THE ECONOMY OF CUBA AFTER THE VI PARTY CONGRESS

1. Introduction: Changes in Cuba: key political and institutional determinants by Juan Publio Triana Cordoví

2. THE ECONOMY OF CUBA AFTER THE VI PARTY CONGRESS • Nova Publishers, 2012 • Alberto Gabriele, UNCTAD, DITC, TNCDB (ed.)

3. Introduction (i) • This book is the product of collaboration between Cuban and European social scientists. Without ignoring the devastating impact of the US embargo, it shows that Cuba’s grave economic impasse is endogenously rooted in the contradictions of its peculiar version of state socialism • These contradictions led to a strongly idealistic and egalitarian bias in economic and social policies, implying a severe underestimation of the objective constraints imposed by the relevance of the law of value in the domain of social relations of production and exchange • Two of their most severe manifestations of the crisis of Cuba’s traditional state socialist model are: • the parlous state of the agricultural sector • the emergence of multiple and novel forms of income inequality. • In broad terms, the overall product of over fifty years of socialist survival has been the well-known “Cuban paradox”, constituted by the coexistence of: • very high degree of human development • abysmally low capacity to produce material goods • In turn, the paradox is related to Cuba’s unique, ever-increasing and ultimately unsustainable process of tertiarization

4. Introduction (ii) Raul Castro’s administration: • identified the core roots of Cuba’s persisting underdevelopment • striving to implement a comprehensive program of policy measures aimed at achieving decisive structural transformations. Their ultimate goal is to make Cuba’s economy more efficient and sustainable, while preserving the fundamental values and principles of socialism. • So far, the liberalization of small-scale commercial activities and of some important markets (such as those of cars and housing) has already advanced remarkably • while productivity-enhancing changes in the key areas of industrial and agricultural production and distributions system are proving far more difficult to achieve.* • Adopting an inter-disciplinary approach based on both economic and sociological interpretative categories, this book analyzes the most crucial problems and contradictions of Cuban socialism at the beginning of the second decade of the XXI century. • The various chapters also critically evaluate the policy measures that have been announced by the government and those that have already been implemented, and posit further or alternative reform suggestions * The recent, belated breakthrough in internet communications might herald other positive developments

5. Chapter 1. Five Decades of State Socialism in Cuba: An Introduction to Post-Congress Reform Challengesby Alberto Gabriele Not differently from other revolutionary experiences Challenge of building a structurally new type of economy under conditions of: • technological backwardness • underdevelopment of production and exchange relations, • isolation from well-established international markets* • exodus of the former ruling class, with most of the country’s knowledge endowment, especially in the areas of economic management, administration, and organization * Both the USSR and China were hit for decades by various forms of trade embargoes imposed by the main capitalist powers

6. Conversely, Cuba differed FromRussia and China as: Itis a small country Its main economic and social problems did not stem mainly from an embryonic degree of development of capitalist relations of production and exchange, as it had been the case in pre-revolutionary Russia and China Rather, they were caused by the articulation of these relations – which were already prevalently capitalist in nature – around the axis of the island’s dependency from the US A classical example of “underdevelopment” according to the particular meaning attributed to this term by the “dependencia” school

7. Little had been learnt On the structuralshortcomings of the Soviet economic model on the part of world socialists, especially in the South. Why? • perception of the USSR success in contributing to the victory against Nazism in World War II • USSR’s decisive support for decolonization • intellectual climate of the Cold War • dearth of reliable data[1] • conjunctural situation occurring in the late 1950s and early 1960s, when the relative performance of the USSR[2] vis-à-vis the US and other capitalist powers looked quite good.[3] [1]This factor was to a large extent linked to the previous one. The propaganda dimension of the Cold War fed in both camps a non-objective mindset and a proclivity to believe in their own discourse. Nowadays, the propaganda component of ideological rivalries and geopolitical international relations, far from disappearing, is more hidden and sophisticated. However, more relatively objective and reliable economic data on virtually all countries in the world are potentially available now than was the case fifty years ago. Moreover, access to it by independent researchers is facilitated by the diffusion of modern electronic technologies. [2]Actually, Guevara rapidly developed a deeply critical view of the Soviet economy. However, his perspective, while ingenious, was vitiated by an idealistic bias, and did not withstand the test of historical experience. [3] The tragic failure of the Great Leap Forward was broadly contemporary to the victory of the Cuban Revolution. Little about it, however, was known at the time even inside China itself.

