Cuba's Revolutionary Economy by Andrew Zimbalist Cuban economic performance is in the eye of the beholder. Despite the fact that between 1980 and 1987 national per capita income in Cuba grew at a real annual rate of 4.4 percent while in the rest of Latin America it fell at an annual rate of 0.7 percent, U.S. mainstream opinion has never reflected that progress. Views of the Cuban economy have varied between "an economic mess" and "only through massive Soviet aid is anything achieved." The first school is populated by pundits who have little claim to any knowledge about Cuba, much less its economy. Thus, Susan Kaufman Purcell of the Foreign Relations Council wrote in the New York Times Book Review in October 1986 that Castro had presided over no less than "the destruction of the Cuban economy." And, one month later in the same publication, Stanley Hoffman asserted that "the [Cuban] economy is in a wretched state." Official pronouncements, of course, have been equally derogatory and severe. President Bush, for instance, said, two years ago: "Castro has taken one of the hemisphere's strongest, most productive economies and ruined it," according to the Miami Herald. Mainstream interpreters with even a passing familiarity with the Cuban economy have acknowledged positive aspects of Cuban economic performance but have attributed this success solely to massive doses of Soviet aid. Lawrence Theriot, in a U.S. Department of Commerce study prepared for the Joint Economic Committee, wrote: "The genuine socio-economic and political accomplishments of the Cuban revolution have attracted much international attention ... [but they] have been possible only because of massive economic assistance provided by the Soviet Union." Another example of this line of interpretation is Carmelo Mesa-Lago, a prominent interpreter of Cuban economic affairs. who told Fortune magazine "Without a phenomenal Soviet subsidy, the Cuban economy would be a disaster." In fact, while Soviet assistance has been both generous and instrumental to Cuban economic development, its magnitude has not been accurately determined nor its impact systematically analyzed. Estimates of Soviet aid by the CIA are widely and uncritically cited, but the estimates are deeply flawed. They use the official dollar/peso exchange rate, which overvalues the peso; they ignore the fact that Soviet aid is tied; and they rely on highly dubious assumptions regarding opportunity costs. When the CIA estimates are appropriately adjusted, Soviet aid to Cuba in per capita terms or as a share of national income is in line with the amount of Western aid to many Latin American countries. To get an accurate reading of the Cuban economy's strength, one would have to discount from Soviet aid the multi- billion dollar cost of the U.S. blockade of Cuba as well as the smaller and far less costly Cuban aid program to other developing countries. To be sure, the Cuban economy has many problems: planning is cumbersome and overly centralized; shortages are ubiquitous; trade deficits have become endemic; and inefficiency and waste are pervasive. With the debt crisis, falling prices for its exports, the dollar's devaluation, and unfavorable weather, the Cuban economy has stagnated over the last three years. The quarterly report of the U.S. government-funded Radio Jose Marti, whose staff of approximately 170 people, monitors Cuban radio and TV all day long, as well as all of Cuba's newspapers and journals, provides abundant information on just how severe these problems are becoming. But it is important to put these shortcomings in perspective. First, micro-management problems in Cuban enterprises are not proprietary information as they are in the United States, but are in the public domain. As the Cuban media has experienced its own glasnost over the past several years, it has begun to expose and criticize mismanagement, inefficiencies, inconveniences, shortages and malfeasance. Thus, the public record of what has gone wrong in the last three years is long indeed. Second, Cuban austerity in the face of the debt crisis bears little resemblance to IMF-style austerity elsewhere in Latin America. Unemployment in Cuba remains minimal; basic services have been maintained and, in many cases, improved; lower income groups have seen their wages rise as higher wages have been frozen; and state-set prices have remained stable. Third, despite the allocational inefficiencies, waste and imbalances engendered by the state's centralized management of the economy, the overriding impact of the state's economic role has been pro- development. This has been accomplished inter alia through the reduction of luxury imports, the promotion of effective capital accumulation, the channelling of this capital to productive investment and the protection of infant industries. In addition, development