Associate Professor, Centre for Cuban Economic Studies, Havana University

Part of the series: La Letra de Temas 2020. Post-pandemic: which way now?

Lea aquí la versión en español de este artículo.

History seems to repeat itself. Three decades after the economic cataclysm that followed the collapse of «real socialism», Cuba is going through another serious crisis. This article focuses on the economic and political restrictions that the authorities face when planning economic recovery and forecasting economic development in the coming years.

The eminently structural nature of the crisis

The outlook is undoubtedly challenging. The possible paths are well-known, but no less bothersome. There is no shortage of serious examination of the problems. There is plenty of research that points to the mainly structural nature of the difficulties that plague the Cuban economic system. The economy has mutated, becoming more diversified. Despite the fact that the center of gravity of the productive system has shifted towards services [1] since the 1990s, the accumulation model continues to be essentially rentier. What is “rent”? It refers to income that does not depend on production costs. In other words, it depends of the idiosyncrasies of the product or sector [2] or on non-economic factors. Very often, the profit is appropriated by a small proportion of the producers or by a public entity, which then directs it to social or economic objectives Rents end up having a negative effect on the economic structure [3]. Not linking profit to production inhibits innovation and business development.

In the case of Cuba, after the forced interruption of the 1990s, a considerable proportion of international trade was again subject to political agreements [4]. These agreements are the ones that generate the rent. This presented the paradox that, although a notable sectoral shift took place, which brought about a productive structure that was more aligned with acquired competitive advantages, this rent caused the same imbalances as had previously been the case. The most pertinent example is the development of medical services as an export, based on the qualification and specialization of the workforce. The dominant business model turned them into something quite similar to rent from a raw material: low employment, few linkages with the domestic economy, a high degree of homogenization, and income disconnected from production costs, that is, from the replacement of the workforce. The only way to correct these problems is to stimulate a fabric of vigorous domestic production. This reasoning proposes shifting the focus of the discussion from the what, which is the dominant traditional approach in Cuba, to the how, which would allow us to address the issues that need more attention.

Along this line, it is impossible to consider a successful transformation of the economic structure detached from the imbalances that central planning and the current ownership structure cause at the enterprise level. The preference for state-controlled rent and monopoly over foreign trade has been justified by various arguments. One of them points to the restrictions forced by the US sanctions. When considered from this angle, it is necessary and legitimate to seek some compensation in external preferential agreements. Another point of view justifies the relevance of these schemes based on the social commitments of the Cuban State. What we lose sight of is that, if this arrangement hinders over time the development of a more diversified and sustainable economic structure, the resources for the generous social policy are compromised in the longer term. There are other less attractive, but equally relevant aspects. The achievement of favorable spaces for overseas insertion has consequences for policies at home. In becomes an alternative to undertaking unpleasant domestic reforms.

We are now going through a phase that capriciously tends to repeat itself every 30 years or so, preceded by a five-year period of stagnation. The most recent economic problems have come about primarily through two phenomena. On the one hand, a tightening of external financial conditions, resulting from both the Venezuelan economic decline and US sanctions. Given the impossibility of reactivating domestic production, we can only accept a new period of rationing and restrictions. On the other hand, growing macroeconomic imbalances have been occurred. These are just the flip side of the same coin. Productive failures cannot be decoupled from pent-up inflation or an increasing fiscal deficit.

The limitations of economic policy in the current context

Given the seriousness of the situation and the indisputable effects on the living standards of the people, experts at home and abroad insist on comparing the current scenario with the "Special Period", those bitter times Cubans lived through in the early nineties. It has even been suggested that strategies that were used then are again valid. Not so fast. Contemporary Cuban society is very different from 30 years ago, and so is the world.

On the one hand, there is a set of objective conditions that inhibit any proposal. Firstly, as explained above, beyond the current economic conditions, the economic weakness is a result of long-term problems which are neither easy to solve nor immediately solvable. The maturation of the necessary reform is sometime in the future. Secondly, as opposed to the nineties when Cuba managed to find spaces in an expanding capitalist world economy, now external demand will play a much smaller role. The most recent studies estimate two years as the time necessary for recovering pre-COVID activity levels. We should also add that, despite the fact that the restructuring of most of the external debt in the past decade can be considered to have been a success, the decline of hard currency revenues and recent debt defaults suggest the start of a new period of uncertainty and tension in the country's relations with its creditors. Although the impact of COVID-19 makes negotiation a little easier, the debt defaults predate these exceptional circumstances. The very fact that the economic crisis is so deep and widespread has the collateral effect of limiting the fiscal margin of rich countries to accommodate the demands of insolvent states. This difficulty is magnified by the fact that Cuba will not benefit from contingency credit from any international financial institutions of which it is not a member [5].

