Government Support to Enterprises in Cuba

by Ernesto Hernández-Catá 2. September 2013 17:40

Cuba has a long history of State support to enterprises. As indicated in Table1, total state subsidies and transfers to enterprises exploded in the early 1990s, following the elimination of Soviet economic assistance, reaching a peak of almost one third of GDP in 1992. From then on, state support then declined steadily to a trough of less than 3% of GDP in 2000. However, state subsidies resumed their upward trend in 2002, rowing steadily to 11% of GDP in 2011.

The reason for these wide fluctuations can be inferred from the first three columns of Table 1, which breaks down government assistance into three categories. Subsidies for losses (subsidios por pérdidas) are by far the principal component. They account for the huge increase in total assistance to enterprises in the early 1990s, which reflected to the government’s (futile) effort to avoid a rise in unemployment and protect investment. They also accounted for the subsequent decline in total support through the year 2000. However, subsidies for losses continued to decline steadily throughout the rest of the decade. Assistance to the Basic Units of Cooperative Production (Unidades Básicas de Producción Cooperativa or UBPCs) which had always intended to be temporary, disappeared in 2006[1]. Why then did total support to enterprises increase in the first decade of the XXI century?

     

 

 

 

 

   Table 1
 

 

 

State Transfers to Enterprises and Cooperatives

 

 
 

 

 

                                       ( Percent of GDP)

 

 
 

 

             

 

 
 

 

 

Subsidies

Support for

"Other"

 

Enterprise transfers to

Net state support to

 

 
 

 

 

for losses

UBPCs

transfers

Total

the state

enterprises

 

 
 

 

1988

9.3

0

1.0

10.3

7.1

3.2

 

 
 

 

1990

14.3

0

1.2

15.5

6.7

8.8

 

 
 

 

1992

29.8

0

1.3

31.1

9.7

21.4

 

 
 

 

1994

16.9

0.3

1.0

18.2

10.9

7.3

 

 
 

 

1996

6.5

2.5

0.5

9.4

10.7

-1.3

 

 
 

 

1998

4.3

1.5

0.4

6.2

7.2

-1.1

 

 
 

 

2000

1.9

0.3

0.6

2.8

5.1

-2.3

 

 
 

 

2002

2.6

0.1

1.0

3.7

4.7

-1.0

 

 
 

 

2004

3.1

0.1

2.5

5.8

5.0

0.8

 

 
 

 

2006

2.0

0.3

4.7

7.0

4.3

2.6

 

 
 

 

2008

1.7

0.0

8.8

10.5

5.7

4.8

 

 
 

 

2010

1.1

0.0

6.2

7.3

4.5

2.8

 

 
 

 

2011

2.2

0.0

8.7

10.9

6.8

4.2

 

 
 

 

 

 

 

 

 

 

 

 

 
                     
   

Sources: ONE, CEPAL, and author's calculations.

     

The reason has to do with the rapid growth of “other” subsidies—to use the Cuban statistical office’s always mysterious terminology. There is no official explanation for what these subsidies are. However, the investigative talents of Jules Maigret or Lieutenant Columbo are not required to solve the apparent puzzle. These subsidies are almost certainly the counterpart of the highly favorable conditions under which Venezuela supplies oil and oil products to Cuba[2]. This is illustrated in Fig.1. Unlike the subsidies for losses, which were clearly counter-cyclical, these “other subsidies” unfolded during a period of relatively rapid economic growth in Cuba—their origin was essentially political.

Table 1 also provides information on enterprise transfers to the central government. These transfers, unlike those provided by the government to enterprises, are fairly stable over time, and do not seem to be related to general economic conditions in the country. The coexistence of transfers in both directions suggests that there is a group of well managed enterprises that are profitable without government assistance. However, this group may also include enterprises that owe their success to government support (through budgetary subsidies and/or favorable treatment under the multiple exchange rate, price control and import licensing systems).

 

Finally the right-most column of Table 1 shows net transfers from the government to enterprises. It is noteworthy that these transfers became negative or nil in the second half of the 1990s and the early 2000s. In those days the enterprise sector was therefore contributing to the financing of the fiscal deficit. However, net transfers increased rapidly after 2004 and the enterprise sector is, again, a burden on the budget.

It could be argued that there is no reason why Cuba should not use the resources provided by Venezuela in the form of oil supplies at favorable conditions. The answer is threefold. (i) In principle, these inflows are temporary if the Cuban government truly intends, as it proclaims it does, to repay the debt incurred as a counterpart for oil imports. (ii) The entire scheme could unravel if Venezuela decides to reduce (or eliminate) payments for Cuban professionals—that are, indirectly, the counterpart to its oil exports to Cuba. (iii) The Venezuelan money could have been saved, at least in part, to serve three important purposes: first, to bolster Cuba’s depleted international reserves; second, to capitalize a fund that would provide the Central Bank of Cuba with a lender of last resort capability; and third to equip the Ministry of Finance with a Fund to cope with natural disasters. If these funds had been in existence in 2008, perhaps the crisis that almost precipitated the whole country into a financial pit would not have occurred. But instead the Cuban government decided, once again, to take the road of increased dependence—on foreign largesse and on cheap oil.

 

References

ONE (various issues). Oficina Nacional de Estadística, Anuario Estadístico de Cuba. La Habana.

CEPAL (2000). La economía cubana. Reformas estructurales y desempeño en los noventa. Comisión Económica para America Latina y el Caribe y Fondo de Cultuta Económica.Mexico, D.F

 



[1] There is a fourth type of support: the subsidies for price differences (subsidios por diferencias de precios). These subsidies are not provided to enterprises. Rather, they apply mostly to food products sold to the population at subsidized prices as part of the rationing system (libreta) and are therefore not included in Table 1.

[2] Venezuela sells oil to Cuba at world market prices, but provides long term financing at low interest rates with a long grace period, so that cash outlays are not immediately required. At the same time, Cuba provides Venezuela with the services of doctors’ teachers and other professionals. I estimate payments for these services at about $7700 in 2011, compared with $6370 for oil imports.

 

 

 

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