Author Archives: Ritter Arch

THE SHERRITT–CUBA JOINT VENTURE: UNCERTAINTIES FOR BOTH PARTNERS

By Arch Ritter  

September 6,  2016

Cuban nickel production and the Sherritt-Cuba joint venture should have good prospects in view of Cuba’s large and low-cost reserves of nickel. Sherritt’s technology and probable future demand.  However, there are a number of looming issues that darken the horizon for Sherritt and to a lesser extent for Cuba including high transportation costs – shipping nickel/cobalt concentrate from Cuba to Fort Saskatchewan Alberta – together with the “Helms-Burton” status of the mine, and future price levels and volatility..

The Moa mine and processing facility, with a 25,000 ton capacity, were initially constructed by US interests – the Moa Bay Mining Company, a subsidiary of Freeport Sulphur. They used proprietary technology from Sherritt, which had pioneered hydrometallurgy processes at their plant in Fort Saskatchewan Alberta. Extraction and processing began in 1959.

The Government of Cuba then expropriated the operation without compensation in August, 1960 and restarted it in 1961 producing concentrate for the Soviet Union.  The US Foreign Claims Settlement Commission (US FCSC) valued the company at US$ 88.4 million at the time of the expropriation.

Sherritt’s direct connection with Cuba began in 1991 with purchases of Cuban nickel concentrate for its Alberta refinery.  Sherritt had had insufficient volumes of concentrate for many years and in 1990 a refining contract with INCO expired. In 1994, Sherritt International and the Compania General de Niquel of Cuba established a 50/50 joint venture, which now owns the Moa extraction, processing, and smelting operation, the Alberta refinery and the international marketing enterprise. The former President of the company, Ian Delaney, also negotiated agreements with the Cuban Government, permitting Sherritt to enter other sectors of the economy, including electric energy, oil and gas, agriculture, tourism, transportation, communications, and real estate. By 2000, Sherritt International had become a major diversified conglomerate in Cuba.

In this deal, the Cuban Government became and is currently a foreign investor in Canada, as the Compania General de Niquel owns 50% of the nickel refinery, a fact not well known in either Cuba or Canada.

The joint venture between Sherritt International and the Government Cuba is a cooperative masterpiece.  It has generated great benefits for both parties.

 I.         The Nickel/Cobalt Operation

The linking of the Moa nickel deposit and part of Cuba’s processing capacity with the Alberta refinery and its access to attractive energy sources was a stroke of genius and/or good luck for Sherritt and Cuba.

Cuba acquired a market for its nickel concentrate. It acquired access to the technological improvements that have occurred from 1959 to 2016.  These have generated improvements in productivity, energy efficiency, environmental impacts, and health and safety.  It acquired Sherritt’s managerial know-how which. Together with technological improvements, have increased production from around 12,500 tons in the early 1990s to around 34,000 tons in the 2010s.zzzzz3The Government of Cuba is now the joint owner of a vertically integrated nickel operation, from extraction and concentrating through to refining and international marketing. Cuba also has obtained new technologies and managerial skills for oil and gas extraction and utilization, as well as electricity generation.  Cuba’s nickel reserves are fifth largest in the world and production volumes are 10th largest.[i] Nickel has been Cuba’s largest merchandise export since the collapse of sugar by 2002. Foreign exchange earnings from the Sherritt-Cuba joint venture’s share of nickel and cobalt exports have averaged about 40% of total nickel/cobalt exports.

It is not surprising that Ian Delaney became known as “Fidel’s Favorite Capitalist”!

For its part, Sherritt has been able to maintain its Canadian refinery and to use its base in nickel to enter other sectors in Cuba. Its earnings from its Cuban operations are significant. The joint venture has been able to increase metal production and achieve high net operating earnings, which have been in the area of 40 to 50 percent of the company’s gross revenues for most years, depending on international nickel prices.  The following chart illustrates Cuba’s total nickel production volumes.  The impact of Sherritt’s innovations in increasing production volumes in the second half of the 1990s is apparent.

 II.        Petroleum, Natural Gas and Electric Power

Sherritt International’s petroleum and natural gas activities also have been successful. New sources of oil and gas have been discovered and extraction rates have increased through enhanced recovery techniques from 1996 to 2000. Natural gas recovery and utilization has also been improved through the construction of two processing plants, a feeder pipeline network, and a 30 Kilometer pipeline to Havana (Sherritt International, Annual Report, 1997, 13).

Sherritt invested CDN $215 million for the construction of two integrated gas processing and electrical generation systems. The natural gas feedstock previously had been flared and wasted. Commissioned in mid-2002, these operations had a combined capacity of 226 megawatts and generated a significant proportion of Cuba’s electricity. At the same time they reduced sulfur emissions, a potential problem especially at the Varadero site, which is adjacent to the hotel zone. By 2007, installed electricity generation capacity had been further increased to 375 mega watts, following an 85 MW expansion that came on stream in early 2006.

