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Book Review: Al Campbell (Editor) Cuban Economists on the Cuban Economy.
9 Jul 2014
Cuba’s New Foreign Investment Law: Amplified Discrimination against Cuban Small Enterprise Operators and in Favor of Foreign Enterprises.
17 Apr 2014
Book Review: ¿Quo vadis, Cuba? La incierta senda de las reformas
14 Apr 2014
Reordenamiento Laboral: Quién se queda, quién se va?; Labor Force Down-Sizing in Cuba’s Medical System
9 Apr 2014
Cuba’s Conception Conundrum: A Valentine’s Day Puzzle
14 Feb 2014
POTENTIALS AND PITFALLS OF CUBA’S MOVE TOWARD NON-AGRICULTURAL COOPERATIVES
30 Jan 2014
Book Review: Carmelo Mesa-Lago and Jorge Pérez-López, Cuba Under Raúl Castro: Assessing the Reforms
28 Oct 2013
CAN WORKERS’ DEMOCRACY IN CUBA’S NEW NON-AGRICULTURAL COOPERATIVES CO-EXIST WITH AUTHORITARIANISM?
7 Oct 2013
CAN CUBA RE-INDUSTRIALIZE?
5 Oct 2013
The Tax Regimen for the Mariel Export Processing Zone: More Tax Discrimination against Cuban Micro-enterprises and Citizens?
26 Sep 2013
Oscar Espinosa Chepe, 1940-2013
23 Sep 2013
“Political Science”: When Will Cuban Universities Join the World?
17 Jun 2013
“ASSESSING THE GOALS AND IMPACT OF THE CUBAN EMBARGO AFTER 50 YEARS”
25 Mar 2013
Cuba-Russia Debt Write-Off and Aircraft Leasing: Win-Lose or Win-Win?
22 Feb 2013
Raul on a Roll; Anti-Reformers in Retreat!
21 Jan 2013
The Economic Implications for Cuba of Relaxing Restrictions on the Freedom of Movement
17 Oct 2012
Cuba’s Economic Problems and Prospects in a Changing Geo-Economic Environment
13 Jul 2012
My Skepticism Runs High, but Maybe I am Wrong! Some Articles on the Moringa Oleifera.
27 Jun 2012
Still More “Good Advice” from Fidel!
26 Jun 2012
Cuba in the 2012 Yale University “Environmental Performance Index Rankings.”
14 Jun 2012
Cuba’s Debt Situation: Official Secrecy and Financial “Jineterismo”
8 Jun 2012
Cuba: Still Paying Homage to the Economic Absurdities of “Che” Guevara
20 Apr 2012
Cuba’s World Heritage Sites
16 Mar 2012
The Concept of a “Loyal Opposition” and Raul Castro’s Regime
28 Feb 2012
Poor Fidel: Repudiated by his Own Brother and Reduced to Playing “Chicken Little’”
13 Jan 2012
Johann Sebastian Bach, the “Stasi” and Cuba
9 Dec 2011
Fidel Castro: The Cowardice of Autocracy
4 Nov 2011
Liberating Cuba’s Long-Suppressed Resource: Entrepreneurship
20 Oct 2011
The “Home Hardware” Cooperative Model and its Relevance for Cuba
19 Oct 2011
Can Cuba Recover from its De-Industrialization? I. Characteristics and Causes
27 Sep 2011
Cuba: A Half-Century of Monetary Pathology and Citizen’s Freedom of Movement
23 Sep 2011
A Further Step in the Liberalization of the Regulatory and Tax Environment for Small Enterprise Has Raul Now Got the “Horse before the Cart”?
27 May 2011
Up-Date on Canadian-Cuban Economic Relations
27 May 2011
Sixth Congress of the Communist Party of Cuba: Will Raul Forge His Own Legacy?
16 Apr 2011
Cuba’s Economic Agenda and Prospects: An Optimistic View!
8 Apr 2011
Cuba’s Economic Reform Process under President Raul Castro: Challenges, Strategic Actions and Prospective Performance
4 Apr 2011
Recuperation and Development of the Bahi ́a de la Habana
29 Mar 2011
An Overview Evaluation of Economic Policy in Cuba circa 2010
15 Mar 2011
A Major Slow-Down for the Public Sector Layoff / Private Sector Job Creation Strategy
1 Mar 2011
Cuba’s Standings in Social, Political, Economic and Environmental Indices in Comparative International Perspective
3 Feb 2011
Has the US Tourism Tsunami to Cuba Already Begun?
2 Feb 2011
Cuba’s Best Friend: the Canadian Winter
25 Jan 2011
Micro-enterprise Tax Reform, 2010: The Right Direction but Still Onerous and Stultifying
10 Jan 2011
“Shifting Realities in ‘Special Period. Cuba”, LATIN AMERICAN RESEARCH REVIEW, volume 45 number 3, 2010
17 Dec 2010
Cuba’s 12 to 20 Chair Reform: Can the Small Enterprise Sector Save the Cuban Economy?
15 Dec 2010
Cuban Demography and Development: the “Conception Seasonality Puzzle”, the “Dissipating Demographic Dividend” and Emigration.
25 Nov 2010
Still the “Bestest” and the “Worstest” and Maybe the Most Opaque: Cuba in the 2010 UNDP Human Development Report
5 Nov 2010
Does Sherritt International Have a Future in Cuba?
20 Oct 2010
Jump-Starting the Introduction of Conventional Western Economics in Cuba
19 Oct 2010
- Book Review: Al Campbell (Editor) Cuban Economists on the Cuban Economy.
The Causes & Consequences of Cuba’s Black Market
22 Aug 2014
WHICH WAY CUBA? THE 2013 STATUS OF POLITICAL TRANSFORMATIONS
13 Aug 2014
AFTER OFFSHORE OIL FAILURE, CUBA SHIFTS ENERGY FOCUS
13 Aug 2014
Book Review: Al Campbell (Editor) Cuban Economists on the Cuban Economy.
9 Jul 2014
Mariela Castro in Ottawa: “I believe in the project Cuba is developing”
9 Jul 2014
COMUNICACIÓN PÚBLICA de Roberto Veiga y Lenier González
1 Jul 2014
CUBAN PROSECUTORS SEEK 15 YEARS FOR CANADIAN BUSINESSMAN IN BRIBERY CASE
1 Jul 2014
Comisión de Derechos Humanos publica listado de presos políticos, JUNIO DE 2014
23 Jun 2014
CUBAN-AMERICANS AGREE: TIME TO END THE EMBARGO
18 Jun 2014
Is Cuba heading towards a repeat of the 2003 Black Spring?
17 Jun 2014
- The Causes & Consequences of Cuba’s Black Market
- karolina on The Marketing of “Che” Guevara: A Review of “Che’s Afterlife: The Legacy of an Image”, by Michael Casey
- Havana Tourist Attractions / Travel Guide / Tips / Blog on Cuba’s World Heritage Sites
- Vladimir Laplace on Time to hug a Cuban
- Analysis: The Mariel Zone — more tax discrimination against Cubans? « Cuba Standard, your best source for Cuban business news on The Tax Regimen for the Mariel Export Processing Zone: More Tax Discrimination against Cuban Micro-enterprises and Citizens?
