capacity of each company to
utilize production should be liberalized, adapting it to the new conditions of greater openness,
making centralized planning mechanisms more flexible. In this respect, some progress has been
made in the redimensioning of industrial programs and in the recent initiative for entrepreneurial
upgrading. It would also be advisable to authorize the establishment of small- and medium-sized
private firms, both in the light industry and the metal-mechanic sectors with the aim of
facilitating the process of adaptation.
In this sense, there has been some tangible progress. The following aspects could be
emulated and extended: bus assembly plants transformed into bicycle plants; a medicalequipment factory which now manufactures kitchen equipment for hotels and another which
exports stainless-steel products, mesh, wire and corrugated rods. There are also capital goods
plants that specialize in the manufacturing of air-conditioning equipment, refrigeration,
ventilators and ironwork made for tourist installations.
To extend the autonomy of companies of the traditional sector in order to improve the
articulation of the dollar sector with the rest of the economic system is an indispensable condition
for increasing productivity, production and employment in a sustained manner. To neglect doing
so would lead to the reproduction of the characteristics of a closed economy and would impede
the diffusion of the benefits of structural change.
b)
Transition and insertion in international markets
The Cuban model of external shock absorption has shown evident advantages: the burden of
adaptation has been distributed relatively equally among the population, without damaging the
146
distribution of income as in other Latin-American countries. The cost has consisted in delaying
the adjustment of the productive structure.
The benefits of the movement of market forces are undeniable, as is also true its potential
focus on destruction of the social fabric due to the inequalities it produces. The related reforms in
the country’s insertion in the international trade flows should therefore be directed toward
establishing and strengthening and, at the same time, humanizing market mechanisms. The
international experience is conclusive: if these effects are not controlled, they can cause damage
to the point of obstructing the development process or weakening social governance.
Many societies have taken decades to manage the markets so as to pragmatically reconcile
the objectives of efficiency with those of equity. Cuba cannot afford to wait decades, nor can it
distort its historic experience. Therefore, it will be necessary to find courses of action, such as
those mentioned below, which clear the way toward transition.
Access to financing and to foreign currency of a diminishing although important part of
productive activity is controlled through an administrative centralized mechanism that does little
to foster progress in productivity. The alternative option, commonly recommended, consists in
establishing a free market with open participation to all economic agents in order to induce
efficiency gains. However, the costs of such institutional changes are rarely considered. An
alternative mechanism could consist in simulating a market within the government, both in
foreign currency and in loanable funds. These scarce resources could be allocated through
auctions in which the public entities themselves, which currently negotiate budgets with the
authority, could participate. The setting of an internal price to the government—subject to
correction in case it led to undesirable allotments—would make it possible to know the costs and
benefits of each alternative use better. The same mechanism could be applied in the case of
redundant machinery and equipment so as to facilitate its transfer to other uses.
To summarize, there would be many advantages to market simulation, such as: it would
allow reaping efficiency gains that accompany the strengthening of market forces; it would
strengthen the passage from one system of administrative allocation to another, in which different
agents compete in preestablished regulatory frameworks; it would allow experimenting with
regulations; it would facilitate forming experienced officials in the standard-fixing process; it
would bolster the formation of managers whose work is judged in terms of results, with rewards
for innovation and efficiency; and, all of this could be modulated without losing sight of the
negative consequences of liberating market forces.
c)
Remittances from migrants
Even when, between 1989 and 1992, remittances of foreign currency to Cuba increased
significantly as a result of the 1993 legalization of dollar holdings, private transfers have had the
greatest macroeconomic effect, becoming an important source of net revenue of convertible
currencies. It is estimated that in 1998, US$700 million dollars entered the country, compared to
US$537 million dollars in 1995.
The transfers are carried out preferably in cash and between individuals, given the
prohibition by the U.S. government—up to 1998—of sending remittances from that country and
147
the lack of access to U.S. financial services. Since mid 1999, Western Union makes direct
transfers (of up to US$300 dollars per person per quarter), from its different establishments in the
U.S. to exchange subagencies in Cuba.
As has been mentioned, the establishment of money exchange offices (CADECA) has
allowed the socialization of part of these remittances, which is why financial modernization could
provide additional benefits.
2.
Foreign direct investment
The change in property rights is one of the most transcendental structural strategies for the
reconstruction of the export sector. The first legal instrument to regulate foreign investment was
Law Decree 50 of 1982, which provided for the formation of partnerships with a minority capital
share by foreign companies8. Ten years later, the Constitution was reformed so that recognition
could be given to the property rights of mixed-capital companies, thereby permitting the transfer
of rights from State dominion and the approval of economic associations.
In recent years, standards regulating foreign investment have undergone new changes
with clear objectives for growth promotion. The Mines Law of 1994 delimits and makes more
flexible the applicable standards to the granting of concessions for the exploitation of subsoil
resources (CEPAL, 1995). In September 1995, the legislative branch approved a new foreigninvestment law that redefines the role of the State in economic activity and makes the applicable
regulating procedures more flexible. The law does not exclude the participation of foreign
investment in any sector—except in the health, education and armed forces services—and the
free transfer of profits abroad in convertible currency is guaranteed. With an analogous aim, the
Law Decree 165 was passed in 1996, creating free zones and industrial parks, with a special legal
regime relative to customs, taxes, labor, immigration, foreign trade and foreign investment.
Lastly, a series of standards are being prepared that will make the consolidation of the real estate
market, related to hotels and foreign investment, more flexible.
These changes seek to make foreign investment an instrument for access to markets,
capital or modern technology. It should therefore be mentioned that the National Energy Program
authorizes the entering into of risk contracts with foreign companies in oil exploration works,
which help explain the growth in oil production in recent years.
As of the readopting of the free-zone regime, the better utilization of extensive storage
spaces and infrastructure—that were underutilized and that did not generate the expected
resources—was brought about. The intention was, as in other countries, to take advantage of the
fragmentation of the production and distribution processes within the context of growing
international globalization. Later modifications have been made to the original regime with the
8
In this way, a dual juridical regime was created: one regulating the functioning of State-owned enterprises and the
other related to the private rights applicable to mixed-capital companies.
148
aim of making the free zones more attractive to investors, improving the labor conditions in them
and assuring that tax income is generated from their activities9.
Formally, there are four free zones, two in the vicinity of Havana (Berroa & Wajay) and
two in the interior (Mariel & Cienfuegos), although in fact the more important operations take
place in the first two. Customs areas previously meant for temporary storage of merchandise for
the domestic market were converted into free zones for storing and processing goods and
generating services not intended for the domestic market. This measure is considered as a way to
establish mechanisms which, although currently have grown very slowly, lay the groundwork for
different production methods and linkages to globalize processes in the future.
The new legislative dispositions have strengthened individual property rights and have
expanded the role of private enterprise and of foreign investors in economic activity, granting
even greater flexibility than the standards in force in other Latin-American countries.
Nevertheless, some restrictions subsist, among which the following can be highlighted:
i)
Authorization by the Council of Ministers, or a commission designated by it, in all
applications for foreign investment; and
ii)
The hiring of Cuban personnel through employment agencies selected by the
authorities and not directly by the interested company must be carried out. In part,
the aim of this system is to mitigate disparities in the wages of the labor force
employed in exporting activities, compared to those dedicated to the production of
goods and services for the domestic market.
On the other hand, as has been mentioned, the trade embargo imposed by the United
States on Cuba and stipulations by the Torricelli & Helms-Burton Laws have not only
represented a significant deterrent to foreign investment flows, but have also made services
linked to foreign trade, such as transportation, insurance, financing, etc. highly expensive by
increasing the country risk.
Nevertheless, by mid 1999, 362 mixed-capital companies had already been created. Most
of the economic associations with foreign capital have been directed toward industrial activities
(31%) and tourist activities (18%). As regards origin, because of their presence in foreign direct
investment on the country, Spain (23%), Canada (19%) and Italy (15%) are particularly notable.
It is estimated that total disbursed capital inflow was more than US$1.4 billion dollars in the
1993-1998 period.
Recently, the opening up to foreign investment was extended to the real estate, energy and
financial services sectors. In 1998, 140 projects were in the process of negotiation. In the
financial sector, the mixed-capital companies Corporación Financiera Habana y Heath of Cuba
were established in order to meet managerial financing needs and insurance, respectively.
9
Resolution 1-97 makes the benefits that workers in the free zones can enjoy more flexible, providing additional
incentives to the general labor legislation. Resolution 53-98 regulates the payment of tariffs for the use of the freezone special regime. In fact, since 1996 to date about 20 resolutions have been adopted to regulate operations by the
Foreign Investment, Interior, Finances and Labor Ministries and by customs and the Supreme Court Governing
Council.
149
In the energy sector, the first investment made wholly with foreign capital was for the
construction of a power-generating plant on Isla de Juventud. Also, two economic associations
were established with French and Canadian capital to modernize electric power generating plants
and for the use of gas necessary for oil wells. In addition, two mixed-capital companies were
established to progressively substitute kerosene consumption with liquefied gas in the supply of
domestic fuel to the population of Havana and Santiago de Cuba.
Another important fact of the opening to foreign investment is the expansion of foreign
companies already in Cuba to other branches of the economy. For example, the Canadian
company Sherrit, which initially invested in nickel production in Moa, has expanded to
electricity generation, telecommunications and tourism, as well as to the agricultural and
livestock sector.
Investment in the free zones is still scant. There are 243 operators in the three active zones
(Berroa, Wajay & Mariel), most of which are commercial enterprises (over 160 are
representative and marketing offices, of which close to 80 were operating previously as fiscal inbond areas). Thirty-four are engaged directly in productive activities for reexport and 49 provide
services, particularly to other operators within the free zones themselves. In several cases, the
producing companies are exporting less than the percentage stipulated by law, given that they had
requested a higher sales percentage than they can provide to the domestic market, particularly to
the dollarized sector of the economy. Foreign partners in these activities are mainly Spain (62
companies), Panama (43), Italy (33), Canada and Mexico (13 companies each).
There are some interesting experiments within the free areas, such as the development of
horticultural activities for export and fulfilling the needs of international tourism, or the sale of
information and data processing services to users in the areas themselves.
In 1995, mutual funds began to operate in Cuba with the aim of creating business
opportunities. Although the amounts up to now are relatively low (less than US$60 million
dollars up to 1997), they could be a useful complement to the promotion of new structural
changes in the future.
In brief, the opening to foreign investment is proceeding, slowly but in a stable manner, in
search of markets, technology and capital. In this regard, which is crucial for the growth of the
Cuban economy, the negative effects of the U.S. embargo, reinforced by the Torricelli and
Helms-Burton Laws in this decade (see chart IV.1), should not be overlooked. The formation of
capital with foreign resources has not been foreseen for the sugar industry, since it is understood
that with a national effort the reactivation of this vital branch of the Cuban economy can be
achieved. However, six mixed-capital companies have already been created in the industry of
sugarcane by-products.
3.
New markets, embargo and negotiation
Progressively, the need of establishing agreements with other countries so as to eliminate double
taxation is arising. The first agreement has already been entered into with Spain, covering taxes
on earnings, personal income, ownership and possession of goods, as well as land transportation.
150
It is open to include other taxes, which both countries may apply and which are of an analogous
nature.
Beyond these mechanisms, the country is making efforts to join a world market that is
globalizing and regionalizing around trade blocs and in which it is not enough to obtain a mostfavored-nation treatment. With the collapse of the CMEA—the only preferential plan to which
Cuba belonged—Cuba faced an international market in which many countries, emerging and
industrial, grant each other preferences under regional and subregional accords of economic
integration. Although Cuba is, in principle, the beneficiary of Generalized Preferential Systems
(GPS), the U.S. embargo remains and periodic negotiations are required with other industrialized
countries' markets. Under such circumstances, long-term certainty on the conditions of access of
Cuban trade is nonexistent. In addition, the main industrialized markets, particularly the
European Union, grant favored treatment to most emerging countries on the basis of diverse
criteria (their classification as less-developed countries, small developing insular economies) or
by geographic grouping, as would be the case of the countries in Asia, the Caribbean and the
Pacific (ACP), beneficiaries of the successive Lomé Agreements. As for other markets,
particularly those in the American continent, Cuba has been practically left out of the regional
mechanisms of integration.
INSET IV.1. Effects of the embargo
Already in the “CEPAL 1992 Economic Survey”, the negative effects that were evident as a result of the
application of the U.S. embargo were noted: "Strictly speaking, the embargo has remained in place for
over three decades, although it only exerted direct influence on 15% of the country's total trade. When the
advantageous trade relations with the socialist camp disappeared, the embargo went on to wholly affect
the Cuban economy." Although it is difficult to measure the direct and indirect cost of that policy, Cuban
researchers estimate that, as of 1998, its effect totaled US$67 billion dollars in unrealized trade, financial
transactions and production and has impeded travel and the rise in the prices of transactions (AguilarTrujillo, 1998).
The Torricelli Law of 1992 tends to hamper Cuban trade with even more losses. First, it prohibits
subsidiaries of U.S. companies in third countries to trade with Cuba. Trade in both directions of these
subsidiaries with Cuba would have come to US$718 million dollars. Second, this Law stipulates that
ships that load and unload merchandise on Cuban territory are banned from approaching U.S. ports, for a
period of six months as of their date of arrival in Cuba. In 1992, the Cuban fleet was able to transport
barely 20% of the merchandise trade tonnage in both directions, which is why this measure makes
international freight more expensive and delays delivery of exported and imported products.
In 1996, the U.S. Congress approved the Helms-Burton Law that reinforces the impact of the embargo,
particularly hindering foreign-investment flows. By affecting real estate and bank accounts of third
parties who conduct business with Cuba or who have access to real estate owned by U.S. citizens that the
Cuban government may have expropriated, and by denying a U.S. entry visa to the main directors and
stockholders of companies that invest in real estate that could have been expropriated, this provision has
serious repercussions on the Cuban economy. There are examples of companies that have withdrawn
from the country and others that have cancelled projects, although, in balance, important foreigninvestment flows continue to arrive.
151
It should be recalled that in the Report of the United Nations Secretary General to the 52nd Period of
Sessions of the General Assembly, it was indicated that "the continuation of the blockade, including its
extraterritorial effects, is affecting in various ways the difficult process of economic recovery begun in
1994", with three main consequences: i) it increases the risks and cost of foreign investment; ii) it makes
the negotiation of the Cuban debt in order to reach agreements and obtain credit from official and
commercial creditors more difficult; and iii) it maintains the conditions that increase the costs of
obtaining financing and transporting imports.
In order to assure a competitive parity and conditions, which necessarily have to
accompany domestic improvement in efficiency and competitiveness, the government has
adopted an active policy of participation in trade negotiation forums. Of strategic importance are
the conditions of access, in order to compete with other suppliers in new markets, substituting
those of the CMEA.
Even before the crisis, Cuba had reached some agreements with countries in the
hemisphere within the framework of the Montevideo Treaty of 1980, that allowed the member
countries of the Latin-American Association of Free Trade (ALADI), to grant nonreciprocal and
nongeneralized preferences to nonmembers, within the framework of those known as "partial
scope agreements". On the basis of "positive lists" (products specifically negotiated for
preferential treatment), Cuba received privileged access from no less than seven of the 11
members on a substantial number of tariff items, in some cases with reductions of over 50% or
the total franchise (see chart IV.4).
Chart IV.4
CUBA’S SHARE IN BILATERAL ALADI AGREEMENTS OF PARTIAL SCOPE
Country
Argentina
Brazil
Colombia
Mexico
Peru
Uruguay
Venezuela
Date
1984
1992
1989
1994
1991
1989
1994
1987
1989
1994
Preferences granted (number of items)
To Cuba
By Cuba
48
230
21
164
231
32
143
48
43
240
4
173
22
570
85
47
242
80
58
400
Source: Quiñónez 1997, the Tariff Policy in Cuba, mimeographed.
Recently the country adhered to ALADI, in such a way that the periodic negotiation of the
extension and permanence of the lists turns into a stable and permanent access mechanism.
Moreover, this is a means by which it will not be excluded from the hemispheric process of
integration that will eventually lead to the formation of a free-trade area in the hemisphere.
152
Another priority linkage for Cuba is the Association of Caribbean States (ACS), which although
it has no explicit trade integration mechanisms, it does group three sub-regional agreements: the
Central-American Common Market (CACM), the Caribbean Community (Caricom) and the
Group of Three (Colombia, Mexico and Venezuela), in addition to other countries such as
Panama and the Dominican Republic, which do not formally belong to regional integration
plans10.
Cuba has joined the process of negotiations of the new Lomé Agreement as an observer,
which is to be entered into by the ACP countries and the European Union. Cuba has already
shown an interest in some global issues of the OMC’s multilateral agenda, as well as in the
beginning of a new multilateral round of negotiations. Included in this round will be
transcendental topics such as the progressive liberalization of agricultural trade and services, as
well as the consolidation and perfecting of a multilateral framework for investment, intellectual
property, the environment and the movement of people within the context of service exports. In
this new international framework, the conditions for access of strategically important products
and services to the Cuban economy would be determined. In effect, the provision of professional
services and the export of new products, such as the pharmaceutical and biotechnical, would be
negotiated.
4. Supply and import substitution policy
In many ways, the productive link with the socialist countries reinforced, rather than impeded, the
comparative advantages developed some time ago in Cuba. In other words, there was not a sense
of urgency for a rapid and radical change in the export pattern, except for those associated in the
long-term to the development of human capital, personnel excellence, or those linked
occasionally to some new technology (such as biotechnology) in world research.
