Category Archives: Featured

Book Review Essay: THE EMERGING NON-STATE SECTOR IN CUBA’S ECONOMY

Carmelo Mesa-Lago, University of Pittsburgh,

Latin American Research Review, July 2017  https://doi.org/10.25222/larr.2

This essay reviews the following works:

Open for Business: Building the New Cuban Economy. By Richard E. Feinberg. Washington DC: Brookings Institution Press, 2016. Pp. vii + 264. $22.00 cloth. ISBN: 9780815727675.

Miradas a la economía cubana: Análisis del sector no estatal. Edited by Omar Everleny Pérez Villanueva and Ricardo Torres. La Habana: Editorial Caminos, 2015. Pp. 163. $5, paper. ISBN: 9789593031080.

Entrepreneurial Cuba: The Changing Policy Landscape. By Archibald R. M. Ritter and Ted A. Henken. Boulder, CO: First Forum Press, 2015. Pp. xiv + 374. $79.95 cloth. ISBN: 9781626371637.

Retos para la equidad social en el proceso de actualización del modelo económico cubano. Edited by María del Carmen Zavala et al. La Habana: Editorial Ciencias Sociales, 2015. Pp. vi + 362. $20 paper. ISBN: 9789590616105.

Soon after current president of the State Council Raúl Castro took over power in Cuba from his brother Fidel in 2006, he started structural reforms to cope with the serious socioeconomic problems accumulated in the previous forty-five years. Some authors, including a few in this review, argue that Cuba is in transition to a mixed economy. Despite the importance of these changes, however, the official view is that central planning will predominate over the market, and state property over private property.1 A main reform goal was to fire 1.8 million unneeded workers in the state sector, which demanded an expansion of the “non-state sector” (NSS) to provide jobs to those dismissed. The four books I review are commendable additions to the growing literature on the NSS (inside and outside Cuba), as they fill some of its existing gaps, to be identified below.2 A few authors rely on surveys to gather data, but surveys are not easy to take in Cuba; hence the majority used interviews of different size and representativeness, as well as in-depth conversations.

Within the NSS, the most dynamic four groups are self-employed workers (507,342), usufruct farmers (312,296), and members of new nonagricultural and service co-ops, NASCs (only 7,700 so far). Altogether these make up 17 percent of the labor force, out of a total 29 percent in the entire NSS.3 Except for the most recent NASCs, the other three forms were legalized during the severe crisis of the 1990s but did not take off until much later. Selling and buying of private dwellings, banned in 1960 and reauthorized in 2011, involve at least 200,000 transactions but still only 5 percent of the total housing stock. The books reviewed in this essay mainly concentrate on self-employment and to a much lesser extent on NASCs.

The main gaps treated by the books are the NSS’s history; size and personal profiles; relations with the state; progress achieved and obstacles faced; the role of variables—age, gender (most treated), race, educa­tion, and location—on growing inequalities; particular issues such as access to raw materials, capital and credit, competition, and taxes; and NSS perspectives. This review discusses the data, method, and evidence that each researcher uses and the major issues and findings, arguing that the size of the NSS remains questionable.

In Entrepreneurial Cuba, Archibald Ritter and Ted Henken combine their economic and sociological exper­tise to produce an encyclopedic, balanced, and laudable volume on the development of the NSS in Cuba. Targeted on self-employment and, to a lesser extent, on NASCs, the book also tackles broader topics like the “underground” economy. It starts with an examination of small enterprises in general, internationally, and its lessons for Cuba. Based on historical and comparative approaches, Ritter and Henken discuss the evolution of self-employment throughout Cuban contemporary history. In the socialist period, they com­pare Cuban policies with those of the USSR and Eastern Europe; furthermore they contrast Fidel’s hostility to the NSS (except for reluctant support in times of economic crisis) with Raúl’s more pragmatic and posi­tive style, which does not exempt the sector from tight controls, restrictions, and taxes. Largely based on my cycles approach,4 the history of self-employment under socialism is divided in three periods (each one covered in a chapter): 1959–1990, trajectories and strategic shifts; 1990–2006, the “Special Period”; and 2006–2014, Raúl’s reforms.

Ritter and Henken conclude that the NSS has grown and achieved substantial progress: for instance, increase in authorized activities and licenses, broadened legal markets, deduction of part of the expenses for tax purposes, micro credits and banking facilities, and rental of state facilities. Conversely they identify limi­tations, like narrow definition of legal activities, exclusion of most professional and high-tech occupations, multiple taxes and taxation at a high level, lack of wholesale markets, bureaucratic resistance, obstacles to hiring employees, and discrimination in favor of foreign firms. They provide suggestions to overcome these problems. Lack of space impedes a more profound treatment of this book, the most comprehensive and profound on self-employment so far. The structure of the book, combining historical stages and current analysis of self-employment and NASC, however, is somewhat complex and leads to a certain overlapping.

