The Cuban Economy in the 1990s: External Challenges and Policy Imperatives

The Cuban Economy in the 1990s: External Challenges and Policy ImperativesAuthor(s): A. R. M. RitterSource: Journal of Interamerican Studies and World Affairs, Vol. 32, No. 3 (Autumn, 1990),pp. 117-149Published by: Center for Latin American Studies at the University of MiamiStable URL: http://www.jstor.org/stable/166090 .

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_H ETHE CUBAN ECONOMY IN THE 1990s:

EXTERNAL CHALLENGES AND POLICY IMPERATIVES

by A. R. M. RITTER

I. INTRODUCTION

CUBA HAS ENTERED the decade of the 1990s in a state of

profound existential crisis. The countries of Eastern Europe, whose economic and political institutions and ideologies were

adopted by Cuba, albeit with some modifications, were abandon-

ing those same institutions and ideologies. Cuba's place in the international system had become one of growing isolation: Cuba had become a curiosity from the 1960s rather than the wave of the future, as it once perceived itself. By mid-1990, it appeared almost certain that the generous subsidization of the Cuban economy by the Soviet Union was about to end. Moreover, the Cuban economy

A. R. M. Ritter is Associate Professor in the Norman Paterson School of International Affairs and Department of Economics at Carleton Univer- sity (Ottawa) and is currently President of the Canadian Association for Latin American and Caribbean Studies. He is the author of numerous articles and books on Latin America and the debt, including LATIN AMERICAN PROSPECTS FOR THE 1980s: EQUITY, DEMOCRATIZA- TION AND DEVELOPMENT (Praeger, 1983) and "Cuba's Convertible Currency Debt Crisis" in the Revista de CEPAL (December 1988).

The author would like to thank a number of people for useful comments on this paper, including S. Roca, A. Zimbalist, C. Mesa-Lago, Jose Luis Rodriguez, and anonymous reviewers for this journal. How- ever, he alone bears responsibility for the interpretations, calculations, conclusions and shortcomings of this study.

117



118 JOURNAL OF INTERAMERICAN STUDIES AND WORLD AFFAIRS

was in serious difficulty as a result of some external factors, namely the convertible currency debt crisis and the problems and uncer- tainties in its relationship with the Soviet Union since 1985, but also as a result of internal institutional incapacities and deform- ities.

Most serious of all, Cuba entered the decade of the 1990s locked in a situation of political and economic paralysis. The current political leadership appeared unwilling to recognize that changes in the international environment have made Cuba's development strategy and institutional structure unsustainable except at so high a political cost that the political status quo itself may well be unsustainable.

The objectives of this study are (1) to analyze Cuba's growth experience in the decade of the 1980s, focusing in particular on Soviet economic assistance and the convertible currency debt problem; (2) to explore the challenges facing the economy in the 1990s; and (3) to assess some of the probable policy options which will be required to surmount the foreseeable problems.

This study focuses mainly on economic growth for the 1980s and the 1990s. The broader development experience of 1959 to the 1980s has been analyzed at length elsewhere (Brundenius, 1984;J.L.Rodriguez, 1987; Mesa-Lago, 1981; Zimbalist, 1987; Roca, 1988; and Ritter, 1974). Although economic growth is the central concern of this paper, this is in no way meant to slight Cuba's strong development performance in terms of income distribution, basic human need fulfillment and employment generation.

The essential argument put forward here can be summarized as follows:

(1) Cuba's strong growth performance from 1980 to 1985 was based partly on internal factors, such as strong and improving human resources, substantial investment, and improving labour productivity, and partly on hidden but unsustainable levels of economic assistance from the Soviet Union and on the build-up of convertible-currency debt prior to 1982.

(2) The economic contraction of 1986 to 1990 was rooted, ultimately, in the decline in the real value of the implicit subsidization from the USSR and in the convertible-currency debt crisis, which choked off imported industrial inputs and asphyxiated growth.



RITTER: THE CUBAN ECONOMY IN THE 1990S

(3) Economic difficulties and systemic transformation in East- ern Europe will reduce the hidden subsidization of the Cuban economy in future. In consequence, Cuba will have to pay its own way, reduce its external dependence, and evolve its own self- financed growth strategy.

(4) Continued strengthening of an external- and trade-oriented pattern of growth will be central to this strategy.

II. CUBA'S GROWTH EXPERIENCE IN THE 1980s

AS MEASURED by official Cuban statistics, Cuba's growth record in the first half of the 1980s was strong. Per capita Gross Social Product (GSP) grew at a real annual compounded rate of 5.9% for the 1979-1985 period (see Table 1). National Income, or Ingreso Nacional Creado (INC) - that is, GSP less intermediate material consumption and before deducting depreciation - grew by 6.1% annually over the same period. All "productive sectors" experi- enced similar growth rates, although agriculture grew relatively slowly, at 3.1% (real annual compounded).

Cuban national accounts statistics generally, and the GSP measure in particular, have to be used with considerable caution, and, indeed, their interpretation and probable accuracy is controversial and uncertain (Mesa-Lago and Perez-Lopez, 1985; Zim- balist and Brundenius, 1989). GSP includes intermediate inputs but measures only the so-called "productive sectors," excluding services such as education, health, finance, personal services and administration. Ingreso Nacional Creado, or national value added, has the virtue of excluding intermediate inputs, purchased by enterprises from other enterprises, as well as depreciation, but it too excludes "non-productive sectors." Thus, neither GSP nor INC are comparable to the national accounts concepts used almost everywhere except by the centrally planned economies. In this section of the paper, annual rates of change of INC and, to a lesser extent, of GSP are used as estimates or proxies for annual economic growth. This practice is reasonable because GSP, and especially INC, would move in approximate harmony - i.e. in the same direction and with similar orders of magnitude - with the authentic value of gross domestic product (GDP), if this latter were known.

119



Table 1 Cuba: Major Macroeconomic Indicators

---1- 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

National Value Added1 (Real) Growth Rate (%) 7.0 0.6 -5.33 20.83 5.1 5.4 7.5 4.6 (1.4) (-3.3) (+0.1) +1.04 Growth Rate per capita (%) 5.9 -0.2 -5.3 +20.8 4.2 4.5 6.4 3.5 (0.3) (-4.3) (-1.2) -0.24

Investment (real) Growth Rate (%) -5.5 -0.6 5.3 20.0 -11.5 +13.8 +17.0 +7.5 -21.0 -20.0 +8.5

Productivity Change1 Output per Worker (%) 8.2 1.7 -6.2 19.53 3.6 1.9 3.9 3.5 -1.5 (-3.6)e (+4.3)e

Merchandise Trade Socialist: Exports CuP.m. 2,916 2,884 2,786 3,179 4,172 4,765 4,909 5,323 4,699 4,797 4,766 Economies: Imports CuP.m. 2,849 3,053 3,613 4,114 4,908 5,414 6,072 6,718 6,412 6,692 6,626

Balance CuP.m. 67 -169 -827 -935 -736 -649 -1,163 -1,395 -1,713 -1,895 -1,860

Market : Exports CuP.m. 524 615 1,181 1,045 761 770 568 660 626 604 753 Economies: Imports CuP.m. 724 635 1,014 1,000 623 808 1,155 1,265 1,156 919 954

Balance CuP.m. -200 -20 -167 +45 +138 -38 -587 -605 -530 -31.5 -201 Convertible Currency:

Balance CuP.m. -136 +99 +367 +284 +606 +441 +73 +67 -164 +34.2 +78.1 Exchange Rates

Official Rate CuP./ .75 .73 .71 .78 .85 .87 .90 .92 .83 1.00 1.00 1.00 $US 1

Terms of Trade (1981 = 100) 108 100 111 100 79 92 89 87 82

Latin America: Growth Rate Per Capita Gross Domestic 2.8 -1.9 -3.5 -5.0 1.2 1.3 1.3 0.7 -1.5 -1.0 Product (%) (excluding Cuba)

Sources: CEE, Anuario Estadistico, 1985, pp.100, 161, 193, 381 BNC-CEE, Sept. 1987, p.11; BNC, May 1987; BNC, May 1989, UNCTAD, Handbook of International Trade and Development Statistics, 1987 Supplement, New York: U.N., 1988, p.533; UN CEPAL, Preliminary Overview of the Economy of Latin America and the Caribbean, 1989. Santiago, Chile, December 1989 and CEE, La .a Cubana en 1989, La Habana, 199U.