In February 1998, Sherritt acquired a 37.5 percent share of Cubacel, the cellular telephone operator in Cuba for $US 38 million, but this was resold. “Sherritt Green,” a small agricultural branch of the company, entered market gardening, cultivating a variety of vegetables for the tourist market. Sherritt also acquired a 25 percent share of the Las Americas Hotel and golf course in Varadero and a 12.5 percent share of the Melia Habana Hotel, both of which were managed by the Sol Melia enterprise but these also have been divested.  By 2010, Sherritt’s Cuban operations were large and growing. Gross revenues reached CDN $1,040 million in 2008.

 III.      Energy Costs, Transport Costs and Potential Relocation

However, there are a number of clouds on the horizon for Sherritt. First, Cuban nickel concentrate is transported by ship to the east coast of Canada and then overland to the Alberta refinery. This makes some sense economically when energy prices are low.  So far, the existence of the refinery there has compensated for high transportation costs. However, if – or when –transportation costs rise with higher energy prices or when full normalization with the United States occurs or when the existing plant reaches the end of its useful life, would a different location become more attractive?   Energy sources are also available in Venezuela as well as the Gulf of Mexico region of the United States or could be transported to Cuba itself in future.  At some point it will likely make sense to relocate a refinery to a locale closer to the nickel ore body.

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So far, Cuba is tied to the Canadian location through its 50% joint ownership of the Alberta refinery. But would Sherritt relocate the refinery to a lower-risk Cuba at some time in the future, or to the post-embargo United States or a post-Maduro Venezuela?  Perhaps. However, Alberta will continue to have competitive energy prices and low risk to compensate for its locational disadvantage for some years to come.

 IV.       “Helms-Burton” Status of the Mine Properties.

The second possible problem for Sherritt is that the Moa mine and the concentration plant are “Helms-Burton” properties for which there are US claimants. What would be the current value of the Using the US FCSC interest rate of 6% per year of non-payment, the 2016 compounded value would be a whopping US$ 2,054.6 million. Obviously there will be a negotiations problem for this and all other such claims.

Resolution of the compensation claims issue with full US-Cuba normalization may require Sherritt and the Government of Cuba to negotiate some sort of compensation package for the original US owners.  In one scenario, the US claimants would simply take over the Cuba-Sherritt operation in Cuba. But this would not be reasonable because at this time, the refinery for Cuban nickel is in Alberta and it is jointly owned by Cuba. My guess, however, is that Sherritt, the Government of Cuba and the US claimants will negotiate an arrangement that will be reasonable for all parties.

In any case, the claim of US interests on the mine property generates ambiguities and uncertainties and will be problematic at some time in the future. Sherritt International may well be one of the few economic interests that perhaps could lose from US-Cuban complete economic normalization. A resolution of the property claims issue may turn out to be very expensive for Sherritt. .

 V.        “Nickel Pig Iron”

A technological advance in the production of “Nickel Pig iron” (NPI), a substitute for refined nickel-steel alloys for some uses where high quality is less necessary.  “Nickel pig iron” may well have already captured a portion of the nickel market for low quality alloys.  In future, it may reduce the demand for nickel thereby placing downward pressures on nickel prices. This will likely reduce and Cuba’s foreign exchange earnings and Sherritt’s revenues and profits from nickel exports in future.

As illustrated in Chart 2, nickel prices spiked in the boom of 2003-2007 – helping to generate a period of relative prosperity for Cuba – then declined in the recession of 2008.  What is striking at this time is that in real inflation adjusted terms, the price of nickel in 2015 and 2016 is pretty much where it was in the 1990s. A number of factors are contributing to this of course, especially the growth rate deceleration in China reducing the demand for nickel.  Is “nickel pig iron” also contributing to weak demand for nickel at this time?  What will be its impact in future?

 zzzzz2

Source: United States Geological Survey, Minerals Information, Nickel: Statistics and information., various years. The “real” or “inflation adjusted” price is the US consumer price deflator.

In conclusion, Sherritt has had a great run in Cuba, contributing to improved nickel production and exports, higher foreign exchange earnings for Cuba and high revenues and profits for itself, especially in the 2004-2014 decade.  The future may be less brilliant for both with the uncertainties of resolving the property claims issue and a possible slow=down in international demand for nickel generated in part by “nickel pig iron.”

[i] United States Geological Survey, Commodity Surveys, Nickel, 2016. http://minerals.usgs.gov/minerals/pubs/commodity/nickel/mcs-2016-nicke.pdf

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DOES CUBA HAVE A FUTURE IN MANUFACTURING?

By Archibald R. M. Ritter

June 7 2016.

 Complete Article Here:  A Futute in Manufacturing? June 7 2016

Cuba has experienced a serious “de-industrialization” from which, by mid-2016, it had not recovered. The causes of the collapse are complex and multi-dimensional. The consequences include job and income loss, the loss of an important part of its economic base, the loss of much of the potential for export expansion and diversification, and rust-belt style industrial and urban decay. Can Cuba‘s manufacturing sector recover from this collapse? What can be done to reverse this situation?