- Biblioteca Digital Cubana | Nuestras Voces Latinas on BIBLIOTECA DIGITAL CUBANA
- Laz on Proyecciones macroeconómicas de una Cuba sin Venezuela
- Rita Maria Garcia Betancourt on Clase de economía política para el Ministerio del Interior (MININT) en Cuba, por Juan Triana Cordovi,
- Vladimir Laplace on The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did
- Arch Ritter on The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did
- Vladimir Laplace on The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did
By Arch Ritter, October 5, 2013
Since 1989, and similar to the United States and Canada among other countries, Cuba has experienced a serious de-industrialization from which it has not recovered. The consequences of this are grave, including job and income loss, the loss of an important part of its economic base and rust-belt style urban decay. Cuba risks becoming a typical small Caribbean Island, exporting services and some resources, while importing almost all manufactures.[i]
The causes of the collapse are complex and multi-dimensional. They were outlined in an earlier article available here: Can Cuba Recover from its De-Industrialization? I. Characteristics and Causes In summary, the causes include:
- The ending of the subsidization from the Soviet Union resulting in an incapacitation of the manufacturing sector;
- The antiquated and uncompetitive technological inheritance from the Soviet era;
- Maintenance and re-investment was de-emphasized before 1989 and collapsed thereafter;
- Low investment levels. [Investment was 10.5% of GDP in 2008 in comparison with 20.6% for all of Latin America, according to UN ECLA];
- The dual monetary and exchange rate systems penalize traditional and potential new exporters that have received Moneda Nacional pesos at a rate of CuP 1 = $US 1.00 from exports – while the relevant rate for Cuban citizens is 26 CuP = $US1.00;
- The prohibition of most small and medium enterprise for the last 50 years has blocked entrepreneurial trial and error and the emergence of new manufacturing activities;
- Effective competition from Chinese manufactures imports, stimulated further by China’s undervalued exchange rate and Cuba’s over-valued exchange rate.
The accompanying chart illustrates the changes that have occurred Cuban manufacturing and some of its subsectors. Total manufacturing output excluding sugar in 2011 was 48.8% below the level of 1989 in terms of physical volumes. Many sectors experienced reductions in the 50% to 99% range. The exceptional success was pharmaceutical production which increased by 765% from 1989 to 2009, albeit from a low base.
What are the longer term consequences of “de-industrialization”? Is it likely that the policy proposals of the Lineamientos approved at the VI Congress of the Communist Party of Cuba will lead to a recovery from this collapse? What can be done to reverse this situation?
I. CONSEQUENCES OF THE COLLAPSE OF CUBA’S MANUFACTURING SECTOR
The consequences of the shrinkage of the manufacturing sector are serious. First, employment in the sector (including sugar) declined from 685,500 in 1989 to 530,800 in 2009 or to 77.4% of the 1989 level, a reduction of 32.6%. (ONE AEC, 2011 Table 7.3)
Second, labor productivity in manufacturing has fallen. The volume of output has diminished more rapidly than employment. The 2009 level of output in the manufacturing sector (including sugar) was 44.9% of the 1989 level (a decline of 55.1%) but employment declined by 32,6%. This means that labor productivity in manufacturing has also probably declined from 1989 to 2009, though this cannot be known for sure without knowing the values as well as the volumes of production in these years.
Third, the importation of manufactures has risen sharply. Virtually all the shoes, clothing, textiles, household gadgetry and a lot of furniture are now imported. Indeed, one can purchase most plumbing supplies, electrical materials, dishes, pots and pans, household gadgetry and furnishings only for “Convertible Pesos” rather than the Moneda Nacional that people actually earn.
Paradoxically, visits to the various Tiendas por la Recaudacion de Divisas (TRDs or former dollar stores) which are the main source of household equipment and gadgetry, furnishings, clothing, foot-ware, plumbing materials, electrical items etc. is similar in one sense to visits to the major Big Box stores such as Walmart or Target in that the vast majority of the items for sale are imported from China. Walmart, Home Depot, Target and their ilk, make their mammoth purchases from China for all their stores in the country, obtaining massive economies of scale and quantity discounts. Has the China-Walmart Alliance helped to de-industrialized the United States?
One wonders if the procurement patterns for the large state store chains in Cuba are not unlike those of Walmart, pictured below. Does CIMEX, the major retailing conglomerate in Cuba make its purchases in the same way, providing for all its outlets in Cuba with single orders? Is a CIMEX-China Alliance in Cuba echoing the China-Walmart Alliance in the United States and having similar results in avoiding smaller scale procurement purchases from Cuba or other countries?
(One wonders if CIMEX procurement would be somewhat similar.)
A fourth result of Cuba’s de-industrialization is that it has lost much of the foundation on which diversified manufacturing activities could be developed in future. For example, Cuba has essentially lost the “clusters” of economic activities that once surrounded the sugar sector specifically and agriculture generally producing inputs and processing outputs. Parts of the sugar-related manufacturing sector have largely shut down – notably the manufacture of cane harvesters and agricultural machinery and equipment as well as the production of replacement parts for the sugar mills. As illustrated in Chart 1, the production of machinery and equipment is at 0.4% of the 1989 level while that for metal fabrication is at 32.8%.
This situation prevails in many other areas of manufacturing as well. A glance at the Chart indicates the magnitudes of the collapse.
Fifth, the potential for the emergence of manufacturing for export markets has been impaired. It will be difficult to reconstruct the manufacturing activities for which Cuba might have been able to develop some comparative advantages.
II. THE “LINEAMIENTOS” ON THE MANUFACTURING SECTOR.
The “Lineamientos de la Política Económica y Social del Partido y la Revolución,” approved on April 18, 2011 by the VI Party Congress include 25 guidelines on Industry. (Lineamientos de la Política Económica y Social del Partido y la Revolución.) Some of the guidelines are of obvious significance and would be of great usefulness if they can be implemented. These include
- “prioritizing” exports (Guideline No. 215) and maintenance (220),
- assuring inputs for the self-employment and cooperative sectors (217),
- emphasizing technical training ((132 and 138)
- the rationalization and restructuring of industrial capacity, including the sales, rental or usufruct of unused facilities to the self-employed (219).
Some specific industrial sectors are slated for emphasis, including pharmaceuticals (221(, nickel (224), natural medicines and dietary supplements (222) , information technology and electronics for export (226), fertilizers (230), rubber tires (231), construction materials (233), and metallurgy and machinery and equipment (234 236 and 237). Some of these seem reasonable and may have important roles to play in future manufacturing.
Elsewhere in the “Lineamientos” exchange rate and pricing considerations are mentioned, with the stated intention to move to a unified and realistic exchange rate but with no implementation as of September 2013.
Liberalizing small enterprise and promoting larger co-operative forms of organization are now in process of implementation. For these two sectors, pricing is for the most part to be determined by the forces of supply and demand. This may be an important step in permitting the emergence of new innovative enterprises. However, the continuing limits on size and professional activities impede the evolution of a diversified range of medium scale enterprise in higher tech manufacturing and related services.
