For 200 years, Cuba was the paradigmatic case of a monocultural export economy, dependent on the production of one primary commodity—sugar—for sale to one principal trade partner—Spain during the early colonial period, the United States during the nineteenth and early twentieth centuries, and the Soviet Union after 1960. Overcoming dependency was high on the agenda of economic reforms pledged by the leaders of the 1959 Revolution. Yet despite a promising start in the 1960s and early 1970s, Cuba could not easily escape the twin afflictions of sugar dependence and a dominant trade partner. Only the collapse of European communism freed Cuba from dependent trade relations with the Soviet Union and its Eastern European allies—albeit at the cost of enormous economic disruption.

In the late eighteenth century, sugar displaced tobacco as Cuba’s principal crop, and comparative advantage soon made the island the dominant producer in the world market. For over a century, sugar brought Cuba prosperity, dulling the economic conflicts that fueled the wars of independence in Spain’s other New World colonies. The rise of sugar also linked Cuba to the United States. When a collapse in international sugar prices in 1884 pushed many Cuban sugar mills into bankruptcy, capital from the United States poured into the island, consolidating and modernizing the sugar sector. In 1898, Washington’s desire to protect these new economic interests contributed to the decision to intervene in Cuba’s war of independence. The subsequent U.S. occupation of the island tied its economy ever closer to the United States by giving U.S. firms concessionary access to the Cuban market. By the late 1920s, U.S. firms controlled 75 percent of the sugar industry and most of the mines, railroads, and public utilities.

The Revolution of 1959 was animated in part by a nationalist desire to reduce Cuba’s dependency on the United States. By 1960, Cuba’s revolutionary leaders had concluded that the path to economic independence and development was a socialist one, and before the year was out, $1 billion of U.S. direct investment had been nationalized. Cuba’s revolutionary government could not have survived Washington’s declaration of economic war without external assistance. With the help of the Soviet Union, Cuba’s international economic relations were radically transformed. By 1962, trade with the United States had fallen to zero, and trade with the Soviet Union, negligible before 1959, had jumped to half of all Cuban trade.

Having ended Cuba’s dependency on the United States, the revolutionary leadership next took aim at sugar. Their first development strategy, pursued until 1963, planned for balanced growth based on agricultural diversification and rapid development of both light and heavy industry. By 1961, bottlenecks associated with the shift from the market to central planning began to appear. Reduced sugar production (as called for in the diversification plan) led to a severe balance-of-payments crisis. Rapid industrial growth was beyond the capital-generating capacity of the Cuban economy, and the Soviet Union was unwilling to finance consistently huge deficits. In mid-1963, returning from a trip to the Soviet Union, Fidel Castro announced a return to specialization in sugar. By the turn of the decade, Castro pledged, Cuba would produce 10 million tons of sugar annually and use the proceeds to develop the rest of the economy. Meeting the target of 10 million tons of sugar in 1970 became enshrined as a matter of political prestige and regime legitimacy. Economic rationality took a backseat. Despite herculean efforts that disrupted every other sector of the economy, only 8.5 million tons of sugar were produced.

The economic reforms that followed this failure marked the beginning of a deeper economic relationship with the Soviet Union. A more rational planning process modeled on the Soviet system was installed in exchange for increased economic aid. To reduce Cuba’s perennial bilateral trade deficit, the Soviets agreed to pay higher preferential prices for Cuban sugar and nickel. Future trade credits were extended interest free, and the repayment of Cuba’s existing debt was deferred for thirteen years. In 1972, Cuba was admitted to the Council of Mutual Economic Assistance (CMEA), becoming one of the main sugar suppliers to the trade bloc.

The attractiveness of these arrangements was undeniable. Cuba was assured a reliable market for its exports, favorable terms of trade, significant development assistance, and an expansive line of credit, allowing it to live beyond its means. Cheap oil reinforced the disincentive for Cuba to diversify its exports or to develop energy-efficient production. The combination of low oil prices and high sugar prices hid the real costs of sugar production, making it seem more lucrative than it was. These structural weaknesses in the Cuban economy would become apparent only when the system of subsidized prices disappeared in the 1990s.

Overall, Soviet aid and the concomitant changes in Cuba’s domestic economic policy had a salutary effect in the early 1970s. The economy enjoyed a robust recovery, with double-digit average annual growth through 1974. In the late 1970s, however, a new economic crisis was precipitated by Cuba’s attempt to expand its trade with the West. In 1974, an upward spike in the world market price for sugar gave Cuba an unexpected hard-currency windfall, enabling it to expand imports from the West. Anticipating that higher sugar prices would last and enticed (as were many Third World countries) by the easy availability of credit due to the global glut of petrodollars, Cuba took on $4 billion of debt. By 1978, however, the world market price for sugar had declined to more traditional levels, and by 1982, Cuba could no longer maintain regular debt service. In 1986, after several restructurings, it declared a moratorium on payments.

Cuba’s hard-currency crisis forced it back into an even more exclusive economic relationship with the Soviet bloc. With little hard currency and no credit, Cuba could not buy much from the West. Trade with the Soviet Union ballooned from just 41 percent of total trade in 1974 to 69 percent in 1978 and remained at or above 60 percent until the Soviet Union collapsed. Cuba’s trade dependence on the Soviet bloc also reinforced its dependence on sugar. Under the socialist division of labor that characterized relations within the CMEA, Cuba was designated as the group’s primary sugar provider in 1981.

By the mid-1980s, Cuba’s economic situation had become precarious. Despite the preferential prices that Cuba received from the Soviet bloc, the balance-of-trade deficit expanded as domestic production of exports fell short of planning targets. In early 1986, Fidel Castro announced a new direction in economic policy. Criticizing the Soviet-sponsored socialist management system (SDPE) for fostering inefficiency, corruption, and profit-minded selfishness, he called for the “rectification of errors and negative tendencies.” The rectification campaign focused on recentralizing economic planning authority, dismantling material incentives and market mechanisms, abolishing the free farmers’ markets launched in 1980, and combating corruption. The rectification campaign did not solve Cuba’s economic problems; if anything, it compounded them. The retreat from market-based material incentives hurt productivity just as it had in the 1960s, so much so that Cuba’s trade deficit grew despite the austerity measures aimed at controlling it.

Thus, Cuba’s economy was already vulnerable when it was hit by the shock of European communism’s collapse. The postcommunist regimes insisted on trading at world market prices, refused to tolerate Cuba’s trade deficits, and shut down their aid programs. The preferential prices and aid that Cuba had enjoyed amounted to several billion dollars annually. Without the subsidies, Cuba’s capacity to import shrank by 75 percent, causing severe shortages of energy, raw materials, and food. The resulting depression slashed gross domestic product by at least 35 percent, closed hundreds of factories, and left tens of thousands of Cubans unemployed. By one estimate, real wages shrank 80 percent between 1989 and 1995.

Faced with the worst economic crisis in the history of the Revolution, Castro announced the beginning of the “Special Period in a Time of Peace” in 1990. Its central goals were, first, to reorient trade relations toward the West, attracting foreign investment capital to substitute for the lost subsidies, and, second, to produce enough food to avert serious malnutrition. The strategy included a series of market-oriented reforms, including the reestablishment of free farmers’ markets, the devolution of many state farms to cooperatives, reductions in subsidies to state enterprises, the legalization of self-employment, and, most significant, the legalization of dollars.

A key element in sustaining the ability of ordinary Cubans to get through the “Special Period” was support from abroad in the form of remittances. In 1993, in hopes of increasing the flow, the Cuban government legalized the possession of dollars and opened dollar stores (Tiendas de Recuperación de Divisas) for Cubans to purchase imported goods. The policy succeeded; over the next decade, the remittances sent to relatives by Cubans abroad rose to over $1 billion annually. At the same time, however, the purchasing power of the Cuban peso receded, creating a two-class system of consumption: those with access to dollars (from remittances, work in the tourist sector, or the black market) and those without.

Another major concession to the market was the decision in 1993 to legalize self-employment (trabajo por cuenta propia). Energy shortages after 1991 forced the closure of many factories, producing significant unemployment for the first time since 1959. Unable to provide jobs, the state was forced to recognize the reality that many Cubans had begun working in the informal sector to make ends meet. Legalizing self-employment gave the government an opportunity to license, regulate, and tax the activity. However, confiscatory taxes and intricate regulations were so stultifying that many prospective cuentapropistas either operated without a licensing or quit altogether; by the end of the decade, there were fewer licensed self-employed than when self-employment was first legalized.

Cuba’s large state farms were dependent on expensive imported equipment, fertilizer, and petroleum, which became unaffordable after the loss of Soviet assistance. They were replaced by small producer cooperatives called Basic Units of Cooperative Production (Unidades Básicas de Produccíon Cooperativa [UBPC]), in which individual families had land use rights. Moreover, the government reintroduced free farmers’ markets, in which both private farmers and UBPCs could sell produce to the public at market prices. This increased food production but only marginally. At the turn of the century, Cuba still had to import 70 percent of its food.

Once Cuba had to pay world market prices for the petroleum to run its sugar industry and had to sell its sugar abroad at world prices, the obsolescence of a large part of the industry became unavoidably clear. For several years, Cuba continued subsidizing sugar production in many rural areas where sugar constituted the only source of employment and income. But in 2002, the day of reckoning arrived, and half the island’s mills closed down. Cuba’s infrastructure, especially housing and public transportation, decayed dramatically during the Special Period for want of domestic reinvestment. Foreign investment lagged because of the political and bureaucratic maze that investors still had to navigate. But the economy stabilized in 1994 and began a slow recovery. By the end of the 1990s, the government had begun to scale back some of the market-oriented reforms, suggesting a degree of official complacency about prospects for future growth.

As sugar declined in importance, tourism rose to takes its place. Marguerite Jiménez describes not only the economic logic that drove the tourist boom but also the negative social consequences that accompanied it. Tourism was second only to sugar before 1959, but in the 1960s, the revolutionary government neglected tourism because of its association with the social ills of prerevolutionary Cuba, especially gambling, prostitution, and foreign domination. In need of hard currency during the Special Period, the Cuban leadership revived the tourism sector because it was attractive to foreign investors and had the potential for rapid growth. It became a critical component of economic recovery.

By the turn of the century, the export of medical services—principally to Venezuela—had become as important as tourism. Economic cooperation between Venezuela and Cuba dates to 2000, when the two signed their first economic cooperation agreement, and the relationship has been expanding ever since. By 2013, Venezuela was providing Cuba with some 110,000 barrels of oil daily at subsidized prices, worth $4 billion annually and representing two-thirds of Cuba’s domestic oil consumption. In exchange, Cuba provided some 40,000 skilled professionals, working mostly in health.

Fidel Castro was always uncomfortable with the market-oriented reforms his government was forced to adopt in the early 1990s at the depth of the Special Period. Speaking on August 6, 1995, he explained to Cubans why it was necessary to “introduce elements of capitalism into our system.” It was not, he assured them, because he wanted to unleash market mechanisms in the Cuban economy. “We have gone down this road basically because it was the only alternative for saving the revolution,” he said. Over the next few years, the limited reforms of the 1990s were gradually constrained, and Fidel intensified his criticism of the social inequality they had produced.

Updating Cuba’s Economic Model

When Raúl Castro assumed the presidency in July 2006 because of Fidel’s sudden illness, the Cuban economy had yet to fully recover from the Special Period. Although it had been growing gradually since the 1990s, the gains were concentrated in tourism and medical services for export. The actual production of goods on the island still lagged behind 1989 levels, and many state enterprises operated at a loss. Agricultural production was so poor that this agriculturally well-endowed island had to import 70 percent of its food at a cost of $1.5 billion every year.

Almost immediately, Raúl Castro began a crusade to bring the Cuban economy into the twenty-first century. The hypercentralized model imported from the Soviet Union in the 1960s “doesn’t even work for us anymore,” Fidel admitted in 2010. The central problem, Raúl bluntly pointed out, was low productivity. “No country or person can spend more than they have,” he reminded the Communist Party Congress in April 2011. “Two plus two is four. Never five, much less six or seven, as we have sometimes pretended.” Cuba needed to “untie the knots holding back the development of the productive forces,” starting with excessive regulations.

One of the fetters holding back Cuba’s forces of production was corruption. As Archibald R. M. Ritter recounts, the economic hardship of the Special Period led to widespread corruption, especially the pilfering of goods from state enterprises for sale on the black market. Since state sector salaries alone were inadequate for subsistence, people were forced to seek other sources of income wherever they could in order to get by (resolver).

In 2008, the government began eliminating prohibitions that Cubans found especially exasperating, legalizing the sale of computers and cell phones, for example, and eliminating rules against Cubans staying in tourist hotels. In 2011, the government legalized private real estate and automobile markets, allowing Cubans to buy and sell directly to one another without a state intermediary. And in 2013, the government eliminated the “tarjeta blanca,” the exit permit required for travel abroad; now, Cubans with a passport can travel whenever and wherever they like.

Raúl’s grand strategy for economic reform—or “updating” the economic model, as Cubans prefer to call it—was unveiled in November 2010 with the distribution of the “Guidelines of the Economic and Social Policy of the Party and the Revolution,” which outlined 291 proposals. After popular discussion, a revised version was approved at the 2011 Communist Party Congress, and since then the National Assembly has been hard at work on implementing legislation.

Cuban economists Jorge Mario Sánchez and Omar Everleny Pérez provide overviews of both the persistent problems that led to the new economic policy and its key components. The most important change in the “Guidelines” is philosophical: the “nonstate sector”—private enterprise and cooperatives—is treated as a permanent and dynamic part of the economy, not as a barely tolerated appendage. In fact, the reform process began in agriculture even before the “Guidelines” were drawn up, as Armando Nova describes. In a 2008 bid to boost agricultural production, the state decentralized the distribution system so that local produce could be sold locally, adjusted the prices it pays to private farmers, and started leasing idle state land to them. By the end of 2012, 3.5 million acres had been distributed. Cooperative farms divided their lands into family farms. Farmers’ markets have proliferated across the country, from huge covered marketplaces in Havana to roadside stands in Oriente province, with prices set by supply and demand.

Restrictions that constrained small business growth in the 1990s have been relaxed. Philip Peters, who has chronicled the evolution of Cuba’s incipient private sector since its appearance in the 1990s, reviews the recent measures aimed at revitalizing it. A confiscatory tax code was revised, and the prohibition on employing nonfamily members was eliminated. Size restrictions, such as one limiting private restaurants (“paladares”) to twelve chairs, have also been eased, so there is no longer any preordained limit on how large a “small” business can grow. The government has also legalized nonagricultural cooperatives, which, along with private businesses, are allowed to contract with state enterprises, opening a huge potential market for them. Before the reform process began, only 15 percent of the labor force was employed in the nonstate sector, almost exclusively by private farms; by the end of 2012, that had risen to 23 percent, and Cuban economists predict that by 2016, it will be as much as 40 percent.

Among the obstacles to small business growth have been the lack of wholesale markets and credit. The “Guidelines” promised to remedy both problems, and banks began providing small business loans. Remittances from the United States provide an alternative source of capital. Orozco and Hansing’s survey of Cuban remittance recipients indicates that while most are still using remittances to augment consumption, others have begun to invest as small business opportunities have opened up. Prior to 2009, the U.S. government limited remittances to $1,200 per year, and recipients used the money to supplement consumption rather than saving or investing it. Since U.S. President Barack Obama lifted the limits in 2009, remittances have jumped from an estimated $1.4 billion to $2.6 billion annually. Miami has become both the banker and the wholesale market for Cuban small businesses, the embargo notwithstanding.

Cuba has also revised its laws on foreign direct investment (FDI), offering investors more favorable terms in hopes of attracting more outside capital. Because of the history of U.S. economic domination of the island, the revolutionary government had little interest in foreign investment before the Special Period. Several revisions of the foreign investment laws since then have opened most of the economy to FDI, but as Richard Feinberg explains, bureaucratic obstacles still discourage most potential investors, depriving Cuba of an important source of capital.

As a package, Cuba’s reforms look very much like the early stages of Vietnam’s “Doi Moi” (renovation) reforms, begun in 1986, aimed at creating a “socialist-oriented market economy,” and Deng Xiaoping’s 1978 reforms aimed at building “socialism with Chinese characteristics.” With a smile, a retired Cuban official described the Cuban model as “socialism with Cuban characteristics.” But that is as far as it will go, Raúl insists. “I was not elected president to restore capitalism in Cuba nor to surrender the Revolution,” he has said. “I was elected to defend, maintain and continue improving socialism, not to destroy it.”

To do so, however, he faces a number of challenges. The real test of the reform process will come in the state sector, which still employs most of the Cuban labor force and produces more than 80 percent of the gross domestic product. The government’s goal is not to privatize the state sector but to modernize it so that it produces efficiently. The “perfeccionamiento empresarial” (business improvement) model is the same one Raúl Castro introduced in defense industries in the 1980s. Enterprises will have to adopt standard accounting practices and become profitable. Control over business decisions will devolve from central ministries to enterprise managers who will have the power to lay off unnecessary labor. By the government’s own estimate, as many as a million workers in the state sector hold jobs that should be eliminated. State enterprises that fail to become profitable will be at risk of closure.

Castro has promised that he will not subject Cuba to “shock therapy” and that “no one will be left behind.” But if market forces are given free rein, Cuba’s income disparities are sure to increase even more than they have in the past two decades. There will be winners and losers. Those who are well educated, live in cities where economic development is more dynamic, and have access to hard currency will be well positioned to thrive in a freer economic environment. Those who are low skilled or elderly, live in rural areas, have no relatives abroad to send remittances, and suffer from racial discrimination are at risk, as María del Carmen Zabala Argüelles’s study of poverty and vulnerability recounts.

The government pledges to maintain the collective welfare system of which the Revolution is most proud, including free health care, free education, and social security. But other state subsidies for consumers are already being phased out, including the ration card, which Raúl called “an unbearable burden” on state finances. Instead of subsidizing everyone’s consumption, the government plans to subsidize only the poor.

Concern about the social dislocation that will inevitably accompany such a radical economic shift is clearly on the minds of Cuba’s leaders. The pace of change will be slow and steady “in order not to err,” Raúl has said. “To those [who] are encouraging us to move faster, we say that we will continue without haste, but in a measured way, with our feet planted firmly on the ground.”

Challenges of Economic Restructuring in Cuba

Once again, Cuba is in the midst of structural change.^[1] Unlike the adjustments made in the 1990s (required by the reinsertion in the international economy that resulted from the collapse of the socialist bloc), this time the catalysts are accumulated internal pressures and an inability to deal with them within the framework of the “prevailing rules.”

For the first time in the history of the Revolution, what is involved is a restructuring of the social contract between state and society. Among the most important aspects in the economic realm is that this restructuring will gradually leave behind the model of massive social coverage based on subsidies and administrative transfers of profits, to move instead toward more targeted policies of social protection, administrative decentralization, and a reduction of the state’s exaggerated presence in economic life so as to make more room for cooperative associations and the private sector.

No less important is the recognition that in the sociopolitical realm, the current panorama is quite different from that of only a few years ago. The state’s traditional hegemony is becoming more porous as new actors and spaces of opinion formation emerge, rendering internal political dialogue more complex. Critical internal debate is gradually reemerging, as is legitimization of differences by way of an explicit rejection of “false unanimity.” Cuba is moving toward term limits—a maximum of two five-year periods—for those holding the highest offices. The January 2012 Communist Party Conference agreed to “rejuvenate the cadre rolls and avoid immobilism and inertia.”

Even before the Conference, there were calls for a change of mentality among leaders and administrators, including a call to listen to the population, at the same time that the press began to publish letters and articles exposing wrong or arbitrary decisions in state enterprises and ministries to public scrutiny. Similar measures have included a national program to “recycle” officials through professional development schools focusing on economic issues. Insofar as internal mechanisms of Party work are concerned, there have been calls to reject imitative theories and submissive mentalities and to forge its own path free of “immobilism based on dogmas and empty slogans.”

In essence, what is involved is not so much a reconfiguration of actors and rules as a change in the basis of government, on a new and irreversible scale, so as to eliminate once and for all the complacency, false triumphalism, and social apathy—a change that would constitute, in fact, a negation of the culture and thinking that have been years in the making. At the same time, there is an attempt to introduce forms of economic management that will counter deep accumulated deterioration.

It is true that some very important restrictions on the country’s activity derive from external factors. These include the global economic crisis; the U.S. policy of international harassment and sanctions affecting investors, banks, and other commercial entities; the complex effects of growing international economic interdependence; and the severe effects of climatic events, such as hurricanes and droughts.^[2] However, it is also true that today’s domestic Cuban society displays many symptoms that are not attributable to these factors, and these symptoms must be addressed. Unless there are changes, the viability of the system has clearly been compromised by increasing erosion of its capacity to achieve economic sustainability on efficient and stable bases.

Among the factors provoking internal strains are an overgrown public sector, an unbelievable overabundance of quasi-juridical rules and restrictions that have strangled enterprise-level initiatives (both public and private), institutional structures and incentives that are distorted or inherited from other circumstances that no longer apply, a powerful state bureaucracy that is resistant to change and to public scrutiny, inertia, corruption, a culture resistant to critical discussion, low productivity, decapitalization of productive structures and industry, and severe demographic pressure resulting from an aging population conjoined with a human resource drain tied to emigration. Some of these characteristics have manifested themselves most sharply in a serious deterioration of the country’s capacity to feed itself (by way of high percentages of idle land and an accelerated accumulation of foreign debt due to food imports).

These are the conditions surrounding the initiation of the program of reforms contained in the “Economic and Social Policy Guidelines”—a program that seeks to gradually meet the challenges of reviving the economy and introducing new ideas and mechanisms that will equip the country’s institutional and political life for the future. The changes whose implementation has begun imply a “loss of habitat” for the bureaucracy that has, until now, benefited from the status quo. Therefore, it is natural for the bureaucracy to respond by obstructing these changes. Such obstruction, in turn, leads in one way or another to discontent in a population that already resents limitations and shortages that result from not-always-justifiable flaws (high losses in the channels of food distribution, artificially high prices inflated by inefficient quality control, and so on) that cause significant losses that could sometimes be resolved without much additional spending. All of this erodes the credibility of institutions.

Thus, a consensus finally emerged among decision makers that partial improvements were not enough. Without radical modification of the economic bases and of the policymaking process in general, there could be no development model that would succeed in breaking the vicious circle in which widespread social coverage and control of poverty also implied massive subsidies that piled up increasing debt, losses from deteriorating efficiency, and low international competitiveness.

The Cuban Change Agenda: The “Guidelines”

The formal initiation of this process came in November 2010 with the issuance of a document called “Proposed Guidelines of the Economic and Social Policy.” This document was to be discussed in public meetings in order to collect proposals for modification, preparatory to the April 2011 Communist Party Congress. The “Guidelines,” as they are generally called, were at once the response to public opinion’s growing demands for change and the strategic platform that would define the transformations to be promoted by the government after consensus had been reached.

The consultation process had three stages. In the first, between December 2010 and February 2011, the public received a first draft with 291 articles (or guidelines). This phase included discussions in the Sixth Ordinary Sessions of the Seventh National Assembly of People’s Power. The result was an expansion of the “Guidelines” to 311 articles on the basis of the 395,000 statements of opinion that were accepted. The next stage, in April 2011, moved the scene of discussion to the provinces and into the hands of delegates and other invited figures who would shortly attend the Sixth Party Congress. In the last phase, at the end of April, the final discussions took place within five commissions at the Party Congress itself, from which emerged the final version of the “Guidelines” containing many modifications and a total of 313 articles.

With respect to the speed at which the changes listed in the document would be imple-
mented, Raúl Castro warned in his speech against sowing false hopes among the population; he said that successful implementation would require at least five years. Once they were approved, the “Guidelines” became the policy outline for the transformations to be promoted. The major changes being introduced or to be introduced in the economy, institutional structures, and (by extension) the society are thus partially codified in a process officially termed “updating of the socialist economic model.” Past measures have been placed in the context of this new and broader perspective, whose ultimate goal has been explicitly defined as adjusting the system, not dismantling it.

The document contains a diagnosis of the causes of Cuba’s economic problems, which it attributes to a lack of integration in the planning process that stemmed from overprioritizing the foreign sector and the short-term balance of payments. The main consequences are noted as disproportionate overemployment by the state, decapitalization of industries, significant expanses of idle farmland, unsustainable levels of state subsidies, a high dependence on imports, a predominance of egalitarianism without attention to social and geographic differences, paternalism, a need to strengthen local and regional development, and a need to eliminate the dual currency (gradually and to the degree that necessary conditions are present).

Major identified priorities are sustainability (nutritional, economic, energy, environmental, and social), more institutional flexibility, promoting international competitiveness, and restructuring the relations between state and society in a way that retains a dominant role for state planning and a commitment to preserve equality of rights and opportunities.

The document also points out that two different approaches must be reconciled. One has to do with short-term solutions: eliminating the balance-of-payments deficit, promoting export earnings, and substituting domestic production for imports; facing the biggest immediate problems affecting economic efficiency, worker motivation, and income distribution; and creating the necessary conditions for transition to a later era of deeper changes. The other, longer term, has to do with promoting sustainable development, which will allow for food and energy self-sufficiency, efficient use of human resources, improved competitiveness of traditional products, and new product lines in high-value-added goods and services.

In sum, the context envisioned for the coming years is framed by the challenge of how quickly and effectively the change from a vertical administrative structure to a flexible decentralization of the state can be achieved alongside a reconfiguration of institutions and incorporation of new, nonstate actors (the private and cooperative sectors) in a relationship of complementarity and competition that will have to be built almost from scratch and will surely lead to some degree of social restratification. This “structural migration” will be achieved through coordinating incentives to promote autonomy of state-owned enterprises along with parallel development of the private and cooperative sectors.

Change in Priorities: From Foreign Threat to Internal Vulnerability

The change in focus from foreign pressures to accumulated domestic problems constitutes an explicit recognition that the most immediate threat to the continuity of the Cuban political system does not emanate from the effects of the international crisis or from U.S. government policy. New policies to address adverse changes in the domestic and international environments began to be implemented in 2003. Among the most important were reorganizing the structure and functions of the State and the Government by combining some and simplifying others while seeking a better distribution of tasks among them.

Other measures included reorienting investments with a priority on short-range objectives so as to help relieve the effect of debt on the balance of payments, decentralizing the use of hard currency so as to promote exports, rescheduling debt payments, granting usufruct rights on state lands to private farmers and cooperatives, energy-saving initiatives, selective experimental elimination of state services (in the areas of transportation and food), and renting out space or equipment to individuals in some small-scale activities (taxis and local services).

More and more prohibitions were eliminated but without this being publicized through the big media campaigns that marked previous eras. This is another of the distinguishing traits of Raúl Castro’s presidency. His style is more pragmatic and directed toward solving the problems that have been identified, making a clear distinction between immediate- and medium-term goals. There is also a notable tendency toward increasing delegation of responsibilities. The modification of prohibitions began in 2006 with the elimination of restrictions on Cubans buying goods and services with convertible currency (household appliances, cellular phones, car rentals, and tourist services in international hotels). Land grants to individual farmers to stimulate domestic food production began at this same time. Also, the artificially low prices paid to farmers for their output were raised, and almost all their debts to the state were written off, some of many years’ duration. The year 2007 saw liberalization of the granting of licenses to private transportistas (drivers of taxis and other service vehicles), and more recently people have been encouraged to legally build and repair houses. (Relieving the housing deficit is one of the most important demands, and its potential for job creation has been harnessed very little.)

Other important changes have come in the area of government spending. Excessive subsidies and other “gratuities” have gradually been eliminated. For example, state-funded foreign travel by officials and managers has been cut by more than 50 percent, and an incentive program for outstanding officials, leaders, and workers costing more than $60 million a year was dropped. The budgeting of resources for some cultural, health, and sports services has been modified, cigarettes have been removed from the ration book, and provision of subsidized meals in workplace cafeterias has been gradually reduced or in some cases eliminated. Finally, the system of supplying rationed goods to households through the nationwide ration book is in the process of being dismantled, with the products (coffee, beans, oil, cleaning products, and so on) being gradually shifted into other markets whose prices include profit margins. Other changes include updating the tax system and raising electricity prices (in response to the worldwide growth in petroleum prices).

None of these measures is by itself very complex or is particularly disruptive for social development as a whole, but taken as a group, they show a will to implement, step-by-step, concrete actions that represent a profound change in the national environment, one occurring without large-scale trauma.

In a speech closing the National Assembly sessions of 2008, Raúl Castro noted that these transformations should be carried out “without hurry and without excess of idealism, in accordance with available resources.” Soon afterward, there was a temporary postponement of the process due to the urgent tasks of recovery from the hurricanes that hit the island that year.

Action resumed in mid-2009, and in late 2010 there began a new stage, going beyond piecemeal changes to the presentation of the structured ensemble of changes embodied in the “Guidelines.” In practice, the steps taken from 2003 to 2008 pointed in the right direction but were insufficient to deal with the roots of dysfunctionality.

This period gave rise to steady deceleration of economic growth while at the same time food imports were growing—a result of evident failures in the way in which agriculture was being managed^[3] —and distortions in the ratio of income to consumption deepened^[4] in the context of an environment made more difficult by unresolved issues, such as market segmentation and the dual currency. Thus, the steps taken up to that point clearly represented only a small portion of those truly needed.^[5]

The need for a reform of the Cuban economic system grew ever more evident—a reform that would assign new roles to the state and the market, to various forms of property, and to enterprise organization.^[6] More than a few studies were devoted to putting forward proposals regarding these issues,^[7] but several years passed before these received the attention they deserved.

In December 2010, the office of the president declared a commitment to these transformations in dramatic terms. In his key National Assembly speech, President Raúl Castro said, “Either we will rectify [our course], or we will run out of time perched on the edge of disaster, and we’ll sink, dooming . . . the efforts of whole generations.”

To comply over the medium term with the needed changes in the role of the state, the directives included reducing excess spending; making more rational use of existing infrastructure to increase the quality of social programs in health care, education, culture, and sports; supporting export growth; and concentrating investment in the activities that can be revived most quickly.

Proposals for immediate action included ending overspending of state budgets and underfulfillment of economic plans. The speech called for eradicating “all types of excuses, extending to vagueness and lies, whether intentional or not, when stated goals are not reached,” because supplying false data, even without fraudulent intent, can lead to wrong decisions with greater or lesser effects on the nation.