8. Cuban leaders did not have Much more theoretical tools to build up a socialist economy than the Russians in 1917 or the Chinese in 1949 Rather they lacked: • the deep intellectual tradition of Russian Marxists (which contributed to allowed Lenin to revert to the NEP at a relatively early stage) • the administrative and managerial experience acquired by the Chinese Communist Party in running the conomy in vast regions under its military control (inhabited by tens of millions of people) during the 1930s and 1940s

9. The US embargo had a far reaching impact… • Devastating ,due to Cuba’s extreme dependency • Along with political and military threats, contributed to perpetuate a sort of permanent quasi-emergency state, making it particularly difficult to rationally plan and implement a long-term development strategy • Forced Cuba to rely almost exclusively on the USSR and its Council for Mutual Economic Assistance (CMEA) allies for trade, economic, and financial cooperation, forging an uneven partnership relation that led the country to adopt a paternalistic and extremely distorted international trade pattern

10. …adding to the socialist system’s distortions • The de-linkage of Cuba’s terms of trade from the world structure of relative prices not only deepened the island’s dependence on exports of sugar and a few other raw or primary commodities and traditional commodity-based products…but also contributed to distort the range of technological alternatives faced by planners. • Goods-producing sectors, and agriculture in particular, adopted more capital- and energy-intensive techniques than those that would have prevailed under ‘normal’ market-based capitalist conditions • Dependence on imports intensified both in the primary and secondary sectors • These contradictions came with an enormous cost after the fall of the USSR

11. Key theoretical fallacy (endogenous): Denial • Of the basic and fundamental difference between the socialist and the communist principles of production and distribution • Due to the continuing validity of the law of value under socialism,as demonstrated by • theory (since the XIX century) • almost a century of worldwide historical experience since 1917

12. Why is the law of value still around? This key theoretical issue cannot be treated extensively here, but basically: • both socialism and capitalism (in spite of their major differences[1]) are based on the production and exchange of commodities and services • in both systems the production and exchange in the productive sphere of the economy generate a surplus • relative pricesmust broadly reflect the underlying structure of costs • a cost structure can be seen as correspondent to the average amount of human labor time currently required to produce different goods and services, under the environmental, technological, and institutional conditions prevailing in a given society in a certain period of time • if workers and machines are not allocated properly across the socialist economy, and are not remunerated predominantly according to their contribution to social production, basic economic equilibria are violated, and the socialist economy cannot function well [1]Various types of socialist systems can be considered either as • historical variants of a mode of production different from capitalism • different socioeconomic formations (as I maintain)

13. Prof. Vasapollo* argues • “...monetary-commercial relation survive under socialism and everything appears to suggest they will be there for a prolonged period of time, the length of which is not clear, neither in theoretical nor in practical terms” • the (effective) realization of socialist property and of other forms of property requires the…utilization of monetary-commercial relations during the complex process of socialist transition. Yet, there were several attempts to deny or minimize the role of these relations in almost all socialist countries, and this mistake has implied a very high cost in the endeavour to construct the new society” This problem has been more severe in some countries and epochs than in other ones: • Great Leap Forward in China • re-centralization periods in Cuba * Vasapollo L., 2011, (ed.) L’economia cubana non e’ una scienza triste, Achab, Verona

14. A particularly centralized version of the Soviet socialist model • strong egalitarian policy bias • non-market policy approaches dominated • material incentive-based policy tools were despised, underutilized

15. A cyclical, stop-and-go pattern of economic policymaking • Centralizing, excessivelyanti-marketpolicies lead tohard times: • Inefficiencybecomesevident • Prudent market-oriented changes Things slowly begin to improve thanks to: • positive impact of partial reforms • and/or favourable exogenous factors • Policy-makers relax and attempt a new re-centralization drive