has been achieved through the implementation of land reform to integrate rural markets and foster the growth of an urban labor force, the development of human capital, the provision of requisite infrastructure, nurturance of and comprehensive support packages for new projects and the maintenance of socio-political stability. Ongoing centralized management, however, becomes increasingly problematic as the economy has grown larger and more complex. The real story of Cuba's economic development over the past 30 years is obscured by exclusive focus on allocational and management deficiencies. The long-run growth, the successful structural change and the virtually universal provision of basic needs provide a more revealing picture. Real income growth per capita in Cuba averaged 3.1 percent per year between 1960 and 1985, compared to 1.8 percent in the rest of Latin America. As a result of this growth, per capita income in Cuba in 1987 exceeded $3,500 while the average in Latin America was $2,223 (in 1986 dollars). Accompanying this growth has been a significant structural change in the Cuban economy. Agriculture's estimated share in the Gross Domestic Product (GDP) fell from 24 percent in 1965 to 10 percent in 1985, and manufacturing's share rose from 23 to 36 percent. With the possible exception of Argentina, Cuba's manufacturing share is the highest in Latin America. Within the manufacturing sector, Cuba's most rapidly growing branch has been capital goods, such as machinery, machine parts and transport equipment, whose share of manufacturing output rose from under 2 percent in 1961 to over 20 percent in 1986, again the highest percentage in Latin America. Part of this transformation has been the result of a reduced role for sugar. While diversification away from sugar has not proceeded as rapidly or as far as it could have, it has nonetheless taken place. After attempting to rapidly diminish sugar's importance to the economy from 1959 through 1962, the Cubans did an about-face and began promoting sugar production. One basic reason for this was that sugar had a different relationship to the post-1959 economy than to the pre-revolution economy. The sugar sector is now domestically owned and it has spawned an impressive list of backward and forward linkages. It has benefitted from highly subsidized and stable prices from the Council for Mutual Economic Assistance (CMEA). Many of the noxious social and economic effects of seasonal and arduous labor during the sugar harvest have been attenuated or eliminated. Cuba today is a world leader in designing and producing machinery and equipment for the sugar industry as well as in developing and commercializing cane byproducts. At present, Cuba has commercialized over 34 sugar byproducts and has another 100 under development. Although the sugar sector has grown, the rest of the economy has grown more rapidly. And sugar's share in exports and in GDP has declined. Between 1948 and 1958 sugar exports averaged 84.1 percent of total exports while during 1982-86 they averaged 75.6 percent. This is not a large drop, but these figures are not indicative of the transformation of the productive base of Cuban exports. The 1980s high share reflects the high price (approximately three to four times the world market price) paid by the Soviet Union for Cuban sugar. If Cuban export shares were recalculated in constant prices, sugar's export share would fall from 84.5 percent in 1965 to 59.1 percent in 1985. (If Cuba's re-export of Soviet petroleum were adjusted for, this 1985 figure would be 64.3 percent.) Paralleling sugar's falling share in exports, sugar's share (including both raw and processed sugar) of GDP has fallen from 12.6 percent in 1961 to 7.5 percent in 1981. Sugar's diminished share in the economy is also reflected in a lowered share for sugar in total investments. Whereas total sugar investments (agriculture plus industry) amounted to 15.9 percent of total investment in the economy in 1975, this share fell to 12.2 percent in 1980 and to 12.1 percent in 1986. (Over the same period, the share of industrial sugar investment in total sugar investment was increasing from 35.4 percent in 1975, to 41.4 percent in 1980, and 43.8 percent in 1986.) This circumstance is, of course, linked to the development of sugar byproducts. Cuba's success at diversification can be seen by comparing Cuba's efforts at increasing non-traditional exports with other nations in the Caribbean Basin--nations which have benefitted from specialized tariff treatment and preferences by the United States under the General System of Preferences and Caribbean Basin Initiative. The growth of non-traditional exports from 258.4 million pesos in 1980 to 611.6 million pesos in 1985 constituted an average annual growth rate of 18.8 percent, 8.2 percentage points above the growth rate