CHANGE IN CUBA?

CHANGE IN CUBA?
12-08-2011.
Paul Meo
Former official of the World Bank with a very extensive experience in
developing countries and a long term member of ASCE

(www.miscelaneasdecuba.net).- The early August meeting of the
Association for the Study of the Cuban Economy (ASCE), held in Miami ,
was different from some of the more recent ones. First, there were few,
if any, papers presented on the "Transition" in Cuba .

Partly because the Castro brothers rival Adenauer in longevity, partly
because there is nothing novel left to say, and partly because the
proposed governmental changes are more interesting, the academics,
retired Bretton Woods institutional staff, consultants, bureaucrats, and
others who make up the membership decided the Transition was not a
priority. Secondly, there were far more defectors, at least recent
ones, than before. It was jarring for me to encounter a Cuban who had
been head of an agricultural brigade in the People's Republic of Yemen
while I had been there on a World Bank mission.

Some Cubans sent their papers via the internet, and there was even
one--who presented an apolitical paper--who had been given an exit visa
to attend the conference. There seemed to be far better information
available on what was happening in Cuba , although the modelers and
other theoreticians continued to successfully ignore reality when
necessary.

Last November, the authorities issued some 270 "Lineamientos"
(guidelines) to be considered by the VI Party Congress. The Congress
met in April, after almost a dozen years of hiatus, and spent a whole
day reviewing and approving the guidelines. In the event, with changes
and additions, about 300 "agreements" were published, and these will
serve for the restructuring of the Cuban economy over the next few years.

Many of the agreements were hortatory--demanding better discipline, more
unity, better efficiency, etc.--and others were mildly
inconsistent--expanding the private sector (the word "private" is still
verboten in Cuba; it is called the "non-state sector") while increasing
taxes on it massively--so the more sensible presenters (and I)
concentrated on the few that might make a difference.

For years; indeed, shortly after the departure of Fidel from the scene,
the ASCE consensus has been that Raul Et. Cia. would produce very little
change in the Cuban economy. This has been true since 2005; very little
has indeed changed. Things may (I say "may" with reason) change in the
future, but not really because of the VI Congress agreements.

There are some important decisions among the trivial.

First, the decision to downsize the public sector workforce by 500,000
has been validated by the Congress. While the timeline of March 2011,
has not been met (only about 250,000 have been shed), the new timeline
of end-2011 has been agreed to by the Congress. Indeed, further
downsizing was also agreed, with a total of 1.8 million to be shed by
end 2014. While all sorts of barriers can be foreseen--military
objections (the military now run the majority of public enterprises),
slow generation of non-state jobs, bureaucratic obstacles--the Cuban
regime has decided that government employment will not be the answer.

Secondly, while the famous 178 "own account" non-state activities were
expanded to almost 200, and even within their context expanded (e.g.,
"paladares" (private restaurants) can now have places for up to 50, from
12), and non-family members can be employed in some activities
(particularly private agricultural ones), there was no permission
granted for establishing small, private businesses. Hence, most private
sector expansion must be in small service activities (small restaurants,
barber shops--which the state has now turned over the barbers,
entertainment activities, beauty shops, taxis, etc.) and not in even
relatively (say, 50 employees) small businesses. Even the
professions--law, accounting, etc.--remain verboten for the private
sector. It is hard to see how this can generate sufficient employment
for over one third of the public work force to be downsized by 2014!

Thirdly, the Congress agreed to allow private ownership of housing; this
to begin by the end of this year. This will obviously have a major
effect, since mortgages, inheritance expectations, and construction will
be massively affected if (IF!) the housing decision is liberally
interpreted. Stay tuned for this one.

Finally, the Congress validated and encouraged an acceleration of
"usufruct" standing for farmers, whereby they can decide what, when, and
how to produce on land they are granted tenure for. But there was no
decision to grant title to the farmers, and the need to accelerate the
turnover stems from the desultory process used so far. (One speaker
asked how you translate "usufruct" into plainer English; I suggested
"sharecropper" since the resemblance to that is amazingly close).

Pari passu with these output changes, there are others that will greatly
affect Cubans. The Tea Party has hit Havana ; government expenditures
are being greatly curtailed. The ration book has been greatly
condensed; many cheap products are now only available on the "market" or
black market. Many state firms had canteens to feed the workers; most
are being closed. Pensions will not be nominally increased; they have
been declining in real terms for years. The education budget has been
cut, and the need for foreign exchange has led to many doctors being
sent abroad. While Raul promised recently to expand medical education
and focus more on domestic medical services, they are now so abysmal
that hospital patients are dying of neglect and even malnutrition.

But not all the Tea Party program has arrived; taxes have been
increased. Many Cubans pay one third of their income in taxes, and "own
account" workers pay far more. (The minimum salary--which is relatively
close to the average-- is now about US$17-18 a month!)