I.       THE COLLAPSE OF MANUFACTURING, 1989-2014

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II.   CAUSAL FACTORS ANE CONSEQUENCES

III.  THE “LINEAMIENTOS” ON MANUFACTURING

IV. WHAT MIGHT BE THE SUCCESSFUL MANUFACTURING SUB-SECTORS IN FUTURE? 

V.  A POLICY ENVIRONMENT FOR THE PROMOTION OF MANUFACTURING

 CONCLUSION

 Does Cuba have a future in manufacturing?  There are some general comparative advantages as well as disadvantages for manufacturing that Cuba is facing as of mid-2016. First, the disadvantages:

  • Cuba’s manufacturing base has collapsed significantly;
  • Its capital stock and infrastructure generally is decayed and obsolete;
  • Low investment levels impede up-grading the capital stock;
  • Human skills relevant for manufacturing are badly decayed, mis-fitted and obsolete;
  • Cuba’s domestic market size small due mainly low real income levels;
  • Agglomerative and scale economies are minimal.

.But Cuba also has important advantages:

  • Cuba’s citizens generally are well-educated with an incentive for further learning;
  • Many Cuban citizens are energetic, creative, and entrepreneurial;
  • Cuba has a some strong manufacturing sub-sectors such as  pharmaceutical products and traditional products (beverages and tobacco);
  • Cuba has potential in some agricultural products, namely fruits and vegetables;
  • Cuba will be able to capitalize on its locational advantage with respect to the US market;
  • The potential symbiotic relationship between Cubans on the Island and the Cuban-American community will stimulate the future development of economic activities in many areas, including manufacturing.

So, does Cuba have a future in manufacturing?

The answer is “Yes” – if policy reforms are significant and expeditious regarding further enterprise liberalization and taxation and if successful monetary and exchange rate reform lead to currency convertibility.  (However, I am a pathological optimist.)

A broad-based industrial revival for Cuba is possible but will be difficult.

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U.S.-CUBA NORMALIZATION AND THE ZIKA VIRUS RISK: PROBABLE IMPACTS ON CUBAN AND CARIBBEAN TOURISM

By Arch Ritter, March 14, 2016

Tourism has been the spectacular growth sector for Cuba since the beginning of the “Special Period” in 1990.  Tourist numbers have increased 10-folds in the quarter-century from 1990 to 2015, as illustrated in Chart 1.  Foreign exchange earnings from tourism have increased correspondingly.  Canada has been by far the largest source of tourists. Indeed, Cuba’s best friend throughout the “Special Period” has been the Canadian winter.

Now with full normalization of U.S. – Cuban relations “en route,” huge prospective increases in U.S. tourism will have major impacts on Canada but also perhaps on other Caribbean tourist destinations.  What might these impacts be?

Chart 1. International Tourist Arrivals, 1990-2015, Thousands. y Source: Oficina Nacional de Estadisticas, Government of Cuba, various issues, Access3ed February 23, 2016

The Coming U.S. Tourism “Tsunami” to Cuba!

Full normalization of U.S. – Cuban relations in time will bring unrestricted travel for U.S. citizens to Cuba. This will lead to a deluge of US visitors. Among the varieties of U.S. tourists would be the following:

  • Curiosity tourists. There will be a huge tourist influx of US citizens wanting to see Cuba for the first time since 1961. Relatively few US citizens appear to have broken US travel restrictions so that the pent-up demand is enormous.
  • Family Reunification tourists. When all controls are lifted on the US side for travel to Cuba, a further increase in short-term visits by Cuban-Americans for family purposes is likely to occur – following major increases already.
  • Sun, Sea and Sand tourists. Many US citizens, especially from the North Eastern and Central parts of the country will likely follow the winter-escaping Canadians to Cuban beaches for one to two week periods.
  • “Snow-bird” tourists. Some US citizens, mainly retirees, will spend several of the winter months in Cuba.
  • Retirement tourists. With normal U.S.- Cuban relations, some citizens of the northern part of the United States, especially Cuban-Americans in new Jersey, may decide to reside for half the year or so in Cuba returning to the U.S. for the other half of the year or even the whole year in Cuba, if their pensions permit it.   Permitting the purchase of time share condominiums would facilitate both snowbird and part-time retirement tourism.
  • Medical tourists. There may be some travel to Cuba for access to medical services which will likely continue to be inexpensive relative to the United States.
  • Convention tourists. Short-term visits for conventions could increase significantly.
  • Cultural and Sport tourists. One might expect more visits for purposes of interacting with and experiencing Cuban art, music, cinema, and sports.
  • Educational tourists. It is likely that American students and teachers at various levels would enroll or visit Cuban institutions of higher learning or cultural and sports centers for courses, years abroad, sabbaticals, language training etc., in much greater numbers than have been possible under the embargo.
  • March-Breaker” tourists. Students from the US are likely to try a visit to Cuba for the March Break, instead of the Maya Riviera, Florida or elsewhere.