16. 5 cycles since the 1980s • 1980-1986, decentralization (I) • 1987-1991, recentralization (II) • 1992-2001, decentralization (III) • USSR collapseforces Cuba’s planners to deal with world prices: deep crisis, special period • famine, mass starving avoided thanks to positive side of egalitarian institutions and culture • selective and cautions opening up to trade, FDI, market • Slow recovery, but… • 2002-2005, recentralization (IV) • 2006-present, decentralization (V) Decentralization unambiguously led to efficiency gains and better economic performances, and vice versa* * See Doimeadiós Reyes Y., 2007, El crecimiento económico en Cuba: un análisis desde la productividad total de los factores Universidad de La Habana, La Habana, 2007

17. Decline of goods production (i) In a small country, in the context of themodern globalizing world more and more difficult tosustain thedomestic production of tradablesunder excessivelyinefficient conditions Traditionally, most goods are tradable, most services are not* Nowadays, the bulk of goods production is shifting into GVC, less so services GVCs, domestically and internationally, are an intensively price-, trade-, market-based form of production * OJO! Presently, this is less and less true, especially in Cuba

18. Decline of goods production (ii) • Disrespect for the law of value • Irrational price structure • Over-egalitarian and distorted wage scales, incentives • Hyper-centralized planning All but impossible to achieve international competitiveness in most goods producing activities Led therefore to their continuous decline

19. Tertiarization Two main contradictory forces drove this process 1. The State’s extraordinary capability to capture resources from the rest of the economy • and to earmark them (rather efficiently) towards the direct and universal provision of social services • in order to satisfy the basic needs of the population[1] • The combination of hyper-centralized planning with an extremely distorted domestic structure of prices and wages • all but impossible toachieve international competitiveness in most goods producing activities, and led therefore to their continuous decline Thus, the relative weight of services kept increasing. But… which services? [1] This capability explains the unique dichotomy between poor economic performance, on one hand, and good and ever-improving human development, on the other hand, that is so typical of Cuba . Cuba’s Human Development Index, as estimated by UNDP, is much higher than the Latin American average. Even more telling is the rank differential between human and economic development: “If positive, this indicator shows that a country is faring better in terms of human development than in terms of economic development than the world average, and vice versa. Cuba's rank differential is 44, the highest in the whole sample of 182 developed and developing countries

20. 2 categories of services (SS) • Infrastructural and other goods production supporting Services (IS) • Directly Needs-oriented Services (DNS) Caveat: Validity and applicability of this aggregation criterion is limited, among other things, by the availability of data.

21. IS • Rather than directly satisfying human needs, they constitute a necessary infrastructural support for the production and transportation of goods • Ex. Transport Telecom Energy • capital-intensive • Multiple backward and forward links • IS performance strongly and robustly correlated with that of goods-producing sectors • Caveats: • Strength of forward and backward linkages with the production of goods varies from one services activity to another • To some extent, for instance, services such as transport and communications also cater directly to household's needs • Physical capital intensity also varies across both categories of services.

22. DNS • Mainly directly geared towards fulfilling basic human needs • also other types of services (R&D,S&T) • Labour-,skill- and knowledge-intensive • In many DNS (and particularly in health and education)knowledge and direct human contact traditionally constitute the essential conditions for service provision, with comparatively little need for any material support • DNS are de-linked from the sphere of material goods production, and as such, are also relatively self-sufficient and isolated from the rest of economy • Caveats: • In the peculiar Cuban reality also tourism is skill- and knowledge-intensiveTourism ( including its ancillary and related activities, among them taxis and handicraft) is the only large and expanding sector where relatively satisfactory incomes can be earned legally in the reality of the Cuban economy . As a result, it attracts an inordinate amount of human capital. • Of course, this line of reasoning cannot be pushed too far, especially in the 21st century. In the old times, knowledge was mostly transmitted orally from an individual teacher to a small number of pupils, and doctors tried to save patients mostly prescribing health-enhancing behavioural changes or administering homemade herbal potions. Modern health and education services are increasingly dependent on access to goods such as drugs, medical equipment, books, journals, and computers

23. GDP STRUCTURE 2000-2010 90.0 80.0 70.0 60.0 PM 50.0 IS 40.0 SDN 30.0 20.0 10.0 0.0 2000 2004 2005 2006 2007 2008 2009 2010 25.0 21.6 19.0 17.5 19.0 19.1 19.4 18.2 PM 73.8 77.6 79.9 81.5 79.7 79.4 79.4 81.1 IS 30.3 36.9 40.6 37.8 38.4 40.2 41.0 41.9 SDN Goods production declines, services up to over 80% of GDP