The same speech pointed out the importance of open discussion of the “Guidelines” in order to shape a democratic consensus (not excluding divergent opinions) on the necessity and urgency of introducing strategic changes in the functioning of the economy, including the legitimization and stimulus of private initiative and of cooperative associations as “irreversible” components—while also making clear that accumulation of capital by the new owners would not be permitted and that the plan would have primacy over the market.

A Decisive Transformation in the Relationship
between State and Society

One of the key immediate challenges is a short-term transition from a vertical administrative culture to a flexible decentralization of the state. This involves granting a more active role to local and provincial government while reshaping the institutional fabric and incorporating new, nonstate actors from the private and cooperative sectors, which will doubtless have important effects on future social restratification.

This dual structural shift will require coordinating incentives for promoting state-enterprise autonomy with a parallel development of the private and cooperative sector based on economic and financial criteria so as to eliminate massive dependence on state subsidies while removing artificial barriers from the areas in which self-sustainability might be achieved. This process requires innovations that include shutting down enterprises that become bankrupt, forming second-level cooperatives (cooperatives made up of other cooperatives), and allowing competition between private and state suppliers (which has already begun in farm-product sales to hotels).

Part of the Cuban adjustment requires a realignment of the visions and proposals emanating from intellectuals and technocrats. Many of the measures now being implemented had been discussed and suggested for years within these circles of thinking, without having much impact on decision making. Two of the most active intellectual forums—the journals Temas and Espacio Laical—provide clear examples of how spaces for discussion and the content of discussion have been evolving. New digital communication technologies have given rise to an unprecedented variety of actors and subjects in a sort of “parallel atomization” that has gone beyond the formal institutional framework and has also made room for the opinions of Cuban emigrants with a wide range of perspectives.

These new dynamics drive a transformation that is taking place in the culture of discussion to which state and party structures must adapt. In the Cuban state-run press and communications media, the syndrome of “captive information” and homogenization of thought continues to prevail. Although some relatively more critical analyses suggesting a moderate change of attitude have begun to appear, we are still a long way from a press that would adequately represent today’s society in all its complexity and conflicts. Raúl Castro himself has remarked on how, to get an article published that severely criticized the management of a state entity, he had to personally intervene in order to overcome resistance that hid behind the argument that we “cannot reveal our internal weaknesses to the enemy.”

The challenges associated with the transformations now beginning may be viewed in three general dimensions. The first is connected with the results of the process now under way, particularly its effects on the underlying social contract (equal opportunity, preservation of full access to social services, and state protection against vulnerability and poverty). This approach recognizes that the social changes that will necessarily occur (restratification of socioeconomic sectors, greater polarization of incomes, and so on) are still in process, and it is still too early to know how far they will go.

In this dimension, it is equally important to see that if an economistic vision of the changes prevails, that would carry the latent danger that social impacts would be minimized and that the need to provide parallel supports that absorb some of the social costs would be undervalued. (Such supports include increased retiree pensions, retraining and placement of workers, protections for vulnerable low income families, and so on.) Although it has been stated that no one will be left out in the cold by this transition (the transition from the traditional massive state subsidy of products to a more focused subsidization of low-income individuals and families), adjustments in income levels will not necessarily keep up with spontaneous changes in prices that will occur when private supply mechanisms increase in a context of scarcity. In fact, the polarization of incomes will continue to widen the gap between state employees and private sector workers no matter how aggressively the latter are taxed given that so far the problem of the immense parallel underground economy has not been resolved.

A second dimension of analysis is associated with the political consequences potentially implied over the longer term by an expansion of the private and cooperative sector in the midst of an environment in which other problems, such as corruption and growing polarization, have not been resolved. The decision to promote a larger self-employed (private) sector constitutes an important transformation reflecting the emergence of a different way of thinking that does not assume a dichotomy between state and market in which one side or the other must prevail (as was assumed under the conception of socialism prevailing for the previous fifty years).

The socialist implosion of the 1990s and the changes it brought to Cuban society and economy allowed for the emergence of a private sector—“permitted but not desired or promoted”—without any “facilitating” legislation or a policy of state protection or recognition that would include incentives, links to state entities, and so on. In that decade, what dominated was the notion that allowing room for a private sector was an ad hoc, temporary phenomenon (i.e., one lasting only until conditions improved and there could be a return to the state-owned property and employment of the 1980s). This position was clearly linked to fear or rejection of the possible increase in social inequality that would result. Thus, what emerged was an eminently urban private sector engaged in small-scale activities of providing prepared foods, lodging, transportation, repairs, and so on that excluded any interaction or links between the state and the private sector. The regulatory environment was primarily fiscal (taxation) and restrictive concession of licenses.

In spite of this relatively hostile environment, these limited actors created a sector of self-employment for economic survival—a peculiar development in which small private businesses took advantage of the market niches allowed by the state but without much hope for future success. (Research has shown that at least 50 percent of small private business shared this perception.^[8])

As the idea of an eventual reversion of the private sector has explicitly disappeared, the rationale underlying that model—which saw coexistence of such a sector with a socialist economy as impossible—has been subverted. Now, the state has become the main promoter of the private sector’s formally institutionalized relation to the market and its independence of action. In principle, this reconsideration also allows for that sector to compete with the traditional state dominance in areas not considered essential.

Some of the changes now under way are truly new in their conception and proportions. What has attracted most attention is the downsizing of state employment through reduction of inflated payrolls. At first, it was announced that 500,000 jobs were to be eliminated in stages, primarily those linked to bureaucratic and service tasks in state enterprises and organizations. These workers were expected to move to other productive jobs both in state enterprises and in the private and cooperative sector. A complementary measure was broadening the categories of licensed self-employment to 178 economic activities, many of which would be permitted to subcontract workers. (Paradoxically, none of these categories included professionals, who are one of the most important labor reserves created by years of mass access to education.)

The original announced goal was to relocate around a million state employees (nearly a quarter of the country’s economically active population), something that would substantially reduce the enormous and costly bureaucratic apparatus. The word “layoff” (despido) was never used. Rather, commissions created in the various work centers would propose which employees should be deemed “available,” and they could take advantage of temporary benefits that would be offered on the basis of seniority, qualification, and so on in the form of payments over a period of one to three months, according to what was deemed necessary.

The secretary-general of the Cuban Workers’ Union, Salvador Valdés, declared repeatedly that this plan of workforce adjustment would “not leave anyone unprotected.” In spite of this and other similar pronouncements, the fact is that after nearly fifty years during which several generations grew up with the idea of job security and stability as an unquestionable right, a change of this sort gives rise to natural uncertainty that cannot be satisfied until reality confirms that the promised alternative spaces will effectively replace lost family incomes.

The sectors chosen to initiate this gradual “labor reorganization” were five ministries: Sugar, Agriculture, Construction, Public Health, and Tourism. However, the process was soon apparently postponed, possibly to provide a margin of time for introducing and consolidating new legal regulations and systems of credit to aid in the formation of cooperatives and private businesses that would create alternative jobs. More than 300,000 licenses for self-employed work have been granted in record time, but it has been announced that the process of reducing state employment will continue albeit “in accord with circumstances and with flexibility as to deadlines.”

This workforce reform is absolutely necessary. If the sizable losses caused by artificial overemployment are not eliminated, efforts to put other economic activities on a sound footing will remain permanently at risk.

Finally, the third dimension or level—no less important—to be considered is the positioning of key countries in Cuban foreign relations with regard to these new developments. This involves issues of multilateral exchanges and assistance, including support for the development of local and small businesses (microempresas)—primarily through international organizations—as well as bilateral mechanisms of trade, investment, and aid, and (indirectly) probable scenarios of trade with and/or assistance from the United States and other, broader, collateral influences.

The current changes are more significant than those of the 1990s. Even before the collapse of the socialist bloc, the Cuban economy was showing clear signs of stagnation due to its own structural problems, such as low levels of productivity and competitiveness, a limited ability to generate internal savings, an international position based on low-value-added exports and financial and commercial dependence on a single market (the Soviet Union) and a single product (sugar), a weak industrial fabric, and mounting fiscal disequilibrium.

The adjustments introduced in the 1990s represented a change unprecedented in the history of the Cuban Revolution. Several major transformations occurred during that decade. Sugar, for the first time in Cuban history, ceased to be the economic engine of the country; it was replaced by tourism and the export of medical services. There was an opening to foreign banks and foreign investment. State agricultural property was redistributed to the cooperative sector, and licenses for small private urban businesses were granted. The dollar became a legal currency, and markets were segmented into different circuits using different currencies, generating a permanent tension that affected efficiency, salaries, and prices, reinforced in turn by remittances from abroad that became a significant source of income.

As a consequence of these changes and their mutual interactions, social impacts soon followed. Problems of poverty, growing inequality, and geographic stratification appeared, along with increased migration from countryside to cities. New challenges demanded responses on an unprecedented scale. It should not be surprising, therefore, to find these phenomena reflected in the realm of ideas and values. Nearly twenty years later, the main negative macroeconomic effects of the shock have been reversed, while others persist and are accompanied by new challenges. The current era has neither the pressure nor the sense of urgency of those earlier days, which were marked by a crisis of reinsertion in the global economy and reshaping of the economic system in response to an external shock. Today’s challenge is a political-institutional transformation that responds to new internal realities, a process that extends farther than the generational changeover to which many observers reduce it.

As one Cuban intellectual has pointed out, the main challenge now is how to remodel the system without creating greater problems^[9]—not to repair an exhausted and dysfunctional model still bearing the marks of European “really existing socialism” but rather to gradually develop a different one, according to the logic of current Cuban society’s problems and needs.^[10]

At both the subjective and the practical level, conditions have reached a point of no return. What distinguishes this moment and today’s transformations from what was done in the 1990s is that the current process began with a public admission that things were not going well domestically, with a real political will to make the changes, and with an acceptance of these changes as irreversible. Within a few years, Cuban society will be different from what it has been. It is quite possible that the normal process of trial and error will give rise to still-unforeseen alternatives, as those who govern and those who are governed will learn how to reform what can be salvaged and discard what is not viable. What is beyond doubt is that the society will never again be the same as it was in the previous decades.

The specific steps that are being taken, such as the tightening of state employment and subsidies, mean that this time the responses will be deeper, going beyond the limits of the reforms of the 1990s, when the level of public spending and the policy of full employment were maintained in the midst of the crisis that followed the socialist collapse. Thus, this time there is a frank acceptance of the need to do away, once and for all, with the vicious circle of low wages and low productivity.^[11]

The changed conception of the role of the state has left behind the 1990s model of vertical subordination in which the upper levels laid out the plans for every other stratum, moving instead in the opposite direction toward a separation of government from enterprises. The key sectors remain in the hands of the state, and administrative decisions are based on economic and financial criteria, while unprecedented powers are granted to enterprises within the context of a general policy. Now, enterprises decide for themselves who will make up their management teams, and they may choose alternative means of financing their operations, eliminating their traditional dependence on the national budget. Similarly, they have autonomy in investment decisions, hiring, and pricing. When enterprises make profits, they may devote these to creating development funds, to new investments, or to employee bonuses.

Resistance from Within

The transformations described above face internal resistance that is expressed in multiple ways. On the one hand, there are the inherited bureaucratic culture and the vertical, rigid institutional structures. On the other, there are a lack of practical experience with the new mechanisms, a pressing and immediate scarcity of resources (financing, equipment, inputs, tools, and so on), and the multiple layers of rules and regulations generated at different levels and by various institutions that must be adjusted to make application of the new directives faster and more efficient.

In his speech at the opening of the Party Congress, Raúl Castro referred to the role of state institutions and enterprises in moving from a centralized economic model to a decentralized system, emphasizing the need to eradicate the widespread attitude of waiting for decisions to be made at higher levels so as to avoid the risks of taking one’s own positions. This mentality of inertia must be definitively uprooted, he said, and he stressed a need to insist on fulfillment of contracts between parties as a way to spread responsibility. He noted that it was necessary to increase political sensitivity, to confront violations, and to demand discipline of everyone, especially leadership cadre. Over the years, many resolutions aimed at solving practical problems had become empty words. What we approve at this congress, he urged, cannot suffer the same fate as previous accords that were not fulfilled.

To these factors must be added a lack of legal instruments and services. Both the farmers and the new urban cooperative members and private workers have had, literally, no other options if the established mechanisms for supplying financing, transport, packing materials, and other inputs fail to work. Although new legal regulations covering the private and cooperative sector have now been presented (a review of more than 180 existing laws is now under way), some of the old mechanisms are still partially in effect—and these either do not recognize the new forms of property and economic action or even penalize them. In this area, the first steps have barely been taken. Implementation and monitoring of the new measures also run up against the interests of socioeconomic groups that have enjoyed powers and access to resources that are now threatened by new competitors, structures, and priorities. It is natural that, instead of facilitating the changes, these groups put up resistance in a variety of ways.

Perhaps the most illustrative example of practical barriers to the transformations is the food production sector. Cuba has been spending more than $1.5 billion per year on food imports (which supply 80 percent of demand), a financially unsustainable burden that is totally irrational given that 40 percent of arable land on the island remains idle^[12] for lack of incentives and because of bureaucratic restraints. Paradoxically, harvested crops frequently go to waste because of lack of transport. The solution—recognized or not—requires dismantling the whole scaffolding of regulations and prohibitions that block any alternative methods (whether state or private) when the established mechanisms fail to work. Otherwise, the adaptive response by the farmers is to prioritize harvesting in order to be able to collect payment, whether or not the food ever makes it to market. Since September 2008, with the goal of increasing food production, 1.18 million hectares of idle land have been awarded as usufruct holdings to 128,435 new proprietors. However, two and a half years later, 30 percent of these parcels are not yet ready to produce food because of bureaucratic delays in making the actual grants, delays in training new proprietors, an insufficient provision of necessary tools and inputs, and the above-mentioned shortfalls in the systems of transportation and commercialization.

Continuity and Change: Old Habits Die Hard

It may seem that the repeated emphasis on restoring control and discipline is the slogan that best expresses the vision behind the changes. In reality, however, the determining factor is the dismantling of obsolete ideas, practices, and structures. There is no doubt that restoring the role of the law is a necessary strategy in a society that became accustomed to living with the breaking of rules and with ad hoc improvisation as a means of survival in the face of accumulated prohibitions and recurrent scarcity. That context generated a culture of permanent subversion of the law that now must be reversed. However, the vision behind the changes has been declared to rest on the priority of state management, gradual implementation so as to avoid improvisation, the preservation of consensus, and keeping the social costs of the changes under control.

Right now, the delicate balance between elements of continuity and of change is substantially evident in the field of economic management, in the restructuring of the institutional apparatus, and in policymaking (methods and styles of work). However, it would be illusory or reductionist to assume that the success or failure of the process is limited to these dimensions. The collateral improvements needed in other areas—such as updating legislation; restructuring institutions; changing the vision of the role of the Communist Party and its methods of coordination and oversight; broadening and empowering new actors, such as local government and the cooperative and private sector; and the multiplying interactions in various forums in civil society—point toward a necessary process of decentralization (not only destatization) that must, progressively, lead to greater transparency and relative transfer of governance toward intermediate levels.

While building consensus out of various visions of the changes is of the most visible importance, still the challenge facing Cuba in the current circumstances is not only about whether the reforms can be put into practice but also about their effectiveness in truly replacing the inherited culture that has viewed change more as a threat than as an opportunity. That culture, as noted, expresses itself in many and varied forms of resistance. The importance accorded to this issue is demonstrated by Raúl Castro’s declaration that “we will be both patient and persistent with respect to resistance to change” but that “any and all bureaucratic resistance to the strict fulfillment of the Congress’s accords, which are massively supported by the people, will be useless.”

This directive took concrete form in the National Conference of the Cuban Communist Party, where the importance of changing Party members’ mentality was cited as a necessary condition for carrying out the transformations. Also singled out was the need to separate the Party’s activities from those of the government and administrative entities so as to eliminate interference and arrogation of functions.^[13] Every two or three months, there are press reports of some prohibition being made more flexible, of the introduction of a new mechanism with that same goal, or of the experimental application of some new regulation or incentive (which later becomes generalized). This illustrates the way in which some of the reforms are being introduced without great fanfare or national campaigns.

In the case of housing, channels for supplying materials were decentralized, and permission to subcontract the work to private tradesmen was reintroduced. Prohibitions that limited citizens’ ability to build houses were lifted, as was the ban on buying and selling houses. Another change was an end to the practice of confiscating the homes of citizens who emigrate; the emigrants can now sell or give them to others. The state soon began to issue bank loans for housing construction or repair (and, in parallel fashion, subsidies to poor families to repair their homes). All this has led to a visible, short-term reactivation of microenterprise in housing repair and construction, which now does not depend on public programs that for years were overwhelmed by the demand. In the case of large state entities, two ministries (Sugar and Telecommunications) were restructured and were converted into state-owned enterprises, thus noticeably reducing their numbers of employees and saving considerable artificial management costs.

As far as the speed and content of the reforms are concerned, reference has been made on various occasions to a strategic plan containing projections as far ahead as 2016. This plan has not yet been made public, but evidently the procedure is one of a sequence preceded by studies of alternatives and evaluation of impacts (for perhaps as long as two years) followed by small-scale implementation and then by the full-scale one, which will only occur after the minimal conditions to avoid additional problems are in place.

Some Conclusions

The process of change in Cuba is inevitable and irreversible. Whether or not one agrees with the proposed content or the pace of implementation, there can be no doubt that a transition that allows for an institutionalized reshaping of the economy (and the resulting interactions), one that guarantees stability and at least a minimum of coherence about priorities, is preferable to a situation of ad hoc and uncoordinated responses. Decentralization of state administration, the emergence of new forms of property, and the creation of new legal frameworks will cause the conventional actors and mechanisms to be reshaped and progressively displaced by new dynamics.

The immediate tasks identified in the “Guidelines” point unambiguously to a need to shake off the accumulated obstacles and deformations that led to a generalized loss of economic efficiency. They similarly point to a need to review and revise institutional structures and policies while creating the conditions for transition to a later period of deeper transformations. In practice, what is under way is a dual process involving both a learning curve and a shift in the limits of what is permissible and appropriate. This perception will be reinforced to the degree that the changes that are introduced succeed in generating the expected results. There is no process of rupture associated with these transformations or one of dismantling government structures. To mechanistically equate an economic reform with drastic political change would constitute an oversimplification of the complex internal dynamic that is taking place in Cuba and a failure to understand the priority being assigned to the governability of the process and the management of its effects.

Cuba’s major challenge today does not lie in determining the speed or depth of the transformations or in improving the quality of methods and oversight, although all of these are clearly needed. Nor is the key issue which particular leaders will be at the head of the country in a few years, though this is also an important issue. What will be decisive to the viability of the transformations has been clearly stated by Graziella Pogolotti: “Without a doubt, what is crucial to the viability of the Cuban project is a rearticulation of a vision of the future, one which links the personal life projects of the country’s citizens with the transformations being implemented. This alone, not the institutional aspects, is the key to sustainability.”^[14]

Notes

Some of the subjects discussed here were partially treated in my chapter “Cuba, el cambio interno y la política norteamericana, en busca de la racionalidad perdida,” in Luis Fernando Ayerbe, ed., Cuba, Estados Unidos, y América Latina en el cuadro actual de las relaciones Hemisféricas (Barcelona: Editorial ICARIA; Buenos Aires: Ediciones CRIES; São Paulo: IEEI-UNESP, 2011), 11–46.

Over the course of ten years, sixteen hurricanes caused damages in the range of $20.5 billion. In 2008 alone, the losses due to hurricanes represented 20 percent of gross domestic product. Between 2003 and 2005, damages due to drought totaled $1 billion.

Armando Nova González, “El papel estratégico de la agricultura: Problemas y medidas,” Temas, April 2010.

Mayra Espina Prieto, “Looking at Cuba Today: Four Assumptions and Six Intertwined Problems,” Socialism and Democracy, no. 52, March 2011, 95–107.

Omar Everleny Pérez Villanueva, “Notas recientes sobre la economía en Cuba,” paper presented at the Tenth “Semana Social Católica,” Espacio Laical, June 2010, http://www.espaciolaical.net.

Jorge M. Sánchez Egozcue and Juan Triana Cordoví, “Panorama de la economía cubana, transformaciones y retos futuros,” in Cincuenta Años de la Economía Cubana, ed. Omar E. Pérez (Havana: Editorial Ciencias Sociales, 2010), 83–152.

Carlos Alzugaray, Arturo López-Levy, Alexis Pestano, and Lenier González, “Cuba: ¿Hacia un nuevo Pacto Social?” Espacio Laical, Suplemento Digital no. 125, April 2011, http://www.espaciolaical.org.

Aymara Hernández Morales, “Estado y sector privado en Cuba: Políticas, relaciones y conflictos de un manejo restrictivo,” paper presented at the Taller Internacional Centro de Investigaciones Psicológicas y Sociológicas, Havana, 2006.

Aurelio Alonso, “Salir del caos sin caer en la ley de la selva,” in Cuba desde el período especial hasta la elección de Raúl Castro, May 2008, http://www.pensamientocritico.info/articulos/otros-autores/139-salir-del-caos-sin-caer-bajo-la-ley-de-la-selva.html.

10.

Rafael Hernández, “Cuba, políticas en la transición,” La Vanguardia, March 2008, http://www.almendron.com/tribuna/index.php/19322/cuba-politicas-en-latransicion.

11.

Gerardo Arreola, “Más allá de las reformas de los 90,” La Jornada, November 10, 2010, 36.

12.

Pedro Olivera (director of the Agriculture Ministry’s National Center for Land Control), in a statement to the official daily Granma, cited in El Universal, January 25, 2011.

13.

Alina Perera Robbio and Francisco Rodríguez Cruz, “Ser parte, no observador,” First National Conference of the CCP, Commission no. 1, on functioning, methods, and style of work, Cubaweb, January 30, 2012, http://www.granma.cubaweb.cu/2012/01/30/nacional/artic04.html.

14.

Graziella Pogolotti, “Para dialogar con los jóvenes,” Juventud Rebelde, March 3, 2010.

Updating the Cuban Economic Model

Cuban authorities have stressed since 2007 that the structural problems facing the country need to be solved in the shortest amount of time possible because they are handicapping economic development. It is precisely this argument, alongside other objective and subjective economic factors, that have been behind the “updating” of Cuba’s economic model. However, we should not forget that in the 1990s, there was already prolific academic work on the subject, and many proposals were put forth that underlined the necessity of enacting significant reforms of the Cuban economy.

In other words, structural economic problems have been strongly debated, at least in academic circles, for the past fifteen years. What are some of these structural problems that have contributed to the worsening of the majority of the country’s economic indicators?

These problems are interrelated, and they have spread throughout an economy that has a small internal market, is extremely dependent on imports, and must face an economic embargo enacted by the United States.

The time and effort devoted to the socialist project, combined with the experiences of socialist countries in Asia, place the Cuban government in the position of needing to update the country’s economic model. The market needs to have an increasingly larger role in Cuba’s economy, even if the country maintains a planned economy.

Thus, it is necessary to implement changes in Cuba’s economic structure. However, not just any change will suffice, at least in the medium term. Rather, any effective change needs to reach sectors of the economy with the highest productivity or aggregate value.

It has already been accepted that the state does not have to control nonstrategic sectors that are capable of absorbing the large number of workers who will become available in the coming years as part of the reorganization of businesses and other economic units. The number of workers who will have to be reassigned to a new sector in the first phase is between 1 million and 1.3 million. However, this first phase began in 2011, when there were 500,000 state workers who needed to be relocated.

With an increasing number of calls to update Cuba’s economic model, it was necessary to convene a Party Congress (the Sixth), which had not been held for more than thirteen years. For the congress, a document titled “Guidelines of the Economic and Social Policy” was prepared, and its recommendations and proposals were debated throughout the country.

In the analysis of Cuba’s principal economic indicators, it is possible to understand the sagacity and need of the Cuban government when it began to update the economic model. Cuban authorities have highlighted, nonetheless, the resistance to the economic changes from both current party leaders and the larger population, which has grown accustomed to a paternalistic state and is interested more in state spending than in state revenue.

A close analysis of Cuba’s current economic situation shows some disheartening trends: these are discussed in the following sections.

Evolution of GDP

In 2010, the Cuban economy halted the trend of negative economic growth of past years and grew by 2.1 percent. The growth rate between 2000 and 2006 was significant in that it reached an annual average rate of 6.2 percent of GDP (at 1997 price levels), but this rate is still low when compared to the untapped potential of the so-called “real economy” of industry and agriculture and the accumulated needs of both the general population and the government.

Structure of GDP

In the structure of GDP, there is a downward trend in the relative weight of the goods sector (agriculture and industry) and of basic services, such as construction and transportation. Additionally, there has been a significant increase in the “other services” category, especially in health, commerce, and other areas, such that services contributed nearly 80 percent of the country’s GDP in 2010. Therefore, it is necessary to consider whether it is possible to attempt development on the basis of service sectors with low productivity, such as health, commerce, education, and others.

Even though areas in which the country should prioritize economic growth have been identified, the sectors that are most likely to propel the economy forward have yet to be identified. That is, the country is working toward economic stabilization, but this does not mean that the routes to economic development have been defined, and the country still does not know with which products it will insert itself into the globalized economy.

The so-called real sector of the economy, such as industry and agriculture, have a weak role in contributing to GDP growth, and in 2008, 2009, and 2010, they actually stagnated.

Low Efficiency in Investments

In the past decade, as well as in previous years, there was a strong immobilization of financial resources in Cuba since there were fewer new investments than those that were already in place. From 2000 to 2009, the approved investment plan was never put into practice, demonstrating either an inadequate elaboration of the plan alongside low interest among the persons tasked with executing the plan or a lack of construction materials and other equipment. This derives from the fact that the country lacked the external financing that investors were seeking, resulting in the immobilization of material and financial resources. Thus, the state lost financial resources and opportunities because of these shortcomings.

Aging and Low Rates of Population Growth

As a result of low fertility among Cuban women, the percentage of the national population between the ages of zero and fourteen has fallen, whereas the percentage of Cubans aged sixty and over has increased. Nearly 1.9 million Cubans were between the ages of zero and fourteen in 2010, while an equal number was over the age of sixty.

The aging of the population is one of the most neuralgic effects of the demographic transition in the country and will demand the efforts of all the institutions and elements of society to address this issue. The first stage of this trend in Cuba began in the 1970s, and already by the end of that decade the country was registering a negative birthrate, and citizens over the age of sixty represented more than 10 percent of the national population. In 2010, the aging of the population stood at 17.4 percent.

Unfavorable Relationship between Productivity Growth and Average Salaries

An analysis of the relationship between productivity growth and average salaries until 2009 reveals a near total imbalance, as salaries were rising faster than productivity. Evidently, in a country with “inflated payrolls” and nearly a million underemployed workers, it is possible to think that this relationship was never viable. This is a challenge that the government must solve, or at least this is what Cuban authorities have expressed.

A sectorial analysis of employment structure clearly shows that there would likely be available workers in the “other services” sector, which is where the number of jobs has increased in recent years. This increase was accompanied by a decrease in persons employed in the goods sector.

Since 2010, the government has accelerated its analysis of jobs that could become available as well as those that were created in health, education, public administration, and other sectors as a result of programs associated with the “Battle of Ideas.”

Completed Dwellings per Year

In 2006, Cuba implemented a special program for the construction, conservation, and rehabilitation of the housing stock, and 100,000 dwellings were ordered to be constructed starting in that same year. This program was only fulfilled in 2011 because priority was given to clearing a backlog of houses requiring small actions to be completed—a backlog that has been around since the beginning of the “Special Period.” Current policy has been geared toward favoring the construction of dwellings, where Resolution No. 40/2010 of the Institute of Housing, published in the Official Gazette of the Republic of Cuba on February 17, 2010, allows for incentivizing the building of dwellings by independent actions through granting construction licenses.

In Resolution No. 40/2010, there is a special mention of the “Third Special Disposition,” which authorizes municipal units that invest in housing to approve without prior selection applications for building permits by persons from these units for new works, remodeling, rehabilitation, and a variety of other modifications. The license will be granted on presentation of proof of ownership of the land or the right to use the roof.

Foreign Trade in Goods

The commercial imbalance of goods continues to characterize Cuba’s foreign trade. Exports are not growing with the necessary dynamism because of decreases in sugar production, a stagnation of mining operations, and a decrease in the export of shellfish, citrus fruits, and other goods. Additionally, imports are very high despite official policies aiming to reduce them.

Stemming from an increase in imports in 2008 and previous commitments, Cuba has experienced increased pressure on its balance of payments and even began to withhold foreign payments, especially in 2009. This has contributed to an extraordinary increase in debt related to both the export of goods and the export of both goods and services together.

Foreign Trade in Goods and Services

The service sector has been one of the largest earners for the state since 2004, and several changes have taken place as knowledge-intensive services have replaced the tourism industry as the main generator of revenue for the state. It is estimated that more than 50 percent of exports of services are in the form of medical services. It is these types of services that contributed to a surplus in the commercial balance of goods and services in 2009 and 2010.

After analyzing these selected economic indicators, we will look at the content of the proposals outlined in the “Guidelines of the Economic and Social Policy of the Party and the Revolution,” which were approved at the Sixth Congress of the Communist Party on April 18, 2011, and approved in the National Assembly of People’s Power on August 1, 2011.

The main proposals and adjustments approved during the Party Congress are the following:

Updating Cuba’s economic model requires an analysis of the so-called small and medium-size businesses (pequeñas y medianas empresas, PYMES), whose possible implementation was first mentioned in the mid-1990s but ultimately never came to fruition for various reasons. These businesses fall within proposals for the expansion of self-employment that were put forth by the National Assembly of People’s Power in August 2010 and published in the Official Gazette of the Republic of Cuba in the extraordinary Edition Nos. 11 and 12 on October 1 and 8, 2010, respectively.

The advantages of the PYMES are numerous. They are an alternative form of work that is necessary in Cuba’s economic climate; they contribute to higher standards of living and personal income, facilitate the decentralization of certain production processes and services, and allow for a greater output of goods and services.

Perhaps most interesting is that the PYMES are not derived from Cuba’s economic situation. Instead, they are part of a global trend to structure economic production based on small and medium-size businesses, with flexibility, a highly skilled workforce (one of Cuba’s strongest assets at the moment), and a high degree of competitiveness. The Cuban government is currently analyzing the need to implement some variant of the so-called PYMES, especially “cooperatives” for the socialization of production and the benefits from this production style.