One can only guess at the future volumes of U.S. tourists to Cuba. One could imagine it quickly doubling the 2015 Canadian level (1,300,092 tourist arrivals) and then redoubling again to 5.2 million and then beyond, as Cuba’s capacity to accommodate more tourists expanded. The total number of tourists then could reach about 8 million by 2022 – or many more if tourism from other countries also increases and does not get “squeezed out.”  (However, U.S. “curiosity tourism” will peak and then subside over the next four or five years following complete normalization.)

This would perhaps lead to an increase Cuba’s total foreign exchange earnings from tourism to about $US 8.0 to 9.0 billion by 2022, up from the estimated level of $US 2.98 billion in 2015 (extrapolating from ONE’s 2014 statement of tourism earnings and 2015 total numbers of tourists.)  This would replace the foreign exchange earnings and the semi-obscured subsidization that Cuba has been receiving from Venezuela which looks totally unsustainable at this time.

The expansion of tourism is great news for Cuba, and will lead to

  • increased foreign exchange earnings for the country,
  • a construction boom in resorts and tourist facilities,
  • a major increase in incomes for the growing private sector servicing tourism (bed and breakfasts, restaurants, travel and guide services among others),
  • higher tax revenues of many sorts, and
  • generalized improvement as real incomes of citizens improve.

The downside is that success in the tourism sector may reduce the urgency of reviving the manufacturing sector which is still operating at close to 50% of the level it had achieved in 1988 before the economic meld-down.

 Will “El Cheapo” Canadian Tourism be Squeezed Out?

Will the increase in U.S. tourism to Cuba crowd out the Canadian tourists who constituted 37% of all tourists to Cuba in 2015%.  Maybe. But U.S. “curiosity tourism” will most likely focus on Havana and the historical areas of Cuba rather than the beaches so that the Canadians at the beach resorts would not be pushed out for some time, at least mot physically!

 yy Source: ONE Anuario Estadistico de Cuba, 2015 Table 15.3), Accessed February 23, 2016

 Most Canadian tourists head to the beach with a package tour – going to Havana or another city on a day’s excursion.  For this reason, they have been sometimes derided as “el cheapo” tourists who spend as little as they can in the Cuban economy.  There may be some truth in this, but most other tourists also are in similar package tours. If prices were to rise significantly with the influx of U.S. tourists, one could expect that some Canadian tourists would switch to other Caribbean destinations. This could indeed happen to some extent, especially if the winter-time “sun, sea and sand” tourism from the United States increases greatly.

Chart 3 Tourist Arrivals, Major Caribbean Countries, 1995 – 2013

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Table 1. Caribbean Tourist Arrivals and Earnings, 2010 and 2014 yyyy1

Source: United Nations World Tourism Organization, Annual Report 2014, p.6.  http://www.e-unwto.org/doi/pdf/10.18111/9789284416899, Accessed February 29, 2016

Will Other Caribbean Destinations Lose Out to Cuba?

There has been some fear that other Caribbean tourist destinations would lose when U.S. citizens start flocking to Cuba.  This indeed is a legitimate fear.

A glimpse at the past 25 years suggests that the impacts on other Caribbean destinations in general may be mixed. A glance at Chart 3 indicates that some other major destinations, including the Dominican Republic, Jamaica and the other “Caribbean Small States” in general have been able to withstand the growing competition from Cuba and have continued to expand significantly in terms of tourist arrivals over the 1995-2013 period. The expansion of tourism in the Dominican Republic is especially notewortheyPuerto Rico is the major exception along with The Bahamas.  Both have lost its shares of tourist arrivals and of revenues in the brief 2010-2014 period as indicated in Table 1.  Surprisingly, Cuba increased its share of tourists in the region, but its share of tourist revenues actually declined.

There is one reason for optimism with respect to the other Caribbean destinations.  Much of the prospective U.S. tourism to Cuba will not be of the “sun, sea and sand” variety, but will be of the other varieties especially “curiosity tourism.”  But what most of the other Caribbean Islands offer is a beach “escape-from-the-winter” holiday. They may therefore be less vulnerable to a tourism “shifting to Cuba” effect.

A small compensation will be that if Canadians are squeezed out of tourism in Cuba with the onslaught of U.S. beach resort tourists, they will likely go to other Caribbean destinations. However, there is also great affection on the part of many Canadians for Cuba as a tourism destination, and the return again and again and again!

Furthermore, international tourism generally has been growing steadily in the post-World War II period and there is little likelihood that this will cease unless the world enters a deep and prolonged recession.  Tourism in the Caribbean generally has been increasing steadily as well.  The overall expansion of tourism in the region should help compensate for any diversion of U.S. tourists from the other Caribbean islands to Cuba.

