Updating of the Cuban

Economic Model

Geneva

april 25, 2013

Marc Vandepitte

Contents

1. 1959 - 1989

2. Special Period

3. Two fundamental challenges

4. Measures (update of economic model)

Introductory reflections

1. Economy: never a bright story

but correct perspective

2. Economy: embedded in society

explain why things happen

never a bright story

• Cfr. Europe

• Focus: 2 challenges

= mayor, structural, complicated

• pessimism ;

correct perspective – longest blockade in world history

– only country within 30 years: 2 x

lost trade & investment partners

– ’91: statistical collapse (probability > East Bloc)

– worse than Greece, Portugal, … no IMF, ECB, …

great resilience

Embedded in society

• Economy mere technical question = always political economy

» Priorities

» Distribution of wealth

» Social consequences

• Explain why things happen

Why they take those measures?

History

Social & political dimensions

Why now?

Path of China? Why or why not?

Part I

1959 – 1989

1. < 1959

2. 1970 – 1986: USSR period

3. Balance 1959-1989

1.Situation < 1959

• Underdeveloped

• Monoculture (sugar, nickel, …)

• Dependent and controled by USA

• 5 % most richest: 26% of wealth 50% poorest: 11%

• < 5% eat regularly meat, eggs or bread

• 1 in 4 unemployed (45%)

• 1 in 2 drinkable water (1 in 7)

• 45% no electricity

• 9% education secondary level

• rural workers: 1 in 3 malaria, 1 in 7 tuberculose

Social Situation < 1959

2. 1970-1986: USSR period

• Strong links with East Bloc (’72: CMEA) safe environment; compensated blockade

• Centralised planning: almost everything under state control

• Poder Popular (1976) formalization of grassroots democracy political reaction to the bureaucratic formalism

3. Balance 1959-1989

• Economic growth 4,8%

• GDP/capita 3%

= within the best of Latin America

= better than Eastern bloc

• Basis for for fundamental social

improvements

• But < 50% Soviet Union

Comparison Latin America ‘89

Cuba Latin

America Life

expectancy 75,4 (+1/8) 67,2

Mortality Rate

U5MR 14 (4,8x) 68

Calories 2948 (+1/5) 2490

UNESCO

School Results Mathematics

Part II

Special Period

1990 - 2005

Speciale

Period

1990-2005

1. Economy

2. Social

3. Ecology

Speciale

Period

1990-2005

1.Economy

• import -76%, export -80%

• Industrie -60%, investments -71%

• enterprises 10-20% of capacity;

70% State enterprises loss

• GDP -35% (> depression) (’94 ’78)

• Deficit : -40%

• Purchasing power -30 à 50%

• 1 dollar ~ 150 peso (salary ~ $ 1,5)

After the fall of the USSR

unprecedented economic crisis

Special

Period

• Widespread shortage:

petrol – 54%

• Import of Food: -65%

calories: 2948 1863 (-37%)

• Social Dislocation

Crisis measures 1. Foreign currency (tourism, dollar, nickel,

Biotechnology & Pharmaceuticals, ...)

2. Foreign investment, new markets

3. Financial balance (state apparatus, subsidy, free services, ...)

4. Monetary stabilization (taxes, prices, ...)

5. Restructuring of production (sugar, agriculture, independent, new sectors, new style ...)

= more drastic measures than in

2010 - !! (no change of model)

Reform of the planning system

Old style

• Extensive growth

• Giants

• Paternalism

• Technocracy

• Egalitarism

• Alienation of means

of production

New style

• Intensive growth

• Small unities

• Entrepreneurship

Responsibility

• facteur subjectif

• Material stimuli

• Link with the means

of production

Not new but now deeper

• Organised improvisation or shock

• Support of majority of population

• impressive results deficit 40% in a year and a half

external trade +70% (4 years)

monetary surplus ; inflation , exchange rate (x7)

Resumption of economic growth (qualitativ: all sectors + productivity )

Despite blockade , interest rates & terms of trade

Assessment of the

economic measures

Special Period

15 years

15 years of loss no investment in infrastructure

+ from scratch (again)

75%

GDP/cap 2007 ($ PPP)

without fall USSR

0

5000

10000

15000

20000

25000

Cu Ar C

hM

e Ve Ur

CR

Pan Br

L.A.

