Cuba's Economy: Mistaken Blame

OPINION
FEBRUARY 2006

Cuba's Economy: Mistaken Blame

BY PHILIP PETERS

Philip Peters is vice president and director of the Cuba Program at the
Lexington Institute. This column is based on a research paper released
in February 2006.

Cuba's inequality is not mainly the result of deviant behavior; it is
caused in larger measure by Cubans' lawful earnings in an economy
separated by the government's own economic policies. The number of
licensed entrepreneurs and foreign investors are falling.

The American press reported a CIA assessment that Fidel Castro has
Parkinson's disease, and the Cuban president responded last November 17
with a four-hour speech that showed stamina and a sense that this
comandante en jefe, at age 79 and in power 47 years, still keeps a long
list of things to do.

Speaking in the University of Havana's formal lecture hall, Castro
himself broached the topic of post-Castro Cuba. He challenged his
audience to consider whether and how the revolution would survive as it
confronts domestic problems now and an American policy that seeks to
undermine socialism quickly once he departs. Among those domestic
problems are two chronic ones - pilferage of state resources and income
inequality - that he discussed with clear knowledge of what is going on
in Cubans' daily lives. It is less clear, especially in the case of
bridging income gaps, that his solutions match the dimension of the problem.

2005 was a turning point; a year when the term used to describe the
economic crisis of the 1990's - the "special period in time of peace" -
fell into disuse. Many factors played a part: revived tourism, high
nickel prices, an offshore oil discovery with hopes of more to come, new
pledges of foreign investment, trade credits from China, and a broad
relationship with Venezuela that includes the export of services, trade
credits, and cut-rate oil supplies. Cuba seems to be escaping its
decade-long cash flow crisis, and international debt is being
restructured to end a punishing dependence on short-term, high-interest
credit. Even the CIA sees progress, estimating that Cuba's economy grew
by 5.2 percent last year.

Despite these improvements, the summer of 2005 was marked by extended
power blackouts that affected Cubans across the island who lost their
power, their running water, the food in their refrigerators, and their
tempers often for days at a time. The blackouts, caused by failed parts
at a Soviet-era power plant, served as a reminder of a large investment
and maintenance backlog.

And in spite of statistics that show low unemployment, the economy is
not generating the broad-based growth needed to create new jobs for
Cuban youth and to provide a strong wage for many valued workers already
in the labor force.

+++ Cuba's licensed entrepreneurs have seen their ranks shrink from a
peak of 209,000 in 1996 to about 150,000 at the end of 2004. There is a
new bias toward large-scale investments, and more than 100 joint
ventures have closed their doors, dropping the total to fewer than 300. +++

The economic improvements were enough to change Cuba's economic policy.
2005 saw a retrenchment of some of the reforms of the 1990's, confirming
that the market-based policies employed to rescue socialism will not be
the basis for a permanent course correction.

Cuba's licensed entrepreneurs have seen their ranks shrink from a peak
of 209,000 in 1996 to about 150,000 at the end of 2004, and the number
may be declining further. The state does not oppose their activity in
principle, but greater competition from state enterprises and tightened
regulations have put the squeeze on the self-employed.

Policy toward foreign investment has also changed; there is a new bias
toward large-scale investments, and more than 100 joint ventures have
closed their doors, dropping the total to fewer than 300. If Chinese and
other investors deliver on recent pledges, however, investment volumes
will rise considerably.

Late last year there was a warning and some enforcement action against
transporters and wholesalers accused of profiteering at farmers markets.
The message was delivered and the markets, which sell producers' surplus
at free-market prices, now seem to be functioning normally.

It is against that backdrop that Castro delivered his address. While his
prescriptions were mainly economic, he set them in a political context
that extends beyond his time in office.

The speech was full of digressions: about the recent inter-American
summit in Argentina, about Hugo Chavez's musings about Mars, about the
revolution's achievements, about President Bush's early-to-bed routine,
about American actions in Iraq, about Castro's own eyesight. Between
these detours he introduced, bit by bit, the issue of the revolution's
survival.

First he touched on the demise of the Soviet Union, a "very bitter"
experience in "a state that should have worked out its problems and
never should have destroyed itself." He then asked, "Is it that
revolutions are called upon to bring themselves down, or is it that men
can make revolutions fall?"

+++ Castro believes the United States no longer expects to bring his
government down through economic sanctions and other measures, but
rather his death. +++

Soon he touched on U.S. strategy toward Cuba; a plan, he argued, that no
longer expects to bring his government down through economic sanctions
and other measures. Rather, he said, "They are waiting for a natural and
absolutely logical phenomenon, which is the death of someone. In this
case they have given me the considerable honor of thinking of me.they
say they have to wait until I die, then that is the moment."

Later he applied his questions to the Cuban context: "Can a
revolutionary process be irreversible, or not? When those who were among
the first, the veterans, are disappearing and making room for new
generations of leaders, what is to be done and how should it be done?"
Castro argued that the Cuban people are well prepared and educated and
"would never permit this country to become again a colony of theirs."
The danger is internal, he continued: "This revolution can destroy
itself, we can destroy it, and the fault would be ours."

How could this come about?

Castro did not directly link energy security to political survival, but
he is in the midst of an energy conservation campaign, and he discussed
the issue at great length in this speech. The audience was left with no
doubt that mass installation of high-efficiency light bulbs would
continue, and that subsidized electricity rates are a thing of the past.