If indeed the proposals of the “Lineamientos” were implemented fully and quickly, one could envisage the possibility of a turn-around for the manufacturing sector. So far, however, reforms in these areas have been cautious limited and slow.
III. SOME POSSIBILITIES
What might be the successful manufacturing sub-sectors in future? This section briefly considers some possibilities.
It is of course hard if not impossible to “pick the winners” in advance. The most efficacious general approach for Cuba would be to establish a reasonable policy and institutional framework and let the winners emerge over time. This would include such policies as unifying the monetary and exchange rate systems, liberalizing small and medium enterprise further, establishing a secure property rights system, consolidating the framework for the impartial rule of law towards enterprises, and a fair taxation system for Cuban-owned private sector enterprises, etc. (See The Tax Regimen for the Mariel Export Processing Zone.regarding the unfairness of the tax system as regards Cuban-owned micro-enterprises.) Cuba is in the process of implementation in some of these areas though it still has a distance to go.
However, assuming that Cuba does establish an “enabling environment” for the emergence of a manufacturing sector, what might be the manufacturing opportunities for Cuba? This section tries to make a first sketch of Cuba’s main manufacturing sub-sectors and their future potential.
A. Traditional Agro-Industries: Sugar, Tobacco and Rum.
The volumes of output in the sugar agro-industrial sector fell from 7 to 8 million metric tons of sugar per year in the 1980s to 1.8 million for the 2013 harvest. Perhaps the sector, focusing also on bio-fuels, can be reconstructed although now this would have to be almost from the ground up. Foreign – that is, Brazilian – technology, investible resources, managerial talent and entrepreneurship would be vital in this endeavor. But the old dysfunctional state enterprise model seems so entrenched that only successful implementation of dramatic institutional change as well as massive investment can bring it about.
Cuba has a major comparative advantage in cigars and a thriving agricultural and manufacturing base for future expansion. Market prospects are mixed but modestly positive on balance. The market for cigars in the high income countries may weaken in future as the baby boomers age further and become more concerned about their health. The cigar fad of the 1990s is unlikely to return in those countries with the same intensity.
On the other hand, cigars may become a status symbol for the males of the burgeoning middle classes of the emerging middle income countries of Latin America and Asia. Normalization of relations with the US will also increase demand.
Conclusion? Continue to promote this sector. Also a suggestion: produce for export high quality but machine-made cigars at prices that are more affordable for a broader market. Cuba has priced itself out of the middle class cigar market.
The market for rum and alcoholic beverages has been strong. Its future should also be positive again due to increasing demand in emerging countries and the United States after normalization.
B. Food Processing
Cuba should have great potential in processing agricultural products. However, this depends on a thriving agricultural sector providing the raw materials. Unfortunately agriculture has been in steady decline especially since 1990. Some past exports such as citrus fruit have fallen out of the picture.
Cuba could have significant production for export markets of citrus products, tropical fruits, vegetables, and beverages. This would require major expansion of food production and is thus a longer-term possibility at this time. However, a a diversified range of agro-industrial possibilities could be considered, e.g. mango cultivation and juicing for export markets. [ii]
This sector has been dramatically successful since 1989, and has become a major export exporter to a growing range of countries. (See the accompanying chart.) This success should continue into the future.
However there are some downside risks. First, new drugs must continuously be developed because generic versions of existing drugs can be produced freely anywhere (read India and China) when patent protection runs out – if not before. This means that Cuba’s producers, like big pharmaceutical companies, face future death unless they innovate successfully. Second, some of the markets for Cuba’s pharmaceuticals are a type of ideological “sweet-heart” deal, e.g. purchases by Venezuela. These may be at risk in the longer term when the Cuba-Venezuela “special relationship” runs its course.
D. Light Manufactures
Some of the economic activities that have declined most seriously – from 70% to 90% in different cases – are footwear, textiles, clothing, and consumer products of leather, wood, paper, metal, rubber and plastic for household use (See Chart 1.) This seems tragic when one considers that even in the 1940’s, Cuba was a major producer of a range of products such as leather and rubber shoes, cotton and rayon textiles, rubber tires, soap, paint, clothing etc. (IBRD, Report on Cuba 1950, p.130.) The collapse of much of Cuba’s light industry is of course paralleled by its corresponding collapse in Canada and the United States, with the resultant job-loss and urban decay in the rust-belt.
It would be difficult for Cuba to reclaim many of these areas, given the incredible economies of scale and agglomerative economies that big countries such as China, India, and other Asian countries experience.
One can imagine niche-type markets for which Cuba could have success. For example, the manufacture of some lines of specialty women’s clothing, leather footwear, and Spanish-colonial style furniture might be possibilities. Already one sees surprising crafts-level innovation in a myriad of areas, focusing on hard-currency tourist markets. These provide some hope that middle-sized enterprises could emerge and develop new products for Cuban and foreign markets.
But for this to happen there would have to be the possibility that micro-enterprises could evolve into small and medium scale firms. This is still blocked – with the exception of cooperative forms of enterprises.
E. Chemical and Petrochemical Products.
If Cuba emerges as a significant petroleum producer or refiner of petroleum imports, it is possible that it may develop a range of petrochemical products for national and regional markets. Some production and exports are likely to emerge from the new refinery complex in Cienfuegos. However, the competition in the region from established producers in the region such as the US gulf coast, Mexico, Trinidad and Venezuela is serious so the possibilities here seem limited.
Could the production or “mixing” of fertilizers – from imported potash, phosphates and nitrogen – be revived? Perhaps, though Cuba has no particular advantage in this area.
F. Heavy Industry and Capital Goods Production
Heavy industry such as an iron and steel complex, metal fabrication, wire and tube making is unlikely to emerge in a significant way in Cuba due to lack of cheap energy sources at this time, the absence of relevant raw materials, absence of significant metal using industries within Cuba, the small domestic market vis-à-vis efficient scales of production, absence of relevant skills etc. This situation could change in future if low-cost sources of energy from off-shore petroleum were to be developed.
H. Machinery and Equipment
Cuba has produced some agricultural transport equipment, namely cane carts, since early colonial times. More recently, it produced heavy can harvesters such as the one in the adjoining photograph.
At this time, Cuba has lost the agricultural foundation for the production of machinery and equipment for the agricultural sector, though there may be some niches where possibilities exist. Brazil seems likely to capture much of this market. There may be some niche products that could emerge however.
Chances for Cuba of capturing automotive parts, batteries, rubber tires etc. seem slim and assembly is out of the question given the lack of the relevant cluster of economic activities on which these would be based and the great economies of scale in established producers elsewhere.
I. Electric and Electronic Equipment
The assembly of some electric or electronic products occurs now in a minor way and could perhaps be expanded. However, virtually all of the components would have to be imported so that domestic value added would be limited. Again, competition from abroad, notably from China will be difficult to overcome due to its huge advantages noted earlier.