Pe Ec

Dom

.ES G

uPa

rBo H

o Ni

Ha

Financial Times

Banque Mondiale

0 5000 10000 15000 20000 25000 30000

Cu

Mex

Chi

Arg

Ve

Pan

Ur

CR

Am lat

Br

Co

Pe

Eq

R. Dom

Ja

ES

Gu

Par

Bo

Ho

Ni

Ha

GDP/cap 2007 ($ PPP) without fall USSR or blockade

Latin

America

Cuba

0 2000 4000 6000 8000 10000 12000 14000 16000

Mex

Chi

Arg

Ve

Cu

Pan

Ur

CR

Am lat

Br

Co

Pe

Eq

R. Dom.

Ja

ES

Gu

Par

Bo

Ho

Ni

Ha

GDP/cap 2007 ($ PPP)

Cuba

Latin

Amrica

CEPAl

Financial Times

+ Incurable injuries

• From now on: world market, credits

• Very weak peso gap peso-CUC

• Whole sectors are disturbed: agriculture

• No dismissals

overemployment > 20% (= 1mio)

Speciale

Period

1990-2005

2. Social

Social

Overall: impressive score, given the dramatic economic downturn

Social Disruption!

Social

Overall: impressive score, given the dramatic economic downturn

No closure of schools or hospitals

Infant Mortality; Life expectancy

famine in the early 90s '2000: again

the best score of Latin America

Evolution life expectancy

Men 1990-1994

63,8

57,3

72,9 73,6

Cuba Russia

Evolution infant mortality

1990-1994

11,1

17,4

9,4

19,9

Cuba Russia

Cuba vs Russia

FAO

917 894 886

770

712

577

479

Belgium Cuba GB Lat. Am. E Asia S Asia SSA

Human Development Index Non Economic

UNDP 2013

World

• GDP/cap 6 times lower than the

OECD; number 103 (186)

Human Development Index: number 26

6

88

92

98

gdp/cap

Life expectancy

Higher Educ.

Infant Mort.

Indicators of development of Cuba (in % of best)

UNDP 2013

OECD

Conclusions

1. Country: few economic resources necessary for high human development. (Cuba in hostile environment).

2. Worldwide: huge amounts are not needed to eradicate extreme poverty. = Reassuring

3. Rich countries can maintain their high level of development, even if they reverse their economic growth.

4. Cuba: every coin has two sides

Social

Overall: impressive score, given the dramatic economic downturn

Social Disruption!

Social Disruption

• Precarious living conditions – ration very tight: food (famine), hygiene

– discomfort: transport, electricity

• Demonstration-effect: tourism Jineterismo, drugs, corruption, aids

• Uncertainty

• Dual consumption: dollar vs peso

necesarry

• to protect domestic

market

• enhance earnings of

tourism

• to recover and control

foreign currency

Weak peso & Dual currency

1 dollar ~ 1 peso

1 dollar ~ 24 peso

monthly income = 450 peso ~ $17 = €14

Social gap + economic consequences ($ ~ 60% peso ~40%)

Dual currency

monthly income = 450 peso ~ $17 = €14

• Son of professor: 1 evening = monthly salary

• Prostitution

• Tourism: earn in euro ($): 3 à 5x plus Florida: earn in euro ($) > 50x plus

Miracle: school, hospitals

Speciale

Period

1990-2005

3. Ecology

Is combination of high human

development with a small

ecological footprint possible?

• High Human Developement big footprint

• High Human Developement big footprint

• Low developement small footprint

• High Human Developement big footprint

• Low developement small footprint

• Emerging countries in between both

+ going in wrong direction

Conclusions

1. Poor and emerging countries that want

high social development:

larger footprint is not mandatory.

2. Rich countries can reduce the

environmental impact without sacrificing

the quality of life.

3. Cuba: every coin has two sides

(less energy, less investment, less productivity, …)

ECONOMY/ECOLOGY

• Lack of currency, credits

• Overemployment

• Delay in investment

• Whole sectors disturbed

• Low productivity/energy

SOCIAL

• Standard of living

• Gap peso – dollar

• Demonstration effect

Two

fundamental

challenges

Part III

2 fundamental

challenges

1. The gap between the social, cultural +

intellectual development

Economic Development

2. Relationship between labor, salary and

purchasing power

Challenge 1

Ensure that economic output

(consumption, material living

conditions) is more in line with

the level of social, cultural &

intellectual development

social – intellectuel – cultural

level of rich countries

Economy

Profile of countries of the region

+ Economic blockade

Special Periode = loss of 15 years

6

88

92

98

gdp/cap

Life expectancy

Higher Educ.

Infant Mort.

