Author Archives: Ritter Arch

Micro-enterprise Tax Reform, 2010: The Right Direction but Still Onerous and Stultifying

By Arch Ritter

As part of the policy reforms designed to absorb almost 1.2 million redundant state sector workers into the private sector, the Government of Cuba has modified the micro-enterprise tax regimen. Some of the modifications were positive in the sense that they will reduce the heavy tax burden on self-employment. However, the changes are modest, and the tax system will continue to limit job-creation and the expansion of micro-enterprise.

Bicitaxis, Central Havana

I. The New Tax Regime

The new taxation system, presented in the Gaceta Oficial, número 11, and Gaceta Oficial, número 12 on October 1 and 8, 2010, has five components:

1.      Sales Tax on Goods

2.      Tax on Hiring of Workers

3.      Income Tax

4.      Surtax on Services

5.      Social Security or Social insurance Payments

Taxes generally will now be payable in Moneda Nacional or “old” pesos. For purposes of tax payment, taxes owing in convertible pesos (CUCs) are to be exchanged into Moneda Nacional at the going quasi-official rate (around 22 to 26 “old” pesos per convertible peso, over the 2001-2010 period). There is a special regimen for bed-and-breakfast operations that is not considered here.

1. Sales Tax

This is a 10% tax levied on the value of sales of goods and payable by all micro-enterprises that do not qualify for the Simplified Tax Regime (See 3. below.)  While this tax in principle is reasonable and is used in most countries, the administrative cost of monitoring the value of sales and collecting the tax for the many of the smaller self-employed activities will be high.

2. Tax on the “Utilization of Labor”

This tax on the hiring of employees is set at “25% of 150%” (that is, 37.5%) of the average national wage which was 429 pesos per month in 2009 (ONE, AEC Table 7.4). The tax would thus be about 161pesos per month per employee or 1,932 pesos per year.

A “Minimum” requirement for the hiring of employees for tax determination purposes is set at two employees for paladares and one for other food vendors and a few other activities. There appears to be no exception or adjustment of the tax for part-time employees.

(Note that some 74 self-employment activities are prohibited from hiring employees and another 7 can hire one employee only.)

3. The Income Tax

There are two tax income regimes, a simplified regime for lesser self-employment activities and a more complex regime for larger activities.

The Simplified Tax Regime applies to some 91 activities. In place of the income tax, sales tax, tax on public services, they instead pay a consolidated tax, constituted by the monthly licensing fee which ranges from 40 to 150 pesos per month, payable in the first ten days of each month. (It is unclear whether overpayments would be refunded – they were not under the previous system.)

Other enterprises fall under the general tax regime, and pay all of the individual taxes discussed here. These activities pay the up-front monthly tax/license ranging from 40 to 700 pesos per month.

For the determination of the tax payment, the “tax base” is defined as total revenue less a fixed amount for deductible expenses. The maximum amounts allowed for deductible expenses range from 10% for 10 activities, 20% for room rental operations, 25% for 40 activities, 30% for 10 activities and 40% for 6 food and transport activities. (Bed and breakfast operations have their own specific regimen.)

The income tax rates rise progressively from 0% for the first 5,000 pesos, through 25% for additional income between 5,000 and 10,000, 30% for income increments from 10,000 to 20,000, 30% for 20,000 to 30,000, 40% for 30,000 to 50,000 and 50% for additional income exceeding 50,000.00 pesos. This rate is high but not unreasonable in international comparison.

4. Sales Tax on Services

A 10% additional sales tax is levied on services provided by micro-enterprise. Those enterprises qualifying for the Simplified Tax Regime are exempt from this tax.

5. Social Security Payments

These payments are destined ultimately for old age support, maternity leave, disability and death in the family. They are determined according to a scale that the self-employed worker selects, and may range from 25% of 350 to 2000 pesos per month depending on the choice of the self-employed person. This is a social insurance scheme though the payments are similar to taxes.

II. Evaluation of New Tax Arrangement

This new tax regime represents a minor improvement over the previous regime. The main improvement is that it permits the deduction as costs of production of more than a maximum of 10% of total revenues as was the case previously. This is a reasonable adjustment to the tax base as most of the self-employed activities generate costs that are higher than the maximum allowable 10% of total revenues.  This is especially beneficial for activities such as gastronomic, transport and handy-craft or artisan activities for which input costs are far beyond 10% of total revenues.

The progressive structuring of the income tax regime is reasonable though stiff.

However there are a number of flaws in the taxation regimen which will continue to stunt the development of small enterprise and will prevent the absorption of the redundant workers being displaced from the public sector.

1. The Blocking of Job-Creation

First, the tax on employment is problematic as it adds to the employer’s cost of hiring a worker. The obvious impact of this tax will be to limit hiring and job creation. Or employment will be “under the table”, unrecorded, and out of sight of officialdom.

2. Onerous Overall Tax Levels

The overall tax level is punitive. The sum of the income tax, employee hiring tax, and public service surtax is high- and as noted below can help create effective tax rates exceeding 100%, as is explained on Section III. This will continue to promote non-compliance. It will discourage underground enterprises from becoming legal. The establishment of new enterprises will be discouraged.

3. Erroneous and Unrealistic Base for the Income Tax

The most serious shortcoming of the income tax regime involves the tax base which is not “net revenues” after the deduction of input costs, but an arbitrary proportion of total revenues.

The tax regime limits the maximum for input costs deductible from total revenues to 10 to 40% depending on the type of enterprise involved. When the actual micro-enterprise input costs exceed the maximum allowable, the tax rate on true net income can become very high. In the example below, the effective tax rate (defined as the taxes payable as a percentage of true net income) can exceed 100%. Obviously this would kill the enterprise and promote cheating and non-compliance. It will discourage underground economic activities from becoming legal and block the establishment of new enterprises.

4. Continued Discrimination versus Cuban Enterprise in Favor of Foreign Enterprise

The minor reforms of the micro-enterprise tax regime do relatively little to reduce the fiscal discrimination favoring foreign enterprise. (See Table 1.) The main difference is the determination of the effective tax base which is total revenues minus costs of production for foreign firms but for micro-enterprise is gross revenue minus an arbitrary and limited allowable level of input costs. The result of this is that the effective tax rates for foreign enterprises are reasonable but can be unreasonable for Cuban microenterprises. For Cuban micro-enterprises, the effective tax rate could reach and exceed 100%.

Moreover, investment costs are deductible from future income streams for foreign firms this being the normal international convention. But on the other hand, for Cuban micro-enterprise, investment costs are deductible only within the 10 to 40% allowable cost deduction levels.

III. Example: Three Taxation Cases for a Paladar or Restaurant

To illustrate the character of the tax regime, a case of a “Paladar” is examined below. It is assumed that the total revenues or gross earnings of the Paladar are 100,000 pesos per year (Row 1) or a modest 280 CUP or about $US 10.50 per day.

It is imagined then that there are three costs of production cases: Case A, B and C where costs of production are 40%, 60 and 80% of total revenues respectively. A situation where input costs for a Paladar are 80% of total revenues is reasonable, given the required purchases of food, labor, capital expenses, rent, public utilities etc. On the other hand, the 40% maximum is unreasonably low.

The differing true input cost situations (Rows 2 and 3) generate different true net income (Row 6). The tax base however is determined by the legal maximum allowable of 40,000 (Row 4 and 5) and is 60,000 pesos in all three cases (Row 7). The income tax payable is determined by the progressively cascading scale noted above and is 19,750 in all three cases (Row 8, based on calculations not shown here). The tax on hiring the legal minimum two employees is 25% of 150% (that is, 37.5%) of the average national wage which was 429 pesos per month or 161 pesos for 12 months for two employees = 3,864 pesos per year (Row 9). A guess for the surtax on use of public services is 1,200 pesos per year (Row 10). The total taxes then are the sum of Rows 8 t0 10 and are 26,614 per year (Row 11).

The effective tax rate is then calculated as Tax Payment as a percentage of Actual Net Income (Row 11 divided by Row 6). For the third case where true costs of production are 80% of total revenues, the effective tax rate turns out to be well over 100% (124.1%). This is due to fixing the maximum allowable for costs in determining taxable income at an unrealistic 40% while the true costs of production were 80% of total revenues.

The chief result of this example is that effective tax rates can be much higher than the nominal tax rates for all the activities where true input costs exceed the defined maximum. In some cases, taxes owed could easily exceed authentic net income – assuming full tax compliance.  This situation likely occurs for all activities not covered by the simplified tax regime.

Such high effective rates of taxation of course could destroy the relevant microenterprise, and block the emergence of new enterprises. While under the previous policy environment for microenterprise, this was perhaps the objective of policy. However, the objective of the new policy environment is to foster and enable micro-enterprise and to create jobs.

IV. Conclusion

Can the Micro-enterprise sector generate about 500,000 new jobs by April 2011 and 1.2 million in the next year? On the positive side, there have been some measures of a non-tax nature (e.g. the stigmatization has been relaxed, licensing has been liberalized; there has been a minor increase in legal activities; prohibitions and regulations have been eased somewhat; and improved access to inputs will likely be possible.) But on the negative side, a narrow definition of legal activities will limit enterprise and job creation; the prohibition of professional activities remains; restrictions and prohibitions on hiring workers remain; and restrictions and prohibitions remain.

The timid revisions of the tax regimen will not facilitate job creation in the microenterprise sector.

  • The high level of taxes generally will limit enterprise creation and legalization.
  • The underground economy will continue to be encouraged.
  • The tax on the hiring of employees will discourage the absorption of labor into microenterprise activity.
  • Microenterprises will remain stunted by the high effective tax rates that are incurred when costs of production exceed the minimum deductible for tax determination purposes.
  • The tax discrimination favoring foreign firms in joint ventures continues.

In order for the micro-enterprise sector is to expand so as to absorb the 1.2 million redundant public sector workers in the process of being fired, further reform of the tax system is necessary.

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“Shifting Realities in ‘Special Period. Cuba”, LATIN AMERICAN RESEARCH REVIEW, volume 45 number 3, 2010

By Arch Ritter

Just Published: “Shifting Realities in ‘Special Period’ Cuba”

Archibald R. M. Ritter, Carleton University, Ottawa, Canada

Che’s Afterlife: The Legacy of an Image. By Michael Casey. New York: Vintage Books, 2009. Pp. 388. $15.95 paper. ISBN: 9780307279309.

The Cuba Wars: Fidel Castro, the United States, and the Next Revolution. By Daniel P. Erikson. New York: Bloomsbury Press, 2008. Pp. xiii + 352. $28.00 cloth. ISBN: 9781596914346.

Political Disaffection in Cuba’s Revolution and Exodus. By Sylvia Pedraza. Cambridge: Cambridge University Press, 2007. Pp. xix + 359. paper. ISBN: 9780521687294.

Looking Forward: Comparative Perspectives on Cuba’s Transition. Edited by Marifeli Pérez-Stable. Notre Dame, IN: University of Notre Dame Press, 2007. Pp. xx + 332. $27.00 paper. ISBN: 9780268038915.

Cuba in the Shadow of Change: Daily Life in the Twilight of the Revolution. By Amelia Rosenberg Weinreb. Gainesville: University Press of Florida, 2009. Pp. 272. $69.95 cloth. ISBN: 9780813033693.