J. The Mariel Export Processing Zone
The Mariel EPZ creates some new possibilities for Cuba. It is possible that China (being wooed by Cuba with a “Mariel mission” visiting that country in September 2013), Brazil and possibly other countries establish assembly, light fabrication or bulk-breaking activities in the EPZ. This is certainly the purpose of the highly generous tax treatment provided to foreign investors, namely a “Zero” profits tax rate for 10 years with presumably full expatriation of profits and a rate of 12.5% after 10 years. (See The Tax Regimen for the Mariel Export Processing Zone.)
To revive Cuba’s manufacturing sector will be difficult. The loss of so much industrial capacity over the last quarter Century has weakened the foundation on which such a recovery could be based. There are a few promising sectors, most notably pharmaceuticals, food products, and some niche fabrication activities. But other most sub-sectors appear generally to be un-promising. Perhaps the Mariel Export Processing Zone will have some beneficial impacts.
What is most needed is the establishment of an “enabling environment” of company law, liberalization of small and medium enterprise, a reasonable tax regimen for Cuban private sector enterprises and of the monetary and exchange rate systems. Some of this was recognized in the “Lineamientos.” But there is still some distance to go.
[i] The industrial sector has not yet been examined as in as much depth as some other economic areas such as agriculture. However, analysts at the Centro de Estudios sobre la Economia Cubana (CEEC) in Havana, notably Ricardo Torres Perez, have been turning their attention to this area.
[ii] For example, Canada imports growing volumes of several varieties of mango juice from the Republic of South Africa. Cuba could share in such markets. Again, normalization with the United States in time will be of benefit in providing a large near-by market.
PHOTOGRAPHS BY ARCH RITTER, 2010-2012
Plaza Vieja, Reconstructed
Music, Plaza de Armas
Paladar, La Rampa con Avenida de los Presidentes
El Conejito, English-style Restaurant apparently built at the request of Celia Sanchez
Flamenco Dancer, in the Bar of the Hotel Inglaterra
Bed and Breakfast or “Casa Particular” Symbol
Car Repairs once again
Iglesia de San Francisco de Asis
Sugar Mill Engine in Habana Vieja
Fidel authorizing Construction of Greek Orthodox Church
Line-up for US Interest Section
US Interest Section and Early Morning Line-up
Cementerio de Colon
By: Ted Piccone; Brookings Institution
Report | October 3, 2013; Series: Foreign Policy Trip Reports| Number 55 of 55
Ted Piccone is Acting Vice President and Director of Foreign Policy at the Brookings Institution.
On September 27, the Committees for the Defense of the Revolution (CDR), the local watchdogs of Cuba’s Communist Party, celebrated their 53rd anniversary with a series of street parties around the country. Neighbors danced around small bonfires and enjoyed potluck dinners into the late hours of the night, leaving Havana’s streets relatively deserted as I strolled downtown the following morning. President Raúl Castro and other party leaders marked the occasion by presiding over the CDR’s 8th Congress, where discussions about various problems, like the proliferation of illegal and “immoral” activities at the local level, were underway.
As I wandered the broken cobble-stoned corridors of Old Havana, I happened upon the Communist Party’s Museum of the CDR, its walls covered with homages to the heroes of the 1959 Revolution, framed greetings from the people of Vietnam and China and various replicas of the Cuban flag and other symbols of nationalist pride. As my guide at the CDR museum completed the tour, she quietly closed the door to the exhibit room, shyly asked for a small tip and then carefully hid the bill in a crumpled piece of paper.
Along the way, I had been approached by other friendly Cubans looking for a favor; one even suggested a trip to the grocery story to buy food for his child. My taxi driver was an aspiring lawyer who drove visitors around in an ailing Soviet-era Lada to earn hard currency on the side. A policeman chatted with fishermen along the famed Malecón as he watched two men in a small boat struggle for the day’s catch in front of a sign that said: no fishing boats allowed.
The problem of illegality in the Cuban economy is alive and well. In this regard, it is not unlike the rest of Latin America, where black markets flourish and up to 47 percent of its non-farm workers are in the informal economy. In Cuba, however, where the state has long prided itself on controlling all aspects of the political economy, the expansion of illegal and informal activities is something new again. Like in the days before the 1959 Revolution when corruption and organized crime flourished amidst high poverty and inequality, or the “special period” when the collapse of the Soviet Union led to a 33 precent contraction of Cuba’s GDP, most Cubans are struggling to survive. This time, they are also taking advantage of the gradual opening of the economy under Raúl Castro.
The “updating” of the socialist model, launched with some fanfare in 2011, is opening new opportunities for Cuban citizens to have some independence from the state. Under new regulations, small business enterprises and cooperatives, already covering nearly 450,000 workers, are set to expand to include such categories as real estate agents, construction workers and repair shops. Newly approved cooperatives in sectors such as construction, industry, transportation and restaurants will be able to use both national and convertible currencies, request bank loans and set prices according to market conditions.
The challenge for the current regime is to stimulate the economy through market-oriented reforms that also generate enough revenue to provide the high levels of health and education services that have distinguished Cuba from the rest of the region. It’s not clear if the changes implemented thus far are working – reliable data about the Cuban economy are notoriously difficult to obtain and often piecemeal. The proliferation of small businesses and family-run inns in Havana, fueled in part by a substantial rise in visitors and remittances from Cubans in the United States, is encouraging. On the other hand, compliance with tax regulations is uneven. According to the newspaper Granma, the Party’s organ, only 57 percent of individuals subject to a new transport tax on vehicle owners have paid it, even after an extension was granted. Even casual observation of the street economy tells us that tax evasion is probably widespread.
One of the core structural problems of the economy is the dual currency system in which most Cubans are paid in local pesos (CUPs) while foreigners and some sectors like tourism deal in convertible pesos (CUCs). The exchange rate of 24 CUPs to one CUC creates serious distortions throughout the economy and society. Professionally trained doctors, teachers and scientists, who must work for the state, earn about 20-30 CUPs a month, while a bartender or hotel maid can make the equivalent in a day. The result is brain drain, both internally as more highly skilled workers move to lower skilled jobs, and externally as people give up and leave the island for good. One public health expert told me that many Cuban health professionals on public duty missions in places like Brazil and Ecuador take up private practice on the side, earning enough to start a small business upon their return to Cuba or buy a house and live comfortable lives in their adopted countries.
One possible solution to the dual currency problem, according to international finance experts, is to unify the currency in one move, coupled with expanded subsidies and tax breaks and a healthy package of international financial assistance to cushion the blow. The 900 percent differential in the currencies’ values means that a “big bang” approach would inevitably generate serious winners (those in the hard currency economy) and losers (the majority of Cuban workers), a prospect any government would want to avoid if possible. A probable spike in inflation is also worrisome. The government appears to be taking a different approach by experimenting with a 10-1 exchange rate for certain state-owned enterprises like sugar, hotels and non-agricultural cooperatives.
We are witnessing today the unfolding of a transitional hybrid economy that has one foot on the accelerator and one foot on the brake. On one hand, a host of ongoing reforms in the domains of agriculture, tourism, property transfers, travel abroad and even sports are unshackling Cubans from a predominant state. President Obama’s decision in 2009 to relax U.S. travel and remittances rules has also helped give oxygen to the more liberal features of the reforms by providing seed money for new businesses and facilitating the flow of goods and capital from the Cuban diaspora in Florida. On the other hand, implementation of reforms is slow and often limited to pilot projects dispersed throughout the island. Rules for foreign investment are too restrictive and arbitrarily enforced and property rights remain in doubt.
