|Title:||Cuba gross domestic product, sectoral market, and international trade growth rates in percentages for 2000 to 2009|
|Source:||Comparative Economic Studies|
Start of full article - but without data
GDP, sectoral and international trade growth rates, 2000-2009
2000 2001 2002 2003 2004 2005 2006
GDP X.X X.X X.X X.X X.X XX.X XX.X Agriculture -X.X -X.X X.X -X.X -XX.X -X.X Sugar industry -X.X -XX.X -XX.X XX.X -XX.X -X.X Manufacturing -X.X X.X X.X X.X X.X X.X Health X.X X.X -X.X XX.X XX.X XX.X Imports XX XX.X XX.X Exports XX XX.X X.X
2007 2008 2009
GDP X.X X.X X.X Agriculture XX.X X.X X.X Sugar industry -X.X XX.X -X.X Manufacturing XX.X X.X -X.X Health XX XX.X X.X Imports -X.X X.X -XX.X Exports XX.X XX.X X.X
Source: ONE (2010)
Since the establishment of the Soviet Union in the XXXXs, various attempts at building socialist economies have been carried out in many countries across the world. However, experience has shown that the drastic and extreme concept of a socialist economy as one that would simply and totally negate all the basic tenets of capitalism and the role of the market and monetary-commercial relations, did not work in practice. This factual realization led to various reform attempts, from the New Economic Policy in the early XXXXs to the market socialism-oriented restructuring of the Chinese and Vietnamese economies that began in the late 1970s and mid-1980s, respectively.
The outcomes of these reforms--or lack thereof--proved to be dramatically uneven, from the collapse of the Soviet Union to the emergence of China as the second and the most dynamic economy in the contemporary world. These experiences demonstrated that the high and ever-increasing degree of complexity of modern economies, linked as it is to continuous and stratified knowledge accumulation on the part of numerous and diverse agents, does not allow for simplistic or over-centralized solutions to the core problem of governance. At the same time, they also showed that market-socialist economic systems can exist and flourish. In these systems, the public sector is endowed with a high degree of direct and indirect control over the means of production, so high that it implies a discontinuity and a key qualitative difference with respect to the various forms of capitalism prevailing in most other countries. As a result, social production relations under market socialism are different from those prevalent under capitalism. History has shown that market socialist economies can be highly effective in fostering economic growth and reducing poverty, as well as (so far, at least) in ensuring a relatively high degree of stability and sustainability. In my view, the latter proposition can be considered as a general law of socialist economic development: therefore, it constitutes the key theoretical and methodological assumption of this work.
This paper focuses on the case of a relatively small socialist country, Cuba, which--especially in the last two decades--has faced particularly adverse external conditions. The goal of this paper is to discuss the past and present problems and contradictions of Cuba's socialist economic fabric and the endogenous policy alternatives that might assist in overcoming them. The main thesis, consistent with the theoretical assumption mentioned above, is that--short of the definitive demise of socialism itself--the only sustainable reform option available to Cuban policymakers is a radical one, centered around a systemic shift from state-socialism to a nationally suitable form of market socialism.
THE FOUNDATIONS OF CUBA'S STATE SOCIALISM MODEL
To help locate the specific case of Cuba within the historical and theoretical background referred to above, this section briefly identifies a few key features of Cuba's model of state socialism.
With respect to the two major socialist experiments of the XXth century, namely those that were implemented after the Russian and the Chinese revolutions, Cuba differed in two key, interrelated aspects. First, it was a small country. Second, its form of underdevelopment did not stem mainly from a dearth of capitalistic relations of production and exchange as had been the case in pre-revolutionary Russia and China. Rather, Cuba's underdevelopment was caused by the island's dependency on the US: a dependency rooted in production and exchange relations that were already prevailingly capitalist in nature.
Cuba's economy, in fact, represented one of the most egregious examples of 'dependencia' or style underdevelopment, (X) according to the then-fashionable theory elaborated by Prebish and tile CEPAL school (see Prebisch, XXXX; CEPAL, 1950, 1951). The almost immediate implementation of the US embargo after the revolution suddenly turned a condition of dependency into a dramatic struggle for short-term survival. These conditions help to explain why post-revolutionary economic policies were characterized by a sort of haphazard approach and the creation of a more or less central planning mechanism took a long time. (X)
Moreover, besides sharing the severe structural shortcomings of the traditional Soviet model, Cuba's economy has been plagued by two additional specific and interrelated weaknesses. One was the paternalistic economic relationship established with the USSR and other members of the Council for Mutual Economic Assistance (CMEA). This led Cuba to further concentrate its already high degree of dependence on primary commodity exports, (X) on a fully artificial trade relationship almost totally de-linked from the evolution of world prices. The de-linkage of Cuba's terms of trade from the world structure of relative prices not only deepened the island's dependence on exports of sugar and a few other raw or primary commodities and traditional commodity-based products such as rum, cigars, nickel, cobalt, but also contributed to distorting the range of technological alternatives faced by planners.