Note: 1. "Productive" sectors only; excluding education, health, social security, finance, and administration.

2. Changes in value added per worker, constant 1981 prices. 3. Dramatic changes in growth rates and productivity arise largely from large changes in the sugar

harvest. 4. Refers to Gross Social Product.

O

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Chart 1 Productivity Indices and Capital-Labour Ratio, 1975-1988:

All "Productive" Sectors

Base Year: 1981

1 1. , I ' I . _ Ai Inon1/. 1 1, fl

O-L

.-A Source: Appendix Table 1

120.0

110.0

100.0

90.0

80.0

1.30

1.20

1.10

1.00

.90

.80

.70

.60

Labour Productivity

Capital Productivity

Capital/Labour Ratio

'a

CI

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104L+ 17OU 1. 7O 1978. IY8u 1iYo 1976




It should be noted also that estimating GDP or GSP in most

developing and developed countries is a most inexact and am-

biguous endeavor, owing to the size of the underground (illegal) economies, the informal (extra-legal and unregulated) economies, and non- or semi-monetized, mainly rural, economies. In the Cuban case, the underground or officially-illegal economy is

likely very large although no estimates of its magnitude have yet been made by the Comite Estatal de Estadisticas (Almagro, 1990) or by other analysts. Because of the official illegality of virtually all small-scale business activities based on private ownership and

organized through markets, together with the inability of the state sector to produce a diversified range of consumer goods, both the

officially tolerated and the illegal components of the informal sector are likely very large. However it is difficult to know whether the relative importance of the underground economy has changed over time in such a way that PSG and INC would be inaccurate indications of the direction and magnitude of changes in the levels of real economic activity.

Cuba's positive growth performance from 1980 to 1985 was based on a number of factors. One of the most important (albeit with a major qualification to be discussed) was the steady im-

provement in the quality of human resources, arising from im-

proved levels of education, of health, and of good nutrition. All of these reflect Cuba's success in terms of fulfilling basic human needs, of maintaining near-full employment, and of general dis- tributional equity. (Cuba's success in these areas is well-known and supported by most indicators of basic needs fulfillment).

Second, Cuba made a serious investment effort, which resulted in a steady rise in the volume of capital available per worker from 1980 to 1985.

Partly as a result of this second factor, labor productivity in the

"productive sectors" rose steadily from 1980 to 1985 in aggregate terms and, again, with a qualification discussed below.

Some indices of changes in productivity are illustrated in Chart 1, which is based on calculations summarized and described in

Appendix Table 1. Because of the high level of investment and the rising capital-labor ratio, value added per worker (labor productivity) in the productive sectors rose significantly from 1975 to 1986 with (1) a sharp, but transitory, downturn in 1980 due to




reduced agricultural output and (2) a steady decline from 1985 to 1988 accompanying the general economic contraction. Not surprisingly, the productivity of capital (value added per unit of capital) trended downwards fro the whole period. However, it is noteworthy that, for the in effect 1980-1984 period, the productivity of capital was reasonably stable despite the rapid expansion of the capital stock. This may indicate that the existing capital stock was used with reasonably good efficiency, and that new investment was also being employed reasonably effectively in this period.

[Nevertheless, the situation in agriculture was unsatisfactory, as indicated in Appendix Table 2. Despite a major increase in the capital stock per worker from 1975-1988, value added per worker in agriculture in fact declined steadily after 1981, while capital productivity declined for the whole 1975-1988 period].

While Cuba has invested heavily in human resource development with good results (as noted above), it must also be recognized that the abolition of virtually all small-scale business - including most "informal sector" activities (completed with the 1968 "Revolutionary Offensive") - destroyed, in effect, a large amount of "human capital." By eliminating such enterprises, the combinations of entrepreneurship, management skill, technical knowledge and marketing know-how embodied in keenly- motivated owner-operators were destroyed. Such individuals were converted into employees in a hierarchal bureaucratic environment. Moreover, almost 25 years of pragmatic learning-by- doing, innovation, and response to new circumstances and opportunities on the part of small-scale entrepreneurs have been lost. Some analysts have argued that Cuba lacks a "culture of economy" (J.L.Rodriguez, 1990) while Vice-President Carlos Rafael Rodriguez commented recently that what Cuba needs are empresarios socialistas, or socialist entrepreneurs (C.R. Rodriguez, 1990). What cannot be ignored, however, is that the abolition of most small businesses since 1968 destroyed a large reservoir of entrepreneurship and has blocked its development ever since.

The absence of a dynamic, flexible, and innovative small-business sector producing a broadening range of goods and services has hurt Cuba's general economic performance in a number of

123




ways. First, its absence results in an economy that has been

sluggish and slow to respond to opportunities created by technical changes and changing consumer demand. Second, the range and

quality of goods and services available to citizens has been grossly inadequate. Third, the cost of production in the state sector itself

undoubtedly has been excessively high because of the absence of small specialized firms producing inputs for the large firms in that sector. Fourth, the division of labour within the economy has been stultified, with consequent losses in productivity. And, finally, the ability of the economy to diversify and expand exports in a range of new non-traditional areas has been impeded, al-

though Cuba is not without some successes in this area. A second set of factors which contributed to the strong growth

performance of 1980 to 1985 was external in character: i.e., the high level of economic assistance to Cuba from the Soviet Union, and the growth impulse imparted by imports of debt-financed

capital goods in the late 1970s and early 1980s. Neither of these factors were able to be sustained after 1985; both are unsustainable into the future.

III. SOVIET ECONOMIC ASSISTANCE

THE LEVELS OF hidden economic assistance, or implicit subsidization, from the Soviet Union were very high in the first half of the 1980s but declined after 1985. Measurement of economic assistance is difficult and imprecise, both conceptually and prac- tically, but reasonable estimates of some components of the assistance can be made. The concept of subsidization used here is the value of the various components of Cuba's special relation-

ship with the USSR in comparison with the value of these if Cuba had participated in the same manner, and to the same extent, in the world economy. The various elements of the implicit subsidization are discussed below.