In terms of the industrialization pattern, the socialist development model did not put
pressure in import substitution. Rather, the subsidies and soft and almost automatic financing
were meant to overcome trade imbalances with the Soviet Union or the CMEA countries,
absorbing the costs of supporting chronic payment breakdowns. Thus, trade deficits did not
become, with some exceptions, an incentive for the implementation of policies more oriented to
the diversification and integration of the productive base. In particular, the marked dependence of
the country on oil imports, on inputs destined for agriculture (fertilizers and pesticides) on food
and capital goods, was eased due to the generous supplying and financing on the part of the
CMEA countries themselves.
In addition, most of the efforts made during the 1960s were necessarily focused on
establishing trade and specialization ties with the socialist countries, as a substitute for the
broken links with the United States of America. Similarly, the centralized decisions on what
consumer goods should be imported mitigated tensions and the stimuli to industrialization that
usually appear in more open Western economies. In effect, the purchase of these goods usually
represented 9% to 11% of total purchases abroad, despite the significant limitations of the
national food supply for humans and animals.
10
Also belonging to the ACS are states and territories of the United Kingdom, the Netherlands and France.
153
Most assuredly, industrial growth exceeded the long-term growth rates of the economy,
but neither one nor the other was sufficient to transform the main bases of the economy. In fact,
progress was made in perfecting the sugar agroindustrial complex. Even when sugar reduced its
share in industry and exports, it still continues to be the key sector of the economy. Furthermore,
together with the size of the market, the above-mentioned internal and external political factors
have also played an important role in limiting the depth of structural change.
There are some lags in the implementation of active industrial promotion measures to
increase the domestic-product supply of the Cuban market. This can be explained in terms of the
external crisis, although the country’s previous historical evolution has also influenced. The
concessioned financing of trade balances with socialist countries possibly weakened or diverted
incentives for industrialization. Nevertheless, after 1975 significant investment efforts were
made. The main headings, on which emphasis on supply diversification was made, were fishing,
textiles and apparel, cement and construction material (despite its high fuel inputs),
pharmaceuticals and certain durable consumer and capital goods11.
As a whole, the import coefficient between 1980 and 1989 seemingly increased
systematically but later contracted mainly as a result of the lack of external financing during the
recent reorganization period of the external sector.
This same phenomenon, together with the particular logic of the links with the socialist
countries themselves, led to the adoption of policies that now limit balanced production growth.
Thus, several industrial12 and agricultural projects were oversized, as is the case of the
mechanization of agricultural tasks or decisions regarding the size of some manufacturing plants.
Industrial gigantism and the delayed transfer of technology13 unfavorably affected not only the
allotment of resources and competitiveness (due to low utilization rates14 of the Cuban
production base as a whole)15, but also restricted the scope of the industrialization process itself.
Nevertheless, some substitutive priorities that appeared during the years of crisis should
be mentioned here. On the one hand, there are the efforts made to increase oil production and
undertake basic exploring and prospecting, which can be explained by the vitally important
objective of mitigating the stranglehold of the fuel supply. Crude oil extraction doubled (from 0.7
to 1.7 million metric tons) in the 1989-1998 period and the presence of Cuban products increased
considerably in the supply to tourism and in the TRDs.
For reasons of social protection and security, the boost to supply, and even imports of
basic foods for the population, was given equal priority. The immediate goal (set in 1990) was to
11
The steel industry and the manufacturing of capital goods were focused on equipment, spare parts and accessories
used in the sugar industry and other activities.
12
Excess capacity compared to the size of the market affected many activities, among which are textiles, steel,
cement production and sugar.
13
Fernández (1995); Pastor & Zimbalist (1995), and Kornai (1990).
14
Chronic excesses of capacity were particularly significant during the crisis. In 1991, idle capacity in the sugar
industry surpassed that of 1989 by 50% (Lage, 1993).
15
Currently, one of the most critical obstacles is that of acquisition of high-consumption technology or those with a
high energy-consumption level, which correspond to the Soviet availability of resources, which deepen the
imbalances in a country highly dependent on imports.
154
substitute 40% of food products obtained abroad in 1989. Emphasis was placed on increasing the
domestic supply of rice, produce and meat (beef, pork and chicken). The achievements have been
partial. Recently, the supply of some types of meat, preserves, “molinos” and candies has
improved. The reaction of the manufacturing of wine and liquor16 has been more impressive. Up
to now, the diversification policies of the production and import substitution base have been
limited in view of the considerations of the crisis.
However, there is one significant exception. Ingenious mechanisms have been introduced,
either with the aim of strengthening domestic productive chains that supply inputs to the export
sector or to some priority branches of economic activity. As has been mentioned, the criterion is
that all State-owned enterprises should maintain a balanced foreign-currency budget. Otherwise,
they are obliged to reduce their output, redimensioning or altering their production patterns. As a
complement, companies producing inputs for use in export activities receive prefinancing aid in
dollars17 that is computed as income in that currency. In this way, they acquire products abroad or
increase their liquidity and profits to sustain or expand their production. The almost automatic
attainment of financing eases the acute shortage of companies’ working capital and represents a
means for expediting access, in view of the banking system’s credit restrictions in foreign
currency. With similar or complementary aims, the International Trade Bank grants special
financing or that associated with Finatur (in the case of goods destined for international tourism).
Undoubtedly, the policy reviewed tends to substitute imports selectively, to eliminate
obstacles to the recovery of foreign sales and to increase supplies to stores for the recovery of
foreign currency18. Also, interindustrial links are strengthened, in such a way as to raise their
employment and income multiples. At the same time, incentives are granted to companies so they
can comply with the central guidelines and maintain or recover the utilization coefficients of
equipment, employment and profitability. Aside from this, the disadvantage of stressing the
dichotomy of production is recognized. In this respect, the program for entrepreneurial upgrading
is being implemented, which, among other objectives, attempts to substitute imports efficiently
(see chapter on the “Manufacturing Sector”), which could comprise production for domestic
consumption, where the greatest lags exist.
Cuba has begun an intensive development stage in which the available competitiveness of
its export niches will have to be based on efficiency and the use of the best available
technologies. So that the positive effects of modernization of the foreign sectors permeate the rest
of the economy, it will be necessary, in turn, to achieve excellence in production, first in the
manufacturing of inputs and later in the supply of domestically produced goods for the local
market. Here, market discipline could advantageously substitute the centralized planning
mechanisms, which are more suitable for promoting extensive growth. Even then, transferring the
functions of economic coordination to the market should be implemented gradually, to mitigate,
as stated earlier, the negative repercussions on social distribution and stratification.
16
To a considerable degree, the recovery of the food industry is associated with increased sales to stores where
foreign currency can be recovered and to hotels or restaurants that cater to tourists.
17
The norm is to cover the stipulated value of the products required by exporters serving tourism.
18
For example, the Suchel company has significantly increased its results by increasing and diversifying the supply
of cosmetics, soap and detergents that are sold in the foreign-currency network stores, even though this makes the
supplying of the domestic markets more expensive.
155
5. Other foreign-financing policies
In addition to fostering investment and the import funding plans needed to produce exportable
goods, other financing modes have been recurred to. Debt swaps for assets have been
implemented in order to ease the problems arising from the suspension of payment on foreign
loans. The most important cases are:
a)
b)
c)
The US$20 million-dollar debt swap for the assets of a cement factory in Mariel, as part of
the agreement with Cemex;
The investment of US$200 million dollars by Mexico in the Emtel telephone company,
carried out in the same manner; and
The investment by Uruguay in the distribution of salt meat, part of whose profits will be
used to pay off a US$30 million-dollar debt.
The plans to swap debt for shares or assets to attract foreign investment must be managed
carefully because they usually become costly financial mechanisms. A final reflection might be
that to the extent that Cuba reconstructs its trade relations with the West, and, due to the size of
its market, accepts turning its economy into a specialized exporting economy in a limited number
of niches, a policy of new access to the international financial markets will have to be expounded.
In this context, renegotiation with the Club of Paris seems inevitable, although it presents a major
challenge under current circumstances.
6.
Toward a policy to ease strangling of the foreign sector
Almost 40 years since the suspension of trade relations with the United States, a new
situation arises in which the availability of foreign currency becomes the determining variable for
economic performance. It has been recognized that accelerating the reconstruction of foreigntrade relations is a priority. Much progress has been made but it is imperative to conclude the
task. This is why a three-stage strategy is suggested, which makes use of income generated at
each stage in order to finance access to a higher phase of structural adjustment that implies
greater productivity, growth and income.
As has been indicated, traditionally Cuba's economy has been outward oriented (as
evidenced by the weight of exports in the evolution of GDP). For more than three decades, this
was done in a protected and preferential framework within the CMEA. As of 1989, it was forced
to redirect efforts to the Western markets open to competition in commercial conditions,
exporting a limited gamut of products, most of them commodities, to international markets in
which, due to their large size, the available supply could be placed. Such is the case of sugar and
its by-products (molasses and rum), nickel, tobacco and even tourist services. The export niches,
their comparative advantages and the resulting experience of this specialization are an asset that
must be taken advantage of. The counterpart of these advantages is a vulnerability to changes in
the international prices of these products, which can be offset in the short term with risk-transfer
instruments and, in the long-term, through diversification.
This is why the highest priority aim in the transition strategy for the productive sector
toward higher efficiency could consist in consolidating these niches in the short-term. At a longer
term, the plan should be not only to generate exportable surpluses (of sugar, tobacco and nickel
156
and to continue to expand the supply of tourist facilities), but also to seek the growing
incorporation of added value to its foreign sales and expand the variety of exportable services,
taking advantage of the educational level and the qualifications of its population (higher than the
average in developing countries).
Excessive and immediate emphasis should not be placed at the beginning on export
diversification, particularly in terms of products, with the exception of pharmaceuticals, in which
significant progress has been made that is beginning to be consolidated. This aim, useful in the
medium term, would distract scarce resources of time and foreign currency advisable to invest in
strengthening niches of excellence in markets where Cuba is already present and to provide them
with greater added value. But a strategy of optimization that includes the consolidation of core
exports with the increase in the national supply for consumption or domestic use is necessary.
To assume that there is managerial ability to implement a wide-ranging strategy could
weaken the immediate aim of achieving the greatest possible exportable production so as to
service the large international markets, which are not being fully taken advantage of. The specific
goal would then consist in coming close to doubling the value of exports of goods and services in
the next five years. In this case, it would be necessary to recover the amount of goods exported,
the value of which in 1998 was still less than one-third of that registered in 1989, although price
drops had a bearing on this. It is true that the high export rate of services has managed to offset
the decline in goods, but even this does not provide the necessary strength to the economy. To
achieve this, in addition to seeking to expand supply and diversify the markets, it is essential to
deepen the effect of exports, generating greater added value through links of the exportable
supply with other sectors of the economy.
The steps taken to meet the demand of the hotel sector as a result of an increased and
improved domestic production, both in consumer goods and in foodstuffs, represent progress in
the right direction. In this same sense, optimization in the use of land could lead to establishing a
sugar platform that is not incompatible with substitution of the food supply. It should be recalled
that the extension of land dedicated to sugarcane production was disproportionate in the past and
that food deficits in Cuba leave ample room for the efficient displacement of foreign purchases.
A lesson learned from the experience of the Asian countries of the Pacific Rim, where
growth in recent decades has been spectacular—including that of China and Vietnam—is the role
given to agricultural production so that it not only contributes to balancing sectorial trade, but
also produces a surplus destined toward financing the physical and human infrastructure
demanded by industrialization. Therefore, the second priority of the previously mentioned
transition strategy could be perhaps to complement reforms in agricultural management with a
better use of the foreign currency generated upon reaching the first objective, until balanced trade
in the agricultural and nonsugar food sectors is achieved in the medium term.
It is an ambitious goal, inasmuch as the gains in production and productivity of the 19941998 period could not be extrapolated without furthering institutional change, accelerating
decentralization in decision-making in the productive sector and adhering to budgetary discipline,
which means that soft financing would be abolished. Funds thus obtained could be earmarked for
investment in physical, labor and social infrastructure, in order to boost an economic
157
consolidation process based on productivity growth, the sole reliable support of sustained
development.
In this respect, it should be pointed out that in the twenty-first century industrial
development would take place within a framework of a globalized world economy, impelled by
two dominant trends. Technological progress in communications and transportation will continue
to lower the cost of moving merchandise and communicating with companies in the international
environment. Consequently, markets will tend to integrate, rigorous competitiveness standards
will be imposed and the productive structure of nations will be transformed completely. This
technological revolution will continue to modify the markets, making products and professions
obsolete. In turn, foreign trade will play a decisive role in economic growth. Progressively, a
greater number of countries will adopt strategies that favor exportable production with the aim of
extending their markets, fostering higher productivity. This trend can be observed in all regions
throughout the world, whether industrial or emerging.
Third, Cuba must respond to these challenges with an active specialized industrialization
policy that will increase its capacity for competing in the international markets on the bases of
quality and technological strength, until its economy has integrated itself into the world markets
(see chapter V). Today, the country’s productive chains are disjointed, reflecting the need to
place production previously destined for the CMEA on the international markets. Consequently,
Cuba’s links with those segments with comparative advantages and possibilities for dynamic
development should be promoted.
The boost will hardly be forthcoming only from the sector whose production is today
placed on the international markets: it is necessary to increase efforts to integrate into the
production logic those Cuban suppliers with sufficient levels of efficiency to increase the national
content of exports. This is indispensable if modernization of the industrial structure is to earn and
safeguard the competitiveness of products in the Western markets. Thus, the objective of the third
phase of the proposed strategy is to gradually transform the productive sector of tradable and
nontradable goods until it reaches international price and quality standards.
D. FINAL REMARKS
Given the importance of the foreign sector in the Cuban economy, the country's development
strategy rests inevitably on the policy of foreign-economic relations.
The economy in Cuba has always been open, which is why attention is given to the
reaffirmation of this openness stance, coupled with a deregulation, decentralization and tariff
reduction process (Alvarez, 1995). The higher import content of the product and the shortage of
foreign financing have turned into a limitation of economic growth, in addition to the fact that the
level of investment and competitiveness in production does not yet permit generating sufficient
export flows.
Under such circumstances, the main challenge in the government’s point of view consists
in designing mechanisms for generating foreign currency that will allow the financing of
158
productive reconversion and confronting the international markets of the 21st century without
relinquishing social or cultural achievements.
The strategy outlined here for the transition of the productive sector consists of three
stages, which are not strictly consecutive and is shored up in the more intensive exploitation of
the already developed comparative advantages and the gradual competitive development of other
areas (see chapter VIII). The immediate goal is to recover the levels prior to the crisis of some of
the main export products so as to moderate restrictions imposed by the shortage of foreign
currency without exacerbating the dependence on tourism and remittances as primary sources of
resources and growth. Financing would be forthcoming from the revenue that the initial export
growth and credits for imports of inputs used to increase foreign sales would produce.
The goal of the second stage would consist in balancing foreign trade in the agricultural
and nonsugar food sector. In the third stage, the resources generated in the first two would be
taken advantage of, by using foreign investment as a catalyst for modernization of the sector that
produces nontradable goods so as to rapidly reach international standards of quality and price. To
this, it is possible to add the deliberate strengthening of the inter-industrial connections linked to
the production of exportable goods, due to its effects not only in substantive savings of foreign
currency but also in economic activity and employment. Later, the diversification of exports will
have to be promoted, as well as an increase in its growth rate.
The Cuban economy today has to compete in the international markets on the basis of low
prices and wages. In the long run, only technical quality and excellence of the goods and services
produced may serve as the basis for competitiveness. Accordingly, it would seem advisable to
take full advantage of a workforce educated in the development of dynamic exporting niches and
in becoming flexible in adapting to oscillations of the international markets. On this point, a
requirement would be to approach a flexible exchange rate regime so as to assure that the
productive forces will be redirected toward more profitable activities, as well as toward
capitalizing previous progress—for example, on biotechnology—and the work of numerous
research centers.
The solution to the foreign stranglehold through an efficient allotment of domestic
resources depends largely on deliberately bringing domestic prices in line with those on the
international markets. The active intervention of the government, through a policy that defines
the strategic long-term objectives and is nourished by social consensus, will facilitate
identification and development of the promising comparative advantages that little by little will
transform Cuba’s economic picture.
Lastly, it should be mentioned that the effort being made in Cuba could be strongly
furthered by relaxing the conditions of the embargo on the Cuban economy applied by the United
States during the last four decades.
159
APPENDIX. ECONOMIC GROWTH AND SHORTAGE OF FOREIGN
CURRENCY
Cuba is a semi-industrialized economy with limited development in the production of capital
goods and therefore had to suddenly face the challenge of furthering activities that would
generate sufficient foreign currency to sustain imports, in particular intermediate goods and fuel
inputs required for production. This task was magnified by the exclusion of the country from the
world capital markets. Thus, the primary goal of the macroeconomic strategy in the “Special
Period” consisted in shaping competitive companies on an international scale, which could
penetrate Western world markets.
The reconversion of markets or of economic structures in order to direct them toward the
foreign sector and position them favorably in the global system is uncertain. It takes time and
implies high transition costs, particularly if, for long periods of time, efficiency patterns were
neglected in production design and marketing. Nevertheless, the transformation of the Cuban
economy is on track at a slow rate and is not exempt from notable delays and a lack of definition.
