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Cuba’s Economic Reform Process under President Raul Castro:Cuba’s Economic Reform Process under President Raul Castro:

Challenges, Strategic Actions and Prospective PerformanceChallenges, Strategic Actions and Prospective PerformanceArchibald R. M. Ritter, Carleton niversit!, "tta#a, Canada



"b$ectives:"b$ectives: – %o revie# Cuba’s current economic situation&

– %o outline and anal!'e the ne# approach of the(overnment of Raul Castro&

– %o speculate on possible outcomes from the Si)thPart! Congress

Main Argument: – Current economic situation is e)ceedingl! difficult&

– Strategic re*orientation so far:right direction, still modest& slo# implementation&

– +efinitive design a#aits Si)th Part! Congress&

– +eliberate stead! reform process is no# probable



"utline:.. Cuba’s Current Economic SituationCuba’s Current Economic Situation:

-onger term economic performance&

Short term con$unctural circumstances

. %he Reform Approach so far: Character, Strengths, and ea/nesses&

Sustainabilit! of the reform process

. Congress: 0-ineamientos1 or (uidelines&

Possible results



.. Conte)t for the Reforms of 2343*44Conte)t for the Reforms of 2343*44

4. (eneral economic performance duringthe 0Special Period1, 4553*2344:

– 6uman development has been positive&

– Alleged success: gro#th and recuperation&7ut:

– Real ncome per person has not risen in pace#ith alleged economic gro#th&

– Production of (oods 8 as opposed toservices 8 has not improved&

– A range of problems continues



Source:Source: ONE, AECONE, AEC various issues and UN ECLAC, Preliminary Overview, various issuesvarious issues and UN ECLAC, Preliminary Overview, various issues



Although the Cuan economy sur!assed the levelso" #$$%, the real value of #ages in Cubaremained at around 93 percent of the 455 level

&see Chart '()

*ut: Cuba’s (+P statistics are dubious: – +he O"icina Nacional de Estadsticas &ONE( ado!ted a

new a!!roach to measuring -.P ;"<E 233=, %able 2.4.2.>3()

– /ncreased the value o" 0government consum!tion1 y23)3 !ercent4"or health, mainly – therey raising Cua5s-.P !er ca!ita and increasing its growth rate6

– UN.P 7.8 9%#% diselieved Cua5s -.P !er ca!ita and

omitted Cua "rom all 7uman .evelo!ment /ndices

Actual economic performance: #ea/



Chart 2 Cuba: Real Inflation-Adjusted Wages, 1989-2009 (esos, !oneda "a#ional

$idal Alejandro, a%el, “Politica Monetaria y Doble Moneda&, in 'ar )%erlen* ere+ et al, !iradas

a la )#onoia Cubana, a .abana: )ditorial Cainos, 2009



Average formal econom! #age is around2?@ of the 455 level&

Minimal recuperation since 455>Some receive other income

– remittances&

– self*emplo!ment – home produced (S&

– goods in /ind from the state&

– underground econom!&

– pilferage&

%hose #ithout other income sources: deeppovert!



/our#e: " C)A, 2000 Cuadro A8 '"), 2010 3able 114



Sugar sector collapse: ma$oreconomic catastrophe – Regional and local development impacts&

– Cluster of input*providing and outputprocessing activities collapse&

– >2.4@ increase in idle farm land ;to 4.2 millionhectaresB&

– Reduced foreign e)change earnings

D* >.? billion in 2343&

– 7!*product electricit! generation reduced&

– ncreased unemplo!ment&

– Ethanol production foregone



Chart 9. Cuban E)ports and mports of Foodstuffs, 455*233;e)cluding %obacco and Alcoholic 7everagesB ;Millions CPB

Source: < CEPA-, 2333 %ables A.>= and A.>G, and "<E, AEC, Harious Iears.