1. The Debt to the Soviet Union

The USSR has permitted Cuba to run a continuous merchandise trade deficit which is unrequited by any known financial flow which might arise, for example, from a surplus on services




on current account. These bilateral deficits have, in fact, been financed by corresponding increases in debt with the Soviet Union. It should be noted here that the trade deficits have been reduced in magnitude by (1) the high export prices which Cuba has received from the USSR for sugar and nickel and by (2) the low, pre-1986 import prices for petroleum that Cuba paid to the USSR. In the absence of such favorable pricing, Cuba's cumulative trade deficit with the USSR would be much higher than it is now. The total cumulative deficit, presumably financed by long-term capital-account credits from the Soviet Union, has not yet been repaid in principal nor, apparently, has interest been paid. One might view this accumulated trade deficit as assistance from the USSR and the annual deficits as annual transfers. (See Table 2, Row 5 for the annual trade deficits.)

Cuba's financial relationship with the USSR has been shrouded in secrecy since 1960. The magnitude of the debt was placed at 15 billion rubles (or $US 23.5 billion, at the official exchange rate of 1 rb. = $US 1.57) by Soviet Prime Minister Ryzkov (Izvestia, 1990) and has since been acknowledged in Havana. This 15 billion figure includes the development credits provided by the Soviet Union, which were used mainly for the purchase of complete industrial plants.

It is unlikely that this debt will ever be repaid in real terms. When asked if it was likely that the Soviet Union would forgive this debt, one high-ranking Cuban official stated unofficially: "I don't know if they will forgive it, but we're not going to pay it" (No se si ellos van a condonarlo, pero no vamos a pagarlo). Certainly it would be difficult for Cuba to repay the real value of the debt in the foreseeable future. On the other hand, if the ruble is devalued drastically in future, as the Soviet Union moves towards convertibility, and if Cuba reintegrates itself successfully into the world economy, repayment in nominal terms would not be inconceivable and might not even be unduly onerous.

A related element of Soviet subsidization has occurred through the continuing postponement and perhaps also the "forgiveness" of interest payments on the debt to the Soviet Union. (If the interest rate on the 15 billion ruble debt were between 3-80/o, the value of the interest payments forgiven would now range from $US 705 million to $1,880 million per year.)

125



Table 2 First Estimation of Soviet Economic Assistance to Cuba, 1980-1987

Assumptions: * Official exchange rate of Cu.P. and $U.S. is used * Debt (interest and amortization) forgiveness is excluded

(Cuban Pesos, Current)

1980 1981 1982 1983 1984 1985 1986 1987

1. Sugar Subsidy (Cu.P. millions) 831.5 974.2 2,164.0 2,368.8 2,046.4 2,329.5 2,017.1 2,574.7

2. Petroleum Subsidy (Cu.P. millions) 2,078.7 1,993.8 1,664.6 1,009.4 489.7 -182.0 -711.7 -664.7

3. Sugar Reexports (Cu.P. millions) 0 0 44.3 146.3 745.9 1,281.4 615.1 664.3

4. Petroleum Reexports (Cu.P. millions) 0 70.2 105.7 105.6 19.7 -38.6 -325.8 -190.5

5. Bilateral Trade Deficit (Cu.P. millions)l 650.2 876.5 454.8 363.5 830.2 937.3 1,401.8 1,577.2

6. Total (Cu.P. millions) 3,560.4 3,914.7 4,433.4 3,993.6 4,131.9 4,327.6 2,996.5 3,961.0

7. Subsidy per Capita (Cu.P.) 367.3 401.4 450.2 401.5 411.4 426.3 292.5 382.5

8. Subsidy per Capita ($U.S., current) 512.3 499.3 524.1 462.1 457.1 463.4 352.4 382.5 at official exchange rates

9. Subsidy as Percent of (%) 36.1 34.0 36.4 30.9 30.2 31.0 23.3 32.2 "Ingreso Nacional Creado"

10. Adjustment for Over- (Cu.P. millions) -580.6 -646.8 -754.9 -849.1 -965.5 -1,074.6 -1,062.8 -773.5 pricing of Imports from USSR

11. Revised Total (Cu.P. millions) 2,979.0 3,267.9 3,678.5 3,144.5 3,166.6 3,253.0 1,933.7 3,187.5 Subsidy


13. Subsidy per Capita ($U.S., current) 428.7 416.7 434.8 363.8 350.3 348.3 227.4 307.8 at official exchange rates


.

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Calculations: 1. Sugar Subsidy: (Soviet price less world "free market" price) times (total Cuban sugar exports less

reexports to the USSR); estimated for 1986 and 1987. 2. Petroleum Subsidy: World price less Soviet price times total Soviet crude petroleum exports to Cuba

less reexports. 3. Sugar Reexports: See Appendix Table 2. mT

4. Petroleum Reexports: See Appendix Table 2. 5. Bilateral Merchandise Trade Deficit with the USSR, (Anuario, 1988, pp.419-423). 7. Per capita subsidy: total subsidy divided by population (Anuario, 1988, p.57) 8. Per capita subsidy in $U.S.: Subsidy in Cuban pesos converted to $U.S. at Cuba's official exchange

rate (see Appendix Table 2). 9. Subsidy as percent of "Ingreso Nacional Creado" (Anuario, 1988, p.99).

10. Adjustment for Overpricing of Imports from USSR: 20% of the value of Cuban imports from the USSR, assuming 0 that Soviet exports are overpriced and quality is inferior to alternate suppliers.

11. to Calculated similarly to Rows 6 to 9. 14.

Sources: t Republic of Cuba, Anuario Estadistica de Cuba, 1988, Havana, 1989. Economic Commission for Latin America and the Caribbean, Statistical Yearbook, 1988, U.N., 1989. Banco Nacional de Cuba, Economic Report, successive issues, 1982 - 1989.




2. Implicit Subsidization through Export and Import Pricing

A second component of Soviet assistance to Cuba is embedded in the pricing of Cuban sugar exports to, and petroleum imports from, the USSR. The USSR has paid a ruble price for Cuban sugar imports which, for most years and at official exchange rates, has been a multiple of the world free-market price and a good deal higher than the domestic US or European Com- munity (EC) price, thereby increasing Cuba's foreign exchange earnings. Similarly, petroleum prices to Cuba have been below world market prices. Due to the practice of pricing petroleum at a lagged 5-year moving average of world prices, subsidization through a low petroleum price was at its peak when world prices were rising from 1973-1985, but turned negative when the world price fell after 1985 - again at official exchange rates (see Table 2, row 4).

Such pricing involves a direct opportunity cost for the Soviet Union which could buy sugar and sell petroleum in international markets in hard currency. For Cuba, the justification for such favorable pricing has been one of equity in the economic relations between developed and developing countries under the international socialist division of labor - in contrast to the perceived inequities in trade between developed and developing countries in the capitalist world. Indeed, Cuban analysts and officials insist that the special pricing arrangements with the Soviet Union do not constitute "aid" but, instead, represent a fair exchange of commodities (C. R. Rodriguez, 1990; andJ.L.Rodriguez, 1990).

The value of the sugar subsidy to Cuba is estimated here as the difference between the world free-market price and the Soviet- Cuban price times the total volume of Cuban net sugar exports (deducting re-exports of sugar purchased from other producers by Cuba for resale to the USSR). What would happen to Cuba's sugar exports to the USSR if its special relationship with that country were terminated is open to conjecture at this time. The most probable outcome is that, as the USSR moves towards ruble convertibility, market-determination of the prices of tradable commodities, and greater openness to international trade, it would continue to import similar -or perhaps increased - volumes of




sugar from the world free-market suppliers generally. This means that, while Cuba might lose special access to the Soviet sugar market, Soviet purchases from other sources would "make space" for Cuban sales to other purchasers in the world market. If both Cuba and the USSR shifted their sugar exports and imports to the world free-market, the average world market price would not change too much, if at all, as a result - although it would become a good deal less unstable. Therefore, it is reasonable to compare the sugar price in the world free-market with the special price of previous decades in order to estimate the value of the subsidy, rather than to use other prices (such as the higher US or EC protected prices).