As of 1993, Cuba implemented a strategy of adjustment and economic transformation to
correct foreign imbalance at its deepest roots. Thus, based on the rationalization of public
finances, no longer penalizing foreign-currency holdings, liberating some markets to private local
or foreign activity and redirecting State-owned enterprises, the economy has begun to grow and
the foreign deficit has been controlled. The rise in productive activity in good measure responds
to dynamic activity in the production of certain internationally tradable goods and services,
among which nickel, and most particularly, tourism, predominate. In fact, tourist services are by
far the activity where exports have advanced more rapidly.
Between 1993 and 1998, economic activity in Cuba increased at an average annual rate of
3% in real terms, boosted by exports (especially services), which grew at an annual average rate
of 10.3% and helped maintain the trade deficit at close to 3% of GDP. The current account
balance has been even lower due to growing revenue from tourism and to the inflow of
international remittances, which since 1995 exceed the expenses from the payment of factor
services.
Despite the positive performance, the country’s economic expansion in the medium and
long term continues to be conditioned by a severe restriction in the balance of payments.
Although the recent reactivation of productive activity responds to a vigorous exporting effort,
the entry of imports has been even more intense. In fact, between 1993 and 1998, imports of
goods and services in real terms showed an annual average increase of 15.8%, a rate 53% higher
than that of exports. This dependence on imports reveals that the availability of foreign currency
continues to be a basic restriction preventing the Cuban economy from reaching sustained GDP
rates higher than a 3% annual without pressuring the balance of payments (unless its access to the
international capital market is expanded). In view of the low population growth rate in Cuba
(0.5%), this performance would still allow maintaining real per capita GDP growth of 2.5%, not a
low percentage in the Latin-American context. It should be recalled that, in the last two decades,
160
few countries in the region have managed to more rapidly and constantly increase their per capita
GDP in real terms19.
It is therefore a matter of concern that, despite the introduction of deep macroeconomic
reforms in Latin America to open markets to foreign competition and grant a more significant
role to the market in allocating funds, the region still does not have access to a program leading to
high long-term economic growth. In most of the Latin-American economies, periods of strong
expansion are usually accompanied by imbalances in the current account of the balance of
payments, which, sooner or later, will lead to a foreign-currency crisis and to contractions in the
production and employment levels, with severe social costs.
This is why it is important for Cuba to strengthen its strategy of modifying its foreign
presence by advancing in three fronts: i) expanding access to foreign financing; ii) diversifying
exports, particularly with products of high aggregate value; and iii) boosting the local food and
fuel supply, among other products, so as to achieve efficient import substitution.
1. Methodological framework
In order to corroborate the previous hypothesis in Cuba’s case, a simple analytical model is built,
which examines the restrictions to growth in economies in which the lack of access to the
international capital markets demands maintaining a virtually zero trade deficit, that is, paying
imports with exports. This model will serve as the basis for econometric estimates for estimating
a long-term economic growth rate that is compatible with the balance in the balance of payments,
supported by the following equations20.
(1)
px
=
p* e m
(2)
p^ + x^
=
p^* + ^e + m
^
(3)
x^
=
η (^p - p^*- ^e) + π w,
^ with η <0, π>0
(4)
m
^
=
φ (^p*+^e - p^) + ξ y^, with φ <0, ξ>0
Equation (1) expresses the accounting identity of the balance of payments in the absence
of foreign-capital flows. The total value of imports can be compared in this equation (p* e m) to
that of exports (p x) at current prices. The annotation adopted is the following: x represents
exports at constant prices in local currency, p represents export prices in local currency, p*
represents the import prices measured in foreign currency (international prices, e is the nominal
exchange rate in local currency units per unit of foreign currency and m equals imports measured
at constant prices in local currency).
19
Progress in efficient import substitution and increasing the national export aggregate value have little by little
tended to solve the problem.
20
The original specification of the model belongs to Thirlwall (1979) and to Thirlwall & Hussein (1982), who, based
on works by Roy Harrod on the foreign-trade multiple, developed the analytical framework which is currently known
as the model of restrictions to economic growth of the balance of payments. Empirical studies which apply this
model to the analysis of economic growth with foreign long-term equilibrium can be found in Bairam (1997), Hieke
(1997) León-Ledesma (1999), McCombie & Thirlwall (1997), and Moreno Brid & Pérez (1999).
161
The second equation reflects the trade balance, given by the previous equation but in
terms of annual growth rates21. The third is the dynamic specification of conventional export
demand measured in terms of its growth rate. It adopts the usual variables as the determining
factors: real foreign income (w)
^ and the relative price of exports (^p–^p*-^e), in which the
coefficients η < 0 y π > 0 correspond, respectively, to their price and income elasticity.
Finally, equation four specifies, also dynamically, the demand function of imports. Its left
side shows a growth rate in imports in real terms (m)
^ and the right side its usual determining
factors: real domestic income (^y) and its relative prices (^p*+^e–^p). The coefficient φ < 0 y ξ > 0
represent the respective price and income elasticity22.
An immediate simplification of the model surges when assuming that, in accordance with
Cuba’s foreign policy, the nominal exchange rate (e) remains at one-on-one with the dollar (e =
1). When substituting (3) and (4) in (2), and resolving the resulting system, one obtains the
expression of the economic long-term growth rate (y^b) compatible with equilibrium in the balance
of payments:
^ + (η + φ + 1) (^p - p^*)
πw
=
y^b
(5)
ξ
This means that long-term economic growth depends on: i) the growth of weighted
external demand due to the export-income elasticity; and ii) the different variation of domestic
and foreign prices (real exchange rate) weighted by the sum of the price elasticity of both.
As equation (5) indicates, if the real exchange rate varies persistently, the long-term
economic expansion rate could be affected. The impact it will have will depend on whether the
sum of the price elasticity mentioned is, in absolute value, lower or higher than the unit. In this
aspect, if it is assumed that the Marshall-Lerner Condition is met on the price-elasticity of
imports and exports (for example: η + θ = -1) or that the real exchange rate remains constant (^p
= p^ *), a more simplified form of the equation (5) is obtained:
^
πw
(6)
y^b
=
ξ
In turn, by substituting the export demand function (3) in this expression, one arrives at
the basic formula for the long-term economic growth rate, in relation to the export expansion rate
in real terms and import-income elasticity:
21
The expression “^x” represents the annual growth rate of the x variable.
In essence, the model assumes two types of goods, one produced externally that is imported into the country at a
unit price p* (in foreign currency) and the other produced locally that is sold at a unit price p (in local currency
units), be it domestically or as exports. This simplification is useful for estimating the long-term economic growth
rate without taking into account, for the moment, the effect of the divergent pauses in the export prices and of
production for the domestic market. Following the usual practice, denominated as a “real exchange rate” is the
quotient in local currency. It should be stressed that when assuming only two goods, the model does not permit
adequate distinction between the effects of the variations in terms of trade and in the real exchange rate.
22
162
y^b = x/ξ
(7)
This synthetic expression of the analytic model indicates that in order to strengthen longterm growth in economies without access to international capital, the export capacity must be
increased and, at the same time, promote the efficient substitution of manufactured goods and
services abroad (in other words, lowering import-income elasticity).
On the basis of the previous analytic formulas, an estimate is made in the following
section of the long-term growth rate of the Cuban economy under current conditions, in which its
access to foreign savings is practically nonexistent.
2. Empirical results
As the summarized analytical model indicates in equation (7), the sustainable economic growth
rate depends on import-income elasticity23 and on the export expansion rate. In this case, exports
are considered exogenously determined and the first measurement of the indicated elasticity is
made as the quotient of the import growth rates and of GDP which have been registered in the
rallying phase that the Cuban economy is currently in since 1994.
Given that in the 1993-1998 period real GDP increased at an average rate of 3% and
imports at 15.8%, a first estimate of import product-elasticity would be 5.3%. Repeating the
estimate for 1994-1998, that is for the period in which the current economic reactivation became
stronger, the estimated GDP-elasticity would be 4.2% which, although lower than the previous
one, stands among the highest in Latin America. Its magnitude indicates that in the absence of an
effective program for import substitution and foreign-sales growth, annual growth of 10% in real
exports of goods and services, as seen in 1994-1998, is insufficient to allow the long-term
expansion rate of the Cuban economy to surpass an annual 2.5% or 3% without incurring in
external imbalances.
The estimates are of course hypothetical; they depend on assumptions that the trends
today will prevail in the future, that is, they exclude the possibility of intensifying the export
effort or the efficient substitution of imported goods and services. Likewise, they do not consider
that net income from unilateral transfers and factorial services or that international capital flows
will expand significantly in the medium term. To the extent that these possibilities are specified,
it will be viable for the Cuban economy to sustain higher growth rates for long periods without
causing imbalances in its balance of payments.
Thus, the previous estimate is only indicative of the probable magnitude of the problem.
But it is based on a rough estimate of import product elasticity. If the intention is to measure it
more precisely, the “income” and “price” effects in import demand must be distinguished. For
this, the lineal-logarithmic conventional demand for imports, based on annual data for 19851998, was estimated by minimum ordinary square roots (see chart IV.5). Various specifications
23
The term income-elasticity or import product-elasticity is used indistinctly, assuming to simplify the analysis, a
comparison of GDP and the domestic income.
163
were considered taking GDP or total demand as an “income” variable24. The relative prices were
estimated as the quotient of the implicit deflator of imports and GDP, which is why they reflect
the real exchange rate seen as the relative price of imported goods and services in face of those of
local origin. It should be mentioned that this relative price of imports in Cuba fell an annual 3.5%
between 1994 and 1998.
Chart IV.5
CUBA: ESTIMATE OF TOTAL DEMAND FOR IMPORTS, 1985-1998
Log (m) = α+ η log (y) + ϕ log (p) + β log (m–1) + ε
Equation
(A1)
(levels)
(A2)
(levels)
(A3)
(first differences)
β
ϕ
η
A. With GDP as an explanatory variable (log y)
-31.85
4.11
-0.95
Not applicable
(10.7)
(13.4)
(5.0)
-37.83
5.00
-0.87
-0.33*
(6.1)
(5.9)
(4.6)
(1.2)
-0.05
3.45
-1.48
Not applicable
(1.55)
(7.47)
(4.70)
B. With total aggregate demand as an explanatory variable (log y)
α
R2
0.95
0.95
0.83
(B1)
-19.21
2.75
-0.60
Not applicable
0.98
(levels)
(16.2)
(23.0)
(6.3)
(B2)
-21.30
3.13
-0.50
-0.19*
0.99
(levels)
(12.1)
(11.7)
(4.6)
(1.5)
(B3)
-0.02
2.58
-0.93
Not applicable
0.93
(first differences)
(1.22)
(11.81)
(4.63)
Note: The A1 and B1 regressions exclude lagging explanatory variables. The figures in parenthesis report the
statistical "t". The asterisk indicates that the estimated coefficient is not significant at 90%. The reported equation
levels passed the tests (the results of which are not included here) of Lagrange multipliers of serial correlation,
heteroscedasticity, normalcy and RESET on the functional form specification with a significance level of 95%. All
calculations were done following the Microfit 4.0 program.
The most satisfactory results, at levels, are those of equations A1 and B1, which exclude
the lagging dependent variable as an explanatory factor. In both, estimated price and income
elasticity of import demand are significant at the 99% level. Their signs agree with the expected
values, that is, positive in the case of income elasticity and negative in that of price elasticity.
Moreover, these estimates met the usual diagnostic tests on the residue patterns25.
The equation (A1) shows an accurate estimate of 4.11 for the import output elasticity in
1985-1998 and of –0.95 of the corresponding price-elasticity. The latter, in fact, is not
significantly different from the unit. The estimated quotient of the product-elasticity is similar to
24
The multi-equational low number of observations impeded the application of the econometric methodology of cointegration, more apt for the study of long-term relations. This is due to the lack of figures of the National Accounts
for foreign trade on years prior to 1985.
25
The usual tests were applied on the performance of the residues in terms of self-correlation, heteroscedasticity and
normality, as well as the Ramsey RESET test to evaluate the adjusting of the functional way adopted in the
regression.
164
that estimated at the beginning of this section as the quotient of the real growth rate of imports
and GDP seen in 1994-199826.
In the statistical inference, regressions in first differences (A3) and (B3) were also
estimated so as to avoid certain problems that could appear, given the non-stationary character of
the data series used. As seen in chart IV.5, the results suggest an import-income elasticity of high
magnitude. Also, they point to a higher price-elasticity value than that corresponding to the
equations in levels.
The estimates reveal an intense dependence on imports that is partially explained by the
insufficient local supply of consumer goods, inputs and machinery and equipment (which
urgently need to be replaced after the prolonged stagnation of net investment and its dependence
on obsolete technologies), although it is also due to the price drop in imported goods and services
compared to those produced locally. In fact, as shown by the econometric study, both the level of
local activity and the relative prices of imports (that is, the real exchange rate) are significant
determining factors of their demand. As could be expected, attaining foreign equilibrium in the
Cuban economy depends both on the activity level and the evolution of the real exchange rate, an
element which, similar to the rest of Latin America, if neglected, could give rise to serious
imbalances in the balance of payments.
3. Conclusions
Except for the progress made in the efficient substitution of imports in Cuba, any sustained rally
in the economic activity will bring with it an intense penetration of products from abroad in the
short term, it will pressure the availability of foreign currency and will threaten foreign
equilibrium. This pressure will be more acute as the real exchange rate appreciates (that will
decrease relative import prices against the prices of goods and services locally produced). In the
same manner, although its quantitative effect was not explored here, it should be evident that the
deterioration in the trade terms could have a very recessive effect on the domestic economy and
complicate the implementation of the stabilization policy and the macroeconomic adjustment.
To summarize, although it is true that the Cuban economy is beginning to regain certain
dynamism, its structural change will have to deepen as it continues, so as to ensure new
guidelines for its insertion in the world economy that will allow it to lay the foundation for a high
long-term expansion platform. This transformation must broaden the domestic production links,
so that the exporting sector may act as the driving force for high, sustained economic growth. If
there is no continuity in strengthening the articulation mainly of the manufacturing and
agroindustrial branches, as has already begun through efficient import substitution, long-term
sustained growth will not likely surpass an annual average growth rate of 3%.
The situation does not set a fatal ceiling. In the facts, as shown by the tourism sector, the
substitution of foreign purchases can occur rather quickly and contribute to the easing of foreign
26
Likewise, although not reported here, the estimates of import product-elasticity, obtained through regressions on
overlapping periods of six or seven years, converge on values close to 4.0 in the measure in which the period covers
recent years.
165
restriction. Making use of the improvement in productivity in the exporting sector, for example,
with the restructuring of the sugarcane sector, could be another contributing factor. Also,
improving access to international financial markets could have a favorable impact, serving as a
bridge during the time between the strengthening of investment in sectors of tradable goods and
domestic saving capacity. In this field, of course, the situation could change, not gradually but
radically, if the conditions of the embargo are modified. Also, although they were not considered
in the empirical analysis, it should not be forgotten that variations in the terms of trade could
have a strong impact on the trade balance and on the availability of foreign currency,
consequently affecting economic growth.
The other solution, if the current relationship between the supply produced locally and
domestic demand, would make it necessary for real exports of goods and services to expand
persistently, at least at an annual growth rate of 20%, double the rate they currently register so
that the Cuban economy could grow an annual 5% in a sustained manner, assuming that the
relative price of imports does not decrease (that is, assuming that the exchange rate does not
appreciate). In contrast, given its almost unitary price-elasticity (-0.95), the cheapening of
imports, in relation to locally produced goods and services, could worsen the shortage of foreign
currency and would therefore demand an even more dynamic exporting sector in order to sustain
high economic growth without throwing the balance of payments off balance. This growth rate in
the expansion of foreign currency is high. However, some supply sources have done it at high
risk (tourism). Therefore, the future strategy of achieving feasible development would consist in a
successful combination of export promotion and efficient import substitution that will allow a
continuing stage of sustained development more firmly and offsetting the upheavals of the
“Special Period”.
166
CHAPTER V. THE LABOR MARKET
A. INTRODUCTION
The Cuban economy faces two major problems that merit special attention: difficulty in generating
productive employment due to tight external constraints; and lower pressure on the labor supply,
coupled with increasing demand for certain social services as a result of Cuba’s demographic
maturity. There has been a gradual decline in the younger population, which has been more than
offset by the increase in citizens over sixty. In the long-term, this means a lower proportion of
working-age citizens (see graph V.1).
The first of these difficulties has limited the availability of productive employment for the
economically active population and, even with reduced demographic pressures, is affecting the
labor market and financing prospects for Cuba’s social policy. Indeed, Cuba’s policy of
maintaining full employment by keeping redundant personnel in their posts despite reduced
investment has translated into lower productivity per worker, particularly during the first half of the
“Special Period”. In short, the employment problem manifests itself in the under-utilization of labor
owing to a shortage of productive inputs and the obsolescence of certain productive structures,
rather than in open unemployment.
The solution to the employment problem lies in restructuring the production base, adapting it to suit
new international conditions. This restructuring is being promoted by pursuing four objectives:)
strengthening the link between savings and investment; ii) reinforcing the correlation between
investment and the generation of foreign-currency revenue; iii) encouraging relations between
industrialists and creating a network of businessmen with government support; and iv) providing
support for workers who have lost their jobs as a consequence of the restructuring process.
In light of these objectives, this chapter will review the employment policy implicit in the reforms
that are currently being implemented. This is followed by an analysis of the implications each of
these industrial restructuring objectives has for the labor market and employment. The chapter
concludes with a study of social welfare policy and how this has been adapted to suit new
economic conditions, taking into account future demographic changes.
