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The Cuban Economy 60 years Later


The Cuban economy 60 years later[1]

Jorge A. Sanguinetty

  1. The beginning

Six decades after the triumph of a revolutionary movement that promised to develop the country’s economy and improve the living standard of its people should provide a sufficiently ample perspective and enough data to ascertain whether and how those promises were fulfilled. Under the leadership of Fidel Castro, the revolutionary government committed itself to the restauration of the constitutional framework that was adopted in 1940 along the lines of a liberal republic, which only lasted 12 years as interrupted by a coup d´etat in 1952. In fact, such an event sparked Castro´s movement which culminated in victory in 1959 with overwhelming popular support based on the promises of economic development and growth, reduction of poverty and unemployment, political stability and honest public administration. Even though at that point in time Cuba had achieved the status of a middle-income country under a reasonably free market economy, and was about the third in high standard of living among Latin American countries, there was a generalized sentiment that there was room for improvement.

Soon after Castro´s victory, he backtracked on his promise of restoring the 1940 constitution while holding free elections, a decision that quickly started a firm opposition among the most democratic and liberal segment of the Cuban population. Nevertheless, the prestige and credibility that Castro had accumulated as a rebel leader during the guerrilla struggle provided him with sufficient political capital to not only keep what seemed to be a strong support of the public opinion despite his broken promise, but the ability to introduce radical measures still based on promises of a general improvement of economic conditions. At the time, due to the prevalence of corruption affecting public affairs, the credibility of democratic institutions and old political parties was at a low point and the demand for a caudillo that could solve singlehandedly all of the country´s problems was at the highest point. In any case, the fact is that the society was intensely polarized between a naïve segment of the population for whom Castro´s word was like the gospel, and a significant but not necessarily majority proportion of the Cuban people that had started actively opposing the government or going into exile.

Castro´s broken promises on the political front as early as 1959 were not sufficient to immediately damage the trust that many Cubans deposited on his promises of economic development. In fact such promises were embellished with specific proposals as the industrialization of the economy, which despite their poor prospects and preparation reinforced the trust in the government and generated optimistic expectations about the future of the country.  The contagious optimism was not only by the Cuban people but also by prestigious international sources which included academics and intellectuals fascinated by Castro’s charisma and promises of a new utopia.

Now, after six decades under the same government administration it is only natural to ask (again) what happened with the Cuban economy. The question is not only pertinent to the main stakeholder in this game, the Cuban citizens, who are supposed to be entitled to an objective answer, but also to many other observers of the revolutionary experiment such as journalists, politicians, academics, etc., who have been permanently curious about its economic performance. And their curiosity has been motivated not only by a scientific interest but also by ideological and political reasons. Conservatives always want to have data that could demonstrate empirically and convincingly the outcomes of socialism or communism, while their leftist counterparts were equally eager to show evidence of how such an economy can achieve a wealthier and fairer society.

  1. How to know if the economy is growing

Thus, the most expedite and relatively reliable method to ascertain an economy´s performance during a given interval of time is to compare its Gross Domestic Product (or National Income) at the beginning and at the end of the period. Such national accounts aggregates are in fact only proxies that could give us a first approximation to a most pertinent question: are Cubans better or worse off today than at the beginning of the Revolution? Before we try to provide an answer we must keep in mind that what we are first trying to measure through the use of national account statistics, is a rough approximation of the aggregate goods and services available to Cubans at different points in time. This approach is based on the utilitarian view of consumption, following Bentham, Edgeworth, and Marshall, typical in economic analysis, that assumes that an important portion of the welfare of individuals is determined by what they consume as observed and measured by what they buy in the market place. But no matter how sophisticated the economists´ measurements and methods are, they always constitute a proxy for the level of satisfaction, well-being or welfare expected to be derived from the corresponding level of consumption and other activities. In their acquisition of goods and services in a free market we cannot observe and measure more than how consumers reveal their preferences among the many choices available to them.

