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Cuba’s Economy: Mistaken Blame

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, argues Philip Peters.

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.

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?"

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 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.

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.

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.

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.

Originally published February 2006

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