Cuban Currency: The Dollar and Special Period Fiction. By Esther Whitfield. Minneapolis: University of Minnesota Press, 2008. Pp. 217. $22.50 paper. ISBN: 9780816650378.

Revolutionary Cuba’s Golden Age ended in 1988-1990 when the former Soviet Union adopted world prices in its trade with Cuba, ceased new lending, and discontinued its subsidization of the Cuban economy. The result was the economic meltdown of 1989-1994. In1992, President Fidel Castro labeled the new époque the “Special Period in Time of Peace,” a title that has lasted almost two decades as of 2010. Many outside observers have imagined that Cuba would in time follow the countries of Eastern Europe and the former Soviet Union in making a transition toward a more market-oriented economic system and perhaps a Western style of pluralistic democracy. This has not happened. The modest economic changes of the early1990s have not led to sustained reform. Political reform has been almost undetectable. At times, rapid change has seemed inevitable and imminent. But at others, it has appeared that gerontocratic paralysis might endure well into the 2010s. Change will undoubtedly occur, but its trajectory, timing, and character are difficult if not impossible to predict. When a process of transition does arrive, it will likely be unexpected, confused, and erratic, and will probably not fit the patterns of Eastern Europe, China, or Vietnam.

The books included in this review focus mainly on changing realities during the Special Period and the nature of prospective change. They constitute a valuable contribution to our understanding of a range of dimensions of Cuba’s existence in this era which in fact is not “special” but is instead the “real world”.

The collection edited by Marifeli Pérez-Stable assumes that a transition will occur and asks what useful insights may be gleaned from the experiences of other Latin, Eastern European, Asian, and Western European countries. The analyses included in the collection constitute the best exploration of the key aspects of Cuba’s possible alternative futures yet available. Then Daniel P. Erikson examines the U.S.-Cuban relationship together with domestic U.S. policies toward Cuba during the Special Period, concluding with a chapter on “The Next Revolution.” His popular historical analysis also is probably the best available as well as most readable review of this tragically dysfunctional relationship.

The culture of the silent majority or “shadow public” is the focus of Amelia Weinreb. This sociological-anthropological analysis of Cuba’s silent majority fills a major vacuum in works on Cuba over the last 20 years, focusing as it does on the character, aspirations and behavior of a group that has been almost ignored even though it probably constitutes a majority of the population of Cuba. Sylvia Pedraza examines Cuba’s evolving domestic political situation and the consequences for emigration over the last half century, including the two decades of the Special Period. Her work is probably the seminal analysis of the motivations underlying and patterns of Cuba’s continuing emigration hemorrhage.

Michael Casey examines how the Cuban government has capitalized on Che Guevara’s “brand”—epitomized by the iconic photograph by Alberto Korda—and how Che’s image has been commercialized for both political and financial motivations, using property and trademark law, and the marketing mechanisms of the international capitalist system. While perhaps outside the common purview of mainstream social science research on Cuba, Casey’s examination of the Korda-Che image provides a novel and convincing examination of how the Cuban political regime has sought to commercialize the central martyr of the Revolution. Finally, Esther Whitfield explores cultural and literary changes in Cuba’s world of fiction during the Special Period. Her work is also ground-breaking in examining the impacts of the economic realities of the two-currency pathology on the incentive structure and orientation of Cuban writers of fiction.

Marifeli Pérez-Stable has assembled an all-star cast of authors to produce yet another fine contribution to our understanding of Cuba and its current situation.[1] Looking Forward aims to investigate the alternatives facing Cuba after a possible regime change or “poof moment”—as Jorge Domínguez puts it (7 and 61) —when such change might occur, as if by magic. The authors were asked to examine their particular areas of expertise for insights from other democratizing processes, the particular relevance of the conditions of the Special Period, and the “plausible and/or desirable alternatives . . . for a Cuba in transition” (7). Given the concision and richness of the twelve essays in this book, it is difficult if not impossible to outline and critique them in the detail that each of them merits in a brief review. All are substantively first-rate.

In opening, Pérez-Stable assumes that “a medium-term democratic transition is likely in Cuba though not certain” (19). She explores first the transitions of Eastern and Central Europe and Latin America for insights into the Cuban case, and second, the possible roles in a post-Fidel Castro Cuba of the Communist Party, the National Assembly, and the Association of Combatants of the Cuban Revolution, Cuba’s veterans’ organization. Her central conclusion is that a hybrid regime is most probable, in which elements of marketization and some liberalization combine with continued authoritarianism.

In his examination of military-civil relations, Jorge Domínguez is reasonably optimistic that further downsizing of the Cuban military will occur with the normalization of U.S.-Cuban relations. He also argues that the military will be compatible with democratization under the last three of the four scenarios that he explores: 1. a dynastic succession with continued Communist Party monopoly and a market economy opening; 2. with removal of the external threat, the military could focus on internal security only; 3. the previous scenario, but with a stronger military to maintain public order in the face of serious domestic security threats; and 4. the second scenario again but with a major continuing role for professional armed forces for international peace-keeping. (61-70).

Gustavo Arnavat analyzes the legal and constitutional dimensions of moving toward representative democracy and a market economy, and argues that major constitutional amendments or a new constitution approved by referendum will be necessary.

Damián Fernández presents a thought-provoking and sobering analysis of the role of civil society, emphasizing the difficulty of political reengagement and the development of attitudes supporting participatory citizenship. Mala Htun puts forward a well-balanced discussion of Cuba’s achievements and lingering problems in the same area of transition politics, and of the impacts of the Special Period on women and gender equality. She concludes that “[a]chieving gender justice . . . requires greater economic growth and political reforms” (137). Alejandro de la Fuente also outlines the achievements of Cuba since 1959 and some of the setbacks for Afro-Cubans since 1990; these include a smaller share of remittances and relatively less employment in tourism and high-end self-employment. His main conclusion is that special antidiscrimination policies will be necessary in the transition to a market economy. Jorge Pérez-Lopez contributes a fine analysis of the economic policy reforms needed for transition. In his first-rate essay, Carmelo Mesa-Lago carefully reviews the impacts of the Special Period on social welfare—education, health, social services, poverty, and income equality—and outlines the range of policy approaches needed if Cuba is to maintain social justice while providing incentives to economic improvement.

Corruption has been a curse for Cuba since Independence. It has evolved in unique ways there since 1990, and has tended to escalate seriously in Eastern European transitions, as Dan Erikson shows in his contribution to Looking Forward. The politically complex and difficult role of Cuban émigrés in any future transition is addressed by Lisandro Pérez, though perhaps not with due emphasis on how Cuban-Americans are likely to contribute to institutional development, trade linkages, investment projects, return migration, and tourism. Rafael Rojas provides an insightful exploration of the psychological and political transformations that must occur in this same area, in which polarized and implacable enemies— each claiming ownership of historical interpretation—must become loyal adversaries, competing yet cooperating within democratic rules. Finally, William LeoGrande provides a superb survey of U.S.-Cuban relations during the Special Period and of U.S. relations with former adversaries, so as to address the future dealings of the two neighbors.

In its entirety, this fine volume sets a high standard that will be difficult to surpass. What one would also like to see, however, is another chapter on how Cuba might get to and through a transition to achieve genuine democracy and a mixed-market economy. One might also question the editor’s decision against the citation of sources so as to reach a broader, less academic audience. This book should indeed reach a wide public, but the absence of the citations hardly seems necessary for that purpose.

In a market well supplied with books and reports on U.S.-Cuba relations, Erikson’s The Cuba Wars is perceptive, objective, and engaging. His work is based on general political analysis from his vantage point at the Inter-American Dialogue in Washington; on interviews with many key players on Cuban issues in Miami, the U.S. Congress, the policy community, and academics; and on his own knowledge of Cuba, attained in many visits to the island in the past decade. For those who have lived through the U.S.-Cuba relationship over the last decade or the last 50 years, Erikson’s discussion will be enjoyable as well as insightful. His narrative style is captivating and brings again to life various events at the center of U.S.-Cuban interaction: events such as the Elián González affair, the tenure of James Cason as chief of the U.S. Interests Section, Cuba’s shooting down of an aircraft operated by Brothers to the Rescue, the conviction of Cuban spy Ana Belén Montes, the “Five Cuban Heroes,” and the eviction of Cubans from a hotel in Mexico City by the U.S. Treasury Department’s Office of Foreign Asset Control. Erikson’s discussions of the Chávez/Venezuela-Castro/Cuba relationship, the Cuban-American Community in Miami, and the pressures promoting and obstructing a greater role for market mechanisms in Cuba are all captivating and substantive. His vignettes of congressmen and women with important roles in policymaking with respect to Cuba are fascinating. If I have any quibbles with the book, it is with the title which seems over-amplified, as there has not been a war between the two countries. The “Next Revolution” referred to in the title is not impossible, but I would think that a difficult but orderly evolution toward Western-style participatory democracy, and a more centrist form of economic organization, are more probable.[2]

In Cuba in the Shadows, Amelia Rosenberg Weinreb (Anthropology, University of Texas at Austin) explores and analyzes the lives, behavior, and views of “ordinary Cubans.”[3] These Cubans are familiar to those who have come to know Cuba during the Special Period. They probably constitute a large majority of the population. These “unsatisfied citizen-consumers,” as Weinreb calls them (2 and 168.), strive to survive with some access to basic “modern” goods, above and beyond what the ration book provides in an amount insufficient for life maintenance since 1990. These modern goods perhaps include some luxuries, but they also include basics such as toilet paper and women’s hygiene products that are available only in the “dollar stores” or tiendas de recaudación de divisas (stores for the collection of foreign exchange). This “silent majority” has remained under-analyzed and largely ignored by scholars, perhaps—as Weinreb suggests—because they do not seem to merit special attention relative to indigenous peoples, the poor, or labor unions, or perhaps because they do not fit the orientations of New Social Movement and Structuralist Marxist approaches.

Weinreb’s ethnographic participant observation succeeds in producing an analysis from about as deep within Cuban realities as it is possible for an outsider to get. Her success can be attributed in part to her research assistants and neighborhood ambassadors, namely her three young children, Maya, Max, and Boaz, who helped to establish rapport, friendship, and shared parenting bonds with Cubans who empathized and wanted to help a young mother. This “family fieldwork” provides a unique window into Cuban society and the lives of Cubans.

Weinreb’s focus is a “shadow public,” somewhat analogous to the shadow economy, as the following explains:

[U]nsatisfied citizen-consumers . . . share interests, characteristics, a social imagery and practice, but their political silence, underground economic activity, and secret identity as prospective migrants casts a shadow over them. They are therefore a shadow public, an un-coalesced but powerful group that engages in resistance to state domination but without a public sphere, and only in ways that will allow them to remain invisible while maintaining or improving their families’ economic welfare. (168)

The roots of the shadow economy of course predate the Revolution, indeed going back to the colonial period and its unofficial economy of smuggling and contraband, as reflected in the expression obedezco pero no cumplo (I obey but do not comply). However, the expansion and pervasiveness of today’s shadow economy were generated by the character of central planning itself, and by the circumstances of the Special Period, as analyzed in chapter 1. Chapters 2 and 3 examine how citizens strive to maintain private space and personal control within the context of the state’s domination of personal life and economic activity. Chapters 4-6 explore a range of survival strategies. Chapter 4 focuses on the concepts and practices encapsulated by the terms resolver, luchar, conseguir, and inventar, each with unique connotations in the context of the Special Period. The significance of material things—and the lack thereof—are investigated in chapter 5. Chapter 6 treats the importance of access to foreign exchange or “convertible pesos.” Weinreb here presents a Cuban class system that puts the “red bourgeoisie” at the top, followed by artists with privileged access to travel and foreign exchange earnings, “dollar dogs” or cuenta propistas (own-account workers) with access to tourist expenditures or remittances from relatives or friends abroad, “unsatisfied citizen consumers,” and finally, at the bottom, the “peso poor” who lack access to foreign exchange and additional earnings. The final chapters examine the broad-based phenomenon of feeling trapped and the dream of escape via emigration. Chapter 8 explores “off-stage” expressions of dissatisfaction, criticism, and resistance, which remain purposely hidden, unorganized, and outside public space. This state of affairs may be changing, however, with the Damas en Blanco and bloggers courageously breaking into the public arena, spearheaded by Yoani Sánchez. Finally, chapter 9 draws together the strands of Weinreb’s analysis and explores the relevance of the concepts of shadow public and unsatisfied citizen-consumer in the broader context of Latin America.