Food mportsFood mports



/our#e: '") A)C, 2004, 3able 111 and 2I51, and %arious issues

"ote: 6ata for 1990-1997 are not a%ailable



Causes of +e*ndustriali'ation:

%he polic! environment ;+ual monetar!and e)change rate s!stemsB&

A grossl! overvalued e)change rate&%he 4553*5> melt*do#n&

%echnological inheritance from the

SSR&nfair competition from China #ith itsgrossl! undervalued e)change rate


http://slidepdf.com/reader/full/a-ritter-bildner-conference-cubas-economic-reform-process-under-president-raul-castro-march-31-2011ppt 15/63/our#e: '"), 2009 3able 7



Source: ONESource: ONE 20092009 +ale )#9+ale )#9



Source: < CEPA-, 2333 %able A.> and Mesa*-ago, 2333. >==



-o# nvestment -evelsnsufficient investment,

– .?@ of (+P ;compared #ith 24.5@ for-atin America in 233B&

nsufficient maintenance

– Run*do#n capital stoc/:housing infrastructure, etc.



Chart 5 nemplo!ment and nderemplo!ment in Cuba, 45*2343

Source: Carelo !esa-ago:Con%irtiendo el 6eseleo '#ulto en $isible en Cuba& )sa#io ai#al, .a%ana Cuba And ComisiJn

EconJmica para AmKrica -atina ! el Caribe ;CEPA-B. 455G, 2333. La Economía Cubana: Reformas Estructurales yDesempeño en los Noventa ;MK)ico +F: Fondo de Cultura EconJmica, 4a ! 2a edicionesB.



Causes of Economic Problems

<ot ea/ 6uman +evelopment

<ot la'iness or #ea/ entrepreneurship

nstead: problems are due to

– Misguided policies&

– nstitutional deformations: e)cessive e)pansion of statesector&

– nsufficient role for mar/et mechanism&

– nnumerable bureaucratic controls in labor, product, financialand capital mar/ets&

nduce people to underta/e unproductive actions %hence the underground econom!, pilferage, blac/ mar/ets



A Central Polic! Mess*p:%he Monetar! and E)change Rate S!stem

A half*centur! of patholog! and inconvertibilit!

%#ent! !ears of the dual monetar! ande)change rate s!stems

Results:

– +!sfunction of general environment of incentives& – +eformation of people’s lives and #or/&

– +amages to the econom! and people’s #ell*being



nternational Economic Conte)t: 233*43

Continuing though modified S Embargo

Ma$or <egative E)ternal Shoc/s, :oCollapse of nic/el prices ;no# recoveredB&

o -o#er sugar prices ;no# recoveredB&

o -o#er petroleum prices:Reduced viabilit! of off*shore oil development

L postponement of e)ploration anddevelopment

Reduced viabilit! of sugar*based ethanol Lpostponement

Reduced capabilit! of Hene'uela to continuetransfers to Cuba&

oReduced credit availabilit!



Positive E)ternal mpacts in 2343:o -o#er "il import Costs ;but some oil #as

alread! subsidi'ed b! Hene'uelaB

but increasing prices in 2344

o Some#hat reduced food import costs,

but increasing in 2344&

"n 7alance: A <egative mpact,

;no# partl! in reversalBReduced Foreign E)change Availabilit!

<egative Macroeconomic shoc/



%he immediate conte)t for Cuban citi'ens:

ncome securit! of the ration boo/ is beingphased out&

6igher prices for man! basic stapleproducts&

ncertain emplo!ment prospects forman!&

A general feeling of economic vulnerabilit!