The value of the petroleum subsidy is estimated as the world price less the Soviet price times total net petroleum exports from the USSR to Cuba (allowing for Cuban re-export of Soviet petroleum to earn hard currency).

A key variable in estimating the genuine level of subsidization of the Cuban economy - through sugar and petroleum pricing and through re-exports (discussed below) - is the exchange rate between the Cuban peso and the US dollar. As is well known, the official exchange rate has been seriously overvalued. For this reason, a second exchange rate of $US 1 = Cu.P. 2 was employed here in estimating subsidization. This exchange rate is likely more realistic than the official rate from both the standpoints of purchasing power parity and of free market determination. It is, in fact, most difficult to predict with confidence what this exchange rate should be at present, or what it would be if Cuba were to participate, fully and openly, in the international economy without the special relationship with the USSR. Use of the 2:1 exchange rate assumption is not to suggest that this could be considered as the appropriate rate, however.

The real value of the Soviet subsidy to Cuba is reduced because most of Cuba's foreign exchange earnings with that country are in inconvertible rubles and must be spent on imports from the Soviet Union. It is generally argued that Soviet exports of most manufactures are uncompetitive in terms of price and quality with those of the developed market economies (DMEs). This conclusion is drawn because in neutral, third-country markets, Soviet manufactured products rarely can match those of the DMEs. It

129




appears that, at official exchange rates of the Cuban peso to the ruble vis-a-vis convertible currencies, imports from the USSR are more expensive than comparable imports from the DMEs (all valued CIF, that is, including freight and insurance costs). While it is impossible to determine this cost and quality differential ac- curately, a crude estimate (used in Table 2) is 20%, which is probably on the conservative side. With more realistic (devalued) exchange rates of the peso and ruble together vis-a-vis convertible currencies, however, Soviet imports quickly become competi- tive in terms of price.

Preliminary estimates of the value of the sugar and petroleum subsidies to Cuba, under different assumptions, are presented in Tables 2 and 3. Similar subsidization may occur through the prices of Soviet nickel imports from Cuba. This is difficult to substantiate, or measure, because Cuba's nickel exports are not in the form of metal but in the form of concentrates of nickel-cobalt-sinter, nickel-cobalt oxide and nickel-cobalt sulphur, which are not traded widely enough to have authentic international market prices. In Table 2, the estimate of Soviet subsidization is also adjusted for an estimate at overpricing of Cuban imports from the USSR. With the assumed exchange rate in Table 3 ($1. US = 2 Cu.P.), such overpricing perhaps does not occur or is much reduced.

In the 1980s, an important component of the Soviet subsidy to Cuba was the re-export of sugar and petroleum. Cuba was permitted to purchase sugar on the international market at the free-market price and to resell it to the USSR in order to fulfill its long-term, sugar-export contracts. This arrangement permitted Cuba to receive a middleman profit, the magnitude of which would depend on the price differential and the exchange rate at which the $US free-market price was being converted to Cuban pesos. In some years, the profits from this resale reached high levels (see Appendix Table 2 for estimation methods and calculations for the subsidy value, assuming official exchange rates.)

The Soviet Union has also permitted Cuba to "re-export" petroleum, on the basis of an agreement which provided that, if petroleum consumption and importation levels declined vis-a-vis previously planned levels due to energy conservation, the petroleum which was "saved" could be re-exported at world



Table 3 Second Estimate of Soviet Economic Assistance to Cuba, with $1 U.S. = 2 Cu.P.

1980-1988

Assumptions: Exchange Rate: $1 U.S. = 2 Cu.P. Forgiveness of debt service is excluded.

(Cuban Pesos, Current)

XJ- I 1 _1_11-1_~ 1 ~1980 1981 1982 1983 1984 1985 1986 1987

1. Sugar Subsidy (Cu.P. millions) -1,380.7 -460.1 1,247.4 1,562.1 1,708.6 1,843.2 1,853.6 1,603.1

2. Petroleum Subsidy (Cu.P. millions) +3,341.4 +3,849.2 3,451.8 2,752.4 2,245.9 1,985.4 81.4 627.2

3. Sugar Reexports (Cu.P. millions) 0 0 25.5 102.6 622.7 1,142.9 489.5 530.6

4. Petroleum Reexports (Cu.P. millions) 193.3 295.5 453.8 753.4 611.8 571.6 197.9 192.7

5. Bilateral Trade Deficit (Cu.P. millions) 650.2 876.5 454.8 363.5 830.2 937.3 1,401.8 1,577.2

6. Total (Cu.P. millions) 2,610.9 4,561.1 5,633.3 5,534.0 6,019.2 6,480.4 4,024.2 4,530.8


7. Subsidy per Capita ($U.S., current) 134.7 233.8 286-.0 278.2 299.7 319.1 196.4 218.7 at $U.S. 1 = 2 Cu.P.


Notes and Sources: See Table 2.

22

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prices and in convertible currency. This transaction has been a

paper transaction only, with the petroleum physically travelling from the USSR to Eastern and, perhaps, Western Europe, but with Cuba importing it on paper at the Soviet-Cuban price and re-ex-

porting it on paper for hard currency. Calculations of the value of this subsidy for the 1980s are presented in Appendix Table 2.

Summaries of partial estimates of Soviet economic assistance to Cuba during the 1980s, together with the method of calculation, are shown in Tables 2 and 3. The value of such subsidization plus the bilateral trade deficit is clearly very high. In per capita terms, whether measured in Cuban pesos or US dollars and under both exchange rate assumptions, the estimated subsidization is high. Economic assistance as a percentage of Ingreso Nacional Creado is also high throughout this period, though it varies from year to

year and under different exchange rate assumptions. Not surprisingly, when the rough estimate of the value of excess pricing and low quality of Cuban imports from the USSR is included in the subsidization measure, the value of the implicit assistance to Cuba declines significantly (Table 2, Rows 9-13).

Is subsidization in the range of 10 to 40%/ of National Income

possible through these mechanisms? The answer to this is "yes." In some years, the relevant special prices were much more

favorable than the world prices at official exchange rates. Moreover, sugar exports and petroleum imports with the USSR accounted for over 67% of total trade with the USSR in 1985, and about 65.5% of total Ingreso Nacional Creado (INC). Furthermore, prior to 1985, market pricing of petroleum would have pushed import costs up substantially, while market pricing of sugar ex-

ports would have lowered export earnings sharply. Both types of

subsidy had the effect of making the trade balance stronger than it would have been otherwise. It is also very important to note that

artificially high export earnings and low import costs exaggerate the true value of GSP and INC and generate levels and changes in these measures of aggregate economic activity which are largely illusory.

The levels of Soviet assistance are also high in comparative international terms. As can be seen in Table 4, in both per capita terms and as proportions of measures of GNP, Cuba receives more assistance than any other independent Latin American country.




(As explained in Note 7 of Table 4, an estimate of Cuba's GNP - rather than GSP or INC - has been used here to ensure com-

parability with the rest of Latin America. Economic assistance for other Latin American countries includes estimates of the US sugar subsidy, although this was largely inconsequential, amounting to about $US 0.30 per capita for all Latin America on average; see Note 6 of Table 4.)