Nonetheless, the package of changes underway in Cuba, under the auspices of Raúl Castro and other heroes of the Revolution, lends a certain political legitimacy to the project that could facilitate a soft landing for such a hard situation. As Richard Feinberg argues in a new Brookings report on the emerging middle classes due out this November, such a soft landing is already underway as small and medium enterprises and cooperatives gain traction. Castro’s announcement last year that his current five-year term will be his last, and the appointment of a much younger vice president to guide the party to the next phase of “prosperous socialism,” give Cubans I spoke to some hope that, in the next five years, Cuba will look even more different than it did five years ago.
This shift is already visible. Open debates among Cuban citizens, including one I attended on the national budget process in a well-appointed theater organized by a leading public affairs magazine, are slowly underway. The Catholic Church is also playing an interesting role. The Conference of Catholic Bishops in Cuba recently released its first pastoral letter in 20 years endorsing the government’s economic liberalization and calling for a political opening that respects “the right to diversity with respect to thoughts, to creativity and to the search for truth.” Outspoken activists are touring European, Latin American and North American cities with their critiques of the current system and returning to the island determined to continue their campaign for greater freedoms, despite continued harassment and detentions. Change is in the tropical air.
As Cuba opens its economy to the world, and gradually finds the confidence to let Cubans be more open at home as well, the United States would be smart to move beyond the confines of its Cold War policy and let Americans see what they can do to support the Cuban people. President Obama can start by expanding the steps he took in his first term to facilitate greater trade, travel and communications with the Cuban people and budding small enterprises. He can also credibly remove Cuba from the list of state sponsors of terrorism, which is severely hampering a whole host of basic financial transactions for legitimate American travelers and businesses alike. It is time to exploit the opportunity offered by Cuba’s economic reforms and let reconciliation – both within the island and across the Florida Straits – begin.
The complete document is available here: Omar Everleny Pérez Villanueva, The Current Deregulation of Cuban Enterprises. Oct. 3 2013
We cannot examine the last 50 years of Cuban economic activity without casting a critical eye. Even if we are clear about future goals, which are certainly full of challenges, an awareness of the pitfalls, errors, mistakes and misunderstandings from the past period may help to correct the future perspective.
Cuba is undergoing changes directed at achieving efficiency and increasing the productivity of the state-run enterprises (the plan), where efficiency depends, among other factors, on productivity. Productivity can be increased from different sources, but the important factor is that although a company may be proactive in the search for solutions, it is not possible to be proactive while being heavily regulated.
Various academic analyses show a decrease in the majority of state-owned economic sectors in the last 20 years, between the early 90’s and 2010, as well as in virtually all sectors, with the exception of a few, such as telecommunications, mining and construction, sectors that have received a strong injection of foreign capital since the early 90’s. Another study on skilled labor force shows low motivation, due to unsatisfactory wages, few moral and material incentives, organizational problems, over-qualification and, of course, technical materials problems.1
On January 29, 2012, at the closing of the First National Conference of the Communist Party, Raul Castro stated that:
“The only thing that can lead to the defeat of the revolution and socialism in Cuba would be our inability to eradicate the mistakes made in the 50 years since January 1, 1959 and those that we incur in the future.”
Following this thinking, it is clear that the challenges posed by the transformation at a relatively short term of the existing structural distortions in the Cuban economy. If we want Cuba to become a land of opportunities and to achieve a sustained increase in the standard of living for all Cubans, then the time to make such decisions is not very far away, and the measures to take must be more pragmatic than those taken under the current government. At the same time we cannot forget to take into consideration the harassment that Cuba is subject to in its external transactions by the U.S. government.
DR. OMAR EVERLENY PEREZ VILLANUEVA
Professor at the University of Havana. Former director of the Centro de Estudios de la Economia Cubana at the University of Havana. Doctorate in Economic Sciences of the University of Havana in 1998. Masters in Economic and International Relations from CIDE, AC Mexico City, Mexico in 1990. Bachelors in Economics from the University of Havana in 1984.
Dr. Perez Villanueva has presented at conferences in various Cuban institutes as well as internationally, including in the United States, Japan, France, Canada, Spain, Brazil, Puerto Rico, Mexico, Dominican Republic, Venezuela, China, Malaysia, Argentina, Peru, Jamaica, Barbados, Trinidad and Tobago and Norway. He has served as a visiting professor at Universities in the United States, Japan and France and has published over 70 research papers in a variety of areas of the Cuban and global economy.
Dr. Perez Villanueva has also published over 75 articles in publications and has co-authored several books in Cuba and abroad, including “Cuban Economy at the Start of the Twenty-First Century,” with Jorge Dominguez and Lorena Barberia (Harvard University. ISBN 0-674-01798-6, 2004), the second edition of “Reflections on the Cuban Economy” (Editorial Ciencias, Havana. ISBN 959-06-0839-6, 2006) and “Outlook fo the Cuban Economy I and II” (ISBN 978-959-303-004-5). His last book is “Fifty Years of the Cuban Economy” (Editorial Ciencias Sociales. Havana. ISBN 978-959-06-1239-8).
HAVANA October 1, 2013 (AP)
By PETER ORSI Associated Press
Cuba is the only country in the world that mints two national currencies, a bizarre system that even President Raul Castro acknowledges is hamstringing the island’s socialist economy and must be scrapped. Exactly how to do that is the problem.
Months after Castro made currency unification a centerpiece of a forceful address to parliament, no details have been made public. But a pilot program operating under the radar might hold clues to a way out.
Since the system was created in 1994, most islanders have been paid in national pesos worth 24 to the dollar in exchange houses, while tourists and the Cubans who attend to them receive a much more valuable peso pegged at 1-to-1 with the U.S. greenback. The imbalance means doctors and physicists can make more money driving taxis or renting rooms than they can working in the professions for which they spent years preparing. In his July speech, Castro denounced the setup as having a warping effect on the economy and society in general.Shaking up the dual currency system risks spiking inflation and creating new winners and losers, always dangerous on an island that embraces the goal of egalitarianism. It would also force a change in accounting rules that would eliminate a huge subsidy to state-run enterprises at a time when cash is so short.
But there are signs that change is coming, and hints at how the value of the currencies might meet in the middle.
Pavel Vidal, a former Cuban Central Bank economist now at Colombia’s Javeriana University, told The Associated Press that a pilot program is being launched with select state businesses operating at a 10-to-1 exchange rate. The businesses are in key sectors such as sugar, hotels and non-agricultural cooperatives. There has been no mention in the official media, but Vidal said it is happening and it’s a good step. “I think it’s great because the elimination of the double currency must be gradual,” he said.
Even incremental change may be tough to pull off, and requires the unraveling of Byzantine accounting practices that effectively allow state companies to purchase dollars at a fraction of what ordinary Cubans pay for them.
