COMPARING AND ASSESSING ECONOMIC SYSTEMS

1
Economic Reform and Development in the Time of
Crisis
2
Overall Themes

• dual economy model
• part of economy operates as before under central
  control
• emerging sector operating under market oriented
  rules
• joint ventures
• Cuban trading organizations
• self-financed state enterprises using foreign
  currencies
• foreign corporations with representative offices
  in Cuba
• domestic private sector
• dual currency
• dollars used in transactions with emerging sector

3

• attempt to preserve socialism while trying to
  integrate into a capitalist world causing
  economic and social problems
• reintroducing economic classes
• those with and those without access to dollars
• foreigners versus Cubans
• Cubans denied access to facilities and privileges
  of foreigners
• causes ideological confusion
• attempt to insulate Cubans from evils of
  capitalism limits impact of foreign investment
• reforms too shallow to have much effect
• subject to sudden reversals
• Castro hates reform -- he remains true to Che at
  heart

4
The Special Period in Time of Peace

• Pérez Villanueva identifies three stages
• management of crisis and adjustment
  (1990-1993)
• internal reforms and financial stabilization
  (1993-1994)
• reactivation, reconstruction, and restructuring
  (1994-1995 )
• Mesa-Lago identifies a fourth stage
• reform process ends, status quo maintained (1996-
  )

5
Management of Crisis and Adjustment (1990-1993)

• reduce consumption and production
• distribute pain equitably
• rotating blackouts
• new forms of transportation
• hitch-hiking
• mass importation of bicycles
• stimulate food production
• bad luck with weather

6

• develop new industries
• tourism
• biotechnology
• pharmaceuticals
• integrate into world markets
• market old and new products
• attract foreign investment

7
Internal Reforms and Financial Stabilization
(1993-1994)

• internal reforms
• domestic liberalization
• dollarization
• expansion of self-employment
• reorganization of agriculture
• creation of farmers markets (again)
• reorganization of central administration
• new enterprise financing schemes
• tax/expenditure plan to reduce budget
• reduction of monetary overhang

8
Reactivation, Reconstruction, and Restructuring
(1994 - )

• exports increase
• agricultural output declines
• peso appreciates on black market after dramatic
  depreciation earlier
• slight growth in GDP
• fall in free prices
• increase in unemployment and inequality

9

• new reforms in 1995
• self-employment
• paladares
• foreign investment
• opening up of all sectors except health and
  education
• Casas de Cambio
• allows access to hard currency for nonstate
  enterprises
• tax and banking reforms

10
Maintaining Status Quo (1996- )

• Market-oriented reform halted in March, 1996
• Raúl Castro criticizes negative effects
• purge of academic reformists
• ratified by Fifth Communist Party Congress in
  Oct, 1997
• Mesa-Lago claims regimes control threatened by
  reforms

11

• Economic growth declines again after 1996
• a very respectable 7.8 in 1996
• only 2.5 in 1997 and 1.2 in 1998
• improves in 1999/2000
• tourism taking off
• increasing investment from abroad, especially in
  oil and mining
• rest of economy stagnant

12

• 2001 shaping up to be really bad
• structural problems
• exceptionally poor sugar harvest
• maturation of tourist industry
• leveling off of growth opportunities in tourism
• reduced foreign investment
• bad luck
• fall in world prices of nickel and coffee
• falling remittances from abroad
• remittances from Miami way down and off 50 from
  Mexico
• world recession reducing tourism
• September 11 has hit tourism really hard
• Russia closing Lourdes listening post
• loss of 200 million in rent alone

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Specific Reforms
15
Foreign Investment

• basic law way back in 1982
• not implemented until special period
• only exception was foreign investment through
  Cubanacán in 1988
• most foreign investment initially in tourism
• obvious appeal to foreign investors
• appealing to Cuban leaders
• easy to isolate from Cuban people
• two principle mechanisms
• joint ventures
• contractual associations

16

• joint ventures
• enterprises formed jointly by foreign and
  domestic entities
• self-governing legal entities just like any firm
  in a market economy
• free to take out profits in hard currency
• subject to profits tax of 30 and payroll tax of
  25 on Cuban workers and other taxes and fees
• may enjoy certain fiscal incentives
• invested capital enjoys property protection
• other special incentives available
• contractual associations
• shorter term contracts to conduct specific tasks

17

• initially, foreign investment was fairly small
  scale and aimed at plugging the dike
• in second stage, investment was directed more for
  long term development, to generate economic
  growth
• but allowable sectors limited
• in third stage, wave of new investment as
  investment permitted in all sectors but health
  care and education
• scale and sophistication of investment
  increasing, according to Pérez-Villaneuva
• also cites loans at 15 to 20!