It is also possible to study other ways to foment economic development, such as businesses that can be composed of self-employed and state workers or individual laborers and cooperatives. It is widely known that many of these entities exist, and there is an effort to make this type of labor relations more explicit and open, setting their corresponding social responsibilities and organizing and controlling these activities on behalf of the state.

There exists a group of activities that were proposed on one occasion but did not appear in the manual of approved self-employment in the mid-1990s. Others worked for a while and then disappeared, but their revival could be worthwhile in the government’s plan to update the country’s economic model.

Additionally, given the highly skilled labor force and the high percentage of youths who do not work, the type of businesses that require a higher use of skilled knowledge should be studied. This will prevent skilled youths from leaving these fields for higher-paying jobs that require less intellectual input and can also stem emigration. These types of jobs can be found in consulting, auditing, architecture, design, and other fields that may even have been proposed by the citizens themselves.

This new process should overcome the insufficiencies that harmed self-employed workers in the past, which have included difficulties in purchasing supplies, contractive fiscal policies, virtually nonexistent financial aid mechanisms (microcredits), lack of state controls, and regulations concerning the hiring of workers, among other challenges.

The experiences of China and Vietnam should be taken into account in this process, especially as Cuba reflects on its economy, society, politics, and ideology. The Chinese and Vietnamese cases are part of broader discussions in Cuba about contemporary socialism, largely because socialism has been the reference point for the country’s transformation ever since the breakdown of “real socialism” in Europe. China and Vietnam, as socialist countries, have the potential to be a good model for Cuba.

For Cuban economists, one of the principal areas of focus in the analysis of the experiences of China and Vietnam is the study of broader and more radical market reforms enacted by the Chinese Communist Party, which has been very successful in economic affairs, relatively far reaching and beneficial (although controversial and contradictory) in social matters, and legitimizing in the political realm. It could be argued that Vietnam is a similar case, and it likely is.

China always offers an economic image limited to only a few aspects: very high economic growth, a magnet for foreign investment, and a formidable export capacity. However, the ability to experience directly the Chinese and Vietnamese realities may have the effect of downgrading these aspects to second class and may instead highlight the important role of the internal market. In other words, the dominant image of China today is of a country with an enormous internal market and dizzying economic growth.

The central role that has been conceded to the internal market in the context of the Chinese reform is a result of agricultural reforms and has been reinforced as time goes by. This has been reflected in favoring policies aimed at diversifying forms of property with a high bias toward the generation of income, supported in the extension of private economic activity.

This leads us to reflect on the fact that even though Cuba is an “open economy” (an export economy) very different from China, the expansion of the internal market is an essential condition for the development of any type of economy and therefore must have a prominent role in any development strategy. This has obviously been an element that has been absent from Cuban economic policy in recent years, and I believe that it should be the priority of development plans in the update of Cuba’s economic policy.

Updating the Cuban model is an essential step in the design of a model for medium-term development. It is necessary to tackle some of the structural distortions that we have mentioned. Of course, the development of the internal market must be one of the essential components of this project. The transformation of this model, keeping in mind the new economic variables that have been introduced, will permit annual growth of 5 percent. It is forecast that in 2015, 35 percent of the jobs in Cuba will not be in the state sector. In other words, the stimulus to production that hopefully will occur—the strengthening of industrial growth in addition to infrastructure and industrial megaprojects already in place, such as the development of the port of Mariel, the petrochemical plant in Cienfuegos, the development of nickel (among others), and the incentive to develop nonstate forms of production both in agriculture and in the service sector—can contribute to the growth of the country’s principal economic indicators.

For this, it is necessary to “open the minds” of decision makers and utilize the word “autonomy” conclusively, break myths from the past, and understand that current and future generations cannot remain tied down to the recent past.

Note

Cuba’s Entrepreneurs

After years of stagnation, Cuban entrepreneurship has changed and grown dramatically. Regulations governing entrepreneurship were liberalized significantly in October 2010, notably allowing the hiring of employees. Official attitudes about it changed from indifference to encouragement. The number of Cubans employed in this sector increased 145 percent, from 157,371 in October 2010 to 385,775 in July 2012, representing about one in thirteen workers.

Most important, the purpose has changed. In the past, when no thought was being given to changing the socialist model, entrepreneurship seemed to be viewed as a necessary evil, of marginal importance to the economy. It is now viewed as a strategic necessity for a government that is determined to cut costs and boost economic output by reducing government payrolls and expanding the private sector. For every new person employed as an entrepreneur, the government counts one more job created, one more stream of tax revenue, one more household with higher income, and one less household in need of the universal food subsidies that it aims to eliminate.

Entrepreneurship, in Cuba called trabajo por cuenta propia (self-employment), is the most visible manifestation of economic reforms undertaken by President Raúl Castro since he took office in 2008. The entrepreneurs, called cuentapropistas, are operating their new businesses on the streets of every city and town. State media are covering this sector amply and, in a new twist, favorably.

But the new entrepreneurs are only part of the reform plan, which is being developed and implemented according to a blueprint approved by the Communist Party in 2011. To reach major economic objectives involving job growth, productivity increases, improved government finances, and reduced incentives for young Cubans to emigrate, a larger “nonstate” sector of the economy has to develop, one that will need to include larger and more complex businesses than those that today’s entrepreneurs are creating.

The Evolution of Cuba’s Private Sector

When Cuba’s socialist government came to power in 1959, it did not set out immediately to eliminate small private enterprise. The first years of the socialist revolution saw the nationalization of large and foreign enterprises, the agrarian reform that redistributed agricultural lands, and the urban reform that did the same for residential property.

It was in 1968, the year of the “Revolutionary Offensive,” that the small business sector came to be targeted. In a speech in March of that year, President Fidel Castro stated, “If this Revolution can be reproached for anything it is not in the least for being extremist, but rather for having been insufficiently radical. And we should not miss the opportunity or let the hour or moment pass to radicalize this Revolution even more. And we have to finish making a revolutionary people. . . . If many are asking what kind of Revolution this is, that still permits such a class of parasites [small business owners] after nine years, they would be perfectly right to ask.” With words like that, the small and medium-size business sector that predated the socialist revolution was put on the chopping block. Restaurants, bars (Fidel noted in his speech that Havana had 955), and service operations of all kinds were “intervened,” or taken over by the state.

Cuba’s future soon became one with only slight vestiges of private entrepreneurship, mainly barbers and beauticians, numbering 10,000 to 15,000. The economy, from farm to factory to retail services, came to be dominated by state enterprises. It all ran under a Soviet-style model where the state attempted to plan nearly all economic activity, including production levels, employment, allocation of resources, pricing, and trade and investment with Soviet bloc partners.

The aversion to private entrepreneurship continued until the early 1990s, when the dissolution of the entire Soviet bloc provoked a sharp economic crisis in Cuba. Responding to that crisis, Cuba legalized the circulation of hard currency, built up its tourism sector, opened to foreign investment, promoted incentive-based agriculture, and undertook a limited opening to small-scale entrepreneurship.

The entrepreneurial sector, like the other reforms, was carefully circumscribed. Private entrepreneurship was permitted only by license, it was limited to 158 specific lines of work, and employees were not permitted except in the case of family “assistants” in cafeterias, lunch stands, and small restaurants. The sector peaked in 1996 at 209,000 cuentapropistas operating restaurants and lunch stands, bed-and-breakfasts for tourists, and home repair and service operations of all kinds all across the island.

The government’s attitude toward entrepreneurship ranged from neutral to wary and never expressed a policy goal of encouraging its growth. A June 1998 document from the Cuban labor federation expressed concern about increasing corruption, including theft of state supplies, and partially blamed the economic reforms that the government had been “obliged” to make. It lamented inequality arising from the parallel hard-currency economy, which allegedly produces “egotism, the cult of capitalist fetishes, and the mentality of the small property owner.”

A typical official view was stated by Economy Minister José Luis Rodríguez in February 2001: “We don’t see that our country’s development rests on self-employment or small private property holders.” In March 2001, he said, “We believe there is no reason for the self-employed sector not to exist if it follows certain regulations, but we don’t stimulate it because we don’t think it is the solution to our economic problems.”

Come 2004, Cuba’s economy had improved from its condition a decade earlier but had by no means fully recovered. With a new and beneficial economic relationship with Venezuela maturing, the government decided to pull back from some of the previous decade’s reforms. On October 1, 2004, as part of the general retrenchment in economic policy, the Ministry of Labor and Social Security issued new regulations governing self-employment, noting in a statement that “self-employment, in the current economic revival that our country is experiencing, acts as a complement to some state activity in the production of goods and the supply of services of value to the public, and is an alternative source of employment.” However, it continued, some private economic activities might “be assimilated . . . by the central state administration.”

The regulations provided that no new licenses would be granted in forty categories of self-employment, but those working in the remaining 118 lines of work could continue to work and have their licenses renewed. In those, an “annual analysis” by municipal authorities would determine whether any licenses at all were necessary. No new licenses were to be granted for private family restaurants, cafeterias, and lunch stands, and the numbers of these businesses dropped noticeably while the government expanded its own retail food services. The result was that the number of entrepreneurs declined beginning in 1997 and stabilized at about 150,000 during the decade 2000–2010. The causes were many. An income tax was introduced in 1996. Some businesses fell victim to competition from the state or from other entrepreneurs down the street. Others were affected by regulatory enforcement that was in many instances normal, such as health inspections of food establishments, and in many other instances seemed punitive. Given all this, many thousands of Cubans risked working without a license, engaging in occasional, part-time, or full-time business activity. This is the situation that would remain until 2010, when a new political leadership produced a new economic diagnosis and a new plan to revamp Cuba’s socialist economic model.

Entrepreneurship in a Changing Socialist Economic Model

In the 1990s, an expansion of trabajo por cuenta propia was undertaken to make a modest contribution to economic recovery in a context in which Cuba’s economic model was being adjusted but not changed in fundamental ways. By contrast, today’s expansion of entrepreneurship is part of a major overhaul of the economic model, and its role in that change is of central importance. When Raúl Castro assumed Cuba’s presidency on an interim basis in 2006 and fully in 2008, he led a process of analysis, debate, and reform in economic policy that, while not yet complete, is more consequential than any economic policy change in Cuba since the early 1990s. His actions are based on assessments made by him—and earlier by his brother Fidel in his last major policy speech as president in 2005—that economic failings constitute a threat to the survival of Cuba’s socialist system itself. Among its main features are the following:

Any doubts about government intentions to reduce its own payrolls were set aside in September 2010, when this headline appeared on the front page of the Communist Party daily Granma: “Announcement of the Central de Trabajadores de Cuba.” The announcement, by Cuba’s labor union federation, was that 500,000 state sector jobs would be eliminated by the following May, with a “parallel increase in the non-state sector.”

For laid-off workers, the announcement explained, there would be a “broadened and diversified” set of job opportunities, including “renting, usufruct, cooperatives, and self-employment, toward which hundreds of thousands of workers will move in the coming years.” Those are all private sector options: “renting” refers to the leasing of state installations, such as barber shops, beauty shops, and taxis, where the workers now operate as small entrepreneurs; “usufruct” refers to long-term leasing of land or other facilities, as in farm cooperatives; “cooperatives” suggests nonagricultural uses of that formula; and “self-employment” means entrepreneurship. The announcement stated that “it is known” that the state sector has more than 1 million excess workers. It noted that opportunities for reemployment in the government and its enterprises would be limited to agriculture, construction, teachers, police, and industrial workers.

Signs of the Times

Also in September 2010, a briefing document that explains these layoffs was made public. It quotes Raúl Castro saying that if Cuba continues to maintain “inflated payrolls in almost all areas” and to “pay salaries with no link to results,” prices will continue to rise, purchasing power will continue to erode, and pay increases for productive workers will remain impossible. The document anticipated that 64,546 new private jobs would be created in Havana, 85 percent in small entrepreneurship. It lists dozens of ideas for businesses that can be performed by private cooperatives outside the farm sector, although policies to establish such cooperatives have not yet been issued.

In practice, the layoffs proceeded more slowly than planned, but they have proceeded. State payrolls were reduced by 140,000 in 2011, and a 500,000 reduction is expected by 2015, according to a Cuban labor federation official and published economic plans. In other contexts, the stated estimates have been higher; for example, the finance minister projected that 1.8 million workers will join the “nonstate” sector by 2015. Vice President Esteban Lazo predicted in April 2012 that the private sector’s share of gross domestic product would grow from 5 to 45 to 50 percent within five years.

In this context, job generation in the private sector—combining the cuentapropistas, private sector agriculture, future private cooperatives, and other private entities—is an essential enabler of various elements of the reform process. Stronger private sector job creation allows the government to proceed faster with layoffs and to reap their budget savings. As more entrepreneurs pay taxes, they boost government revenues, hastening the day when the government can afford to attack the pernicious disparities in Cubans’ purchasing power by, for example, raising the pay of doctors and others in the health sector. And each time a household income improves because of a private sector job, it becomes easier for the government to end universal benefits, such as food rations, and to direct them to the needy only.

October 2010: The Policy Liberalization

Shortly after the announcements about state sector layoffs, the government followed with announcements about new regulations that would permit an expansion in Cuba’s entrepreneurial sector. A September 2010 Granma article previewed the new policies and stated, almost apologetically, that they would aim to “distance ourselves from those conceptions that condemned self-employment almost to extinction and stigmatized those who decided to join it, legally, in the 1990s.” The new regulations themselves were published in October. Soon thereafter, the reality of new policies became clear on Cuban streets when the Labor Ministry started opening special municipal offices to process applications for business licenses.

Public response to the new policies was strong because of the government’s new disposition to issue new licenses again and because they in fact expanded opportunities for entrepreneurship:

Beyond the new regulatory treatment, other government actions evidence a change in attitude toward entrepreneurs and a desire to see the sector grow rather than simply subsist. The Cuban media’s treatment of the sector has changed dramatically. In the past, coverage of entrepreneurs was sparse and fell mainly into three categories: stories about pilferage of state resources to supply private businesses, stories about food service establishments that violate health codes, and stories about entrepreneurs profiting from deeply subsidized public services, such as electricity.

Since late 2011, there has been much more coverage of entrepreneurs, and much of it is positive. Cuban media encouraged people to apply for licenses and explained how to do so. In November 2011, an article in Granma detailed the new regulations governing home rental and the ways in which they “considerably broaden” the possibilities for this line of work. It explained that entire houses may now be rented in the Cuban peso or convertible currency, space can be rented for lodging or for use by other entrepreneurs (e.g., a room for a hairdresser or a front porch for a sandwich stand), those who rent out their homes can now get licenses for additional lines of work, and they may hire employees.

In December 2010, with new licensing processes in effect barely one month, Granma ran a 1,300-word article on the necessity “to untie the bureaucratic knots that slow down the expeditious issuing of licenses to small entrepreneurs.” With the new policies governing entrepreneurship, a retiree in rural Pinar del Rio province said, “The only people not working are those that don’t want to.” That is an exaggeration but an easy one to make given the appearance of so many new businesses across Cuba.

Assessments

The growth of small enterprise has been strong and positive in several respects. After hovering around the 150,000 level for more than a decade, the addition of 228,000 to this sector, counting both entrepreneurs and their employees, represents very substantial growth of 145 percent in legal employment. It has demonstrated the amount of grassroots economic initiative that previous regulations had driven into the underground economy or suppressed altogether. The expansion of entrepreneurship has improved family welfare, boosted government revenues, and begun to provide a destination for workers laid off from the government’s “inflated payrolls.” Current regulations do not amount to an open grant of economic freedom to all who wish to start the business of their choice, but the 2010 liberalization greatly expanded space for private economic initiative and is a positive step in human rights.

Government statements that the new policies are here to stay are credible. While Cubans remember the retreats from the economic openings of the 1990s, many are watching the policies in action and the change in official discourse and are believing that there will be no turning back this time. With the reform process steadily reducing state sector employment, further expansion of private employment is essential. A reduction would disrupt other parts of the reform program and be politically problematic. Regulations continue to limit the growth of entrepreneurship and the benefits it provides the public.

The new regulatory regime is a significant progrowth improvement: it allows entrepreneurs to hire employees, to hold multiple licenses, and to sell to government entities, state enterprises, and joint ventures. Development of markets for entrepreneurs’ basic supplies, especially at wholesale, will mark a further improvement.

Yet the need to choose among a list of 181 licensed lines of work is a limiting factor, preventing would-be entrepreneurs from choosing the activities that appeal to them and in which they believe they can succeed. More than small-scale entrepreneurship in its current form is needed to meet the government’s goals for generating new private sector employment. An expansion of Cuba’s entrepreneurial sector by more than 200,000 was unimaginable a few years ago. So was a government decision that a key to improving productivity is to expand the private sector by more than 1 million workers. But entrepreneurs alone are not likely to generate 1 million new private sector jobs under current rules. Those jobs, combined with further reductions in the public sector workforce, can potentially eliminate a fiscal deficit that has already declined from 6.9 percent of gross domestic product in 2008 to 3.8 percent last year.

In Cuban discussions of economic policy—in academic journals, public debates, Catholic Church magazines, and state media—there is no shortage of ideas for policies to spur the expansion of the private sector. When it comes to entrepreneurship, the most common suggestion is to treat the sector as an “infant industry” by reducing taxes to promote growth until the sector matures. Other suggestions are to do away with the list of 181 permitted lines of work and instead to allow entrepreneurial ventures in any line of work except those that the state may reserve to itself and to allow professionals to work as entrepreneurs in the field for which they were trained. However, the potential for far more substantial job growth lies in the creation of private nonfarm cooperatives. In this area, policies have yet to be defined except in general terms.

The economic policy blueprint adopted in 2011 by the Communist Party stated that private cooperatives will be formed “as a socialist form of collective property in different sectors . . . integrated by persons who join together contributing goods or labor . . . and assume all their expenses with their income.” A policy for pilot projects for nonagricultural cooperatives in three provinces was approved in March 2012, but details were not released. Among the issues to be defined will be policies governing cooperatives that are converted from state enterprises (such as cafeterias, repair shops, and manufacturing operations that are handed over to workers) and start-up cooperatives formed by persons who affiliate for that purpose. Also to be defined are levels of taxation, the sectors in which cooperatives may do business, and whether professionals will be permitted to participate. A likely limiting factor in the policies governing cooperatives is the government’s concern about “concentration of wealth,” which will presumably be addressed through taxation.

The new tax system is a key variable. A primary consideration in tax policy has been fairness: charging entrepreneurs for the government services and benefits they receive. The choice of tax rates is a matter of conflicting objectives. Higher rates can potentially increase near-term government revenues, enabling expenditures on other priorities, such as attacking income inequality by raising some state sector salaries. Lower rates can encourage job creation and increase disposable income, and this, in turn, can fuel further private sector growth. The government has shown that it is weighing these considerations, and its 2011 tax reductions were a midcourse correction to encourage job creation over immediate revenue generation. To date, the impact of taxes on the entrepreneurial sector has varied. Surely, taxes are among the factors that have caused some entrepreneurs to return their licenses. It is also possible to find entrepreneurs who are not held back by the current tax burden.

An entrepreneur who runs a pizza and sandwich stand in a good Havana location said that he pays 400 pesos per month in tax—a burden that is “not very strong.” He has operated since May 2011, and his gross revenues average about 2,000 pesos daily, although he says that with each passing month, he is feeling the effects of greater competition from additional private establishments. With his savings, he is starting a new cafeteria ten blocks away. Many entrepreneurs are working below their professional potential and outside the fields of their education and training.

The lack of entrepreneurial opportunities for Cubans with advanced professional and technical skills means that Cuba is failing to take full advantage of the investment made in their education and forgoing their potential contribution to economic development: innovation, competitiveness, export growth, job growth, and reduced incentives for young Cubans to emigrate. Many of the new entrepreneurs, such as those reselling housewares brought to them from relatives abroad or selling copied music and movies on disc, have created jobs and pay taxes but otherwise contribute little to development.

Note

Cuban Agriculture and the Current Process of Economic Transformation

The Cuban economy has begun an interesting and important process of economic transformation that has been identified as the “updating of the economic model.” It covers all economic sectors, with important implications for the economic, social, and political sectors of the nation. These changes have been reflected in the “Guidelines of the Economic and Social Policy of the Party and the Revolution,” adopted during the Sixth Congress of the Communist Party held in April 2011.

One may note that the most profound and important transformations have been initiated in a sector that is economically vital and strategic for the Cuban economy, as is the agricultural sector. Insufficient domestic food production (see Nova 2010) is an issue that has been prevalent during the past fifty years in the national economy, increasing the country’s dependence on foreign food, making it more vulnerable, and resulting in a high expenditure of foreign currency for food imports (see table 12.1) when most of these could be produced domestically under competitive conditions.

Dynamics of Imports for 2002–2010 and Estimated for 2011 (in millions of U.S. dollars)
	Total imports	Total food imports	Food for humans	Food for animals	Food as percentage of total imports
2002	4,140.767	827.236	762.385	64.851	20.0%
2003	4,612.598	998.120	912.296	85.824	21.6%
2004	5,615.198	1,183.273	1,073.422	109.851	21.1%
2005	7,604.259	1,494.204	1,357.313	136.891	19.6%
2006	9,497.890	1,391.928	1,261.697	130.231	14.7%
2007	10,082.557	1,746.402	1,570.706	175.696	17.3%
2008	14,249.234	2,544.822	2,280.401	264.421	17.8%
2009	8,909.541	1,755.604	1,524.645	230.959	19.7%
2010	8,000.000	1,600.000	1,400.000	200.000	20.0%
2011 (est.)	8,100.000	1,700.000	1,500.000	200.000	21.0%

Source: Prepared by the author with data from the National Office of Statistics (ONE 2002–2010).

The current issue of the agricultural sector could be summarized as follows: agricultural and livestock production is down, there are records of significant quantities of idle agricultural land, and food imports continue to grow to cover the shortfall in domestic production. This leads to obvious signs that the productive forces are still frozen and the need to transform systemically production relationships and analyze how to solve the issue of ownership of the land and the changes needed to achieve it.^[1]

The current situation of dependency in the area of food products is paradoxical given the fact that the agricultural sector shows a significant number of unused areas (more than 2 million idle hectares). Results obtained from various scientific and technical institutions indicate that there is a material basis (although undercapitalized largely by years of economic crisis, but it exists and can be improved and used) and that the sector has significant human capital. All this suggests that agriculture holds an important productive potential that must be put to use.

From 2007 to date, a series of measures aimed at finding solutions to the revitalization of this important sector have been implemented, searching for solutions to increase production, the substitution of food imports, and the generation of surpluses to increase the exports of goods. These measures include an increase in the price of milk, beef, and agricultural products; decentralization of functions by identifying the municipality as the key space for the execution and decision making in agricultural activities; and simplification of the structures and functions of ministries that generate primary production and food processing (Nova 2010). Recent steps have been taken with regard to the hiring of a labor force, agricultural expansion of microloans, and the gradual decentralization of the marketing of agricultural products.

But the most important decision has been the delivery to individuals of idle (uncultivated) farmland under conditions of usufruct.^[2] These deliveries are made currently under the conditions of lease for a renewable period of ten years. Decree Law 259 on the distribution of land in usufruct has been an important and decisive step, although from its inception it included a number of restrictions and limitations that caused a significant degree of uncertainty for the beneficiaries (Nova 2009). Currently, although Decree Law 259 has not been officially changed, official statements have been made promising to increase the time period of the usufruct contract, recognize the right to build housing, and increase the area of land to be delivered, as long as there is the possibility of its being cultivated.

The current distribution of idle land also leads to a new stage and agricultural model that establishes and reinforces the dominance of nongovernment producers, particularly the Cooperativas de Créditos y Servicios (Credit and Service Cooperatives [CCS]) and the private sector, which could increase from 18.5 to 51.0 percent in landownership (see table 12.2). If these producers are often the best (according to the results^[3]) and the measures to be analyzed below are implemented under a systematic approach, we should expect significant increases in food production.

Forms of Land Ownership (%)
Agricultural Area		Total	Government		Nongovernment		UBPC	CPA		CCS and Private**
2007	100			35.8	64.2	36.9		8.8	18.5
2011*	100		17.0		83.0		23.0	9.0		51.0

* Estimated.

** Includes those benefited by Decree Law 259.

UBPC: Unidades Básicas de Producción Cooperativas (Basic Units of Cooperative Production).

CPA: Cooperativas de Producción Agrícola (Agricultural Production Cooperatives).

CCS: Cooperativas de Créditos y Servicios (Credit and Service Cooperatives).

Source: Prepared by the author from the National Office of Statistics (ONE 2007–2010).

There is a trend toward the dominance of small and medium-size nongovernment companies, both in the possession and in the ownership of the land, in a spiral movement that involves qualitative changes. This does not represent a return to the situation observed in the late nineteenth century^[4] (Nova 2011) but rather to a form that, although rooted in the dominant forms of that time, is strengthened by the collective forms of production (cooperatives), the farmer’s knowledge transferred through the years from generation to generation and enriched by scientific and technical development.

The more wealth is distributed, the less inequality there will be and a more fair model of agriculture and social-economic model will be created. This is consistent with the thoughts of José Martí: “A rich country is a country that has many small owners” (quoted in Almanza 1990, 261).

How Is the Agricultural Sector Behaving?

Regardless of the measures taken since 2007, the results obtained have not been the results expected. During 2009 and 2010, agricultural production declined or, in the best case, remained stable. In 2009, total agricultural and livestock production closed at 100.5 percent, a stable level when compared to 2008, while the production of vegetable foods grew by 5.6 percent, and production of livestock fell by 4.6 percent. In 2010, the agricultural sector reported a decrease of 2.8 percent. There was a decrease in agricultural and livestock production in twelve basic items, including rice, pork, eggs, vegetables, beans, root vegetables (potato, malanga), citrus fruits, and poultry. At the end of 2011, there was an increase in total production (agricultural and livestock); however, the levels of food supply to the population decreased with a corresponding increase in prices. According to reports from the Oficina Nacional de Estadísticas (National Office of Statistics) (2002–2010), agricultural production grew 8.7 percent (11.5 percent agriculture and 6.0 percent livestock).

What Are the Factors That Have a Negative Influence?

Sometimes, the reduction in agricultural and livestock production is attributed to the effects caused by drought, and to some extent this is a contributing factor, but this is a variable that must always be kept in mind. It is necessary to prepare early for this effect and reduce the current vulnerability. This requires creating the necessary food reserves during the spring, or rainy period.

However, the most important aspect is the delay in implementing reforms in the agricultural sector, formalized in the “Guidelines” adopted at the Sixth Congress of the Communist Party of Cuba and the systematic failure to apply them:

A delay in delivery of land to farmers under the framework of Decree Law 259 and its regulations (primarily bureaucratic aspects)
An insufficient offer of supplies, insufficient means of labor and production, with high prices (recent measures have been taken aimed at reducing prices) not adjusted to the demands, requirements, quality, and specifications of producers and regions and not taking into account the actual objective existence of the market and its role
A need to amend Decree Law 259 to eliminate the uncertainties that it contains and that do not favor the permanence of the producer
The failure to implement comprehensive measures for the decentralization of marketing and elimination of the government inventory system
The issue of prices paid to producers that are not satisfactory (despite the price increases in some categories), particularly those products that replace imports, while paying high prices for imported products and not to the local producer
The late delivery of loans and technical assistance

In summary, reaffirmed by the results achieved at the end of 2011, there are still three aspects that have not been settled:

Limited rights of the owner of the property: the producers should be allowed to make their own decisions throughout the production-distribution-consumption-change cycle.
Failure to recognize the real and objective existence of the market and its complementary role with planning.
Lack of systemic approach in the design and implementation of measures.

Given this ongoing situation, it is evident that the productive forces of the agricultural sector are still detained, and it is necessary to remove the obstacles that hinder its development, which implies continuing as fast as possible the transformation of production relations in agriculture, which is a strategic economic sector for the Cuban economy.

Notes

Excerpted from Armando Nova González, “Cuban Agriculture and the Current Economic Transformation Process,” April 2012, Desde la Isla website (Cuba Study Group). Reprinted by permission of the publisher.

References

Almanza, R. 1990. En torno al pensamiento económico de José Martí. Havana: Editorial de Ciencias Sociales.

Nova, A. 2009. “50 años de la agricultura en Cuba, Línea de desarrollo, Resultados y Transformaciones.” Seminario Científico Anual CEEC, May.

———. 2010. “La agricultura cubana medidas implementadas: Para lograr incrementos en la producción de alimentos. Análisis y valoración,” Seminario Científico del Centro de Estudio de la Economía Cubana (CEEC), Universidad de La Habana, CD, June.

———. 2011. “Valoración del Impacto en Cuba de las medidas más recientes en el Sector Agropecuario y los Lineamientos de la Política Económica y Social.” Seminario Científico Anual CEEC, U.H., June.

Oficina Nacional de Estadísticas. 2002–2010. Anuarios Estadísticos de Cuba. Havana: Oficina Nacional de Estadísticas.

The right of the producer to be able to decide what to produce, how to sell it, and at what price and to be able to participate in an open market to purchase the necessary means and at the appropriate time in order to reach the successful closing of the productive cycle.

Uncultivated agricultural land, initially estimated at 1,868,210.84 hectares, was recently discovered to be some 500,000 hectares more.

The agricultural and livestock sectors are integrated by five productive entities: Unidades Básicas de Producción Cooperativas (Basic Units of Cooperative Production), Cooperativas de Producción Agrícola (Agricultural Production Cooperatives), Cooperativas de Créditos y Servicios (Credit and Service Cooperatives), private, and government. The most efficient are CCS and private. These two economic entities produce 57 percent of the total production of food in the country from only 24.4 percent of land. They also produce 63 percent of milk (the government produces 13 percent) and have more than 64 percent of milking cows and more than 57 and 60 percent of the cattle and pigs, respectively.

The Cuban agrarian situation in 1899 recorded the primacy of the small and medium-size companies with regards to larger enterprises.

Chapter 13

The New Cuban Economy

Richard E. Feinberg

What Roles for Foreign Investment?