24. Unending tertiarization • Services constituted over 2/3 of Cuba’s GDP already in the early 1990s, and grew to ¾ by the turn of the century • Since them, the weight of services in GDP kept increasing further (it is presently around 4/5), while the share of GS is about 20%.[1] Thus, the tertiarization of the Cuban economy further intensified in the 2000s • The exacerbation of Cuba’s tertiarization process during the 2000s is superficially similar to trends observed in some other Latin American countries, but completely opposite to the trends exhibited both by Asian market-socialist countries and by newly industrialized capitalist Asian countries [1] Trends in the employment structure broadly follow those of the GDP. However, there is still a relatively high share of people living in rural areas, many of who are underemployed

25. Structure of the services sector, 2000-2010 70.0 60.0 50.0 40.0 IS DNS 30.0 20.0 10.0 0.0 1 2 3 4 5 6 7 8 59.0 52.0 49.0 54.0 52.0 49.0 48.0 48.3 IS 41.0 48.0 51.0 46.0 48.0 51.0 52.0 51.7 DNS DNS UP, IGPSS DOWN

26. Internal evolution of services • The negative performance of IS was broadly consistent with the -decline of the GS • In a specular fashion, DNSs increased both in terms of GDP share (to over 40%) and share in total services (to just over 50%) • In turn, the performance of the various DNS activities was uneven. • The GDP contributions of Hotels and Restaurants, S&T, and other Personal, Community, and Association Activities declined slightly. Those of Public Administration, Defence, Social Security, and Education moderately increased. • What really catches the eye is the major rise of the share of Health and Social Assistance – from 7.7% in 2000, to 15.1% in 2005, and finally to 15.8% in 2009 • The extraordinary boom in health explains most of the overall increase in the weight of the service sector in Cuba’s GDP[1] Conversely, the GDP contribution of agriculture, which was already minimal at the beginning of the decade, declined even further to less than 4% by the end of the decade

27. From a health-based survival pattern… • The health boom reflects the surge of a new type of export, which completely transformed the structure of Cuba’s foreign trade • Professional services, and health services in particular, have become the island's largest foreign exchange earner since the mid-2000 • Cuba had been serendipitously building up its comparative advantage in this area through decades of human capital investment in social services • Over 100,000 Cuban health workers have been travelling abroad, often for prolonged periods, since the early 1960s. • Cuba receives part of its health export earnings from services provided to foreigners, who are treated in hospitals, clinics and other specialized institutions (according to the modalities of so-called “health tourism”) • Yet, the bulk of foreign exchange earnings stems from the services provided by Cuban health specialist who reside abroad, working mostly in Venezuela and other ALBA countries

28. …to a knowledge-based development path? • The sustainability of such a peculiar trade structure is precarious • The exodus of the best doctors has already severely weakened the ability of Cuba’s famed public health system to assist its own citizens • The potential for health services expansion in the short term has been exhausted, as proven by their quasi-stagnation in 2009 and 2010 • In the future, professional services, and the health cluster in particular, might not only contribute to gain foreign exchange, but also to the emergence of a knowledge-based development path

29. In the short- to medium-term, however • No escape from the urgency of revitalizinggoodsproduction • Mainlyagriculture and industry

30. Will the vicious circle be finally broken? For the first time, and still often in a shy and cryptic form, Cuba’s structural problems are now increasingly acknowledged as being largely endogenous* Raúl Castro’s leadership has the historical merit of having begun to tackle them courageously and systematically * notwithstanding the gravity of the embargo

31. Raúl and the perfectioning of Cuban socialism • After a long period of uncertainty, the government began to act forcefully towards the end of the first decade of the XXI century • Re-orienting the axis of economic policy towards decentralization and liberalization • Raúl Castro himself acknowledged the structural shortcomings of the state socialist model with unusual frankness[1] • Concrete reform measures were slow to come [1]Among the main structural problems, acknowledged on several occasions by President Raul Castro, the following are the most pressing ones: the scarcity of foreign exchange; the distortions in relative prices caused by an overvalued exchange rate and by the lack of effective convertibility; monetary duality; the segmentation of markets; the collapse of the sugar industry; the persisting crisis in the agricultural (and especially food-producing) sector; the widespread lack of efficiency among public administration and State-owned enterprises