The Congress was also an obvious attempt by Raul to institutionalize
what has been so far a family-run dictatorship. Party procedures have
been restored, empty positions filled, and new faces abound (Raul
recently replaced all of the provincial governors with younger
stalwarts). By keeping 70 percent of the public sector management
within the military, Raul probably also expects he can force
implementation of his changes more quickly; he publicly stated he wants
to move from chaos to socialism. (Where has he been the past 52 years?)

Now, on the face of it, these changes are both partial and
disappointing. While Cuban data continue to show a relatively buoyant
economy, independent estimates indicate per capita income is still below
that of 1989, the fiscal position is abysmal, and the external situation
even worse. Cuba 's recent sugar harvest, for example, was the worst in
a century. Tourism, the chief export earner, has been relatively
stagnant for three years, as has Venezuela 's financial support. In
spite of the agricultural reform--begun two years ago--food production
remains stagnant. Cuban debt arrears continue to grow, and the country
is "off cover" for all but the Chinese, Brazilians, and Venezuelans.
The only growth item comes from Obama's decision to allow unlimited
remittances and visits by Cuban Americans.

The economy confronts three major structural problems: the state
enterprises are mostly dysfunctional; Cuba has extremely low, overall
productivity; and gross investment--after years of being negative on a
net basis--is still barely above depreciation levels. No sane person
expects "taking in each other's laundry" will reverse these, let alone
generate enough productive jobs to absorb the over third of the public
workforce being fired over the next three years.

But. But I believe change (or "informal" reforms) may accelerate.
First, one has to realize that Cuba is no longer a "hard state" when it
comes to economics. Corruption is rampant; so rampant that virtually
every head of a foreign-linked sector—Cubana airlines, tourism, tobacco,
rum--has been convicted of corruption. Even Pedro Alvarez, once the
all-important head of ALIMPORT who used to negotiate deals with US farm
groups and state Governors, has been tried and convicted. (Like most
Cuban officials, on release from prison he headed for the US ; he now
resides in Tampa .)

To understand how irrelevant the VI Congress is, simply click on
www.revolico.com and note the many homes "for trading." While you can
barter homes for homes, it is illegal to include cash or other payments
in the deal. This is done openly with no (yet) punishment. Given the
tax burden on "own account" workers, few register or pay taxes; or
rather they pay only nominal sums to the block warden of the "Committee
for the Defense of the Revolution." Tips are now illegal in resorts
patronized by foreigners. This is treated as a joke. Prostitution
abounds; crime is rampant; education, health, and other vaunted public
services are often provided only after bribes.

Pandora's box is now open. Recent foreign observers quickly note that
there is less obedience of even the most sacred laws; folks openly
disparage the government; and there seems to be greater economic freedom
than ever. Understandably, while--as noted above--the formal statements
still genuflect to Marxism, there is far less rhetoric about the glories
of socialism as the social safety net is reduced, public workers are
fired, and 52 years of that persuasion have ended in economic disaster.
Fidel is now history. Alive, occasionally writing columns on world
events, and trotted out to embrace Chavez (and visiting US Senators), he
is otherwise ignored on policy issues. All those linked to him and of
less loyalty to Raul are now gone.

A cynic would remind us (and one did) of the reforms of 190-85, and of
1993-95, when the economy confronted disaster. As soon as the
challenges were ameliorated, the "reforms" (far more timid than those
now underway) were reversed. But there now seems no savior in sight.
Whatever happens to Chavez or Venezuela , it is obvious that Venezuelan
subsidies will not increase. The state enterprises remain among the
least productive in the world. The authorities have recently increased
taxes on tourism. The declining infrastructure and desultory service
mean that Cuban tourism sites are now fairly uncompetitive with other
Caribbean spots, let alone the now cheaper Florida options. In spite of
the agricultural reforms, including the closure of two-thirds of the
(inefficient) sugar mills, agricultural production continues to fall.

Thus, I--for one--believe the move towards a market economy is now
irreversible. The corruption combined with the desperation of Cubans
will quickly expand the private activities from legal to illegal
micro-enterprises (already occurring) and then to small and medium-sized
firms. One example; a recent traveler to Cuba noted that one private
restaurant had valet parking, a singer, and other ancillary attractions.
All are still illegal. Timid house ownerships regulations, when they
come at the end of the year, will likely lead to a total freeing of the
housing markets. Banks may now lend directly to people; while they have
yet to do so, I expect this to accelerate once the bankers receive the
appropriate incentives--bribes.