In this discussion of Soviet assistance, a number of implications are central to the argument of this paper. First, the Soviet Union has been exceedingly generous to Cuba. In real terms its subsidization has been enormous. It has insulated Cuba from in- stabilities in the international economy and has permitted higher levels of aggregate economic activity than would have otherwise occurred. Second, the level of subsidization declined sharply in 1986. Indeed, subsidization through petroleum pricing became negative, i.e., implicit assistance flowed from Cuba to the USSR

through this mechanism - at least at official exchange rates. The cause of this was the decline in the world price of oil, used as the reference price for subsidization estimates relative to the Soviet

price (which itself was based on the high world price of 1981- 1985). Higher Soviet oil prices vis-a-vis world prices contributed to a tightening foreign exchange situation and to relative contraction of imports after 1985 which, in turn, reduced levels of utiliza- tion of industrial capacity and lowered the volume of output (Roca, 1990). Third, economic assistance to Cuba, disguised in the form of commodity prices, is unlikely to continue at current levels indefinitely. The price of petroleum exports to Cuba will

likely continue to move towards the world price. The price of

sugar exports from Cuba to the USSR, which is dependent on the relative prices of Soviet exports (including petroleum to Cuba), also will likely decline in peso terms in the early 1990s, thereby reducing both the price subsidy and the profits from sugar reex-

portation.

IV. CUBA'S CONVERTIBLE CURRENCY DEBT PROGRAM

IN THE LATTER half of the 1970s, Cuba borrowed heavily from commercial banks and government lending agencies in the

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Table 4 Latin America: Comparative Indicators of Debt Burden and Economic Assistance

Total Debt as Interest Payments % of as % of Exports Economic Assistance6

Disbursed External Debt Merchandise of Goods & Per Capita Percent

Total, 19881 Per Capita, 1988 Exports Services $ U.S. of GNP $ millions $ 1988 1985 1988 1987 1987

LATIN AMERICA 401,360 981.4 339% 35.4% 28.0 8.7 0.4

OIL EXPORTING COUNTRIES 167,150 1,120.0 343 32.1 28.3 -

Bolivia 4,450 568.6 595 46.8 34.8 47.5 7.1 Ecuador 9,600 1,028.3 388 25.5 33.3 20.7 1.9 Mexico 105,600 1,137.2 339 36.9 29.1 1.9 0.1 Peru 15,300 761.8 442 27.9 21.8 14.8 0.6 Venezuela 32,200 1,698.3 290 25.3 26.9 1.0 0.0

NON-OIL-EXPORTING COUNTRIES 242,665 907.6 337 38.4 27.9

Argentina 54,500 1,799.0 541 51.1 40.4 3.5 0.1 Brazil 116,900 794.4 321 40.0 29.7 2.2 0.1 Colombia 15,700 519.6 218 28.9 20.8 2.8 0.2 Costa Rica 3,800 1,428.0 260 24.9 19.7 89.0 5.3 Chile 20,510 1,498.2 236 43.5 22.6 1.7 0.1 El Salvador 2,250 370.5 185 11.1 10.0 87.6 9.0 Guatemala 2,720 327.2 225 14.9 13.0 29.7 3.4 Haiti 740 128.5 276 5.4 6.9 35.7 9.7 Honduras 3,145 666.4 290 16.1 14.4 55.8 6.4

Nicaragua 6,200 1,850.8 2,068 72.0 103.0 40.2 4.4 Panama 4,900 1,794.3 n.a. n.a. n.a. 20.4 0.7

Paraguay 2,000 531.1 324 8.3 11.6 21.3 1.8 Dominican Republic 3,700 558.3 220 18.7 13.2 24.9 2.6

Uruguay 5,600 1,956.6 354 34.3 23.4 6.5 0.2

CUBA 1.Convertible Currency 6,4504 616.1 615.0 15.6 27.1 1.5 (1985) 0.1 (1985)7

2.With USSR2 8,200 to 12,000 783.3 to 1,146.3 183.5 to 268.5 0 0 307.8 to 218.75 (26.0 to 36.9) Total3 14,650 to 18,450 1,400.0 to 1,762.4 265.5 to 334.3 4.3 5.5 309.3 to 220.25 (26.0 to 36.9)

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Sources: 1. ECLAC, December, 1988, p.24, for all information except for Cuba. 2. BNC, May 1987 and December 1988 for Cuban Data. 3. EIU, Country Profile, p.25, for estimate of the magnitude of the debt with the Soviet Union. 4. IDB, Economic and Social Progress in Latin America, 1988 Report, Washington, D.C., IDB 1988 p.534 for

population estimates. 5. World Bank, World Development Report 1988, Washington, D.C.: World Bank, 1989, pp.202-203 for information on

economic assistance. 6. UNCTAD, Handbook of International Trade and Statistics, 1987 Supplement, New York: United Nations, 1988.

Notes: m 1. Totals for Disbursed Debt of Latin American countries are preliminary estimates by ECLAC 2. For the estimates of Cuba's Total Debts with the USSR as a percentage of "goods and services exports", only

merchandise exports are included, information on trade in services being unavailable. 3. Cuba's debts with other countries in Eastern Europe are excluded, so that the "Totals" for Cuba's debt

indicators are underestimated. m 4. The exchange rate used for converting Cuba's peso debt to $U.S. is CuP. 1 = $U.S. 1., that is, the average 8

official exchange rate for 1987. Z 5. These are estimates of implicit subsidization by the Soviet Union. The former estimate is made using the O

official exchange rate of the $U.S. to the Cuban peso, while the latter uses an exchange rate of $U.S. 1 = Cu.P. 2. See Tables 2, 3 and 4.

6. In order to improve the comparability of Cuban and other Latin American aid estimates, the value of the U.S. sugar price subsidy is included as assistance. This was calculated as the difference of the 1987 U.S. price for quota imports less the world price, multiplied by the 1987 U.S. sugar quota allocation. In all cases, aid through this mechanism was too small to affect aid as a percent of GNP. See IMF, H Primary Commodities,July 1989. Washington, D.C. 1989.

7. Cuba's GNP, which is virtually identical to GDP in Cuba's case in view of the absence of international factor payments, is calculated following Zimbalist and Brundenius (1989, p.43), who estimate that non- material services (NMS) in 1981 were equivalent to 26.5% of GDP, while the productive sectors share is 73.5%. Because of the more rapid growth of NMS than productive sectors for 1980-1988, the NMS share is adjusted to 30%, GDP is magnified accordingly in order to make Assistance as a percent of GDP comparable with other Latin American countries.




market economies (excluding, of course, the United States). This occurred as a result of Cuba's improved creditworthiness in the 1970s (reflecting strong economic performance in that decade) together with the imperative of the commercial banks to recycle petrodollars by aggressive marketing of loans. Cuba's planners were anxious to borrow from the market economies in order to achieve ambitious investment targets and to diversify, and perhaps improve, the importation of technology embedded in the import of capital goods. By 1980-1981, the volume of debt had built up to significant levels, but no debt servicing problem was encountered due to high free-market sugar prices and strong convertible currency earnings in those years.

