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Here’s What Happened in Cuba’s Last Major Economic Challenge

In 1990, when the USSR collapsed, Cuba endured a severe curtailment of investment, trade and general political support from a partner that had invested about $100 billion (in 2016 $US) in the preceding 30 years.

The so called “Special Period” was defined primarily by the severe shortages of hydrocarbon energy resources in the form of gasoline, diesel, and other petroleum derivatives¬† The period radically transformed Cuban society and the economy, as it necessitated the successful introduction of sustainable agriculture, decreased use of automobiles, and overhauled industry, health, and diet countrywide. Cubans were forced to live without many goods they had become used to.

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In the summer of 1993, Cuba took steps to liberalize certain areas of the domestic economy and to attract foreign resources. A second set of initiatives, including stabilization measures, was implemented in May 1994 together with a sweeping law, Decree-Law 149, against “improper enrichment.”

Stabilizing the Economy

Cuba’s macroeconomic situation in the early 1990s was dismal. The country had a very large government budget deficit, very high levels of repressed inflation (manifested through physical shortages and rampant black markets), and large cash balances in the hands of the population. To address these problems, Cuba took a number of actions to introduce fiscal discipline, including reducing government expenditures, increasing revenues, and reforming the tax system.

Meeting in early May 1994, the National Assembly adopted a resolution calling for strict discipline in the implementation of the budget law and for reductions in expenditures and increases in government revenues. On the expenditures side, the National Assembly directed the executive to take steps to reduce subsidies to loss-making enterprises, stimulate personal savings, increase revenue collection through increases in prices of nonessential goods and some services, and develop a comprehensive tax system that would be equitable, foster production and work effort, and raise sufficient revenue to balance the state budget.

A reorganization of the central state administration reduced the number of entities from fifty to thirty-two, eliminating altogether 984 organizational units, such as departments, sections, and directorates, and reducing personnel and administrative expenses.

The results of the implementation of austerity measures in 1994-95 were sharp reductions in the budget deficit and in the amount of currency in circulation. All areas of government expenditure were subject to cuts, particularly subsidies to enterprises. The budget deficit in 1994 was 1.6 billion pesos, 50 percent lower than the projected deficit of 3.2 billion pesos. For 1995 the budget deficit was anticipated at 1 billion pesos, but the actual deficit was 766 million pesos, and it was 570 million pesos in 1996,459 million pesos in 1997, and 560 million pesos in 1998. The budget deficit as a share of GDP was 39.5% in 1993, 12.6% in 1994, 5.8% in 1995, 4.0% in 1996, 3.1% in 1997, and 3.8% in 1998.

On the revenue side, the Executive Committee of the Council of Ministers decreed increases in the prices of cigarettes and alcoholic beverages, gasoline, electricity, and public transportation, and in the rates for sending mail and telegrams; eliminated subsidies to workplace cafeterias; and imposed a charge for services formerly provided free, such as school lunches, some medications, and attendance at sports and cultural events. Assessing fees on self-employed workers is a new source of government revenue.

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Image by Cuba Journal

Currency in circulation fell from 11.0 billion pesos at the end of 1993 to 9.9 billion pesos at the end of 1994, or by 10%, as a result of increased savings and price increases. Cash holdings were 9.5 billion pesos in 1995,9.4 billion pesos in 1997, and 9.7 billion pesos in 1998.

In August 1994, the National Assembly approved a new and very broad tax code, to be implemented gradually beginning in October 1994. The new system levies taxes on the income of enterprises, including joint ventures with foreign investors, as well as on the value of assets owned; earned income; sales; consumption of products, such as cigarettes, alcoholic beverages, domestic electric appliances, and other luxury goods; public services, such as electricity, water and sewer, telephone, telegrams, transportation, restaurants, and lodging; real estate holdings; gasoline-or draft animal-powered transportation vehicles; transfer of property, including inheritances; public documents issued; payrolls; and use of natural resources.

The law also provides for employer contributions to social security, user fees on roads (tolls) and airport services, and charges for advertising of products or services. Implementation of the law has been gradual, with personal income taxes, user fees on air port services, and charges on advertising becoming effective in October 1994 and the rest since 1995.