32. 2 necessary conditions: • ENDOGENOUS: Respect for the law of value, and more generally for the role of commercial-monetary relations of production and exchange • Drastic reform of prices structure (including exchange rate and wages) • EXOGENOUS (partly)*: Investment/credit *ALBA, China, etc.: some room for geopolitically motivated – yet market-compatible - FDI, South-South coop. No coming back to old times

33. The VI Congress: is the glass half full or half empty? (i) • In November, 2010, the PCC announced the long-awaited convocation of its VI Congress for April, 2011, and issued a very important political document: the proposal for the Guidelines of Economic and Social Policy[1] for the Party and the Revolution. • The proposal constituted the most important pre-congressional document, and was to be discussed among grassroots party organizations as well as with workers and the population at large. • The draft was very comprehensive, and covered all the most crucial topics, such as monetary, foreign exchange, tax and price policies, and the model of economic management itself. Foreign trade and investment, agricultural, industrial, energy, tourism, transportation, science, technology and innovation, domestic trade policies are also open to discussion, as well as social policy in education, health, sports, social security, culture, employment and salaries. • The tone of the Guidelines proposal was very frank and self-critical, and it appeared to invite the very essence of Cuban socialism to an open debate – as long as socialism itself was not put into discussion. [1] In Spanish, “Lineamientos de de la política económica y social”.

34. The VI Congress: is the glass half full or half empty? (ii) Contrary to what many superficial external observers might have predicted: • The debate before and during the Congress was a real, vast and lively one • Opposition to change was strong • The result was a draw • Many of the most crucial reform proposals were watered down

35. An example on the principle of distribution (i) “the economic system that will prevail in our country will keep being based on the socialist property of all the people over the fundamental means of production, in which the socialist distribution principlefrom each one according to her/his ability, to each one according to her/his work will be applied” (PCC 2011, p.5).

36. An example on the principle of distribution (ii) • The socialist principle of distribution is simply “to each one according to his work”, ori.e.his/her contribution in labor-value terms, as famously argued by Marx in the Critique of the Gotha program • This principle is consistent with the persistent validity of the law of value in a socialist economy, and hence adequate to the Cuban situation. • Conversely, the above-quoted formulation in the Guidelines appears to hint to a strangely hybrid kind of society • people are expected to freely contribute to common prosperityas if they were living in a communist world • but are paid according to their work • The latter point implies the existence of scarcity and, presumably, of money and markets. • instead of having their needs satisfied just as citizens, independently from their personal contribution

37. An example on the principle of distribution (iii) What does this theoretical mix up mean? Two interpretations are possible: • A literary interpretation. • The government is willing to pay Cubans according to their work • but still expect everybody to contribute selflessly to the common good! • utilizing as much as possible his or her personal capacities • without any consideration for the relationship between each one’s human capital and working effort and his/her salary However, the eventuality that such an absurd form of idealism can still permeate the approach to the economy of PCC leaders is very remote • A terminological confusion • What the Guidelines really mean is simply that the socialist principle of distribution according to work will prevail • This interpretation is themost plausible • would be both correct and consistent with the rest of the Guidelines and the overall change-oriented line of the PCC • indicates a strong political willingness to embark in a process of radical structural change • an important, if still insufficient, step forward in the domain of theory

38. Chapter 2: Evaluation of the impact of recent reform measures on Cuba’s agricultural performance: by Armando Nova González Until recently, a paradoxical situation in this strategic sector: • Over two million hectares of unused cultivable land • Several research centers that produce concrete and potentially useful scientific results • Sizeable infrastructure endowment that (albeit deteriorated by over ten years of lack of maintenance and investment) still embodies a important productive potential • Large and highly qualified human capital endowment. • Yet, Cuban agriculture is increasingly import-dependent (and, therefore, food-dependent), in spite of the fact that it could produce most of the imported food products under competitive conditions • Several new measures have been implemented, yet results so far are not as expected

39. 3 crucial areas • Have strongly contributed to the present dire situation • Lack of realization of property rights • Failure to acknowledge the real and objective existence of the role of the market • Non-existence of a systemic approach along the production-distribution-exchange-consumption cycle • A manifestation of the relationship between the macro and the microeconomic spheres