From about 1981 to 1985, Cuba's convertible currency debt problem was problematic but manageable (Ritter, 1988). The main debt indicators showed little deterioration in this period: both debt as a percentage of Ingreso Nacional Creado and interest as a percentage of foreign exchange earnings were lower in 1985 than they had been in the late 1970s (see Table 5). This was in part illusory, however, because both the peso and the US dollar value of the total debt and debt-service burden were declining only because the US dollar was appreciating against the other currencies of the OECD (Organization for Economic Cooperation and Development), in which Cuba's debt was denominated. Moreover, the convertible currency balance of payments appeared to be strong largely due to the previously-mentioned petroleum re-exports for hard currency from 1983 to 1985.

After 1985, however, the convertible currency debt problem became severe. The debt burden indicators rose sharply - to levels comparable to those in the rest of Latin America. Total convertible currency debt, as a percentage of an estimate of Cuban "GNP," surpassed 33% (Table 5). Debt service, as a proportion of convertible currency export earnings, approached 30%, exceed- ing the Latin American average of 28% in 1988 (Table 4). This sharp deterioration was caused by:

* the decline in convertible currency earnings, due particular- ly to reduced profitability of petroleum re-exports, and low free-market sugar prices;




* the devaluation of the US dollar and the continued over- valuation of the Cuban pesos vis-a-vis the US dollar, which increased the peso value of the debt which is denominated in non-$US, OECD currencies. (Much of the increase in the debt in 1987 arose from this source).

As a result of the worsening debt situation, in 1986 Cuba declared a moratorium on payments of interest and principal pending renegotiation with the Paris Club of creditors. A set of austerity measures designed to reduce convertible currency imports, raise imports, and improve the domestic macroeconomic balance was adopted by the National Assembly on 26 December 1986. ByJanuary 1988, the arrears on debt repayments amounted to 2,461 million Cuban pesos, with 2,105 m. in principal and 365 m. in interest (BNC, 1988). Nonpayment of interest "capitalizes" it in effect, adding it to the total value of principal outstanding. In early 1988, Cuba proposed that all principal and interest due in 1987 and 1988 be rescheduled over a 15-year period, including a 5-year grace period. By July 1990, agreement still had not been reached with the Paris Club. Some sort of agreement with creditors is urgent because trade must be conducted on a cash-only basis, and because new credits are required for productivity-enhancing and foreign-exchange-generating investments.

There is little or no likelihood that Cuba would repudiate its convertible currency debt at present, though of course partial "forgiveness" would be welcome. (Despite arguing that the Latin American debtors should repudiate their debts, Castro has stated that Cuba would fulfill its debt obligations (Castro, 1987: 147) on the grounds that (1) the lending was by non-US banks who violated the US financial embargo willingly and (2) that the loans were invested productively.)

The longer-term resolution of the convertible currency debt problem will undoubtedly involve a multi-year rescheduling with a relatively onerous debt "work-down" (or repayment schedule) following, perhaps, a grace period. After a few years of demonstrated success with such a scheme, fresh commercial credits should be forthcoming.

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Table 5 Cuba's Total Disbursed Debt in Convertible Currency and Indicators of Debt Burden

1969-1987

Total Debt Debt Service -Total Debt Total Debt

Current $U.S. Annual Change per capita as percent Interest Interest and Pesos current Current Pesos Current of Only Amortization

Year millions m% Pesos GNP3

1969 291.0 291 - 34.3 - n.a. n.a. 1,632 1969 to 1975

1975 1,338.0 29.0% p.a. 142.9 16.0 n.a. n.a. 1975 to 1978

1978 2,883.8 3,845 29.2% p.a. 297.7 23.4 19.2 57.7 1979 3,267.3 4,476 13.3 335.0 26.1 19.4 45.3 1980 3,226.8 4,545 -1.2 332.9 25.2 17.7 28.7 1981 3,169.6 4,064 -1.8 325.0 21.2 19.3 35.9 1982 2,668.7 3,140 -16.5 271.0 16.9 21.0 64.7 1983 2,789.7 3,207 4.5 280.5 16.6 20.1 n.a. 1984 2,988.8 3,321 7.1 297.6 16.8 16.5 n.a. 1985 3,621.0 3,936 21.2 356.7 20.0 17.4 41.8 1986 4,985.0 6,006 52.6 379.4 29.8 21.7 67.8 1987 5,657.0 5,657 -5.8 588.5 35.4 29.7 n.a. 1988 6,450.0 6,450 +14.0 616.1 38.9 27.1 n.a. 1989 (Sept) 6,201.3 6,201 -3.9 604.4 37.1 n.a. n.a.

Source: Equipo, 1985, p.55 for 1969 and 1975 debt totals; BNC, March 1986, for 1979-1984; BNC May 1987 for 1985-1986, and CEPAL, 1988, p.277.

Note: 1. "Debt service" is defined as (i) Interest and (ii) Interest plus Amortization as a percent of total exports of goods and services in the convertible currency area.

2. The total debt figures in current Cuban pesos are translated into current $U.S. using the official exchange rates from Table 1.

3. GNP is used here to ensure comparability with other Latin American countries. It is estimated as indicated in Table 4, Note 7.

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RI1TER: THE CUBAN ECONOMY IN THE 1990S

V. PROSPECTS AND POLICY IMPERATIVES

CUBA'S ECONOMIC GROWTH PROSPECTS for the 1990s will be influenced by a variety of internal and external factors which cannot be fully examined in this paper. Concerning the internal

factors, it is likely that emphasis upon investment in people, both

past and prospective, will continue to provide a strong human resource foundation for economic growth. Re-establishment of high levels of investment should also contribute to rising productivity. The main domestic difficulty affecting growth prospects will

likely be the pervasive micro-inefficiencies which arise because of the absence of realistic, or economically-rational, constellations of input and output prices, together with a sufficient degree of

enterprise-level financial autonomy and responsibility and

decision-making authority. The near-absence of small enterprises, operating within a decentralized "market" environment and man-

aged by self-activating owner-operators also limits the process of human resource development, impedes the diversification of the

economy, and will become an increasingly serious constraint on the improvement of productivity in the future.

This section's central concern will be the external, macroeconomic constraints on Cuba's prospects for growth in the 1990s, notably the necessity to service the debt and the likely reduction in Soviet economic assistance.

The previous section argued that the current heavy burden of debt service and the large total disbursed debt - now in a "moratorium" situation - would likely be "worked down" after a

multiyear rescheduling and an initial grace period and, conceiva-

bly, with partial "forgiveness." The implications of this type of resolution of the debt problem for the balance of payments are clear: an increased trade surplus in merchandise and services will be necessary in order to cover interest and principal payments on the debt.

Will the debt to the Soviet Union have to be repaid in future? As noted, this is not clear. Cuba's debt with the USSR has not been "forgiven," but so far (to mid-1990) interest and amortization on this debt has been uncollectible because Cuba has continued to

experience large bilateral merchandise trade deficits with the USSR in most years. Should repayment be required beginning in

139



JOURNAL OF INTERAMERICAN STUDIES AND WORLD AFFAIRS

the 1990s, generation of a large trade surplus with the Soviet Union would become imperative.

The real value of Soviet economic assistance to Cuba is likely to continue to decline in the 1990s, as it has in the 1985-1989 period. This is likely to occur with or without the continuing implementation ofperestroika in the USSR. The petroleum import price subsidy to Cuba, which more or less disappeared or became

negative after 1986, will likely be insignificant or will disappear altogether. The profits to Cuba from the re-export of petroleum will either remain low or will also disappear. The sugar export price subsidy to Cuba will also decline because the Cuban export price is determined, in part, by an index of prices of Cuban imports - including petroleum - from the USSR. Sugar resale profits going to Cuba will be lower in the 1990s than the 1980s due to lower Soviet ruble purchase prices and world free-market, hard-

currency prices, which will probably be higher than the depressed prices of the mid-1980s.