Foreign Investment

In May 1990, President Castro inaugurated the first of many foreign-owned hotels on Cuba’s premier tourist beach at Varadero. He announced that Cuba would henceforth seek foreign investment to develop its economy. These policies would soon be endorsed by the PCGs executive organ, the Political Bureau. These changes had implications well beyond their economic significance. In reversing the regime’s founding policies, President Castro and his comrades signaled that they could no longer govern Cuba as they had and as they would still prefer. Other modest market-oriented economic policy reforms further communicated to the population the state’s retreat from orthodox bureaucratic socialism.

Cuba first passed legislation allowing foreign investment on the island-mostly in the form of joint ventures-in February 1982. This innovation generated very little interest among Western investors until the 1990s, when Cuba began an aggressive campaign to attract foreign capital. In 1992 the National Assembly passed a number of amendments to the 1976 constitution clarifying the concept of private property and providing a legal basis for transferring state property to joint ventures with foreign partners.

One of the areas in which Cuba has been particularly active in seeking foreign investment has been mining. In December 1994, the National Assembly passed a new Mining Law, which became effective in January 1995, aimed at encouraging foreign investment in exploration and production of oil and minerals. In the 1990s, mining has received a boost from foreign joint ventures, primarily with Canadian investors.

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Stimulating Production

Cuba took some tentative steps to liberalize selected sectors of the economy to stimulate production. The most significant steps were those related to the liberalization of self employment, agricultural production and sales, and the decentralization of foreign trade. Concern about the possibility that economic liberalization measures would bring about the enrichment of some individuals prompted the adoption, in March 1994, of Decree-Law 149 (effective that May) to facilitate the prosecution of “profiteers.”

In September 1993, the Cuban government authorized self employment in more than 100 occupations, primarily those related to transportation, home repair, and personal services. It took this long overdue measure in order to legitimize a booming black market for personal services and handicraft production and to absorb the large number of workers unemployed and underemployed because of the idling of their workplaces.

However, under Decree-Law 186, restrictions on self-employment remain quite severe. Professionals with a university degree cannot become self-employed in the occupation for which they were trained; moreover, physicians, dentists, teachers, professors, and researchers are not allowed to engage in self-employment because education and public health services continue to be supplied by the state. Even with regard to the occupations where self-employment is allowed, restrictions apply: the self-employed have to request a license, cannot hire others, have to pay fees and taxes to the government, and are limited on how they sell the goods or service they produce. In October 1993, the state expanded the list of occupations amenable to self-employment by twenty occupations.

In June 1995, it designated additional occupations for self-employment, bringing the number of authorized occupations to 140; in July 1995, the Ministry of Labor authorized university graduates to become self-employed, provided the occupations they performed differed from those for which they were trained-for example, an engineer could be self-employed as a messenger or a taxi driver.

Shortly after self-employment was authorized, there was an explosion of home restaurants-commonly called paladares set up pursuant to the provisions of the law that authorized self-employment related to food preparation. Most of the home restaurants were modest operations and provided relatively simple staple foods, but some were fancy and charged high prices.

The government first banned home restaurants, arguing that they were inconsistent with the authorized forms of self-employment, but in 1995 it reversed course and explicitly authorized them, provided they sat twelve or fewer customers and complied with a stiff schedule of monthly fees. At the end of 1995, approximately 208,000 workers had been authorized to engage in self-employment, less than 5% of the economically active population of 4.5 million workers and about one-fifth of the estimated 1 million workers who would be subject to dismissals in an overall rationalization of state enterprises.

New fees and taxes-pursuant to the 1994 tax code-began to be charged to the self-employed effective February 1, 1996. Fees paid by self-employed taxi drivers jumped from 100 to 400 pesos per month, manicurists from 60 to 100 pesos, hair dressers from 90 to 200 pesos, and paladares charging prices in domestic currency (pesos) to 800 pesos per month. The new progressive income tax system levied taxes of 10 percent on annual incomes up to 2,400 pesos and 50 percent on annual incomes exceeding 60,000 pesos. By January 1998, the number of self-employed had fallen to about 160,000, from about 209,000 in March 1996, and reportedly has continued to fall.

