The objective of this paper is to analyze certain stylized facts of the Cuban economy. The first is the recent policy by the Cuban government to allow the development of a private sector alongside the state sector. The second is the push towards greater industrialization with the development of the port of Mariel. The third is to explore the effects of a decline in fertility in Cuba on its prospects for economic development. Finally, it appears that Cuba’s model will consist of closing inefficient state companies and permitting the existence of only a few to remain in order to encourage competition between them and therefore efficiency.
The literature on the determinants of economic growth in centrally planned economies is sparse. Notable contributions to the literature include Roberts and Rodriguez (1997) and Bajona and Locay (2009). This paper differs from theirs in that it models economic growth within a two sector model of capital accumulation. It follows in the vein of Uzawa (1962, 1964) of a Solow-Swan type model for the sake of simplicity.
We assume two sectors in the economy, a private sector which we denote with subscript p and the state sector which we denote by s. In this economy, labor and capital are assumed to be freely mobile between sectors. The production functions in both sectors are assumed to exhibit constant returns to scale. The key difference between this model and other two-sector models is that competition is assumed to exist in the private sector, but the state sector is a monopoly. In other words, we assume that the Cuban government does not permit entry into the state sector but does allow entry and exit from the private sector. This is in fact currently the case since the Cuban government has licensing requirement for entry into the private sector, while not allowing entry into the state sector. It should be noted that this policy of restricting entry into the state sectors will have consequences for Cuba’s trade policy in the sense that the Cuban government will have to restrict international trade (imports) in order to maintain the monopoly position of the state sector. Without the Cuban government restricting trade, imports of goods which compete directly with state produced goods will reduce the profitability of government industries, and therefore, government revenues. We can explore this problem in an extension of the model we present by permitting the economy to be open to international trade.
Let the labor-augmented production functions for both sectors be:
Since the left-hand side of equation (18) is decreasing in the capital-labor ratio, the steady state capital-labor ratio, *k under a monopoly in the state sector is smaller than it would be if the Cuban government structured it as a competitive sector. Since per capita income is increasing in the capital-labor ratio, this smaller capital- labor ratio under the current structure implies a lower per capita income for Cuba than otherwise.
An interesting finding is that since the growth of Cuba’s population, n, has declined, by equation (18) we can see that the steady-state capital-labor ratio is greater that it would be if the population was growing more rapidly. As a result, we should expect that the per capita income of Cuba to be larger in the future than otherwise. A distressing implication from the model is that the rate of depreciation of Cuba’s capital stock which we measure by δ, will lead to a much lower capital-labor ratio than otherwise and as a result, Cuba will experience a lower level of per capita income. To prevent the continuation of this trend, it is important that Cuba addresses institutional changes in the ownership structure of firms and in particular, encourages the development of well-functioning capital markets (stock and bond markets) which will allow for the removal and replacement of managers in firms based upon their performance. Management has to have a long term horizon that makes the appropriate investments in plant and equipment. This has not been the case, and as a result we observe in Cuba a capital stock that depreciates at a faster than necessary rate.
We explore some of these results graphically in Figure 1. The downward sloping line is the marginal product of capital as given by the left-hand side of the equation 17. With an economy where the state sector is a monopoly, the equilibrium capital-labor ratio in the steady-state is given by *k . On the other hand, if the state permitted competition in this sector than the equilibrium capital-labor ratio is given by the larger k** . With this larger capital-labor ratio, per capita income in Cuba would be larger than otherwise. As for the effects of population growth and the rate of depreciation of capital, we can see that increases in either will result in the horizontal line shifting upwards and as a result, Cuba’s capital-labor ratio and per capita income decline.
Bajona, C. and Luis Locay. 2009. “Entrepreneurship and Productivity: The Slow Growth of the Planned Economies,” Review of Economic Dynamics, 12(3), pp. 503-522.
Roberts, Bryan and Alvaro Rodriguez. 1997. “Economic Growth under a Self-Interest Planner and Transition to a Market Economy,” Journal of Comparative Economics, 24, pp. 121-139.
Uzawa, Hirofumi. 1962. “On a Two-Sector Model of Economic Growth” Review of Economic Studies, 29, pp. 40- 47.
Uzawa, Hirofumi. 1964. “Optimal Growth in a Two-Sector Model of Capital Accumulation,” Review of Economic Studies, 31, pp. 1-25.