Then there is the recent and massive increase in immigrant remittances
and travel by US citizens to Cuba . I did not write "Cuban-Americans"
because it is clear the Obama Administration will let anyone travel to
Cuba . In the last year of the Bush Administration there were 1500
citations sent to Americans for illegal travel to Cuba . Since Obama
took office there have been 19. One of the student papers presented
included anecdotes from a recent tourist trip to the island. Foolishly,
I commented to some Cuban-Americans that the student must have been
Canadian since she was not of Cuban origin and her trip was--as
noted--pure tourism. I was immediately deluged with example after
example of travel by ordinary Americans as simple tourists; the travel
agencies which package the tours are often forgetting to include the
"research" or other legal reason for the trips. Canada has replaced
Spain and Italy as the most important tourist provider as Cuba
increasingly deters "immersion" tourism (ie, city-tourism, where
linguistically capable Italian and Spanish tourists can mingle with
ordinary Cubans) and concentrates on resort tourism. And the US is fast
becoming one of the top five tourist providers.

Since the US already ranks fourth in Cuban merchandise trade and
provides two thirds of the remittance flows, you can quickly understand
how the "blockade" is working. And these flows have led to some
interesting results. Micro-credit is now available to Cubans; a system
has arisen by which a family member in the US guarantees the credit and
the Cuban then receives the loan. Remittances were the source of over
half the "own account" activities surveyed last year. And illegal
housing purchases are often made by proxies of Cuban Americans buying
retirement homes. Farmers expanding their new "usufruct" activities
often can do so only because of immigrant remittances.

While all this will lead to steadily deeper and more helpful "reforms"
(actually, the expansion of the informal economy, with legality
hopefully following after a lapse), there seems little reason to expect
a major or significant shift quickly. Chavez' health, the continued
role of state enterprises, the uncompetitive nature of the overall
economy, remain.

Cuba is very likely to find significant deposits of oil. A Norwegian
fifth-generation drilling vessel costing $750 million was launched in
Singapore recently and hired to drill north of Havana by Repsol and
other European (and Chinese) firms. It cost $450,000/day and will
likely make five to seven attempts. You don't spend that kind of money
unless you are reasonably certain something will turn up. But even the
most optimistic estimate of Cuba's possible reserves indicates Cuba
might become self-sufficient (it consumes under 150,000 bbl/day) in the
longer term; and if oil is found next year it will be five years before
it becomes available. The Venezuelans and Chinese are building two
150,000 bbl/day refineries: one on the south coast near Cienfuegos
(actually, this is being renovated and expanded), another on the north
coast for processing Chinese crude from South America . These, however,
are projects that will both take a few more years to complete and offer
few jobs and little foreign exchange (refining is the least profitable
of petroleum activities; and off-shore ones are notoriously parsimonious
to their hosts). Cuba now has agreements with over 90 countries to
provide medical professionals. From Pakistan to South Africa , from
Qatar to Bolivia , Cuban doctors and nurses labor at Cuban salaries
(about $20/month) while the host governments pay 10 times or more to the
Cuban government. (This, of course, violates a series of ILO
agreements, but as usual the "international community" ignores it.)
Most--probably 30,000 out of 50,000--are in Venezuela and likely
ensuring Cuba receives free oil (in fact, Venezuela should charge
$27/bbl, but since Cuba never pays it is free). Given the effect
exporting doctors and nurses has had on the domestic health scene, Raul
has announced he will be expanding Cuba 's doctor-training capacity to
100,000/yr. (This compares to about 2/3 that in the US , and is
probably as credible as the 10 million to sugar harvest attempted years
ago!) Nevertheless, this income will likely grow in the future,
although it will depend on finding new markets for the doctors/nurses...

Finally, the usual cautionary note. While I am quite convinced the move
towards economic markets is virtually irresistible, if chaotic and
"illegal" in most cases, I have no crystal ball on its effect on Cuba 's
political scene. Raul continues to beaver away, institutionalizing the
dictatorship in the hope it will last when he and Fidel are entombed.
The military remains strongly in control of both the economy and the
government, if complemented by some younger civilians in provincial
posts. And Cuba 's police remain as effective as ever--using access to
education, other social services, rationed food, etc.--in controlling
most dissent before it becomes public. The Arab Spring has not hit
Havana . But the desperation of Cubans, the increasing policy conflict
between downsizing public work forces and limiting the growth of
alternative, private work alternatives, and the likely departure of
Chavez, Fidel and Raul from the scene could lead to a revolution. An
ex-Diplomat privately noted that the political scene seemed far more
fragile today than it was when the USSR withdrew its support. We'll
simply have to wait and see what happens.... Paul Meo

*************

One question: Was concrete information presented in the conference
showing that indeed 250,000 workers have been dismissed from the public
sector? The last I have heard is that they have punted and extended the
deadline for reducing the public sector payrolls a few years down the road.

The "punting" was over the 500,000 downsizing target, which was
supposed to be achieved by end-March 2011. The even more massive
target--1.8 million--is supposed to be achieved by end-2014. One
presenter noted that by the VI Congress (April 2011) the authorities had
indicated only 200,000 to 250,000 had been downsized, so the timeline
for the half-million was extended to end-2011

http://www.miscelaneasdecuba.net/web/article.asp?artID=33266