Goods-producing sectors, and agriculture in particular, adopted more capital- and energy-intensive techniques than those that would have prevailed under 'normal' market-based capitalist conditions. Dependence on imports intensified both in the primary and secondary sectors. As a result, problems such as the lack of economic diversification and international competitiveness in the non-traditional sectors inherited from Cuba's traditional dependency status were exacerbated. These contradictions came with an enormous cost after the fall of the USSR.
The other key problem with Cuba's socialist construction was a particularly pronounced denial of the very basic and (at least theoretically) well-established distinction between the socialist and communist principles of production and distribution. This idealistic fallacy led to a recurring egalitarian policy bias in favor of state-mandated, non-market distribution of goods and services to a degree that was inconsistent with the objective level of the development of production forces.
Nevertheless, for almost three decades, Cuba was able to advance towards the progressive realization of its ambitious social development agenda, particularly in the areas of public health and education. Things started falling apart only in the early 1990s.
PARTIAL REFORMS, SLOW RECOVERY AND CRISIS
This section briefly reviews the half-hearted policy response taken by Cuban policymakers to address the catastrophic impact of the fall of the Soviet Union, which obviously made unviable the previously aid-dependent form of state socialism. This policy response was very effective in mobilizing all of the country's meagre resources in order to avoid systemic collapse and in preserving each citizen's right to the satisfaction of her own minimum basic needs. Yet, economic reforms were seen as a necessary evil made unavoidable by negative exogenous circumstances and did not imply a thorough revision of the Cuban economic model per se.
During the early years after the fall of the USSR and the CMEA, the Cuban economy all but collapsed. Exports, imports, GDP, real wages and consumption all were reduced to a fraction of their former size in a matter of X-X years (see, among others, ONE, 2002b; Galbraith et al., 2006). Mass starvation was avoided only due to the lack of class differentiation, the strength of the Cuban state and the effectiveness of its selective rationing mechanisms. This dramatic phase of Cuba's economic history, and especially the most dramatic years of quasi-famine, was officially labeled as the 'Special Period in Time of Peace'.
The government reacted to the catastrophic exogenous shock of the early 1990s with a coping strategy focused on two key goals: to preserve the basic tenets of state socialism and to minimize the social cost paid by the population. Growth eventually resumed in 1994, on the basis of a completely changed pattern of international trade; yet, it was not matched by a correspondingly radical structural change in the relationship between production and exchange prevailing in Cuba's economy.
In the domestic domain, policymakers launched a significant yet limited liberalization and de-centralization campaign. Conversely, the endeavor to completely rearrange--and, to a large extent, re-invent--the export-oriented component of the Cuban economy did amount to a major structural change. The main actions launched to achieve such a change were a (cautious) open door policy vis a vis foreign capital, the creation of joint-ventures and the legalization of the possession of foreign currency. They were preceded by constitutional changes that formally eliminated the state monopoly over foreign trade and recognized non-state property rights.
Several other de-regulating and liberalizing measures were enacted both in urban and rural areas. Yet, they were half-hearted, and domestic consumption markets never developed very much. In part, this failure is to be seen as a consequence of the lack of substantial reforms in agriculture and in rural-urban production and exchange relations, which crippled the growth of food supplies and the development of food markets (see Carriazo, 1994; Enriquez, 1994, 2003; Garcia Alvarez, 2006; Alvarez, 2009; Arias Guevara, 2009; Nova, 2006, 2009a, b).
In sum, the reforms selectively aimed at resuscitating tourism and a few other foreign-exchange earning and infrastructural sectors on the pragmatic basis of attracting FDI and cooperating with foreign capitalistic firms while allowing the population to engage in a limited set of market and monetary relations. In turn, this relieved the State from the impossible burden of ensuring everybody's survival (see Figueres Perez, 2004). Production and exchange relations in the bulk of Cuba's economy (public services, sugar, manufacturing, agriculture) changed little. As a result, the linkages between the core and the rest of the whole edifice of production and exchange relations became more tenuous. In turn, this trend contributed to an increasing degree of domestic economic de-integration and to a surge of the typical schizophrenia that characterizes the livelihoods of most ordinary Cubans, always oscillating between state and (mostly black) markets, Cuban and convertible pesos, formality and informality, legality and illegality.
The limited market-oriented reforms of the 1990s, notwithstanding their purely defensive and circumscribed scope, allowed Cuba's economy to survive and to eventually re-embark upon a positive growth path (see, among others, CEPAL, 1997; Brundenius, 2002; Burki and Edison, 2004; Ritter, 2004; Barberia et al., 2004; Perez Villanueva, 2005, 2006, 2009b; Mesa-Lago, 2005a, b, 2008; CEPAL, 2007, 2009; Hershberg, 2008; Triana Cordovi, 2008; Vidal, 2008a, b).