Uncertainty has become embedded in the world economy. And there are processes underway whose outcome and consequences are unpredictable. Two of them are of particular importance for Cuba. As a small country with an open economy, the collapse of international trade is very bad news; leverage that was available in the last great crisis has been lost. But there is more. The Soviet collapse was catastrophic for Cuba, but the western economies, with which the USSR had very limited economic relations, remained strong. Decoupling between the United States and China is another matter. The ties between the two powers are very strong, as are the Asian Giant's ties to Europe. A sudden break would damage both axes with which Cuba maintains very important exchanges, albeit of a different nature. Not to mention the aftershocks of the SARS-COV-2 pandemic. A change in travel trends would directly impact international tourism, a key industry for Cuba.

As a logical consequence, a premise of the changes to consider must be the empowerment of domestic actors and resources. The greatest obstacles to advancing an economic policy geared to reform are in the configuration and evolution of the decision-making process itself. An economic reform like the one needed by Cuba involves a redistribution of power. Since 2010 there has been an increase in terms of private production, occupying segments hitherto dominated by the public sector. It is understandable that some are overwhelmed imagining the political consequences of such changes. Unfortunately, the dominance of the "State" was not necessarily due to its organizational, technical or productive superiority, but rather to the implantation of a model sustained by an exhausted and ad hoc model. The Chinese and Vietnamese became aware of this death trap and took great steps to innovate with new institutions adapted to their specific conditions.

The consolidation of a recovery program based on the documents already approved by the highest levels of political and state power will face many obstacles. But not everyone is opposed to them for the same reasons. The bureaucracy has already been identified in the public discourse as an obstacle to "updating", although unfortunately its influence has not diminished. This multi-layered group of bureaucrats is convinced that it has a lot to lose when administrative procedures take a back seat, making roles and jobs redundant. It can be said that at this point our bureaucracy "has more to do with the social structure than with the objectives of the set of social processes that support it" (González, 2019: 104). There are examples everywhere. Countless times well-intentioned instructions have been distorted and virtually stripped of their content, limiting their ability to bring about change.

Similarly, as a result of the limited, incomplete and even chaotic nature that dominated State enterprise reform since the 1990s, public entities have stratified at various levels. They appear to be subject to disparate rules, which inevitably favor some to the detriment of others. It is essential to understand that in a scenario dominated by the central allocation of scarce resources, the proliferation of asymmetric rules of the game in deploying resources generates spurious income sources that some appropriate for themselves, and others relinquish. It could be considered a case of "institutional arbitration". It seems clear that those who receive these rents benefit from the status quo.

On the other hand, there is a renewed activism amongst certain semi-organized groups, who project themselves into public life with the legitimacy afforded by some state institutions. Quite often they attack those who defend and promote substantial reform of the Cuban economic model. Negative name-calling abounds, and they continually draw up polarized alternatives. We must choose between the existing model, which is the only one possible, and barbaric neoliberal capitalism. The official ideology is used as a flag to defend a dying paradigm, one of whose biggest problems is the inability to evolve. The idea of this being the only possible socialism is not very original either. Brezhnev already used the ruse to quell the storms of the past and reassure the cadres.

Other aspects should be taken into account, based on what has been learned in the last decade. On the one hand, it can be said that, at least in economic terms, there has been a limited institutional capacity to design and implement a coherent program of changes. This has to do, among other aspects, with the well-known deficiencies in aspects of basic economic policy, including the correct identification of structural problems. Out of ignorance, or for the sake of convenience, references to the property system and the nefarious incentives it generates throughout the economic system are avoided. In this sense, the conditions for having the most advanced debate on current problems and their possible solutions are found essentially in the academic and intellectual arena.

Unfortunately, academics only have access to certain layers of decision-making and they pass through so many filters that the message is diluted. The change in mentality referred to is a paradigm shift, which is only achieved through in-depth discussions in a wide range of groups. There is no error-correction or peer-reviewed learning. A third issue is the institutionalization of change, which has to do with, but is not limited to, the eternal dilemma between the urgent and the strategic. Which public entity is in charge of the design and implementation of the "updating program"? The Implementation and Development Commission, created in 2011, has become practically invisible. In the very demanding conditions in which the Cuban economy operates, the urgent will always prevail over the strategic. And change must not only be designed and implemented, it also has to be properly communicated. A transparent public plan not only guides, but also contributes to generating support and creating at least some level of consensus.

So much has changed in such a short time, here and internationally, that the "update" itself needs to be modified. This was something that was foreseen in the texts but has been diluted in practice.

The limits are clear but not so effective

The greatest risk is that, due to the magnitude of the problems, some practices in the formulation of economic policy, despite proven to be ineffective, become entrenched. There are at least three features that permeate the current approach. First, decision-making is predominantly administrative. Public discourse seems to measure the effectiveness and immediacy of the response based on the number of "measures" that have been adopted in the different areas. The validity of government action is not a function of those measures or the length of the documents that come out of the deliberations. A list of cosmetic changes, however long it may be, does not change the object. The focus needs to be on the content and scope of any modification. A recent example is found in the state-owned enterprise, which according to the Implementation and Development Commission has been the object of more than 100 such "measures". In 2019, another 28 were added, and they cannot claim to have achieved the planned objectives. Another example is prices. The Conceptualization establishes that «Based on these premises, prices are determined, primarily, in a decentralized manner by producers and sellers, with respect to demand…» (Cuban Communist Party, 2017) (p. 10). However, it is not that a system with these characteristics could not be fully established, which may be understandable, but that it has not even moved in that direction. In the face of internal monetary imbalances, the first reaction was to establish price caps for agricultural products, which, far from solving the problems, has exacerbated them.