Castro spoke frankly about the income inequality that emerged during the
1990's, and he disparaged the "new rich" who may earn "twenty times,
thirty times more" than a doctor, professor, or engineer who earns a
simple salary from the state. He also discussed in detail the ways in
which some Cubans earn extra income illegally - the unlicensed taxi
driver who "drives his old car, buying and stealing gasoline all the way
from Havana to Guantanamo.charging 1,000 pesos, 1,200 pesos to one of
those young students who has to travel when the transportation situation
is very difficult."

Describing the theft of resources from the state, he asked rhetorically,
"How many kinds of theft are there in this country?" He cited the case
of a construction brigade that systematically stole and sold
construction materials. And he spoke of large-scale theft of gasoline
that was exposed when the government posted young "social workers" to
monitor sales and receipts at gas stations across the country. In
Havana, Castro recounted, gas station revenues suddenly doubled. In
Pinar del Rio, "It was soon discovered that what was being stolen was
equal to what was being sold."

But there was a gap in the explanation of income inequality. There is no
doubt that thieves and black marketeers - not to mention the
"cheapskates" and "egotists" that Castro described in his speech - can
and do enrich themselves. However, Cuba's inequality is not mainly the
result of deviant behavior; it is caused in larger measure by Cubans'
lawful earnings in an economy bifurcated by the government's own
economic policies.

Cubans who work for a joint venture with a foreign investor, or earn
tips in the tourism industry, or work as licensed entrepreneurs, or sell
private farm produce on the open market, or receive support from
relatives abroad, easily earn three or more times the average salary
paid to state workers. Cuban policies adopted between 1992 and 1994 make
these high incomes possible.

At the very same time, life became more expensive. Cuban consumers found
that many goods needed to meet basic needs - soap, toothpaste,
housewares, appliances, many kinds of clothing - were available only in
hard currency stores, and not at discounted prices. Cubans with low
incomes and no access to hard currency are left scraping each month to
make these purchases. Cuba's vast black market is surely more a result
of this inequality than its cause.

+++ Government actions make the income gap harder to breach: prices
remain high in state retail establishments, certain telephone charges
increased last year, and electricity rates are going up now. Actions yet
to come could widen the gap further. +++

The Cuban government has attempted to close this income gap in recent
years, for example by increasing salaries for health and education
workers, and last year by increasing minimum salaries and pension
payments across the board. The government has also taken steps to
redistribute income. Through a new exchange rate that devalues the
dollar against the Cuban convertible peso (the sole currency for
domestic hard-currency commerce), it is drawing a new stream of revenue
from Cubans who have dollar income from family remittances and other
sources.

However, other government actions make the income gap harder to breach:
prices remain high in state retail establishments, certain telephone
charges increased last year, and electricity rates are going up now.
Actions yet to come could widen the gap further. Referring to the ration
book that tracks each household's monthly supply of highly subsidized
food, Castro said without elaboration, "We are creating the conditions
for the libreta to disappear." He talked of a drive to eliminate
subsidies in housing and transportation and other services while
maintaining free health care and education. Castro hinted at pay
increases to come - but depending on the magnitude and sequencing of all
these measures, they could make purchasing power go up, or down.

When Soviet bloc support for Cuba's economy came to an end, Cuba's first
task was to survive a horrific economic crisis. Survival was
accomplished, and Cuba went on to accomplish its "re-insertion" into the
international economy through new sources of hard currency income and
new economic alliances.

Now comes the third major task of Cuba's post-Soviet economy: ending
gross income inequality and raising standards of living in an economy
unbalanced by more than a decade of deep change.

For Cubans in their twenties, this means providing good jobs at good
wages. For older generations, it means restoring the purchasing power
they had before 1991 when salaries covered basic needs and more. For the
Cuban economy as a whole, the rationalization of pay structures is
vitally important: it can eliminate incentives for petty corruption, it
can end the flight of educated and talented Cubans from their fields of
expertise to tourism, where earnings are higher.

+++ There will be continued efforts to expand economic relations with
countries such as Venezuela and China, and to expand exports of medical
services. +++

Castro's speech does not provide a clear road map as to how these goals
will be achieved. He did indicate a continued recentralization of
economic decisionmaking - a reversal of a management reform taken a
decade ago. There will be continued efforts to expand economic relations
with countries such as Venezuela and China, and to expand exports of
medical services. Social workers will be deployed beyond gas stations to
root out theft in bakeries, cafeterias, pharmacies, and other
installations. Energy conservation will continue to be a high priority;
ministries will reduce their fleets of vehicles and lose control of some
of their fuel supplies. Gas-guzzlers in the private sector - including
some private taxis and the 1950's American cars with replacement engines
under their hoods - may also receive, in Castro's phrase, "a Christian
burial." Private restaurants may disappear altogether, he said, having
long been subsidized by low electricity rates.

The effort to promote equity will proceed, in other words, on the
strength of Cuba's new financial position, and by betting on the central
government's ability to plan and execute a growth strategy. There is no
sign of a perceived need for the entrepreneurship and decentralized,
competitive decisionmaking that have generated broad-based growth from
below in economies, including socialist economies, around the world.
Market-based growth is not part of Cuba's equation today - to the
contrary, it is viewed as an error that could threaten socialism itself.

"There were those who believed that with capitalist methods they were
going to construct socialism," Castro said. "It is one of the great
historical errors." The speech does not define how or whether Cuba will
act to rectify those "errors," leaving a question mark by many current
economic policies. What is clear is that corruption, theft of state
resources, and the excessive use of "capitalist methods" have all been
placed in the ideological context of threats to the revolution's
survival, and their treatment can now be viewed as matters of national
security. If there is a decision to retrench further in economic policy,
the ideological path has been cleared.

http://www.latinbusinesschronicle.com/reports/opinion/0206/peters.htm