Yet, in 2008, the economic situation worsened again (see Table X). The deceleration and subsequent crisis of Cuba's recovery path can partly be attributed to unfortunate exogenous shocks (such as the hurricanes and the sharp terms of trade deterioration that both hit the island in 2008), but it was mainly caused by economic policy mistakes and uncertainties.
In 2003, emboldened by the partially satisfactory results obtained and by the new, more favorable economic and financial conditions created by a vastly changed regional and global geopolitical scenario, Cuban policymakers once again embarked upon an excessively ideology-driven recentralizing policy course. The results, as usual, were disappointing: traditional distortions and inefficiencies were exacerbated, economic growth was impacted negatively, and progressively mounting real and financial disequilibria created the pre-conditions that would lead to crisis in the late 2000s.
Yet--both in Cuba and abroad--the perception of this policy failure was obfuscated by the one-time boost stemming from the boom in professional services exports and by the confusion created by the new GDP evaluation methodology that was introduced almost at the same time as the launching of the new policy course. The main controversial feature of the new methodology is that it evaluates the GDP created in social SS (namely health) on the basis of the structure of prices prevailing in international trade, rather than on the basis of their cost according to Cuba's own structure of prices and wages. The reason for the new methodology is heuristically reasonable; it is an attempt to overcome the apparent underestimation of Cuba's per capita GDP (relatively to that of other countries) that was caused by the contrast between the high value of its free medical and other social services in human development terms, on the one hand, and their small contribution to the national accounts (due mainly to the low wages earned by Cuban professionals), on the other hand. Yet, the new methodology is not consistent with international accounting and statistical standards and taking into account the extraordinary magnitude of Cuba's health sector has objectively led to an overestimation of the country's GDP growth rate in the mid- and late 2000s (see Perez-Lopez and Mesa-Lago, 2009).
Apart from the problems related to the GDP evaluation methodology, it is clear that a financial crisis has been unfolding since 2008, and one of its prime victims has been the newborn financial system itself and its international credibility. This crisis is largely the product of the shortcomings of the 2004 monetary reform--which left a legacy of monetary duality and currency overvaluation--and of other subsequent mistakes in the domains of monetary, exchange rate and trade policies.
During the first years after the reform, the key objective of monetary stability was basically achieved, as the convertible pesos (CUes) segment of monetary circulation was backed by sufficient foreign exchange reserves. This equilibrium, however, began to unravel in 2008. Due essentially to a lack of flexibility in import and investment planning, the government failed to react promptly to an unforeseeable deterioration of the terms of trade, which was in turn partly caused by the world financial crisis (Vidal, 2010b). The monetary counterpart of this policy mistake was the creation of an excessive amount of convertible pesos, which inevitably eroded the most important feature of the young currency: convertibility itself (see Vidal, 2008b).
Already by mid-2008, Cuba was forced to default on various external debt obligations with creditors from Japan, Germany, Canada and France. The amount of non-payments may have reached up to X billion US$ by year-end (CEPAL, 2009). Most foreign investors' bank accounts were frozen and a full-fledged banking crisis erupted in early 2009. As a result, 'the Cuban banks are trapped in a systemic liquidity crisis, which could not be completely overcome so far' (Vidal, 2010a, p. X).
Moreover, the centralized foreign exchange allocation system increasingly penalizes the ability of most firms to perform basic functions. The foreign exchange approval committee (CAD) has been eliminated and its functions reverted to the ministries, but little has changed in terms of enterprise autonomy. The present two-tier foreign exchange allocation process is still vertical and centralized. The central planning machine, through the Cuenta Unica de Ingresos en Divisas del Estado (only/unified foreign exchange state account), allocates the funds to the various ministries, who in turn distribute them to their subordinate enterprises (see Pineiro Harnecker, 2010; Vidal, 2010a, b).
Yet, this is not the end of the story. As the foreign exchange is fact rationed, firms need liquidity certificates (Certificados de Liquidez (CLs) in Spanish) to convert CUCs into foreign exchange. CLs are issued in limited quantities by the ministries, on an ad hoc, discretionary basis. In practice, not all convertible pesos are convertible. The Cuban economy is thus left in the unenviable and probably unique situation of functioning on the basis of two different national currencies, neither of which are fully convertible. Besides CUCs accounts, many foreign exchange-denominated accounts belonging to foreign and joint venture enterprises were also frozen in a desperate attempt to control the exchange rate, and have only partially been reactivated since 2009 (EIU, 2010; Gazon, 2010).