The Cuban Revolution defined itself in large measure in terms of what it was not: not a dependency of the United States, not a dominion governed by global corporations, and not a liberal, market-driven economy. As the guerrilla army made its triumphal entry into Havana and the infant revolution shifted leftward, a hallmark of its anti-imperialist ethos became the loudly proclaimed nationalizations of the U.S.-based firms that had controlled many key sectors of the Cuban economy, including hotels and gambling casinos, public utilities, oil refineries, and the rich sugar mills. In the strategic conflict with the United States, the “historic enemy,” the Revolution consolidated its power through the excision of the U.S. economic presence.

For revolutionary Cuba, foreign investment has been about more than dollars and cents. It is about cultural identity and national sovereignty. It is also about a model of socialist planning, a hybrid of Marxist-Leninism and Fidelismo that has jealously guarded its domination over all aspects of the economy. During its five decades of rule, the regime’s political and social goals always dominated economic policy; security of the Revolution trumped productivity.

Fidel Castro’s brand of anticapitalism included a strong dose of antiglobalization. For many years, El Comandante en Jefe hosted a large international conference on globalization where he would lecture thousands of delegates with his denunciations of the many evils of multinational firms that spread brutal exploitation and dehumanizing inequality around the world.

Not surprisingly, Cuba has received remarkably small inflows of foreign investment, even taking into account the size of its economy. In the twenty-first century, the globe is awash in transborder investments by corporations large and small. Many developing countries, other than those damaged by severe civil conflicts, receive shares that significantly bolster their growth prospects.

Today’s ailing Cuban economy, whose 11.2 million people yield the modest gross national product reported officially at $64 billion^[1] (and possibly much less at realistic exchange rates), badly need additional external cooperation—notwithstanding heavily subsidized oil imports from Venezuela. As with any economy, domestic choices made at home and by Cubans will largely determine the country’s fate. Yet as Cubans have been well aware since the arrival of Christopher Columbus, the encroaching international economy matters greatly; it can be a source of not only harsh punishments but also great benefits.

Cuba’s Shifting Attitudes

The rise and fall in the stock of joint ventures on the island has reflected the dramatic shifts in Cuban economic policies since the Revolution. Over the past five decades, we can distinguish five periods. During the revolutionary 1960s, the regime systematically nationalized most foreign- and Cuban-owned properties, beginning with large U.S.-owned properties and eventually extending to small-scale enterprises and even mom-and-pop retail outlets. Soviet-style planning came to dominate economic policymaking. In the second phase, the sudden loss of the large Soviet subsidy occasioned an interlude of liberalization, of warm welcomes to European, Canadian, and Latin American investors, often extended by Fidel Castro himself. But once the economy showed signs of recovery, Castro reevaluated the opening to foreign capital and ordered the closure of many joint ventures, especially smaller firms, amid a more general recentralization of economic decision making. During the fourth phase, the Cubans turned toward state-backed projects involving Venezuela, China, and Brazil.

Since assuming the presidency in 2008, Raúl Castro has sent contradictory signals regarding foreign investment. In principle, Cuba’s foreign investment laws offer favorable conditions, and some joint ventures are successfully navigating the Cuban economic system. But the government has been keeping many suitors waiting for the final green light. Projects for large golf and marina resorts have been pending for years. The owners of the prime commercial office space in Havana have been unable to secure authorization for next-phase construction. An international hotel chain that offered to refurbish the shabby downtown Habana Libre hotel was refused an equity share. Brazilian negotiators have been urging Cuba to allow large investments in sugar mills and associated ethanol plants, only to be frustrated by “political symbolism”^[2] —lingering fears of compromising the sacred gains of the Revolution and endangering national security.

Even more alarming, major joint ventures have recently been shuttered or challenged by the authorities for failing to meet demanding performance requirements. Nevertheless, the government has been debating revisions to the foreign investment law, opening the possibility for a new, more positive phase in Cuba’s treatment of foreign direct investment (FDI).

The Cuban Economy Today: How FDI Fits In

In recent years, Cuba has suffered from the painful external shocks of exorbitant energy costs and rising food prices. And the island has been laid siege to by its formerly dominant and geographically proximate economic partner, the United States, which has imposed punishing comprehensive economic sanctions—including prohibitions against investments—unprecedented in their scope and longevity. The sudden withdrawal of Soviet subsidies in the early 1990s precipitated a major crisis but only a partial, hesitant course correction while Cuba’s Latin American neighbors made major strides forward through structural reforms and deepening engagement with the global economy. Only through such integration into the global economy can Cuba hope to modernize its factories and farms, realize economies of scale, and gain access to large markets, new technologies, and investment capital.

Tough and resilient, the Cuban economy survives and evolves—and is today opening another reform chapter, one that seems likely to be more consequential than earlier turns of the wheel. This time around, Cuba can build on its impressive investments in human capital, its quality health care, and universal education, originally undertaken by the Revolution largely for humanitarian reasons. Today’s high-quality workforce is a potent building block in the race toward higher earned incomes and more lucrative integration into global markets.

The Cuban Economy: Weaknesses and Strengths

By several key indicators, the Cuban economy is seriously underperforming:

The Cuban economy has increasingly become a low-productivity service economy. Industrial production is stalled at less than 50 percent of its pre-1989 levels. Agricultural output, despite some gains, remains insufficient to feed the population, and hefty imports of food staples bite off a big share of foreign exchange earnings. By 2010, agricultural output had recovered from mid-decade droughts and hurricanes but only to regain 2000 levels.
Merchandise exports, reported at $4.6 billion in 2010, were less than 10 percent of national output, reflecting the low international competitiveness of much of Cuba’s industry and agriculture. The weak export performance opens a gaping merchandise trade deficit that Cuba struggles to finance, often by accumulating payments arrears that irritate its international partners and undermine its credit ratings. Cuba has managed to narrow its bulging foreign exchange shortfall thanks only to the largesse of Venezuela, which barters its oil for Cuban medical personnel on terms highly favorable to Cuba.
Especially debilitating, national savings and investment rates are very low at around 10 percent of gross domestic product, half of the Latin American average and even further below the strong Asian investment rates. This results in the ongoing decapitalization of some sectors and relegating Cuba to a low-growth trap. From 1996 to 2008, the ratio of gross capital formation to gross domestic product averaged about 12.5 percent, startlingly low by international standards. In a survey of 157 countries, Cuba’s investment rate was consistently below the lowest tenth percentile during the period from 1990 to 2008.^[3]

The reforms of the 1990s did yield some important results as Cuba opened select sectors to foreign investment and commerce. In 2012, in partnerships with foreign hotel investors, managers, and tour operators, Cuba will host some 3 million tourists, yielding well over $2 billion in gross receipts. A Canadian nickel mining and smelter company, Sherritt International, is generating the largest single source of foreign exchange earnings, surpassing sugar. Other joint ventures with major European multinationals are successfully distributing premium Cuban rum and tobacco in international markets. These positive developments in international tourism, nickel and cobalt mining, and high-value-added agriculture (hand-rolled cigars and vintage rums) are foundations for future growth. They have not yet, however, sufficed to lift Cuba onto a strong sustainable growth path. To overcome the critical problems still confronting the Cuban economy, the Cuban government publicly recognizes that it will have to undertake more and deeper policy reforms.

Reform Guidelines

In April 2011, under the leadership of Raúl Castro, the Cuban Communist Party approved the “Guidelines of the Economic and Social Policy of the Party and the Revolution.” A lengthy document with 313 points, the official blueprint recognizes the economy’s major shortcomings and proposes pathways forward. Just twelve of the 2011 guidelines (numbers 96 through 107) directly address foreign investment—and these table no major policy reforms. The relevant guidelines neither recognize the critical role that foreign investment is already playing in the Cuban economy nor propose that foreign investment become a central driver of growth. Nevertheless, in the internal debates during the drafting of the guidelines, the proreform factions did manage to insert some positive language recognizing the potential contributions of FDI: “access to advanced technology, the transfer of management skills, a diversification and expansion of export markets, import substitution, the generation of new employment,” and access to external finance.

The more orthodox factions within the government and Communist Party seem to have gained the upper hand in drafting the section on foreign investment. The conservatives inserted language revealing their enduring distrust of foreign capital and underscored the need to carefully screen projects as well as to monitor closely those projects that are allowed to proceed:

Foreign capital is categorized as a “supplement” to national savings. While under any likely scenario domestic savings will indeed exceed foreign capital inflows, economists in Havana interpreted the “supplemental” label as demoting FDI to playing a secondary, nonessential role in economic planning.
Foreign investments should be carefully screened to be “consistent with the National Economic Plan” and “to make sure that the foreign capital satisfies a host of objectives.”
The guidelines suggest that foreign investments be subject to both external and domestic performance requirements. Foreign-owned firms should purchase goods and services supplied by Cuban companies.
Approved projects should be subject to continuous and rigorous monitoring to ensure that the foreign partner is observing its commitments. Existing partnerships should face “assessment and adjustment” to ensure consistency “with the country’s requirements.”
A time limit should be set for approved foreign investments to commence operations “to avoid their continued utilization of resources indefinitely with a resulting increase in inefficiency.”

Amid these cautionary notes, the guidelines do contain some positive news for potential foreign investors. The guidelines call for “more expedient” assessment and approval procedures. Investments that target the domestic market rather than the high-priority export sector should nevertheless be considered where they provide “indispensable” products or substitute for imports. Special Development Zones that attract FDI and promote exports and high-tech projects should be created. The guidelines also called for an up-to-date portfolio of investment projects that might be of interest to foreign partners. After persistent expressions of interest from the diplomatic community in Havana, the Cuban Chamber of Commerce—whose leadership is appointed by the Ministry of International Commerce and Foreign Investment (MINCEX)—issued such a portfolio in December 2011. But the surprisingly short list broke little new ground and addressed a truncated number of sectors. Rather than signal a renewed interest in attracting foreign investment, the chamber’s portfolio seemed to confirm that many Cuban economic planners believed that FDI was, at best, a secondary supplement to more promising sources of growth.

The Legal Framework

As part of the post-Soviet economic opening, Cuba authorized a new foreign investment law (Law 77, 1995) that combines elements commonly included in such national FDI frameworks with characteristics specific to the Cuban system. Law 77 stipulates that FDI may take the form of joint ventures with state firms or may be fully foreign owned.^[4] Investors enjoy full protection against expropriation, “except for reasons in the public interest,” in which case they will be indemnified, and have the right to appeal to a mutually agreed-on international investment dispute resolution entity. Litigation over other disputes between FDI and state-owned enterprises (SOEs) or government entities is referred to the jurisdiction of national courts. FDI firms pay income taxes at a 30 percent rate of net taxable income, although reinvested income can be exempt if so authorized by the government. Additional taxes of 25 percent are levied on employee wages, composed of an 11 percent wage tax and 14 percent social security contribution. Profits and dividends are freely transferable abroad in convertible currency.

All sectors of the economy are open to FDI, excluding only health and education services and the armed forces. FDI firms can import and export directly (i.e., without passing through a state wholesale company).

The Approval Process

For interested investors, an especially irritating peculiarity of the Cuban FDI system is the prolonged multilayered approval process. First, the foreign investor must draw up its application with its proposed SOE partner and the relevant ministry and then present that request to MINCEX. Second, MINCEX must then consult with all the corresponding agencies and institutions, which typically include the pertinent sectoral ministry, the powerful Ministry of Economy and Planning, the influential Ministry of Finance and Prices, the central bank, and the Ministries of Labor and Environment. Third, if subsequent to these broad consultations MINCEX is favorably disposed, it makes a recommendation to the Executive Committee of the Council of Ministers (CECM), which is composed of several national vice presidents and pertinent ministers and formally chaired by President Raúl Castro. Fourth, according to legal experts familiar with these procedures, the CECM normally accepts the recommendation of MINCEX, although it is not unknown for CECM to refer a proposal back to MINCEX for further elaboration.

Law 77 requires that applications be acted on within sixty days, but in fact the FDI approval process may drag on for two years or longer or may languish unanswered altogether. Moreover, MINCEX does not feel obliged to provide a written ruling to applicants and may or may not offer an oral explanation for its ruling. This demanding screening process could be admired for its inclusiveness, but it also contains a plethora of veto points and opportunities for delay. Applicants complain that the process is a nontransparent black box, denying access to many of the decision makers or even knowledge as to which personalities are at the table.

Law 77 allows for 100 percent foreign ownership. Yet only six such wholly foreign-owned firms exist today: three in petroleum and energy, two in maritime transport, and one in the financial sector.^[5] Underscoring the wide degree of bureaucratic discretion in the foreign investment regime, government functionaries have chosen to largely ignore an important option that dominates FDI in most countries that would allow foreign investments independent of Cuban SOEs. Another curious feature of the Cuban system is that FDI ventures are approved for a fixed time period—as low as fifteen years—on which time the contract is terminated unless it is renewed by joint agreement of the parties and the government. As many FDI firms have discovered, renewal is anything but automatic, and the government may seek to alter the contract terms in fundamental respects. For example, whereas in the 1990s the government often granted the foreign partner majority control, now it is seeking to revert 51 percent or more of the voting shares to the SOE partner. This revealed Cuban preference for management control discourages some investors altogether.

It also drives joint ventures to finance themselves through higher debt—rather than equity—than they might otherwise. In another escalation of conditions placed on new joint ventures or those up for renewal, the government is also pressing firms to export at least 20 percent of their production.

In principle, the Cuban authorities have honored the prohibition against expropriation without compensation guaranteed in Law 77 (chapter III, article 3). But many FDI firms have been closed through the nonrenewal of contracts or, more precipitously, by the state placing the firm in a nontenable position and forcing sale of shares to the state. The government has also seized the property of shareholders accused of corruption, as in the dramatic case of the successful fruit juice manufacturing and distribution firm Rio Zaza.

The World’s Heaviest Tax on Labor

The most unusual characteristic of the Cuban FDI regime is the labor contract system. FDI firms are not generally allowed to directly hire labor. Rather, a state employment agency—typically a dependency of the relevant sectoral ministry (e.g., Tourism or Light Industry)—hires, fires, settles labor disputes, establishes wage scales, and pays the wages directly to the workers. The FDI firm pays the wage bill to the state employment agency, which in turn pays the workers. But there is a very special twist to the Cuban system: the FDI pays wages to the employment agency in hard currency, and the employment agency turns around and compensates the workers in local currency, an effective devaluation or tax of twenty-four to one. Thus, if the firm pays the employment agency $500 a month and the employment agency pays the workers 500 pesos, over 90 percent of the wage payment disappears in the currency conversion; the effective compensation is instantly deflated to $21 per month. This could be the world’s heaviest labor tax. It provoked one Cuban worker to remark to the author, “In Cuba, it’s a great myth that we live off the state. In fact, it’s the state that lives off of us.” This labor system, which also authorizes only one national union (the Confederation of Cuban Workers, which is closely allied with the Communist Party), violates many principles of the International Labor Organization, of which Cuba is a charter member. It also freezes Cuba into a low-wage, low-productivity trap.^[6]

The legal regime governing FDI has permitted broad official discretion. In the mid-1990s, the government welcomed and approved many joint ventures. But beginning in 2003, without any formal legal alterations, the government began to rigorously review existing firms and closed many that failed to meet its shifting standards, favored larger over smaller businesses, and privileged foreign SOEs over private partners.

Few Foreign Firms, Big Contributions

Assessing foreign investment in Cuba is complicated by the scarcity of data. The Cuban government’s culture of secrecy takes on extreme form when it addresses international capital flows. Spectacularly, Cuba simply does not publish a capital account. Cuba releases no numbers on capital inflows or outflows, nor is there an official accounting of foreign reserves. And offerings within the current account that record capital-related flows are presented in highly aggregate form: there is but one line for “renta” (income), which includes transactions (both outgoing and incoming) on interest, dividends, and profits, “among others.”^[7]

When pressed for an explanation, the Cuban government points to U.S. hostility, affirming that the U.S. Treasury might take advantage of greater transparency to harass Cuba’s economic partners or seize Cuban assets. These fears may well be justified, demonstrating yet another example of how U.S. sanctions engender precisely the behavior pattern—in this case, extraordinary state secrecy—that the United States decries. In spaces where Cuba apparently feels less threatened, such as social indicators or even the direction and composition of merchandise trade, statistics are made more readily available.

During the brief period between 1993 and 2001, the Cuban government did publish some limited, highly aggregated data on foreign investment flows. Cumulatively, reported flows through 2001 totaled $2 billion (table 13.1).

Foreign Investment Inflows, 1993–2001 (millions of dollars)
Year	Annual Flow	Cumulative
1993	54.0	54.0
1994*	563.4	617.4
1995	4.7	622.1
1996	82.1	704.2
1997	442.0	1,146.2
1998	206.6	1,352.8
1999	178.2	1,531.0
2000	448.1	1,979.1
2001	38.9	2,018.0

* The reported flows jump in 1994, when the government decided to fold in flows from years prior to 1993.

This useful series was discontinued after 2001, when another emerging option caught Cuba’s attention: the availability of state-owned capital in countries, notably Venezuela and China, which offered certain advantages from the Cuban perspective. These friendly powers were prepared to offer capital on subsidized terms and in ideologically comfortable state-to-state deals.^[8] For these state-to-state deals, which are notoriously nontransparent and often not reported to the international agencies that track FDI, it is extremely difficult to estimate actual investment flows; to disentangle announcements, commitments, and on-the-ground implementation; and to decipher whether the deal is structured in the form of equity (wholly owned or joint ventures) or an arms-length service contract or as a production-sharing agreement (as is often the case in the petroleum sector). The capital flows may not qualify as FDI at all but rather as state banking loans. This has been the case with the Brazilian involvement in the Mariel port expansion and in the renovation of a sugar refinery in Cienfuegos province—projects often erroneously labeled in the media as “investments.”

Perhaps the best informed estimate of the stock of Cuba FDI comes from an international financial consultant (who wished to remain anonymous) with privileged access to foreign investment data. The source noted that according to the Cuban central bank, FDI inflows as of 2001 totaled $1.9 billion (very close to the published figure of $2.02 billion in table 13.1) and estimated that by 2009 the total stock may have reached $3.5 billion. He added another telling estimate: twenty investors accounted for nearly $3 billion of the $3.5 billion; indeed, the top ten investors accounted for the lion’s share. The remaining universe of some 200 joint ventures, therefore, would account for only about $500 million in investment capital, or an average of $2.5 million per project.

Joint Ventures: Numbers and Size of Firms

As of 2011, the total number of joint projects stood at 245. These 245 projects included sixty-seven hotel administration contracts, eight production and service administration contracts, and thirteen production cooperation agreements. Moreover, not all of these joint projects included private partners; some hail from Venezuela as the source country, and presumably many of these projects engage not private investors but rather Venezuelan SOEs. Compare the number of joint ventures operating in Cuba with the number of foreign affiliates reported to be operating in other countries of roughly comparable size and development: 911 in Chile, 754 in Croatia, 5,387 in Ireland, 2,761 in Malaysia, 5,144 in Portugal, and 2,049 in Taiwan.^[9]

The number of joint projects in Cuba has been in sharp decline since 2002, when they peaked at just over 400, then fell by half by 2008. This consolidation occurred for several reasons. The Cuban state closed down many joint ventures, having concluded that they were either not living up to their original promises, were not advancing Cuban economic goals, were losing money, or were behaving illegally.^[10] Some firms withdrew on finding it impossible to carry on a successful business within the context of Cuban state planning; firms entering during the heady reform years of the mid-1990s were taken aback when Fidel Castro decided to halt and even roll back some of those hopeful market-oriented measures. In some cases, Cuban SOEs did not welcome competition from private firms that had certain advantages, such as superior access to foreign credit and therefore to imported inputs, and so used their access to government agencies to squeeze the joint ventures; hapless joint ventures reported that their electricity rates or real estate rents suddenly spiked, gasoline was no longer delivered on time, visas were denied to international experts, access to critical foreign exchange was blocked, and so on. Students of the political economy of state planning would not be surprised to hear of SOEs leveraging their political networks to disable private competitors.

In 1998, the Cuban government announced as a matter of principle that it preferred large-scale joint ventures to smaller ones.^[11] Apparently, this preference remains in place. Yet this bigger-is-better prejudice flies against contemporary trends in international economic thought that argue the opposite: that small and medium-size firms are often more innovative, more flexible, and employ more workers per dollar invested than very large firms. Nor is it necessarily an either/or proposition, as larger firms can benefit from being surrounded by efficient, specialized smaller suppliers. The Cuban government’s opposition to smaller joint ventures seems particularly odd at a time when it seeks to stimulate employment, increase the availability of consumer goods, and actively promote small-scale enterprise.

Joint Ventures: Employment, Sales, and Exports

Citing internal government documents, Cuban sociologist Mayra Espina Prieto estimated that joint ventures employed 0.7 percent of the state’s 4.9-million-person workforce—about 34,000 people.^[12] This rather small number seems plausible, considering that some of the larger joint ventures are located either in capital-intense mining and energy (Sherritt International) or in international marketing (Habanos and Pernod Ricard) whose sales forces are located primarily overseas and who do not directly employ the producers of tobacco or rum. Nor does this estimate take into account the large numbers of workers in hotels that are owned by Cuban SOEs but managed by foreign firms under hotel administration contracts.^[13]

Some joint ventures are strategically placed in the vital export sector. According to Cuban economist Omar Everleny Pérez Villanueva (based on his access to unpublished data), joint ventures accounted for $1.9 billion in exports in goods and services in 2008. He attributed 80 percent of these exports to just seven firms.^[14] Pérez Villanueva places these businesses in nickel, tobacco, citrus fruits, beverages, tourism, and communications, among others.^[15] Based on our case studies and the high degree of industrial concentration, we can place names on these firms: Sherritt International (nickel), Habanos (British Imperial Tobacco, cigars), Havana Club rum (beverages), Rio Zaza and BM (citrus fruits), as well as Sol Meliá (tourism).^[16]

Further relying on unpublished government statistics, Pérez Villanueva presents data indicating that total joint venture sales in the period from 2007 to 2009 averaged $4.5 billion, including both exports and domestic sales. At $4.5 billion in sales, joint ventures would account for roughly 7 percent of Cuba’s total production of goods and services, reported at $62 billion (2009).^[17]

De Facto Excluded Sectors

Law 77 (chapter IV, article 10) allows for FDI in all sectors except health, education, and “the armed forces institutions, with the exception of the latter’s commercial system.” In practice, joint ventures have also been largely excluded from two sectors where foreign investors could make a huge contribution: sugar and biotechnology.^[18] In the case of sugar production, the obstacles appear to be rooted in revolutionary history. The expropriations of the large, often foreign-owned estates were a hallmark of the Revolution; to return the land to foreign hands might seem an inglorious retreat. There is also the unresolved question of compensation to the former owners, necessary to free the lands from potential legal challenges by claimants and U.S. sanctions. Today, as officials reconsider FDI within the context of economic reforms, there is a sharp debate over whether and to what degree to further open food processing and agroindustry, including sugar-based biomass, to external capital. In an apparent victory for more favorable treatment for FDI, in late 2012 and after lengthy negotiations, the Cuban government approved a joint venture, Biopower, S.A., with British investors to generate biomass from sugar derivatives; the roughly $50 million investment is to construct a thirty-megawatt power plant. Billed as a pilot project, the British firm Havana Power hopes that other biomass energy projects will follow.^[19]

In the case of biotechnology, government officials voice fears that foreign partners will take advantage of Cuban firms and pirate their innovations. Rather than turn to the European and Japanese multinational pharmaceutical giants to assist in marketing Cuban innovations and pharmaceutical products, Cuba has preferred to seek state-to-state commercial deals with developing countries (notably Venezuela), and to attempt joint ventures abroad (notably in China), where Cuban firms are the foreign investors.^[20] Cuba has had some success with these strategies but has had great difficulty accessing promising markets in Europe, Latin America, and much of Asia. Yet it is the pharmaceutical multinationals that possess the requisite knowledge of national patent regimes and distribution networks that could take the Cuban biotech sector to another level of success.

Also largely excluded are financial firms, reserving a monopoly over most financial transactions to state-owned banks. A legacy of the Soviet planning model, capital markets are severely repressed in Cuba. Those international banks allowed to open representative offices in Cuba are generally restricted to international transactions that serve client needs.

Summarizing these findings, we can conclude that FDI added about $3.5 billion to Cuban savings and investment over the past two decades or so, contributed handsomely to exports of goods and services, and accounted for roughly 7 percent of domestic output. Joint ventures currently employ about 34,000 Cuban workers, or under 1 percent of the active labor force.

The flows of FDI to Cuba compare unfavorably to the experience of other countries, whether for countries of similar size and location in the Caribbean Basin or in high-growth East Asia. Joint ventures can be successful in the Cuban context. But the Cuban government has driven a wedge—whether by directly denying business permits to operate or by indirectly discouraging investors—between Cuba and the vast ocean of savings circulating the globe and driving capital formation, technological diffusion, economic growth, and poverty reduction in developed and developing countries alike.

The Diaspora as Investors

The overseas Chinese and Vietnamese are two examples of diasporas that have made use of their kinship connections and cultural knowledge to help fund economic development in their home countries. Many of the 1.8 million Cuban Americans (2010 U.S. Census) have prospered and would invest in Cuba—if the two governments allowed them to do so under reasonable conditions.

According to Miami real estate lawyer Antonio Zamora, a Bay of Pigs veteran who has since traveled to Cuba dozens of times, there could be a booming condominium market for mainland investors and Cuban Americans looking to retire in a culturally comfortable environment that offers good health care and relatively inexpensive, secure living. Zamora also counts some twenty golf resort and boat marina projects on the drawing boards—of which four alone are worth more than $1 billion—waiting for the green light from Cuban authorities.^[21]

The future of investments by Cuban Americans is linked to Cuba’s immigration rules, which currently deprive many émigrés of the right to own property. Changes in the rules governing émigré property holdings could set the stage for the release of pent-up Cuban American demand for housing, property, and other investments on the island. Already, many Cuban Americans are pumping money into their relatives’ restaurants and other small businesses now authorized as part of the regime’s policies of growing the nonstate sector (private businesses, cooperatives, and private farms). Sanctions by the United States do not yet permit investments—risk capital seeking a return—on the island but do permit donations. The conditions under which these remittances occur are known only to the parties to the transfer. They may lack formal legal protection, but as some Cuban Americans assert, “trust can be a stronger bond than written contracts.” One informed Cuban American businessman estimated that as many as 80 percent of the larger paladares (restaurants) opening in Havana benefit from expatriate funding. Thus, the imposition by the Cuban government in September 2012 of hefty taxes on gift parcels, some carrying materials for use by small businesses, was a setback to emerging private enterprises.^[22]

Very few Cubans can accumulate savings from their meager salaries. Cuban state banks are accustomed to lending to medium- and large-scale enterprises, not to risky start-ups. Hence, aspiring Cuban entrepreneurs must rely on remittances or, in some cases, income earned during sojourns overseas. The financial constraint is a major obstacle to the blossoming of the small-scale private sector. The Miami-based Cuba Study Group has partnered with the Catholic Church–affiliated Félix Varela Center to offer instruction to aspiring microentrepreneurs in subjects such as accounting, marketing, and composing business plans. The project, “Cuba Emprende,” could be a prototype of cooperation between businesspersons in the diaspora and the emerging private sector on the island.

Despite the numerous obstacles, many Cubans are now dreaming of starting their own businesses—and some are succeeding. For example, they are succeeding as owners of fine-dining restaurants, stands selling cream-filled churros, a beauty salon specializing in Afro-Cuban hairstyles, a high-concept barber shop, a graphics design venture, a cell phone repair shop, and home remodeling and as managers of apartment rentals and taxicab fleets.^[23] Many of these young businesses are receiving some form of assistance—remittances, supplies, or customers—from the diaspora.

The United States could do much more to bolster Cuba’s emerging entrepreneurs. It could facilitate the pooling of remittances targeted at investing in nonstate firms. More boldly, the United States could lift sanctions on investment and trade with nonstate Cuban firms rigorously certified as genuine private businesses and independent cooperatives. Larger investments by Cuban Americans or by U.S.-based corporations must await changes in regulations in both nations. The outstanding claims of properties expropriated in the early years of the Revolution stand as another barrier to investment flows.^[24]

As emphasized throughout this study, changes in legal frameworks by themselves will not be sufficient to unlock large-scale investment flows. Many U.S. individuals and firms will wait until they perceive a more attractive investment climate, with all that entails. Some Cuban Americans may exhibit a somewhat lower threshold, whether as the result of a “sentimental premium” or because they believe that their strong social networks reduce their risks.

Looking Ahead

Cubans will decide the roles that foreign investment will play in the island’s development. But it is difficult to imagine that Cuba, with only its own resources, can save enough, innovate rapidly and widely enough, and access enough distant markets to meet the rising expectations of the Cuban population. Rather, Cuba should make up for lost time, learn from its mixed experiences with joint ventures and free trade zones, and study the success stories of other developing countries in harnessing foreign capital for national development. Cuba should also recognize that far from being a threat to the social gains of the Revolution, international capital is the best hope for preserving quality social services within the context of a more productive and competitive national economy.

Cuba is richly endowed with more than enough comparative advantages to compete successfully in the global economy. The Cuba of the twenty-first century can offer deep history (a renovated Habana Vieja), attractive lifestyles (sun and surf, rum, and tobacco), quality performing arts and design, cutting-edge innovations in medicine and health care, and enduring affinities to European, Latin American, and U.S. popular cultures. A good portion of the workforce is already well educated, including in engineering, mathematics, and computer technologies.

Rather than perceiving its proximity to the United States as a danger, Cuba will sooner or later grasp the tremendous opportunities of a mass market of over 300 million consumers. At the same time, when compared to the prerevolutionary Cuba of the 1950s, today’s more diversified global economy offers a plethora of competing sources of capital; a new Cuba will host a rainbow of international investors who will be more respectful of Cuban political sovereignty.

Epilogue: Cuba’s New Investment Law; Open for Business?

Dateline Havana, April 1, 2014: The Cuban legislature has approved a new foreign direct investment law (FDI), and the detailed follow-on regulations will be issued within the next 90 days. From my informal conversations in Havana, Cubans on the street seem to accept with enthusiasm the government’s dual message: that the new guidelines will not compromise Cuban sovereignty—a key gain of the 1959 revolution—but will encourage badly needed inflows of foreign capital and technology.