167
Graph V.1. Cuba: Population structure by age segments, 1985-2025
100%
90%
80%
20-59 YEAR-OLD POPULATION
70%
60%
50%
40%
0-19 YEAR-OLD POPULATION
30%
20%
10%
60 AND OVER-60 YEAR-OLD POPULATION
0%
1985
1990
1994
1998
2000
2005
2010
2015
2020
2025
Source: CEPAL, based on official data.
B. EMPLOYMENT DURING THE “SPECIAL PERIOD”
The economic stranglehold facing Cuba is related to the loss of major markets and limited access to
foreign financing. Production cutbacks arising from a lack of imported inputs to supply the
production base, compounded by full-employment policies, led to a reduction in average
productivity per worker. As illustrated in chart V.1, this was reflected during the height of the crisis
(1993) in a reduction equivalent to one-third of total output in 1989 and a 32% drop in the average
worker productivity index, while the investment rate fell to just 4.8% of GDP.
Chart V.1
CUBA: PRODUCTION, PRODUCTIVITY AND INVESTMENT, 1993-1998
1993
1994
1995
Gross domestic product (annual growth rate)
-13.6
0.6
2.5
Average productivity index (1989 = 100.0)
68.2
71.2
76.2
Investment rate (% of GDP at current prices)
4.8
4.9
6.5
Source: CEPAL, based on a combination of official and unofficial figures.
1996
7.6
85.5
7.4
1997
2.5
89.1
8.2
1998
1.8
91.1
8.3
The initial adjustment policy during the “Special Period” relied on transfers within the budget
aimed at maintaining full employment and guaranteeing basic food supplies, education, health care
and social security. Spending on public health and social security has increased steadily in nominal
terms. Subsidies for corporate losses were increased in order to guarantee employment, particularly
during 1992 and 1993.
168
In fact, the flexible budgets that governed the economy in the 1989-1993 period culminated in high
fiscal deficits and excessive liquidity. The austere budget policy that was subsequently
implemented had two contrasting consequences. On the one hand, it led to reduced spending in
certain areas, particularly investment, and on the other, disbursements of a social nature, at current
prices, doubled in terms of GDP (from 26% to 52% between 1989 and 1993). As it was impossible
to increase the tax burden of the budget by these amounts, despite cuts in other government
expenditures, huge fiscal deficits accumulated through 1993. As of this date, fiscal and monetary
policies were tightened until budget imbalances were appreciably reduced.
Graph V.2 and chart V.2 illustrate the extent to which average worker productivity declined. If we
assume that average output per worker in 1989 corresponds to full employment, we can consider
the extent of underemployment to be the ratio between the annual decrease and output in that
period1.
Chart V.2
CUBA: BUDGET ADJUSTMENT INDICATORS AND FOREIGN EXCHANGE, GOODS AND LABOR
MARKETS
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Labor market indicators
Percentage share (of population over 15)
58.3 57.8 57.1 55.3 54.4 52.9 53.0 52.7 53.4 53.5
Percentage share (of working-age population) a/ 76.1 74.1 73.0 70.8 69.2 67.5 67.8 67.9 69.2 70.0
Unemployment rates
7.9
7.3
7.7
6.1
6.2
6.7
7.9
7.6
7.0 6.6
Productivity index (1989 = 100)
100.0 96.8 87.7 80.7 70.3 72.4 73.7 79.5 79.9 80.2
Productivity gap (compared to1989 levels)
0.0
3.2 12.3 19.3 29.7 27.6 26.3 20.5 20.1 19.8
Equivalent unemployment rates
7.9 10.3 19.0 24.2 34.0 32.5 32.1 26.6 25.7 25.1
Occupational categories (% of employed persons)
Population employed in non-State activities
5.3
5.5
5.8
6.4
7.9 16.0 18.2 18.5 19.4 20.7
Cooperatives and BCPU
1.5
...
...
...
...
7.7
8.4
8.4
7.9 7.6
Semi-State companies and mercantile
...
...
...
...
...
2.0
2.0
2.6
3.1 3.5
societies
Private domestic companies
3.2
...
...
...
...
3.4
4.5
4.6
5.3 7.0
Self-employed
0.6
...
...
...
...
2.9
3.3
2.9
3.0 2.6
Population employed in State activities
96.8 96.8 94.2 93.6 92.1 84.0 81.8 81.5 80.6 79.3
Source: CEPAL, based on UN figures and CEPAL estimates.
a/ Economically Active Population (EAP) based on specific age groups, in this case persons of "working age":
women between 17 and 54, men between 17 and 59.
1 If Y89 is the average output per worker in 1989 and is assumed, solely for illustrative purposes, to be the year of full
employment, and Y90 is the average output per worker in 1990, the extent of underemployment in 1990 is extent of
underemployment in 1990: (Y90 - Y89)/Y89. This corresponds to the percentage of a full-time job that would have to be
generated per underemployed person. The equivalent unemployment estimate was obtained by taking the average
output per worker in 1989 as the full-employment standard. If on that date, underemployment already existed, estimates
should be considered conservative.
169
Graph V.2. Cuba: Relationship between macroeconomic variables and employment
Imports and GDP (variations compared to 1989 levels)
10.0
0.0
GDP
-10.0
-20.0
-30.0
-40.0
Imports
-50.0
-60.0
-70.0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Source: CEPAL, based on official data and CEPAL estimates.
Graph V.3. Cuba: Unemployment and GDP (variations compared to 1989 levels)
40.0
30.0
20.0
Unemployment a/
10.0
0.0
GDP
-10.0
-20.0
-30.0
-40.0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Source: CEPAL, based on official and own figures.
a/ Equivalent unemployment rate, CEPAL estimates.
Underemployment estimates, multiplied by the proportion of the Economically Active Population
170
(EAP), act as an indicator of equivalent unemployment. By adding these estimates to open
unemployment rates, the resulting conclusion is that underemployment has increased. Nevertheless,
the employment policy has prevented the unemployment rate from rising (in 1989 it stood at 7.9%
of the EAP, falling to 7.6% and 6.6% in 1996 and 1998, respectively). However, a large portion of
the employed population has been forced to reduce its productivity and therefore qualifies as
underemployed. Based on 1989 productivity levels, it has been estimated that the equivalent
unemployment rate of the underemployed, added to the open unemployment rate, stood at 42% in
1994 and 1996. Toward 1998, an improvement in productivity due to an increase in economic
activity contributed to a reduction in the equivalent unemployment rate.
The figure may be exaggerated. Nevertheless, we must take into account the sharp drop in GDP
between 1989 and 1993, which had still not been completely offset by 1998, a year in which GDP
was 20% lower than 1989 figures. This led to an equally sharp drop in productivity of the
workforce, which, given the idiosyncrasies of the Cuban labor market and the computation
methodology used, translates into an increase in the equivalent unemployment rate.
Even in the midst of a crisis the magnitude of Cuba’s, technological factors, compounded by new
labor divisions on international markets and other phenomena resulting from the globalization
process have been weakening Latin America’s labor markets. According to International Labor
Organization (ILO) figures, informal employment, which to some extent reflects the proportion of
excluded or underemployed workers, reaches figures well in excess of 40% in general, based on a
sample of selected countries (see chart V.3)2.
Chart V.3
LATIN AMERICA: INFORMAL EMPLOYMENT IN SELECTED COUNTRIES
Countries
Year
Percentage of urban informal employment as to total employment
Argentina
1996
45
Brazil
1995
59
Chile
1996
37
Colombia
1996
46
Costa Rica
1995
42
Cuba a/
1996
34
Mexico
1995
48
Panama
1995
41
Peru
1995
55
Venezuela
1996
43
Source: CEPAL, based on ILO figures, "Panorama Laboral", 1997.
a/ CEPAL estimate, corresponding to underemployment rate.
There are other characteristics of the labor market adjustment that pose additional problems. First,
the relative magnitude of the supply of jobs has diminished. Reduced productivity generally
discourages people of working age from seeking employment. Second, we should mention the
2 In any case, we are dealing with a general indicator (with limited assumptions), rather than exact figures. Likewise,
the special features of the Cuban labor market and the existence of active social support networks make it difficult to
compare the effects of the exclusion of a part of the workforce on an international basis.
171
emergence of a new type of formal employment outside the sphere of the State. As of 1994, as a
consequence of the legalization of private activities, employment in this sector of the labor market
increased significantly. Third, as mentioned previously, opportunities for generating productive
employment are limited by the availability of foreign-currency revenue to purchase inputs,
machinery and imported equipment.
Fourth, there are factors that limit labor mobility. The reactivation of certain sectors that produce
tradable goods has led to employment problems: the poor mobility of labor between regions is
related to the availability of housing, while there are divergences between the skills of the
workforce and skills required in jobs that are created or reactivated.
Fifth, the budget flexibility required to guarantee employment has necessarily yielded to
macroeconomic restrictions. The 1996 unemployment subsidy, estimated on the basis of the
average monthly wage granted to the total of equivalent unemployed, accounted for 12% of GDP.
Assuming that only 60% of this wage was granted, the burden on the budget would have been
equivalent to 7% of GDP3. This phenomenon was alleviated in the last two-year period due to the
recovery of economic activity.
Workers who lose their jobs are guaranteed 100% of their wages during the first month of
unemployment. Thereafter, they receive a subsidy equivalent to 60% of their fixed wage for a
period determined in accordance with the number of years of service rendered. By way of example,
workers who can provide evidence of 20 years of service or more may be entitled to the subsidy for
18 months; those who have worked only one year are entitled to the subsidy for a period of three
months. However, this benefit is eliminated when an available worker rejects a given number of job
offers suited to his or her capacities. According to official figures, the number of “available”
workers totaled approximately 20,000 in the 1995-1996 period and began to decline thereafter to
the extent that economic activity recovered. By the end of 1997, the number of “available” workers
had dropped to below 9,000 and to 3,164 by the end of 1998. Of these workers, approximately half
have not been relocated and continue to receive unemployment or other subsidies granted by their
respective local government administrations.
The marked annual decline in the number of “available” workers is due, in the majority of cases, to
the rapid relocation of workers via the administrative network once they have been declared
“available,” their incorporation into other jobs as self-employed workers, or into high-growth
emerging sectors (tourism and related services). Hence, in 1998 almost 15,000 workers were
declared “available,” 16,800 of which were permanently relocated in the period, while a further
3,800 were struck off the subsidy register, 2,000 for failing to accept job offers, 176 due to the
expiration of the subsidy or guarantee term and the remainder due to temporary relocation.
3 Naturally, these figures exaggerate the impact on GDP, as they include job seekers who do not receive any kind of
subsidy.
172
C. THE EMPLOYMENT POLICY IMPLICIT IN THE PRODUCTIVE
RESTRUCTURING PROCESS
The employment problem in Cuba has been addressed on the basis of its economic roots, that is,
around the demands of a dual economy with tight external restrictions. The main strategies
employed have been: i) opening up the economy to foreign investment; ii) maintaining equity
during the adjustment period by trying to preserve jobs and (nominal) wages, maintaining healthcare, education and social security facilities and distributing available consumer goods as equitably
as possible; and iii) developing sectors that produce tradable goods (import substitution and
promotion of exports) and food products (Ferriol 1996, pages 11-15).
As far as more specific measures go, the following deserve mention: the legalization of selfemployment; the transfer of farm holdings to cooperatives and unproductive land to families; the
establishment of incentives to meet or surpass production goals in priority sectors; the liberalization
of agricultural markets and markets for industrial and traditional goods, in which all types of
enterprises can place surplus output after meeting compulsory quotas; the creation of foreignexchange recovery stores and the legalization of foreign-currency deposits and holdings; more
flexible foreign-investment regulations and the setting up of bridge enterprises to negotiate the
hiring of Cuban personnel with foreign investors or joint ventures; the safeguarding of jobs and
workers’ wages directly with the company concerned—even when there is little or no work—or
indirectly through social security.
All these measures were designed to sustain labor demand or to guarantee wages, either directly or
indirectly. However, a number of restrictive measures also had to be implemented. These involved
reducing the number and amount of subsidized goods in the ration booklet; severe wage restriction
policies were implemented, particularly in the central government; limits were placed on soft loans
to public enterprises and on loss absorption by the public budget; free services (entertainment) were
eliminated and prices or taxes were raised on a number of goods (cigarettes, alcoholic beverages,
gasoline) and services; and tax regulations applicable, in principle, to corporations and individuals
were modified.
1. The employment policy geared toward strengthening the link between surpluses and
investment
Direct foreign investment has been promoted with a view to easing balance of payment restrictions.
In this context, the implicit employment policy is in keeping with the dual growth and employment
model. Thus, a traditional State sector is being created, along with a sector of high-productivity
mixed-ownership companies in partnership with foreign investors, to which labor will gradually be
transferred. The rate at which labor transfers will take place depends on the rate of investment in
this new sector of economic activity. However, the dual-currency system and the existence of a
Cuban labor office, which regulates labor transfers between the two sectors, are causing
complications.
Cuban legislation stipulates that corporations in the emerging sector must hire Cuban personnel
through a labor office that will remunerate each individual worker in Cuba’s national currency.
173
Corporations, in turn, pay the total income earned by their staff to the labor office in convertible
currency, in addition to labor taxes and social security contributions. These taxes amount to 25%
(11% corresponding to the labor tax and 14% for social security contributions) in the case of
mixed-ownership companies and contractual partnerships, and to 39% in the case of corporations
funded exclusively by foreign capital.
Consequently, different forms of remuneration exist side by side, these being: the basic wage,
payable in pesos, which is a standard amount throughout the country; incentives paid in convertible
currency or goods awarded for surpassing previously agreed production goals and the wage bill in
US dollars4, with which mixed-ownership companies pay the labor office. The aim of this system is
to prevent wages from being fixed at extremely low rates as a result of transferring nonessential
surpluses abroad and to avoid excessive wage gaps between emerging sectors and the rest of the
economy.
In mid 1999, the number of foreign–capital joint ventures totaled 360, with an accrued capital of
some US$2.5 billion dollars in direct investment. In this way, a significant number of jobs have
been created, while making more efficient use of labor (Ferriol, 1996). Assuming a 15% rate of
return on investment, the capital accumulated would yield US$575 million dollars in profits for
mixed-ownership companies. Under current international conditions and projecting an inflow of
fresh investment similar to that of the two previous years, foreign investment could contribute
toward resolving Cuba’s employment problem, provided domestic savings and exports are
revitalized.
Many aspects of current legislation and tax incentives could be revised with a view toward
avoiding biases that hinder growth in employment and savings. Payroll taxes, the lack of
reinvestment incentives and instruments to promote savings could all be included in this category.
2. Exports and employment
The government has implemented complementary strategies to reactivate the export sector, which
could also contribute to employment growth. These are based on three factors analyzed in the
previous chapter: i) exports finance 76% of the value of imports; ii) import-GDP elasticity is high;
and iii) implicit employment—GDP elasticity—shows that reducing the unemployment rate (the
open unemployment plus the equivalent rate) by five percentage points would boost GDP by 7.5%.
In accordance with these hypotheses, reestablishing the balance of the 1989 labor market would
require growth rates of 7.5% over a five-year period, or 5% over a seven-year period. Achieving
this goal would apparently depend on how strong a boost can be given to exports and the
substitution of imports.
As mentioned in the previous chapter, the export strategy should advance gradually, in phases:
encouraging traditional exports; rebuilding the agricultural sector by focusing on exports and
promoting more sophisticated industries by tapping into productivity growth potential, adapting
technology and exploiting market opportunities.
4 Payments are calculated based on the average wage paid by similar corporations in the Caribbean.
174
a)
Real wages and consumption of agricultural products
As has been mentioned, four main mechanisms have been implemented to protect families’
purchasing power and ward off speculation and adverse effects on food supplies. The ration booklet
continues to be used as a means of controlling prices and food supplies5; the agricultural markets of
farmers who exceed government quotas have been liberalized; foreign-currency holdings and the
payment of wages in convertible currency have been legalized and supplies of imported and
domestic goods have been promoted in foreign-exchange recovery stores.
At this point, a distinction should be drawn between two separate consumption baskets: one is
made up of ration-booklet goods at official prices and the other of goods for sale on open markets
and in foreign-exchange recovery stores. There are also four different sources of income: wages
payable in pesos, wages payable in convertible currency, income derived from self-employed
activities, and remittances. The purchasing power of real wages has deteriorated for agricultural,
and particularly, industrial goods (see chart V.4).
In short, access to foreign currency and the existence of foreign-exchange recovery stores has
served to safeguard against supply shortages and inflation, since they allow those with access to
supplementary income (incentives or family remittances) to offset the loss of purchasing power of
their wages. Despite its advantages, this has encouraged unequal distribution of income, which
cannot be corrected until wage reforms are implemented or productivity incentives become more
widespread (see chart V.4).
Chart V.4
CUBA: REAL WAGES, 1989-1998
(1989 = 100)
Year
Nominal wages a/
Price indices b/
Agricultural Manufacturing
1989
100.00
100.0
1990
99.47
114.8
1991
98.40
122.3
1992
96.8
121.7
1993
96.81
122.9
1994
98.40
135.7
1995
103.19
128.6
1996
107.45
129.1
1997
109.57
127.9
1998
109.57
129.8
Source: CEPAL estimates.
a/ Based on average monthly wage (State entities).
b/ Based on implicit deflators per sector.