of the Dominican Republic, the next best performer in the group. The growth rates alone can be deceptive if Cuba begins from a much lower base. In fact, the Cuban base level in 1980 of 258.4 million pesos (or $360.4 million converted at the official 1980 rate of exchange) is considerably above that in Panama ($90.3 million), Dominican Republic ($105.3 million) and Jamaica ($106.5 million), about the same as in Honduras ($291.9 million), and below that only in Costa Rica ($441.9 million) and Guatemala ($707.7 million). Between 1980 and 1985 Cuba introduced 111 new export products and experienced significant growth in exports of citrus fruits, fish products, steel products, recycled raw materials, scrap metals, gas stoves, paper products, soldering irons and electrodes, non-electrical machinery, transportation materials and machinery, fiberboard, radios, sulphuric acid, batteries, teletransmission and processing equipment, among others. A major new copper discovery near Matahambre and the expected 150 percent increase in nickel production capacity by 1990 offer significant promise for export expansion in the medium term. Cuba is also exporting several manufactured items which hold interesting potential for the future, including: agricultural machinery and implements, boats, computer keyboards and terminals, digital integrated circuits, pharmaceutical products and refrigerators. In 1985, Cuba's non sugar exports, excluding petroleum re-exports, were 1023.1 million pesos; of this, 448.9 million pesos or 43.9 percent were for convertible currency. Thus, more than half of Cuba's non-sugar exports benefit from CMEA's protected market, but over two fifths were exported to competitive world market countries (mostly LDCs). Further, considering only industrial non-traditional exports out of a total 147.7 million in 1986, 90.8 million (61.5 percent) went to market economies. Cuba's accomplishments in the areas of income distribution and fulfilling basic needs are better known. According to estimates from the U.N.'s Economic Commission for Latin America, the decile ratio (share of total income going to the top 10 percent of income earners divided by the share going to the bottom 10 percent) in Latin America is approximately 45 to 1, while the decile ratio in Cuba is 3.9 to 1. (The Cuba estimate is for 1986, the Latin America estimate is for 1975 and includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.) By this measurement the Cuban income distribution is over 10 times more equal than in the rest of Latin America. It is instructive to contrast Cuba's current decile ratio with that of 1953, when Havana consumed more Cadillacs per capita than any city in the world. In that year, Cuba's decile ratio was 64.7 to 1. Cuba also significantly outperforms the rest of Latin America in terms of life expectancy, infant and child mortality, morbidity, literacy, educational attainment and an array of other social and health indicators. All of this is not to say that Cuba has conquered underdevelopment or that its economy functions efficiently. But in terms of conventional measures of economic development and living standards, Cuba has done substantially better than its neighbors in Latin America. As elsewhere in the region, the current period in Cuba is extremely difficult and immediate prospects for growth are not rosy. The fourth decade promises to present a plethora of new challenges, as well as many new opportunities. Annual Growth Rate of Non-Traditional Exports 1980-85 Cuba 18.8% Costa Rica - 4.7% Guatemala - 5.1% *Honduras - 2.7% *Panama 2.3% Dominican Republic 10.6% Jamaica 7.4% *1980-1984 SOURCES: Comite Estatal de Estadisticas, Anuario Estadistico de Cuba, 1986, pp. 426-435; Banco Nacional de Cuba, Informe Economico, March 1986, p.10; SRI International, Nontraditional Export Expansion in the Central American Region (Arlington: Report to the Agency for International Development, 1987) Social Indicators in Latin America, mid-1980s Nation Life

Expectancy

At Birth Infant

Mortality Illiteracy

Rate Urban

Unemployment Argentina 70 35 6.1 6.1 Brazil 63 71 25.5 5.3 Chile 71 24 8.9 17.2 Costa Rica 73 20 6.4 6.6 Dominican Republic 63 63 27.0 20.3 El Salvador 64 70 38.0 30.0 Haiti 54 107 77.0 40.0 Jamaica 70 28 12.0 25.9 Mexico 59 82 17.4 11.8 Nicaragua 58 84 12.9 16.3 Peru 59 82 17.4 11.8 Uruguay 70 38 6.1(1) 13.1 Venezuela 69 39 15.3 14.3 CUBA 74 13 3.9 3.4(2) NOTES:

- Mid 1980s is latest available figure

- Infant Mortality is defined as dead before 1 year of age per 1000 born, rounded to nearest integer

- Illiteracy Rate is for those above 15 years of age

(1) 1975 figure

(2) Urban and rural unemployment (Census 1981) Andrew Zimbalist is a professor of economics at Smith College. He is a co-author of the upcoming book, The Cuban Economy: Measurement and Analysis of Socialist Performance.