In a shift from past practices, government messaging has emphasized the importance of foreign investment worldwide, with the Communist Party daily, Granma (March 31, 2014), quoting a government commission declaring that “no country today has successfully developed without foreign investment as a component of its political economy.” President Raúl Castro asserted that “we must take into account the absolute necessity to stimulate and attract foreign investment, to add dynamism to our economic and social development.” Experienced commentators have noted, however, that many of the more positive paragraphs in the new law could also be found in the previous 1995 FDI regulations, which were outweighed by more restrictive clauses and by a recalcitrant bureaucracy that in recent years has approved very few major new foreign ventures.

Several of the more promising sections of the new law echo recommendations in the 2012 Brookings monograph, The New Cuban Economy: What Roles for Foreign Investment?:

A strong official recognition that FDI must be integral to Cuba’s development strategy if the country is to depart from its sluggish economic path.
Majority foreign ownership is an option (this was also the case, even if ignored in practice, under the 1995 regime).
The project approval process should be streamlined and made more transparent.
Firms should have more flexibility with regard to wage scales, such that remuneration can be a stimulus to productivity. In addition, the much anticipated currency unification will likely reduce the extraordinarily heavy tax on wages paid by foreign investors.

Other noteworthy aspects of the new law include reductions in certain taxes and the promise of just compensation in the event of expropriation. But some existing obstacles to investment appear not to have been adequately addressed. For example, the new law continues to press investors on local content requirements, even as it also notes the importance of firm integration into global value chains.

The proof will be in the pudding, and investors will be watching closely for the fine print in the new regulations and, most importantly, for the implementation of the approval process. The new law recognizes that Cuba badly needs foreign investment in many sectors of its economy, including but not limited to agriculture and sugar, energy, bio-technology, construction, and tourism. Will the government establish an investment climate that attracts foreign investments and a truly transparent bureaucratic process that vets proposals in a prompt timeframe competitive with international standards?

Notes

Excerpted from Richard E. Feinberg, The New Cuban Economy: What Role for Foreign Investment? (Washington, DC: Brookings Institution Press, 2012). Reprinted by permission of the publisher.

Oficina Nacional de Estadísticas (ONE), National Accounts, table 5.2, “Global Supply and Demand,” http://www.one.cu/aec2010/esp/05_tabla_cuadro.htm. Figure is for 2010.

Embassy of Brazil in Havana, “La industria de la caña de azúcar en Cuba,” sector report, 2012.

Gabriel Di Bella and Andrew Wolfe, “Cuba: Economic Growth and International Linkages—Challenges for Measurement and Vulnerabilities in a Bimonetary Economy,” Cuba in Transition 19 (2009): 354–67.

Law 50 of 1982 had established a ceiling of 49 percent for the participation of foreign capital in joint ventures. Law 77 opened the door to joint ventures with either majority or minority foreign ownership shares as well as to wholly foreign-owned ventures. Formally, Law 77 of 1995 allows for FDI to take one of several forms: (1) a joint venture in which one or more foreign investors participate with one or more national investors to form a Cuban commercial company that adopts the form of a nominal share corporation, (2) an international economic association contract in which the national and foreign investors cooperate without the establishment of a legal entity distinct from each of the parties, and (3) totally foreign capital company, without the involvement of any national investor.

Center for the Study of the Cuban Economy, La Inversión Extranjera y de la Unión Europea en Cuba (Havana: European Union, 2012), 5.

Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva, “Apertura al cuentapropismo y la microempresa, una pieza clave del ajuste estructural,” in Miradas a la economía Cubana: El proceso de actualización, ed. Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva (Havana: Editorial Caminos, 2012), 51.

ONE, External Sector, “Methodological Notes,” http://www.one.cu/aec2010/esp/08_tabla_cuadro.htm.

See Richard E. Feinberg, “Cuba’s Emerging Market Strategy,” in Reaching Out: Cuba’s New Economy and the International Response (Washington, DC: Brookings Institution Press, 2011), 23–44. Source: ONE, Anuario estadístico de Cuba 2002 and other issues, and Jorge F. Pérez-López, “The Rise and Fall of Foreign Investment in Cuba,” Cuban Affairs Journal 3, no. 1 (February 2008): 25, http://www.cubanaffairsjournal.org.

UN Conference on Trade and Development, table 34, “Number of Parent Corporations and Foreign Affiliates, by Region and Economy,” 2010, World Investment Report 2011. These country numbers should be treated as rough orders of magnitude, as country reporting methodologies are not uniform and may understate quantities.

10.

Center for the Study of the Cuban Economy, La Inversión Extranjera y de la Unión Europea en Cuba; see also Emily Morris, “Cuba’s New Relationship with Foreign Capital: Economic Policy-Making since 1990,” Journal of Latin American Studies 40 (2008): 769–92, and Paolo Spadoni, “Foreign Investment in Cuba: Recent Developments and Role in the Economy,” Cuba in Transition 12 (2002): 158–78.

11.

U.S.-Cuba Trade and Economic Council, “Foreign Investment Policy Change,” Economic Eye on Cuba, February 16–22, 1998, http://www.cubatrade.org/eyeonr.html#4; see also Economist Investment Unit, “Foreign Investment Focuses on Large Projects,” Cuba Country Briefing, February 12, 2001.

12.

Mayra Espina Prieto and Viviana Togores González, “Structural Change and Routes of Social Mobility in Today’s Cuba: Patterns, Profiles, and Subjectivities,” in Cuban Economic and Social Development: Policy Reforms and Challenges in the 21st Century, ed. Jorge I. Dominguez et al. (Cambridge, MA: Harvard University David Rockefeller Center for Latin American Studies, 2012), 267, table 8.2.

13.

E-mail communication of Mayra Espina Prieto with author, June 2012.

14.

Omar Everleny Pérez Villanueva, The External Sector of the Cuban Economy (Washington, DC: Woodrow Wilson International Center for Scholars, 2010), 4–5, http://www.wilsoncenter.org/cuba. See also Omar Everleny Pérez Villanueva, “Foreign Direct Investment in China, Vietnam, and Cuba: Pertinent Experiences for Cuba,” in Dominguez, Cuban Economic and Social Development.

15.

In 2009, mining exports were $839 million, sugar industry exports (e.g., rum) were $226 million, and tobacco exports (cigars and cigarettes) were $212 million. In each sector, brand-name joint ventures were dominant. ONE, External Sector, table 8.7, “Exports of Good per Groups of Products,” http://www.one.cu/aec2010/esp/08_tabla_cuadro.htm.

16.

Communications, however, has since been fully nationalized, as has Rio Zaza fruit drinks. The contribution of Sherritt to exports will vary with the market prices for nickel and cobalt. The tourism exports attributed to foreign investment would capture joint ventures but not hotels managed by service contracts with international hotel operators.

17.

ONE, National Accounts, table 5.2, “Global Supply and Demand,” http://www.one.cu/aec2010/esp/05_tabla_cuadro.htm.

18.

Also excluded in practice have been domestic and international commerce and legal consultancy. See Rolando Anillo, “Cuban Reforms and Foreign Investment Legislation: Knowing Your Neighbor and Future Partner,” Cuba Law Update, January 2010 (Law firm of Fowler Rodriguez Valdés-Fauli).

19.

Marc Frank, “Britain’s Havana Energy Sets Cuban Bioenergy Venture,” Reuters, November 12, 2012.

20.

On joint ventures in China, see Julio A. Díaz Vázquez, China-Cuba: Relaciones económicas 1960–2010 (Mexico City: Universidad Nacional Autónoma de México, Cuadernos de Trabajo del CECHIMEX, 2011), 7, table 2.

21.

Statement at the annual meetings of the Association for the Study of the Cuban Economy, Miami, August 2012, http://www.cubastandard.com, February 2011. However, some of the proposed golf resorts pertain to non-U.S. investors.

22.

One knowledgeable observer estimated the value of remittances entering Cuba at $2.2 billion and of merchandise entering as packages at $2.0 billion to 2.5 billion in 2011. Emilio Morales, “What’s behind the New Cuban Tariffs,” Havana Consulting Group, July 9, 2012, http://thehavanaconsultinggroups.com/index.php?option=com_content&view=article&id=329%3Awhats-behind-the-new-cuban-tariffs&catid=47%3Aeconomy&lang=en. A former executive with the SOE CIMEX, Morales attributed the new taxes in part to pressure from state-owned firms suffering from the competition. See also Marc Frank, “Reforms and Informal Market Hit Cuban State’s Retail Sales,” Reuters, September 14, 2012.

23.

Richard E. Feinberg and Collin Laverty, Cuba’s New Entrepreneurs: Recent Experiences and Policy Options (in press).

24.

For an expert discussion of settlement options, see Rolando Anillo-Badia, “Outstanding Claims to Expropriated Property in Cuba,” in Proceedings of the Association for the Study of the Cuban Economy (Miami: Association for the Study of the Cuban Economy, 2011).

Chapter 14

The Political Economy of Leisure

Marguerite Rose Jiménez

More than 2.9 million international tourists visited Cuba in 2012. It was the tenth year in a row that Cuba had surpassed the 2-million-arrivals mark, further solidifying Cuba’s place near the top of the Caribbean tourist market in terms of total visitors annually. Cuba’s return to the international tourism market has profoundly affected the Revolution in the past twenty-five years. Only 275,000 tourists—less than one-tenth the 2012 figure—came to the island in 1987, when the government approved a law allowing joint ventures with foreign investors in tourism-related projects, such as hotels.^[1]

The decision to rely on tourism for hard-currency earnings was not taken easily. Cuban leader Fidel Castro’s reluctance to promote tourism was rooted in memories of pre-1959 Cuba as a hedonist playground for affluent North Americans, accompanied by drugs, prostitution, corruption, and gambling casinos run by organized crime syndicates. These pathologies were largely eliminated in 1959 or shortly thereafter when the tourist industry was essentially shut down. As a result, images of Cuba’s prerevolutionary past complicated the discourse on possibilities for Cuba’s economic recovery. But the unwanted saviors—international tourism and dollarization of the Cuban economy—became necessities, however unpalatable, as the Cuban economy spiraled downward in the first years of the “Special Period.”

During the first decades of the Revolution, tourism and foreign investment were disdained by the fiercely independent government. By the late 1980s and early 1990s, economic necessity had caused the government’s previously hard-line position to soften considerably. With limited options and tourism’s potential to quickly generate high returns on investment, 20 percent of total investment during the 1990s went to developing the tourist industry.^[2] The government’s focus on tourism paid off, and the industry has grown exponentially during the past twenty-five years. For example, between 2000 and 2005, tourism increased nearly 20 percent annually, helping Cuba break into the top ten most frequented tourist destinations in the Western Hemisphere.^[3] Today, Cuba, along with Puerto Rico, the Dominican Republic, and the U.S. Virgin Islands, accounts for more than 50 percent of total arrivals in the Caribbean, even though Cuba remains closed to U.S. tourists because of the embargo.^[4] With $2.6 billion in revenues generated in 2012, tourism has replaced sugar as a primary driver of the Cuban economy.

Along with the beneficial effects of tourism’s rise to economic dominance on the island, there are several potentially problematic consequences as well. By jump-starting the economy with an infusion of hard currency from tourists and foreign investments, the Cuban government set off a chain reaction that has contributed to a gradual deterioration of many of the ideals on which revolutionary Cuba was founded. Prior research about Cuba’s turn to tourism has focused on aspects related to its economic impact. Often excluded from the discourse on tourism, until recently, are its inherent sociopolitical consequences, such as discrimination, unequal power relations, and socioeconomic inequality. These negative effects raise questions about the viability of tourism as a means to sustain both economic development and the Revolution’s sociopolitical goals. The detrimental long-term side effects of tourism result from several factors: (1) the re-creation of class conflict within the dual economy, (2) the renewed objectification of Cuban women (and men to a lesser extent), (3) the growth of race-based discrimination, (4) the commodification and marketing of Cuban culture, and (5) the loss of human capital as educated professionals seek out opportunities to earn hard currency in the tourist sector.

Dual Economy or Duel Economy?

After the fall of the Soviet Union, tourism emerged as “the only sector of the Cuban economy with the capacity to act as a ‘leading sector’ for the country’s development,” according to Cuban economist Pedro Monreal.^[5] It seemed to be an obvious choice because of Cuba’s abundance of natural resources, which gave Cuba a competitive edge over its Caribbean neighbors. Cuba has more beachfront than all of the other Caribbean islands put together.^[6] Other assets, as stated by Charles Suddaby, are Cuba’s “geographic diversity, enormous range of existing and potential attractions, cultural and architectural history and combination of educated workforce and low incidence of crime,”^[7] which makes Cuba a desirable destination for pleasure-seeking travelers.

To make Cuba attractive to foreign investors, major shifts in economic policy were required. After extensive debates during the Fourth Congress of the Cuban Communist Party in October 1991, two key reforms were enacted that were calculated to ease obstacles for foreign investors. The first came in the form of a constitutional amendment in 1992 that allowed foreign companies investing in Cuba to own a 49 percent share in joint ventures.^[8] The second occurred in 1993 with Decree Law 140, which legalized the use of dollars on the island.

While the 1993 decision was necessary given the dire economic situation, Max Azicri notes, “the dollarization of the economy raised concerns with its social implications.”^[9] Dollars, which began to circulate freely, came mainly from Cubans who worked in the tourist industry or from those with family abroad who sent monthly remittances.^[10] Their access to dollars enabled them to purchase material goods that were unavailable to the majority of Cubans. Thus developed the “dual economy,” consisting of the peso economy, where moneda nacional (national currency, or pesos cubanos) is used, and the dollar economy, where only foreign currency, or pesos convertibles (convertible pesos, CUC), are acceptable.^[11] Aside from operating with separate currencies, the two economies had their own stores, restaurants, and forms of transportation. State salaries are paid mainly in the national currency, as is social security. National currency can be used to ride a bus, pay for some state services, and buy basic foodstuffs (bread, rice, beans, vegetables, milk, and meat) and a meal in some restaurants. But it cannot, for the most part, be used to buy imported goods (toiletries, gasoline, electrical appliances, most clothing, or goods that can be exported for hard currency). The failure of the peso economy lies in the average Cuban’s inability to buy necessities with the national currency. This inability has increased the pressure for Cubans to find ways of obtaining hard currency, although access to the tourist economy is difficult for most to acquire. The dual economy has produced several problems, the most prominent of which is the emergence of significant inequalities in the population.

Entertainment or Exploitation: Sexualizing the Revolution

One of the many attractions drawing tourists to Cuba is the entertainment industry dominated by music and dance. The tourist-oriented entertainment industry has contributed to the hypersexualized image and objectification of Cuban women (and increasingly of Cuban men as well). The use of women in the promotion of tourism in Cuba was epitomized at the very beginning of the Special Period when Playboy was allowed to tour the island and run a feature on Cuban women.^[12] Susan Eckstein claims, “The government’s interest in hard currency led it to play on its prerevolutionary reputation and to reverse its earlier puritanical stance on such matters.”^[13]

Immediately after the Revolution, the government made efforts to eradicate prostitution by rehabilitating and educating former prostitutes, incorporating them back into the new Cuban society as productive workers.^[14] According to Elisa Facio, “The revolutionaries aimed to free women from sexual exploitation in all sectors of society.”^[15] Azicri further explains, “The government enforced policies directed at women to facilitate their progress and incorporate them into the overall development programs, so their gains would be parallel to men’s.”^[16] Cuban women experienced opportunities previously unimaginable in Cuba, in areas such as education, health care, and employment. They became full participants in the Cuban economy, increasing their economic activity by 223.9 percent between 1970 and 1990.^[17] During these years, prostitution in Cuba all but disappeared.

Coincident with the start of the Special Period and the growth of tourism, prostitution, and sexual tourism reemerged.^[18] Cuban authorities have tended to place a large share of the blame for the rise in prostitution directly on the women involved rather than on the men who pay them or on the economic circumstances on the island. Facio argues,

To succeed, sex tourism requires Third World women to be economically desperate enough to enter prostitution. . . . The other side of the equation require men from affluent societies to imagine certain women, usually women of color, to be more available and submissive than the women in their own countries.^[19]

There is some debate among social scientists writing on sex work in Cuba (in which both women and, increasingly men, participate) as to whether materialism or genuine necessity drives these individuals to prostitution or sex work on the island.^[20] Eckstein states, “A lust for dollars, meals in dollar restaurants, and gifts from the dollar stores outweighed the social stigma, the degradation, the health risks and the fear of arrest.”^[21] According to the Cuban government, individuals do not have to resort to these sorts of “deviant” acts to survive because the population’s most basic needs are covered. Fidel Castro remarked in 1993,

There are no women forced to sell themselves to a man, to a foreigner, to a tourist. Those who do so, do it on their own, voluntarily, and without any need for it. We can say they are highly educated hookers and quite healthy, because we are a country with one of the lowest number of AIDS cases. . . . Therefore, there is truly no prostitution healthier than Cuba’s.^[22]

Sex work in Cuba is not only a problem because of the exploitation of women (and men). The rise in sex work has also exposed and perhaps exacerbated a racial divide within Cuban society. Tourists seeking sexual relations on the island are known to prefer darker-skinned and “exotic” consorts, and Afro-Cubans have a preexisting economic disadvantage. Facio explains, “The combination of foreign men seeking sexual partners who are racially and culturally different, coupled with the sexual double standard’s separation of women into ‘good’ versus ‘bad’ ones, reinforces the desirability of darker-skinned Cuban women as sex objects.”^[23]

The Color-Blind Revolution

The dream of a color-blind Cuba began long before 1959. José Martí, one of the major heroes of Cuba’s War of Independence, propounded the idea in the 1890s. Martí envisioned the creation of a shared Cuban identity, or cubanidad, where people were neither black nor white but simply Cuban. He wrote, “There is no danger of war between the races in Cuba. Man means more than just white man, mulatto or black man. The souls of white men and negroes have risen together from the battlefield where they have fought and died for Cuba.”^[24]

After 1959, there was a decrease in the material inequalities that had been so prominent in prerevolutionary Cuba and had disproportionately affected Afro-Cubans. Alejandro de la Fuente quotes Fidel Castro as saying, “We believe that the problem of discrimination has an economic content and basis appropriate to a class society in which man is exploited by man. . . . Discrimination disappeared when class privileges disappeared.”^[25] Clarence Lusane, a scholar of comparative race relations, disputes this position. “Cuba eradicated institutionalized racism,” he explains, but “racial prejudice and individual discrimination continue to occur at other levels.”^[26] While a decrease in the material gap between the races did occur in socialist Cuba, since 1991 class inequality has once again coincided with racial inequality. The reintroduction of tourism into the Cuban economy appears to have exacerbated the racial inequality, as Afro-Cubans have significantly less access to jobs in the legal tourist industry, placing them in direct contact with visitors who tip for services rendered.^[27] In the late 1990s, 60 percent of the Cubans involved in legal tourism were light skinned.^[28] This phenomenon is strengthening the racial divide because Afro-Cubans have less access to hard currency with less opportunity in the tourist industry. The discrepancy in access to hard currency would be problematic on its own because of its impact on Cuba’s goal of creating an egalitarian society. It is compounded by the fact that Afro-Cubans had been the most economically disadvantaged segment of prerevolutionary Cuban society and had not achieved equality when the Special Period began. As Lusane points out, the revolutionary leaders did not initiate programs targeted at overcoming the effects of racial discrimination. They assumed, he explains, “that a rising tide would lift all boats, and that a broad distribution across all of Cuban society would necessarily benefit Afro-Cubans.” Their assumption was problematic in the first instance, he argues, because “it reduced racial discrimination to material relations.”^[29]

In spite of the disproportionately negative impact the economic crisis has had on many Afro-Cubans, race is still not commonly addressed in official discourse. De la Fuente notes that the “official silence” about racism in Cuba has enabled negative racial stereotypes to continue and to be reproduced throughout the population.^[30] In fact, the tourist industry has included these in advertising that depicts Cuba as an exotic destination. Writer Eladio Secades notes, “The tourist is a type . . . who has become tired of civilization and seeks the primitive. To create the primitive where it does not exist is one of the ways to promote tourism.”^[31] This can be seen in the mass marketing of Afro-Cuban spirituality via reenactments of religious ceremonies, along with traditional song and dance forms packaged for tourist consumption.

Promoting and Protecting the “Real” Cuba

There is perhaps no other country in the Western Hemisphere that evokes such romanticized images as Cuba. Tourists traveling to the island often come with detailed fantasies, which undoubtedly would include old cars, exotic women, cigars, rum, salsa music, the Buena Vista Social Club, Latin dancing, and beaches. It is easy to see how tourist promoters would begin their effort based on such preconceived notions of their potential clientele. They lay out Cuban culture (or what tourists believe is Cuban culture) for consumption. Such promotions are evident in and around the major hotels or tourist establishments. In Old Havana, for example, miraculously preserved prerevolutionary American cars, waiting for tourist passengers, line the streets in front of the high-end hotels surrounding the Parque Central. More than merely the pride of their owners and a source of hard currency, these cars also embody the expectations of tourists. Travel writers and movies depicting prerevolutionary Cuba create such expectations with their lyrical elegies and imagery. Cuban-born novelist Cristina García observes,

There is a name for the gorgeous old American cars that continue to hum, rattle, and roll through the Cuban landscape: cacharros. Normally the word means broken-down jalopy. . . . But in the case of these Yankee beauties . . . cacharro is whispered softly, tenderly, like the name of a lost first love.^[32]

The Buena Vista Social Club, both the documentary and the sound track, gave unprecedented exposure in North America to Cuban “traditional” music. While the group could rightly attribute its success to the breathtaking musical talents of its members, it also succeeded by resurrecting a romanticized prerevolutionary Cuban fantasy, with octogenarian musical phenoms being “rediscovered” by foreign musicians and producers. Regardless of its actual popularity (among Cubans) in Cuba today, the Buena Vista Social Club has come to epitomize Cuban music for many foreigners. As such, many tourists expect to hear songs featured in the documentary, sung by grandfatherly Cubans in fedoras smelling of Cuban cigars. In order to meet these expectations, Cuban musicians have committed the film’s sound track to memory and regularly reproduce the tourists’ desire for nostalgia on request.^[33] This is consistent with a pattern that social scientist D. J. Greenwood has described:

Culture is being packaged, priced and sold like building lots, rights-of-way, fast food, and room service, as the tourism industry promises that the world is his/hers to use. All the “natural resources,” including cultural traditions, have their price, and if you have the money in hand, it is your right to see whatever you wish.^[34]

One consequence of such packaging is the “commodification” of culture; that is, cultural practices are transformed into something whose value is measured by sales in the marketplace. In order to attract a steady tourist clientele, it is necessary to create and provide a desirable tourist experience.

Indeed, in Cuba as well as other tourist-dependent developing nations, local artists tend to skew their own work so that it conforms to tourists’ expectations. Yet in much of the scholarly literature on tourism, the host population is rarely included in analyses about internal cultural changes or adaptation. Historian Louis Pérez’s description of the way in which prerevolutionary Cubans contorted themselves indicates why Cuban leaders were so reluctant in the 1990s to embrace tourism as a solution to the Special Period’s economic problems:

The expanding tourist presence introduced changes that were both profound and permanent, transformations to which the Cuban people adjusted as a normal part of daily life. . . . This involved a complex transaction by which the North American notion of “Cuban” acted to change or otherwise modify Cuban self-representation as a means of success and advancement.^[35]

People in areas where tourism is common often try to preserve their cultures and the normalcy of their daily activities by keeping much of their life hidden away from the gaze of tourists eager to explore exotica. By conducting many of their traditions and rituals or even basic aspects of their daily lives out of the tourist arena, they are able to express their culture as they choose without worrying about whether it fits the tourist’s vision of how their culture ought to appear. This concept has been explored by anthropologist Laurie Medina, relating to interactions between tourists and local Mayan populations near Cancún, Mexico:

The host population confronted with the arrival of tourists in their midst, protect and insulate their culture by dividing their lives into “backstage” areas, where they continue meaningful traditions (and go about their everyday lives) away from the gaze of tourists, and “frontstage” areas, where they perform a limited range of activities for a tourist audience. This makes available portions of host culture for guest consumption, while it protects other parts from commoditization.^[36]

In this sense, official regulations limiting Cubans’ interactions with tourists facilitated efforts by Cubans to preserve their culture. To be sure, another motive of these rules was to ensure that most of the tourists’ hard currency went to the Cuban government, not to private individuals. A third objective was (and is) to insulate tourists from the exigencies of Cubans’ daily lives. The average tourist does not spend time in the homes of Cubans, visit Cuban schools, travel by distinctly Cuban transportation, or participate in Cuban recreational activities. Few tourists thus experience blackouts, wait hours for overcrowded buses, or experience material shortages of any kind while in Cuba. Photojournalist Fred Ward noted, “Generally, living in first-class Cuban hotels is convenient and pleasant. Tourists are spared almost all the everyday problems plaguing citizens.”^[37]

However, there is a fine line between self-segregation and government-imposed segregation, with the latter giving rise to the term “tourist apartheid” used to describe discrimination against and exclusion of Cubans within the tourist industry on the island during the 1990s and up through 2010s.

With the resurgence of tourism in the late 1980s and early 1990s, the Cuban government grew concerned about the negative impact of tourism on the maintenance of revolutionary values such as collectivism, egalitarianism, and inclusiveness. As a consequence, the government began a campaign to root out social ills seemingly associated with tourism by limiting the opportunities for Cubans to interact with tourists. Laws focused primarily on restricting Cuban access to tourists and tourist facilities rather than on restricting the actions or behaviors of tourists. For example, there were laws that required hotel guests to pay in hard currency when Cuban possession of hard currency on the island was still illegal. Other laws prohibited Cubans from entering the residential areas of tourist hotels or other specifically designated guest areas. In practice, the restrictions were enforced inconsistently and rarely with any substantive punishment; however, domestic tourism was virtually nonexistent on the island. As a result of both legal restrictions and economic realities, Cubans were effectively excluded from participating in their country’s booming tourist industry—that is, unless they were able to secure employment in it.

Cuban Tourism Looks Ahead: Prospects and Challenges

During the past five years, under the leadership of Cuban President Raúl Castro, Cuba has undergone a series of dramatic reforms intended to strengthen the Cuban economy. Tourism remains a vital part of Cuba’s economic growth and development strategy. At the helm of the tourist industry is Minister of Tourism Manuel Marrero Cruz, an ally of Raúl Castro and former president of the Cuban military’s prized Gaviota tourism conglomerate. Marrero, known as an effective, innovative, and disciplined leader, was appointed to his post in 2004 when the tourist industry on the island seemed on the verge of a major downturn. Marrero has deftly made the transition from directing a single albeit important tourist enterprise to overseeing the development and execution of a national tourism strategy encompassing a wide range of both state and increasingly nonstate actors. According to Marrero, in order for Cuba’s tourist industry to continue serving as an engine of the Cuban economy, Cuba needs to access new markets, develop new strategies, take advantage of existing competitive edges, and attract new investors.

Authentic Cuba: Promoting Cuba to the World

In May 2010, at Cuba’s Thirtieth Annual International Tourism Fair, Minister Marrero announced a new campaign to promote tourism on the island.^[38] As part of the “Authentic Cuba” campaign, representatives from Cuba’s tourist industry would roll out a range of promotional activities in countries worldwide intended to expose potential industry executives and travelers to Cuban arts, food, culture, music, and general tourist offerings. After a slow start in 2010, by mid-2013 the campaign was in full force.

During the last two weeks of June 2013, Authentic Cuba campaigns were launched in a range of countries, with special emphasis placed on attracting visitors from nontraditional sending countries. At a kickoff event at the residence of Ernesto Plesencia, Cuba’s ambassador to Qatar, guests from Middle Eastern tourist companies and other industry executives from the region enjoyed samplings of traditional Cuban food, performances of Cuban dance and music, and presentations made by Cuban Ministry of Tourism officials. While speaking to Qatari journalists covering the event, the ambassador explained that Cuba hoped to attract new visitors from the Gulf countries, noting Cuba’s “historic connection” with the Arab world.^[39] The event in Doha was followed several days later by a “Cuban night” hosted by the Cuban embassy in Cyprus.^[40] Similar events were scheduled to take place in other Middle Eastern countries as well as Southeast Asia, China, and India.

In addition to attracting visitors from afar, the Authentic Cuba campaign has also set its sights on potential tourist markets closer to home in the Americas. Promotional efforts since May 2010 have been especially effective in the Southern Cone and Peru. Compared to the first half of 2011, visitors from the subregion grew 131.64 percent during the first six months of 2013, with a total of 94,234 tourists from the subregion visiting Cuba between January and June.^[41] Efforts to promote South American tourism on the island continued in July 2013 with a series of high-profile meetings in Brazil between Cuban Minister Manuel Marrero and Brazilian Tourism Minister Gastao Dias Vieira. While in Brazil, Marrero, who arrived in the Brazilian hub by way of a Cubana Airlines flight, marking the resumption of direct flights between Cuba and Brazil,^[42] signed a series of agreements with his Brazilian counterpart intended to increase collaboration in the tourist sector between the two countries.^[43]

There is another important new tourist market in Cuba, one that not only is evidence of changes in economic conditions and policies on the island but that also underscores the magnitude of broader changes under way in Cuba. Once legally excluded from tourist establishments and expected to tolerate the omnipresence of tourism on the island as a necessary evil and economic savior, Cubans themselves are now active participants in the industry—not simply as servants but increasingly as those being served. Gone are the prohibitive policies restricting Cuban access to tourist facilities and hotels. Instead, during the past several years, Cuba’s Ministry of Tourism has actively encouraged hard-currency-holding residents to enjoy Cuba’s wide array of tourist amenities throughout the island. In 2012, roughly 1 million Cubans living on the island participated in the domestic tourist industry.^[44] Of those 1 million Cuban tourists, an estimated 570,000 paid in hard currency to stay in hotels across the country.^[45]

Teeing Off on the Greens: Communism versus Capitalism

In addition to seeking new tourist markets at home and abroad, a key aspect of Cuba’s longer-term strategy involves expanding tourist options, recreational activities, and amenities on the island. One such area ripe for expansion is golf. Golf courses were once viewed as playgrounds for the rich and foreign; in 1962, Fidel Castro shut down the island’s golf courses and private clubs, ordering the land to be put to less “bourgeoisie” use.^[46] Several were turned into military training facilities, and one became the site of a leading art school. However, today, as part of Cuba’s overall strategy of tourist sector development, golf has resurfaced as a potential draw for both tourists and investors alike.