100.0
108.1
113.4
106.0
97.3
97.4
95.6
153.9
157.9
160.9
Real wages in goods
Agricultural
Manufacturing
100.0
86.7
80.4
79.5
78.8
72.5
80.3
83.2
85.7
84.4
100.0
92.0
86.8
91.3
99.5
101.0
107.9
69.8
69.4
68.1
5 This was in response to shortfalls in the Food Plan, which had two main objectives: i) self-sufficiency in the supply of
vegetables and root crops in the provinces of Havana and Santiago, while producing surpluses for other provinces, and
ii) boosting production of agricultural exports (particularly sugar and citrus fruits) and foods for domestic consumption
(rice, bananas, beef, milk, poultry, eggs, fish). The failure of the Plan has been attributed to a shortage of imports, the
high cost of agricultural production and the effects of hurricanes and storms (Lage, 1992 and 1993).
175
b)
Wages and competitiveness on international markets
The pressing need to reenter international markets brings with it the need to review the relative
prices of tradable goods in Cuba. While such prices are of little significance in a rationed market,
they will take on greater importance to the extent that sectors producing tradable goods or services
become self-sufficient in supply. It seems that the relative prices of tradable goods, especially
imported goods, have in fact undergone an adjustment. As mentioned previously, the purchasing
power of average wages has dropped substantially. At the end of the day, the net impact of these
changes on export or import substitution profitability in relative prices does not guarantee the
channeling of sufficient funds into these activities, as long as other restrictions continue to exist,
whether these are internal (planned allocation of funds and inputs) or external (segregation from
international financial markets) (see chart V.5).
c)
Nominal wages and stabilization
Upon measuring inflation in the implicit GDP deflator, it is seen that the wage policy has been
characterized by the absence of complete indexing. Moreover, primary costs do not reflect the
shortage of foreign currency on the unofficial market. Consequently, there is repressed inflation
that comes to light on validating rationing and in certain consumer queues. Subsistence goods are
rationed directly through the ration booklet on controlled markets. Above the subsistence level,
rationing takes place on open markets and at foreign-exchange recovery stores, since only
consumers with access to foreign currency or convertible pesos can purchase these goods. The
ration-booklet system tends to distribute the burdens of adjustment, while the open market tends to
create disparities, as incentives are not available in all sectors (approximately 1.4 million workers
receive incentives, but in different proportions).
The different wage restrictions have therefore contributed to the effectiveness of the stabilization
program. However, certain costs have led to distortions on the labor market. One of these
distortions is reflected in distribution disparities that are unfavorably weighted in the central
government. Another is encouraging workers to view job opportunities in terms of the access they
afford to supplementary income—particularly in foreign currency—rather than in terms of their
intrinsic social importance, although these generally favor the production of marketable goods.
176
Chart V.5
CUBA: RELATIVE PRICES OF TRANSFERABLE GOODS AND PURCHASING POWER OF WAGES IN
FOREIGN CURRENCY, 1989-1998 a/
(1989 = 100)
Prices of
Prices of
Prices of
Prices of
Prices of
exportable
importable
exportable
importable
exportable
goods in terms Exchange rate b/
goods in terms goods in terms goods in terms goods in terms
Year
of importable
(Iw / Ie) c/
of GDP
of GDP
of wages
of wages
goods
(Im / Iw) c/ (Ix / DIPIB) c/ (Im / DIPIB) c/
(Ix / Iw) c/
(Ix / Iw) c/
1989
100.0
100.0
100.0
100.0
100.0
...
1990
115.0
103.4
110.6
99.5
111.2
100.0
1991
123.8
104.7
126.8
107.3
118.2
34.6
1992
124.4
133.4
121.0
129.8
93.2
19.5
1993
124.4
153.2
103.1
126.9
81.2
8.7
1994
134.0
213.5
92.6
147.5
62.8
7.3
1995
120.1
231.0
78.9
151.8
52.0
22.6
1996
123.4
208.7
85.5
144.6
59.1
39.4
1997
120.7
189.7
86.7
136.3
63.6
33.5
1998
122.8
195.1
85.3
135.5
63.0
36.7
Source: CEPAL estimates.
a/ Calculated based on GDP deflators.
b/ Excluding external inflation; measures only the equivalent wage in foreign currency at unofficial exchange rate.
c/ "Ix": Price Index of Exportable Goods; "Iw": Price Index of Wages; "Im": Price Index of Importable Goods;
"DIPIB": Implicit GDP Deflator; and "Ie": Exchange Rate Index.
3. Changes in the labor market and in forms of business management
Aside from partnerships and joint ventures funded with foreign capital, other institutional reforms
are creating new labor markets and microeconomic management styles.
The encouragement given to the cooperative movement in the countryside, the creation of Basic
Cooperative Production Units (BCPUs) and individual holdings are gradually changing the face of
labor relations. In principle, wages and BCPU pensions are the same as those workers were
previously entitled to. However, wages represent advance payments on profits—even when these
are guaranteed—and incentives are linked to increases in productivity, as a means of offsetting
losses in real wages. BCPU business management still faces severe restrictions, but these units have
become an alternative source of employment. Individual agricultural activity and self-employment
are another expanding segment of the labor market. The legalization of open markets, whether
agricultural, traditional, industrial or in the food-service industry, has contributed to this trend.
These activities, in addition to making substantial contributions to supply, family income and tax
revenue, guarantee a growing number of jobs.
However, these developments are cause for concern to the extent that they tend to create privileged
economic circles or provide benefits that are not extended to the population at large. This bone of
177
contention has led to a nationwide debate, which has inspired a number of regulations restricting
the expansion of “second economy” activities6.
A dilemma clearly arises here. On the one hand, increasingly tighter limitations could be placed on
the expansion of private activities and open markets, at the risk of pushing up the cost of the
structural adjustment process. On the other hand, greater growth incentives could be provided for
the labor market and “second economy” corporations, albeit in the knowledge that this would lead
to a certain degree of polarization in the distribution of income.
The agricultural market was created for private enterprises, although government entities (which
already have a 40% market share) are also allowed to trade. Farmers that have met production
quotas to be delivered to the State, who are officially registered and who meet their tax obligations,
are permitted to trade on this market, where prices are determined according to supply and demand.
This has benefited the financial situation of corporations and workers’ remuneration.
The employment and wage model in the new cooperative organizations has been improved with a
wage guarantee and a pension similar to those granted by the Agricultural Production Cooperatives
(APCs) and links wages to production by means of a basic wage and a peso bonus. This in itself
constitutes a labor incentive and a way to improve efficiency. However, many major management
decisions in these companies are still taken by the government, which determines the crops to be
cultivated and the volume of sales that can be made at subsidized prices. This combination of a
market mechanism for determining employment and a mixture of market and central planning in
defining output gives rise to complications in corporate management. The economic rationale of
remunerating workers according to their productivity has to be adapted to the limitations of
productivity and market values on the one hand, and to regulations stemming from the government
solidarity on the other.
a)
Management changes, self-employment and private corporations in the nonagricultural
sector
A number of changes have been implemented to meet domestic demand not covered by public
enterprises:
Self-employment has been legalized and those who engage in it are authorized to perform a
range of activities, which must be formally registered and which are subject to taxes. It is
assumed that, in addition to creating a source of employment, such activities cover a demand
that is not met by large corporations;
Local industry has been revitalized, focusing on low-cost products that make use of domestic
ii.
raw materials and are in strong popular demand, and
iii. State-owned food outlets have been improved to compete with privately owned restaurants
(known as "paladares") and exploit agricultural markets, but demand has been segmented to
satisfy the needs of consumers paying in foreign currency and low-income groups.
i.
6 These include, among others: a ban on hiring wage-earning workers for self-employed activities; limitations on the
eligible fields of self-employment; restrictions on public employees working in their free time; restrictions on
transactions between State enterprises and the emerging private sector; high tax payments and limitations on access to
credit and strategic inputs.
178
Industrial and food-service markets have been created with these sectors in mind. The former is
comprised of local industries, self-employed workers and, more recently, State enterprises that
produce goods to meet popular demand using surplus resources, production remnants or financing
approved by the central government. The food-service market operates more freely, except for
regulations that stipulate the exclusive use of family labor, place limits on the number of customers,
and state that supplies must be obtained from agricultural markets.
These semi-entrepreneurial activities offset major shortfalls in domestic demand and help solve the
employment problem by: i) reducing severance payments to dismissed workers; ii) contributing
revenue to the national budget; iii) improving the provision of services and products; and iv)
boosting income and creating jobs.
INSET V.1. Self-employment
The self-employed constituted a small minority in the Cuba economy until 1993, when a series of measures
were introduced to encourage such activities with a view to easing some of the tension in the labor market.
Regulations pertaining to self-employed activities were amended by Law Decree 141 and its
complementary legislation, authorizing all those with the opportunity and aptitude to carry out certain
activities. Furthermore, the government sought to ensure that such activities would act as a complement to
State activities. Self-employment grew at an accelerated rate during the initial years, but began to drop off
in 1996 due to a combination of factors: the incorporation of other high-growth activities (such as sectors
linked to the tourism industry and other related services), insufficient demand for the goods provided or
services rendered, difficulties in obtaining raw materials, high tax rates and government regulations, among
others.
At year-end 1996, approximately 167,000 workers were licensed to carry out self-employed activities and
this figure had not changed significantly by mid 1999. Two segments of the noneconomically active
population account for a large portion of the self-employed: retirees (approximately 25%) and, to a slightly
lesser degree, housewives. Just over 50% of self-employed persons belong to sectors that were “excluded”
from the labor market until recently.
Source: CEPAL, based on official information.
b)
Management changes in mixed-ownership companies and the financial sector
Cuba’s integration into international financial markets depends increasingly on the business
management capacity of corporations that produce tradable goods, as these are obliged to finance
their own operations in foreign currency. Several measures have been taken to this end: i) foreignexchange transactions have been decentralized7; ii) contracts where the counterparts fix prices by
7 To this end, such corporations are permitted to finance their own operations in foreign currency and these are merely
complemented by the State budget. This practice stands in contrast to the foreign-currency allocations made by the
central government to producers, importers, construction firms, service providers, input allocations and the assigning of
construction material supplies.
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mutual agreement have been authorized8; iii) corporations are now empowered to retain profits and
make independent decisions regarding finance management9; and iv) mixed-ownership companies
and both foreign and domestic investors are now allowed to open accounts in freely convertible
currency at any domestic banking institution, thereby facilitating collections and payments.
D. REFORMS TO THE PENSION SYSTEM
The Cuban government’s social security and welfare systems protect the entire population. The
former extends free benefits: i) in general services (education, health-care, rehabilitation and
others); ii) in kind (school materials, medicines and medical and orthopedic prosthesis, among
others); and iii) in cash (subsidies for unemployment and temporary disability, maternity leave and
old age, disability and widows’ pensions).
The high priority given to social security is evidenced by the fact that the government determines
these annual disbursements without consideration for income and contributions. Employers
contribute 14% of the payroll and no contributions are required from workers. Social security
spending has increased as a percentage of GDP during the “Special Period”: in 1998, such
expenditures accounted for 6.5% of GDP and 14% of total government spending, whereas these
figures stood at just 5.3% and under 8%, respectively, in 1989. Current and new pensions account
for a relatively constant proportion of the average wage, which requires maintaining a chart
replacement rate over time. However, an economic downturn or higher unemployment could have
serious repercussions on the State budget.
The number of pensioners grew at an average annual rate of 28,000 in the 1990’s, but there has
been a significant change in the composition of this group: the number of old-age pensioners
(which was double that of invalid pensioners at the beginning of the decade) has almost tripled in
recent years. Budget figures continue to reveal a large social security deficit and to close the gap it
will be necessary to increase the amount of contributions, make inter-budget transfers or contract
debt. Nevertheless, this will not be sufficient in the medium-term, much less in the long-term, as
the ratio of retired to active workers is on the increase. Over the next 25 years, the situation will be
exacerbated by a major change in demographic dependence (the ratio of 8 potentially active
workers per one pensioner will drop to 2 to 1 in the next fifty years) (see chart V.6 and graph V.1
again).
8 The aim is to limit the foreign-currency denominated revenue and expenditures budget exclusively to State enterprises
that rely on foreign-currency revenue, but do not generate such revenue. Inter-company foreign-currency transactions
have therefore been facilitated by allowing the parties to fix prices through mutual agreement.
9 The purpose is to make investment decisions independent of the budget.
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Chart V.6
CUBA: CUBA WORKER'S PENSIONS, 1990-1997
Year
1990
1991
Average pension (retired workers)
Current
New
83.7
...
85.2
104.2
Average
monthly wage
187.0
185.0
Average pension (as a % of the average wage)
Current
New
44.7
...
46.1
56.4
1992
90.9
109.2
182.0
1993
92.2
107.5
182.0
1994
93.3
108.8
185.0
1995
94.6
109.6
194.0
1996
95.5
110.2
202.0
1997
97.4
113.5
206.0
Source: CEPAL, based on a combination of official and unofficial figures.
45.9
50.7
50.4
48.8
47.3
47.3
60.0
59.1
58.8
56.5
54.6
55.1
1. Financing, growth and stability of the pension system
The benefits provided by the Cuban State are an important factor in maintaining social stability and
redistributing income. However, their financing could eventually become an obstacle to stability
and economic growth.
Social security spending climbed from 5% to 9% of GDP in the 1989-1993 period. These
percentages are extremely high for a developing country. Since these are mandatory rights,
conflicts arise between budget allocations for social needs and human-capital investment on the one
hand, and economic and capital-raising goals on the other.
INSET V.2. Main implications of a system based on mandatory benefits
The social security system is based on mandatory State obligations financed by the national budget.
Coverage is universal, so that the amount and quality of benefits remain unchanged regardless of the
beneficiary’s economic capacity and contributions are not raised excessively when the cost of services rises
or the number of beneficiaries drops. State financing is deemed a human-capital investment.
The Department of Labor and Social Security is responsible for drawing up a preliminary draft of the
annual social security expenditures budget, which it submits to the Department of Finance and Prices. The
latter then prepares a preliminary draft of the State budget, which is submitted to the Council of Ministers
for review and then to the National People’s Power Assembly. The social welfare budget is decentralized; a
preliminary draft of the expenditures budget is drawn up by the provinces and submitted to the Department
of Finance and Prices, which passes it on to the Provincial Administration Council.
In keeping with these procedures, the pension system is deemed part of the distribution mechanism and
serves to implement social objectives rather than spur domestic savings. There are differences between
sectors, branches of activities and retirement ages, but these are minimal in priority sectors. In 1998, there
were 1.4 million pensioners (53% collecting old-age pensions, 20% disability pensions and 27% widows’
pensions). The population of retirement age stood at just over 1.5 million, which represents coverage of
48% if only old-age pensions are taken into account, and 72% if widow’s pensions are included. The State
181
finances deficits through transfers from public enterprises, making social security contributions residual in
nature. Public enterprises also render social services and make transfers of goods and services for the
welfare of the population at large.
The amount of available financing was affected by the sharp decline in productivity and the subsequent rise
in underemployment during the initial years of the “Special Period”. As a result, revenue has declined in
real terms and this has become a source of considerable pressure, causing: i) burdens on the State budget
due to the policy of keeping the amount and quality of benefits intact, despite reduced contributions from
State enterprises and the new categories of agricultural and self-employed workers; and ii) changes in the
breakdown of beneficiaries (less for corporations and products and more for income support).
The above makes it necessary to reconsider ways of achieving an overall balance between the population’s
needs and economic capacity. The following points merit closer examination: i) there are new categories of
corporations and workers, while State enterprises have been restructured and must now finance their own
operations and compete. The efficiency and cost considerations of these enterprises may prove incompatible
with budget contributions made for social purposes; ii) in view of the under-utilization of the workforce,
eligibility criteria for early retirement and disability need to be reviewed if pressures on the budget are to be
reduced; and iii) maintaining the quality of services provided for senior citizens makes it necessary to ration
food and other goods efficiently by means of special ration booklets.
a/ CEPAL / United Nations Development Program, “La Seguridad Social en Cuba”, 1994.
During the “Special Period”, the average productivity of the working population dropped
appreciably through 1994, due mainly to the economic recession. Thereafter, this trend was
cushioned by a combination of higher economic activity and a more efficient utilization and
allocation of human resources. This, however, places more pressure on the social security system.
The number of beneficiaries financed by a budget that is shrinking in constant terms can only be
increased by offering poorer-quality services or sacrificing other budget items.
The financing of the social security budget deficit is therefore key to achieving a macroeconomic
balance and the path to future growth. Since 1989, the gap between social security spending and
revenue has remained substantial, since benefits are deemed yet another of the State’s social
obligations, regardless of income generated from payroll taxes. This could have repercussions on
the growth potential of the Cuban economy, as social security financing requirements put pressure
on government spending, leaving fewer resources for investment purposes. As a result, less capital
is available, which, in turn, limits growth, employment and wage prospects. Hence, the need to
review the pension system and restructure the entire social security network.
2. Obstacles to the government’s social function
In the context of the crisis, higher social spending as a percentage of GDP has not had a long-term
impact on poverty levels. The growing number of pensioners and unemployed receive benefits that
are financed with contributions from State enterprises, whose output and wages have deteriorated.
This income can only be partially protected in real terms through the ration booklet. As a result,
current benefits are much lower than the real income contributed indirectly by current pensioners
during their working life.
182
While the social security network and the ration booklet made it possible to distribute the burdens
of adjustment evenly, discriminatory access to additional sources of income (open-market trading,
family remittances, etc.) have given rise to disparities. In brief, building up the productivity levels
of the working population is the only way to ensure that the pension system can meet its social
objectives. This necessarily implies rethinking the structure of the system and adapting it to suit the
country’s changing circumstances.