Weinreb succeeds admirably in describing and analyzing Cuba’s silent majority, those “ordinary outlaws” who are decent, hard-working, entrepreneurial, and ethical, yet must defend themselves and their survival through a myriad of economic illegalities within the framework of a dysfunctional economic system. These people live within the doble moral, effectively cowed into acquiescence by a political system whose main escape valve is criticism, innocuous at first, but then increasingly bitter, followed by emigration. The shadow public perhaps constitutes a potential “shadow opposition,” but seems to be easily contained and controlled by the governments of the Castro brothers. One might conclude from Weinreb’s work that this population—currently disengaged and thinking incessantly about emigration—is ripe for public reengagement and that in time there may occur a surprisingly rapid mobilization for change.

Weinreb’s analysis raises some additional questions. Under what circumstances might a shadow opposition become organized, finding a strong voice to become a real opposition? Will the new citizen-journalists of Cuba’s blogging community—plus critics such as Vladimiro Roca, Oscar Espinosa Chepe, Marta Beatriz Roque, Elizardo Sánchez, the Damas en Blanco, and some Catholic organizations—be able to break the control of the Communist Party and the current leadership? Will normalization of relations with the United States and the ending of the “external threat”—a siege mentality long used as a pretext for denying basic political liberties—further erode control of the Party and create new political alignments within Cuba?

Like the flag raised by Máximo Gómez in Cuba’s struggle for independence but sewn by Victoria Pedraza, her grandaunt, Sylvia Pedraza (Sociology, University of Michigan) intends her book to be a contribution to Cuban history. Political Disaffection in Cuba’s Revolution and Exodus,  Pedraza’s magnum opus so far,  is indeed a splendid contribution. It examines the political, social, and economic history of Revolutionary Cuba, exploring its impact on citizens and on emigration decisions and patterns from 1959 to midway through the first decade of the present century. The scope of the work of course goes beyond the Special Period, whose emigrants are the most recent product of a series of four waves from Revolutionary Cuba, following those of 1959-1962, 1962-1979, and 1979-1989.[4] These emigrations serve as organizing periods for Pedraza, who offers a careful reading of the history of the Revolution, using participation and observation from within the Cuban-American community and among Cubans on the island, 120 in-depth structured interviews with a representative selection of émigrés from 1959 to 2004, personal documents of émigrés, and census and polling information. Of special interest in this engaging and moving mix (which few academics manage to achieve) are Pedraza’s personal odyssey and insights as a child of the Revolution, quasi-Peter Pan émigré, and returnee with the Antonio Maceo Brigade in 1979. The account of her reunification with an extended family that she had not seen since leaving Cuba is particularly poignant.

In Che’s Afterlife, Michael Casey follows Korda’s famous photograph of a Christ-like Ernesto “Che” Guevara into the consciousness of people around the world. This image is a well-defended and trademarked icon (copyright VA-1-276-975) owned by Korda’s daughter, Diana Díaz, and used in collaboration with the government of Cuba. For some, it is a quasi-spiritual symbol of hope for a better future; for others, a symbol of undefined but earnest youthful rebellion; and for still others, an abhorrent symbol of authoritarianism. Casey, a Dow Jones Newswire bureau chief in Buenos Aires, has written an intriguing history of the image’s trajectory over the last half century. He brings together research into the lives of both Korda and Guevara, a command of the history of Revolutionary Cuba, knowledge of countries where the Guevara mythology is important, an understanding of copyright law, and original investigative interviewing and reporting.

Casey begins with the instant when the photo was taken on 5 March 1960. He sketches Che’s role in the new government—notably as chief of La Cabaña prison and overseer of the swift executions of prisoners—his secretive and disastrous Congo operation, and his guerrilla campaign in Bolivia, putting the launch of Che as icon and of the “Heroic Revolutionary” brand at the 18 October 1967 memorial ceremony at the Plaza de la Revolución. Casey also presents an account of Korda’s activities in Havana, the first publications of his photograph, and the cultural ferment of the early years of the Revolution, followed by the disillusionment of many in the mid-1960s. He traces the peregrinations of Korda’s Che through Argentina, Bolivia, Venezuela, and Miami, as well as in the student ferment of 1968 from Paris to Berkeley. His later chapters focus on the use of Che’s image as a brand by the government of Cuba; here, it no longer signifies a heroic guerrilla promoting revolution, but has instead become an advertisement, selling Cuba in the international tourist marketplace. The essence of the image ia now “the idea of revolutionary nostalgia” (306). After some thirty-seven years during which the photograph was freely available for use by anyone, copyright ownership now applies and control is exercised through legal means when necessary.

Casey takes us on a fascinating journey through the life and afterlife of Che and through a half century of international social and political history, using Che’s image as a prism. His book should find a wide readership, of all political stripes, who have an interest in Cuba or in major political and social movements. Those with interests in marketing, branding, and copyright law will also find this volume illuminating.

I must confess that when I agreed to include Cuban Currency: the Dollar and Special Period Fiction in this review, I thought it was an analysis of Cuba’s monetary system, not having read the title carefully. To my initial trepidation, Esther Whitfield focuses instead on literature, but in the context of Cuba’s dual-currency pathology. Her survey of recent fiction has turned out to be a delight, even for an economist with little direct knowledge of Cuban literature.

Whitfield’s central argument is that the Special Period generated a boom in cultural exports, including literature, due to the opening of Cuba’s economy and society, the subsequent expansion of international tourism and the popularity of all things Cuban, the decriminalization of the use of the dollar, its adoption as a legal currency, and its quick ascent to supremacy over the “old peso.” Special Period literature then became market-driven—like many other activities in Cuba—with authors’ incomes dependent on foreign sales and hard-currency contracts, rather than on Cuba’s literary bureaucracy and membership in the writers’ union. The dominance of the foreign market was further strengthened by the shrinkage of the domestic peso market for books because of declining incomes. This new foreign-market orientation was formalized by legislation in 1993 that permitted authors to negotiate their own contracts with foreign publishing houses and to repatriate their royalties under a relatively generous tax regime. Like other Cuban citizens, authors responded quickly to these new incentives. Special Period fiction is set in a “real Cuba” of interest to foreigners, namely in the Cuba of a behavior-warping dual-currency system, urban decay, dysfunctional Soviet-style economy, and political gerontocracy, together with a vibrant Afro-Latin culture and time-immemorial tropical eroticism. Ironically, the international boom in Cuban fiction during the sunset of the Revolution was a sequel to the literary boom of the 1960s, which was set in the confidence and vigor of the youthful Revolution.

Whitfield begins with an analysis of the circumstances of the Special Period that pushed authors into an external orientation. She then focuses on the works of Zoé Valdés, especially her award-winning I Gave You All I Had (1966), published in exile in Paris, which allows Whitfield to trace the central role played by a U.S. one dollar bill and its symbolic relevance for the culture of the Special Period. Short stories are the subject of the next chapter, with particular attention to the work of Ronáldo Menéndez. His story, entitled “Money,” is also set in the world of the doble moneda and doble moral, but criticizes the reliance on foreign markets and worries about the jineterización (translated imperfectly as “prostituting”) of the writer-publisher relationship and possible debasement of “true” Cuban literature. Whitfield goes on to examine the work of Pedro Juan Gutiérrez, notably the five books of his Ciclo Centro Habana. Gutiérrez writes for a foreign readership, but also critiques it, placing the reader in the position of voyeur into the “lives of sexual disorder, moral depravity and economic despair” of Havana (98). In her final chapter Whitfield meditates on artists’ depictions of Cuba’s urban decay and on critical analyses of such depictions.

Whitfield has produced a fine analysis of how economic circumstances generated new problems and new possibilities for Cuban authors, who have risen to the challenge and produced a literature of broad international appeal. Whitfield’s writing is engaging, her knowledge seems profound, and her subject is enchanting. However, I am not a competent critic of Cuban literature or literary criticism, and cannot tender a confident evaluation of its value for scholars in these fields. Her book, linking socio-politico-economic circumstances of the Special Period to Cuban literature, will nevertheless interest a broad range of social scientists, as well as the more literary-minded.

Is the international market for Cuban fiction as transitory as one might expect or hope that the Special Period itself may be? Perhaps. It may be that when Cuba escapes the Special Period and becomes a “normal country” with a normal monetary system, the special interest in its literary portrayal may diminish. However, the difficulties of economic and political reform are likely to continue for some time, and are likely to take various twists and turns that will hold our interest for some time to come. I hope that Cuba’s fiction writers are there to illuminate the process for a world readership.


[1] Full disclosure: I served as an evaluator for Marifeli Perez-Stable’s edited collection Looking Forward for the University of Notre Dame Press.
[2] One minor detail: Fidel Castro’s hometown was not Bayamo but Birán, not far from Cueto and Mayarí, both immortalized in the song “Chan Chan” by the Buena Vista Social Club.
[3] I also served as a reader for the Universities Press of Florida for the original manuscript of this volume. I was as impressed with it then as I am now.
[4] The emigrations of 1979-1989 were sparked in part by the return visits of Cuban Americans, who turned out not to be gusanos (worms)—the dehumanizing  label given to them by the Cuban government—but instead mariposas (butterflies), as they were relabeled with typical Cuban humor.

 

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Cuba’s 12 to 20 Chair Reform: Can the Small Enterprise Sector Save the Cuban Economy?

 

The quasi-private restaurants in the Barrio Chino have enjoyed a cultural exemption from the controls placed on normal “paladars” or restaurants. They have faced no 12 chair size limitation. They emerged some time ago as dynamic, large, diverse and efficient restaurants – indeed, the best in Havana. They are a living example of what many sectors of the Cuban economy could become if the tight restrictions and toxic tax levels were all made more reasonable. This is not yet happening. (Photo by Arch Ritter  2008)
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By Arch Ritter

In October 2010, Raul Castro’s Government increased the size limitation on private restaurants from 12 to 20 chairs. This was part of a broader reform package designed to shrink the state sector ultimately by about 1 million workers or 20% of the labour force and to re-absorb them into an expanding small enterprise sector. The 20 chair rule however is symbolic of the positive but timid character of the reforms undertaken so far.