Ritter and Henken rely on three series of interviews conducted in Cuba with sixty self-employed workers in 1999–2001, half of them re-interviewed in follow-up visits in 2002 and 2009 and, finally, some revisited in April 2011 to evaluate the impact of Raúl’s reforms. The authors select the three most dynamic, lucrative, and sizeable private activities: small restaurants (paladares), taxis, and lodging. They asked their informants about three issues: (1) ambitions and expectations for the future (whether they expected to become true small- and medium-sized enterprises—SME—in the long run); (2) survival strategies in negotiating with the state (how they responded to the government regulations, licenses, and taxes); and (3) distinctions between licensed and clandestine self-employed workers.

Accompanying abundant evidence, deep analysis, statistical tables, synoptic charts, figures, and useful appendices (including a list of the 201 authorized activities for the self-employed and a timetable of the evo­lution of NSS in 1959–2014), the authors intersperse vignettes that allow the reader to better understand the daily life of the self-employed. Occasional jewels in the book brighten our knowledge, such as uncover­ing in fascinating detail the bureaucratic shutdown of El Cabildo, which was the most prosperous private, medium-sized business in Cuba.

Miradas a la economía cubana, a collection edited by well-known Cuban economists Omar Everleny Pérez Villanueva and Ricardo Torres, includes twelve essays that offer a first-rate sample of scholarship on the NSS at the Center for the Study of the Cuban Economy, the best economic think tank in Cuba. The anthology, an excellent complement to the Ritter and Henken book, includes self-employment and NASCs. In the prologue, Juan Valdés Pérez notes that “the new economic model in Cuba is moving [transita] toward a mixed economy, based on a public sector, a mix-capital sector, and a private sector, mostly SME” (14). Most contributors to the volume propose reasonable policies to help the consolidation and further expansion of the NSS.

In the opening chapter, Torres discusses the role of the private sector in a centrally planned economy such as Cuba, which generates an intrinsic conflict. Despite NSS advances, the government still sees it as a supplement to the state sector and imposes clear limits. Hence the NSS role is and will continue to be very minor, if currents trends hold. An important point, among many discussed by Torres, is that its productivity is low, despite the very highly educated labor force (ranked at the top of Latin America), and shows a declin­ing trend due to the low skills of the activities approved. He ends by suggesting, “In a scenario [Cuba] where public enterprises are predominant and mostly inefficient, wealth is not socialized and man is not liberated from alienation, just the opposite” (25). Torres believes that the solution to all existing problems is neither privatization of all public assets nor to insist on old formulas overcome by time, and urges a serious national social debate on these issues.

Pérez Villanueva analyzes and defines self-employment and SME, tracing their evolution and identifying needs such as autonomy, a wholesale market with competitive prices, facilitation of payments through the national banks, and use of highly skilled personnel; he also notes adverse effects like social inequalities (see Zavala et al., below). At the end of his chapter, he asserts that “the Cuban SME would be more viable than the actualization of our economic model and contribute more positive results, providing that the government understands its role and potential” (35).

Camila Piñeiro provides the most comprehensive and deep analysis of NASCs so far. These cooperatives grew 74 percent, from 198 to 345, in 2013–2014, but their tempo slowed to 6 percent in 2015.5 Based on diagnosis and audits done on sixty NASCs in 2014, Piñeiro identifies their achievements (increase in income and motivation, improvement in the locale and working conditions) and problems (complex and delayed creation, insufficient training, and lack of a wholesale market). The most successful NASCs are those cre­ated by the voluntary initiative of a group of persons that share the same goals and values (23 percent of all NASCs), and the least successful are those coming from former state enterprises, without negotiating with their workers so that they accept what is decided from above (77 percent).

Mariuska Sarduy, Saira Pons, and Maday Traba analyze tax evasion and underdeclaration of income among self-employed owners. They report that evasion was 12 percent of total fiscal revenue and 60 percent of registered self-employed contributors in 2013–2014. They carried out 300 interviews with self-employed workers in Havana in 2014 and found that 55 percent omitted income in their declaration for the follow­ing reasons: 95 percent due to very high taxes; 77 percent blamed the complex procedure to pay taxes; 80 percent knew that evasion or underdeclaration are toughly penalized crimes, but half believed that they were necessary to survive, and 20 percent thought that it was improbable that fiscal authorities would catch them.

Expanding her substantial work on geographic inequalities, Luisa Íñiguez uses the 2012 population census to explore the distribution of NSS enterprises in Cuban provinces and municipalities and shows their differences and contribution to social inequalities. She develops various maps of the island, displaying the location of total NSS enterprises, as well as key components such as the self-employed, usufruct farmers, and small private farmers. In addition, she calculates percentages of components of the NSS relative to the employed labor force. The NSS developed much further after 2012, but her work remains valuable and sets a solid foundation for future study.