In May 2013, several days after Antonio Castro, son of former president Fidel, won a golf tournament hosted by Esencia, a British development company, at the Varadero Golf Club, British ambassador to Cuba, Tim Cole, announced a Cuban-British joint venture to develop Cuba’s first golf resort.^[47] In addition to constructing only the second eighteen-hole golf course on the island, the $350 million project will feature private villas and apartments along with a country club, tennis courts, spa, yacht club, and hotel.^[48] This joint venture between Esencia and the Cuban government will be the largest British investment on the island in the past decade.^[49]

Beyond the novelty of being the first full-fledged resort of its kind, the Carbonera Country Club will be a novelty on the island for another, arguably more significant reason: foreigners will be allowed to purchase private property and own vacation homes on its 420-acre grounds.^[50] The Carbonera website (in development) describes the facility as offering an “elegant lifestyle” and “gated community real estate” that “represents a unique investment opportunity on the island.”^[51] The site explains, “With great medical services, an unbeatable climate and a very friendly tax regime, the future looks bright.” The question here, as with so many other aspects of the tourist industry on the island, is, bright for whom?

Tourism: Savior or Destroyer?

In order to survive today, the average Cuban needs access to hard currency. For many Cubans without a family abroad to send remittances or employment within Cuba’s ever-expanding private sector, working with tourists is the only legal option for acquiring hard currency. Recognizing the need for some adjustment, the government has begun to offer hard-currency compensation along with worker’s state salaries in certain enterprises. However, the government has found itself, once again, in a battle of moral versus material incentives.

If Cubans cannot legitimately gain access to hard currency through occupations that provide for the common good—such as medicine or education—they will have less incentive to educate themselves. This has already resulted in a serious drain (and will continue to do so) of Cuba’s well-trained professional population—a group that has been one of Cuba’s defining strengths throughout the Revolution thus far. Miren Uriarte describes this risk as “the ‘inverted pyramid,’ a phenomenon that reflects the devalued return on education and professional preparation in the new economy. The immediate result has been the exodus of public service workers into low-level service jobs in the tourism industry.”^[52]

Cuba cannot afford this brain drain from the professional and high-value-added sectors of its economy. Such a loss would undermine many of the progressive elements on which Cuban national identity has developed, such as health care, education, and cultural production. Of even greater concern, this loss of human capital would cripple Cuba’s prospects for development beyond the tourist industry.

Regardless of the obvious economic benefits derived from the tourist industry and claims of a trickle-down effect with rising tourist tides lifting all boats, tourism will not generate greater equality or renew a spirit of egalitarianism. Tourism by its very nature creates distinctions between those who serve and those who are served, regardless of whether those being served are foreigners or hard-currency-holding Cubans—members of Cuba’s new and expanding “elite.” In many developing countries, it is an industry built on and fueled by the exploitation of inequality. Without greater attention to and concrete government efforts to address the inherent contradictions in the promotion of tourism, the Cuban government ignores a phenomenon that is difficult to hide: contemporary Cuba increasingly resembles prerevolutionary Cuba, with its glaring social inequalities and other trappings of dependency.

Notes

Philip Peters, International Tourism: The New Engine of the Cuban Economy (Arlington, VA: Lexington Institute, 2002), 2.

Peters, International Tourism, 2.

Stanley Turkel, “Cuba: Tourism Thriving despite the U.S. Trade Embargo,” Hotel Interactive, October 4, 2006, http://www.hotelinteractive.com/index.asp?page_id=5000&article_id=6319.

Caribbean Tourism Organization, “State of the Industry Report on February 15, 2012,” http://www.onecaribbean.org/wp-content/uploads/StateIndustryStats15Feb2012.pdf.

Pedro Monreal, Development Prospects in Cuba an Agenda in the Making (London: Institute of Latin American Studies, University of London, 2002), 15.

Julio Cerviño and Maria Cubillo, “Hotel and Tourism Development in Cuba: Opportunities, Management Challenges, and Future Trends,” Cornell Hotel and Restaurant Administration Quarterly 46, no. 2 (2005): 225.

Charles Suddaby, “Cuba’s Tourism Industry,” paper presented at the seventh annual meeting of the Association of the Study of the Cuban Economy, Miami, August 7–9, 1997.

William M. LeoGrande and Julie Thomas, “Cuba’s Quest for Economic Independence,” Journal of Latin American Studies 34 (2002): 344.

Max Azicri, Cuba Today and Tomorrow: Reinventing Socialism (Gainesville: University Press of Florida, 2001): 141.

10.

Sending remittances to Cuba became legal during the administration of Jimmy Carter but expanded considerably during the 1990s.

11.

The U.S. dollar was used in Cuba until November 8, 2004. After November 8, all dollars had to be exchanged for pesos convertibles, a transaction that included a minimum tax of 10 percent.

12.

Susan Eckstein, Back from the Future: Cuba under Castro (Princeton, NJ: Princeton University Press, 1994), 105.

13.

Eckstein, Back from the Future, 105.

14.

Oscar Lewis, Ruth M. Lewis, and Susan M. Rigdon, “The ‘Rehabilitation’ of Prostitutes,” in The Cuba Reader: History, Culture, Politics, ed. Aviva Chomsky, Barry Carr, and Maria Smorkaloff (Durham, NC: Duke University Press, 2003), 395.

15.

Elisa Facio, “Jineterismo during the Special Period,” in Cuban Transitions at the Millennium, ed. Eloise Linger and John Cotman (Largo, MD: International Development Options, 2000), 57.

16.

Azicri, Cuba Today and Tomorrow, 87.

17.

Azicri, Cuba Today and Tomorrow, 87.

18.

While women made up the majority of sex workers during the 1990s and early 2000s, it has become increasingly common to see men (accompanying both women and other men) involved in sex work as well as other forms of “hustling,” where there is a monetary or material transaction in return for companionship that may or may not also involve sex.

19.

Facio, “Jineterismo during the Special Period,” 71.

20.

Facio, “Jineterismo during the Special Period,” 58.

21.

Eckstein, Back from the Future, 123.

22.

Douglas Farah, “Catering to Foreigners Instead of Cubans Puts Castro on Defensive,” Washington Post, August 9, 1992.

23.

Facio, “Jineterismo during the Special Period,” 69.

24.

Hannah Caller, History of Cuba: José Martí 1853—1895 and the War of Independence, Rock around the Blockade Educational Series, http://www.rcgfrfi.esaynet.co.uk/ratb/cuba/history2/htm (accessed December 1, 2005).

25.

Alejandro de la Fuente, “Race and Inequality in Cuba, 1899–1981,” Journal of Contemporary History 30 (2005): 133.

26.

Clarence Lusane, “From Black Cuban to Afro-Cuban: Issues and Problems Researching Race Consciousness and Identity in Cuban Race Relations,” in Linger and Cotman, Cuban Transitions at the Millennium, 87.

27.

Based on the author’s observations while traveling throughout Cuba in 2003 and 2004.

28.

Alejandro de la Fuente, “Recreating Racism: Race and Discrimination in Cuba’s Special Period,” Georgetown University Cuba Briefing Paper Series 18 (1998).

29.

Lusane, “From Black Cuban to Afro-Cuban,” 94.

30.

de la Fuente, “Recreating Racism,” 133.

31.

Eladio Secades, quoted in Louis A. Pérez Jr., “Image and Identity,” in Inside Cuba: The History, Culture, and Politics of and Outlaw Nation, ed. John Miller and Aaron Kenedi (New York: Marlowe & Company, 2003), 144.

32.

Cristina García, “Cacharros,” in Miller and Kenedi, Inside Cuba, 147.

33.

Personal communications between the author and Cuban musicians in several of the “house bands” playing nightly in the hotels surrounding El Parque Central, Havana, December 2004.

34.

D. J. Greenwood, “Culture by the Pound: An Anthropological Perspective on Tourism as Cultural Commoditization,” in Hosts and Guests: The Anthropology of Tourism, ed. V. Smith (Philadelphia: University of Pennsylvania Press, 1989), 171–85.

35.

Louis A. Pérez Jr., On Becoming Cuban (Chapel Hill: University of North Carolina Press, 1999), 395.

36.

Laurie Kroshus Medina, “Commoditizing Culture Tourism and Mayan Identity,” Annals of Tourism Research 30, no. 2 (2003): 353–68.

37.

Fred Ward, “Havana, 1977: Welcome Tourists,” in The Reader’s Companion to Cuba, ed. Alan Ryan (Orlando, FL: Harcourt Brace, 1997), 252.

38.

Agnerys Rodríguez Gavilán, “Authentic Cuba Campaign,” Cubaweb, May 4, 2010, http://www.cubaweb.cu/en/component/content/article/226-campana-autentica-cuba.

39.

Ramesh Mathew, “Cuba Woos Tourists from Qatar, Region,” Gulf Times, June 24, 2013, http://www.gulf-times.com/qatar/178/details/357366/cuba-woos-tourists-from-qatar,-region.

40.

“Cyprus Promoting Tourism to Cuba,” website of the Cuban embassy in Cyprus, http://www.cubadiplomatica.cu/chipre/EN/Home/tabid/14167/ctl/Details/mid/22723/ItemID/30055/Default.aspx.

41.

“Growing Number of South American Tourists Coming to Cuba,” Cuba Contemporánea, June 26, 2013, http://www.cubacontemporanea.com/en/growing-number-south-american-tourists-coming-cuba/.

42.

“Cuba Airliner Resumes Nonstop Flights to Brazil,” Cuba Contemporánea, July 12, 2013, http://www.cubacontemporanea.com/en/cuban-airliner-resumes-nonstop-flights-brazil/.

43.

“Brazil, Cuba to Collaborate in Tourism Sector,” Cuba Contemporánea, July 17, 2003, http://www.cubacontemporanea.com/en/brazil-cuba-collaborate-tourism-sector/.

44.

“Experts Address Challenges, Prospects of Cuba’s Travel Industry,” Cuba Contemporánea, June 1, 2013, http://www.cubacontemporanea.com/en/experts-address-challenges-prospects-cubas-travel-industry/.

45.

Domingo Amuchastegui, “Marrero Reveals Tourism Growth Plans,” Cuba News, June 12, 2013, http://www.cubanews.com/sections/marrero-reveals-tourism-growth-plans.

46.

Sarah Rainsford, “Cuba Golf Project Gets Green Light,” BBC News, May 13, 2013, http://www.bbc.co.uk/news/world-latin-america-22507776.

47.

“A Tale of Politics, Corruption and Golf,” The Economist, May 25, 2013.

48.

Rainsford, “Cuba Golf Project Gets Green Light.”

49.

Maria Valencia, “China to Invest in Cuba Golf Courses,” Cuba Contemporánea, June 4, 2013, http://www.cubacontemporanea.com/en/china-invest-cuba-golf-courses/.

50.

Rainsford, “Cuba Golf Project Gets Green Light.”

51.

Carbonera Country Club website, http://www.thecarboneraclub.com/.

52.

Miren Uriarte, Cuba, Social Policy at the Crossroads, Maintaining Priorities, Transforming Practice (Boston: Oxfam America, 2002), 27.

Chapter 15

Remittance Recipients and the Present and Future of Microentrepreneurship Activities in Cuba

Manuel Orozco and Katrin Hansing

This chapter explores the extent to which Cuban remittance recipients are responding to the Cuban government’s economic reforms that seek to incentivize entrepreneurial activities as an economic growth strategy and to state liberalization policy. The analysis is based on fieldwork and a survey of remittance recipients in Cuba (see the section “Appendix: Survey Methodology” for a description of the survey). The findings show that remittances continue to play an important role in the economic survival of Cubans, with money coming from the United States and other parts of the world. We find that an important proportion of recipients want to own a business and that some already have established one. The businesses that remittance recipients have established or aspire to establish are geared toward the service sector and led by microenterprises aimed at achieving self-subsistence rather than wealth generation.

In light of the reforms introduced by the Cuban government, there seems to be a mismatch between government policies and people’s needs and interests. Many of the economic activities that remittance recipients would like to undertake through small businesses are not within the scope of the new reforms. Moreover, these policies may not be sufficient to enable an amenable environment for business development. In light of these shortcomings, there is an expectation among remittance recipients wanting to set up a business that remittances and families abroad will help them finance their businesses. However, given the global recession and particular socioeconomic situation of many Cuban remitters, these inflows do not constitute a formal mechanism for small business development and should rather function as a complement to possible policy and development incentives. Given the precarious position of ongoing and potential businesses and reforms that would provide limited incentives for growth, it is important to consider implementing strategies that respond to the prevailing conditions of these enterprises, such as microcredits, wholesale markets, technical advice on business development, and financial training.

Current Trends in Remittances to Cuba

Remittances have continued to flow into Cuba, with the flows having four characteristics (table 15.1). First, the United States continues to dominate transfers but with less presence than in earlier periods; transfers from Europe and Latin America have increased in importance. Second, despite the 2009 changes in U.S. remittance policy to Cuba, few remittance transfer operators have entered the market, and the use of informal transfer mechanisms continues. Third, the amount received has remained the same or declined, most likely a symptom of the recession. [Editors’ note: Since this article was written, remittances have grown from about $2 billion annually to over $2.6 billion.] Fourth, remittances continue to represent at least one-half of the total income of recipients, who are able to save, though they tend to do so informally.

Remittances Transfers to Cuba: Some Characteristics
	2005	2010/2011
Receiving from the United States	81%	68%
Receiving from Spain	12%	7%
Number of years receiving	4	9
Amount received per month	$150	$125
Frequency receipts per year	6	9
Receiving from parents	18%	20%
Receiving from siblings	22%	35%
Receives via money transfer operators	44%	47%
Receives via mula (informal)	54%	50%

According to survey data, 68 percent of remittance recipients interviewed received money from relatives in the United States, 13 percent received remittances from Europe (primarily from Spain), and 19 percent received remittances from Latin America and other developing countries, of which 8 percent were from Cuban workers in Venezuela. This last observation can be explained by the stronger relations between Cuba and Venezuela, including labor contracts to bring Cuban doctors and nurses to Venezuela. Regarding transmission channels, informal networks continue to be prevalent. Although policy changes in the United States have liberalized previous restrictions set in 2005, few businesses have entered the remittance market to offer transfers to Cuba.

Recipients own few assets that could serve as resources in productive or commercial activities, and most do not own bank accounts (87 percent). However, all of the respondents acknowledge that they save utilizing various methods, most of which are informal. While their assets are limited, they have accumulated liquid assets (table 15.2) in the form of cash savings amounting to a reserve or stock of nearly U.S.$900. These data suggest that the characteristics of remittance recipients have not changed substantially in the past five years despite policy reforms in the United States. Informality would have been expected to decrease and the amount sent to increase as a result of the initiatives by the Obama administration.

Savings Methods Used by Remittance Recipients and Stock of Amount Saved
	%	U.S.$
I put money aside from what is left over at the end of the month	57	$827

I invest it in a business	2	$2,000
I work extra hours	3	$1,900
Take advantage of special sales	36	$758
I buy durable goods	3	$2,600

Source: Stock of amount saved refers to the amount of money one has accumulated in savings at the moment of the interview. A stock is what one has on reserve as opposed to what one does to save yearly, for example.

Another important point to highlight is that income dependence on remittances invariably remains below 60 percent. Cuban remittance recipient earnings range under $100 a month. This figure is important in that it points to a few broader issues that relate to the size of the Cuban economy. Specifically, remittance recipients earn incomes above average, but even using their average income as a reference for the entire population, it would mean that national income is less than U.S.$25,000 million as opposed to the officially recorded U.S.$40,000 million. Earnings among remittance recipients also hint at the extent of the size of their financial stock—typically, remittance recipients save more than nonrecipients and in amounts between U.S.$1,000 and U.S.$2,000. Together with other assets, these funds constitute a basis for potential business investment.

Cuban Reforms and Small Business Operations

The efforts of the Cuban government to reform its economy by encouraging small business entrepreneurship among its population has brought attention to the potential role of remittances and their recipients in triggering business development.^[1] In the small business sector, the reforms authorize the establishment of business enterprises for 178 economic activities within the Cuban economy. The activities generally fall into categories of manual labor, services, artisanship, and performance, the last two possibly considered part of Cuba’s important tourist industry.^[2] It should be noted that the list of legal economic activities includes very few opportunities for professionals. Small businesses are to be taxed at a 25 percent rate, while businesses with employees may be taxed at a rate of up to 50 percent. Guidelines for salary levels for employees stipulate that wages must increase as the number of employees increases such that minimum salary for employees working at a firm with fifteen or more workers is three times the median monthly salary.^[3]

Given the changing context for small businesses and the assumption that remittance recipients may be more prone to invest in a business, this section explores the extent to which these recipients might decide to engage in a business activity. The results show that there are three distinct groups: those who are not planning to establish a business, those who are, and those who already own a business. Forty-three percent of recipients expressed that they would not form a business in Cuba, whereas 34 percent expressed that they would, and 23 percent said that they already had a business. Here we focus on those who are interested in setting up a business as well as those who already have a business. However, it is important to mention that the large number of people who said that they would not create a business stated as their main reasons for not doing so the following: a lack of resources, a lack of entrepreneurial know-how, and an undependable, risky economic and political context. In other words, it is not that this group is per se uninterested in starting a small business but rather that its members’ current situations and the wider context make it unviable for them to do so.

Moreover, among those planning to establish a business or who already have one, a general finding is that, given their economic position, this is a population whose potential and actual businesses are limited to subsistence enterprises. Those interested in establishing a business are primarily men (67 percent) and suggest that they would invest mainly in a commercial activity involving food or clothing, while a fifth would be interested in a manufacturing trade. The activities listed as potential lines of business included the sale of food, clothing, or CDs/DVDs. These activities are a partial fit into the list of businesses that the Cuban government has announced could be allowed by the state.

When asked about the purpose of a business, the majority expressed that the business would be a complement to their current job or as a survival strategy should they lose their current job (table 15.3). Only a small group (9 percent) stated that they wanted to own a business as a matter of interest. These responses are important in that they provide clues as to the direction of possible entrepreneurial activity. Those who engage in a business out of necessity due to job loss or to add to their income are less likely to grow their enterprise substantially after achieving self-subsistence. Moreover, if the business is unable to obtain financing and strengthen its marketability through additional training, its competitive edge decreases.

Purpose for Setting Up a Business among Remittance Recipients
	%
Start a new job if I lose the current one	44
Complement my current income	38
To own my own business, I like to do business	9
Support my family	8
Other	1

When thinking about the position of a business in the market, a successful enterprise is the result of various factors, such as access to capital, linkages to the value chain, entrepreneurial skill, and support from the regulatory environment. Even when a business is created out of necessity, getting access to financing, being competitive, or enjoying government support or incentives can help these businesses grow and accumulate wealth. In turn, enterprises are able to reinvest in jobs and machinery or accumulate personal wealth.

A closer look at remittance recipients shows important features that characterize their potential for engagement and performance in the business environment as it pertains to available resources, access to financing, and expertise in the trade. Overall, 95 percent of those interested in setting up their own business consider that their investment would involve less than U.S.$5,000 and most likely less than U.S.$1,000.^[4] Moreover, when asked about what resources they had available to start the business, one-quarter affirmed that they already had sufficient savings, whereas 30 percent said that they already had a locale to operate and 16 percent had working capital. Those with cash in hand and working capital held a stock of savings worth up to U.S.$1,600. In addition to their existing investment stock, remittance recipients were asked about sources of financing that could complement their initial investment, business upkeep, and available guarantees. Just over a quarter stated that their own resources served as their additional financing source, and nearly two-thirds responded that they would seek financing from relatives living abroad. This dependency or expectation of support from relatives abroad confirms similar expectations in the media about the role of the Cuban community in the United States in particular. Moreover, no one considered institutional support to finance their business, and for the most part they saw their savings or the relative abroad themselves as a guarantee to financing.

Despite their financial weakness and no formal access to the financial sector, most of these individuals have some experience in the trade in which they plan to engage. Such a condition would give them an edge were they to compete in the market, unless it is already saturated.

These responses point to individuals seeking to form relatively small, subsistence operations for which they will depend on support from families living abroad and that may be outside the scope of government intervention. In turn, they will have a limited impact on economic growth and business development.

Current Businesses among Remittance Recipients

Those who already owned a business (23 percent) share similar characteristics with those who want to start a new one, except that 60 percent of current owners are women compared to 33 percent of those interested in setting up a new business. Consider the following:

These entrepreneurs work mainly in services and sales, in many cases in activities similar to those of persons who want to start an enterprise.
Twenty-two percent sell food, and 4 percent own a paladar.
Seventy percent have the owner him- or herself as the employee, and the rest have only one additional employee.
Sixty-two percent have a license to operate, while 38 percent in street sales and other trades operate informally.
The average value of monthly sales is U.S.$200 (table 15.4), an amount that may add little to their total income. Because more than half of their income is coming from remittances, these entrepreneurial activities may complement their earnings from additional work but may not represent half of all income unless 40 percent of their sales go into salaries.
In order to keep the business running, 63 percent fund the operations from business-related sales, and 27 percent do so with remittances.
They typically operate their businesses out of their place of residence (80 percent) or are street vendors (12 percent).

Economic Activities of Entrepreneurs and Value of Sales per Month
	%	U.S.$
Food sales	22	$123
Beauty parlor (manicure), hairdresser	19	$60
Sell, repair garments	8	$95
Rent rooms	4	$1,400
Rent and sell videos	7	$40
Artisan crafts	4	$233
Paladar	4	$500
Agriculture	3	$75
Child care	3	$110
Import/export	3	$550
Teacher	3	$100
Ponchero (tire repair)	3	$200
Other	15	$200

Conclusions and Observations

The results of the survey show that Cuban remittance recipients continue to rely on such flows to manage their day-to-day survival. Moreover, there are indications that those interested in setting up a business or who already have one are operating mainly at a subsistence level and are not able to generate additional wealth. As Cuba promotes self-employment, it is important to consider the issues that may contribute to the development of small businesses. It is also important to understand the correspondence between the type of enterprise emerging in the Cuban context, resources needed to strengthen and develop these into successful enterprises, and the short- and long-term impacts.

In any society, small businesses are faced with striking a balance between achieving success and overcoming challenges. Depending on the type of business, the issues to deal with may vary. Their business success depends on achieving increasing profit margins, maintaining financial liquidity, covering labor costs, promoting innovation, and consistently selling quality goods or services. They also are confronted with various challenges, some inherent to a business (capital access linked to value chain) and others associated with the global economy (managerially and commercially competitive) and the motivations of entrepreneurship. Because current Cuban entrepreneurs are mainly subsistence enterprises, what is critical is to identify the instruments that can enable these businesses to develop and grow as enterprises that can generate wealth. This may mean looking at the development of their business capabilities, their insertion into the global and domestic value chains, their access to financial resources to function and expand, and the incentives they would need to operate in a formalized environment. A number of observations regarding entrepreneurial activities in Cuba are in order:

Relying on remittances or savings accrued as a primary means to invest is not an ideal situation, as such resources are typically fungible and can be used for various other activities. Savings can serve as part of a financial guarantee for a loan but not as the primary financing source: if they are depleted before the business fully develops, the enterprise can fail, and the entrepreneur is left worse off.
The role of microfinance is pivotal, as it can help put these businesses in a better position to expand their activities and become sustainable. Moreover, microfinance would give nonremittance recipients the opportunity to gain access to credit and enter the emerging small business sector. Because ongoing businesses do not generate annual revenues over U.S.$3,000, projecting the right amount of financing needed to help a business grow is part of a financing strategy. On that basis and assuming that about 100,000 small and microenterprise operations were created as a result of the reforms, credit portfolios may need to reach at least U.S.$300 million.
Training to orient interested entrepreneurs toward activities that are competitive, that are directly connected to commercial value chains, and that exhibit the potential to reach economies of scale is important. Many of the respondents were interested in setting up businesses or activities that may not be competitive or that may be market saturated. Thus, assessing the marketplace for commercial and productive activities can coincide with technical advice to businesses on where to invest and establish their enterprise and how to go about it.
There are no wholesale markets in Cuba at this time. In order to make it worthwhile for people to seriously contemplate creating a small business, the Cuban state would do well to sell goods and materials at wholesale prices.
The current regulatory environment is not friendly to entrepreneurs. Taxation by the state is quite onerous and will strangle the capacity of businesses to operate and reinvest in business growth; such an environment will not prolong subsistence-level businesses. Exempting new businesses from paying taxes during a certain period and gradually introducing them into the tax structure can help them grow in the short term.

Appendix: Survey Methodology

The survey in Cuba was conducted in various cities across the country. Researchers worked on a representative sample of the population’s social, demographic, ethnic, regional, and social strata. However, given the Cuban political context, researchers did not do random street interviewing; instead, the sample units relied on the snowball procedure among people who could be interviewed in confidentiality. The sample size was 300 remittance recipients.

Notes

Excerpted from Manuel Orozco and Katrin Hansing, “Remittance Recipients and the Present and Future of Micro-Entrepreneurship Activities in Cuba,” in Cuba in Transition, Association for the Study of the Cuban Economy, 2011. Reprinted by permission of the publisher.

Josh Goldstein, “Cuba & Remittances: Can the ‘Money in the Mail’ Drive Reform?,” Center for Financial Inclusion, http://centerforfinancialinclusionblog.wordpress.com/2011/02/01/remittances-a-key-driver-of-economic-reform-in-cuba/.

The musical group Los Mambises and dance duo Amor are examples of the surprising specificity of the regulations within the performance category. “Actividades autorizadas para el ejercicio del trabajo por cuenta propia,” Juventud Rebelde, September 24, 2010, http://www.juventudrebelde.cu/cuba/2010-09-24/actividades-autorizadas-para-el-ejercicio-del-trabajo-por-cuenta-propia/.

Oscar Espinosa Chepe, Cambios en Cuba: Pocos, Limitados, y Tardíos, http://reconciliacioncubana.files.wordpress.com/2011/03/cambios-en-cuba.pdf.

U.S.$1,000 is less than the average saved and would represent the minimum start-up investment, plus the resources they say they would use to establish the business.

Chapter 16

Poverty and Vulnerability in Cuba Today

María del Carmen Zabala Argüelles

Poverty and vulnerability are important human issues in any context but even more so in a society that, exactly fifty years ago, embarked on an alternative path of development—socialism—which prioritizes the emancipation of human beings and the fulfillment of their potential. This required as its point of departure a commitment to social development, justice, and equity, based on universal and multifaceted social policies. Below I reflect on current poverty and vulnerability in Cuba and their determinants and forms of expression. My thesis is that these are diverse and heterogeneous, and their analysis must be supplemented by a family and gender perspective. Finally, I outline some ideas about how to improve social policies to address these issues.

Social Development, Justice, and Equity
in the Cuban Social Model

When the World Summit for Social Development took place in Copenhagen in 1995, many of the world’s pressing social problems had already been solved in Cuba, and several of the proposals agreed on at this important forum were already an integral part of the Cuban concept of social development that had been devised and implemented since 1959. Among them are the promotion of social integration, especially of the most disadvantaged groups; access to a quality education and basic health care; gender equality; and the eradication of poverty.

While the rest of Latin America embraces the reigning belief that economic growth will solve the problems of poverty and inequity (“trickle-down theory”) and has been pursuing policies of structural adjustment and privatization, Cuba has placed its bets on universal social policies and the central role of the state to promote and achieve just and equitable human development. Cuba’s concept of social development is defined by these basic principles: it is comprehensive and multidimensional in character, economic and social aspects are assumed to be interconnected, the state plays a central role in the design and implementation of social policies that ensure free and universal basic social services, there is broad public participation in social policies, individual and social consumption together ensure higher consumption standards, and differential treatment of those groups considered vulnerable (children, women, and the rural population) with appropriate policies is acknowledged as necessary. These principles give rise to multifaceted, coherent, and systematic social policies that are comprehensive and universal (Rodríguez and Carriazo 1987).

This Cuban model places special emphasis on equity, consistent with its aim of social justice. Equity does not pertain only to the distribution of income; it also includes equal opportunities and universal access to social services, with specific attention to disadvantaged groups so they can benefit from the existing structure of opportunities (Alvarez and Mattar 2004).

Cuban social policy regarding poverty attempts to eradicate it by addressing its causes, promoting equity as a means to integrate all sectors of society, fostering human development and well-being, and guaranteeing the entire population basic social protections. Above and beyond these objectives are more specific policies of direct assistance for those sectors considered vulnerable. In keeping with the ethical and humanistic principles of Cuba’s social program, merely reducing, alleviating, or mitigating poverty is not enough. The aspiration is to eliminate or minimize the conditions that produce and/or reproduce poverty and to promote human development in all its aspects.

As a result of implementing this concept of development and the social policies it implies, Cuban society for nearly three decades enjoyed a trend toward a more equitable distribution of wealth, which has been documented by renowned authors and institutions^[1] and advanced significantly in terms of social development, as evidenced by very favorable social indicators—some of which are even comparable to those of developed countries—at virtually the same level throughout the island. Particularly outstanding among these indicators is the Human Development Index. Cuba’s rank has risen significantly since 1998, and as of 2013 it was ranked fifty-ninth (United Nations Development Program 2013). According to the Human Development and Equity Index,^[2] whose goal is to measure equity in the relevant aspects of human development, Cuba ranks among the top five nations of Latin America and the Caribbean—along with Trinidad and Tobago, Colombia, and Costa Rica. It must be emphasized that these results were achieved by an underdeveloped country with limited resources and almost constantly facing adverse economic conditions.

Poverty and Vulnerability in Present-Day Cuba

The crisis and economic reforms that occurred in Cuba during the 1990s not only severely hurt the country’s economy but also seriously affected everyone’s quality of life. In particular, material insecurity grew and intensified. In this complex scenario, poverty reemerged as a social problem, and, consequently, the thesis that poverty was being eradicated in Cuba (Rodríguez and Carriazo 1987), which had been widely shared in all spheres—political, social, and academic—and proven by indisputable social advances and achievements, began to be questioned.^[3] Special terms are used to discuss problems connected with types of personal insecurity (precariedad), reflecting both the aforementioned social achievements and the specifics of the phenomenon of poverty in Cuban society. Among these terms are “social disadvantage,” to describe adverse socioeconomic and familial conditions that place schoolchildren at risk (Díaz et al. 1990); “vulnerable groups,” defined as groups with incomes too low to provide a minimum standard of living (Torres 1993); and “at-risk population,” defined as that population in danger of not being able to meet some basic needs (Ferriol et al. 1997)—a term the authors explicitly prefer to use instead of “poverty.”^[4] The recognition of poverty in today’s Cuba requires acknowledgment of its sui generis character. It is limited in extent and one does not find critical or extreme poverty of the sort that would produce malnutrition, poor health, illiteracy, insecurity, and social exclusion. It is also unique with regard to the social protection received by the entire population.