While the rate in exchange houses is 24 pesos to 1 convertible peso, or CUC, the Cuban government treats them as equal in official accounts, meaning state entities are getting them at a 1-to-1 subsidized rate. “Whoever is getting these dollars at one-to-one is doing well, and that’s the official sector,” said Rafael Romeu, former president of the U.S.-based Association for the Study of the Cuban Economy.
Despite reforms under Raul Castro, the state still may be too inefficient to quit the subsidy cold-turkey. “They would be basically confronting their budget constraint in a serious way, and I don’t think they are ready to do that,” Romeu said. “They would have to cut a lot of social services.”
The two pesos have been circulating in parallel since 1994, when the loss of billions in Soviet trade and subsidies forced Cuba to reluctantly open the economy to tourism, while trying to insulate most islanders from its capitalist effects.
The drab local one-peso note bears the visage of independence hero Jose Marti, while the brightly colored CUC bill shows an image of the monument that honors him. Holding it up to the light reveals a magnetic strip with the words “Fatherland or death — we will be victorious,” in Spanish.
Other communist countries have experimented with second, hard currencies aimed at foreigners and business dealings, only to drop them. The Soviet Union tried dual currencies in the 1920s and China in the 1980s and 1990s. For Cuba, the idea seemed simple: Canadian and European travelers would spend hard currency at government CUC shops catering almost exclusively to foreigners, while Cubans would keep living a socialist ideal in the other currency. It hasn’t worked out that way. As authorities pulled back on subsidies that once covered almost all of islanders’ housing and food needs, people grew increasingly dependent on the added CUC income — moonlighting in the tourism industry or receiving remittances from relatives abroad.
The result is the upside-down wage structure where low-skill workers like hotel chamber maids earn more from travelers’ tips than professionals. A 53-year-old doctor recently left the medical profession after 25 years because his $25-a-month salary was putting food on the table for just two days a month. He now helps his mother rent rooms to tourists paying in convertible pesos.
“Professional salaries are in a desperate situation,” he said, speaking on condition of anonymity because doctors generally are not authorized to talk to foreign media. “There’s no motivation, and every day they ask more of you.”
Contrast that with Rigoberto Sanchez Beltran, who pulls in about $70-$100 a month in tips for watching over parked cars at a tourist complex in Havana. Getting by is still tough, but he knows the job gives him a leg up on many of his more-educated neighbors. “You get to know the regulars, and they give you a little more,” he said.
Since 2010, Cuba has seen reforms including the legalization of a real estate market, increased private small businesses and creeping decentralization of state enterprise. In July, Castro declared that the dual currency was “one of the most important obstacles to the progress of the nation.” He did not say, however, how the cash-strapped state would manage to pay white-collar workers more.
Cuban officials have long argued that state salaries are effectively much higher than the often-reported average of $20 a month if you factor in things such as free health care, education and monthly food ration cards. But today just about everyone acknowledges that low pay has been the enemy of efficiency, doing little to inspire hard work. Employees often pilfer supplies to resell or barter, or spend work hours on side projects that bring in CUCs.
At stores that still offer cheaper prices in national pesos, goods from soap to mops sell out quickly, snapped up by hoarders or black marketeers. So finding basics such as cooking oil and eggs often entails a trip to a CUC store.
“It’s totally absurd that you get paid in one currency, but in order to live you need to pay with another,” said Margarita Nieves, 69. “Until they fix that, they can’t keep telling people there’s no productivity.”
Three “Convertible Pesos” or CuC; CuC3.00 = $US 3.00 more or less.
By ANNE-MARIE GARCIA; Associated Press Sep 27, 7:55 AM EDT
HAVANA (AP) — Cuba announced Friday that island athletes will be allowed to sign contracts to compete in foreign leagues, a shift from decades of policy that held professional sports to be anathema to socialist ideals.
The measure promises to greatly increase the amount of money baseball players and others are able to earn, and seems geared toward stemming a continuing wave of defections by athletes who are lured abroad by the possibility of lucrative contracts, sapping talent from national squads.
It was not immediately clear if the ruling would let Cuban baseball players jump to the U.S. Major Leagues without restrictions at home or under U.S. laws that restrict money transfers to the communist-led island. Athletes will be eligible to play abroad as long as they fulfill their commitments at home, the Communist Party newspaper Granma reported. “It will be taken into account that they are in Cuba for the fundamental competitions of the year,” Granma said.
The paper said the decision was approved at a recent session of the Council of Ministers, which is headed up by President Raul Castro. “International experiences, including 10 sporting laws of various Latin American nations, were studied,” it added.
Until now, few Cuban baseball players have been permitted to play abroad. Alfredo Despaigne spent this summer with the Pirates of Campeche, Mexico. Previously, Omar Linares played in Japan. In the 1990s, some athletes in other sports such as volleyball played in European leagues. A number of athletes, especially baseball players, have defected in recent months and years. They include Yasiel Puig, who signed a multimillion-dollar contract with the Los Angeles Dodgers.
Professional sports were outlawed under Fidel Castro in 1961, two years after the Cuban Revolution.
Rogelio Manuel Diaz Moreno, Havana Times, September 13, 2013 |
HAVANA TIMES — In the years immediately following the triumph of the Cuban Revolution (in January 1959), the island’s trade union leadership undertook to do away with the strike as a mechanism for asserting worker demands.
The Cuban Workers’ Federation (CTC) was absorbed by the State apparatus, regulated by the government and controlled by the single-party system which came into being at the time. The government assumed the commitment of brining economic and social progress to the country.
The CTC did its part, and did it well. Though it is true the revolutionary government helped the majority of the population living in abject poverty, putting behind their deplorable living conditions, it is also true that it lost its direction somewhere down the road. This, at least, is the view expressed by Raul Castro, who went as far as saying the country had been taken to the edge of a precipice.
Thus, we have arrived at a situation in which working people do not receive enough, in wages, to be able to get by. That is another statement made by Cuba’s president. Lacking an institution that can organize and represent them, Cuban workers have no means of making any kind of labor-related demands.
They look on the CTC as a mere appendage of their company’s management and of State institutions. Union meetings, for them, are basically an occasion to express support for government and Party directives, calling for more work, less earnings, accepting a lay-off without protesting, etc.
Defending worker rights or calls for public protests, which earn one the reputation of being a troublemaker and pave the road to unemployment, is, of course, out of the question. The State / government is free to do whatever it pleases.
¿Or is there another side to this?
A responsible and courageous attitude on behalf of the CTC’s representatives and members, and an attitude of respect from the State, would be a means of channeling tensions and difficulties and of working towards a consensus around the solutions ultimately imposed on us by reality.
All societies have a rebellious lot. Cuban construction workers may not have approached the CTC to express their grievances, but they did, at one point, stage a de facto strike. In the 1990s, Cuba’s construction companies were practically left without employees. The State had no choice but to substantially improve wages, accommodations for employees, food, and other conditions, in order to repopulate the industry with part of the lost labor force.
A similar situation arose in connection with another difficult job, that of maintaining public order. The government had to re-locate police officers from the eastern provinces to Havana en masse, as nearly no one in the capital was willing to do such a thankless job for the low wages the State was offering. Once again, the State, faced with an inexorable need, had to give in and began paying police officers more decorous salaries.