In September 1993, the Council of State approved breaking up state farms into a new form of agricultural cooperatives, the Basic Units of Cooperative Production (Unidades Basicas de Producci6n Cooperativa-UBPC). The UBPCs have the use of the land they work for an indefinite period of time, own the output they produce, have the ability to sell their output to the state through the state procurement system or through other means, have the authority to contract and pay for the technical and material resources they use, have their own bank accounts and buy necessary inputs on credit, and are able to elect their own management, which must report to its members periodically. The UBPCs also have to pay taxes. The rationale for the policy change was that the shift from state farms to cooperatives would give workers greater incentives to increase production with the least expenditure of material resources.

In essence, the UBPCs operate as production cooperatives within each state farm, breaking up the larger estates and creating smaller units that compete with one another. Workers of former state farms shift from being wage workers in the employ of the state to being cooperative members, with their earnings connected to the profitability of their units. Cooperatives are able, within some constraints, to make decisions regarding how they use their land. They are permitted to set aside some land for growing agricultural products and raise livestock to meet their own consumption needs.

In early May 1994, the Council of State adopted a broad statute that would allow confiscation of assets and income of individuals who had obtained them through “improper enrichment” (enriquecimiento indebido). This law grants the government sweeping powers to confiscate cash, goods, and assets of individuals found guilty of “profiteering” and provides for retroactive application of sanctions against this offense. Seizures ordered by the Office of the National Prosecutor in “improper enrichment” cases are not appealable.

In late September 1994, Cuba authorized agricultural markets, locations at which producers of selected agricultural products can sell a portion of their output at prices set by demand and supply. Before an agricultural producer-private farmer, cooperative member, or even state enterprise-can sell his or her output in the new markets, sales obligations to the state procurement system must be met. Participants in the agricultural markets would also have to pay a fee to participate and a tax on sales conducted. In most respects, the agricultural markets authorized in September 1994 are similar to the farmers’ free markets (mercados libres campesinos) that were in operation during 1980-86 and scuttled during rectification.

In October 1994, following on the establishment of agricultural markets, the Cuban government announced that it would also allow the free sale of a wide range of consumer products through a network of artisan and manufactured products markets. The new markets could be used by artisans to sell handicrafts and also by the government to dispose of inventories of manufactured goods and surplus products made by state enterprises. These markets resemble very closely the artisan markets that were in operation during 1980-86 and eliminated during rectification.

Prior to the 1990s, Cuban foreign trade was a state monopoly, based on Article 18 of the socialist constitution of 1976, which decrees that “foreign trade is the exclusive function of the state.” Cuban foreign trade institutions mirrored those of the Soviet Union and East European socialist nations: exports were conducted by specialized enterprises of the Ministry of Foreign Trade; imports were primarily the responsibility of the State Committee for Technical and Material Supply (Comite Estatal de Abastecimiento Tecnico-Material-CEATM).

Among the reforms to the constitution implemented in 1992 was a reformulation of Article 18 that eliminated the state monopoly over the conduct of foreign trade, and shifted the role of the state to directing and controlling foreign trade. Cuba has created various foreign trade corporations that operate largely independently of the state. Examples are Acemex, S.A., a private shipping company registered in Liechtenstein; Diplomatic Corps Service Company (Empresa para Prestaci6n de Servicios al Cuerpo Diplomatico-Cubalse), which imports consumer goods for the diplomatic corps and foreign technicians residing in Cuba and exports beverages, tobacco, leather goods, and foodstuffs; Havana Tourism Company (Havanatur); International Tourism and Trade Corporation (Corporaci6n de Turismo y Comercio Internacional-Cubanacan), a tourist agency; the military-owned tourism company Gaviota; the Panama-based Import-Export Company (Compania ImportadoraExportadora-Cimex); Union of Caribbean Construction Enterprises (Union de Empresas de Construccion del CaribeUneca); and International Financial Bank (Banco Financiero Internacional-BFI), a commercial bank that promotes Cuban exports and banking relations. Cuba has also experimented with the establishment of quasi-private companies called sociedades anonimas (S.A.), stock companies controlled by government loyalists. Cuba’s sociedades anonimas have considerable autonomy from the state. Many organizations that produce goods and services are also permitted to import and export, with many working on the basis of self-financing arrangements using convertible currency.