3. Factors to be taken into consideration on reforming social security laws
The social security problem leads us to question whether the deterioration of benefits is due
exclusively to the sharp drop in GDP or if this has deeper roots. There appears to be a combination
of factors at play, with structural changes to the economic system also high on the list of priorities.
The following issues should be addressed:
a)
A generous system
In 1993, 4.3 million people were employed (39.5% of the total population), a figure that is
somewhat lower than in previous years and that has continued to drop further in subsequent years.
As of 1996, and particularly toward 1998, employment levels had virtually made a complete
recovery in absolute terms. However, the number of pensioners has increased (with almost 20%
collecting old-age pensions), while the ratio of active workers to pensioners has been falling. This
implies that, over time, contributions will not be sufficient to pay for the same real benefits, unless
productivity increases at the same rate. The way to avoid larger budget deficits would be to revise
the structure of social security contributions and establish a transparent link between benefits and
financing.
b)
Demographic maturity
The aging of the population in the long term will create additional complications for the Cuban
pension system. So far, society has benefited from a favorable phase in population dynamics
resulting from a drop in fertility rates and increased life expectancy. However, the combination of
these two factors indicates that the trend is likely to persist, meaning that the budget gap will widen
due to the falling ratio of potential contributors to pensioners.
c)
A changing labor market
The wage bill from which social security contributions are paid is limited. It has probably shrunk
even more during the “Special Period” due to the emergence of self-employed workers and the
decreased participation of the workforce. Consequently, existing trends indicate that contributions
from the wage bill will continue to drop, thus widening the gap between social security revenue and
spending, since benefits are not linked to revenue.
There is no doubt that the generosity of the present system, compounded by its weakened primary
source of financing and demographic trends, make social security reform a priority issue. More
specifically, it would be advisable for the government to make a distinction between its role in the
redistribution of income and its social welfare policy, as this would make it easier to determine the
183
origin of deficits, that is, whether these are attributable to a poorly designed social welfare system
or an excessively generous redistribution policy.
The solution lies in rescuing three social welfare principles that have a functional purpose in a
changing economy: i) maintaining the transferable nature of rights and obligations so that each
individual worker remains within the system, regardless of his place of work, even when he carries
out self-employed activities; ii) linking benefits to contributions at the individual level; and iii)
segregating financing mechanisms and sources of financing making these transparent so that
income not intended for social welfare purposes can be redistributed.
184
CHAPTER VI. SOCIAL DEVELOPMENT
A. THE PRIVILEGED SITUATION OF SOCIAL SERVICES
Since 1959, Cuban economic policy has given priority to the allocation of resources to social
sectors to ensure a gradual improvement in the well-being of the population (CEPAL, 1980).
While the amount of funds granted to each sector varies, this criterion has always prevailed in
national development plans.
Social policy is unquestionably one area in which Cuba has excelled by guaranteeing an equitable
distribution of income and well-being of the population, while investing in human capital. No
doubt deficiencies, poor administration and even some lags were evident in the earlier decades,
but for more than 30 years, health-care, educational, cultural, sports and social security services
have been steadily improving and have been made available. Aside from notable achievements in
the sports world, a comparison with social indicators in Latin America—even with higherincome countries—place Cuba in a favorable position. In the late 1980s, Cuba was generally
rated above the Latin-American average, calculated on the basis of a series of social indicators
(see chart VI.1). These achievements came as a result of sustained efforts and a complex
institutional organization, which, despite the recent crisis, continue to stand out in the region1.
Cuba’s social policy was viable partly as a result of the island’s unique, privileged and decades
long relations with socialist-bloc countries, particularly the former USSR. That cooperation was
important in the financial sphere, ensuring material and equipment supplies, as well as technical
assistance. However, it also had an important impact in providing funds that raised the
population’s well-being above the average in countries with similar and even higher income
levels2. Over and beyond all this has been the government’s unwavering political decision to
forge an egalitarian society, which has yielded results in equality and social justice.
This does not mean that the strategies implemented were exempt from errors in their planning
and application. In the mid 1980s, a detailed self-critical analysis of results was made, which led
to the adoption of a series of measures intended to facilitate meeting goals and correcting
inefficiencies in production processes and investment. The study covered all spheres of the
economy and revealed satisfactory results in achievements in the social domain.
Failure to meet social goals had a twofold impact on the well-being of the population: on the one
hand, this had repercussions on the equitable distribution of food rations and other essential
1 According to the human development index published by the United Nations, Cuba is rated in an intermediate
position, slightly above the average for Latin America as a whole. Cuba also holds an advantageous position in relation
to the average poverty index for Latin America, which is calculated on the basis of the following indicators: mortality
before age 40, adult illiteracy and lack of general economic well-being (see UNDP, 1997).
2 It is estimated that transfers of funds from the CMEA accounted for more than 20% of Cuba’s disposable income
during the 1980s.
185
goods (CEPAL, 1981) and on the other, delays in completing social infrastructure (due to
repeated incidents of inefficiency in construction activities) were costly, although they did not
impede the expansion of services. Even so, the 1986 "wake-up call" proved easier to implement
in social sectors, whereas obstacles in implementing changes were encountered in economic
management and control systems.
Chart VI.1
CUBA: EVOLUTION OF SOCIAL INDICATORS DURING THE "SPECIAL PERIOD"
Indicators
Previous
Level
Recent
Life expectancy of less than one year
1986/87
74.46
1994/95
Available daily food ration per inhabitant
Calories
1989
3 108
1997
Proteins
1989
73.0
1997
Average number of inhabitants per doctor
1989
303
1998
Medical consultations per inhabitant
1989
6.3
1998
Number of hospital beds per 1,000 inhabitants
1989
7.4
1998
Literacy rate (population aged 10 and over)
1990
4.0
1988
Gross rate of enrollment per educational level
1996
96.9
1989
First level
1996
90.2
1989
Second level
1996
20.5
1989
Third level
Source: CEPAL, based on official data, except for information pertaining to availability
inhabitant (FAO) and the gross rate of enrollment per educational level (UNESCO).
Level
Unit
74.8
Years
2 480
5l.7
175
7.0
7.3
3.8
Units
Grams
Units
Units
Units
Percentage
Percentage
106.1
Percentage
77.3
Percentage
12.4
of daily food rations per
It is only fair to point out, however, that the State’s more flexible and progressive position in the
sphere of social well-being was not consistent throughout the range of social services provided or
even within each one. So, while an attempt was made to meet fair objectives and reduce
differences between provinces and regions, between urban and rural areas, or between large cities
and smaller ones, some sectors and goals were bypassed. This was the case with the housing
sector, where substantial shortages and backlogs are being felt. Furthermore, in its quest to reduce
regional differences, housing construction and maintenance were neglected in Havana, the
consequences of which can be seen in overcrowding and the deteriorated living conditions of the
capital’s inhabitants.
The remainder of this section reviews the performance of social services during the “Special
Period” and the effects of the crisis on social indicators. More in-depth analysis will be given to
activities linked to health-care, educational, housing, cultural, sports, physical education and
recreation services. The chapter concludes with a look at the dilemmas facing Cuba’s social
policy under today’s restrictive economic conditions.
186
B. SECTOR DEVELOPMENT AND THE IMPACT OF THE CRISIS DURING THE
“SPECIAL PERIOD”
1. Health care
In the 1980s, not only the general expansion of health-care services, provided for the entire
population in all regions of the country was particularly outstanding, but also improvements in the
quality of certain specialties, which are among the most advanced worldwide. This was facilitated
thanks to the consolidation of organization and procedures3, combined with a highly skilled body of
human resources and the maturing of prior investments.
The main characteristics of the "health-care strategy" were as follows:
i.
ii.
iii.
iv.
Primary health care developed along two lines: first, more resources were allocated to all
the provinces, in keeping with the objective of overcoming the differences among regions;
and second, efforts were made (especially as of 1984) to improve diagnosis and prevention
of disease through the creation of a type of “family physician”4 concept. According to
official data, this led to greater awareness of health-endangering habits, while improving
the level of primary health care and reducing costs.
The expansion of the network of services through substantial investment considerably
increased the number of hospitals. Large-scale hospitals (with a capacity of 700 beds) were
built in provincial capitals and certain other cities. Special emphasis was also placed on
developing "specialized centers", such as blood banks and stomatological clinics, among
others. In addition, certain units were upgraded with state-of-the-art technology of the
period5.
Intensive training was provided for university-level human resources, doctors and
paramedics and the creation of new medical schools was encouraged at provincial
universities. The link between medical theory and practice was more closely tied together
not only at a local level, but also at an interregional level, with care being taken to improve
teaching standards.
Scientific research was once again promoted (namely the training of highly qualified
technicians in the CMEA countries), combining foreign technological assistance with the
3 Two examples: the first dates from the 1981-1982 period, when the country was hit by a dengue epidemic. This was
quickly abated by the implementation of a national emergency plan into which considerable resources were channeled;
the second dates from around 1988, when a new cost-control system was implemented for health-care services.
4 Each unit (there were approximately 20,000 by the mid 1990s) has a doctor and an auxiliary nurse. These replaced
primary outpatient care at polyclinics. More recently, 5,000 similar units have been set up in schools and the workplace.
A physical education teacher is employed at each of these units with financing from the National Sports, Physical
Education and Recreation Institute (INDER), as will be discussed later.
5 This is the case of nuclear magnetic-resonance equipment or that used to detect congenital diseases in pregnant
women.
187
v.
setting up of research centers by experts. This facilitated the establishment of major
medical and biotechnology research centers6.
Major investments were made in the development of the medical-pharmaceutical industry,
working in conjunction with the above-mentioned research centers. This helped import
substitution efforts in the pharmaceutical industry, boosted exports and, in general, reduced
the industry’s dependence on foreign inputs. Mention should be made of medication,
chemical pharmaceutical and bio-medication research and development centers, the
Pharmaceutical Laboratories Enterprise and the Technical Drug Laboratory, among others.
The amount of funds allocated to health care during the 1981-1985 period made it possible to
sustain the above-mentioned upward trends. However, obstacles to expansion arose in the 19861990 period, when it became increasingly difficult to secure foreign financing. This had a
considerable impact on the supply of imported equipment and inputs, while foreign technical
assistance also became scarcer.
Generally speaking, the development of the health-care sector was satisfactory through 1989,
although dependent on the exterior. That year, US$237 million dollars were channeled into
imports of medicinal products (US$134 million dollars), equipment, instruments and spare parts7.
Similarly, a considerable amount of direct aid was received from the CMEA countries, while
indirect aid was given through general subsidies. This has become a problem under present
circumstances, since the absence of such aid has had major repercussions on the normal
operations of the sector.
Despite the difficulties in the “Special Period”, the government decided to maintain social
benefits, with priority given to health care. Nevertheless, in view of the imbalances in State
finances, foreign-currency allocations for the purchase of medicinal products had to be drastically
reduced. These dropped to US$66 million dollars in 1993, although some recovery was seen over
subsequent years (US$90 million dollars, US$108 million dollars and US$126 million dollars in
1994, 1995 and 1996, respectively).
The crisis also made it necessary to tighten austerity and adjustment measures that were initially
implemented in mid 1980s. Among the most important of these measures was the requirement
that each branch or sector increase foreign-currency generation as much as possible, with a view
to becoming self-sufficient in the financing of imported inputs and equipment.
The health-care sector was no exception. In 1998, foreign-currency revenue totaled US$138
million dollars. At this point, it would be helpful to list the means by which such revenue has
increased:
6 The following deserve mention by way of example: a) centers for molecular immunology, immune testing,
pigmentary retinitis, transplant and nervous system regeneration, as well as research and production centers for serum
and vaccination, and b) the institutes of cardiology and cardiovascular surgery, endocrinology, gastroenterology,
hematology and immunology, occupational medicine, sports medicine, tropical medicine, nephrology, neurology and
neurosurgery, nutrition and food hygiene, oncology and radiobiology, hygiene, epidemiology and microbiology.
7
According to the Department of Health, most equipment was of European origin (such as Siemens of Germany,
Philips of Holland and Spanish brand names); the socialist-bloc countries supplied X-ray equipment (Hungary) and
other equipment was provided by the former German Democratic Republic, while stomatological equipment was
supplied by Yugoslavia, while the USSR provided equipment required for transportation of medicinal products.
188
i.
ii.
iii.
iv.
v.
vi.
Medical care for patients from other countries (known as “tourism for health care”)
accounted for some US$5 million dollars annually8;
Exports of medicinal products (totaling US$47 million dollars in 1997);
Donations from workers in the tourism sector to a cancer research program (over US$1
million dollars was raised in 1996);
Remittances from Cuban doctors on missions abroad (US$6 million dollars annually);
Foreign sales of computer software with medical applications; and
Tuition fees paid by foreign students, a source of revenue that is not expected to increase in
the short term, given that students at the Latin-American School of Medical Sciences who
come from economically depressed areas of countries in the region will be entitled to a
scholarship that covers tuition fees and all expenses incurred during their stay in Cuba.
Independently, resources in kind have been obtained from a variety of sources, principally
transfers from the European Union (valued at an estimated US$20 million dollars annually) and
nongovernmental organizations (pharmaceutical raw materials, materials for use in medical
practice and recently developed equipment). The above-mentioned European contribution, which
consisted mainly of medicine and raw material donations for the pharmaceutical industry,
eventually declined to the extent that resources were redirected to zones of conflict in the Federal
Republic of Yugoslavia. However, contributions by nongovernment organizations remain
substantial, particularly insulin donations (at a monthly value of US$250,000 dollars).
It should also be noted that a commercial agreement has been entered into with the People’s
Republic of China. This agreement, which has been ratified via letters of credit, provides for the
supply of raw materials for the pharmaceutical industry9, finished medicinal and other products
(valued at US$45 million dollars) in exchange for sugar.
Nevertheless, despite increased revenue, foreign currency is still scarce and this had had
unfavorable negative repercussions on the management of the health-care sector as a whole. For
example, production of pharmaceutical products is highly dependent on inputs of imported raw
materials and this continues to cause distortions in the operation of different medical units,
making it necessary to reorganize services at both the national and provincial level and modify
evaluation and management control systems.
Under these circumstances, it was fortunate that primary health care began to be provided
through family-physician programs before the crisis. This was key in ensuring a rapid initial
diagnosis and timely decisions as to the course of treatment to be followed. This led to
improvements and savings by avoiding unnecessary hospitalization of patients and excessive
administration of medicines. Medical records reveal that the number of consultations per
inhabitant tended to shift from hospitals and clinics to the family physician.
More recently, in an attempt to cut back on spending without jeopardizing patient care, the
streamlining of the hospital network has been intensified considerably as a result of two factors.
On the one hand, the family physician has replaced hospital care to the extent that patients are
8
Among the most important institutions are the medical centers specializing in the treatment of Parkinson’s disease and
neurotransplant surgery, pigmentary retinitis, organ transplants and orthopedic ailments, among others.
9
Imports account for 90% of the value of pharmaceutical inputs.
189
only hospitalized when absolutely necessary; on the other, the last few years have seen the
development of the so-called “Integrated Medical Emergency System”, which has led to the
setting up of emergency polyclinics in each municipality10. The outcome has been the
concentration of services with the merging of hospitals in each city or their conversion into
specialized health-care centers.
The resulting relocation of medical and nursing staff to family physician and emergency units has
also served to take pressure off the hospital system. Today, Cuba’s hospital infrastructure has
more available capacity, as evidenced by the decline in the number of beds (1998), thereby
reducing the need for fresh investment.
Conversely, the loss of capital investment has had extremely negative repercussions on the
capacity to replace and maintain high-technology equipment. This has led to the excessive use of
available equipment with the subsequent shortening of its useful life11.
Efforts are being made to strengthen the role of family physicians, while taking advantage of
existing hospital infrastructure. There are also plans for the selective replacement of equipment at
certain centers, without expanding hospital facilities.
On the other hand, the deterioration and aging of nonmedical equipment and facilities has been
partially offset with financial assistance from abroad. By way of example, Spain has donated
US$40 million dollars, which will be used to replace and repair equipment at major hospitals
throughout the country.
One of the main bottlenecks in this respect is access to leading-edge medical technology.
Negotiations are currently underway with commercial equipment suppliers in Germany.
Together with the policy of rationalizing and simplifying services, while maintaining efficiency
levels, measures designed to employ resources more effectively have been implemented. These
give greater priority to the supply of essential inputs for the pharmaceutical industry than to its
expansion. Greater emphasis is placed on resolving pressing problems rather than on initiating
new research, and the conclusion of selected works in progress is deemed more important than
disbursements for the maintenance of existing projects over and above the essential minimum.
In short, indicators show that the high level of coverage provided by health-care services has
been sustained with a comparatively minor reduction in quality due to the promotion of ambitious
programs, which had been consolidated by the time the economic crisis began. Moreover, even
though government spending on health care had to be cut by 22% in real terms in the 1989-1995
period, such services continued to enjoy high priority. This fact is illustrated by the 21% increase
in real terms registered in the 1995-1998 period, even though spending levels were still
somewhat lower than in the previous decade.
10
These units, which began operating in the last two years, form part of a network headed by a national coordination
center above provincial coordinating centers.
11
Granma (1996). Foreign observers have reported that the total number of operations dropped 31% between 1990 and
1995, while heart operations were reduced by half in the same period (Reuters, March 27, 1997).
190
Aside from the structural problem of convertible foreign-currency constraints, the health-care
sector faces lags in remuneration of professional employees, despite recent wage increases.