0e confront unpleasant realities, but #e are not closingour e!es to them. e are convinced that #e must brea/dogmas and #e affirm #ith firmness and confidence theimplementation, alread! in process, of Nour economic

model ’1. Raul Castro

0n socialism, it is indispensablethat in economic plans, theassignation of resources bematched strictl! to the availableresources. e cannot hope that2 plus 2 are ?. 2 plus 2 are 9. nn

fact, sometimes, in socialism, 2fact, sometimes, in socialism, 2

plus 2 comes out to >.1plus 2 comes out to >.1

. Raul Castro’s Approach to Reform



/ncluded in the/ncluded in the 00

Pro$ecto de -ineamientos de la Politica Economica ! Social1 Pro$ecto de -ineamientos de la Politica Economica ! Social1 oror

0.ra"t -uide "or Economic and Social Policy1 and the Legislation o"0.ra"t -uide "or Economic and Social Policy1 and the Legislation o"

Octoer 9%#% on Em!loyment and ;icroenter!rise6Octoer 9%#% on Em!loyment and ;icroenter!rise6

0O ithout an increase in efficienc! andproductivit!, it is impossible to raise salaries,increase e)ports, substitute for imports, increasefood production, and sustain definitivel! theenormous social e)penditures of our socialists!stem.1 Ral

0n the economic polic! that is proposed, socialismis eQualit! of rights and opportunities for theciti'ens, not egalitarianism1 0-ineamientos1

http://cafefuerte.com/wp-content/uploads/2010/11/Proyecto-CongresoPCC.pdf






Pre*233= Complacenc!



00+raft (uide for+raft (uide for

Economic andEconomic and

Social Polic!1 ofSocial Polic!1 of"ctober 2343"ctober 2343



00+raft (uide for Economic and Social Polic!1of+raft (uide for Economic and Social Polic!1of"ctober 2343"ctober 2343

7roader Problem*identification is implicit in the0Pro$ecto1 and includes:Putting unused lands into productive use,

Raising agricultural !ields,

+eveloping ne# mechanisms to reverse industrialand infrastructural de*capitali'ation

;nderta/e studies in order toB eliminate monetar!dualism, and

Provide improved capacities for more decentrali'edregional development.

Recover traditional e)ports



00Contours1 of Economic and Social Polic!

;254 guidelines, goals, or recommendationsB Economic Management Model ;>B

Macroeconomic Policies ;2?B

E)ternal Economic Policies ;99B

H nvestment Polic! ;4>B

H Science, %echnolog! and nnovation Polic! ;GBH Social Polic! ;>=B

H Agro*industrial Polic! ;>4B

H ndustrial and Energ! Polic! ;>GB

%ourism Polic! ;4>B

%ransport Polic! ;4B

Construction, 6ousing, and ater Polic! ;49B

Commercial Polic! ;5B



Essential Character:

– Purel! economic, no political elements

–"stensibl! to promote popular debate. – 0(uidelines1 onl!&

<ot intended as a 0plan1& Ma!be a 0Pre*strateg!1

– Ambitious and comprehensive

– A statement of aspirations& a 0ish*list1 orma!be an 0agenda1

– <o priorities indicated

– <o seQuencing of policies or investments – <o coordination

+oes it suggest a 0Hiet <amese Model1 or a

0Chinese Model1 "nl! partiall!



Some <otable (uidelines:Establish #holesale mar/ets for state,

cooperative and self*emplo!ment enterprises ;5B(reater autonom! for state enterprises reinvestment ;4>B

-iQuidation of nsolvent enterprises. ;4=B

or/ers incomes in state enterprises to belin/ed to enterprise performance ;45B

Monetar! and e)change rate unification #ill be

0advanced1 ;?9B ;more studiesB%he ta)ation s!stem #ill be advanced in terms ofprogressivit! and coverage, ;?= and ?GB – Real estate ta)ation at municipal level



Centrali'ed price determination #ill be maintained.

Recover the place of #or/ as the fundamental means of

contributing to the development of societ! and the

satisfaction of personal and famil! needs. ;4>3B

Modif! the structure of emplo!ment, reducinginflated state sector staffing and increasing

emplo!ment in the non*state sector ;4?*4?5B

Eliminate the ration boo/. ;4=2B

mprove agriculture& ;4==, 4G9, 459.B

Promote e)port*oriented industr! ;45GB

+evelop ne# industries such as tires, construction

materials and metallurg! ;24>, 24?, 24=B

Restructuring retailing and #holesaling. ;2>*254B



%he Core of the <e# Strateg! so far ::

