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Posted August 12, 2011 by publisher in Castro's Cuba

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The author of this article, Paul Meo, is a former official of the World Bank with a very extensive experience in developing countries and a long term member of Association for the Study of the Cuban Economy.

ASCE recently concluded it’s annual meeting in Miami.

Mr. Meo starts off by saying that this year’s annual meeting was different from some of the more recent ones. 

First, there were few, if any, papers presented on the “Transition” in Cuba.  Partly because the Castro brothers rival Adenauer in longevity, partly because there is nothing novel left to say, and partly because the proposed governmental changes are more interesting, the academics, retired Bretton Woods institutional staff, consultants, bureaucrats, and others who make up the membership decided the Transition was not a priority.  Secondly, there were far more defectors, at least recent ones, than before.  It was jarring for me to encounter a Cuban who had been head of an agricultural brigade in the People’s Republic of Yemen while I had been there on a World Bank mission.

Some Cubans sent their papers via the internet, and there was even one—who presented an apolitical paper—who had been given an exit visa to attend the conference.  There seemed to be far better information available on what was happening in Cuba, although the modelers and other theoreticians continued to successfully ignore reality when necessary. 

Last November, the authorities issued some 270 “Lineamientos” (guidelines) to be considered by the VI Party Congress.  The Congress met in April, after almost a dozen years of hiatus, and spent a whole day reviewing and approving the guidelines.  In the event, with changes and additions, about 300 “agreements” were published, and these will serve for the restructuring of the Cuban economy over the next few years.

Many of the agreements were hortatory—demanding better discipline, more unity, better efficiency, etc.—and others were mildly inconsistent—expanding the private sector (the word “private” is still verboten in Cuba; it is called the “non-state sector”) while increasing taxes on it massively—so the more sensible presenters (and I) concentrated on the few that might make a difference.   

For years; indeed, shortly after the departure of Fidel from the scene, the ASCE consensus has been that Raul Et. Cia. would produce very little change in the Cuban economy.  This has been true since 2005; very little has indeed changed.  Things may (I say “may” with reason) change in the future, but not really because of the VI Congress agreements.

There are some important decisions among the trivial.

First, the decision to downsize the public sector workforce by 500,000 has been validated by the Congress.  While the timeline of March 2011, has not been met (only about 250,000 have been shed), the new timeline of end-2011 has been agreed to by the Congress.  Indeed, further downsizing was also agreed, with a total of 1.8 million to be shed by end 2014. While all sorts of barriers can be foreseen—military objections (the military now run the majority of public enterprises), slow generation of non-state jobs, bureaucratic obstacles—the Cuban regime has decided that government employment will not be the answer.   

Secondly, while the famous 178 “own account” non-state activities were expanded to almost 200, and even within their context expanded (e.g., “paladares” (private restaurants) can now have places for up to 50, from 12), and non-family members can be employed in some activities (particularly private agricultural ones), there was no permission granted for establishing small, private businesses.  Hence, most private sector expansion must be in small service activities (small restaurants, barber shops—which the state has now turned over the barbers, entertainment activities, beauty shops, taxis, etc.) and not in even relatively (say, 50 employees) small businesses.  Even the professions—law, accounting, etc.—remain verboten for the private sector.  It is hard to see how this can generate sufficient employment for over one third of the public work force to be downsized by 2014!

Thirdly, the Congress agreed to allow private ownership of housing; this to begin by the end of this year.  This will obviously have a major effect, since mortgages, inheritance expectations, and construction will be massively affected if (IF!) the housing decision is liberally interpreted.  Stay tuned for this one.

Finally, the Congress validated and encouraged an acceleration of “usufruct” standing for farmers, whereby they can decide what, when, and how to produce on land they are granted tenure for.  But there was no decision to grant title to the farmers, and the need to accelerate the turnover stems from the desultory process used so far.  (One speaker asked how you translate “usufruct” into plainer English; I suggested “sharecropper” since the resemblance to that is amazingly close). 

Pari passu with these output changes, there are others that will greatly affect Cubans.  The Tea Party has hit Havana; government expenditures are being greatly curtailed.  The ration book has been greatly condensed; many cheap products are now only available on the “market” or black market.  Many state firms had canteens to feed the workers; most are being closed.  Pensions will not be nominally increased; they have been declining in real terms for years.  The education budget has been cut, and the need for foreign exchange has led to many doctors being sent abroad.  While Raul promised recently to expand medical education and focus more on domestic medical services, they are now so abysmal that hospital patients are dying of neglect and even malnutrition.

But not all the Tea Party program has arrived; taxes have been increased.  Many Cubans pay one third of their income in taxes, and “own account” workers pay far more.  (The minimum salary—which is relatively close to the average—is now about US$17-18 a month!) 