Wages paid to these formerly privileged workers are now lower in comparison to those received
by workers involved in foreign-trade related activities and even to those of nonskilled workers
with access to foreign-currency income. Another key issue is the long-term viability or
advisability of continuing to sustain an exemplary health sector with state-of-the-art technology
given Cuba’s present economic situation. Here we need to review the pros and cons objectively
and correct certain distortions; for example, those that are already translating into an excessive
number of medical professionals12.
2. Education
An account of the most important aspects of Cuba’s educational process since the 1980s would
be incomplete without mentioning certain earlier events (Department of Education, 1999).
INSET VI.1. Latin-American School of Medical Sciences
Within the framework of Cuba’s cooperation and exchange policy with other countries, in late 1998 the
government decided to establish a Medical Faculty for Latin-American students near the Baracoa District
of Havana. Candidates must meet two requirements: they must be native to zones of these countries
where there is a low (or zero) ratio of doctors per inhabitant and must commit themselves to practicing
their profession in these same zones.
The activities of the Latin-American School of Medical Sciences take place at the former facilities of the
Naval School. The buildings are less than 20 years old, so little investment was required to adapt them to
their new purpose. The process was completed in a short period of time and the majority of resources
were used to adapt and equip rooms to accommodate seven laboratories and for other specific purposes.
There is a small hospital (40 beds), an X-ray room and three dental clinic units, among others. Close
relationships have been forged with nearby hospital units a/ for didactic purposes.
To ensure that the school’s 1,800 students would start their first year of medicine in September 1999 with
a uniform pre-university education, 1,675 of these students from 15 different countries in the region took
part in standardization courses during the two months prior to the beginning of classes. The majority of
students come from Central-American countries: Nicaragua, Honduras, El Salvador and Guatemala, in
descending order according to number. Others are natives of Argentina, Belize, Bolivia, Brazil,
Colombia, Chile, Ecuador, Panama, Paraguay and the Dominican Republic, although these are fewer in
number. Students from Haiti are placed in the Santiago de Cuba Medical School in the east of the
country, where they are given a one-year Spanish language course.
Students cover only the first two years of their course at the main facilities of the Latin-American School
of Medical Sciences, after which time they are placed in one of the country’s 21 medical schools. Here
they receive clinical training in connection with the hospital and family-physician systems.
12
This has enabled Cuba to increase the number of doctors and paramedics it sends to Central American and Caribbean
countries suffering the ravages of natural disasters and to other continents (as in the case of South Africa). It was with
this purpose in mind that the Latin-American School of Medical Sciences was founded and began operating in 1999
(see inset VI.1).
191
Tuition is free and the governments of the countries that the candidates come from are required only to
cover their students’ airfares. The Cuban government grants full scholarships to students during their stay
in the country. These include enrollment fees, tuition, food, accommodation and clothing, plus a monthly
allowance of 100.00 Cuban pesos each.
Furthermore, Cuba has sent numerous groups of doctors to different parts of the world (mainly Latin
America) to attend casualties caused by natural disasters and provide long-term medical assistance.
a/ The Department of Public Health coordinates both health-care services (through the hospital network
and other links in the institutional chain) and teaching (through the medical science schools).
Measures implemented since the 1960s aimed at guaranteeing the extension of educational
services, drastically reducing illiteracy and readapting the system’s institutional
organization. The most important of these was, first, the 1961 National Literacy Campaign,
which succeeded in substantially reducing illiteracy, and, second, the Nationalization of
Education Law promulgated on June 6, 1961, which decreed that education should be free
and made available to the entire population.
The creation of the National Education System (Sistema Nacional de Educación, SNE),
whose institutions were restructured in 197713. The system was based on the following
tenets: the all-inclusive nature of education; the close relationship between studies and their
working applications; the participation of all segments of society in education in all regions
of the country; coeducation at all levels of the SNE, with men and women having equal
access to educational facilities; and finally, the free nature of education with scholarship
systems for students and study programs for workers.
i.
ii.
Today, the SNE represents the culmination of a lengthy process of maturity, which was
consolidated mainly in the 1980s. It consists of the following educational subsystems: preschool;
general, polytechnic and labor; special; technical and professional; teacher training and
development; adult and higher education. The main features of each subsystem are described
below:
a)
Preschool education
Includes children aged 1 to 5 who receive education at school and at home. Institutions include
the children’s circle (up to age 4) and the preschool grade (either in the same children’s circles or
primary schools).
There are three types of children’s “circles” (a type of day-care center): for children of working
mothers; mixed, which also have boarding facilities for “socially disadvantaged” children; and
13
Since 1977, the Department of Education has overseen the spheres of primary, secondary, adult and technical
education, which account for over 90% of the country’s total enrollment while the Department of Higher Education
supervises a large part of university education. Other agencies also provide university-level education, such as teacher
training (Department of Education), medicine (Department of Public Health), physical education (INDER), art (Higher
Institute of Art run by the Department of Culture) and industrial design (Institute of Industrial Design at the Department
of Economy and Planning). There are other higher-education institutions run by the Higher Institute of Nuclear Science
and Nuclear Technology, the Department of Science, Technology and the Environment, the Department of the Armed
Forces (Military Technical Institute) and the Department of the Interior.
192
those providing special education for handicapped children. This subsystem was gradually
expanded during the 1980s. A standardized program based on teaching experiments was
established for children’s circles and schools throughout the country as of the 1994-1995 school
year.
Informal education (mainly for children under five) has become widespread, particularly over the
last two years. This is supervised by the Department of Education with the participation of other
institutions (Federation of Cuban Women, Department of Culture, Department of Public Health
and the National Sports, Physical Education and Recreation Institute), and is provided to over
700,000 children.
By 1998, there were 144,533 minors attending children’s circles, although the number of units
has not increased due to financial limitations. Efforts have been made to find alternatives. For
example, a high percentage of children under five receiving informal tuition now have the
backing of UNICEF, which finances a large portion of personnel specializing in the training and
assistance of mothers.
b)
General, polytechnic and labor education
This is the largest subsystem as it covers primary, basic secondary and pre-university level
education14. Educational policy guarantees that all students in 6th grade go on to secondary
school, while all those who complete 9th grade are offered the choice of a university education, or
technical or professional training.
State policy continues to prioritize education, although fewer resources are available, especially
from foreign sources. With a few exceptions, satisfactory results have been obtained insofar as
maintaining educational levels at the end of the previous decade (100% of children receive
primary school education and 97% basic education up to 9th grade). According to the authorities,
no schools have been closed, despite critical maintenance problems. There are, however, some
exceptions, such as the case of the priority program for pre-university level institutions and
several secondary schools.
Allocation of budget funds for education dropped a substantial 48% in real terms in the 19891995 period and only recovered 10% over the last three years. Although teacher’s salaries have
not fallen15, adjustments have been made to funds for the purchase of utensils, text books (these
are still free, but are now given out on loan and must be returned so they can be used for the next
group of students) and other materials, as well as funds for capital formation. This has had a
14
Primary education consists of six grades, divided into two cycles (1st to 4th grade and 5th to 6th grade). There are
currently 9,401 schools in operation, three-quarters of which serve rural zones. Students throughout the country devote
part of their time to tending school vegetable gardens, the produce of which is consumed by the schools themselves.
Basic secondary education covers 7th to 9th grade. There are two types of institutions (urban 79% and rural 21%, the
latter with boarding facilities). Pre-university level education comprises 10th to 12th grade, divided between urban and
rural institutions (which account for 70% of the total). The urban/rural structure is different from that of basic secondary
education.
15
During the height of the crisis (1993-1995), some teachers took jobs in emerging sectors of the economy, although
some of them have returned to the teaching profession over the last three years. The wage reform implemented in early
1999 is expected to favor this trend.
193
negative impact on the normal functioning of the entire educational system, although the
repercussions have been more severe in laboratories and workshops, where equipment has
deteriorated over time. Student boarding centers have also been affected by cuts in transportation
services and food rations. The overall effects of this situation are now becoming evident in the
diminishing quality of educational services. In the specific case of laboratories, teaching is often
limited to demonstrations due to an inability to replace equipment, denying students the
opportunity to partake in practical training. Only equipment and instruments essential to
specialties or techniques deemed as a priority are replaced. In other areas, a partial solution to the
problem has been found, such as information technology due to the supply of equipment in
educational centers, although somewhat outdated technologically. This equipment is used mainly
to access computer software in use internationally.
Although efforts are being made to obtain foreign funds by rendering services abroad and
organizing international courses in Cuba, this is not likely to be an easy task, since the education
sector has limited means of generating foreign-currency revenue16.
Adjustments are also being made to study plans and programs, especially in secondary and
professional education, while maintaining quality standards. Systems that save teaching time in
schools have gradually been consolidated so the staff has the opportunity to upgrade their skills
without detriment to their salaries.
Programs designed to replenish teacher reserves take into account the unique characteristics of
Cuba’s demographic pyramid. Indeed, in the short and medium terms the population of school
age will drop off in certain age groups, leading to structural changes in the system. This will
make it necessary to modify personnel requirements in the future.
c) Special education
Substantial funds continue to be allocated to education for children and youths with physical,
mental and behavioral problems in close coordination with other State institutions (such as the
Department of Public Health). Since these handicaps are both diverse and disparate, this
subsystem requires an organization with costly equipment and instruments. However, despite
significant limitations related to foreign-currency availability, the authorities give priority to the
implementation of this subsystem’s plans and programs.
d) Technical and professional education
Skilled workers and mid-level technicians are trained in this subsystem. Study plans stipulate that
more than half the student’s time should be devoted to practical activities and that they should
actively participate in tasks related with the production of goods and services. Relations with
polytechnic centers and corporations are facilitated by the process known as “integration,
teaching, production and research”, which is also in keeping with the policy of associating studies
16
The number of teachers has been reduced by taking advantage of the margin afforded by using human resources
more efficiently. This has allowed them to devote more time to improving training standards in post-graduate courses
for teachers. There is also the possibility of earning foreign-currency income by teaching abroad or organizing
international courses in Cuba (which is more feasible within the higher-education subsystem).
194
with work. This subsystem has been reformed in recent years by reducing the number of
specialties offered, seeking to harmonize the supply of skilled workers with changing labor
demands imposed by structural changes in the productive system. Similarly, an effort has been
made to organize courses in each province that teach the specialties most in demand in that
particular geographical area. The type of specialties taught in large urban centers differs from
those taught in other parts of the country, where courses tend to be more oriented toward
agricultural techniques. The number of specialties has gradually been reduced from
approximately 100, at the beginning of the “Special Period”, to 69 in 1999.
A significant number of new polytechnic centers (there were 662 in 1999) were established in the
1990s, mainly to address the need to broaden the coverage of mid-level agricultural education.
Although the authorities back the development of this subsystem, in practice it has been affected
by financial constraints, particularly equipment shortages, compounded by the deterioration of
workshops at scientific and technical centers, which lack the modern equipment and spare parts
to keep up with technological advances.
e) Teacher training and development
The SNE has traditionally tried to classify teacher training according to different levels. In the
1960s and 1970s, emphasis was placed on the “intensive training of teachers and professors.”
Ever since, priority has been given to ongoing refresher courses and, more recently, to the
training of post-graduate teachers. This trend has become more pronounced in the present decade,
as the consolidation of the policy to improve training standards coincided with the increasing
availability of teachers temporarily released from the teaching profession as a result of improved
organization throughout the education system. Thus, a growing number of professors now take a
“sabbatical year” and have the opportunity to enroll temporarily in national or international
courses or teach abroad.
f)
Adult education
Adult education is divided in three groups: for workers and farmhands, for workers’ basic
secondary education, and for students who drop out of higher education.
Efforts are being made to reduce the illiteracy rate (currently 4%) through adult education. Even
in these difficult years, the adult educational level has been sustained, while the educational lag
and the drop-out rate have both been reduced. However, this subsystem has also been affected by
the problems and shortages mentioned in relation to other subsystems.
g) Higher education
The economic adjustment had had similar repercussions on higher education to those discussed
previously in connection with primary, secondary and technical education. Although no
educational centers have been closed, students are encouraged to enroll in centers closest to their
homes. To this end, a series of enrollment regulations have been introduced which imply certain
organizational changes, since not all subjects are offered in every province.
195
The main impact of the crisis on this subsystem is reflected in obsolete equipment in universities
and laboratories; in many cases replacement parts are not available. This has more serious
repercussions on courses such as biology, chemistry and veterinary science. Most equipment was
supplied by the CMEA member countries and very little of it has been replaced.
Spending cuts have been reflected in reduced investment budgets and in current nonwage
expenditures: expenses in kind for students (food allotments) and for various materials and
inputs are in very short supply.
A third consequence is the challenge to education posed by the new national reality, which
requires a professional workforce with different skills to those of workers already trained or in
the process of being trained. There is a shortage of administrators, accountants, financial and
marketing experts and corporate lawyers, and a surplus of professionals in other fields. Further
imbalances have been caused by the incorporation of professionals from other fields, regardless
of whether there is a surplus or not, into high-growth segments of the economy, such as tourism.
Although study programs have been modified on a regular basis, recent events have brought
about such profound changes that these have, to a certain extent, overtaken the gradual process of
reform. In the 1960s and 1970s, Cuba introduced a transitional policy that was later modified in
the early 1980s within the framework of central planning that was based on requirements very
different to those of today. New reforms have been implemented since 1991, but in view of the
current circumstances, further changes will almost certainly be required.
Unlike the health-care sector, the education sector has limited means for generating foreigncurrency revenue. Nevertheless, a small percentage of teachers and technicians work abroad or
participate in international courses organized in Cuba. Such is the case of the Latin-American
Pedagogical Institute in Havana, financed by foreign funds.
3. Housing
The housing sector is administered by the National Housing Institute (with a nationwide scope)
and Provincial Offices with a Municipal Office in each of the 169 municipalities in the country.
These work in conjunction with a network of corporations responsible for housing renovation,
maintenance and construction17.
Havana is home to almost 20% of Cuba’s population. Since 1959, the policy for housing and
investment has focused more on the provinces than on the capital in an attempt to balance
population levels and housing development in these zones. This explains the costly maintenance
backlog in the capital’s housing facilities.
Under the General Housing Law that came into effect in 1985, housing that was previously
government property was gradually transferred to residents. As a result, more than 90% of homes
are now owned by their occupants. The government has retained only a limited number of homes
17
The budget item “Housing and Community Services,” which dropped substantially in the 1989-1995 period (36% in
real terms), has shown a sustained recovery in the last three years. However, despite the chronic housing shortfall, the
authorities stipulated that the majority of these additional funds be channeled into community services (see inset VI.2).
196
in zones close to sugar complexes and other production units to facilitate worker accommodation,
although housing in these zones is also being transferred to workers who have completed a given
period of service (approximately 170,000 homes are currently in the process of being
transferred). In accordance with the above-mentioned law, ownership of all new homes is being
transferred to occupants under a loan and savings agreement entered into between the occupantdebtor and the People’s Savings Bank (Banco Popular de Ahorro).
According to official statistics, an average of 35,000 homes (neither the characteristics nor the
size of these new homes is specified) were constructed annually in the 1986-1990 period, peaking
at around 40,000 in 1987, but this was not sufficient to meet demand. Since 1990, when the lack
of imported inputs began to make itself felt and production came to virtual standstill due to input
and energy shortages, greater attention has been focused on the possibility of substituting
imported construction materials by using locally produced raw materials that can be processed by
the domestic industry.
The new home ownership program marks the first step toward relieving the government of its
housing maintenance responsibilities. However, lags persist, which in addition do not correspond
to State policy priorities and the situation is still far from meeting the conditions of a real-estate
market (which would help absorb some of the excess liquidity in the monetary and banking
systems), since housing sales remain subject to strict regulations (only transfers are allowed).
INSET VI.2. Individual and household community services
Water supply, cleaning and waste removal services account for more than half of the current expenditures
budget of community administration. In 1995, as a result of State priorities, 91% and 88% of the total
population had access to drinking water and sanitary service. These figures were higher in the urban areas
(98% and 92%, respectively).
However, during the “Special Period”, problems began to arise in connection with the functioning of the
water and sewage infrastructure, which had repercussions on the quality of services. The most common
problems are electricity outages, making the water supply unstable; the technical deficiency of pumping
equipment, insufficient capacity and the deterioration of water systems, which in turn causes considerable
water loss. Less than 60% of the water system is in good working condition, while a shortage of chemical
products for water purification exposes the population to the risk of disease.
Only 40% of equipment used for sewage purposes, such as cistern tanks and equipment for the cleaning,
unblocking and maintenance of septic tanks and deposits, is in good working condition. The quality of
solid waste collection and disposal services has also deteriorated due to a shortage of basic resources
(trash collection vehicles and disposal units).
Up until the early 1990s, the State provided nearly all these services for individuals and households but
workers gradually took on these tasks, encouraged by the economic reform process. Currently, selfemployed workers render a variety of services, ranging from the preparation of food to transportation,
messenger and utensil-repair services.
Source: National Economic Research Institute (1997), “Los Servicios Comunales a la Población y a los
Hogares”, Havana, May.
197
Housing programs have undergone a series of modifications aimed at adapting construction
objectives and methods to Cuba’s new economic reality. The main objective has been to
introduce construction techniques that make greater use of locally produced materials that require
the least possible energy. That is, the idea is to make maximum use of domestic production and
raw materials, avoiding direct and indirect application of imported inputs. According to official
statistics, in accordance with these criteria 11,000 homes were built in 1995, which required an
average of just one metric ton of cement and 400 kilograms of iron per unit and were built using
mainly domestic inputs. A total of 44,500 homes were constructed that year, 11,324 of which
were for cooperatives. Volumes rose, exceeding 57,000 homes in 1996, but dropped again by
around 22% over the following two years. Meanwhile, housing standards continue to deteriorate.