Will the Maya Riviera be hit with a diversion of U.S. tourists to Cuba?  This may well happen to some degree.  However, the Mexican Yucatan region is a highly attractive tourist waterfront destination with other major attractions. A beach holiday can be combined with archaeological tourism with a visit to the ancient Maya cities of Uxmal and Chichen Itza (both World Heritage Sites), Tulum, to less well-known but quite incredible Calakmul (another World Heritage Site) and Kohunlich and innumerable smaller sites. As well as this is the Colonial legacy in many small towns as well as Merida and Campeche (still another World Heritage site.)   In the long term, the Yucatan should certainly be able to hold its own.

 The Zika Virus Risk to Cuba’s Population and Tourism

While it is not known whether or not the  Zika Virus, linked to birth defects elsewhere in Latin America, has arrived in Cuba, there can be no doubt that it will. If, as seems increasingly certain, the Zika virus is primarily transmitted by the female Aedes aegypti, then pregnant women in Cuba would be at grave risk. This would likely have a major impact on the tourist sector and the Cuban economy generally – as well as tourism elsewhere in the Caribbean and tropical parts of the world, as suggested by the accompanying map.

Cuba has had long and reasonably successful experience in containing the dengue virus that has affected many people and also the rarer Chikungunya virus, a disease that causes fever and severe joint pain.  Both are also spread by some branches of the Aedes aegypti mosquito.  This has been achieved with frequent fumigation of homes, public and buildings and clean-up of stagnant waters that are the breeding grounds of the mosquitos.

 Map 1. Probable Occurrence of Aedes Aegypti in the Caribbean Region zika 2

Source: Wikipedia, Zika Virus, accessed February 29, 2016

Note: Global Aedes aegypti predicted distribution. The map depicts the probability of occurrence (blue=none, red=highest occurrence).

 On February 23, a public program was announced to deal with the potential problem. This involves:

  • using the army to expedite fumigation spraying,
  • calling on the somewhat moribund neighborhood associations – the Comites por la Defensa de la Revolucion – to promote public education,
  • a general clean-up of the streets and stagnant waters and
  • improved garbage disposal arrangements.

Judging from recent reports from Cuba these programs have been implemented quickly and people are already adjusting their behavior to eliminate the mosquito vector of the disease and in their normal living arrangements (using mosquito nets at night for example.)

Cuba’s public health system is very strong and its actions already seem to be determined and serious.  Cuba will probably be able to deal with the mosquito and the disease very effectively. Obviously effective action is imperative to protect Cuba’s people and future generations.

What will be the effect on Cuba’s tourism and its tourism-dependent economy?  Already there are concerns on the part of young women and especially of course pregnant women regarding travel to Cuba. This will undoubtedly have an impact, very minor one hopes, on Cuba as well as on the rest of the countries in the region.  But it is probable that Cuba’s public health system will minimize and hopefully eliminate the problem. If so, tourism will not be affected that seriously.

 Conclusion

In summary, if managed wisely, Cuba can look forward to greatly expanded and economically beneficial tourist boom with full normalization of relations with the United States. This may generate some collateral damage for Canadian tourists who may face a crowding out and pricing out effect, but this will likely be modest and would likely benefit other Caribbean countries. Within the Caribbean region, some countries may feel pressure from the diversion of U.S. beach resort tourists, but most of the bigger destinations have held their own in the last few decades and will continue to do so.

A question mark and potential risk for the tourist sector – and more importantly for the whole population and for future generations in Cuba and many tropical regions is the Zika virus. This will likely hit Cuba in time if it has not already. But resolute policy, education and action have begun to deal with Zika.  Cuba’s past successful programs for controlling the dengue virus should facilitate rapid and effective action against Zika.

With respect to tourism in summary, the positive economic impacts of the coming U.S. tourism tsunami should far outweigh any possible effects of the Zika virus, which will likely be successfully controlled.

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Cuba’s Best Friend of the 1990s: The Canadian Winter

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Cuba’s Best Friend of the 2016 Onward: The Curious American Tourist !

> on February 26, 2015 in Havana, Cuba.

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ALTERNATIVE INSTITUTIONAL FUTURES FOR CUBA’S MIXED ECONOMY

Archibald Ritter                                                                                          

February 1, 2016

Since 2010, Cuba has been implementing a redesigned institutional structure of its economy. At this time it is unclear what Cuba’s future mixed economy will look like. However, we can be sure that it will continue to evolve in the near, medium and longer term. A variety of institutional structures are possible in the future and there are a number of types of private sector that Cuba could adopt. Indeed it seems as though Cuba were moving towards a number of possibilities simultaneously.

The objective of this note is to examine a number of key institutional alternatives and weigh the relative advantages and disadvantages for each arrangement.  All alternatives include some mixture of domestic or indigenous private enterprises, cooperative and “not-for-profit” activities. foreign enterprise on a joint venture or stand-alone basis, some state enterprises (in natural monopolies for example) and a public sector.  However, the emphasis on each of these components will vary depending on the policy choices of future Cuban governments.