#. First: do#nsi'e the state sector

-a! off redundant #or/ers&

9. Second, re*absorb displaced #or/ers in

the sel"<em!loyment and coo!erative sector6

Shoc/ %herap! ltra*<eo*-iberal=

A 0slap*in the*face1 for Fidel

+he old a!!roach was not wor>ing, des!ite ?idel5s

Se!temer assertions6



An Ama'ing Reversal of Fortune:

Te! Uuestion:

Can the micro*enterprise and cooperative sectorabsorb ?33,333 to 4,233,333 apparentl!redundant state sector #or/ers and rescue theCuban econom!

Cuenta-Propistas are no# longer stigmati'edoutcasts but have become the designatedsaviors of the Cuban econom!V



2. Polic! Changes to#ards Micro*Enterprise:

aBRange of activities: a small increase

bB Regulator! frame#or/: some rela)ation

cB %a) regime: minor change, and continuingrigor

dB -icensing: significant liberali'ation

eB Media and political environment 0de*stigmati'ed1

Conclude: Some improvement but still minor



;aB Range of activities:

– 4G finel! defined activities allo#ed&Compared #ith4?G after 455>&

%hen reduced b! 93 in 233>

ncludes 4= minor activities in 6istoric "ld 6avana

Minor increase from pre 233?An!thing not specificall! permitted is prohibited

– Mainl! lo#*tech activities&

– Hirtuall! all professional self*emplo!mentremains prohibited&



;bB Regulator! Frame#or/: 0: 0From 42 to 23 chairs11

+efinition of nfractions and Penalties

Hirtuall! unchanged& See +ecree*-a# 2G9. September >3, 23437ut license removal and confiscation of eQuipment and

products is eliminated

Prohibitions: some Rela)ation

;aBAccess to credit ma! be possible&;bBSome mproved access to purchased inputs, in future

;cB Some minor limits e)tended: 42 to 23 Paladar chairs&

;eB ncreased limits on hiring emplo!ees&

;fBPett! restrictions continue,

Prohibitions: some continued:;aB<o intermediaries

;bB<o advertising

;cB<o reasonable access to foreign e)change or imports

; B % R i C l P iti +i i ti ti



;cB %a) Regime: Comple), Punitive, +is*incentivating

For 54 small*scale activities ,

0Simplified Formula1 can be used: up*frontmonthl! pa!ments

For larger enterprises: Four %a)es:4. Sales %a) on (oods and Services for G of the 4G

activities ;43@ of (ross RevenuesB

2. %a) on 6iring of or/ers

>. Social Securit! %a)

9. ncome %a):%a) rates: from 2?@ to ?3@

%a) 7ase: =3@ to 53@ of (ross Revenues

Effective rate can e)ceed 433@



Evaluation of <e# %a) Arrangement

4. 6ighl! comple) for the G larger t!pes of firms&

2. 6igh 0effective ta)ation1 rate #ill promote non*compliance

>. %a) on hiring #or/ers #ill discourage hiring

and legal $ob*creation9. Comple)it! and high rates #ill discourage

underground enterprises from becoming legal

?.Enterprise 0Stunting1 #ill continue: e)pansionand economies of scale discouraged orprohibited



Additional Positive Changes:Additional Positive Changes:

7roadened eligibilit! for self emplo!ment:non*retired or non*disabled ma! obtainlicenses

Rental of facilities from citi'ens or the state

is easier

Sales to state entities is no# possible&

se of ban/ing facilities and ban/ credit #ill

be possible&Cooperative ventures are no# encouraged;ta)is, beauticiansB



Can the Microenterprise and Co*op sectorsgenerate 4.2 million ne# $obs b! +ec. 2342

%he positive side:

4.Stigmati'ation reversed:

from outcasts to heroes of theeconomic recover!