40. A moderately optimistic scenario • Nova also carries out a vast analysis and evaluation of the parts of the Guidelines affecting the agricultural sector • implementation of partial, half-hearted measures in absence of a systemic policy approach could lead once again to the unsuccessful conclusion of the productive cycle and to the non-recognition of producers’ property rights • However, notwithstanding the shortcomings of the approved version of the Guidelines, the author concludes that the general scenario (and, in particular, the new policy attitude towards the agricultural sector, is very favorable in the quest for achieving a renovated and effective economic model

41. Chapter 3: Cuba’s Macroeconomic Crisis and Reform. The Role of the New Non-State Actors:by Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva (with a contribution by Alexandra Wielink) The authors describe the resurging role of non-state economic agents. • Even if it is not proceeding as fast as initially planned, the large-scale transfer of labor force from the State to the emerging private sector has already begun • the most relevant socioeconomic transformation taking place in the country so far • a clear indicator of Cuba’s movement towards a thoroughly reformed model of socialism • in which the non-State sector is likely to play a far more significant economic role. • The recent labor force and economic changes in Cuba do represent a step in the right direction. • However, the reform process faces a series of challenges that will require further policy transformations, and greater flexibility on the part of the Government

42. Chapter 4: Commercial Circuits and Economic Inequality: by Sara Romano’ Sara Romanó focuses on economic inequality: • Her study adds to the growing body of literature on inequality in Cuba, most of which focuses on specific categories of actors who have been in a position to cope better – or, in some cases, worse – than others in the evolving socioeconomic environment that has characterized Cuba since the early 1990s. • A quantitative empirical study based on a model of a specific social mechanism that generates one of the several forms of economic inequality presently prevailing in Cuba. • A crucial feature of Cuba’s socio-economic structure is the coexistence of various commercial circuits. • Some individuals, in virtue of their official working position, can keep their feet on both sides of social frontiers normally separating different social worlds. As people populating these different social worlds are often willing to establish a contact between each other, the aforementioned individuals can act as intermediaries, capturing significant advantages in term of control and information. • Moreover, they are more likely to develop entrepreneurial abilities than individuals who live in socially homogeneous environments, because they are embedded in particular relationships that are conducive to engaging in continual negotiations between people holding contradictory expectations. • The author’s main conclusion is that economic reforms since the 1990s contributed to generate a new type of social structures of competition, triggering entrepreneurial opportunities for some actors and consequently spurring economic inequalities.

43. Chapter 5: Cuban reforms at a crossroads:by Alberto Gabriele and Pavel Vidal Alejandro • Material conditions of the Cuban population remain very hard • The financial crisis has only partly been overcome through a painful adjustment program. • The structural character of the contradictions and inadequacies of the traditional state socialist model is becoming increasingly evident • For the first time in Cuba’s post-revolutionary history, this fact is also openly acknowledged and recognized by the government

44. The PCC leadership does not officially declare that its strategic goal is to transform Cuba into a market-socialist economy… …along the lines of China and Vietnam. Yet, the direction of the reforms inevitably points towards: • A reduction of the (still overwhelming) role of the State • An expansion and upgrading of the role of the market and of monetary-commercial relations • the emergence of a sizeable private sector as a legitimate and significant component of the national economy • The urgency of superseding the traditional, excessive egalitarian bias of past economic policies is explicitly declared in the political discourse, along with the determination to preserve everybody’s fundamental right to have her or his minimum human needs met in terms of access to basic goods and services

45. A hard task To simultaneously achieve such diverse and intrinsically competing goals while pushing the structural reform process forward is not easy, especially in a context of extreme scarcity of domestic and international resources • Even in the most optimistic scenario, large parts of the Cuban populationwill see theirwelfare reduced in the short to medium term • Some, less numerous strata (who presently obtain modest but significant positional rents and detain a certain amount of power by exploiting the system’s very inefficiencies and contradictions) will definitely – and rightly – lose, even in the long term • Various forms of resistance to change on the part of many, be they inspired by social, ideological or even individualistic motivations, are inevitable, and cannot be simply brushed away • In order to sustain the reform process through an adequate base of consensus, a new social pact is needed