The possible institutional structures to be examined here include:

1. Institutional status-quo as of 2016;

2. A mixed economy with intensified “cooperativization”;

3. A mixed economy, with private foreign and domestic oligopolies replacing the state oligopolies;

4. A mixed economy with an emphasis on indigenous small and medium enterprise.

 Option 1. Institutional Status-Quo as of 2016

The institutional “status quo” is defined by the volumes of employment in the registered and unregistered segments of the small enterprise sector, the small farmer sector, the cooperative areas, the public sector, and the joint venture sector, plus independent arts and crafts and religious personnel.  The employment numbers are mainly from the Anuario Estadístico de Cuba together with a number of guesstimates, some inspired by Richard Feinberg (2013). The guesstimate for unregistered employment in the small enterprise sector may seem exaggerated. However, a large proportion of the “cuentapropistas” utilize unregistered workers and a proportion of the underground economy does not seem to have surfaced into formally registered activities.  These employment estimates by institutional area are presented in Table 1 and illustrated in Chart 1, which also serve as a “base case” for sketching the other institutional alternatives.

Table 1 z zz

The current institutional status quo has a number of advantages but also some disadvantages. On the plus side, adhering to the status quo would avoid all the uncertainties and risks of a transition.  It would maintain the possibility of “macro-flexibility,” that is the ability for the central government to reallocate resources by command in a rapid and large scale fashion. However, in view of the numerous “macro errors” made possible by a centralized command economy (the 10 million ton sugar harvest of 1970, the “New Man” endeavor, shutting down half the sugar mills), “macro-flexibility” may be a disadvantage.  There are major advantages for the Communist Party in maintaining the institutional status quo in the economy, namely enabling political control of the citizenry (a disadvantage from other perspectives) and continuing state control over most of the distribution of income (also a disadvantage from other perspectives).  The approach also helps foster good relations with North Korea (I am running out of advantages).

There are also major disadvantages. The centralized planned economy and public enterprise system generates continuing bureaucratization of production; continuing politicization of state-sector economic management and functioning; continuing lack of an effective price mechanism in the state sector and continuing perversity and dysfunctional of the incentive structure. The result of this is damage to efficiency, productivity and innovation.

 OPTION 2. Mixed Economy with Intensified “Cooperativization”

zzzA second alternative might be to promote the authentic “cooperativization” of the economy in a major way.  This would involve permitting cooperatives in all areas, including professional activities; opening up the current approval processes; encouraging grass-roots bottom-up ventures; providing import & export rights; and improving credit and wholesaling systems for coops.

 This approach has a number of advantages. First, it would strengthen the incentive structure and elicit serious work effort and creativity on the part of those in the coops.  This is because worker ownership and management provides powerful motivation to work hard and profit-sharing ensures an alignment of worker and owner interests. This approach would generate a more egalitarian distribution of income than privately-owned enterprises. Cooperatives may possess a greater degree of flexibility than state and even private firms because their income and profits payments to members can reflect market conditions. Perhaps most important, democracy in the work-place through effective and genuine coops is valuable in itself and constitutes an advantage over both state- and privately-owned enterprise.  [Workers’ ownership and control proposed in Cuba’s cooperative legislation is ironic and perhaps impossible since Cuba’s political system is characterized by a one-party monopoly.  On the other hand it may help propel political democratization.]

The “second degree cooperatives” or “cooperative coalition of cooperatives” called for in the cooperative legislation is particularly interesting as it may permit  reaping organizational economies of scale (a la Starbucks, McDonalds, etc. ) for small Cuban coops in these areas.

An emphasis on cooperatives would help to maintain ownership and diffused control and profit-sharing among local citizens, thereby promoting greater equity in income distribution.

But cooperatives also face difficulties and disadvantages.  First, are they really more efficient than state and private enterprises? Generally speaking, cooperatives have passed the “survival test” but have not made huge inroads against private enterprise in other countries over the years.  Perhaps this is because the “transactions costs” of participatory management may be significant.  Personal animosities, ideological or political differences, participatory failures and/or managerial mistakes may occur.  And for larger coops, complex governance structures may impair flexibility.

 Second, Cuba’s actual complex co-op approval process is problematic and creates the possibility of political controls and biases. Certification of professional cooperatives is unclear. Also, the hiring of contractual workers is problematic

  • The “Hire or Fire after 90 days” rule may curtail job creation;
  • The 10% limit on contractual labor also may curtail job creation;
  • Governance may be impaired if uncommitted workers have to join.

Finally, what will be the role of the Communist Party in the cooperatives?  Will it keep out of cooperative management?  Will Party control subvert workers’ democracy and deform incentives structures?

OPTION 3. Wide Open Foreign Investment Approach zzzzA third possibility would be to open up completely to foreign investment. This would involve a rapid sell-off of state oligopolistic enterprises to deep-pocket foreign buyers such as China, the United States (in due course), Europe, Brazil, or elsewhere.  The buyers might be the Walmart’s, Lowes, Subways, or Starbucks of this world, wanting to acquire major access to the Cuban market. This is a strong possibility if existing state oligopolies (e.g., CIMEX and Gaviota) were to be privatized in big chunks. The policy requirements for this approach to occur would be rapid privatization plus indiscriminate direct foreign investment and takeovers by large foreign firms.