2. -icensing liberali'ed #ill be helpful&

>. Small increase in permitted activities&9.%a) change: increased deductibilit! of

costs from gross revenues for ta)es has

for some activities&



?.?. Rental of facilities from citi'ens or theRental of facilities from citi'ens or the

state is easier state is easier

=. Regulations eased some#hat&

G. 6arsh punishments for infractions arecut, though fines remain&

. se of ban/ing facilities and ban/se of ban/ing facilities and ban/

credit #ill be possible&credit #ill be possible&

5. mproved access to inputs perhaps infuture



"n the <egative Side::

##. 6eav! ta)ation continues: firms #ill remain

underground&2. %a) on hiring #or/ers #ill discourage $ob creation&

>. <arro# definition of legal activities #ill limitenterprise and $ob creation&

9. E)clusion of high*tech and professional activities bloc/ development of /no#ledge*intensiveenterprises and #astes the training of the highl!

educated@ nnovation throughout the econom! bloc/ed

?. Some bi'arre restrictions and prohibitions remain



=. Restrictions on hiring #or/ers remain

Stunting of enterprises #ill prolonginefficiencies

+isincentives to legali'ation of undergroundactivities continue

Contempt for the -a# and non*compliance is

promoted b! continuation of apparentl!frivolous restrictions

Results Results



. Results. Results

E)pansion of Small Enterprise and $ob creationhas been too slo# to absorb ?33,333 b! March 4,2344

@ 4G4,333 ne# licenses b! March 43, 2344

Proposed shoc/ therap! re emplo!ment#as too brutal to be implemented:

Firing of #or/ers ;?33,333 b! March >4B hasbeen postponed till after Congress.

Probable pressures to reverse theliberali'ation process if it is not #or/ing&



Source: "<E: Anuario Estadistico de Cuba, various issues



<e# Paladar, Februar! 2344



Repairing a 7ic!ta)i

"ther Polic! nitiatives: Wul! 233= "ctober 2343



"ther Polic! nitiatives: Wul! 233=*"ctober 2343

233=233=

Permission for Cuban citi'ens to use tourist hotel facilities

Permission to acQuire personal cellular phone contracts

Permission to rent cars previousl! reserved for foreigners

Rela)ation of rules regarding purchase of computers, +H+ pla!ers,etc.

0Resolution on Regulations for -abor +iscipline1

233G

-egali'ation of hard currenc! salar! supplements to Cuban emplo!ees‐

of foreign $oint ventures

233

+ecree*-a# <o. 2?5: ten*!ear leases of unused stateland to small farmers

+ecree -a# <o. 2=3, Financial incentives to attract teachers bac/ totheir profession

2335



2335

Replacement of Fidel Castro’s economic team and resignation of thePresident of the Central 7an/

Proposal to reduce subsidi'ation of rationed products

Replacement of #or/er’s dining facilities #ith an income increase

2343

Rela)ation of restrictions on private ta)is

E)periment #ith cooperative beaut! and barber shops

Mar/ets for inputs for small farmers

Raising of retirement ages from ?? to =3 for #omen andfrom =3 to =? for men

-iberali'ation of sale of building materials to citi'ens

-egali'ation of 55*!ear leasing of land to foreign touristcompanies ;August 4>, 2343B

Announcement of -a!*offs of ?33,333 state sector #or/ers to beincorporated into self*emplo!ment. ;September 4B

s the Reform Process Sustainable



s the Reform Process Sustainable

0Fidelistas1 are li/el! running some interference&

e.g. Wose -uis Rodrigue': the Cuban econom! isthe Cuban econom! is

<"% in crisis<"% in crisis))

0O0Oesencialmente, el modelo se puede sostener, la pruebaesencialmente, el modelo se puede sostener, la prueba

es Que la economXa ha seguido creciendo, desde el aYoes Que la economXa ha seguido creciendo, desde el aYo

4559&4559&

Es verdad Que la tasa de crecimiento en 2335 fue de 4.9@Es verdad Que la tasa de crecimiento en 2335 fue de 4.9@! en 2343 llegJ a 2.3@, pero el hecho es Que no ha! un! en 2343 llegJ a 2.3@, pero el hecho es Que no ha! un

retroceso a pesar de todos estos problemas.retroceso a pesar de todos estos problemas.