Intensification of perestroika in the Soviet Union could lower the real value of Soviet assistance in a variety of ways. First, greater reliance on the market in exchange rate determination, meaning a devaluation in the ruble and presumably the peso as well, would lower the US dollar equivalent of the ruble and the

peso price of sugar. This would reduce the margin between the Soviet price and the free-market price, thereby reducing the hidden sugar subsidy and eliminating the profits from reselling sugar bought at the free-market price from other sugar producers for re-export to the Soviet Union. A major devaluation of the ruble, with the ultimate objective of establishing full international con-

vertibility, is probable, and perhaps imminent, following the 90% devaluation of the ruble (25 October 1989) for "non-commercial" operations, i.e. for Soviet and foreign travelers (Ottawa Citizen 1989). Moreover, at the January 1990 meeting of COMECON in Sofia, the Soviet delegation proposed that trade among members be conducted in convertible currencies and at market prices (Mesa-Lago et al., 1990: 61).

Second, the Soviet move towards a realistic exchange rate will

undoubtedly be accompanied by a move towards realistic (market-determined) pricing for major goods traded, such as

petroleum, sugar, nickel and other commodities. This would

140




diminish, and perhaps eliminate, hidden subsidization and opportunities to profit from re-exporting unless Soviet-Cuba pricing arrangements remained exceptional. However, while Cuba would lose some, or all, of its subsidization as a result of ruble convertibility and market-based pricing of its main trade items with the USSR, it may gain in that its foreign exchange earnings with that country may become fully convertible - and usable anywhere in the world.

A third implication of perestroika is the greater power allo- cated to Soviet firms (in a law of April 1989) to market their products abroad independently. The result of this could be that some enterprises may choose to supply foreign purchasers who can pay a hard currency price or a premium price. This could mean that Cuban importers might not be able to purchase the item at all, or would have to pay a higher price. This phenomenon has already occurred with the Icarus bus enterprise in Hungary (Gran- ma Weekly Review, 1989).

Fourthly, the general orientation of Soviet policy under Gor- bachev - e.g., greater concern with re-establishing dynamism within the sluggish Soviet economy, reduced emphasis on foster- ing socialist and communist regimes in the rest of the world, and greater recourse to decentralization and the market mechanism in economic organization - all lead to the conclusion that heavy subsidization of the Cuban economy is unlikely to last. Further- more, as the domestic economy weakened in 1990, the Soviet Union became more interested in obtaining low-cost credits, and perhaps outright assistance, from the West to facilitate a transition towards greater marketization of the economy. It is improbable that the United States or other DMEs would assist the USSR if this merely meant a flow-through of assistance to Cuba. In consequence, by mid-1990 the USSR was under pressure to reduce its subsidization of Cuba.

Finally, by mid-1990, the possibility of serious economic and/or political breakdown or turmoil in the USSR appeared to be real. If any of a variety of possible "breakdown" scenarios were to occur, one probable consequence would be a quick end to the special relationship with the Soviet Union and the implicit subsidization of Cuba. This adds an important imperative for Cuba to

141




pay its own way and to become authentically self-financing in its

development process. The special relationship was maintained throughout 1990 with

a renewal of the Soviet-Cuban trade agreement. Cuban analysts in 1990 emphasized the mutuality of benefits of Soviet-Cuban trade, pointing out the undoubted higher productivity, in real terms, of Cuban sugar-cane versus Soviet sugar-beet production, the high cost of any Soviet substitution of sugar imports by domestic production, the importance of nickel and citrus exports to the USSR, and the usefulness of the secure Cuban market for a diversified range of Soviet exports. While there is probably much truth in this view, it also seems inevitable that Soviet implicit subsidization will be phased down further in the mid-to-long term, with a major reduction being probable in 1991.

Declining Soviet assistance and the need to "work down" the convertible currency debt - and maybe the Soviet debt as well - threaten to asphyxiate Cuban economic growth through shortage of crucial imports. (Cuba has relatively few inconsequential, or luxury, imports which can be trimmed easily and painlessly from its import mix.) To avoid this eventuality, the only solution would seem to be to increase exports of goods and services. The opportunities for developing industries to produce commodities in substitution for those previously imported is now limited due to the extreme import-substitution program pursued in the past in Cuba. The need for export promotion, the diversification of markets, and the diversification of the range of export commodities is well understood in Cuba and has been emphasized for some time. Indeed, there has been some success in 1988-1989 in entering Latin American markets and in expanding non-traditional exports, although this process is still in an embryonic stage (EIU, 1989).

To surmount these external challenges will require a continuing major effort and a rethinking of institutional structures and of the design of policy. A more effective externally-oriented and trade-oriented development strategy is required. What might be the components of such an institutional and strategic redesign? Among the more important are the following:



RITIER: THE CUBAN ECONOMY IN THE 1990S

Institutional: * greater decentralization of enterprise decision-making

regarding output mix, marketing, input purchasing, output pricing, hiring, etc.;

* enterprise financial responsibility and autonomy within the framework of a market-oriented pricing system;

* direct contact between enterprises and foreign purchasers; * incentive structures for firms and employees which en-

courage successful exportation; * pluralism regarding ownership forms, i.e. legalization of

cooperative or private ownership of small-scale enterprise, coexisting with state ownership of key sectors.

Policies: * establishment of a single, unified, realistic exchange rate to

replace an overvalued rate and a bizarre structure and system of controls;

* greater reliance upon market-determined pricing domesti- cally and movement towards harmonization of domestic and international prices for tradable goods and services;

? reduction and gradual phase-out of the current absolute bureaucratic control over imports;

* continued easing of policies affecting foreign investment and joint ventures.

These proposals are obviously controversial in the Cuban context at this time. The design and implementation of specific institutional arrangements along the above lines is difficult in any circumstances and especially in Cuba. Indeed, with the very term "market" being a bad word in the current Cuban context, and with the Soviet Union, in particular, facing problems with its reforms, a "market-oriented" development strategy for Cuba is not currently probable. But as the reform process in Eastern Europe proceeds, when difficulties of the transition recede, and when the benefits of marketization are increasingly apparent, adherence to the traditional system in Cuba will be unsustainable.

143




A move towards generalized marketization with an increased role for small business and for joint ventures with foreign firms would undoubtedly generate a variety of phenomena (such as

impacts on income distribution) which would require further

policy modifications or innovations (such as the creation of an income tax). Over a transitional period, the first new enterprises and entrepreneurs would receive high incomes. It should be

recognized, however, that such incomes are the signal and incentive for enterprise proliferation and expansion in particular activities. In time, high incomes would be lowered by the strength of competition from other enterprises. (President Castro's justification for shutting down the farmers' markets in urban areas in 1986 was that excessively high incomes were being earned by the

entrepreneurs.) In the long run, there appears to be no reasonable alternative

to a substantially marketized, mixed-ownership, and externally- oriented economic system. In the absence of intensified movement in these directions, Cuba could look forward to productivity decline, growth slow-down, excessively slow diversification and

expansion of exports, and sluggish response to new economic

opportunities - judging from the past experience of the East

European countries as well as Cuba. The challenge for Cuba in the medium term is to achieve this type of economic reorientation while maintaining the basic equity of income distribution and its success in fulfilling basic human needs.