State farms in Cuba’s countryside also witnessed an exodus of workers. Here, the State didn’t respond by raising salaries but by distributing idle lands to those willing to make an honest living with the sweat of their brows. In the long run, workers again had their way.
Of course, these aren’t “strikes” in the strictly theoretical or academic sense of the word. The loss of teachers, qualified health specialists and high-performance athletes, who either change professions or countries, also does not fit nicely into the Marxist paradigm of proletarian struggle. The theft of goods, raw materials, fuels and other products from any workplace that isn’t rigorously monitored fits this paradigm even less.
When those at the bottom perceive that the strongest and less scrupulous of the lot are the ones who come out on top, they do what they can, even if it’s not in the textbook and isn’t exactly heroic. The dominant class, at the top, tightens the screws in response, and the result is a kind of arm wrestling match where the one who can hold out the longest wins.
The Party bureaucracy and its servile underlings still find it hard to accept that working people have rights and value. They squeeze as much as they can out of them in every sphere. They try different strategies to ride out the storm or confuse their opponents, depending on the sector: they mobilize workers through the Food Program, launch intensive teacher training courses, re-locate construction workers, police officers and teachers to other regions and tolerate or encourage the broadcasting of alienating and superficial videos through the mass media.
Unfavorable productivity rates are hidden behind a thick curtain of demagogy and flattering figures are extolled without limits. All the while, workers are required to show their unconditional support for the government if they have any hopes of getting ahead, working abroad or earning a very limited bonus.
A string of tiresome political campaigns – as oppressively dense as they can be thrown together – are used so as to drain people of the energy or will to think about changing the (dysfunctional) way in which things work in the country.
At certain points in time, more material incentives are made available in given jobs and, when a more or less precarious stability is achieved, they are taken away. Where none of this can be put into practice, or where it fails beyond any hope of recovering the sector, or where the government cannot afford to lose the profits to be gained there, they liberalize the sector and make concessions to foreign capital.
The CTC is the most conspicuously absent organization throughout these processes. So much so, that it is evident that Cuba suffers from a degeneration of supposedly grassroots organizations, those which ought to organize and defend the workers.
A responsible and courageous attitude on behalf of the CTC’s representatives and members, and an attitude of respect from the State, would be a means of channeling tensions and difficulties and of working towards a consensus around the solutions ultimately imposed on us by reality.
This would pave the way towards a possible raise in worker salaries and the implementation of measures and plans aimed at increasing production, improving services, taking better care of the environment, satisfying community needs and other improvements.
One is more likely to see an apple tree sprout oranges than a privileged class give up its benefits willingly. We probably won’t be able to avoid an intermediate stage of chaos in which the country’s productive structures and services infrastructure are worn down, when hard facts will force many to change their way of thinking.
Those who have stifled, or stood by as others have stifled the ability of Cuban workers to self-manage and organize, bear a heavy burden of responsibility for the incalculable damage to the nation and the people this has brought upon us.
I say this so as not to come off as too much of a radical, and affirm that, since we aspire to build a socialist system, where the means of production are controlled by the workers, what we simply need to do is do away with the country’s bureaucracy in one fell swoop and let the workers manage their workplaces, and the country, as they see fit.
The Tax Regimen for the Mariel Export Processing Zone: More Tax Discrimination against Cuban Micro-enterprises and Citizens?
By Arch Ritter
The Mariel Export Processing Zone (EPZ) is the second attempt since May 1997[i] to set up an EPZ that will promote foreign investment and thereby generate jobs, income, domestic value added and foreign exchange earnings for Cuba. This new container port facility and industrial park will free Havana Harbor for restoration and regeneration ultimately for recreational rather than industrial purposes. One might expect that Brazilian and Chinese enterprises – private and state-owned- will seize the opportunity to operate in Mariel vigorously with an eye for exports or re-exports to the Caribbean region.
The regulation and tax regimes for the Mariel EPZ were announced on September 23, 2013 (Marc Frank, Reuters, September 24 2013). The tax regime for the foreign firms operating in the Mariel EPZ is generous. It includes:
- a ten-year holiday from paying a tax on profits and
- presumably the full ex-patriation of profits;
- a 12% tax rate after 10 years;
- the normal Cuban income tax rate for foreign workers
- a 14% (of wage) payment for workers’ social security;
- zero tax on imported equipment; low duties on imported materials; and
- 0.5% for EPZ maintenance.
These provisions should provide a strong incentive for foreign firms to locate in the EPZ. On the other hand, this tax regime in itself will not generate a huge amount of foreign exchange revenues for the Cuban Government.
The down-side of the tax regime for foreign investors and the major earner of foreign exchange for the government will be the hidden taxation involved in the hiring of labor. EPZ enterprises, like those in joint enterprises will have to pay hard currency to a state company to cover the wages and salaries of Cuban workers at a rate around $US 1.00 = 1 peso (CuP in Moneda Nacional) while the rate that is relevant for Cuban citizens is $US 1.00 = 26 pesos (CuP). The government can then sell the hard currency (“convertible pesos” or CuCs) at the rate of 1CuC = 26 CuP, meaning a profit on each CuC of 25 CuPs. This profit to the government is in effect a 96% tax rate (1 – 25/26 = 0.038) . This counterbalances to some extent the generosity of the rest of the tax regime for the EPZ firms.
In the words of Marc Frank:
“However, one of the main complaints of foreign investors in Cuba has not changed: that they must hire and fire through a state-run labor company which pays employees in near worthless pesos while investors pay the company in hard currency. Investors complain they have little control over their labor force and must find ways to stimulate their workers, who often receive the equivalent of around $20 a month for services that the labor company charges up to twenty times more for.” Frank, Reuters, September 23, 2013
EPZ enterprises also would prefer to operate with a reasonable and realistic exchange rate and the power to hire labor directly rather than to go through the state labor company.
The accompanying table compares the tax regimes for micro-enterprise, foreign firms in joint enterprises and EPZ enterprises. While the reforms of the micro-enterprise tax regime in 2010-2011 reduced the discrimination favoring foreign enterprises, but did so only slightly. For foreign firms the tax base is total revenues minus all costs of production and investment. In contrast, for micro-enterprises the tax base is total revenue minus arbitrary and limited maximum allowable levels of input costs ranging from 10 to 40 percent depending on the activity, and regardless of true production costs. As a result, for Cuban micro-enterprises the effective tax rate can be very high and could exceed 100% while the effective tax rate for foreign enterprises is exceedingly low. Moreover, investment costs are deductible from future income streams for foreign firms, this being the normal international convention. But for Cuban micro-enterprise, investment costs are deductible only within the 10 to 40% allowable cost deduction levels for the current year.
The highest tax rate or bracket for domestic micro-enterprises is 50% while that for foreign firms in joint-enterprises is 30% generally but 50 % for mining (namely for Sherritt International). The Mariel EPZ rate is 0.0% for 10 years and 12% thereafter.