Even those sectors with scarce resources are guaranteed access to basic social services (Zabala 1996). It is precisely this social protection—free and accessible health care, education and social security, guarantees of employment, wages and basic foodstuffs, and indirect residential subsidies—that keeps social exclusion to a minimum. It is this social protection that accounts for Cuba’s favorable ranking in terms of human development and poverty. According to the Human Poverty Index, Cuba has ranked among the top five developing countries over the past ten years, with poverty rates ranging from 4.1 percent (2002) to 5.1 percent (1997). It has ranked between second and sixth, and in every case the results have been considered very favorable.^[5]

The second report prepared by the Instituto Nacional de Investigación Económica (National Institute of Economic Research [INIE] 2005) on the Millennium Development Goals showed that Cuba was doing very well at meeting those goals. Regarding the goal of eradicating extreme poverty and hunger, unemployment fell from 7.1 percent (1997) to 1.9 percent (2004), a rate that can be regarded as full employment, benefiting all sectors of society, especially youth, women, the disabled, and the people of the country’s eastern provinces—the region where unemployment was highest during the economic crisis. Over this same period, minimum wage increased (by 125 percent, benefiting 1,657,191 workers), as did the base pay in various sectors. Social security benefits to low-income pensioners increased, benefiting 1,468,641 individuals, as did social assistance, benefiting 476,512.

In terms of the goal of reducing the rate of hunger by half between 1990 and 2015, food availability increased between 1999 and 2003, from an average of 3,007 kilocalories to 3,165 per capita per day. The proportion of the population at risk of malnutrition fell to 2 percent. The incidence of low-birth-weight babies has fallen since 1993 and is consistent throughout the country. Likewise, the percentage of children up to five years old who are moderately or severely underweight decreased to 2 percent—a very low incidence by worldwide standards—and with very little variation between the sexes. Specific programs are now being developed to ensure the proper nutrition of children, the elderly, pregnant women, and the chronically ill. Given all of this, the achievement of this millennium goal is quite possible for Cuba. Cuba has shown significant progress toward fulfilling other related goals, such as universal primary education, women’s equality and independence, reduction of infant mortality, better maternal health, and combating HIV/AIDS, malaria, and other diseases.

One should add that social vulnerability has increased to a degree in Cuban society. Major contributing factors are the aforementioned economic crisis and reform, the effects of the U.S. economic blockade, and the natural disasters that frequently assault the country. Other factors are associated with the characteristics—gender, race, age, and so on—that can make individuals, households, or groups more vulnerable. In addition, the most vulnerable can be identified by looking at poor people’s resources and assets—physical, financial, productive, and human and social capital—and particularly the types of strategies developed by an individual or a household (Moser 1998).

Insufficient Income

Most economic studies of this phenomenon—and in particular those using the income or poverty line method—have revealed insufficient income to be the essential determinant of poverty and its sole, most important and widespread form. This view of poverty places emphasis on the inputs available to individuals or households to satisfy their material needs. Those individuals or households who do not have the monetary income to satisfy their minimum needs within the historically determined norms of a society are considered to be below the poverty line. We know that the income redistribution that took place during the first two decades of the Cuban Revolution resulted in notable increases in the incomes of the poorest sectors (table 16.1).

Income Distribution
Years	Gross Domestic Product per Capita (U.S. dollars)	Income per Capita of the Poorest 40%	Proportion of Total Income (%)	Income per Capita of the Richest 5%	Proportion of Total Income (%)
1958	866	182	6.5	5,947	26.5
1962	882	379	17.2	2,237	12.7
1973	996	506	20.3	1,892	9.5
1978	1,395	865	24.8	3,068	11.0

Source: Brundenius (1984).

This tendency toward equitable distribution of wealth in Cuban society is demonstrated by the Gini coefficient, which shows a continual decrease in values from 1953 to the end of the 1980s: 0.56 (1953), 0.25 (1978), and 0.22 (1986) (Baliño 1991; Zimbalist 1989). Although in later decades the value of this coefficient has increased somewhat, to 0.38 between 1996 and 1998, it still ranks among the lowest in Latin America and the Caribbean. Cuba’s rank is even more significant because these calculations include only monetary income and do not include transfers, such as health care, education, and housing. Cuban experts explain these low levels of income inequality recorded until 1989 by the high employment rate—95 percent—in the state sector of the economy, the implementation of a unified salary system with a relatively narrow range of pay levels, the importance of salaries to household income, the effect of state-subsidized consumer items, and the maintenance of an overvalued exchange rate (Alvarez and Mattar 2004).

However, the crisis and the economic reforms reversed this trend in income distribution and equity. Various factors contributed to this: the declining purchasing power of salaries due to price increases; the dual currency system^[6]; a segmented market system with different prices, currency, and quality of products; diversification of income sources; and the divorce of the pay scale from work effort and professional skill, among other factors. Taken together, these factors led to an increase in social inequalities and socioeconomic differentiation. Mayra Espina (1997) studied these aspects in depth and found that they are expressed in the polarization of income and the emergence of vulnerable groups who do not enjoy high levels of consumption or material well-being. In her most recent work, Espina links this tendency to the emergence of poverty: “Without producing a mechanism for restoring the relations of exploitation or of private property on a large scale, Cuban reform measures led to restratification, providing the context for the growth of poverty as a social problem, the expansion of the at-risk segments of the population, and a general trend of widening socioeconomic inequalities” (Espina 2008, 161).

Such social restratification and growth of income inequality are linked to the increased role of the market in distribution. Macroeconomic studies designed to identify sectors of the population with insufficient income have found an increase over the past two decades. A study carried out by experts at the INIE and the Centro de Investigaciones de la Economía Mundial (Global Economy Research Center for Study of the World Economy [CIEM]) looked at the urban population at risk and found that this sector had more than doubled, from 6.3 to 14.7 percent, between 1988 and 1996; in both years, the income of the majority of the at-risk population was near the poverty line. By region, although the east was most affected (21.7 percent of the population at risk), the western region and the city of Havana showed the sharpest increase in risk. The urban at-risk population includes disproportionate numbers of seniors, women, individuals with only primary and middle school education, the unemployed, state workers, and large households (Ferriol et al. 1997). As of 1999, 20 percent of the urban population was at risk. The data show that there is little variation within this group and that most of these people live close to the poverty line. Preliminary calculations for 2001 have indicated that this situation has not been reversed (Alvarez and Mattar 2004).

Insufficient income is directly associated with limited consumption of all kinds but food most of all. A study performed in the city of Havana by researchers of the INIE, the Oficina Nacional de Estadísticas (National Office of Statistics [ONE]), and the Centro de Estudios de Población y Demografía (Population and Development Studies Center [CEPDE]) highlights the insufficient food consumption of households in the two lowest-income deciles and their dependence on the rationed goods from the state markets complemented by government-subsidized meals and other forms of social protection (Ferriol et al. 2004a).^[7]

Economist Viviana Togores combines the rates of dependence and salary income of households and an estimate of the basic food basket into a single index. From these, she calculates income poverty, defined as a condition in which the household is not able to meet its basic food needs. According to her estimates, 48.4 percent of the Cuban population is in this category. But at the same time, she acknowledges that the redistributive effect of social expenditures—in education, health, social assistance, and so on—while it does not compensate for the loss of purchasing power, does have a favorable effect on the population, especially those in more needy sectors (Togores 2000, 2004).

In contrast with other countries, insufficient income in Cuba is not directly related to unemployment; even during the economic crisis, workers’ nominal salaries remained unchanged, and the employees affected by company closings received subsidies. Moreover, as the economy recovered, unemployment dropped significantly. In 1995, the unemployment rate was 8.3 percent; by 2000, it had dropped to 5.4 percent. In 2006, it stood at only 1.9 percent, and in 2007 just 1.8 percent, or nearly full employment. In addition, nominal wages in the state sector have been gradually increasing as a result of wage reforms. The average monthly salary in state and mixed enterprises increased from 261 pesos in 2002 to 408 in 2007 (ONE 2008).

Furthermore, the social security program ensures universal protection for workers and their families and also for sectors of the society whose essential needs are not otherwise met or who, because of life circumstances or health reasons, cannot meet their needs without social assistance.^[8] Expenditures on social security and services as well as pensions have increased substantially in recent years. The costs of social assistance programs and the number of beneficiaries have also increased dramatically (table 16.2).

Social Security and Social Assistance Data
Indicators	2002	2003	2004	2005	2006	2007
Social security expenditures (millions of national pesos CUP)	2,098.2	2,144.7	2,172.1	3,088.8	3,783.0	3,730.0
Social security beneficiaries	1,422,511	1,464,049	1,483,779	1,495,825	1,533,230	1,571,924
Average pension	112.81	119.04	120.69	179.36	191.83	194.11
Social assistance expenditure (billions CUP)	102.6	215.7	261.9	451.6	572.4	590.7
Social assistance beneficiaries	269,495	395,821	476,512	535,134	599,505	595,181

Source: ONE (2008).

Insufficient income is related primarily to the decline in purchasing power of salaries and social security and assistance benefits. According to Togores (2004) and Pérez (2008), this occurs because nominal wages have not kept up with increases in the Consumer Price Index^[9] so that real wages have fallen by 37 percent between 1989 and 2000 (Pérez 2008). This affects particularly those whose main income comes from the state, such as traditional state sector employees who do not receive other benefits or perks and those receiving pensions and social assistance.

Although unemployment is not the main cause of insufficient income, households with low adult employment and high rates of economic dependence are among those with the lowest income levels (Ferriol et al. 2004a; Zabala 1999). Although these estimates reflect the significance of insufficient income in today’s Cuba, they should be analyzed with caution and in the light of important qualifications. For example, free public services, such as health care and education, satisfy important needs. Furthermore, the cost of the basic goods basket is difficult to calculate because basic goods are acquired in various markets with different prices; each household has its own formula for satisfying its needs. Moreover, such estimates are themselves questionable because they do not take into account income not stemming from formal employment, such as hard-currency income and various types of worker incentives.

Unmet Basic Needs

Poverty can be identified directly by examining whether individuals’ or households’ actual consumption of goods and services meets their basic needs (as opposed to being measured by income, which is an indirect approximation, as it represents only a portion of inputs). In order to identify the unmet basic needs, each household’s success at meeting a group of specific needs—housing, water, sewage, electricity, furniture and household items, and so on—is evaluated. In each case, a minimum value is set. If the household falls below that level, the need in question is considered unmet, and an overall lack of essential services exists (Boltvinik 1992). Studies on spatial inequalities undertaken by the Center for the Study of Health and Human Welfare at the University of Havana have revealed interregional and intraregional inequalities; some of these are due to spatial inequalities inherited from before the Revolution and the new inequalities that emerged during the crisis and the economic reform. Such inequalities involve differences in housing quality, access to consumer goods and social services, and levels of socioeconomic development that give advantages to certain regions over others, the so-called luminous and opaque areas, respectively (Iñiguez and Pérez 2004; Iñiguez and Ravenet 1999).

The housing question is, without a doubt, one of the most pressing problems facing Cuban society. Despite efforts and achievements, the latest data available indicate that 26 and 15 percent of Cuban homes were considered to be in fair or poor condition, respectively (Alvarez and Mattar 2004). Estimates made in 1993 indicated that fair and poor structural conditions were more common in rural areas (Hábitat 1996); nevertheless, the city of Havana was in a particularly critical state: not only were 20 and 16 percent of units, respectively, classified as fair or poor, but in addition, 60,000 houses needed to be replaced, another 60,700 dwellings were located in tenement buildings,^[10] and 2,700 units were homeless shelters that accommodate families whose housing is uninhabitable; in addition, there were sixty unhealthy districts and 114 precarious settlements with marked deterioration in the capital (Coyula 2006).

Another housing problem is the accumulated housing shortage, which the National Housing Institute has estimated at about 530,000 units (Alvarez and Mattar 2004), and the overcrowding that this causes. Currently, a do-it-yourself construction program is under way with the participation of the state. In 2007, 57.4 percent of homes were built without state involvement, and of these, 52 percent were do-it-yourself (ONE 2007); however, the construction is far from meeting expectations and existing needs.

The natural disasters endured by Cuba, steadily more frequent and intense, have had a damaging effect on the country’s housing situation by destroying dwellings entirely or partially and accelerating the deterioration of the housing base.^[11] Although reconstruction and rehabilitation of housing damaged by hurricanes are given priority in allocating the scarce resources available for construction, only 22 percent of the affected dwellings have been repaired (Rodríguez 2008).

In terms of safe drinking water, the coverage of households is high—95.2 percent, according to 2002 data—although in rural areas the figure is only 85.4 percent, and only 75.4 percent of covered households have direct connections. In many homes, water must be stored because water service is intermittent, affecting its quality and availability; 94.2 percent of households in 2002 have sanitation services, of which 38.4 percent are sewer connections and 55.8 percent pits and latrines. The situation is worse in rural areas, where 84.6 percent have services, only 9.8 percent of which are sewer connections. In general, the lowest levels of access to water and sanitation are found in the rural areas of the country’s eastern provinces (Alvarez and Mattar 2004).

Regarding electricity, 95 percent of households have service: 100 percent in urban areas and 83 percent in rural areas (ONE 2002). The state continues working to bring electricity to the more remote areas.

Some Perspectives of Analysis: Family and Gender

The diversity and heterogeneity of poverty are also evident when examined by gender and family status. This investigation also brings subjective and sociocultural dimensions into the analysis. Poverty studies from the family perspective^[12] have revealed the impact of poverty on family structure, dynamics, and functioning as well as on the ways in which families respond to their situation—including survival strategies. Poverty also influences the ways people interpret their family situation in plans, self-perception, self-esteem, and values, among other things. The family perspective incorporates both analysis of the immediate socioeconomic impacts specific to families and analysis, over time, of the changes that occur through the entire life cycle of a family.

Along these lines, I have conducted studies of families living in poverty based not only on their unfavorable living conditions but also on family composition: high average size, mainly young age structure, education level slightly lower than the national average, low rate of employment, overrepresentation of blacks and mixed-race individuals, and female heads of household. They are characterized mainly by extended families and single mothers, unstable relationships, predominance of the maternal role in all areas of family life, patterns of early motherhood and high fertility rates, and limited educational role of the family. In the family-society relationship, one can discern various family strategies oriented toward subsistence; a high degree of social integration, except in employment; a limited degree of social participation; and some conflicts with or alienation from social organizations. In subjective terms, one can observe the variable self-perception of families regarding their poverty, the predominance of a family-centered perspective instead of a social perspective along with short time horizons, and the importance of the family in transmitting values.

These studies reveal a reciprocal relation between the characteristics of structure, functioning, and dynamics of families living in poverty and the organization of their daily lives based on family survival via various strategies. This relation reinforces disadvantaged living conditions, family dysfunction, and the insufficient use of opportunities offered by society, thus feeding the generational reproduction of poverty and the intensification of this phenomenon at certain stages of the family life cycle. The studies also highlight the importance of the family in the reproduction of poverty, expressed in three dimensions: traditional, situational, and current. The traditional includes the lack of material wealth and other assets as well as some generationally transmitted patterns of behavior and values. The situational dimension is linked to the economic crisis and reforms. In this context, the current dimension refers to reinforcement of some traditional characteristics and behaviors.

Subsequent research reaffirms some of these findings. A study by the Center for Psychological and Sociological Research confirmed that the most disadvantaged families were extended, single parent, growing, and with female heads of households and many economically dependent family members. It also revealed that such families are most common in poor housing conditions, areas of little socioeconomic development, urban shantytowns, and resource-scarce rural areas (Díaz Tenorio 2008). Families’ lack of various kinds of capital affects their poverty. According to psychologist Patricia Arés (2008), families with high educational and cultural capital and declining economic capital—professionals and technicians belonging to the traditional state sector—and particularly those with low cultural capital and declining economic capital are financially insecure.

Other studies conducted in Havana city found that with regard to income, poorer families were those headed by women and pensioners, those with more children, elderly individuals living alone, the unemployed, the chronically ill and disabled, women, full-time homemakers, the less educated, larger families, and people of color (Ferriol et al. 2004a). From the foregoing, it can be concluded that the diversity and heterogeneity of poverty are linked to specific characteristics of the family group, their living conditions, their links with society, and their subjective representations.

The gender perspective in the analysis of poverty enriches the understanding of this phenomenon. In the Cuban context, it acquires special significance because of the important achievements of women in the social sphere and the social and legal protection they enjoy. Regarding the problem of poverty, according to estimates of the at-risk population, defined as those with incomes below the poverty line, there were no significant gender differences in urban areas in 1997: females accounted for 50.7 percent of total population at risk (Ferriol et al. 1997). More recently, research on at-risk populations in Havana found that women were slightly overrepresented (57 percent) in the lowest monetary income groups—the two lowest deciles (Ferriol et al. 2004a). Although there is no occupational or wage discrimination in Cuba and although women have achieved high educational levels, their greater poverty could be due to their overrepresentation in lower-paying occupational categories, such as service and administration, even though they make up the majority of professionals and technicians (Núñez 2000); unequal access to management positions of leadership (Díaz 2004); the existence of a sector of the female population that has no economic autonomy because it engages only in homemaking; and the greater role of women as caretakers for children and the infirm.

In the realm of family, this analysis points to the possible vulnerability of households headed by women, particularly single mothers, whose numbers are steadily rising in Cuba. These households are in some cases in a state of poverty and vulnerability because of the structure, composition, and conditions in which the mothers fulfill their roles and responsibilities. Several studies have shown that households headed by unemployed, single-parent females who lack technical training or have low educational levels are vulnerable and in poverty. This analysis highlights the importance of access to and control over job opportunities, training, education, and social support networks available to women, which may be decisive in breaking the cycle of poverty.^[13]

This demonstrates that women still suffer some disadvantages that are made to seem natural or justified by symbolic representations of women, families, and various social actors that are historically and culturally conditioned and that contribute in various ways to a certain level of vulnerability in women not only in the employment and social realms but also in the family environment. It is important to consider that such representations can be determinants of gender-associated poverty and thus contribute to the social exclusion of women.

Concluding Remarks

Comparative analysis shows not only that the conditions and manifestations of poverty in Cuba are unique but that that uniqueness is strongly influenced by the social policies implemented in the country and the social protection they provide. In Cuba as elsewhere, poverty is diverse and heterogeneous in expression. Considered separately, its manifestations—insufficient income and unmet basic needs—can offer only a partial and incomplete view of the phenomenon.

Other dimensions of poverty, especially the subjective and cultural, complement that diversity and are reflected when poverty is analyzed qualitatively from the perspective of family and gender. The results of such analysis reaffirm the importance of Cuba’s educational and cultural policy. Poverty in rural areas remains to be studied adequately; the issue has been left unexplored in recent decades.

The goals of equity and social justice, inherent in a society that seeks to build socialism, make it essential to eradicate poverty. To that end, it is critical to maintain existing social policies and continue improving them. In the present decade, these policies have been expanded through various social programs currently under way and have assumed a more personalized character. The further development of policy should take into account the diversity and heterogeneity of the phenomenon. Addressing the problem of low incomes would require changes in employment and wage policies, while the persistence of unmet basic needs would require prioritization of housing construction and repair and improvement of related infrastructure. Policy should also recognize the more specific needs of its beneficiaries. Another positive move would be to implement social policies affecting the family as a unit, transcending the traditional sectoral approach that focuses on particular members. Finally, it is necessary to encourage families and local communications to take a more proactive approach to solving their problems.

Notes

Excerpted from María del Carmen Zabala Argüelles, “Poverty and Vulnerability in Cuba Today,” Socialism and Democracy 24, no. 1 (2010): 109–26. Reprinted by permission of the publisher.

References

Alvarez, Elena, and J. Mattar, eds. 2004. Política social y reformas estructurales: Cuba a principios del siglo XXI. Mexico City: CEPAL/INIE/PNUD.

Arés, Patricia. 2008. “Familia como red familiar compleja.” Paper presented at the Centro de Estudios Demográficos, University of Havana.

Baliño, Gerardo. 1991. La distribución de los ingresos en Cuba. Havana: INIE.

Boltvinik, Julio. 1992. “El método de la medición integrada de la pobreza: Una propuesta para su desarrollo.” Comercio Exterior 42, mo. 4.

Brundenius, Claes. 1984. “Crecimiento con equidad: Cuba 1959–84.” In Cuadernos de Pensamiento Propio. Managua: INIES-CRIES.

Centro de Investigaciones de la Economía Mundial. 2000. Investigación sobre desarrollo humano y equidad en Cuba 1999. Havana: Centro de Investigaciones de la Economía Mundial.

Coyula, Mario. 2006. “La Habana toda vieja.” Temas, no. 48, October–December.

Díaz, B., I. Guasch, B. Vigaud, et al. 1990. “Caracterización del niño en riesgo por condiciones socioeconómicas y familiares adversas: Acción preventiva intraescolar y comunitaria.” Research report. Havana: Ministry of Education.

Díaz, Elena. 2004. “Mujer cubana: El progresivo proceso de empoderamiento.” Unpublished research report.

Díaz Tenorio, Mareelén. 2008. “Investigación sobre grupos familiares en un cuarto de siglo.” In Cuadernos del CIPS 2008: Experiencias de investigación social en Cuba, edited by María Isabel Domínguez et al. Havana: Editorial Caminos.

Espina, Mayra. 1997. Transformaciones recientes en la estructura socioclasista cubana. Barcelona: Editorial Servei de Publicaciones.

———. 2008. Políticas de atención a la pobreza y la desigualdad: Examinando el rol del estado en la experiencia cubana. Buenos Aires: CLACSO.

Ferriol, A., G. Carriazo, O. U-Echavarría, et al. 1997. Efectos de políticas macroeconómicas y sociales sobre los niveles de pobreza: El caso de Cuba en los años 90. Havana: INIE/CIEM.

Ferriol, A., M. Ramos, and L. Añé. 2004a. Reforma económica y población en riesgo en Ciudad de La Habana. Havana: INIE/CEPDE/ONE.

Ferriol, A., G. Therborn, and R. Castiñeiras. 2004b. Política social: El mundo contemporáneo y las experiencias de Cuba y Suecia. Havana: INIE.

Hábitat. 1996. Informe Nacional de Cuba para Hábitat II. Havana: Instituto Nacional de la Vivienda.

Iñiguez, Luisa, and Omar Everleny Pérez. 2004. “Territorio y espacio en las desigualdades sociales de la provincia Ciudad de Havana.” In Colectivo de autores, 15 años Centro de Estudios de la Economía Cubana. Havana: Editorial Félix Varela.

Iñiguez, Luisa, and M. Ravenet. 1999. Desigualdades espaciales del bienestar en Cuba: Aproximación a los efectos de los nuevos procesos en las realidades sociales. Havana: Centro de Estudios de Salud y Bienestar Humanos.

Moser, Carolina. 1998. “The Asset Vulnerability Framework: Reassessing Urban Poverty Reduction Strategies.” World Development 26, no. 1.

National Institute of Economic Research (INIE). 2005. Millennium Development Goals Cuba: Second Report. Havana: INIE.

National Office of Statistics (ONE). 2002. Anuario Estadístico de Cuba. Havana: ONE.

———. 2007 and 2008. Anuario Estadístico de Cuba. Havana: ONE.

Núñez, Marta. 2000. “Estrategias cubanas para el empleo femenino en los noventa: Un estudio de caso con mujeres profesionales.” Caminos. Revista Cubana de Pensamiento Socioteológico, nos. 17–18.

Pérez, Omar Everleny. 2008. “La economía en Cuba: Un balance actual y proyecciones necesarias.” In Boletín Cuatrimestral, agosto 2008. Havana: Centro de Estudios de la Economía Cubana.

Rodríguez, José Luis. 2008. “Presentación a la Asamblea Nacional del Poder Popular del informe sobre resultados económicos del 2008 y los lineamientos del Plan Económico y Social para 2009.” December 27.

Rodríguez, J. L., and G. Carriazo. 1987. Erradicación de la pobreza en Cuba. Havana: Editorial de Ciencias Sociales.

Togores, Viviana. 2000. Cuba: Efectos sociales de la crisis y el ajuste estructural en los 90s. Havana: Centro de Estudios de la Economía Cubana.

———. 2004. “Ingresos monetarios de la población, cambios en la distribución y efectos sobre el nivel de vida.” In Colectivo de autores, 15 años Centro de Estudios de la Economía Cubana. Havana: Editorial Félix Varela.

Torres, Julia. 1993. Pobreza. Un enfoque para Cuba. Havana: INIE.

United Nations Development Program. 2013. 2013 Human Development Report. New York: United Nations Development Program.

Zabala, María del Carmen. 1996. “Familia y pobreza en Cuba.” Master’s thesis, University of Havana.

———. 1999. “Aproximación al estudio de la relación entre familia y pobreza.” Doctoral thesis, University of Havana.

———. 2009. Jefatura femenina de hogar, pobreza urbana y exclusión social: Una perspectiva desde la subjetividad en el contexto cubano. Buenos Aires: CLACSO.

Zimbalist, A. 1989. The Cuban Economy: Measurement and Analysis of Socialist Performance. Baltimore: Johns Hopkins University Press.

For more information, see Baliño (1991), Brundenius (1984), and Zimbalist (1989).

This index was developed by a collective of Cuban researchers (CIEM 2000).

Evidence of conditions of insecurity was already recognized before the crisis, as in research by the Institute for Research and Orientation on Internal Demand, which revealed socioeconomic variation among households and regions in the country, including some classified as disadvantaged. Consistent with this, some researchers believe that the current situation reflects a deterioration of poverty relief mechanisms since total eradication has not been possible.

Subsequently, they developed the concept of poverty with protection and guarantees, characterized by insufficient income to cover the cost of the basic goods basket but with social protection in key areas—namely, food, health, education, employment, and universal social security services that are free and subsidized. This condition certainly distinguishes the Cuban situation from the destitution that characterizes poverty in the rest of the world (Ferriol et al. 2004b).

The Human Poverty Index includes an estimate of the number of individuals who will not survive to the age of forty, illiterate adults, individuals without access to safe drinking water, individuals without access to health care, and children under age five with moderately low or severely low weight. This index came into use in 1997. In 1996, the Índice de Pobreza de Capacidad was used. Cuba received a score of 7.8, placing it tenth among 101 countries. In 2001, Cuba’s Human Poverty Index ranked it in fourth place among ninety developing countries.

Two currencies circulate in the country: Cuban pesos (moneda nacional) and convertible pesos. The former are used for rations, subsidized meals, social consumption, domestically produced items for domestic consumption (with prices set by the state), and farmers’ markets (with prices determined by supply and demand). The latter are used in hard-currency stores. Until 2004, U.S. dollars also circulated in the hard-currency market.

Calculations from 1992 regarding households with low monthly incomes—50 pesos or less—showed that this amount was insufficient to meet basic needs. As mentioned earlier, Julia Torres (1993) called these sectors “vulnerable groups” because of their lack of food security.

Currently, the system provides social protection to those experiencing illness, maternity, work-related injury or illness, partial or total disability, or retirement and to survivors of deceased workers. It includes not only monetary provisions (direct income in the form of salaries, subsidies, and pensions) but also a range of services and in-kind benefits.

This is due to the high price in Cuban pesos of products in the nonregulated markets—especially farmers’ markets—and the prices of food and nonfood items in the hard-currency stores, which reflect a high exchange rate.

10.

These are buildings divided into residences with shared bathrooms and kitchens called solares ciudadelas.

11.

Hurricanes Gustav, Ike, and Paloma alone damaged 530,758 dwellings (Rodríguez 2008).

12.

See Zabala (1996, 1999).

13.

These issues were the focus of a study I carried out as a senior fellow with CLACSO-CROP: Jefatura femenina de hogar, pobreza urbana y exclusión social: Una perspectiva desde la subjetividad en el contexto cubano (Zabala 2009).

Chapter 17

Economic Illegalities and the Underground Economy in Cuba

Archibald R. M. Ritter

Various types of economic illegalities and underground economic activities occur in all countries. In Cuba, however, public policies and structural economic forces have promoted these phenomena. Indeed, Cuba appears to be awash with economic illegalities. Many Cuban citizens insist that almost everyone is involved in economic activities that are considered illegal by the state, contributing to a pervasive culture of illegality. This perception was well expressed in a 2004 Havana street saying: “Todo se prohíbe pero todo se hace” (Everything is prohibited, but everything is done). Another street saying highlights the ineffectiveness of the myriad measures put in place by the government to address these problems: “Al tratar de controlarlo todo, termina sin controlar nada” (By trying to control everything, the government ends up controlling nothing).

Economic illegalities and the underground economy are serious problems with corrosive effects on Cuban society. This chapter analyzes the nature and scope of these problems, the forces that produce them, their consequences, the policies necessary to reduce them, and the anticorruption campaign of late 2005.

Definitions: Economic Illegalities and
the Underground Economy

The term “informal economy” was introduced in 1972 by the International Labor Organization in the context of Kenya and was further elaborated in the Latin American context by Victor Tokman (2004), De Soto (2002), and others and by more recent analyses (Portes and Haller 2005). However, because none of these sets of definitions fit the unique institutional character of Cuba, a custom-designed set of categories was developed for this chapter. The four categories included are household economy, formal economy, underground economy, and criminal economy. The household economy is similar to the International Labor Organization’s (2002) concept of “reproductive economy” and includes all nonmonetized production and exchange of goods and services within the home and between friends and neighbors. The formal economy includes the public sector, state enterprises, mixed enterprises (with joint foreign, multinational, and state ownership), and cooperative enterprises. Licensed self-employment is also included in the formal economy, as it operates within the tax and regulatory framework of the state.

The analysis in this study focuses on the underground economy and the criminal economy. The underground economy involves the production and exchange of legal goods and services and the generation of income in unlicensed enterprises or using unauthorized methods. It is complex and includes a variety of phenomena: (1) “legitimate” underground economic activities; (2) underground activities operating within registered self-employment activities; (3) underground activities operating within state firms or the public sector; (4) unrecorded and unofficial income supplements paid by foreign organizations, mixed enterprises, state firms, or the public sector to some employees; (5) unrecorded and unofficial payments from customers to employees; and (6) black markets or illegal exchanges of goods and services.