18

• pace of investment slowed by several factors
• slowness of approval process
• lack of adequate banking infrastructure
• weakness of domestic market
• largest investment in telecommunications, nickel
  mining, tourism, and oil exploration and mining

19
Foreign Trade

• prior to the crisis, 85 of trade was with
  COMECON
• flexibility in trade not needed when all Cuba had
  to do was follow Moscows orders and produce
  sugar
• the free international trade environment of today
  requires flexibility and ability to respond to
  ephemeral opportunities
• flexibility and quickness not possible in a
  centralized, bureaucratic environment

20

• from 1989 to 1993, exports fell 78
• from 1993-1997, exports rose 73
• still 65 below 1989 level
• from 1989 to 1993, imports fell 75
• from 1993 to 1997, imports rose 105
• still 47 below 1989 level
• from 1993 to 1997, per capita trade deficit
  increased three-fold
• terms of trade continue to deteriorate as the
  prices of sugar and nickel decline

21

• composition of trade the same as always
• exporting primary products
• sugar, nickel, fish, shellfish, tobacco
• importing oil and food
• one big difference is that capital goods share
  fallen while fuel and food has risen

22

• in 1992, Cuba decentralized international trade
  operations
• all trade had been monopolized by the state
• now some three hundred industrial enterprises,
  import-export firms, research institutes, and
  tourist firms are licensed to trade directly with
  foreigners
• also, foreign firms have representatives in Cuba

23
Tourism

• Cuba has undertaken massive investment, mostly in
  joint ventures with Spanish and Italian firms
• prior to 1990, there were only 5,000 rooms for
  international tourism
• at the end of 1994, there were 22,000 rooms
• a the end of 2002, there were over 40,000
• tourism is Cubas main source of hard currency

24

• revenues have increased eight-fold between 1989
  and 1997
• revenues grew 11.8 in 1997 and 17.7 in 1998
• net revenue only about a third because of high
  input costs
• inputs have to be imported
• not generating multiplier effects
• need to insulate domestic population interfering
  with the potential economic benefits of the
  industry
• appears to be over-investment in rooms
• occupancy rate is only 57

25
Dollarization

• holding of foreign currency legalized in 1993
• allows state to capture a part of the hard
  currency held by individuals
• taxes on dollar generating activities
• room rentals, tourist markets, paladares
• contributes to growth of emerging sector
• creates classes
• those who have access and those who do not
• many goods cannot be purchased with pesos
• huge mark-up, which state captures

26
Self-Employment

• authorized in 1993 to individuals in 140
  occupations
• excluded university-educated professionals
• expanded in 1995
• authorized creation of restaurants in private
  homes (paladares)
• allows professionals to be self-employed, but
  only in an occupation other than that for which
  trained

27

• purpose to stimulate production of goods and
  services state unable to provide and to create
  jobs
• in 1996, there were 208,500 self-employed
• in that year, the cost of a license was increased
  300 and fees were increased 650
• there were only 175,267 by the end of 1997

28
Agriculture

• at beginning of the crisis, agriculture was
  organized in large state-managed farms that used
  large quantities of fertilizer, chemicals and
  fuels
• in 1994, some state farms were broken up into
  agricultural cooperatives (UBPC) owned by the
  workers

29

• meant to strengthen relationship between work and
  reward
• required to sell output to the state at low,
  state set prices
• they are told what to produce
• highly inefficient and under-productive

30

• private land created in 1994
• private plots were created and distributed to
  6,000 households, mostly for producing coffee
• 155,000 persons were given small plots for
  own-production
• 9,393 households given land for tobacco
  production
• agricultural markets
• free markets in which prices set by supply and
  demand
• few restrictions
• accounts for up to a third of agricultural
  products sold in Cuba