National Account statistics were estimated by the Cuban Central Bank (Banco Nacional de Cuba) Department of Economic Research until 1958, and published in the form of National Income, a component and close approximation of the Gross Domestic Product (GDP). Unfortunately, their estimation and publication were suspended indefinitely in early 1960 when the president of the Bank (at the time Comandante Ernesto “Che” Guevara) did not like the first estimate for 1959 national Income because it showed a paltry growth of the Cuban economy of only one percent, a politically unacceptable performance of the Cuban economy during the first year of its revolution. It must be noticed that Guevara chose to suspend the operation of the department instead of falsifying the estimate, but his decision had far reaching implications as no other estimates of aggregate economic performance were attempted until much later in the 1960s but covering from 1962. But the new national accounts were produced under a communist/Soviet methodology (services are not recognized as producers of value added) and in an economic system under central planning were prices and quantities were distorted by rationing and centralized decisions on virtually all goods and services. This makes traditional time comparisons of the corresponding statistics, using 1958 as a base, incommensurable and therefore meaningless. In synthesis, without a fundamental reconstruction of the statistics, we do not really know how the Cuban economy performed from 1958.

Guevara´s decision inaugurated an era of information darkness that lasts until today and represents a major obstacle not only for economic research but also for the conduct of any rational economic policy. It is interesting to notice that Guevara is the same man that was not only a principal advocate of installing a Stalinist’ styled communist economy in Cuba, based on central planning but also the herald, two years later, of a development plan aimed at a spectacular 15 per cent annual growth rate. The same year that the official estimation of the national account statistics was suspended, or 1960 a development that went unnoticed by the general public, the revolutionary government suppressed virtually all forms of freedom of expression and information by confiscating newspapers, radio and TV stations, and publishing houses across the entire country. The only source of information in Cuba was the government while official statistics about the economy did not become available again until 1965. One can only wonder how the highest authorities of the government were planning to monitor such ambitious growth plans, whether they were aware of the information problem they were creating or whether the official development goals only represented a propaganda gimmick to buy time and popular support for a more radical transformative agenda.

No comparable economic statistics were made available by the Cuban government until 1965 but they were reported late, with many inconsistencies and of doubtful reliability. But the most important condition was that the new national accounts were not commensurate with the old ones for several crucially important reasons. One is that typically the basket of goods and services that a society purchased during one period of time to compare it with another period are assumed to be approximately constant during the interval. But in the case of Cuba, due to radical changes in the domestic production and distribution systems (private enterprises almost disappeared, replaced by state enterprises managed by ministries and their bureaucrats) and the introduction of central planning and rationing those baskets are not equivalent to the typical one used for the base period. The other critical problem that renders the comparison useless is that the prices of the goods and services corresponding to the two baskets tend to be radically different or distorted, because rationing and the introduction of planning impede the determination of prices via demand-supply equilibrium interaction that merge and compose consumers´ preferences with producers´ capabilities. This way Cuba´s economy becomes one determined by supply-side factors centrally and somewhat arbitrarily decided by the government through its planning apparatus, while the demand side is now determined by severe restrictions to consumers´ revealed preferences. Therefore the implementation of a communist economy should not only be seen through the expropriation of the means of production (its supply side) but also as the expropriation of consumers’ freedom to choose according to their preferences as they reveal them in the market place. It is worth noticing that it is in the economics of the market place were the political lack of freedom (as part of the loss of civic liberties, as Hayek pointed out) can me more easily observed and measured.

A number of investigators have heroically struggled for many years with the problem of how to measure Cuba’s economic performance endeavoring to provide a reliable assessment of the performance of the Cuban economy at different times since the beginning of the Revolution, among them Carmelo Mesa-Lago, Jorge Pérez-López, John Devereux, Luis Locay, Brian Roberts, Pavel Vidal, Claes Brundenius and A. Zimbalist. Though most of their results based on estimates of Gross Domestic Product are not dramatically contradictory and they coincide in terms of the shape of their fluctuations, they do vary in terms of rates of growth over the 60-year period, so for this analysis I rely on the work done by Devereux (2019) based on his reconstruction of the corresponding time series. I make this choice based on what I think I know about the Cuban economy, my direct experience as a planner from 1960 through 1966 (Institute of Tourism, Central Planning Board and Ministry of the Sugar Industry)  and the haphazard way it has been managed for 60 years. The resulting estimates by Devereux show that Cuba´s economy only grew by 37 per cent during 1957-2017, after contracting during the first decade of the Revolution, recovering thanks to Soviet subsidies that lasted about 30 years, contracting a dramatic 37 percent upon the loss of the subsidies and recovering again thanks to significant subsidies from Venezuela from year 2,000. Somewhat consistently with this picture, recent estimates by Pavel Vidal indicate that from the 1990s the Cuban economy seems to have lost about half of its GDP and has not been able to recover since then.