The crippling implications of such a monetary and banking mess are evident. Besides exacerbating the already widespread distortions stemming from the double currency regime, it also negatively affects the country's present and perspective access to foreign financing sources, the flows of foreign direct investment, the functioning of domestic credit operations, and the provision of capital, intermediate and final goods to both enterprises and households. Therefore, the foreign exchange constraint has become even more binding (see Vidal and Fundora, 2008).
Economic growth decelerated markedly in comparison to the promising results achieved in the 2004-2007 favorable cycle. The GDP growth rate was X.X% in 2008 and X.X% in 2009. These moderately positive figures, however, were pushed up by the resilience of many SS and by a modest increase in agricultural production and partly masked a harsher reality. In 2009, the government was forced to drastically cut both imports and investment. For the first time in the decade, manufacturing production decreased (see Tables X, X) and sugar and mining industries also performed poorly. These unfavorable trends were further aggravated by the impact of the global capitalist crisis, which seriously affected Cuban citizens' economic and social welfare (see Mesa-Lago and Vidal, 2010).
In this difficult predicament, the government (always distracted and constrained by the urgency of micro-managing the crisis in the short term) has halted the previous re-centralizing policy bias and has begun to move in the opposite direction. Yet, until recently there has been a hiatus between the boldness of the public acknowledgment of the dramatic and structural inadequacy of many key components of the state socialism model, on one hand, and the shyness and excessive cautiousness of concrete policy measures, on the other hand (see Perez Villanueva, 2009a, b, 2010). The major reform initiatives so far have taken a few steps towards a pro-peasant agrarian reform--mainly aimed at distributing unused state lands to fanning households (X)--and the liberalization of petty, small scale activities (most of them in the sector of commercial services). Both reforms have the potential to generate large economic benefits and are very relevant from an ideological, theoretical and political viewpoint, as they run counter to the basic tenets of traditional state socialism. Yet, their impact so far has been marginal. In the case of the agrarian reform, the main reasons for the scarcity of productive results are the dearth of financial resources to support the peasant farms and the reluctance to radically restructure the state farms, cooperatives and the centralized system of inputs and output commercialization. Moreover, more time is needed for the new production and exchange relations to be established in the Cuban countryside. The (mostly urban) liberalization of self-employment and petty private activities has been purely experimental and extremely circumscribed so far. However, the government recently appeared favorable to deepening and widening its scope.
In this respect, contradicting most observers' expectations, a major policy decision was made in the summer of 2010. On XX September, the government declared that in a few months up to half a million state employees (about XX% of the country's workforce) would be laid off and invited to fend for themselves in the newly encouraged small scale commercial sector (see Morrissey, 2010; Sanchez Serra, 2010; Wilkinson, 2010). One hundred and seventy-eight types of activities were authorized, and the overall regulatory framework became more flexible, including with respect to the sensitive issue of hiring non-relatives. These measures were still far too limited and timid. Besides other limitations, the list of authorized activities is too narrow and excessively detailed and does not cover knowledge-intensive activities (Vidal and Perez Villanueva, 2010).
TERTIARIZATION AND THE GOODS-SERVICES DICHOTOMY
This section illustrates the ever-increasing and extraordinary prevalence of a sub-group of services in the Cuban economy and the corresponding decay of most agricultural and industrial goods-producing activities.
The crisis and the reforms carried out since the beginning of the special period have led to a pronounced tertiarization--that is, an increase in the relative weight of the SS (both basic and non-basic)--and de-industrialization process (see Pico Garcia, 2003, 2004). The relative weight of services GDP and employment in Cuba is exceptionally high, while that of industry is particularly low in comparison to other Latin American countries. This contrast is even starker when compared with the market socialist economies of China and Vietnam (see Table X).
During the decade, of the 2000s, major changes also occurred in the relative weight of different parts of the SS. In order to demonstrate this concept clearly, it is useful to distinguish between two services sub-sectors on the basis of the strength of their respective linkages to the goods sector (GS). The first one consists of infrastructure and other goods production supporting services (IGPSSs), and the other of directly needs-oriented services (DNSs).
Most IGPSSs, on the one hand, rely on the availability of a consistent amount of dedicated physical capital. On the other hand, they are not directly aimed at satisfying human needs since they are rather ancillary to the production and transportation of goods. Thus, their output can be viewed as an intermediate product that enters an enlarged macro-production function of goods. Given the strength of their reciprocal backward and forward linkages, the performance of this group of services tends to go hand in hand with that of the GS.
DNSs are labor-intensive and, in many cases, skills and human capital-intensive as well. This is especially true for education, health, and science and technology (S&T). However, also the tourist sector has increasingly been attracting some of the brightest and most entrepreneurial young professionals and skilled workers. Conversely, DNSs are not very (physical) capital-intensive. Therefore, the sub-sector of services directly aimed at satisfying basic (health, education, social assistance and security) and non-basic (such as hotels, restaurant and other tourism-related activities) needs is the most de-linked from the sphere of material goods production.