 This approach does have some advantages.

  • It would generate large and immediate revenue receipts for the Cuban government;
  • It would lead to large and rapid transfers into Cuba of financial resources; entrepreneurship and managerial talent; physical capital (machinery and equipment and structures); most modern technology embedded in machinery and equipment; and personnel where and when necessary;
  • The results would be rapid productivity gains, higher-productivity work and rapid GDP gains.

However, there would also be disadvantages such as:

  • Profits would flow out ad infinitum;
  • Income concentration: profits to foreign owners (e.g. the Walton family of Arkansas who practically own Walmart) and profits to oligopolistic domestic owners;
  • Oligopolistic economic structures would be damaging in the long run;
  • There would be a strengthened probability of lucrative employment and ownership for the civilian and military “Nomenclatura”;
  • Blockages or inhibitions to the development of Cuban entrepreneurship;
  • “Walmartization” of Cuban culture; dilution of Cuban uniqueness;
  • Further reduction of the potential for diversified manufacturing in Cuba (e.g. due to the  Walmart/China  mass-purchaser/mass-supplier symbiosis);
  • Probably a blockage of export diversification.

 OPTION 4: Pro-Indigenous Private Sector in a Mixed Economy

zzzzzA fourth possibility would be for Cuba to promote its own small-, medium- and larger enterprises in an open mixed economy. This would require

  • An “enabling environment” for micro, small and medium enterprise with a reasonable and fair tax regimen; an end to the discrimination against domestic Cuban enterprise (See Henken and Ritter, 2015, Chapter 7);
  •  The establishment of unified and realistic monetary and exchange rate systems;
  •  Property law and company law.

A liberalization of micro-, small and medium enterprise would also be necessary to release the creativity, energy and intelligence of Cuban citizens.  This would involve open and automatic licensing for professional enterprises;  an opening up for all areas for enterprise – not only the “201”; permission for firms to expand  to 50 + employees in all areas; creation of wholesale markets for inputs; open access to foreign exchange and imported inputs;  full legalization of “intermediaries” ; and permission for advertising.

 This approach has some major advantages:

 Oligopoly power would be more curtailed compared to Option 3;

  • The economy would be more competitively structured with all the benefits this generates;
  • It would encourage a further flourishing and evolution of Cuban entrepreneurship;
  • It would permit the development of a diversified range of manufacturing and service activities and also a greater diversification of exports;
  • It would provide a reduced role for the “Nomenclatura” of military and political personnel and their families that would otherwise gain from the rapid privatization of state enterprises;
  • It would decentralize economic and thence political power and reduce the power for government to exert political influence through economic control;
  • It would generate a more equitable distribution of income among Cuban citizens and among owners than Option 3;
  •  Profits would remain in Cuba;
  •  There would be a stronger maintenance of Cuban culture.

There would be some disadvantages with this approach.

  • There would be no massive and immediate cash infusion to Government from asset sell-offs.   Or is this an advantage?  [more effective use of in-coming revenues]
  •  Perhaps there would be a slower macroeconomic recuperation;
  • There would be slower inflows of technology, finance, managerial know-how – but more domestically controlled.

Conclusion

Most likely, Cuban policy-makers in the government of Raúl Castro, the government of his immediate successor, and future governments of a politically pluralistic character will design policies that ultimately will lead to some hybrid mixture of the above four possibilities.  I of course will have little or no say in the process. However, my personal preference would be for an economy resembling the structure in the accompanying chart, with a large “indigenous” private sector, a significant cooperative sector, of course a large public sector for the provision of public goods, a small sector of government-owned enterprises, and a significant private foreign and joint venture sector. zzzzzzSo my bottom-line recommendations for current and future governments of Cuba would be:

  1. Utilize Cuba’s abundant resource — well-educated, innovative, strongly-motivated entrepreneurship — effectively, by further liberalizing the regulatory and fiscal regime for the indigenous micro-, small and medium enterprise sector, thereby also promoting Cuba’s indigenous economic culture;
  2. Use Cooperatives and “Coops of Coops” where possible;
  3.  Avoid “Walmartization” & homogenization of Cuban economy and culture by utilizing an activist policy towards direct foreign investment.

Bibliography

Feinberg, Richard E., Cuba’s Economic Change in Comparative Perspective, Brookings Institution, 2013

Oficina Nacional de Estadísticas, Anuario Estadístico de Cuba, 2014

Ritter, Archibald and Ted Henken, Entrepreneurial Cuba, The Changing Policy landscape, Boulder Colorado: Lynn Rienner, 2015

 

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HOW GREAT IT IS TO BE ABLE TO “THROW THE RASCALS OUT”!

By Arch Ritter

The people of Canada just changed governments, voting out the Conservatives under Steven Harper and voting in The Liberal Party of Justin Trudeau.  It was a hard-fought campaign, with the Liberals coming from a distant third place and gradually moving to first place by means of great campaigning, good policies, steadily improving leadership and a widespread dissatisfaction with the government of Steven Harper.  The win by the Liberal party represents generational change, the installation of a new team to form the government, new energy and intellectual entrepreneurship, and a new and improved rapport with the Canadian people.