The EPZ firms can import equipment and materials at 0.0% import duty. For many imported inputs required for micro-enterprises, the sales tax they pay in the “convertible currency” stores is 140%, though wholesale markets are to appear before long providing imported inputs at prices that may be a good deal lower.
All in all, the differential tax regimes represent a surprising type of discrimination against Cuban citizens and in favor of the foreign firms in joint enterprises or the Mariel EPZ. The tax system permits very low taxes for the foreign owners of enterprises investing in the EPZ. IN contrast, Cuban micro-enterprises face a daunting tax regime.
From the perspective of Cuba’s national interest, the tax regime has another weakness. This is the heavy but hidden taxation on the payment of labor in the EPZ. The effective 96% tax operating through the dual exchange rate system does generate revenue for the Government. However, by making labor relatively expensive for the EPZ firms, it will provide a disincentive to job creation in the EPZs. This is a central objective of Cuban economic policy at this time as it tries to absorb up to 1 million workers that it considers to be redundant in the state sector of the economy.
Moreover, while the wage compensation to Cuban workers is pitifully low under the dual exchange rate system, the cost to employers is high. Under the wage payment systems of the previous EPZs, illustrated in the Table 2 below, the wage costs to employers were well above neighboring countries in the Caribbean region. This may well persist under the tax arrangements for the new Mariel EPZ.
By Marc Frank
Original Article Here: Mariel
HAVANA, Sept 23 (Reuters) – Cuba published rules and regulations on Monday governing its first special development zone, touting new port facilities in Mariel Bay in a bid to attract investors and take advantage of a renovated Panama Canal.
The decree establishing the zone and related rules takes effect on Nov. 1 and includes significant tax and customs breaks for foreign and Cuban companies while maintaining restrictive policies, including for labor.
Cuba hopes the zone, and others it plans for the future, will “increase exports, the effective substitution of imports, (spur) high-technology and local development projects, as well as contribute to the creation of new jobs,” according to reform plans issued by the ruling Communist Party in 2011.
The plan spoke positively of foreign investment, promised a review of the cumbersome approval process and said special economic zones, joint venture golf courses, marinas and new manufacturing projects were planned. Most experts believe large flows of direct investment will be needed for development and to create jobs if the government follows through with plans to lay off up to a million workers in an attempt to lift the country out of its economic malaise.
The Mariel special development zone covers 180 square miles (466 square km) west of Havana and is centered around a new container terminal under construction in Mariel Bay, 28 miles (45 km) from the Cuban capital.
The zone will be administered by a new state entity under the Council of Ministers, and investors will be given up to 50-year contracts, compared with the current 25 years, with the possibility of renewal. They can have up to 100 percent ownership during the contract, according to Cuba’s foreign investment law.
Investors will be charged virtually no labor or local taxes and will be granted a 10-year reprieve from paying a 12 percent tax on profits. They will, however, pay a 14 percent social security tax, a 1 percent sales or service tax for local transactions, and 0.5 percent of income to a zone maintenance and development fund.
Foreign managers and technicians will be subject to local income taxes. All equipment and materials brought in to set up shop will be duty free, with low import and export rates for material brought in to produce for export.
However, one of the main complaints of foreign investors in Cuba has not changed: that they must hire and fire through a state-run labor company which pays employees in near worthless pesos while investors pay the company in hard currency.
Investors complain they have little control over their labor force and must find ways to stimulate their workers, who often receive the equivalent of around $20 a month for services that the labor company charges up to twenty times more for.
And investors will still face a complicated approval policy, tough supervision, and conflict resolution through Cuban entities unless stipulated otherwise in their contracts. And they must be insured through Cuban state companies.
The Mariel container terminal and logistical rail and highway support, a $900 million project, is largely being financed by Brazil and built in conjunction with Brazil’s Grupo Odebrecht SA. The container facility will be operated by Singaporean port operator PSA International Pte Ltd. The terminal is scheduled to open in January.
Future plans call for increasing the terminal’s capacity, developing light manufacturing, storage and other facilities near the port, and building hotels, golf courses and condominiums in the broader area that runs along the northern coast and 30 miles (48 km) inland.
Mariel Bay is one of Cuba’s finest along the northern coast, and the port is destined to replace Havana, the country’s main port, over the coming years. The Mariel terminal, which will have an initial 765 yards (700 meters) of berth, is ideally situated to handle U.S. cargo if the American trade embargo is eventually lifted, and will receive U.S. food exports already flowing into the country under a 2000 amendment to sanctions.
Plans through 2022 call for Mariel to house logistics facilities for offshore oil exploration and development, the container terminal, general cargo and bulk foods facilities. Mariel Port will handle vessels with up drafts up to 49 feet (15 meters) compared with 36 feet (11 meters) at Havana Bay due to a tunnel under the channel leading into the Cuban capital’s port.
The terminal will have an initial capacity of 850,000 to 1 million containers, compared with Havana’s 350,000.
By Arch Ritter
It is with great sadness that we mourn the death of Oscar Espinosa Chepe, who passed away today, Monday September 23 2013, in Madrid with his wife Miriam Leiva by his side. He had been seriously ill with a liver disease and had gone to Spain for treatment.
Oscar will be seriously missed. His was always a voice of reconciliation among Cubans and between the United States and Cuba. He argued strongly against US interference and spoke for Cubans solving their own problems. His was always a voice championing democracy and good economic sense, un-beholden to the powers that be. He and Miriam displayed immense courage, speaking their minds and stoically accepting the consequences imposed by the authorities.
We are fortunate that Miriam will undoubtedly continue her own independent journalism and activism for reconciliation and democratization.
Oscar became, over time, an independent analyst on the Cuban economy. From 1965 to 1968, however, he was in an Economic Advisory Group to the President. After some disagreements regarding economic policy, he was demoted and sent to work in the fields. He was later reinstated as a professional economist in the government with the support of Carlos Rafael Rodríguez and then worked for some years in Belgrade on Cuba’s economic cooperation with Hungary, Czechoslovakia, and Yugoslavia.
Returning to Cuba, he was employed in the National Bank of Cuba until 1996 when he was fired, again for his critical views on economic policy. He then began his independent analytical work until he was arrested in the “Black Spring” of March 2003 along with 75 other dissidents. He was sentenced to twenty-year incarceration for “activities against the integrity and sovereignty of the State.” Amnesty International declared him a “prisoner of conscience.” He was released early after about two years due to illness.
Oscar then continued to make his own analyses of economic issues from 2005 into 2013. Most recently, he published a book length study of Cuban economic policy[i] and contributed to another book[ii], edited by Ted A. Henken, Miriam Celaya, and Dimas Castellanos, forthcoming in 2013.
[i] Espinosa Chepe, Oscar. 2011. “Cambios en Cuba: Pocos, Limitados y Tardíos,” Havana. http://reconciliacioncubana.files.wordpress.com/2011/03/cambios-en-cuba.pdf.
[ii] Espinosa Chepe, Oscar, and Ted A. Henken. 2013. “Economics,” in Cuba, edited by Ted A. Henken, Miriam Celaya, and Dimas Castellanos. Santa Barbara, CA: ABC-Clio,