In view of the need to promote savings in the construction industry, preference has been given to
one- and two-story houses, although three-story houses are now being constructed. This is
affecting Havana, where there is a housing shortage and many existing homes need considerable
maintenance. Of a total of 558,000 homes some 132,000 (24%) are in poor condition, a further
140,000 (25%) require major repairs and the remainder are in good condition. The severity of the
problem varies in different parts of the city. To rectify this, an emergency project known as the
Cayo Hueso Plan is now underway in downtown Havana. The aim of this project is to renovate
some 60,000 homes in the 1998-2002 period. These improvements include roof and structural
repairs, repairs to plumbing, sanitary and electrical fixtures and the remodeling of facades.
Maintenance work has also been carried out on some 100,000 homes and a further 30,000 are to
be demolished due to their advanced state of dilapidation18.
The above-mentioned project combines the imperative need to improve housing standards in a
densely populated area of the city, with the economic need of remodeling a tourist zone. Similar
projects are being carried out in 88 municipalities in 14 provinces.
Housing construction began to recover in 1992 through 1996, both in the State sector and
cooperative organizations due to the efforts of occupants and the technical support and materials
provided by municipal agencies. In 1997, the number of homes built by the State diminished
slightly and construction by cooperatives also declined but construction by individuals continued
to rise leading to a structural shift 1998, when individual construction accounted for almost 40%
of the total number of homes built, as compared to only 17% in 1989.
4. Culture
A total of 191 million Cuban pesos were earmarked for cultural activities in 198919. The crisis
has taken a heavy toll on such activities, since funding was highly dependent on Cuba’s relations
with the CMEA countries, particularly the former USSR. Cultural activities therefore had to be
reorganized in administrative and financial terms and institutions were adapted through a
program coordinated by the Ministry of Culture. Guidelines were also established with a view to
boosting convertible-currency revenue generated by cultural services. Nevertheless, a substantial
18
Similarly, foreign-currency denominated tax revenue derived from the lease of housing to foreigners is reinvested in
housing maintenance and repair.
19
In 1989, this item accounted for 1.4% of total government spending and 0.9% of GDP. In 1998, these figures dropped
to 1.3% and 0.7%, respectively. In constant terms, these budget items fell by almost 50% during the 1990s.
198
investment program is now underway that will require additional government spending to repair
cultural facilities and the installation of Internet in the provinces and municipalities, among other
projects.
Financial results have improved, both in terms of savings and foreign-currency generation, but
are still insufficient to recover the levels posted ten years ago. Exports of cultural services
exceeded US$20 million dollars in 1996, rising steadily from an insignificant US$200,000 dollars
in 1989. This has resulted in greater contributions to the Cultural and Educational Fund, which
finances arts education through the Higher Art Institute (Instituto Superior de Arte, ISA) and the
National Art Schools Center (Centro Nacional de Escuelas de Arte, CNEA)20, as well as libraries,
traditional arts and crafts and the manufacture of musical instruments. Subsidies for activities
such as music recordings—with strong sales in Europe and Japan—have been reduced and are
now beginning to generate profits.
Cultural programs have been designed primarily with a view to promoting community projects
that encourage local traditions, particularly handcrafts, plastic arts and music. These programs are
also intended to compensate the concentration of activities that for reasons of scale are carried out
mainly in Havana by giving priority to projects in the provinces and those organized by the
Provincial Assistance Centers.
Efforts have been made to maintain high-quality cultural standards, while strengthening contacts,
exchange programs and relations with other countries, although with somewhat disparate results.
The ISA and the Cuban Art School (Escuela Cubana de Arte) have signed agreements with
several Latin-American countries, including Argentina, Mexico and Venezuela.
However, serious problems still exist and more are likely to arise in the future. On the one hand,
there has been a generalized deterioration in investment and maintenance in this sector, to such
an extent that the number of operational cultural facilities has declined by one-fifth over the last
eight years; and on the other, supplies of imported inputs are scarcer. One of the areas most
affected has been the printing and publishing industry due to paper shortages and the high cost of
publishing. The sharp downward trend registered in the 1990-1993 period has been reverted,
although output is still a long way from former levels21. The movie industry has also been
affected due to the obsolescence of equipment and budget cuts, although feature film production
has posted a slight recovery over the last two years.
The pronounced decline in cultural events has also begun to revert, particularly in the fields of
theater, dance and music. These events have proved to be a valuable source of foreign-currency
revenue both in Cuba through entertainment provided for tourists, and tours abroad.
As mentioned previously, preference has been given to fostering community culture. The
Turquino Plan implemented in eastern Cuba aims to revitalize cultural activities in mountain
regions so as to retain local laborers and prevent emigration to urban zones. A movement has also
20
These institutions teach the following courses in coordination with the Department of Education: music and music
specialties, plastic arts, theater and ballet, dance, circus acts, coaching and library science.
21
A total of 37.6 million books and 7.8 million pamphlets were published in 1990, compared to 4.2 million and 2.5
million in 1998, respectively.
199
been initiated by ten basic cultural institutions to provide services in each of the country’s 169
municipalities.
5. Sports, physical education and recreation
Physical education and sports have rated among Cuba’s priorities since 1959. The establishment
of training regimes from childhood and on a massive scale has earned the country’s international
recognition in many sporting disciplines. The technical and financial assistance provided by the
socialist-bloc countries also made a significant contribution to the development and expansion of
a sporting culture throughout the country.
A decline in foreign funds and a shift in national policy in the 1986-1987 period led to a new
approach designed to improve organization and promote greater efficiency in the use of material
and financial resources.
From the late 1980s through 1997-1998, budget allocations to sporting activities fell by almost
50% in constant terms. The crisis has also forced this sector to seek sources of foreign-currency
revenue to become financially self-sufficient. This has involved setting targets, defining priorities
and eliminating certain activities. Nevertheless, the right of the Cuban people to physical
education and sports remains unaltered.
To this end, programs are being designed that combine the functions of a physical education
teacher with those of a family physician (who is responsible for prescribing suitable physical
activities for each patient). This is complemented by a rich and varied School Sports Calendar
(INDER, 1999).
The present situation of the sports sector has changed due to lack of financing and to other factors
as well. Sports worldwide have become more commercialized with both events and athletes being
sponsored by large corporations and the mass media. This trend stands in contrast to the concept
of amateur sports, which continues to prevail in Cuba. A series of measures have been introduced
recently that point to a policy change in this area, namely, that the main aim in the development
of the Cuban sports sector should not be one of self-financing. For example, wages of active and
retired athletes have been increased, better accommodation facilities are now provided when
athletes travel within the country and transportation services, such as buses, have been improved.
There has also been substantial investment in sports and other related facilities.
Nevertheless, several forms of securing foreign-currency revenue has been studied and put into
practice since mid 1980s, these being primarily:
i.
22
The creation of a business organization (Cubadeportes) to market the country’s sports
image and enter into agreements with sports-training coaches, technicians and experts who
render services abroad22.
In 1992, Cuba sent 474 sports-training coaches to 24 different countries to provide technical assistance. This figure
increased gradually; and by 1998, 1,110 coaches were working in 43 countries, particularly in Latin America and
Africa. Each coach earns an average monthly salary of US$600 dollars to US$1,000 dollars.
200
ii.
iii.
iv.
The development of the sports industry through the manufacture of sports equipment and
goods for sale abroad and in the so-called “border commerce” niche, which exploits the
growing tourism market in Cuba.
Income derived from prizes awarded by other countries. Cuban athletes are allowed to keep
a percentage of the prize money as an incentive, but the remainder goes to the Sports
Development Fund.
Income derived from other sources. There are plans to continue promoting these sources of
income through: 1) technical assistance rendered abroad in the field of sports medicine, 2)
courses at the Higher Physical Education Institute (Instituto Superior de Cultura Física),
and 3) expert counseling in applied sports systems engineering and the sale abroad of
software on sports and related aspects, taking advantage of the experience of the Applied
Sports Technology Center (Centro de Informática Aplicada al Deporte).
Despite these achievements, progress has not been sufficient to solve problems such as:
i.
ii.
iii.
The lack of funds for the improvement of a sports infrastructure. Resources have been
insufficient to properly maintain equipment and sports facilities, despite the work of
“maintenance brigades23”. Construction of new facilities has been lacking in recent years
(with the exception of certain disciplines, such as swimming), although the schedule for
utilization of existing infrastructure has been expanded in an attempt to offset these
shortfalls.
Constraints with regard to the maintenance of infrastructure and equipment, compounded
by a lack of transportation and essential inputs, have had an adverse effect on the amount
and quality of physical education provided, even though children are encouraged to develop
the habit of exercise from primary school.
A lack of imported inputs has hampered domestic production of many sports goods and the
growth of the specialized Cuban industry.
In light of these factors, it is difficult to determine the prospects for sports, physical education
and recreation, despite efforts to promote and provide incentives for the development of the
country’s 39 sports disciplines through the organization of municipal, provincial and national
events. In this context, school sports involving children and adolescents up to 15 and 16 years of
age, an area that was somewhat neglected at the beginning of the “Special Period”, have taken on
increasing importance.
To date, organizational changes and the use of sources of foreign-currency revenue has enabled
Cuba to maintain standards of excellence and fund a modest expansion of activities at highperformance sports centers in the provinces24. However, these achievements have meant
sacrificing certain goals and postponing spending on investment and maintenance. In the short
and long term, it will not be possible to postpone spending on equipment and facilities any
longer, as this will jeopardize quality and the number of sports programs made available to the
population.
23
This has sometimes had serious repercussions on the management of certain sports, such as rowing and bowling.
In 1999, approximately 2,000 athletes were attending high-performance sports centers, while a further 5,000 were
enrolled at one of the country’s 162 “sports academies.”
24
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C. SOCIAL POLICY DILEMMAS
Of foremost importance, the effects of the crisis were reflected in a reduction of over 20% in
social spending in real terms during the 1989-1994 period. Spending gradually recovered through
1998 to stand at 3% below 1989 levels, although this trend conceals important structural changes
(see chart VI.2). Primary spending (education, health, housing, culture and sports) fell 29% in the
period, while there was a marked increase in spending on education (42%), culture (45%), and
sports (44%). Conversely, transfers of funds for social purposes rose 42% (taking into account
only disbursements for social security, social welfare and consumption subsidies), despite rationbooklet cuts and reduced spending on many other items. If we include cross subsidies paid by
corporations to cover the wages of unemployed and inactive workers, this figure would be even higher.
Chart VI.2
CUBA: SOCIAL SPENDING BUDGET a/
1989
Total revenue
Total expenditures
Surplus (deficit)
Total social spending
Primary social spending c/
Transfers for social purposes d/
Social security and welfare
Subsidy for price differences
12 600
14 014
(1 415)
5 169
3 295
1 874
1 196
679
Total revenue
Total expenditures
Surplus (deficit)
Total social spending
Primary social spending c/
Transfers for social purposes d/
Social security and welfare
Subsidy for price differences
60.1
66.9
(6.7)
24.7
15.7
8.9
5.7
1993
1994
1995
1996
Billions of pesos at 1981 prices
8 208
9 029
8 374 7 955
12 564 10 035
8 866 8 326
(4 356) (1 006)
(491) (371)
4 772
4 078
4 137 4 456
2 605
2 119
2 033 2 179
2 167
1 959
2 104 2 277
1 533
1 598
1 670 1 713
634
361
434
564
GDP percentages
57.3
62.6
56.6
50.0
87.7
69.6
60.0
52.3
(30.4)
(7.0)
(3.3)
(2.3)
33.3
28.3
28.0
28.0
18.2
14.7
13.8
13.7
15.1
13.6
14.2
14.3
10.7
11.1
11.3
10.7
1997
1998 b/
8 064
8 368
(303)
4 526
2 300
2 226
1 725
501
7 951
8 307
(356)
5 006
2 349
2 657
1 797
860
49.5
51.3
(1.9)
27.8
14.1
13.7
10.5
3.1
47.9
50.0
(2.1)
30.1
14.1
16.0
10.9
5.2
3.2
4.4
2.5
2.9
3.5
Source: CEPAL, based on figures supplied by the Department of Finance and Prices.
a/ Series at current prices were deflated using implicit GDP price indices.
b/ Budgeted.
c/ Includes spending on education, health care, housing and community services, culture and arts, and sports.
d/ Includes spending on social security, welfare and subsidies for price differences.
Social pressures stemming from the crisis contributed to changes in the breakdown of
expenditures, which benefited disbursements for social purposes. However, difficult economic
conditions and the extent of the adjustment led to a contraction in constant terms. The priority
given to social spending is reflected in its increased share of GDP, which rose from 24% in 1989
to 30% in 1998, even though economic activity levels were considerably lower than in 1989.
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These figures indicate that efforts were made to mitigate the decline in living standards, even
though this often translated into reduced spending on other items, such as capital formation.
The main adjustments in State activities of a social nature have been based on organizational
changes designed to improve efficiency and reduce costs related to investment and equipment, as
well as maintenance of facilities. Emphasis has not only been placed on savings but on promoting
exports of cultural services with a view to generating sufficient convertible foreign-currency
revenue to make these self-financing.
Social spending remains a priority, but there has been a gradual decline in resources (inputs,
furnishings, basic equipment and infrastructure) that has often had a negative impact on the
quality of services rendered.
Many problems are also attributable to changes in the movement of human resources, both
between sectors of the economy and regions due to the attraction of the strength of the economy,
such as the tourism industry, in the former case and internal migratory changes in the second.
Significant achievements have been made in terms of peso savings and the generation of foreigncurrency revenue. Moreover, social security safety nets have effectively mitigated the effects of
the crisis so far, without affecting indicators too severely. The infant mortality rate continues to
fall and the number of physicians, nurses, and other health-care indicators have risen both in
absolute and relative terms. Educational levels remain high in general with slight variations in the
ratio of teachers to students in the different educational subsystems, except in higher education.
In some areas of the educational system, the reduced number of students can be explained in part
by the sharp decline in the percentage of younger age groups compared to the total population, a
trend that became more evident in the 1990s.
The most significant setbacks have been in the national diet. Calorie intake dropped 34% and
protein intake 40% between 1989 and 1993, the worst years of the crisis. Meanwhile, the number
of students in higher education fell by almost 60% in the 1990-1998 period, pointing to necessary
shifts in labor-market demand—shifts that have yet to affect the medical professions—that
indicate the beginning of a probable deterioration in human capital resources in the long term.
Efforts have focused mainly on maintaining the living standards of workers unemployed or
displaced by the crisis and the large majority have found themselves underemployed, despite a
slight improvement following the economic recovery of the last four years (1994-1998).
The adjustment process and certain more radical changes in welfare policy have been relatively
successful in cushioning the effects of a particularly serious state of emergency and distributing
the cost of adjustment fairly evenly among the population. The dilemma of sustainability arises
from the reduced likelihood of being able to sustain a heavy social structure until the economy
recovers former growth rates and external constraints are addressed.
Reduced investment in infrastructure and the equipping of social sectors, combined with lower
allocations for the purchase of imported inputs, has undoubtedly eased budget pressures, although
temporarily, and has made it possible to maintain services for a time, but sooner or later these
pressures are bound to translate into reduced coverage or poorer quality services. While it is true
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that organizational and program changes have generated savings and a certain amount of foreigncurrency revenue, it is difficult to make further progress with regard to financial self-sufficiency,
while having to bear the burden of the retired, the unemployed and the underemployed.
Perhaps one of the greatest risks lies in the gradual deterioration of one of the most noteworthy
achievements of the last three and a half decades: guaranteeing the well-being of the population
with a relatively equitable distribution of income. Another danger is related to the weakening of
human capital, which is perhaps Cuba’s greatest comparative advantage today. It would therefore
be advisable to proceed with the reform process in different, but interrelated fields. One such
reform consists in legalizing and liberalizing the creation of small family businesses, which have
proven to be an important source of employment. For similar reasons, industrial streamlining
programs need to be expedited since corporations have been constrained to finance a large
portion of the costs of the economic slump, with the ensuing repercussions on competitiveness
and the prolongation of State unemployment subsidies. It would also be recommendable to
reform the pensions system in order to alleviate excessive burdens on the budget. There would
also seem to be some justification in proceeding with reforms to home ownership regulations,
thereby encouraging the establishment of real-estate markets. Similarly, it would be advantageous
to create a closer connection between projected labor market demand and the supply of skilled
labor, teachers, professors and coaches. Inevitably, cost-reduction measures will have to be
tightened and more sources of foreign-currency revenue sought out, however much this runs
counter to certain long-standing policies. Finally, since the Cuban diet has fallen below
internationally accepted nutrition standards, greater priority should be given to increasing
domestic food supplies through programs designed to boost the national livestock herd and
promote family vegetable gardens.
The cultural dimension of Cuba’s social policies naturally raise complex, difficult issues that are
not the subject matter of this study and that are hard to evaluate exclusively in terms of their
achievements and scope. These are problems that concern the collection and diffusion of the
country’s artistic, scientific and academic personality, which serves as an organic link to similar
forms of development in other countries. They are also issues related to the evolution of Cuba’s
own individual philosophy in the face of changing circumstances and alien ideologies in an
increasingly globalized world. It is here that Cuban intellectuals could play the vital role of
accommodating community values to the inevitable process of change without causing
irreparable damage to the country’s social fabric. It will essentially be up to the government to
foster a climate of freedom in which to reshape those values.