This is an amazing and ironic reversal of fortune for Cuba’s private sector. Small enterprises were almost eliminated in the 1960s, were liberalized from 1993 to 1995 and then were stigmatized and contained by onerous regulations and taxation. Now they are supposed to save the economy, generating jobs, higher productivity and higher living standards than was possible under the old system. 9Raul apparently has even more faith in the small enterprise sector than I do!)

Fidel Castro’s 50-year attempt to construct his own variety of “socialism” is being repudiated and abandoned by his own brother and by the Cuban Government. This is an obvious humiliation for Fidel, even though the genuflections in the media and official documents –  including even the “Linamientos” – continue.

Firing one million state sector workers looks risky and brutal. Hoping that they will somehow be absorbed in the small enterprise sector looks like wishful thinking. In other contexts this approach would be labeled “neo-liberal”! Will the laid-off workers have the abilities and aptitudes necessary to start their own businesses?

But the biggest question is whether the small enterprise sector can create 500,000 jobs by March 30 and ultimately one million new jobs. As of  November 28, half way through period when the lay-offs are to occur, only 45,000 new self-employment licenses had been issued, with 43% going to retirees rather than those in the labor force. This process is off to a slow start but perhaps it will accelerate.

The regulatory and tax regimes under which small enterprise operated from 1995 to 2010 were designed to contain its growth, to keep enterprises tiny, and to limit the incomes of the self-employed. Now the tax and regulatory framework has been liberalized somewhat:

  • Licensing has been broadened.
  • Rental of facilities from citizens or the state is easier.
  • Sales to state entities are now possible.
  • Use of banking facilities and bank credit will be possible.
  • Permitted activities have been increased.
  • Some regulations have been eased.
  • Punishments for infractions have been eased. Virtually all of the old ‘infracciones’ continue to punished by the same fines as before. But the seizure of equipment and  the retraction of licenses have been dropped.
  • Imported inputs will become accessible for small enterprise at wholesale prices.

But tight limits on self-employment remain.

  • Professional activities are prohibited.
  • Intermediaries are prohibited and each producer is supposed to be the seller of his or her output.
  • Petty restrictions such as the 20 chair rule continue.
  • Tight limits continue on the hiring of employees.
  • Advertising remains prohibited.

The tax regime has been slightly relaxed but is still problematic. Small enterprises face five taxes: a sales tax (10%), a tax on hiring employees, social security taxes, a public services usage tax, and an income tax (that rises to 50% of income above 50,000 “old” pesos or about $2,000.00 per year.) For the calculation of the income tax, deductible costs of production from total revenues are limited to 10% for simpler enterprises up to 40% for larger enterprises. This means that for a restaurant with actual costs of production of 80% of total income, the tax on actual net revenue exceeds 100%.  The tax on hiring an employee is 37.5% of the average monthly wage for Cuba.

For very small-scale activities, an up-front monthly licensing fee that constitutes a simplified tax payment is required.

This revised regime is an improvement over the previous system. It may induce some enterprises to come up from underground and may promote the establishment of some new enterprises. But, on the other hand:

  • The high effective tax rates will kill off many potential enterprises and promote continued non-compliance.
  • The 37.5% employment tax will limit hiring.
  • The numerous controls and limitations on small enterprise will continue to “stunt” them so that they remain inefficient, wasting human and material resources.

It is therefore unlikely that small enterprise will expand enough to absorb one million redundant workers. By stunting the small enterprises, the possibilities of raising productivity, real incomes and ultimately living standards will also be limited

What happens then? Perhaps the “Fidelistas” could proclaim victory and halt or reverse the reform process. This is unlikely because the old “Fidel” model is discredited by events and by Raul himself. Moreover, Raul’s appointees now dominate the Council of Ministers. His military colleagues hold many key posts in the economy.

More likely, Raul’s Government will conclude that job creation should precede the lay-offs, not vice versa and that their expectations regarding job creation in the small-enterprise sector were overly optimistic. They might then slow down the lay-offs and in time liberalize the tax and regulatory framework.

Raul Castro is finally emerging from 60 years in his elder brother’s shadow. Perhaps he is thinking of his own historical legacy. “History” will never “absolve” Fidel, but it might absolve Raul if he sets Cuba on a course towards a workable economic system – not to mention human rights and meaningful pluralistic democracy.

Since its liberalization in 1993, the production of arts and crafts, largely for the tourist market, has expanded immensely and the quality and diversity of the products has improved greatly. It is now  a major source of foreign exchange for Cuba, though statistics on this do not seem to exist. This sector  provides another living example of the improvements that could be made in the small enterprise sector generally if it was liberalized appropriately. Above, a photo of the crafts market near the Cathedral on Avenida del Puerto, by Arch Ritter, 2008.

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Cuban Demography and Development: the “Conception Seasonality Puzzle”, the “Dissipating Demographic Dividend” and Emigration.

By Arch Ritter

Cuba’s Oficina Nacional de Estadisticas (O.N.E.) recently published the 2010 Edition of the Anuario Demográfico de Cuba 2009, available on line here: http://www.one.cu/anuariodemografico2009.htm. A wide-ranging listing of the web publications on demography and population is located at this address: Oficina Nacional de Estadisticas, LA POBLACION CUBANA . Comprehensive statistical information for Cuba is available quickly, comprehensively. ONE’s coverage and presentation of demographic statistics has been improving steadily in terms of quality and timeliness. (In contrast, basic information on the economy such as unemployment, the consumer price index, and GDP is opaque, minimalist, and not clearly defined.)

Numerous useful and interesting insights into Cuba’s development, past and prospective, are apparent in the ONE data – and other demographic sources. A few are mentioned here.

1. Cuba’s Seasonal Conception Puzzle

An interesting phenomenon. of which I have been unaware. is the seasonal character of the numbers of births in Cuba – and of course the causal seasonality of conception rates. As Chart 1 illustrates, births peak from August to December but decline sharply during the months of February to June. This means that Cuba’s amorous months of high conception levels are from about December to April.

One can venture a number of guesses as to why this might be the case. For example, perhaps the cooler weather of Cuba’s winter months is more conducive to activities related to conception. Or maybe there is greater optimism and dynamism during the more prosperous times of the tourist high season. If anyone has clearer insights into this phenomenon, please let me know!

Chart 1 also shows increasing numbers of births from 2007 to 2009.

2. From Baby Boom to Baby Bust and Beyond?

From 1960 to 1970 Cuba experienced a major “baby boom” with fertility rates rising to around 4.5 children per woman on average Chart 2. This may reflect the improvement in living conditions for many families, improved medical facilities and perhaps greater optimism about the future, leading women and families to choose to have more children during the first decade of the Revolution.  As is well known, however, the fertility rate began a long descent to levels a good deal below the minimum necessary for long-term population stability which is considered to be around 2.2 children per woman.  This baby “bust” commenced in 1970 and has continued to 2009, bottoming out at 1.39 children per woman in 2006 but rising somewhat to 1.70 in 2009. Cuba’s demographic experience is similar to that of numerous higher income countries such as Spain, with a fertility rate of 1.6 in 2005-2010: Italy, 1.4 ; Portugal, 1.4; Russia, 1.5; Canada, 1.6 and Germany 1.3.)

The causes of the declining fertility rates in Cuba undoubtedly included similar factors to the experience of other countries: higher female labor force participation rates (so that the income sacrifice for additional children was higher), better pension systems (so that one’s children were no longer necessary for income-support during old age), reduced opportunities for employing children as income earning assets due to urbanization and increased schooling, different career aspirations for women, easy availability of contraception including abortion etc.

The impact of the changing fertility rates can then be observed in the 2010 population pyramid (Chart 3.) The 1960-1975 “Baby Boomers” reached age 40 to 50 during the 2000s leading to the large cohorts in the 2010 pyramid. But since 1970, the declining fertility rate has led to ever-narrowing cohorts of younger age groups. Even the demographic “echo” of the 1960-1970 cohort was muted.

Chart 3  Cuba’s Population Pyramid, 2010

The consequences for Cuba of an aging population also are similar to those for other countries, though some other high income countries, large scale immigration changes the picture. The main consequences are:

  • The Old Age Dependency rate increased by almost 40% over the 1990-2010 period. Child Dependency rates declined by about 30% in the same period, reflecting the declining fertility rate.  (Table 1.).
  • The aging population will cause the Total Dependency Ratio (the sum of Child and Old Age Dependency as a proportion of the total population) to increase in future, burdening the economically active population for the support of pensioners and their health care.
  • The “aging population” in time will become a “dying population.” The population, previously increasing or stable, will decline sharply when the “baby boom” cohorts hit age 65 or so in 10 to 15 years. This could be modified by compensating changes in fertility or international migration, but not in life expectancy which is unlikely to rise much further in future..
  • The “Total Dependency Ratio” has been particularly low during the years when Child Dependency declined but the large “Baby Boom” age cohorts were still of working age. It is now at 42.2% (Table 1). Consequently the economically active population between age 20 and 60 as a proportion of the total population has been large.This so-called “demographic dividend” or “demographic window of opportunity” normally provides a stimulus to growth and development as in China. However, in Cuba’s case, it is passing quickly and so far has been partly wasted as it has been underemployed in low productivity activities.

Emigration

The Anuario Demográfico de Cuba 2009 also provides comprehensive information on internal migration and some general figures for external migration. Emigration numbers are illustrated in Figure 4. The “Special Period” since 1994 has been characterized by a steady hemorrhage of emigration. While ONE does not present information on the sociological character of the emigrants, casual observation suggests that they are well educated, entrepreneurial and perhaps disproportionately in the early adult 18 to 35 age grouping.

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Still the “Bestest” and the “Worstest” and Maybe the Most Opaque: Cuba in the 2010 UNDP Human Development Report

By Arch Ritter

The 2010 UNDP Human Development Report , published on November 5, 2010, presents the definitive and much-awaited “Report Card” on the social, economic, political, environmental and security dimensions of development for all countries of the world. In this Report, Cuba fares well in some indices, badly on others, but is also “out-of-the-running” on the major UNDP Human Development Indices due to lack of reliable information.

The whole of the UNDP Human Development Report can be accessed here:   2010http://hdr.undp.org/en/mediacentre/

Here are a few of the interesting comparative insights and results for Cuba.

1.      Main Human Development Indices

Cuba is excluded from the main Human Development Indices that the UNDP presents, namely the Human Development Index (Table 1), the Inequality-adjusted Human development Index (HDI) (Table 2) and the Multidimensional Poverty Index (Table 5)  as well as the HDI Trends from 1980 to 2010 (Table 3). This is unfortunate because it is not possible this year to make a comparison of Cuba with other countries or with itself over time.

Due to the existence of the dual exchange rate system in which there is no reasonable single exchange rate, together with the complexity of the highly segmented markets – underground economy, rationing system, farmer’s markets, non-market allocation of some goods and services, and quasi-dollar stores – it was concluded by the UNDP that it was impossible at this time to construct a measure of GDP per capita in purchasing power terms as is done for some 169 other countries. . The UNDP apparently is working with the Government of Cuba to correct this situation. The UNDP’s explanation of the problem is presented in Appendix 1.

2.      Gender Inequality Index

Cuba comes first in Latin America and 47th in the world for this measure, which includes maternal mortality rates, adolescent fertility rate, share of parliamentary seats held by each sex, attainment at secondary and higher education, labor market participation rates, contraception availability, and births attended by health personnel (Table 4).