Three qualifications are in order on Devereux estimates. Firstly, if we really want to know how the Cuban economy performed without the crutches of significant Soviet subsidies first, and less significant Venezuelan subsidies later as a test of the economics of a communist system, we should use statistics adjusted to deflate the effects of such subsidies on the Cuban GDP. So we can assume that Devereux figures include an important portion of the Cuban GDP that in reality is not part of the country economic performance.

Secondly, Devereux does not include the income Cuba has been receiving for its exports of medical services to many countries around the world, which at times it has been reported to have reached a volume equivalent to as much as 20 per cent of GDP. This raises an important issue about what to measure as part of the GDP. As is well known, in the presence of the Cuba´s government monopsony in the employment of medical doctors (private practice is illegal in Cuba), and in combination with the well-established fact that doctors´ income is less than what doormen in luxury hotels make, they have no options but to work in “international missions” funded by client governments who pay the Cuban government for their services. In return, the Cuban government pays the Cuban doctors less  than half that amount in hard currency, which represent a strong incentive for the doctors who in return would go overseas for extended periods of time but forced to leave their families behind. This arrangement breaks international norms as stipulated by the International Labor Organization based on involuntary work, equivalent to indented labor, and one can wonder if the income derived by such means is a legitimate expression of a country´s domestic economic performance. As the objective of this paper is to compare the performance of the Cuban economy in 2019 based on the economy of 1959, I prefer to exclude that segment of the income so generated as it belongs to an economic subsystem that did not exist at that time and was created only as the result of the failure of the Cuban government to keep the traditional levels of production after the implementation of massive expropriations of private enterprises under a communist planning system.

Thirdly, it is possible to argue that Devereux figures should be adjusted as to reflect the effects of the U.S. embargo on the Cuban economy. One counterargument is that such embargo was brought about as a response of the U.S. government to Cuba´s policy decisions to install a new economic system, without recognizing the due payments for the corresponding expropriation of American and Cuban enterprises. Other counterfactuals could be made as part of this evaluation, but perhaps the most pertinent is what would have happened to Cuba´s economic growth and development if Fidel Castro had kept his original word of restoring the democratic republic defined in 1940 in the framework of a not pure but a pretty functional market economy.

  1. Beyond utility maximization

It is plausible to assume that in 1959 Cuba´s economy was in a state of Pareto long-term competitive equilibrium, where prices and quantities were fundamentally determined according to Walras´ Law, consumers were free to reveal their preferences as buyers, while producers enjoyed the autonomy necessary to combine all necessary factors of production to satisfy the demand of their clients. And all this facilitated by free trade and reasonable availability of financial intermediation and credit. Government intervention was not so large as to become a political issue. Labor markets were partially free though there were a few powerful labor unions operating in many important sectors of the economy. Then in 1960, following the massive government confiscation of national and foreign enterprises, the levels of production, exports and imports fell dramatically causing a severe shortage of almost everything that had been easily available until then, especially imported goods.

Very rarely in history a country suffers in less than two years such a profound transformation of its society and economy without the intervention of a war. Queues became the informal way of rationing starting slowly in 1960 and spreading rapidly in 1961 until formal rationing by quotas was instituted in the entire country in March 1962. Standing in queues became part of the daily life everywhere in Cuba until today, following varying periods depending on the overall intensity of scarcity and rationing. Consumer choice was severely limited and a new era started for the way all citizens would relate to the nation´s economy, not only as consumers but also as workers as the government almost became the only employer. Only some private farms and some very small enterprises were allowed to operate, until 1968 were all forms of private enterprise were strictly forbidden, including street vendors and shoeshine chairs.