The Congress was also an obvious attempt by Raul to institutionalize what has been so far a family-run dictatorship.  Party procedures have been restored, empty positions filled, and new faces abound (Raul recently replaced all of the provincial governors with younger stalwarts).  By keeping 70 percent of the public sector management within the military, Raul probably also expects he can force implementation of his changes more quickly; he publicly stated he wants to move from chaos to socialism.  (Where has he been the past 52 years?) 

Now, on the face of it, these changes are both partial and disappointing.  While Cuban data continue to show a relatively buoyant economy, independent estimates indicate per capita income is still below that of 1989, the fiscal position is abysmal, and the external situation even worse.  Cuba’s recent sugar harvest, for example, was the worst in a century.  Tourism, the chief export earner, has been relatively stagnant for three years, as has Venezuela’s financial support.  In spite of the agricultural reform—begun two years ago—food production remains stagnant.  Cuban debt arrears continue to grow, and the country is “off cover” for all but the Chinese, Brazilians, and Venezuelans.  The only growth item comes from Obama’s decision to allow unlimited remittances and visits by Cuban Americans.

The economy confronts three major structural problems:  the state enterprises are mostly dysfunctional; Cuba has extremely low, overall productivity; and gross investment—after years of being negative on a net basis—is still barely above depreciation levels.  No sane person expects “taking in each other’s laundry”  will reverse these, let alone generate enough productive jobs to absorb the over third of the public workforce being fired over the next three years.   

But.  But I believe change (or “informal” reforms) may accelerate.  First, one has to realize that Cuba is no longer a “hard state” when it comes to economics.  Corruption is rampant; so rampant that virtually every head of a foreign-linked sector—Cubana airlines, tourism, tobacco, rum—has been convicted of corruption.  Even Pedro Alvarez, once the all-important head of ALIMPORT who used to negotiate deals with US farm groups and state Governors, has been tried and convicted.  (Like most Cuban officials, on release from prison he headed for the US; he now resides in Tampa.)

To understand how irrelevant the VI Congress is, simply click on Revolico and note the many homes “for trading.”  While you can barter homes for homes, it is illegal to include cash or other payments in the deal.  This is done openly with no (yet) punishment.  Given the tax burden on “own account” workers, few register or pay taxes; or rather they pay only nominal sums to the block warden of the “Committee for the Defense of the Revolution.” Tips are now illegal in resorts patronized by foreigners.  This is treated as a joke.  Prostitution abounds; crime is rampant; education, health, and other vaunted public services are often provided only after bribes. 

Pandora’s box is now open.  Recent foreign observers quickly note that there is less obedience of even the most sacred laws; folks openly disparage the government; and there seems to be greater economic freedom than ever.  Understandably, while—as noted above—the formal statements still genuflect to Marxism, there is far less rhetoric about the glories of socialism as the social safety net is reduced, public workers are fired, and 52 years of that persuasion have ended in economic disaster.  Fidel is now history.  Alive, occasionally writing columns on world events, and trotted out to embrace Chavez (and visiting US Senators), he is otherwise ignored on policy issues.  All those linked to him and of less loyalty to Raul are now gone.

A cynic would remind us (and one did) of the reforms of 190-85, and of 1993-95, when the economy confronted disaster.  As soon as the challenges were ameliorated, the “reforms” (far more timid than those now underway) were reversed.  But there now seems no savior in sight.  Whatever happens to Chavez or Venezuela, it is obvious that Venezuelan subsidies will not increase.  The state enterprises remain among the least productive in the world.  The authorities have recently increased taxes on tourism.  The declining infrastructure and desultory service mean that Cuban tourism sites are now fairly uncompetitive with other Caribbean spots, let alone the now cheaper Florida options.  In spite of the agricultural reforms, including the closure of two-thirds of the (inefficient) sugar mills, agricultural production continues to fall. 

Thus, I—for one—believe the move towards a market economy is now irreversible.  The corruption combined with the desperation of Cubans will quickly expand the private activities from legal to illegal micro-enterprises (already occurring) and then to small and medium-sized firms.  One example; a recent traveler to Cuba noted that one private restaurant had valet parking, a singer, and other ancillary attractions.  All are still illegal. Timid house ownerships regulations, when they come at the end of the year, will likely lead to a total freeing of the housing markets.  Banks may now lend directly to people; while they have yet to do so, I expect this to accelerate once the bankers receive the appropriate incentives—bribes.