3.      “Empowerment”” Measures

In a new dimension of its analysis (Table 6), the UNDP brings together a variety of indicators of human “empowerment.”  Cuba fares uniformly badly, and indeed worst in Latin America for many measures:

  • “Democracy”: worst in Latin America;
  • “Press Freedom”: worst in the world, including China;
  • “Satisfaction with Freedom of Choice”: worst in Latin America, with 26% and 28% satisfaction for males and females respectively;
  • “Journalists Imprisoned”: worst in the world with the exception of  China;
  • “Human Rights Violations”: among the worst.

4.      Education

Cuba fares well in education generally (Table 13). One notable feature of Cuba’s comparative experience is that it has the largest tertiary education enrolment in the Hemisphere and the world at 121.5% compared to an average of 36.5% for all of Latin America.

How can this be? Presumably more people than are in the normal tertiary education age cohort are attending colleges or University. This is the result of increasing the supply of tertiary education, by creating alleged “Universities” in every Municipality, plus an increase in the demand for higher education by those who have been put out of work in various areas including the sugar sector. It is difficult to know without further information if the 121.5% figure represents an achievement or a gross misallocation of resources given that Cuba needs to produce real products in agriculture and industry, and seems to be overproducing university graduates – not unlike some higher income countries .

5.      Health

As is well-known, Cuba also fares well in health measures and has been particularly successful in squeezing strong health outcomes from very scarce resources (Table 14).

One interesting measure is the number of doctors per 10,000 people that stands at 64 for Cuba. This again is the highest ration by far in Latin America and the world. Again, this looks like an over-allocation of resources to the “doctor” category in health. However, given that the 30,000 doctors abroad are now the largest earner of foreign exchange for Cuba, it is likely that this over-abundant resource is now being used effectively.

6.      Access to Information and Communications Technology.

Cuba’s performance is in communications and access information is also the weakest in the Hemisphere. Here are a number of indicators noted by the UNDP (Table 16).

  • The access of Cubans to land-line and mobile telephones stands at 13%. This is by far the lowest in the Hemisphere. Even the lower income countries in the region have much higher access to telephones, with Haiti at 33%, Nicaragua 60%, Guatemala 120%; Grenada 86%, El Salvador 131%, Paraguay 103%m and Honduras 96%.
  • The cost of a mobile telephone connection in Cuba is by far the highest in the world, at $120.00.  Obviously this limits the demand for mobile connections and helps explain Cuba’s 13% access rate.
  • Access to the internet is particularly low at 12.9 per 100 persons, though not the lowest in the Hemisphere.
  • The proportion of the population with personal computers was estimated at 5.6 per 100 persons, again low but not the lowest in the Hemisphere.

This illustration shows the HDI trajectories for all countries of the world from 1980 to 2010, excepting Cuba and a few others.
Appendix !: Purchasing power parity conversions and the HDI: an illustration with the case of Cuba (Source: UNDP,  HDR 2010, p.138).

The HDI uses internationally comparable data on gross national income (GNI) per capita from the World Bank (2010g). These data are expressed using a conversion factor that allows comparisons of prices across countries. This conversion, known as purchasing power parity (PPP), is necessary to take into account differences in the value of a dollar across countries.  Four countries have data on all HDI components except for GNI: Cuba, Iraq, Marshall Islands and Palau. For three of these countries (Cuba, Marshall Islands and Palau) this is due to the fact that they do not participate in the International Comparisons Program. Iraq lacks information about GNI for the last 10 years.
To illustrate the options and problems that arise in attempting to reliably estimate GNI per capita in PPP terms, Cuba is used as an example. One well known approach to estimating GNI—used by the Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania (Heston, Summers and Aten 2009)—is a regression that relies on data from the salaries of international civil servants converted at the official exchange rate. However, because the markets in which foreigners purchase goods and services tend to be separated from the rest of the economy, these data can be a weak guide to the prices citizens face in practice. The Center for International Comparisons of Production, Income and Prices recognizes this problem, rating its own estimate of Cuba’s GDP as a “D” (the lowest grade).
An alternative estimate applies the exchange rate used in Cuba and the PPP conversion of an economy with similar attributes, but this method goes against the principle of using a country’s legally recognized exchange rate and prices to convert its national aggregates to an international currency. Another option is to not apply any PPP correction factor to the official exchange rate for convertible pesos. Both of these options yield far lower estimated income than the PPP correction does. The wide variation in income estimates arising from these different techniques indicates that no single robust method exists in the absence of reliable data.
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Does Sherritt International Have a Future in Cuba?

By Arch Ritter

The joint venture between Sherritt International and Cuba is a cooperative masterpiece that generates great benefits for both parties.  However, when looked at from the perspective of transportation costs – shipping nickel/cobalt concentrate from Cuba to Fort Saskatchewan Alberta – together with the “Helms-Burton” status of the mine, some questions occur as to its long term viability.

The Moa mine was initially constructed by US interests – the Moa Bay Mining Company and expropriated by the government of Cuba in August, 1960. The US Foreign Claims Settlement Commission valued the company at $88,349,000 at the time of the take-over.

Sherritt’s 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 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.

Sherritt International CEO Ian Delaney and President Raul Castro appreciate a comment.

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.

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 masterful move and has generated important benefits for Cuba and for Sherritt. Cuba has acquired a market for its nickel concentrate. It acquired access to improved production technologies relative to its older 1950s-vintage US technology and its 1960s-vintage Soviet technology which has generated improvements in productivity, energy efficiency, environmental impacts, and health and safety. The Government of Cuba is now the joint owner of a vertically integrated nickel operation, from extraction 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.

(Click to enlarge)

The Nickel Refinery at Fort Saskatchewan Alberta, jointly owned 50/50 by Sherritt International and the Compania General de Niquel of Cuba.

Sherritt is able to utilize more fully 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 Table presents some information on Sherritt’s Cuban operations, drawn from its Annual Reports.

(Click to enlarge)

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 has been 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 two clouds on the horizon. First, Cuban nickel concentrate is transported by ship to the East coast of Canada and then overland to the Alberta refinery. This seems to make sense economically at this time low energy prices in Alberta and the existence of the refinery there compensate for high transportation costs. However, if – or when –transportation costs rise with higher energy prices, and when the existing plant becomes obsolete or simply reaches the end of its useful life, would a different location become more attractive?   Low cost energy is also available in Venezuela for example. The Chvez factor is also of relevance. Will a future Cuban post-Raul Government still be enamored of a Chvez or post-Chvez Government in Venezuela? What will be the relative risks of relocating the refinery to another location such as Venezuela?

So far, Cuba is tied to the Canadian location through its 50% joint ownership of the Alberta refinery. Would Sherritt ever accept a transfer of the refinery to Venezuela, if pushed by its Cuban partner?  Perhaps in a more distant future that is difficult to foresee. However, Alberta will continue to have competitive energy prices and low risk for a many 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. US-Cuba normalization may require Sherritt 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. To construct another would be costly. 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 uncertainties and will be problematic at some time in the future. Sherritt International may well be one of the very few economic interests that perhaps could lose from US-Cuban economic and diplomatic normalization.

V. “Nickel Pig iron”

As noted in an earlier entry in this Blog, a technological breakthrough in the production of “Nickel Pig iron” (NPI), a substitute for refined nickel is already having an impact on the nickel market and causing reductions in the price of nickel. This technology will likely put a cap on nickel prices in future a as alternate new supplies enter the market. This will likely reduce Sherrittt and Cuba’s foreign exchange earnings from nickel exports in future, and may halt any expansions in nickel nickel mining for some time to come. (See Bad News for Cuba’s Nickel Industry and Sherritt.)

Thus, while the near-future looks as bright for Sherritt International in Cuba as the last 10 years or so, these three issues raise ambiguities about its medium and longer term future – at least in the nickel sector.

Ian Delaney: a Sympatico CEO, it would appear

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Jump-Starting the Introduction of Conventional Western Economics in Cuba

By Arch Ritter

I.   Initiation of the Joint Havana-Carleton Universities Economics MA  

As the Cuban economy was sinking into the nadir of its depression following the ending of the “Special Relationship” with the former Soviet Union, the Faculty of Economics at the University of Havana decided that the time was right to introduce conventional economics into University curricula and into Cuba generally. With the collapse of the Soviet Union and the transition to mixed economies throughout Eastern Europe and the Soviet Union, the Soviet version of the discipline of Economics virtually disappeared. Cuban economists were left orphaned with a discipline that had become extinct. They generally were unfamiliar with the near-universal language of economics and found it difficult to communicate in the discipline with their colleagues in Latin America and the rest of the world.

This move to introduce conventional economics was spear-headed by Dra. Lourdes Tabares, who was the Chair of the Economics Department at the University of Havana at the time. It had broad though far from unanimous support within the University.

A meeting was arranged in early December 1993 in Havana to discuss alternative approaches to accelerating the process of developing instruction in conventional economics. Financed by the International Development Research Centre (IDRC), and coordinated by Dr. Gary McMahon, this meeting brought together a number of academics and officials from Chile and Argentina and me from Canada, with University of Havana counterparts.

A decision was reached at that meeting to organize a joint MA program in Economics mainly for young faculty members from Cuban Universities to be given in Cuba at the University of Havana. An agreement was subsequently reached between the President of Carleton University, Dr. Robin Farquhar and the Rector of the University of Havana. Juan Vela, to provide the Carleton program adapted to the circumstances of Cuba.

The program was conceived in December 1993 and was up and running six months later in Havana.

The Economics MA was financed for the first two years by the IDRC and was supported by Gary McMahon and Pierre Beemans. Following that, the Canadian International Development Agency (CIDA) financed another three years of the MA Program. The program received crucial support from the United Nations Economic Commission for Latin America (UN ECLAC), which lent its good name as a co-sponsor of the program and provided about 40% of the faculty at its own expense. Particularly vital was the support of Francisco Leon and the Secretary General Gert Rosenthal of UN ECLAC. The Canadian Embassy in Havana, notably through Ambassador Mark Entwistle and Nobina Robinson, were instrumental in the extension of the program. CIDA was so pleased with the first two IDRC-financed years that it decided to extend the Economics MA for an additional three years.

It also agreed to expand collaboration between Carleton University and the University of Havana for five years and to five other units at the two Universities: Biology, Business, Linguistics, Women’s Studies and Public Administration. Professors were recruited from a number of Latin American countries as well as Canada. Among the contributing professors were

  • Canada: Keith Acheson, Zhiqi Chen, Donald McFetridge, Gary McMahon, Carl McMillan, Soo Bin Park, Simon Power, Arch Ritter, Nicholas Rowe, Larry Willmore (also with the United Nations), and Frances Woolley.
  • UN ECLAC: Ricardo Ffrench-Davis, Michael Mortimer, Bernardo Kosakoff Juan Carlos Lerda, Luis Felipe Jimenez, , Jorge Katz, , Joe Ramos, Daniel Titelman.
  • Argentina: Jose Maria Fanelli. Mario Damill, Guillermo Rozenwurcel
  • Bolivia: Juan Antonio Morales
  • Brazil: Ricardo Paez de Barras
  • Peru: Alberto Pasco-Font

Senior Cuban professors worked with the visiting Canadian and Latin American professors and took over some of the classes. Among the Cuban professors were Felix Marero, Elena Hernandez, Lourdes Tabares, Nelida Gancedo, Vilma Hidalgo, Manuel Miranda, Frank Hidalgo, Ela de Quezada, Raul Sandoval, Celia Fernandez, Ermida Gonzalez and, and Marta Madero.  