Initially explained and justified by the Cuban government as a result of its confrontation with the United States, the reduction in the aggregate level of consumption was in fact a deliberate decision to increase the national rate of savings to finance an expansion in the level of investment to accelerate the rate of economic growth. Yet the conflict with the US, its main trading partner until then, was the cause of a major upheaval to the Cuban economy as it disrupted all forms of trade, forcing the authorities to scramble for new sources of food supply, other consumer goods, fuel, all kinds of intermediate goods, spare parts, capital goods, and short- and long-term financing.

At prima facie, and consistently with Devereux estimates of GDP, from the first few years of the Revolution, we can presume that the general level of welfare of the population was reduced solely from a strictly utilitarian, material, logistic or engineering point of view as they could no longer buy what they wanted even if they can afford it according to their budgets. However the loss of welfare was more than what would have corresponded to that loss of utility, as the consumers choice sets were furtherly reduced, based on the principle that choosing x when y is available is preferred to choosing x when y is not available, as pointed out by Amartya Sen (1987). In other words, consumer preferences are not only relevant as expressed in choosing a given bundle of goods at one point in time, but also in their access to wider choices, beyond a given horizon. But the general level of well-being of the Cubans was furtherly affected by many other developments and conditions that became apparent following the implementation of rationing and central planning.

  1. A new economy, a new way of life

The many changes in living conditions in Cuba can be observed (and in principle measurable) through the changes in the use and allocation of time of all agents, especially consumers and workers. The most important change was in the citizens’ loss of leisure time derived from rationing. Virtually all activities suffered an increase in transaction costs that could be measured in terms of time and forgone income, as the opportunity cost of the time lost, that the new living conditions demanded. We can say that the “prices” in time of most activities increased, consequently reducing the time allocated for work causing a contraction in the supply of labor as shown by the increase in absenteeism, a recurrent complaint in political speeches by government leaders during the first years of economic planning. Forced changes in consumer behavior explain this phenomenon. The distribution of rationed quotas as officially stated was never dependable, regarding the quantities promised and timely delivery. Even though for some items the rationed quotas were set on a weekly or monthly basis, their actual arrival for immediate distribution was only known in each neighborhood by word of mouth, and not only until their physical distribution in the predetermined stores, it was not known if the quotas were sufficient for all the customers registered in each location. This created a level of uncertainty about the supply of food and other items like shoes and clothing that forced consumers to spend time waiting in line for hours to make sure that they were among the first in lines, in case the day of the distribution of the rationed article the quantities available were not sufficient for all. Thus citizens had to spend more time than usual not only waiting in line, but also visiting stores several times to check upon deliveries, or pursuing in other neighborhoods the few goods that were not rationed, or trying to find sellers in the illegal black markets of those goods whose quotas were not sufficient to satisfy demand, and goods that were not even rationed but had altogether disappeared from the market. In other words, transaction costs for consumers and practically all economic activities increased considerably from the establishment of the new economy and persist until these days. The breakdown of urban and rural transportation systems added to the transaction costs as waiting in lines for hours became a new normal for all.

The extra time spent in purely consumption activities represented a large loss of welfare in terms of negative utility as “leisure” time was much less available than before 1959. But such loses, of a magnitude that will never be known, would grow as the Cuban government, using its dictatorial/totalitarian powers, implemented a number of activities that were tantamount to the rationing of leisure time. Most importantly, mass mobilization initiatives such as participation in frequent and lengthy political rallies, militia drills, “voluntary work” in harvests became part of the daily life almost under mandatory terms, even from the place of employment. Obviously, the corresponding time dedicated to such activities can be considered a loss in the citizens well-being, unless one is a true-believer militant of the Revolution. But the ensuing use of time was not limited to affect leisure time, but also time dedicated to productive activities in state enterprises whose operations were frequently interrupted to respond to political demands, disrupting the operation of all enterprises, and contributing to reduce their productivity and the supply of everything in the economy. Mass mobilizations, with various degrees of intensity, were part of the normal life of Cubans for many years from 1959 until 2008, when Fidel Castro was replaced as head of the government by his brother Raúl, who seems to have been more concerned about the low level of efficiency and productivity of the Cuban economy.