The slight economic recovery registered in 1994 was reportedly fed by sharp growth in the manufacturing sector (7.6%) and in the electricity industry (4.4%). Cuba reported a growth rate of 2.5% for 1995, 7.8 percent for 1996, 2.5% for 1997, and 1.2% for 1998. Unfortunately, the requisite data and information on methodology to confirm aggregate growth trends are not available. Data on detailed physical output data, product prices adjusted for inflation, and the relative importance of each product within a sector and within the economy at large are also not available.

The fragmentary data that are available raise some questions. For example, the recovery of the manufacturing sector suggested by the official statistics is incongruent with the poor performance of the sugar industry, a principal component of that sector. With the exception of nickel-where foreign investment has played a key role-manufactured products showed output in 1998 below the level reached in 1989.

Agricultural production continued to decline despite the breakup of state farms and creation of the UBPCs. By the end of 1994, the state had distributed the bulk of agricultural land to the UBPCs, retaining only 25%. Unable to obtain necessary inputs, the UBPCs struggled to adjust to their new independent status after being part of large enterprises and accustomed to extensive use of mechanization, fertilizers, and pesticides; most of the 1,500 sugarcane UBPCs were unprofitable in 1994.

Overall, the agricultural sector has continued to perform poorly. By 1997 production of tubers, plantains, corn, and beans had reached or exceeded 1989 levels, but other agricultural products, such as vegetables, rice, citrus, other fruits, tobacco, eggs, and milk were still below the level reached in 1989.

The agricultural markets reportedly got off to a good start, quickly increasing the amount and variety of produce available to the public, although at very high prices. According to a 1998 Cuban survey, the origin of produce sold through the farmers’ free markets was as follows: private farmers, 60 percent of meats and 50% of all other products; state sector, 39 percent and 51 percent, respectively; and cooperatives (including the UBPCs), 0.2 percent and 8.3 percent, respectively. Prices in farmers’ markets continue to be very high and unaffordable to the average Cuban consumer. The average monthly salary of workers in the state sector was 203 pesos in 1998 and 1997, and 200 pesos in 1996. Meanwhile, prices in agricultural markets in La Habana (hereafter, Havana) in August 1998 were 4.50 pesos for a pound of rice, 10 to 12 pesos for a pound of beans, 2 pesos for one egg, and 23 to 25 pesos for a pound of pork.

Set Backs

In mid-1995, however, Fidel Castro vowed not to abandon Cuba’s socialist principles and Marxist-Leninist convictions. Subsequently, the pace of change slowed down as the government postponed implementation of enterprise-restructuring measures that would inevitably have resulted in the shutdown of inefficient plants and increased unemployment.

In March 1996, Raul Castro Ruz, the minister of defense and vice president, strongly criticized some of the economic changes that had been implemented. He lashed out at foreign influences associated with the international tourism industry and the wealth acquired by individuals engaged in legal forms of self-employment, and called for renewed ideological vigor in defense of communism. Raul Castro’s broadside squelched an incipient domestic dialogue on reforms centered on the work of several Cuban economists.

In May 1990, President Castro inaugurated the first of many foreign-owned hotels on Cuba’s premier tourist beach at Varadero. He announced that Cuba would henceforth seek foreign investment to develop its economy. These policies would soon be endorsed by the PCGs executive organ, the Political Bureau. These changes had implications well beyond their economic significance. In reversing the regime’s founding policies, President Castro and his comrades signaled that they could no longer govern Cuba as they had and as they would still prefer. Other modest market-oriented economic policy reforms further communicated to the population the state’s retreat from orthodox bureaucratic socialism.

Source: US government

Here’s What Happened in Cuba’s Last Major Economic Challenge was last modified: October 13th, 2016 by Cuba Journal