 

II. Impacts of the Program

The objective of the five years of the MA Economics Program was to support the introduction of conventional economics into the curriculum of Cuba’s universities. From this perspective, I think that it could be considered to have been reasonably successful. At the University of Havana for example, a program in conventional economics was initiated quickly and is in operation. Similarly the University of Oriente soon established a conventional economics program, under the leadership of the MA graduate Ulisses Pacheco who became Dean of the Faculty. These programs have been producing some impressive graduates and new academics for over a decade.

A substantial number of the MA graduates went on to earn Doctoral degrees in Economics both inside Cuba, notably in a program with the University of Barcelona and outside Cuba at Carleton University, Ottawa Canada. However, significant numbers of the graduates have emigrated and built their lives elsewhere. This is undoubtedly a loss for Cuba, as all were just at the early stages of their productive professional and family lives. (Remittances are small compensation for this loss.) 

Of the 76 graduates of the program, 16 now are employed in Cuban Universities, 22 have other employment in Cuba, most in government, 7 were citizens of other countries and have returned to their own countries, and 31 have left Cuba. The visiting professors were particularly happy with the level of qualification and the strong commitment and motivation of the Cuban students. It was a positive and pleasant experience for all the professors involved. There were of course some minor frictions in the implementation of the program but surprisingly few and most were resolved quickly and satisfactorily. 

One such issue was a conflict with the Ministry of Cooperation and Foreign Investment, MINVEC. The problem was that the University of Havana had entered into an agreement with Carleton and IDRC but had not gone through MINVEC. It was some five months after the beginning of the program in July 1994 that MINVEC finally gave its approval.

Another issue that had to be dealt with has been described by Luis Casaco in a his Blog entitled “historias mínimas – short tales, palabras, amigos y un poco de música”,  and can be seen at the following address: when carleton university knocked my door at  http://kaskouy.blogspot.com/2008/03/when-carleton-university-knocked-door.html.

 

III. Where are They Now: Graduates of the Havana-Carleton Economics MA, 1995-1999

As of October 15, 2010 This listing is based on information mainly from around 2002. Much has happened since then, and undoubtedly there are many inaccuracies. Please forward any corrections that you may be aware of regarding locations and employment or contact information. Please send any corrections or new information to Arch_Ritter@Carleton.Ca

1994-1995 COHORT

  • Raul Ávila Rodríguez, Ottawa Canadá
  • Regino Boti Llanes, Londres, RU
  • Idania Coello Caballero, La Habana, Cuba
  • Ledya Fernández Lleal, Facultad de Economía, Universidad de La Habana, Cuba
  • Luis René Fernández Tabío, Instituto de Investigaciones (CESEU), La Habana, Cuba
  • Nélida Lamelas Castellano. University of Santiago de Compostela, Santiago, España
  • María Rosa Moreno Fernández, PNUD, La Habana, Cuba
  • Ulises Pacheco Feria, Decano, Facultad de Economía, Universidad de Oriente, Santiago de Cuba
  • Carmen Quintela F., (Facultad de Economía, Universidad de La Habana,) Cuba, Deceased
  • María C. Sabourin Jovel, Miami USA 
  • Mario Sánchez Egozcue, Centro de Estudios sobre la Economía Cubana, La Habana, Cuba
  • Juana Sánchez Mesa, PNUD, La Habana, Cuba
  • José Somoza Cabrera, Dpto. del Medio Ambiente, Universidad de La Habana, La Habana, Cuba
  • Magda Valera Cepero, Miami, Estados Unidos
  • Ignacio Vera Paneque, Naciones Unidas, Nueva York

Class of 1995-1996

  • Fausto Arias Araluce, “Interholdings” Spain
  • Even Chi Pardo (ciudadano panameño) Universidad de Panamá, Panamá
  • Pablo Crespo Brito, Barcelona, España
  • Bernardo Cutié Rizo, Miami, Estados Unidos
  • Gelvis de Armas O., Facultad, ISRI, La Habana, Cuba
  • Pierre Fils Aimee, (ciudadano haitiano) Toronto, Canadá
  • Idania Gancedo Gaspar, Facultad de Economía, Universidad de La Habana, Cuba
  • Eduardo Hernández Roque, Banco Central de Cuba, La Habana, Cuba
  • Nelson Lim Chang, Departamento de Economía, Universidad de Oriente, Santiago de Cuba
  • Boris Moreno Capote, Iglesia Católica, San Antonio de los banos, Cuba
  • Olga Pérez Soto, Facultad de Economía, Universidad de La Habana, Cuba
  • Amarylis Rodríguez R., Ferris Management Ltd., La Habana, Cuba
  • Maria Sanabria Pis, Banco Central de Cuba, La Habana, Cuba
  • Javier Tella Reyes, USA
  • Jorge A. Uriarte Landa, Gobierno de Canadá, Ottawa, Canadá

Class of 1996-1997

  • Alex Gay Cabrera, ¿Alemania?
  • Yuri Gracia Morales, Integral S. A., La Habana, Cuba
  • Arturo López Callejas, Universidad de Denver, Estados Unidos
  • Ricardo Mansilla Corona, Center for interdisciplinary Research in Sciences and the Humanities of the National University of Mexico (UNAM) Ciudad de Mexico. Web site :  http://www.ceiich.unam.mx/0/13PerCur.php?tblPersonalAcademico_id=12  
  • René Mujica López, España
  • Mahe Parodi Heydrich, Mississauga, Canadá
  • Karel Regalado Alonso, Tembec, Temiskiming, Canadá
  • Judith Rodríguez Marcial, FinTur (empresa financiera) La Habana, Cuba
  • Luciano Rondón Hernández, Montreal, Canada
  • Ana Julia Yanes Faya, Gobierno de Canadá, Ottawa, Canadá

Class of 1997-1998

  • Alexis Aguilera Borges, Cuzco, Peru  
  • Raysa Alcalá Martínez, Investigadora, Oficina Nacional de Administración Tributaria (ONAT), La Habana, Cuba
  • Alberto Baly Gil, ¿Cuba?
  • Luis Casaco, Montevideo, Uruguay
  • Vladimir Díaz, Empresa Seguridad y Protección, La Habana, Cuba
  • Yaimí Farías Dominguez, Miami, Estados Unidos
  • Tania García, Facultad de Economía, Universidad de Oriente, Santiago de Cuba
  • Abel Izquierdo Falcón, Profesor, Universidad Central de Las Villas, Cuba
  • Ernesto Landa Falcón, Gobierno de Cuba, La Habana, Cuba
  • Adrián López Denis, Profesor, Universidad Princeton, Princeton, Estados Unidos
  • Osmel Martínez Trujillo, Toronto, Canadá
  • Cristian Meneses Torres (ciudadano chileno), ¿Chile?
  • Hector Molina, Facultad de Economía, Universidad Central de Las Villas, Cuba
  • Antonio Ruiz Cruz, Facultad de Economía, Universidad de Las Villas, Santa Clara
  • Esteban Salido Gamboa, Miami, United States
  • Víctor Sombart, Faculty de Economía, Universidad de Oriente, Santiago de Cuba
  • Thanh Huong Tran (“Alina”), (ciudadano vietnamita) Viet Nam
  • Eileen Tur, Toronto, Canadá

Class of 1998-1999

  • Maritza Álvares Herrera, Miami, Estados Unidos
  • Hamma Bachra Ahmed, (ciudadano saharaui), Sahara Occidental
  • Maria Boiko, (ciudadana ucraniana) Ucrania
  • Vilma Cervantes R., La Habana, Cuba
  • Marco Díaz Díaz, La Habana, Cuba, (deceased)
  • Kim Frederick, (ciudadano granadino) Grenada
  • Antonio Galis-Menéndez, Estados Unidos Radamés Gonzáles, Santiago de Chile
  • Tatiana González, Ministerio de Comercio Exterior, La Habana, Cuba
  • Luis Gutiérrez Urdaneta, La Habana, Cuba
  • Zoe Medina Valdés, Facultad de Economía, Universidad de La Habana, Cuba
  • Yenniel Mendoza, Instituto Nacional de Investigaciones Económicas, La Habana, Cuba
  • Mavis Morales, Rusia
  • Ana M. Pérez de la Cruz, Panamá
  • Heidi Portuondo C., Barcelona, España Eduardo Ramos D., n.a. Cuba
  • Lester Rodríguez, Business Analyst, Finantix (Italian financial software house),
  • Padua Italy Paul Valdes-Miranda, Market Research Analyst, Ciudad Mexico, Mexico
  • Katty Yeja López, Bahamas

At the Inauguration of the Program, Ambassador’s Residence,September 1994 Gary McMahon, Ambassador Mark Entwisle, Francisco Leon, and Lourdes Tabares

Nicholas Rowe, teaching a Macroeconomics class, October 1994

 

Class of 1996-1997 From left to Right: Nicki; Nicki’s son Junior, (Canadian, not known), Elizabeth Rohr (Carleton University), Rene Mujica, Victor Sombert,  Luciano Rondon,  Ana Julia Yanes Faya, Mahe Parodi, Karel Regalado, E. V. Diaz, Judith Rodriguez, Yuri Gracia,  

Class of 1997-1998   From left to right, Back:  Osmel Martinez, Yaimi Farias Dominguez, Raysa Alcala, Ernesto Landa, Belkis, Alberto Baly, Alina, Paul Valdes-Miranda, Tran Thang Huong, Esteban Salido, Eileen Tur, Alexis Aguilera and Arch Ritter. In front: Ricardo Mansilla, Adrian Denis with Luis Casaco’s son Mauri and Luis Casaco, Guabano, February 1998

Class of 1998-1999 Front row. left to right: M. Bachra-Ahmed, Maritza Alvarez,  Maria Boiko, Kim Frederick, Tatiana Gonzalez, Marcos Diaz Diaz Back row:  Radamez Gonzalez, Vilma Cervantes, Zoe Medina, Katty Yeja, Mavis Morales, Eduardo Ramos, Heidi Portuondo, Ana Margarita Perez. Luis Gutierrez, Paul Valdes-Miranda

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Cuba’s Achievements under the Presidency of Fidel Castro: The Top Ten

NOTE: For additional articles on various aspects of Fidel Castro’s presidency, see:

Fidel Castro: The Cowardice of Autocracy

Fidel’s Phenomenal Economic Fiascoes: the Top Ten

Fidel’s No-Good Very Bad Day

The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did

On September 17, I published and entry on this blog entitled “Fidel’s Phenomenal Economic Fiascoes: the Top Ten” but stated that I would also write a statement on Cuba’s greatest achievements under the leadership of President Fidel Castro. Here it is.

There certainly were economic policy blunders from 1959 to mid-2006 when Fidel Castro stepped aside in favor of his brother Raul. However, as is well known, Cuba made major achievements over these years in socio-economic terms. I will begin with a quick summary of Cuba’s socio-economic performance from 1959 to 1990 and 1990-2010, and then proceed to a listing of the Tip Ten Achievements

I. Socio-Economic Performance, 1959-1990

While the performance of the Cuban economy from 1959 to 1990 period was mixed, major improvements were made in terms of socio-economic well-being. The summary of changes in a few key socio-economic indicators in Table 1 illustrates the absolute and relative improvements achieved in human well-being. Life expectancy and infant and child mortality are summary indications of nutrition, income distribution and poverty and the quality of a nation’s health care system. Literacy and educational attainment are key factors in the investment in human capital and in citizen empowerment in a modern economy.