How great it is to be able to “Throw the Rascals Out”!

The results of the election are illustrated graphically below.

“Old Regimes” in time become mired in their sense of entitlement, self-importance, paralytic conservatism, sclerosis, irrelevance, entrepreneurial lethargy, and intellectual exhaustion.

The regime of the Castro dynasty in Cuba continues to block any opening to an authentic pluralistic and participatory democracy. This is most likely largely because it fears that it would be voted out of office and lose its monopoly of political power and the perquisites of power. How nice it must have been for President Fidel Castro and now his brother Raul to know that they would never have to fight a free and fair election and that they would never wake up the next morning out of office and out of power – despite their long series of policy screw-ups.[i]

But whether Raul’s regime likes it or not, an opposition, though tightly or almost totally repressed at this time, will strengthen. Movement towards genuine participatory democracy will only intensify.  Generational change will come.

If Raul Castro were truly interested in the long term health of Cuba – and his own historical “legacy” – he himself would make moves towards such political pluralism. Unfortunately, this is improbable though perhaps not impossible

[i] Recall Fidel, 1970: ” We have cost the people too much in our process of learning. … The learning process of revolutionaries in the field of economic construction is more difficult than we had imagined.” Speech of July 26, 1970, Granma Weekly Review, August 2, 1970

xzzzz zzzzzz zz

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PAN-AMERICAN GAMES: THE REAL RESULTS.

PAN-AMERICAN GAMES: THE REAL RESULTS.

By Arch Ritter

Being a numbers junkie, I follow the Pan-American Games results – and those of the Olympics – with keen interest. However, I am always bothered by the commonly-used scoring systems that rank countries either but the total number of medals won, or the number of gold medals won.  Obviously these rankings are biased to the more populous and the wealthier countries and are therefore not all that valid. The bigger and wealthier countries such as the US and Canada can develop expertise in all the rarer and expensive sports like water-skiing, water boarding, sailing, and equestrian. Big countries like Brazil and Mexico, both reasonably well-off and with huge population bases can be expected to do well also.

One surprise outlier is always Cuba, which with its relatively small population achieves a strong medals ranking,  coming fourth in these games

But the real winners have always seemed to me to be the small Caribbean Islands with minuscule populations in some cases, yet with some medals to their credit.

REAL PAN-AMERICAN GAMES RESULTS

So I decided to recalculate the rankings of countries with respect to the Pan-American Games results. According to my system, explained below, the real winners are:

  1. Bahamas       (2 gold, 2 silver, 2 bronze)
  2. Antigua          (1 silver)
  3. St. Kitts and Nevis (1 bronze)
  4. Grenada         (1 bronze)
  5. St. Lucia         (1 bronze)
  6. Cuba                 (36 gold, 27 silver, 34 bronze)
  7. Barbados        (1 bronze)
  8. Trinidad and Tobago (3;3 2)
  9. Bermuda        (1 bronze)

10. Canada                     (78; 69; 70)

22. United States        (103; 81; 81)

24 Brazil                        (41; 40; 60)

The complete spread-sheet on which these rankings are based is here: Pan-American Games Real Results. You can play with them and re-calculate the rankings any way you like.

It is interesting that even using a population adjustment and Human Development Index adjustment, Cuba still performs exceptionally well, ranking 6th in this system despite a population of about 11.6 million.  Congratulations to Cuba. But congratulations also the Bahamas (#1) and the other Caribbean countries that make the top 9.  The countries with large populations such as the US, Brazil and Mexico obviously don’t do so well with this measurement arrangement.

Panamerican Games, The Real Results.METHODOLOGY

The revised rankings here are based on three adjustments to the raw medals data. First, a weight of “3” is given to gold; “2” to silver and “1” to bronze, generating the “weighted” results on the attached table. Second, the “weighted” results are recalculated on a per million population basis, leading to the “Per Capita” Ranking. Third, the “Per Capita” Ranking results are discounted by the UNDP Human Development Index, leading to the Final results and the HDI-adusted Ranking in the last column. The HDI adjustment was made to compensate for the unfair advantage that better-off countries possess, (with higher income levels and better health systems) that can afford to invest in expensive sports programs.

REAL RESULTS Spreadsheet:  Pan-American Games Real Results

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FREE ELECTIONS and AUTHENTIC (though IMPERFECT) DEMOCRACY: FUN! BESIDES EVERYTHING ELSE

By Arch Ritter

Winston Churchill might have been right when he said that democracy was the worst political system – except for all of the others!

What he neglected to say was that authentic participatory democracy is also ultimately FUN, despite the uncertainties and heartaches as well as jubilation and legitimacy that it generates.

Here are the results of two amazing elections this past week in Alberta Canada and the United Kingdom as well as the results of the elections in Cuba over the last half century.

  ALBERTA MAY 1 2015