There were other significant losses of welfare caused by the permanent and extreme disorganization in the supply of consumer goods many of which are complementary as traditionally consumed in combination with others. This condition was a source of permanent frustration for consumers as all ingredients of regular dishes produced at home were rarely available at the same time. This annoying problem could be easily avoided with the use of inventories but neither stores nor households rarely held stocks of practically anything due to chronically insufficient and unstable supplies, and all this while the government frequently tried to explain the shortages as a result of “hoarding” which was considered a crime. Basic ingredients, for instance cooking oil, salt and spices, frequently disappeared altogether from the markets for indefinite periods of time creating a level of aggravation for consumers who were mostly depending on household elaboration of their meals. But probably worst than the lack of complementarity few conditions were more frustrating that the permanent uncertainty about the delivery of critical items. There have been periods when Cuban consumers frequently go to market with the nagging anxiety that they may not find enough food for their family. The government-denominated Special Period that was inaugurated in 1992 upon de collapse of the Soviet Union and in practice seems to have lasted eight to ten years (it has never been declared closed) was particularly harsh. And while we write this, everything points in the direction of a new food crisis as Venezuela, the benefactor that replaced in part the Soviet Union in 1999 moves deeper into a similar economic crisis of its own making. Even though the supply of food is the most salient and urgent aspect of consumers’ inability to satisfy the daily needs of his family, the same problems of unstable supply have plagued the entire spectrum of consumer goods, from personal hygiene, clothing and shoes, to medical products. Consumer durables, from cars to small and large appliances, together with all forms of home furniture, virtually disappeared from the market in the early years of planning, and then followed a fluctuating but permanent pattern of instability, plus a distribution system that at times was based on quotas allocated to state enterprises or government dominated labor unions. Even if the Cuban rationing system could deliver certain amount of items, the well-being of citizens was affected as consumers would always live with the anxiety generated by the frequent breakdowns in the supply chain.

But perhaps more onerous to the welfare of consumers, besides the daily struggle to cover basic needs, was the widespread deterioration of housing and consequently the fall in the quality of life. With central planning and rationing, private housing construction activities came almost to a halt for several years, but not their physical decay. Construction activities, including simple maintenance, were out of consumers’ choice. From 1962, basic construction materials like cement, bricks, iron bars, wood and paint were made not available for private consumers while private enterprise was not allowed in the construction sector. As a result, maintenance of buildings was all but paralyzed for decades while the deficit of houses was increasing with the population growth. At a reportedly increasing rate, the number of houses or apartments in structurally unsafe buildings, together with increase of collapses during rain storms is an important condition to factor in in the Cuban welfare function as thousands off dwellers are forced to live in danger. Newlyweds have nowhere to go but to live with their parents in dwellings that end up several times subdivided, with improvised means, to accommodate more than one family and their offspring. The housing crisis, as it can be visually ascertained in the decay of Cuban cities, more dramatically in the capital Havana, has been aggravated by the decay of Cuban infrastructure, especially when it comes to water supply and electricity generation. The breakdown of water supply systems in some sectors of the cities in combination with frequent blackouts add to the misery of some consumers that must spend time and energy collecting water in buckets from trucks, almost on a daily basis, to be carried to their apartments. To make things worse, elevators in tall building have been often partially or totally out of work due to lack of maintenance by the corresponding state enterprise or lack of imported spare parts, so water must be carried in buckets using the stairs, a task generally forbidden for the elderly. We must keep in mind that there is no data that could reflect the magnitude of this condition and it affects the wellbeing of those suffering it directly.

Another approach to determine whether Cubans are better off today is asking them directly through surveys. Nevertheless, the reliability of such method applied to a sixty-year period is very low as discussed by Kahneman and Krueger (2006) in their analysis of the application of subjective indexes of welfare and how the memories of past experience on personal utility is subject to significant error. Still it would be of great interest to interview a sample Cubans to measure reported changes in subjective well-being because demographic data from the Oficina Nacional de Estadística e Información suggest that about 20 per cent of the Cubans that were alive in 1959 are alive today.  We would have to take into account that the demographic composition of Cubans has suffered great changes in this period due to migration, impacting the consumer habits of the population at large.