(click to enlarge)

Cuba’s rankings for these indicators in 1960 were relatively high in the Latin American context so that it was building on reasonably strong foundations.

However, despite improvements in the rest of Latin America, Cuba raised its relative ranking for all five of the socio-economic indicators vis-à-vis the rest of Latin America (excluding the English-speaking Caribbean.)  However Cuba’s economic ranking – in terms of the purchasing power of GDP per person – fell well down the list in 1990 placing Cuba at the 14th rank. As a result, Cuba placed at #10 in the UNDP Human Development Index.

II.        Socio-Economic Performance 1990-2010

Despite the economic difficulties of the 1990s, Cuba continued to improve its socio-economic performance in relative and absolute terms, at least as these are measured by the indicators in Table 2. Cuba continued to lead the Latin American countries in infant mortality and the education indicators. The improvements in education and health indicators and rankings occurred despite weakening of resource allocations and problems of maintaining quality. Cuba’s success in these areas was due largely to the quality and quantity of the educational systems built up in the previous1960-1990 period and institutional momentum.

(click to enlarge)

III.             Top Ten Achievements

Here is a listing of the Cuba’s socio-economic and economic achievements under the Presidency of Fidel Castro. They are not presented in order of importance. Some are the result of specific policy decisions or design or negotiations of Fidel Castro, though others are not.

#1        The 1961 Literacy Campaign

#2        Reorganization of the Health Sector

#3        Redesign of the Educational System

#4        Rapid Expansion of the Tourism Sector

#5       Provision of Medical Services to Latin America and Other Countries

#6        Survival in the Face of the 1989-1993 Economic Melt-Down

#7        Winning Economic Support from the Soviet Union, 1961-1990 and Venezuela, 2004-2010

#8        Establishment of the “Polo Cientifico” and the Development of the Bio-Technological Sector

#9        Dedication to their Jobs by Cuban Citizens during the Catastrophic Decline in Real Wages and Incomes after 1990

#10      Fruitful Collaboration with Foreign Enterprises


IV.             Achievements in Detail

#1        The 1961 Literacy Campaign

The 1961 literacy campaign was an inspired approach to improving educational levels among the relatively large proportion of the population that was illiterate in 1959. This was done at relatively low cost with strongly motivated volunteers. It quickly improved literacy rates immensely, though there is some disagreement as to the quality of the literacy that was achieved.

#2       Reorganization of the Health Sector

Cuba succeeded in reorganizing its medical system so as to provide universal access to health services, and managed to obtain excellent results relative to the amounts of resources that it was able to devote to the health sector.  As a result, Cuba’s health indicators improved quickly and remain among the very best in Latin America (See Tables 1 and 2)

#3        Redesign of the Educational System

Cuba’s reorganization and expansion of the educational system in the early 1960s also made education universally accessible and increased investment in people (human capital.) As a result, Cuba moved from 5th place in Latin America in terms of literacy and school enrolment in 1970 to 1st in 2007 – a fine achievement.

#4        Rapid Expansion of the Tourism Sector

As a result of the 1989-1994 economic melt-down, it was decided to earn foreign exchange by expanding the tourist sector. This required massive involved massive investment by both Cuba and foreign enterprises and the rapid shifting of resources to the sector. This was done and by 2008, Cuba was earning almost MN 2.4 billion from tourism.

#5        Provision of Medical Services to Latin America and Other Countries

By the latter 1990s, Cuba had a major surplus of medical personnel, with doctors and nurses posted in small tourist hotels and day care centers. However, this was converted into a major humanitarian asset, with Cuba’s provision of medical assistance to many countries in need, and expanding the Latin American Medical School outside Havana. The services of medical personnel are also exported to other countries – paid mainly by the Government of Venezuela. The foreign exchange earnings from medical (and educational) service exports amounted to MN 6.1 billion, almost half of Cuba’s foreign exchange earnings in 2008, as indicated in the accompanying chart.

#6        Survival in the Face of the 1989-1993 Economic Melt-Down

With the loss of Soviet subsidization and the near 40% decline in income per capita from 1989 to 1994, Cuba reorganized its economy, “depenalizing” the use of the US dollar, legalizing farmers’ markets, liberalizing self-employment and promoting new economic activities and exports etc. With no support from the international financial institutions of which it was not a member, thanks to the embargo with the United States, Cuba survived, at a cost borne almost directly, immediately and totally by its citizens.

#7       Winning Economic Support from the Soviet Union, 1961-1990 and Venezuela, 2004-2010

As noted in an earlier blog, The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did posted on September 9, 2010 ,  Cuba received generous subsidization from the Soviet Union for a substantial period of time. An estimate of the amount of the subsidization is presented in the accompanying chart.  Presumably President Fidel Castro is responsible for negotiating this support. Similarly, Cuba has received substantial support from President Chavez of Venezuela through export and investment credits, low-cost oil imports and generous payments for Cuba’s exports of medical services.  How beneficial any of this assistance has been is debatable partly because it has been and is unsustainable and it has made possible the continuation of economic policies and institutions that have been counterproductive in the longer term. Fidel Castro can undoubtedly take the credit for these special relationships.

(click to enlarge)

#8        Establishment of the “Polo Cientifico” and the Development of the Bio-Technological Sector

To my knowledge, there has been no careful analysis of Cuba’s huge investment in the “Polo Cientifico” and the Bio-Technological sector. Indeed, I have not seen any analysis of the investment in the sector so I cannot judge accurately if it has been commercially viable so far or not.

However, Cuba is beginning to achieve major exports of pharmaceutical products amounting to MN 296.8 million pesos vis-à-vis MN 233.4 million for sugar in 2008.  These exports should continue to increase in future and the investment in the sector may be valuable. Moreover, Cuba’s investment in the “Polo Cientifico” has built a professional and institutional foundation for future success in pharmaceutical and other scientific areas.

#9        Dedication to their Jobs by Cuban Citizens despite the Decline in Real Incomes after 1990

I have always been impressed at the professionalism of many Cuban citizens that I have known over the years since 1990. In the face of huge declines in the purchasing power of their incomes, they continued to work seriously and with dedication in medicine, the Universities, the schools, the public service, or other employment. Many professionals and others in effect subsidized their state sector employers by earning other incomes that permitted them to survive in the unofficial economy. We have all heard of the doctors and engineers forced to provide taxi services on the side in order to make ends meet and continue to function in their professional capacities. The dedicated work of countless citizens over the difficult years of the Special Period, 1990-2010, is essentially what has brought about some recovery since the depths of the depression in 1993.

#10      Fruitful Collaboration in Nickel, Oil, Gas and Electric Power Generation with Sherritt International

Cuba opened up to foreign direct investment in joint venture arrangements with state firms. This has paid off handsomely, most notably with Sherritt International (nickel, cobalt, oil, gas, and electric power) and other enterprises as will be argued later in this Blog.

 

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State Sector Lay-offs then Private Sector Job Creation: Has Raul Got the Cart before the Horse?

On Monday September 13 2010, the Cuban Labour Federation announced a new government policy on lay-offs in the state sector and expansion of self-employment and cooperative sector employment.( Pronunciamiento de la Central de Trabajadores de Cuba.) As is now well known, the policy calls for the lay-off of some 500.000 workers, about 10% of Cuba’s entire labor force and their re-incorporation into self-employment activities mainly, but also some co-operative activities. This of course marks a major strategic re-orientation of Cuba’s economic structure. The economy already was a “mixed economy” though with a small self-employment sector outside of agriculture, but it will now shift further towards a “marketization.” Raul basically is asking the small and harassed self-employment to come to the rescue of the Cuban economy by generating productive employment because the state sector ostemsibly has failed to do so. Many questions can be and have been raised by outside observers as to how this new approach will be implemented. A couple of questions are noted here. I. Has Raul Got it “Bass Ackwards”? 1.      Prior to any state sector lay-offs, would it not be wise to redesign the framework within which small enterprise operates so that it will be in a position to expand and absorb the laid-off state sector workers? Firing state sector workers and hoping that they somehow will be reabsorbed somewhere sounds distinctly un-socialist. 2.      If workers’ efforts and productivity are low, is this due mainly to sloth and laziness? Or is it instead due to a dysfunctional incentive structure in which workers are paid very little in Moneda Nacional, but somehow have to acquire  “Convertible Pesos” to survive with purchase in the Hard Currency (formerly dollar) stores? As the old saying goes:  “They pretend to pay us and we pretend to work.” Maintenance Workers at the Australia Sugar Mill, November 1994; Certainly working hard, but probably laid off in 2002 when the Mill was converted to a museum;  visited with Nick Rowe who “blogs”  at “Worthwhile Canadian Initiative” and Larry Willmore, who “blogs” at “Thought du Jour” (Photo by A. Ritter) 3.      Is low productivity also due to mismanagement that wastes human effort? Is inefficiency also the result of low capacity utilization in enterprises  for example, in state stores that have little to sell, in offices with little to do, or in industrial enterprises idled through poor maintenance, insufficient imported inputs, breakdowns etc.? (Note the diagram below that illustrates the reduction in non-sugar industrial output since 1989. Despite allegations of record economic growth in the late 2000s, industrial output remains around half of its 1989 level.) II.   Who will be laid off and how will it be done? 1.      Will those who are laid off be good candidates for creating their own self-employment small businesses? 2.      Will those laid-off be offered “severance packages” or “buy-outs” that would provide them with an amount of capital to begin their own small businesses? 3.      Will older workers be offered “early retirement packages” that would assist them in starting a small business or co-operative? 4.      Will workers be free to self-select – with a “severance package” – so that they can start a small business? 5.      Will those who are laid off be the truly redundant and unproductive workers, in which case they may not have the aptitude to start their own small business? 6.      If laid-off workers can self-select, will the state sector enterprises or bureaucracies then lose their more capable and industrious workers? 7.      How generous will the unemployment benefits be and how long will they last while workers look for new jobs or attempt their own job-creation? In any case, the process of laying people off will be most difficult. The anxieties generated among the population must be intense and the Workers Assemblies now discussing these issues must be acrimonious. III.   Creating an “Enabling Environment” for Micro, Small and Cooperative Enterprise Since 1995, public policy has been aimed at containing small enterprise – after liberalizing it in 1993 – by licensing limitations, tight and vexatious regulations, onerous taxation, harassment by inspectors and negative political and media stigmatization. This has not been an easy environment for the functioning of self-employed to operate. Major changes will be necessary if the small enterprise sector is to expand in order to be able to absorb the lion’s share of the displaced state workers. How can this be done? A previous Blog outlined some possible measures: Raul Castro and Policy towards Self-Employment: Promising Apertura or False Start? Here are some of the key policies that would be necessary to generate a flowering of the micro, small, and cooperative enterprise sector. Additional policies regarding advertising and vending 1. Liberalize Licensing: Let anyone and everyone open a small enterprise ( Result: competition will push prices downwards and quality upwards); 2. Permit All Types of Self-Employment, including Professional and High-Tech while maintaining state medicine and health systems intact; 3. Raise the limit on employees to 5, 10 or 20; 4. Provide legal sources for the purchase of Inputs; 5. Permit access to imported inputs (outside TRDs and at the exchange rater available for the state sector); 6. Eliminate silly and vexations restrictions; 7. Make microenterprise taxation simpler and fairer; 8. Establish micro-credit institutions; 9. Establish a “Ministry for the Promotion of Small Enterprise.” Photographer, at the Capitolio circa 1996, (Photo by A, Ritter)

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Fidel’s Phenomenal Economic Fiascoes: the Top Ten

Fidel Castro recently clarified an allegedly erroneous quotation and stated something to the effect that “Yes the Cuban Model does indeed work”. It would have been difficult for Fidel to do a “Mea Culpa” and agree that half a century of his own management of the Cuban economy had been erroneous and counter-productive.