“Legitimate” underground economic activities involve the production and exchange of legal goods and services although the persons producing them are outside the control of the state. Although tolerated elsewhere, in Cuba such unauthorized activities are considered criminal. A second variety of activity would be the private or semiprivate enterprises, operated by some employees within the state sector, which require additional payments from citizens for their services. Some employees of mixed enterprises receive additional dollar incomes “under the table.” Some employees of state firms and institutions use public property for private activities and may receive particular benefits such as access to foreign travel and the per diems this generates. Other observers of the Cuban reality attest that almost every single employee of a state firm and institution uses public property of any kind for private activities or sale or exchange for other desired items.^[1]

The criminal economy refers to economic activities that produce illegal goods and services in clandestine circumstances outside the regulatory and fiscal purview of the state. Illicit drug manufacture and sales, prostitution, trade in endangered species, gambling in some jurisdictions, the sales of some types of firearms or explosives, smuggling, theft, and the sale of stolen property are cases in point. Bribery and overt corruption would also be part of the criminal economy.

Character and Dimension

There are many varieties of economic illegalities in Cuba. The following provides a list of some of these that are known to the author. This list could probably be extended considerably:

A butcher reserves some choice cuts of meat for “under-the-counter” sale to clients who are willing to pay more than the official rationed price.
Cigar makers remove cigars from the cigar factory for resale.
An official at a state institution with access to a vehicle for official purposes uses it more or less as a private vehicle and uses the chauffeur as a personal employee.
A waiter or barman provides low-cost homemade peso-economy rum instead of official dollar-economy rum to clients. The dollar-economy rum is then sold for a dollar price.
A doorman at a cinema permits entrance without the purchase of a ticket but instead with a small payment on the side.
An inspector of cuentapropista paladares (microenterprise restaurants) disregards discrepancies in restaurant owners’ input purchase and receipt records in exchange for a payment.
A mechanic for a state sector enterprise tells a client that a placement part is not available from official sources but that he is able to locate and provide the part from outside the shop at a higher price. While this may often be legitimate, it may also involve theft and resale of the part from the enterprise.
A gasoline tank truck provides a larger amount of gasoline at a gas station than officially recorded. The gasolinera provides the driver of the tank truck with a payment and then resells the gas unofficially at a higher price.
A taxi driver provides a ride with the meter off and for a fixed fee, explaining that the meter is not working—or that he needs the money. Alternately, a taxi driver returning from a destination to home base picks up a client and requests payment without use of the meter.
A foreign enterprise provides salary supplements in food and homemaking supplies to its employees.
The owner of a house not licensed as a room rental facility rents a room illegally.
The local Comité de Defensa de la Revolución president accepts a $10 bribe in exchange for overlooking an illegal room rental.
A citizen pays a 5.00-convertible-peso bribe to an agent in order to secure a scarce 85-peso (moneda nacional, or $3.15 convertible peso) one-way airline ticket from Havana to Holguín.
Jobs that permit the acquisition of significant foreign exchange through tips, notably in tourism, are sold to applicants by the hiring decision maker.
A citizen sets up a satellite dish, receives foreign broadcasting, hooks up his neighbors for a 10.00 convertible peso monthly fee, and provides twenty-four-hour cable service. (This was a common practice in early 2005.)
Some tourists are overcharged, ostensibly by mistake, for their meals in a restaurant, with an additional beer billed in some cases with a “tip” included in the bill (though this is not in the menu or in the policy of the restaurant) or with the prices for some items overstated.

There are also innumerable microenterprises in what has been labeled here legitimate underground economic activities. As noted, these activities are legal in virtually all countries producing legal goods and services. However, in Cuba, numerous policy limitations force many of these otherwise perfectly legal activities into the underground economy. These microenterprises produce every imaginable but otherwise legal product or service. A partial listing of such activities that are known to the author, directly or indirectly, includes the following:

Personal services: barbers, hairdressers, manicurists, clothes washing, teachers, clothing repair, shoe repair, film rental, and “messengers”
Gastronomic services: snack bars, soft-drink vending, baking, fruit vending, candy vending, seafood vending, and pizza vending
Retailing: bicycle parts, ice vendors, jewelers, cigarettes, newspapers, and plumbing parts
Automotive repair services: mechanics, electricians, body shops, adornments, painters, tire repair, auto upholsterers, and locksmiths
Appliance repair: pumps, stoves, air conditioners, TV and video, water pumps, locks, and furniture upholstering and repair
Construction trades: carpenters, plumbers, electricians, plasterers, glass workers, painters, and concrete construction
Transportation: taxis, bicycle taxis, and carters
Manufacturing: shoemaking, mattress making, cigarette and cigar making, soft-drink bottling, and rum making
Primary sector activities: fishing, woodcutting and vending, charcoal burning and vending, and food growing and vending

While it is difficult to know exactly how significant the above-mentioned types of economic illegalities and underground activities may be, the scale appears to be enormous. A glimpse may be obtained from a number of examples. One report indicated that in three of the fifteen municipalities in Havana, police and customs officials raided 150 clandestine cigar-making operations, which were then shut down. A total of 11,935 boxes of cigars were confiscated (http://www.Cubanet.org, June 1, 2004). If there were 150 illicit cigar operations in three of the fifteen Havana municipalities, it is likely that there are thousands across the country because of the widely known skills, the low barriers to entry into the activity, and its profitability. Recent restrictions on the export of cigars without proper paperwork and purchase validation has perhaps impeded but certainly not blocked the illegal production and/or sale of cigars.

There also have been a variety of illicit practices in the tourist sector. In the words of a manager of a five-star hotel,

This is a billion-dollar business where millions flow daily in a poor country of people struggling to survive. Everyone finds some way to get unearned income and a few people get greedy. Just like in many other Third World countries, people often pay to work in the industry and then kickback a proportion of what they earn to their superiors. I could give you hundreds of examples. How high up these little mafias go, and if the problem is related to the Cubanacán scandal, is anyone’s guess. (Frank 2004)

This was corroborated in early 2004 when fifteen higher officials in Cubanacán were dismissed from their jobs, as was the tourism minister (Frank 2004). On February 19, 2005, Resolution 10 was enacted by the Ministry of Tourism, defining a code of conduct for the workers in the sector as well as higher-level management officials. A further revealing example occurred in October 2005 when the government ordered a change of personnel in all the gas stations on the island in order to stop the theft of gasoline that had reached alarming levels (BBC Mundo América Latina 2005).

Causes of Economic Illegalities

The causes of the illegal activities are complex but are rooted mainly in the economic policies that compel citizens to act outside the letter and spirit of the law in order to survive. It is also important to bear in mind that economic illegalities of various sorts are common in most countries and that some of the forces at work in Cuba are common to most other countries as well.

To begin with, Cuban citizens’ disregard for economic authority has historical roots. From the earliest colonial times, Cubans broke the enforced bilateral trade relationship with Spain. Contraband trade was common with France, Britain, and later the United States as well as with corsairs and pirates. Moreover, in the colonial era, Spain attempted significant micromanagement of the Cuban economy despite distance and slow communication. The response of many Cubans to this situation was to obey the regulations and rules from Spain only nominally while continuing their own activities illegally. The phrase summing up this widespread practice was “Obedezco, pero no cumplo” (I obey but do not comply).

While Cuba had developed a diversified range of large modern corporate business by the 1950s, large numbers of small-scale cottage industries continued to exist in many areas of the economy. This was an authentic “informal economy” that was producing legal goods and services and tolerated by the state, although it was outside the state’s regulatory framework. These small enterprises evaded taxes, paid lower wages than the large firms, were nonunionized, and avoided social benefit payments. There was probably a considerable degree of continuity between underground economic activities before and after the 1959 Revolution. People already functioning “in the shadows” in 1958 could easily remain underground after 1959.

A second factor promoting economic illegalities is the character and functioning of the central planning system adopted in 1961–1963. The rationing system implemented in 1961 was designed to provide everyone with the same basic supply of foodstuffs, clothing, and household products in order to achieve a minimum level of equality. This was to be achieved by replacing individual (or family) choice, expressed through markets, with an allotment of basic goods available at prices that were low relative to the average monthly income. However, because everyone received essentially the same rations and not all necessities were covered, many people would sell the rationed items they did not want or trade them for other products they did want. In this way, the rationing system converted many people into minicapitalists, searching for opportunities to sell and to buy.

Because the central planning system could not and cannot work perfectly, especially in the context of economic turbulence, enterprise managers must often improvise to resolve unforeseen problems. To obtain required inputs, they must negotiate with other enterprises, with superior officials, or with superiors or inferiors in other sectors or ministries. Indeed, managers of state companies were more effective and successful if they had a strong net of “extra-plan” sources of inputs in order to keep their enterprises functioning. This also promoted the illegal and extralegal exchange of goods.

A third factor is what appears to be a “common property problem” at work with respect to state property. A general attitude appears to be that state property belongs to no one and to everyone so that if one person does not help himself to it, someone else will instead. Public property therefore is treated as if it were firewood in a public forest or fish in the seas, belonging to no one in particular. It is “up for grabs” by whoever needs it and is in a position to take it. Similarly, public property, such as a vehicle accompanying an official position, is readily used for personal purposes with few qualms of conscience. In the words of the sociologist Juan Clark, “The majority of people believe that stealing from the state is not a crime” (cited in Pérez-López 1995, 99). Others add that such theft is seen not as a crime but as a right (Yanes, personal communication, October 2005). The standard for this type of attitude and behavior may be the Communist Party of Cuba and President Castro, who are able to use state property for partisan political purposes and often for personal purposes.

A fourth reason for the expansion of illegal economic activities in the 1990s and 2000s is the coexistence of the old-peso economy (with rationed products at very low prices) and the new economy (now with convertible pesos and previously with dollars and partly market-determined prices). The gap in prices between these two economies is enormous, creating an opportunity for arbitrage in a “black market” in which prices are determined by supply and demand. An example of the price gap between the two economies will illustrate the scope for arbitrage. The price of sugar with the ration book is 0.15 old pesos per pound. In comparison, a pound of sugar in the dollar stores costs 1.50 convertible pesos, or 39.00 old pesos (at the exchange rate relevant for Cuban citizens; that is, 1.00 convertible peso = 26 old pesos). This is 260 times higher than the ration system price. Of course, the “black market” also includes the exchange of products that are pilfered from the state sector.

A fifth factor is that policy limitations on the legal microenterprises also promote economic illegalities. For example, all legal microenterprises must be licensed, but relatively few licenses are in fact granted. In the municipality of Havana in 2001, only 23.9 percent of the 97,687 applications were in fact approved with licenses granted (Dirección Provincial de Trabajo y Seguridad Social, Ciudad Habana 2001). Restrictive licensing means that potential legal microenterprises are pushed into the underground economy. Legislation in October 2004 banning the issue of new licenses for some forty types of microenterprise will further intensify this effect. [Editors’ note: These restrictions have since been relaxed to encourage legal small enterprises.]

The tough regulatory regime for microenterprises also makes their lives difficult and leads some of those who can to the underground economy (see Government of Cuba, Decreto Ley 174 of 1997). Tough regulations regarding the inputs that can be used and where they can be purchased push some microenterprises into illegal acquisition of inputs. Restrictions on employment have a similar effect.

Basically, the more complex the regulations governing the conduct of particular economic activities, the greater the scope for illegal actions. In consequence, there are frequent violations of those rules that are thought to be unreasonable by the self-employed. Heavy taxation also leads some microenterprises to try to evade taxes in various ways. In consequence, large numbers of enterprises that would otherwise operate legally are forced into clandestinity. As noted above, there are innumerable such microenterprises or “legitimate underground economic activities” operating in the shadows of the underground economy, producing huge varieties and volumes of goods and services.

However, the most powerful force promoting economic illegalities of many sorts is necessity. Citizens earn old pesos, but their earnings are insufficient to purchase the basic foodstuffs—not to mention everything else—that they require for survival. This means that people must find additional sources of income in old pesos or convertible pesos (previously U.S. dollars). Cuban citizens often remark that their official monthly wage will buy basic foodstuffs from the rationing system and other sources that are sufficient for only about ten to fourteen days of the month. Purchases for the rest of the month must be made with funds from other sources. In addition, the number of products available through the rationing system is inadequate. Other goods and services have to be obtained from the dollar stores, from cuentapropistas, or from the state or private agricultural markets at high prices. (Electricity, water, and most types of health services but not telephone services were also available for low old-peso prices.)

This meant that virtually all Cubans needed additional sources of income, preferably in dollars or now in convertible pesos, simply to buy food. But people need more than food to survive. Clothing, transportation, utility payments, personal hygiene products, and so on are all necessary. Some of these—such as sanitary napkins—are available only in convertible pesos at the dollar store prices.

The inadequacy of peso incomes was confirmed in April 2005 when President Castro announced major wage, salary, and pension increases. The minimum wage was increased from 100 to 225 pesos, and the minimum pension was raised from 55 to 150 pesos (Granma 2005). The increased incomes will have to be spent on nonrationed products from the mercados agropecuarios, the state vegetable markets, and the hard-currency stores (at international prices plus a 140 percent sales tax). The latter require convertible pesos, available at 26 old pesos to 1 convertible peso. In consequence, the purchasing power of the income increases for pensioners and those on the minimum wage is not particularly significant.

However, people have in fact survived. They purchase not only their required food but also other daily requirements because they have other sources of income besides those earned from the official wage and salary system. There are a number of ways that people acquire additional incomes:

Some receive remittances from family members or friends outside Cuba; these are estimated to total between U.S.$700 million and U.S.$1 billion annually. [Editors’ note: Since President Obama relaxed restrictions on remittances in 2009, the estimated annual total has risen to more than $2 billion.]
Some acquire convertible pesos from foreign travel for governmental, business, or academic purposes.
Income supplements to Cubans are paid “under the table” by foreign enterprises or organizations.
Some 140,000 Cubans earn incomes from self-employment. A large number of individuals work formally and informally with the registered cuentapropistas. [Editors’ note: As of early 2014, the number of licensed self-employed had risen to more than 400,000.]
Some receive additional income working abroad—in Venezuela, for example—in officially sanctioned capacities.
Some earn tips from their work in the tourist sector. These payments make the approximately 100,000 tourist sector workers among the highest paid in the Cuban economy and provide a powerful incentive for qualified people to leave other areas of the economy, such as university teaching, for tourism.^[2]
Income supplements in kind or in cash (convertible pesos) are also provided to considerable numbers of workers in key sectors of the economy and in international or foreign organizations. Such supplements in kind also can enter the black market for resale.

However, for those citizens lacking access to any of these sources of supplementary income, the situation has been desperate. They have been below or near a minimum subsistence level of income. Necessity is therefore the primordial force pushing citizens into economic illegalities or the underground economy.

This general situation was aptly expressed by “Adrian,” one of the gasoline employees expelled in the October 2005 firing of all gas station attendants in an attempt to stop the theft of gasoline: “What’s most important in looking for a job is not the salary but what can be ‘resolved,’ meaning in good Cuban Spanish what we can steal.” “Of course we rob, chico! Or does he (Fidel Castro) think that I can maintain my wife and two children with the 10 dollars per month that he pays me” (BBC Mundo América Latina 2005).

Economic and Social Consequences of Economic Illegalities

The economic illegalities that are practiced in Cuba have a range of consequences. Some of these are benign and even useful, but others are socially and economically noxious. The consequences vary, depending on the specific character of the illegality.

The “legitimate” underground economic activities that produce legal goods and services have mixed impacts, but on balance, these are strongly positive. On the positive side, such enterprises consist of low-income people producing a range of goods and services for other low-income citizens. Usually, these goods and services are provided ineffectively by the state sector but are important for people’s daily lives (see the list of activities that presented earlier in the chapter).

The microenterprises generate jobs and incomes for the entrepreneurs and the workers. The entrepreneurs save and invest with no access to banks, public support, or microfinance. They earn foreign exchange for Cuba by selling products to tourists, and they save foreign exchange by relying heavily on recycled and domestically available inputs. They are also valuable “schools of entrepreneurship.” The owners of these enterprises work hard and utilize their resources as efficiently and carefully as possible under the circumstances of clandestinity. On the other hand, by forcing such enterprises underground, the government does not collect taxes from them. They may also be inefficient because of their small size and the “costs of clandestinity” and therefore may waste a proportion of the entrepreneurial energies of their owners. They also may rely on inputs pilfered from the state sector.

On the other hand, theft from state enterprises and institutions and the use of public property for personal purposes are at the other end of the spectrum. While these activities may help some people survive, they also have noxious effects. Theft damages the enterprises and institutions in which it occurs by impairing the capacity to provide the goods and services they are intended to provide to the general public. Theft also worsens income distribution in that those who do not steal have lower effective incomes than those who do, and it reduces the available quantity of lower-priced state goods and services. The use of state property and the abuse of power for personal purposes may be less visibly noxious, but it damages income distribution because those with privileged access gain at the ultimate expense of the broader society. Corrupt practices, such as the taking of bribes or the selling of jobs, also have harmful consequences. In such cases, strategically placed individuals are able to use their positions of privilege and trust for private gain. Those who are able to pay the bribes or purchase their jobs also gain privileged access to scarce goods and services, again damaging other people’s access and thus harming the broader society.

Black markets may either enhance or diminish the welfare of society. If the black market exchange between a willing buyer and seller does not involve stolen property but, rather, only the recirculation of rationed goods, for example, then it benefits both seller and buyer. As a case in point, both buyer and seller benefit from under-the-table payments accompanying a “permuta,” or the exchange of housing of unequal value, as indicated by their willingness to undertake the transaction. On the other hand, a good deal of black market merchandise is stolen from the state sector. Obviously, this is a negative phenomenon. Even if both buyer and seller gain, they are doing so at someone else’s expense.

Finally, stealing from the state breeds attitudes and cultures of lawlessness that damage trust and the ethical foundations of the economy and society. The practice of economic illegalities could escalate further and become a sort of undeclared civil war among citizens for spoils from the economic system. So far, this has deformed the economy and society seriously. However, it has permitted people to survive an otherwise impossible situation.

Reducing Illegalities

In view of their corrosive and perverse effects, widespread illegalities and the culture of petty corruption in time should be reduced. What measures might be effective in this regard?

The main methods used by the government of Cuba to deal with the phenomenon are preaching, policing, proscription, and punishment. The effects of this approach in the past have been transient, and the illegalities have surfaced as soon as the pressure and the campaigning subsided. If the underlying forces that generate the economic illegalities are not addressed, it is unlikely that the latter will disappear with this type of approach.

The government of Cuba often asserts that the principal source of pervasive illegalities is the existence of the licensed and therefore legal microenterprise sector and the private farmers’ markets. Invariably, it then moves to further restrict their operation. But limiting legal microenterprise numbers and tightening the regulations on them merely pushes some of them into the underground economy. Those formerly self-employed legally would also have an incentive to engage in a variety of other illegal activities as well in order to make ends meet.

A frequently used approach to dealing with the more noxious economic illegalities is to monitor and police them more vigorously. A major role for the police has been to stop and question anyone traveling by foot, bicycle, or car on the street with large packages or backpacks in order to apprehend anyone engaged in the transport of black market products. However, the police themselves may overlook possible or actual infractions out of friendship for the perpetrator or empathy for his or her situation or perhaps because they have received a payoff of some sort.

Infractions may be punished by prohibitions of the relevant activities, but this may only push the activities underground. To prevent infractions, monitors or inspectors are required to police the legal self-employment activities. The role of the inspectors for the paladares and bed-and-breakfast operations is well known. However, it is also reported that, in some cases, the inspectors have become avaricious and require payoffs for infractions that may be real, imagined, or fabricated. In other cases, the inspectors seem to be somewhat less officious in enforcing the letter of the innumerable regulations relevant for the microenterprises.

Part of the task of monitoring people’s activities in order to prevent illegalities is passed on to the Comités de Defensa de la Revolución (CDRs) or the neighborhood monitoring committees. In some areas, the CDRs may carry out this task effectively. However, the local officials of the CDRs also need additional income to survive. They are likely to be involved in illegal activities themselves and therefore may not be diligent in exposing and prosecuting their neighbors. Or they may acquire a small share of the benefits of such illegal activities. In other contexts, security guards are used to try to prevent theft or other illegal activities. However, these individuals also would like to survive, so they may look the other way when an infraction or theft is occurring in order to obtain a payment. They may also pilfer articles from their place of work or obtain a payment from others who may be doing the pilfering.

In other situations, the government uses a pretext to undertake house-to-house searches for illegal activities. In January 2003, for example, a campaign against drugs was used to search numerous homes and to penalize any illegal and underground economic activities encountered. This led to a cessation of some underground activities but only until the pressure was off, at which time they resumed.

Another method used to reduce economic illegalities is exhortation through speeches, statements, editorials, or articles in the media. However, it is not clear how much attention people give to the voluminous presentations of President Castro. It would be surprising if the attention paid to his words did not meet diminishing returns many years ago.

Fundamental Changes Required

To sum up, as long as the basic conditions of people’s lives require them to acquire additional income to survive, the various layers of inspectors, monitors, security guards, and CDR officials constitute corruptible layers in the system. Their true effectiveness in enforcing the regulations and preventing illegalities of various sorts is limited.

More fundamental policy changes will be necessary in the future. First, as argued earlier, the dual monetary and exchange rate systems generate primordial economic forces that motivate people to undertake various types of illegalities. Unifying the dual economy will be a difficult task, requiring complete realignments of internal wages and salaries on the one hand and costs and prices on the other.

A second fundamental change would be to revamp the regulatory, fiscal, and policy environment within which legal microenterprises operate in order to permit them to thrive. An appropriate approach would be to permit licensing for all microenterprises that want to establish themselves and that paid taxes and respected reasonable regulations. However, the credibility of such a change in government policy would be problematic. Underground microenterprises might not be willing to emerge aboveground if they thought that government policy would change again, jeopardizing their future existence. However, with a different government or an authentic and credible change in policy toward microenterprises, the result in time would be that most currently unlicensed microenterprises would come aboveground and come into the official tax and regulatory system.

Additionally, the government could simplify its dense regulations and establish a reasonable taxation system so that there would be less incentive to remain underground. It would also be desirable to establish normal sources of inputs for the microenterprises besides the high-priced former dollar stores. This would reduce and perhaps eliminate the tendency of some microenterprises to resort to illegal sources of inputs. Easing the regulatory burden and simplifying bureaucratic requirements would also reduce the often-abused discretionary powers wielded by officials and inspectors of all types.

State property poses a more difficult problem. In Cuba, as was also the case in Eastern Europe, a clear distinction between the public and the private use of public property has not been maintained. The result of this ambiguity is widespread pilferage and the use of public property for private purposes. To the extent that people view the economic system as hostile and one that makes it impossible for them to survive legally, theft may be viewed as necessary and legitimate. Dealing with this deeply rooted behavior will not be easy. Reducing the role of the state in running economic enterprises may reduce much of the scope for the pilfering of public property. Changing behavior at the highest political level so that there is a strong demonstration effect regarding the public use of public property would help as well. A strong economic recovery and a broad-based improvement in real incomes or living standards so that people did not have to act illegally to survive would also help greatly to reduce such illegalities.

In the longer term, the task of reducing economic illegalities will be one of changing the economic culture that has evolved. The deeply ingrained behavior of pilferage, extraction of personal benefits from positions of power and responsibility, and use of public property for personal gain will be changed. More fundamental policy changes will be necessary in the future only with changes in the objective conditions that generate it.

Prospects for Change

Some of the policies adopted in the current campaign against corruption should have a positive impact, though others are more likely to have only a transitory impact. More exhortation is also likely to be of limited and temporary benefit. Increased wages, pensions, and social security payments may result in a minor reduction in the incentive to pilfer from the state, but the impact will likely be limited, as peso incomes are still far below the level necessary for reasonable survival. If the wage and pension increases prove to be inflationary (Frank 2005), this will reduce the value of the old peso in relation to the convertible peso and drive the two currencies farther apart rather than toward unification.

It is also questionable whether current approaches to changing popular perceptions of the sanctity of public property are serious and likely to be effective. As long as the leadership, the party, and higher officials use state property for partisan and personal purposes, it will be difficult to persuade citizens not to do so as well.

Finally, economic recovery, increased real wages in the old-peso economy, and an authentic improvement in living standards should reduce the incentive of people to pilfer state property or use it for their personal purposes and undertake other types of illegality. While living standards have improved somewhat from the dark days of 1992–1994, relative material hardship continues for many—and probably the vast majority. It is unlikely that many people could survive on their peso incomes alone without additional sources of income. Until this situation changes, the economic illegalities will continue. In summary, it seems unlikely that the scope and intensity of the economic illegalities analyzed here will diminish significantly as long as some of the fundamental approaches to public policy and institutional structures remain unchanged.

Notes

Excerpted from Archibald R. M. Ritter, “Economic Illegalities and the Underground Economy in Cuba,” Focal, RFC-06-01, March 2006. Reprinted by permission of the author.

References

BBC Mundo América Latina. 2005. “Cuba: Sorpresa en las gasolineras.” October 17. http://news.bbc.co.uk/hi/spanish/latin_america/default.stm.

De Soto, Hernando. 2002. The Other Path. New York: Basic Books.

Dirección Provincial de Trabajo y Seguridad Social, Ciudad Habana. 2001. Información estadística mensual. Havana: Dirección Provincial de Trabajo y Seguridad Social, Ciudad Habana.

Frank, Marc. 2004. “Cubans Purge Hotel Trade of Bad Habits.” Financial Times, January 7.

Granma. 2005. “Incremento salarial para los trabajadores de más bajos ingresos del país,” April 22.

International Labor Organization (ILO). 2002. Women and Men in the Informal Economy: A Statistical Picture. Geneva: ILO.

Pérez-López, Jorge. 1995. Cuba’s Second Economy. New Brunswick, NJ: Transaction Books.

Portes, Alejandro, and William Haller. 2005. “The Informal Economy.” In The Handbook of Economic Sociology, edited by Neil J. Smelser and Richard Swedberg, chap. 18. Princeton, NJ: Princeton University Press.

Tokman, Victor. 2004. Una Voz en el Camino: Empleo y Equidad en América Latina: 40 Años de Búsque da. Santiago: Fondo de Cultura Económica. http://www.Cubanet.org.

Yanes, Ana. 2005. Personal communication, October.

“The personal benefits of a particular position in Cuba are measured in terms of what kind of goods the individual is able to manage to take home, and not in terms of salary (which is in reality little more than symbolic). This has created a market for ‘positions’ or ‘jobs’ where access to a number of them is sold by a price determined by ‘how much’ the individual is going to make out of the related illegal activities. This happens not only in tourism, but elsewhere, especially in places related to food (bodegas, carnicerías, comedores obreros y escolares, almacenes de víveres), and other basic needs, like clothes, items of personal consumption or gasoline. To obtain a job as a ‘bodeguero’ or in a retail store, or in a garage, has a high price” (Yanes, personal communication, October 2005).

As of January 19, 2005, Resolution No. 10 of the Ministry of Tourism prohibited the receipt of tips by tourism sector workers from foreigners (Ministerio de Turismo, Capítulo Primero, Artículo 1). All tips actually received by tourist sector workers are to be turned over to their managers or chiefs for subsequent distribution. This regulation may be difficult or impossible to enforce. It will likely push more people into a new zone of illegalities. To the extent that it can be enforced, it may reduce the incentives for tourism workers to provide good service.

Economics

Updating Cuba’s Economic Model

Challenges of Economic Restructuring in Cuba

The Cuban Change Agenda: The “Guidelines”

Change in Priorities: From Foreign Threat to Internal Vulnerability

A Decisive Transformation in the Relationship between State and Society

Resistance from Within

Continuity and Change: Old Habits Die Hard

Some Conclusions

Notes

Updating the Cuban Economic Model

Evolution of GDP

Structure of GDP

Low Efficiency in Investments

Aging and Low Rates of Population Growth

Unfavorable Relationship between Productivity Growth and Average Salaries

Completed Dwellings per Year

Foreign Trade in Goods

Foreign Trade in Goods and Services

Note

Cuba’s Entrepreneurs

The Evolution of Cuba’s Private Sector

Entrepreneurship in a Changing Socialist Economic Model

Signs of the Times

October 2010: The Policy Liberalization

Assessments

Note

Cuban Agriculture and the Current Process of Economic Transformation

How Is the Agricultural Sector Behaving?

What Are the Factors That Have a Negative Influence?

Notes

References

The New Cuban Economy

Cuba’s Shifting Attitudes

The Cuban Economy Today: How FDI Fits In

The Cuban Economy: Weaknesses and Strengths

Reform Guidelines

The Legal Framework

The Approval Process

The World’s Heaviest Tax on Labor

Few Foreign Firms, Big Contributions

Joint Ventures: Numbers and Size of Firms

Joint Ventures: Employment, Sales, and Exports

De Facto Excluded Sectors

The Diaspora as Investors

Looking Ahead

Epilogue: Cuba’s New Investment Law; Open for Business?

Notes

The Political Economy of Leisure

Dual Economy or Duel Economy?

Entertainment or Exploitation: Sexualizing the Revolution

The Color-Blind Revolution

Promoting and Protecting the “Real” Cuba

Cuban Tourism Looks Ahead: Prospects and Challenges

Authentic Cuba: Promoting Cuba to the World

Teeing Off on the Greens: Communism versus Capitalism

Tourism: Savior or Destroyer?

Notes

Remittance Recipients and the Present and Future of Microentrepreneurship Activities in Cuba

Current Trends in Remittances to Cuba

Cuban Reforms and Small Business Operations

Current Businesses among Remittance Recipients

Conclusions and Observations

Appendix: Survey Methodology

Notes

Poverty and Vulnerability in Cuba Today

Social Development, Justice, and Equity in the Cuban Social Model

Poverty and Vulnerability in Present-Day Cuba

Insufficient Income

Unmet Basic Needs

Some Perspectives of Analysis: Family and Gender

Concluding Remarks

Notes

References

Economic Illegalities and the Underground Economy in Cuba

Definitions: Economic Illegalities and the Underground Economy

Character and Dimension

Causes of Economic Illegalities

Economic and Social Consequences of Economic Illegalities

Reducing Illegalities

A Decisive Transformation in the Relationship
between State and Society

Social Development, Justice, and Equity
in the Cuban Social Model

Definitions: Economic Illegalities and
the Underground Economy