Probabl! <ot Reversible %he 0Fidelista Model1 is discredited

Fidel himself is irrelevant and discredited&

0Fidelistas1 are also discredited 7! current realities,

7! the 0Pro!ecto de -inamientosO1

7! Raul’s statements and speeches regarding the

need for a ne# economic approach 7! publicit! re the need for a ne# approach

Fidelista Ministers have been mostl! replacedb! Raulistas&



– Raul’s militar! colleagues have moved intomanagement throughout the econom!

Raul and the militar!: pragmatic since the 4553s7ut management militari'ation is also problematic

– Raul appears to have emerged from the shado#

of his elder brother&

Raul seems to #ant his o#n economic model,

Raul seems to #ant his o#n legac!

n summar!



n summar!

-o# probabilit! of sufficient $ob creation b! the

micro*enterprise and cooperative sectors to 4,233,333

in the ne)t fe# !ears.

Further liberali'ation #ill be necessar!:

4. Modif! the ta) regime&

@ Eliminate ta) on hiring #or/ers&@ Permit all costs to be deductible from gross

revenues for calculating ta)able income&

2. 7roaden of permitted activities&

>. Rela) ve)atious regulations&

9. +rop hiring restrictions



?. Establish microcredit institutions;international assistance is available forthisB

=, mprove access to #holesale inputpurchase

G. -egali'e 0ntermediaries1;permitting speciali'ation bet#een

producers and vendersB

. Permit Advertising

5. Establish a 0Ministr! for SmallEnterprise1VVV



.. Si)th Part! CongressSi)th Part! Congress::

+iscussion oriented around+iscussion oriented around0-ineamientos10-ineamientos1

Producing a coherent strateg! or 0plan ofProducing a coherent strateg! or 0plan of

action1 from the 0(uidelines1 #ill beaction1 from the 0(uidelines1 #ill bedifficult&difficult&

Conversion of a #ish*list into a strateg!#ith concrete measures

Polic! priorities, seQuencing of measures

Results difficult to predict& ait and SeeResults difficult to predict& ait and See



– For some, e)pectations for significant

measures are lo#: rhetorical sound andfur!, but little implementation

– For others 8 dissident and mainstreamanal!sts, signs are encouraging

– Climate of opinion: decisivel! on thereform olption



M! Prediction:

A document based on the -ineamientos#ill be approved 8 probabl! alread!#ritten 8 including:

– Statement of more specific ob$ectives& – ndication of priorities&

– nclusion of some 0seQuencing1 of tas/s&

– Focus on productivit! and getting theincentive structure rightV

S f th M i El t f th



Some of the Main Elements of thereform process

– Further liberali'ation for small enterprise

– +o#n*si'ing of state sector esp. in areasthat #or/ #ell #ith small enterprise

– (reater reliance on mar/et mechanismsand mar/et*determined prices

– (eneral subsidi'ation via ration boo/ to be

replaced b! targeted social assistance – Movement to#ards monetar! and e)change

rate unification

"ptimistic againV



"ptimistic againV

Raul seems pragmatic and deliberative& accepts hard truthsand ta/es strong actions&

Fidelistas are in ;permanentB eclipse&

Problems have to be dealt #ith&

(enerational change is under #a!&

Climate of opinion has changed&

6eightened popular e)pectations for change are increasingl!difficult to ignore&

Some toleration #ith containment of critical vie#s, despite

intensif!ing 0C!ber*#ars1 and 7logger 7attles&Reform process #ill continueV

7ut ris/s are significant

%o Conclude:



%o Conclude:

Economic situation is difficult&

Polic! changes are in the right directionbut reforms so far are timid&

– E)cessivel! harsh re la!*offs

– E)cessivel! modest re private sectorliberali'ation

A d!namic to#ards further reform

measures has been set in motion, #ill bepropelled for#ard at the Si)th Part!Congress and #ill continue.

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