However, as the grand economic “strategizer” as well as the micro-manager of many issues that captured his attention President Fidel Castro was responsible for a long list of economic blunders. Here is my listing of Fidel’s most serious fiascoes.

Next week I will try and produce a listing of Cuba’s Greatest Achievements under President Castro. Unfortunately I find this more difficult than to identify the failures.

Top Ten Economic Fiascoes

Fiasco # 10     The Instant Industrialization Strategy, 1961-1963:

Fiasco #9        The 10 Million Ton Sugar Harvest Strategy, 1964-1970

Fiasco #8        The “New Man”

Fiasco #7        The “Budgetary System of Finance”

Fiasco #6        The “Revolutionary Offensive” and the Nationalization of Almost Everything

Fiasco #5        Revolucion Energetica

Fiasco #4 Shutting Down Half the Sugar Sector

Fiasvco #3 A Half Century of Monetary Controls and Non-Convertibility

Fiasco #2        Suppression of Workers’ Rights

Fiasco #1        Abolition of Freedom of Expression


Fiasco # 10     The Instant Industrialization Strategy, 1961-1963:

Cuba’s first development strategy, installed by the Castro Government in 1961, called for “Instant Industrialization”, the rapid installation of a wide range of import-substituting industries, such as metallurgy, heavy engineering and machinery, chemical products, transport equipment and even automobile assembly.

The program proved unviable as it was import-intensive, requiring imported machinery and equipment, raw materials, intermediate goods, managerial personnel, and repair and maintenance equipment. Because the sugar sector was ignored, the harvest fell from 6.7 million tons in 1961 to 3.8 in 1963 generating a balance of payments crisis. The end result was that Cuba became more dependent than ever on sugar exports, on imported inputs of many kinds and on a new hegemonic partner, the Soviet Union.

The strategy was aborted in 1964.

Fiasco #9        The 10 Million Ton Sugar Harvest Strategy

The failure of the “Instant Industrialization” strategy led to an emphasis on sugar production for export with a guaranteed Socialist Bloc market for 5 million tons per year at a price well above the world price – from 1965 to 1970. The over-riding preoccupation became the 10 million ton goal, which according to President Castro was necessary for “defending the honor, the prestige, the safety and self-confidence of the country” (February 9, 1970.)

Fidel seemed happiest when conducting a campaign military style as he did during the effort to produce 10 million tons of sugar.

If it had been implemented in a measured way, a strategy to increase export earnings from sugar would have been reasonable. However, as 1970 approached, the implementation of the 10 million ton target became increasingly forced. Other sectors of the economy were sacrificed as labor, transport capacity, industrial inputs, energy, raw materials and national attention all focused on sugar.

This strategy was aborted in 1970.

Fiasco #8        The “New Man”

In order to mobilize human energies for the 10 million ton harvest a radical “Guevaraist” approach was adopted involving the construction of the so- called  “New Man.” The idea behind this was a vision of the Cuban Nation as a guerrilla column marching behind Fidel – somewhat like his marches down the Malecon in 2000-2006 – single-mindedly pursuing a common objective, willingly sacrificing individual interests for the common good and with the esprit de corps, discipline and dedication of an idealized guerrilla band. To promote this revolutionary altruism, the government used public exhortation and political education, “moral incentives” instead of material incentives and proselytizing and enforcement by the Party and other “mass organs” of society.

By 1970, it was apparent that people could not be expected to sacrifice their own and their family’s material well-being and survival for some objective decreed and enforced by the Party. The approach was dropped in 1970.

Fiasco #7        The “Budgetary System of Finance”

In a simultaneous experiment, a so-called “budgetary system of finance” was installed under which enterprises were to operate without financial autonomy and without accounting, neither receiving the revenues from sales of their output nor paying for their inputs with such revenues – somewhat like University Departments.

Without a rational structure of prices, and without knowledge of their true costs or the value of their output, neither enterprises nor the planning authorities could have an idea of the genuine efficiencies of enterprises, of sectors of the economy, or of resource-use anywhere. The result of this was disastrous inefficiency.  In President Castro’s words:

“..What is this bottomless pit that swallows up this country’s human resources, the country’s wealth, the material goods that we need so badly? It’s nothing but inefficiency, non-productivity and low productivity.” (Castro, December 7, 1970)

This system was also terminated in 1970.

Fiasco #6        The “Revolutionary Offensive” and the Nationalization of Almost Everything

In the “Revolutionary Offensive” of 1968, Fidel Castro’s government expropriated most of the remaining small enterprise sector on the grounds that it was capitalistic, exploitative, and deformed people’s characters, making them individualistic instead of altruistic “New Men”. The result was true living standards were impaired, product quality, quantity and diversity deteriorated, enterprises were pushed into the underground economy,  theft from state sector and illegalities become the norm and citizen’s entrepreneurship was suppressed. This policy was changed in 1993, then contained by tight regulation, licensing and taxation after 1985,.

Again in September 2010, the government of Raul Castro appears ready to expand the small enterprise sector in hopes that it will absorb most of the 500,000 workers to be laid off from the state sector.

Fiasco #5        “Revolucion Energetica”

President Castro’s “Revolucion Energetica” included some valuable elements such as conservation measures, re-investment in the power grid and the installation of back-up generators for important facilities such as health centres. A questionable feature of the plan is the replacement of large-scale thermal-electric plants with numerous small generators dispersed around the island. But the use of the small-scale generators likely constitutes a major error for the following reasons:

  • The economies of large scale electricity generation are lost;
  • Synchronizing the supply of electricity generated from numerous locations to meet the minute-by-minute changes in electricity demand is complicated and costly;
  • Problems and costs of maintaining the numerous dispersed generators are  high;
  • Logistical control and management costs escalate as the national grid is replaced with regional systems.
  • Expensive diesel fuel is used rather than lower cost heavy oil:
  • Diesel fuel has to be transported by truck to the generators around the island;
  • Investments for the storage of diesel fuel in numerous supply depots are necessary;
  • Problems of pilferage of diesel fuel may be significant, and costs of security and protection may be high.

No other country in the world has adopted this method of generating electricity, suggesting that it does not make sense economically.

The energy master-plan also ignores a possible role of the sugar sector in producing ethanol and contributing to energy supplies. The experience of Brazil indicates that at higher petroleum prices, ethanol from sugar cane becomes economically viable. The shut-down of some 70 out of Cuba’s 156 sugar mills in 2003, the moth-balling of another 40 and the contraction of the whole sugar agro-industrial service cluster is also a major loss for electricity generation.

Fiasco #4        Shutting Down Half of the Sugar Sector

In 2002, Castro decided that there was no future in sugar production, a decision prompted by low sugar prices at the time and undoubtedly the continuing difficulties in the sector. He decreed the shut-down of 71 of 156 sugar mills, taking some 33% of areas under sugar cane out of production and displacing about 100,000 workers. It was hoped that land-use would shift to non-sugar crops, that remaining mills would become more productive, and that displaced labour would be reabsorbed elsewhere.

In any case, sugar production has continued to decline which is unfortunate given high prices in recent years. There has not been a shift into ethanol production. The physical plant has continued to deteriorate. The cluster of activities surrounding sugar must be near collapse.  The sugar communities are left without an economic base and some face the prospect of becoming ghost towns.

Fiasco #3        A Half Century of Monetary Controls and Non-Convertibility

Responsibility for Fiasco #3 is shared in part with Che Guevara, who as President of the Banco Nacianal de Cuba, presided over imposition of monetary controls and implementation of the policies that made Cuba’s peso non-convertible for half a century.

Cuba’s monetary system has been and is a serious obstacle to the freedom of Cuban citizens. Citizens’ incomes have had purchasing power outside the country only when permitted to be exchanged for a foreign convertible currency and then only at a discount for some decades. As is well known, the official exchange rate for Cuban citizens has been in the area of  22 pesos (Moneda Nacional) to US $1.00, so that the purchasing power of the average monthly salary – 415 pesos in 2008 (Oficina Nacional de Estadisticas, 2009, Table 7.4) is about US$20.00.

Fiasco #2        Suppression of Workers’ Rights

Thanks to the regime implanted by President Castro, Cuban workers do not have the right to undertake independent collective bargaining or to strike. Unions are not independent organizations representing worker interests but are official government unions. Independent unions and any attempts to establish them are illegal.

Cuba has signed the Universal Declaration of Human Rights and is a member of the International Labor Organization.  The basic United Nations Declarations support freedom of association for labor. The International Labor Organization’s Declaration on Fundamental Principles and Rights at Work includes, as the first fundamental right of labor, “freedom of association and the effective recognition of the right to collective bargaining”

The central function of independent labor unions is to provide countervailing power to oligopolistic or monopolistic employers in wage determination and in the setting of the terms and conditions of work. Unions have been successful in western countries in raising wages, improving the equity of income distribution and improving work conditions.

In the Cuban case, workers have confronted a monopolistic employer – the state – that also controls their unions which are in effect “company unions.” By controlling the unions and containing their wage demands, wages have been held down. The absence of independent unions has permitted the government to implement counterproductive economic policies year after year and has muted the urgency of undertaking economic reforms.

Fiasco #1        Abolition of Freedom of Expression

An important requirement for the sustained effectiveness of an economic system is the ability to freely, openly and continuously analyze and criticize its functioning.  Open analysis and criticism in a context of free generation and diffusion of information provide a necessary spur for self-correction, exposing illegalities, flawed policies and errors.  Free analysis and criticism is vital in order to bring illicit actions to light, to correct errors on the part of all institutions and enterprises as well as policy makers and to help generate improved policy design and implementation. This in turn requires freedom of expression and freedom of association, embedded in an independent press, publications systems and media, independent universities and research institutes, and freely-functioning opposition political parties.

Unfortunately this has been lacking, thanks to the Castro regime.  The media and the politicians have largely performed a cheerleader role, unless issues have been opened up for discussion by the President and the Party.

The near-absence of checks and balances on the policy-making machinery of the state also contributes to obscuring over-riding real priorities and to prolonging and amplifying error.  The National Assembly is dominated by the Communist Party, meets for very short periods of time – four to six days a year – and has a large work load, so that it is unable to serve as a mechanism for undertaking serious analysis and debate of economic or other matters. The cost for Cuba of this situation over the years has been enormous.  It is unfortunate that Cuba lacks the concept and reality of a “Loyal Opposition” within –the electoral system and in civil society.  These are vital for economic efficiency, not to mention, of course, for authentic participatory democracy.

NOTE: For additional articles on various aspects of Fidel Castro’s presidency, see:

Fidel Castro: The Cowardice of Autocracy

Cuba’s Achievements under the Presidency of Fidel Castro: The Top Ten

Fidel’s No-Good Very Bad Day

The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did

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