A second aspect has to do with the partial nature of the approach. It is not uncommon when there are exceptional situations, to identify the "bottlenecks", "knots" or priority sectors, on which immediate action has to be taken to guarantee survival in the short term. For example, food production and therefore agriculture have been brought to the fore since 2019, and prominent in 2020's public discourse. The list of "the chosen ones" may expand depending on the real possibilities and the nature of the problem, but this confirms the pernicious trend described above. Any process or economic sector in Cuba is affected by the structural failures of the model. In this sense, the focus on the small details can provide temporary relief, but it leaves the true causes unattended. Thus, the imbalances in a productive system are bound to have more to do with systemic difficulties than with specific problems. Therefore, it is not surprising that, time and again, temporary improvements are made before the next storm erupts. Keep in mind that agriculture and everything associated with it had been identified as a central part of the reform.

A third element lies in the predominance of superficial remedies. In these months of lockdown, many examples have been exposed of criminal behavior related to the hoarding and illicit sale of all kinds of products. What is striking is the absence of any serious discussion about the origins and causes of this type of behavior. Chronic and cyclical scarcity is a known attribute of centrally planned economies. It is a consequence of the way the model operates and the perverse incentives it generates amongst economic actors. It is an economic phenomenon, not a moral or legal one. As if that were not enough, an emergency situation has been used to account for a phenomenon that has existed in Cuban society at least since the triumph of the Revolution. Another striking case is again the agricultural sector. The external financial crisis itself is known to have reduced the availability of key inputs for crop cultivation and animal breeding. Under these conditions, an increase in production, or failing that, at least the stable provision of essentials would be achieved only by improving overall efficiency. It is well documented that this is only achieved through a shock in the incentive structure, which rewards by way of higher income guarantees, greater effort or the inevitable restructuring of processes. Instead, once again rallying calls and political mobilization are used as means of achieving production targets. Likewise, parallel mechanisms are promoted to respond to the shortcomings of the state distribution monopoly, Acopio.

Still, it is highly likely that the response contains high doses of the above elements. However, it does not have to be that way.

Epilogue

Cuban authorities are facing several key challenges in 2020. Full control of the pandemic is required to allow immediate recovery and future development to be planned, seriously and relatively calmly. The management of the health emergency has been exemplary, befitting our top-class medical capabilities. But as the danger passes, concerns will focus on the economy. In turn, it is imperative to design an emergency economic program that combines the specifics of the situation with a speeding up of the economic reforms that have been stagnant in the last four years. This is important, among other things, because the VIII Congress of the Communist Party, the five-year political forum at the highest level, will be held in 2021, and until now there is very little to show in terms of fulfilling the previously agreed modest reforms. The third element has to do with complying with the legislative schedule approved by the National Assembly. It may be convenient to bring forward some legislation in order to implement the agreements of the VII Congress, those which have been inexplicably delayed, keeping almost everything that exists under the heavy cloak of transition or backlog, multiplying the already numerous obstacles to Cuba's development. That same approach must not set the pace of pending reform. Hopefully the pressure of the moment will not only stimulate the imagination, but above all, will change the correlation of forces in favor of those who prefer to choose a different path. 

References

González, M. (2019). Paredes de cristal. La burocracia y sus peligros en el socialismo. Temas, 98, 102-109.

Partido Comunista de Cuba. (2017). Conceptualización del Modelo Económico y Social Cubano. La Habana.

Schuldt, Jürgen y Acosta, Alberto. (2004). Petróleo, rentismo y subdesarrollo ¿una maldición sin solución? Nueva Sociedad, 204, 71-89. Buenos Aires, Argentina, Editorial Nueva Sociedad.

Traductora: Jackie Cannon

[1]  Specifically, all activities related to international tourism, medical services, education, transport and telecommunications.

[2] Reference to market characteristics that imply a sale price that is determined on the basis of agents' perceptions or expectations, the existence of a producer with market power, among others.

[3] There is a copious literature on economic rentier and its effects on the productive structure. The concept itself has spread. In the specific conditions of Cuba, one could think of remittances, or the fiscal revenues that result from the mere fact that the State owns the companies. For a discussion with an accent on Latin America see (Schuldt & Acosta, 2004).    

[4] Between 2005 and 2015, Venezuela represented between 50-60 percent of the total commercial exchange, including medical services. In 2016, PDVSA shipped only 45 percent of the volumes compared with previous years. In August 2017, CUPET assumed full control of the Cienfuegos oil refinery, which had been reactivated by a joint venture with PDVSA, where oil from that country was refined and derivatives were exported.

[5] Cuba is a member of the Central American Bank for Economic Integration (CABEI), a relatively small, but well-governed bank that can offer some support in these circumstances. Cuba is also a member of the International Investment Bank, the successor to the development bank in the former socialist countries.