An important part of any long term reorientation of the Cuban

economy towards greater trade/external-orientation will ultimate-

ly involve the reestablishment of trade relations with the United States, which undoubtedly is part of Cuba's natural geographical market sphere. This, of course, would be of benefit to Cuba as an

exporter but is also not without risks of an economic, as well as

sociological, character which cannot be explored here. Cuba can be in a stronger position to benefit from normalization with the United States if it has already established a successful export- oriented economic structure and trading system.




CONCLUSION

CUBA'S RECORD OF ECONOMIC GROWTH in the 1980s has been mixed. The strong and positive performance of 1980-1985 was based partly on a foundation of improving human resources, substantial investment, and rising productivity, and partly on unsustainable levels of disguised economic assistance from the Soviet Union and debt-financing. The negative growth record from 1985-1988 has arisen mainly due to reductions in economic assistance, a convertible-currency debt servicing problem, and a hostile external environment that have lowered foreign exchange earings and reduced imports.

Economic difficulties and systemic transformation in the Soviet Union will likely lead to further reductions in economic assistance to Cuba in future. Cuba will have to improve its international financial self-reliance, or pay its own way. This will require a continued, and intensified, external/trade-oriented development strategy and pattern of growth, with the policy changes necessary to make this happen. The relevant policy changes must ultimately involve improved market-oriented rationality in both economic institutional structures and policies.

145



Appendix Table 1 Cuba: Productivity Indices and Capital Labour Ratios, 1975-1986

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

I ALL PRODUCTIVE SECTORS Capital/Labour Ratio 1981 = 1.0 .604 .679 .744 .793 .838 .895 1.00 1.085 1.112 1.156 1.244 1.268 1.289 1.306 Labour Productivity 1981 = 100.0 75.4 78.5 83.0 86.4 87.1 84.5 100.0 103.6 105.6 109.8 113.0 107.5 101.0 99.0 Capital Productivity 1981 = 100.0 124.9 115.6 111.53 109.0 104.0 94.4 100.0 95.5 95.0 94.9 90.8 84.7 78.4 75.8

II AGRICULTURE Capital/Labour Ratio 1981 = 1.0 .441 .590 .681 .735 .793 .849 1.000 1.151 1.280 1.457 1.620 1.738 1.817 1.758 Labour Productivity 1981 = 100.0 77.6 82.6 86.3 92.5 93.6 83.3 100.0 95.5 89.9 96.1 92.6 87.0 86.7 82.5 Capital Productivity 1981 = 100.0 176.0 140.1 126.6 125.9 118.1 98.1 100.0 83.2 70.1 66.0 57.1 50.0 47.7 46.9

Source: Republica de Cuba, Anuario Estadistico de Cuba, 1988, Havana, Cuba, pp.136, 168-170 and 192. Note: The measure of output used here is "ingreso nacional creado" (a measure of value added) in the "productive sectors"

only, that is, excluding such services as health, education, social security, financial services etc. All raw data are in constant 1981 prices. Capital/Labour Ratio: An index of an index of capital stock divided by an index of employment, all indices with a 1981 base period. Labour productivity: an index of a value added index divided by an employment index. Capital productivity: an index of a value added index divided by an index of the value of the capital stock.

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Appendix Table 2 Petroleum and Sugar ReExports: Estimated Profits (at Official Exchange Rates)

1980 1981 1982 1983 1984 1985 1986 1987

SUGAR 1. Volume Reexported, thousands, 0 0 88.8 206.0 975.0 1,419.4 812.8 945.0

metric tons 2. Purchase (Import) Price $U.S. per lb.. .287 .170 .084 .085 .052 .041 .061 .068 3. Import Price (at official exchange 454. 302. 159. 163. 103. 83. 110. 150.

rates) Cu.P./metric ton 4. Selling (ReExport) Price 759. 606 658. 873. 868. 986. 867. 853.

Cu.P./metric ton 5. Profit per metric ton Cu.P. 0 0 499 710 765 903 757 703 6. Total Profit millions CuP. 0 0 44.3 146.3 745.9 1,281.4 615.1 664.3

PETROLEUM 7. Volume Reexported, thousands, n.a. 790.5 1,243.3 2,666.9 2,666.9 2,926.9 3,016.6 3,000.0e

metric tons 8. Purchase (Import) Price 83.2 102.7 125.8 147.0 174.2 193.2 190.4 191.3

from USSR Cu.P./metric ton 9. Selling (Reexport) Price 28.50 32.50 33.48 29.30 27.53 26.50 13.54 17.43

World Price $US/barrel 10. ReExport Price (at official 150.00 191.50 210.80 186.60 181.60 180.00 82.40 127.80

exchange rates) Cu.P./metric ton 11. Profit per Metric Ton Cu.P. n.a. 88.80 85.00 39.60 7.40 -13.20 -108.00 -63.5 12. Total Profit millions, Cu.P. n.a. 70.2 105.7 105.6 19.7 -38.6 -325.8 -190.5

Official Exchange Rate Cu.P./$US .717 .804 .859 .869 .90 .92 .83 1.00

Notes: The exchange rate used for currency conversions is the official rate "Contra Certificado de Divisas Indirecto," the rate used for balance of payments and debt accounting purposes. The series indicates devaluation against the U.S. dollar (which was appreciating) from 1980 to 1985, followed by a peso appreciation in 1986. In 1987 there was a major peso devaluation against U.S. dollar despite the fact that the dollar itself was devalued that year. The fact that at these official exchange rates, large losses on petroleum reexports were occurring but that trade was being continued only indicates that the exchange rate is seriously overvalued. With a more realistic exchange rate (e.g. $U.S. 1 = CuP. 2) the import price of sugar would be increased and the reexport profits reduced, while the reexport price of petroleum and hence reexport profits would be increased in terms of Cuban pesos.

Sources and Calculations: Rows 1 and 7: BNC, May 1987; CEE, 1986, p.409; EIU, 1986:4, p.12; BNC-CEE, September, 1987. Rows 2 and 8: OAS, International Commodity Ouarterly Price Bulletin, Oct.-Dec. 1989. Rows 3 and 9: $U.S. prices per lb. and barrel converted to Cu.P. per metric ton, with conversion

factors as follows: 1 metric ton = 2,204.6 lbs; 1 metric ton of oil = 7.33 barrels. Rows 4 and 10: ReExport prices in Cu.P. per metric ton. Rows 5 and 11: ReExport prices less Import prices Rows 6 and 12: Profit per metric ton multiplied by total reexports from Rows 1 and 7.

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REFERENCES

ALMAGRO, F. (1990) Author interview with Vice-Minister, Comite Estatal de Estadisticas, Havana (Cuba), 9 July.

Banco Nacional de Cuba (BNC) (1988) Economic Report, January. Havana, Cuba: BNC.

Banco Nacional de Cuba/Comite Estatal de Estadisticas (BNC/CEE) (1987) Informe Economico Trimestral (Septiembre). La Habana, Cuba: BNC.

BRUNDENIUS, C. (1984). Revolutionary Cuba: The Challenge of Economic Growth with Equity. Boulder CO: Westview Press.

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Documents

The Cuban Economy in the 1990s: External Challenges and Policy Imperatives