For the sake of completeness, we have to consider that there was an addition to the welfare function of Cubans as the government implemented a significant expansion of free universal health care and free education at all levels, though freedom of choice was eliminated in both sectors. We do not know how much was the increase in resources allocated to these two sectors with respect to 1959. Though there are reasons to believe that the increase in material allocation of resources accrued benefits for many citizens, some qualifications are in order. University education was mostly available to students that could show some allegiance to the one-party political process in Cuba or at least no opposition to the government, depending on the career selected. Also students have been frequently rallied for political purposes or, at times, forced to participate in programs away from home, as it was Escuela al Campo (School in the Countryside) that significantly disrupted family life and therefore their welfare and their families’. Though there have been reliable reports about the gradual deterioration of health services and education, due to the chronic economic crisis, there is not enough information to make a more accurate assessment about the impact on the welfare of the population.

  1. Conclusion

Upon observing the modes of operation of the Cuban government and the ways it manages the economy, one can better understand why the country has failed to develop its economy. It is not a simple policy failure to fulfill the promises of 1959, but the installation of a system that led the country to a massive exodus of its population, widespread decapitalization and extensive damage to its productive capacities. There are no statistics that allow us to ascertain the losses in physical, financial, and human capital. We know almost nothing about the distribution of income and wealth or how the economic decisions are made. What we see is a dysfunctional economy, incapable of maintaining, exploiting efficiently and growing the assets that were confiscated almost sixty years ago, suffering of permanent instability, and heavily dependent on large subsidies and foreign capital for its investments. What caused this debacle was not only the adoption of a Stalinist model of central economic planning, but also the implementation of an extremely centralized, improvised and haphazard style of management that affected all levels of the economy, from individual state enterprises all the way to the top to the ministries handling them. This style of management prevailed in Cuba until Fidel Castro´s retirement from day-to-day management of the economy in 2004 when his brother Raúl took over as head of government, a no-nonsense military man that tried to make the country´s economy more efficient. But Fidel´s management style left a deep mark in the systematically inefficient ways everything was run in the country, a condition that can be characterized as path dependency making it very hard and costly to change to more effective modes of operation. Making things even more difficult for the economy was that political goals and considerations, especially in the international arena, were lexicographically preferred by Fidel Castro, while employment policies were designed to reward political and ideological loyalties, not productive efficiency. After decades operating like this a culture of low efficiency set in, reinforced by a management system dominated by bureaucrats and politicians, who did not know how to use financial indicators of profitability that could have assisted management in achieving higher levels of productivity.

The extent and depth of the loss of the productive capacity of the Cuban economy was dramatically made evident recently when the investors in the luxurious Kempinsky Hotel in Havana were forced to bring more than one hundred workers from India for several months, because they could not find in Cuba the manpower with the required qualifications. Any observer familiar with Cuba before 1959 would know that the capacity of is construction sector and the qualifications of its workers and personnel in general were among the best in the world, as reflected in the buildings that still stand erected across the country´s cities.

As I write, Cuba is entering a new “Special Period”, similar to the one of extreme scarcity that affected the country in the 1990s. After 60 years under the same government regime Cuba cannot show a single major economic or social achievement despite the early promises of its leaders. The economy not only fails to grow but also gives signs of regressing, while suffering from decapitalization in all physical, financial and human modalities. Even though the statistics are irregular and full of gaps, based on what we know it is safer to conclude that the welfare of most Cubans has suffered significant loses during this interval and does not seem to hold any promise for improvements in the short and middle terms. Ironically Cuba has descended from being a middle-income economy and about the third in per capita Latin America terms in 1959 before socialism to a subsistence economy, surviving precariously today thanks to remittances from Cubans abroad, many of whom where former foes of the regime, tourism, exchanges with the capitalist world, and subsidies from a few remaining friends.

References

Devereux, John (2019). “The Absolution of History: Cuban living standards after Sixty years of Revolutionary Rule”. Working paper.

Kahneman, Daniel, and Krueger, Alan B. (2006). “Developments in the Measurement of Subjective Well-Being”, Journal of Economic Perspectives, Vol. 20 Number 1.

Sen, Amartya (1987). On Ethics and Economics. Blackwell, Oxford and Cambridge, U.S.A.

[1] I am grateful to John Devereux, Ernesto Hernández-Catá and Luis R. Luis for their comments to an early version of this post. I remain solely responsible for its final content.

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