Indicators of development of Cuba (in % of best)

UNDP 2013

Tension between both

There is no sufficient economic base for the high intellectual and culturel development

High expectations

(colleagues around the world and tourists)

frustrations …

ex. Engineer: no car, mobile, laptop

piano player: no grand piano

High-level training manual labor (agriculture) = victim of its own success

Productivity

Nutrition

(agriculture)

Housing

Transport

Energy

Consumption

Motivation

Corruption

Ageing population

Blockade

Reliance on tourism

Dual currency

(gap)

Bureaucracy

Peso

Very difficult: position world market + blockade

orientate to the production or services of

higher added value

+ import substitution (oil )

gradually

+ depends also on productivity & foreign investment

Dual currency

Productivity

Nutrition

(agriculture)

Housing

Transport

Energy

Motivation

Corruption

Ageing population

Blockade

Reliance on tourism

Dual currency

(gap)

Bureaucracy

• Perfeccionamiento Empresionarial 1998:

better psychosocial climate: greater

involvement & better communication and

transparency;

more demands quality & discipline

better management, more autonomy

partial result (28% of entreprises)

• Campaigns against corruption:

Fidel 2005; Raúl 2008 + role of newspapers,

but campaigns are not enough

• Salary in function of efforts 2008

Motivation, corruption,

bureaucracy

Productivity

Nutrition

(agriculture)

Housing

Transport

Energy

Motivation

Corruption

Ageing population

Blockade

Reliance on tourism

Dual currency

(gap)

Bureaucracy

Bridging the gap is

necessary, but it's far

from easy.

Cuba is already among

the best economic

performers of Latin

America

5,5

4,3

5,3 5,6

4,6

-1,9

5,2 4,5

3,2

5,8

11,2

12,1

7,3

4,3

1,4 2,1

2,7 3,2

2004 2005 2006 2007 2008 2009 2010 2011 2012

Economic growth in %

Lat. Am. Cuba Source: Cepal, IMF

hurricanes worldcrisis

Lat-Am: 4,0 %

Cuba: 5,5%

Salary almost worthless:

tourism, taxi: 3 à 5x more

crossing to Miami : 50x more

+ tourism: demonstration efect

basic products + services: (peso)

for free or very cheap

Jeans, shoes, supplements (CUC)

very expensive (monthly salary)

Challenge two

Working (hard) or not working (hard)

has few consequences

no more link between work, salary and

purchasing power

workers do not feel owners of the

means of production

motivation

corruption

Part IV

Measures:

update of

economic model)

1. Measures

2. Objectives

3. Why now

4. The path of China?

5. Means and trumps

1. Measures

• Reward on the base of effort

• Two jobs; student job

• Raise of wages in education

• Cooperatives ; decentralise;

working for own account

• Offer arable land

• Cut 500,000 to 1 million jobs in public

sector

• libreta , meals for free

• Free sale of GSM, dvd, computers, cars,

houses

• Relaxing travel restrictions

2. Six objectives

• Create new jobs

• Decentralise production

More autonomy for local producers

• Productivity (subvention )

• Formalization (legalization/reorganization)

of informal economy

• Link between work, salary and

purchasing power

• Improve infrastructure

≠ changing or reforming

model

= up dating, perfection,

improving

3. Why not earlier?

• Up to ± 2005: no choice

(sink or swim)

Special Period

Why not earlier?

• Up to ± 2005: no choice

• Fidel: december 2005: tackle corruption

• Summer 2006: Fidel falls ill

• Raúl: summer 2007: launches consultation

• 2008: 3 hurricanes

+ financial hurricane

• 2010: room for new initiatives

“I reiterate that our problems will not be

solved spectacularly. We need time and,

most importantly, we need to work

systematically and with devotion to

consolidate every achievement, no

matter how small. ”

Raúl Castro, 2007

It takes time …

« The generation which made the

Revolution has had the historic privilege, not

often seen, of being able to lead the

rectification of errors they committed, an

eloquent demonstration of the fact that these

did not have strategic repercussions;

otherwise we would not be here today. We

are not thinking, despite the fact that we are

no longer that young, of wasting this last

opportunity.”

Raúl Castro January 2012

… but time is running

4. Following the path of China?

1. Scale: balance of power towards TNC’s

2. Longest Blockade in history strong links

3. In 30 years: 2x loss of business partners

Cuba is in a very vulnerable economic

position

4. Cuban diaspora is working with the U.S., wanting a

regime change = political vulnerability

5. China: had much more retardation

accent on economic growth

6. China >’78: reaction of the Great Leap Forward &

Cultural Revolution Rectification

5. Means and

trumps

• Planning: cushion of

the whims of the world market,

natural disasters,

oil supply

• Consultation of the population

supporting power

• level of education

1,5 x students higher education than

Belgium

scientists: 260 ‰oo Cuba

21 ‰oo Mexico

20 ‰oo Brazil

ALBA

Latin America

• ALBA: (2004)

physicians oil, refinery,

know-how

• cooperation:

telecommunications, food industry,

transport, tourism

• Relations : China, Vietnam, Brazil,

South Africa, India, Malaysia, …

nickel, biotechnology, oil, R&D, credits, tourism, …