Then there is the recent and massive increase in immigrant remittances and travel by US citizens to Cuba.  I did not write “Cuban-Americans” because it is clear the Obama Administration will let anyone travel to Cuba.  In the last year of the Bush Administration there were 1500 citations sent to Americans for illegal travel to Cuba.  Since Obama took office there have been 19. One of the student papers presented included anecdotes from a recent tourist trip to the island.  Foolishly, I commented to some Cuban-Americans that the student must have been Canadian since she was not of Cuban origin and her trip was—as noted—pure tourism.  I was immediately deluged with example after example of travel by ordinary Americans as simple tourists; the travel agencies which package the tours are often forgetting to include the “research” or other legal reason for the trips. Canada has replaced Spain and Italy as the most important tourist provider as Cuba increasingly deters “immersion” tourism (ie, city-tourism, where linguistically capable Italian and Spanish tourists can mingle with ordinary Cubans) and concentrates on resort tourism.  And the US is fast becoming one of the top five tourist providers.

Since the US already ranks fourth in Cuban merchandise trade and provides two thirds of the remittance flows, you can quickly understand how the “blockade” is working.  And these flows have led to some interesting results.  Micro-credit is now available to Cubans; a system has arisen by which a family member in the US guarantees the credit and the Cuban then receives the loan.  Remittances were the source of over half the “own account” activities surveyed last year.  And illegal housing purchases are often made by proxies of Cuban Americans buying retirement homes.  Farmers expanding their new “usufruct” activities often can do so only because of immigrant remittances.   

While all this will lead to steadily deeper and more helpful “reforms” (actually, the expansion of the informal economy, with legality hopefully following after a lapse), there seems little reason to expect a major or significant shift quickly.  Chavez’ health, the continued role of state enterprises, the uncompetitive nature of the overall economy, remain.

Cuba is very likely to find significant deposits of oil.  A Norwegian fifth-generation drilling vessel costing $750 million was launched in Singapore recently and hired to drill north of Havana by Repsol and other European (and Chinese) firms.  It cost $450,000/day and will likely make five to seven attempts.  You don’t spend that kind of money unless you are reasonably certain something will turn up.  But even the most optimistic estimate of Cuba’s possible reserves indicates Cuba might become self-sufficient (it consumes under 150,000 bbl/day) in the longer term; and if oil is found next year it will be five years before it becomes available.  The Venezuelans and Chinese are building two 150,000 bbl/day refineries: one on the south coast near Cienfuegos (actually, this is being renovated and expanded), another on the north coast for processing Chinese crude from South America.  These, however, are projects that will both take a few more years to complete and offer few jobs and little foreign exchange (refining is the least profitable of petroleum activities; and off-shore ones are notoriously parsimonious to their hosts).  Cuba now has agreements with over 90 countries to provide medical professionals.  From Pakistan to South Africa, from Qatar to Bolivia, Cuban doctors and nurses labor at Cuban salaries (about $20/month) while the host governments pay 10 times or more to the Cuban government.  (This, of course, violates a series of ILO agreements, but as usual the “international community” ignores it.) Most—probably 30,000 out of 50,000—are in Venezuela and likely ensuring Cuba receives free oil (in fact, Venezuela should charge $27/bbl, but since Cuba never pays it is free).  Given the effect exporting doctors and nurses has had on the domestic health scene, Raul has announced he will be expanding Cuba’s doctor-training capacity to 100,000/yr.  (This compares to about 2/3 that in the US, and is probably as credible as the 10 million to sugar harvest attempted years ago!)  Nevertheless, this income will likely grow in the future, although it will depend on finding new markets for the doctors/nurses… 

Finally, the usual cautionary note.

While I am quite convinced the move towards economic markets is virtually irresistible, if chaotic and “illegal” in most cases, I have no crystal ball on its effect on Cuba’s political scene.  Raul continues to beaver away, institutionalizing the dictatorship in the hope it will last when he and Fidel are entombed.  The military remains strongly in control of both the economy and the government, if complemented by some younger civilians in provincial posts.  And Cuba’s police remain as effective as ever—using access to education, other social services, rationed food, etc.—in controlling most dissent before it becomes public.  The Arab Spring has not hit Havana.  But the desperation of Cubans, the increasing policy conflict between downsizing public work forces and limiting the growth of alternative, private work alternatives, and the likely departure of Chavez, Fidel and Raul from the scene could lead to a revolution.  An ex-Diplomat privately noted that the political scene seemed far more fragile today than it was when the USSR withdrew its support.  We’ll simply have to wait and see what happens.

  1. Follow up post #1 added on August 20, 2011 by Cubaking

    I have just returned from Cuba on my 72 research trip since 1993 and there are major changes occurring in Cuba. a market economy is developing very quickly and China is showing the Cubans how to go market. The USA missed the boat again.
    Gordon Robinson Port Alberni B.C. Canada
    .(JavaScript must be enabled to view this email address)

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