The role of women in microenterprises is examined by Ileana Díaz and Dayma Echevarría, relying on data from the 2012 population census and Ministry of Labor and Social Security in 2013, and a survey of thirty-five self-employed owners in Havana circa 2014 (63 percent women and 37 percent men). Among other gender inequalities, they find that women are more hurt than men by the lack of a state policy to foster microenterprises, and by poor access to credit as well as to legal and accounting advice. Interviewees answered key questions with a fair consensus: 50 percent noted unfair competition from state and mixed enterprises; most preferred to work as self-employed instead of for the state; public or private financing was judged insufficient; elementary-secondary school didn’t help in their activity but university did; and they noted poor access to wholesale markets, telecommunications, and vanguard technology. Virtually all inter­viewees, but a sizably lower percentage of women than men, said that their success was more than expected. Both genders agreed on the major obstacles: limited demand, excessive state bureaucracy and regulations, too much competition, absence of a wholesale market, and difficulties to get inputs.

Retos para la equidad social, edited by Maria del Carmen Zavala et al., contains twenty contributions, all but one authored by women, focused on socioeconomic inequality under Raúl’s structural reforms. Three chapters of the book deal with expanding inequalities among the self-employed by age, gender, race, educa­tion, and location, and also with their motivation, satisfaction, competition, capital access, obstacles faced, and views of the future.

The best chapter in the collection, by Daybel Pañellas, Jorge Torralbas, and Claudia Caballero, relies on a survey taken between October 2013 and March 2014 among 419 persons self-employed in fifty-seven activities and located in three districts of Old Havana. They find that age, gender, education, and location are important factors in the quality of occupation, access to capital, and earnings of the self-employed. In the sample, 76 percent worked by themselves, without employees; 13 percent were employers and 11 percent employees; 64 percent were men and 36 percent women; 48 percent were white and 52 percent nonwhite; 54 percent were middle-aged adults, 30 percent young people, and 15 percent elderly; 54 percent had precollege or university education, 31 percent had a low level of education, and 15 percent had a technical education (a highly trained labor force and NSS, also noted by Torres). Not only are women underrepresented, but their activities reproduced their roles in domestic life, such as work in cafeterias, food preparation, manicure, makeup, and as seamstresses. While women rented rooms mostly in national pesos (CUP), men rented rooms in the more advantageous convertible pesos (CUC = 24 CUP). Combining education, race, and gender, the best-educated white males had better occupations than the lowest trained nonwhite females (e.g., computer programing vis-à-vis seamstress). The self-employed were mainly attracted by these features of self-employment (not exclusive categories): better income (80 percent), easier labor journey (20 percent), and being their own bosses (15 percent). Their level of sat­isfaction ranged from so-so (53 percent), to good/very good (38 percent), to bad/very bad (9 percent)—the higher the educational level the more occupational satisfaction.6 Success in competition was attributed to the quality of product or service (56 percent), business location (24 percent), and low prices (14 percent). Access to capital was mostly by employers that receive remittances, are white, and have higher or mid­dle education, ample social networks, and good locations; conversely, investment is minimal among low-educated nonwhites. Obstacles encountered by the self-employed were lack of access to raw materials (49 percent), heavy taxes (44 percent), lack of financing (35 percent), state control and inspections (33 percent), and legal procedures (23 percent). These proportions varied in the three districts and were influenced by gender, race, and type of activity; for example, controls and inspections were mostly mentioned by workers with low education, nonwhites, and women. On their perceptions for the future, 81 percent believed that the self-employed would prosper—especially if the mentality of the state and the self-employed changes— and 10 percent didn’t think so.

Geydis Fundora expands on the growing inequalities enumerated above, based on a study of fifty-two self-employed residents of Havana Province in 2010–2013, reaching similar conclusions. Out of the 201 activities approved, 65 percent have a male profile; paladar owners mostly hire women because of their sex appeal to clients and because the work is similar to that done at home; other activities are in practice barred to the “weak sex.” Men tend to be employers and women employees, thus resulting in lower decision making and income for women. The elderly are disadvantaged because most activities require physical strength; most young people are hired as employees and in less specialized activities. There is no political will to gather statistics on race, but whites predominate over blacks and mulattoes, opposite to what Pañellas, Torralbas, and Caballero found; nonwhites have less access to capital and hence to success and higher earnings. Those that have a high initial capital—coming from savings, remittances, or hidden foreign investment—enjoy an advantage over the rest not only to establish the business but also to buy inputs, pay taxes, and bribe inspec­tors. Location in more attractive and populous zones are keys to success.

Magela Romero targets self-employed women engaged on infant care, a most-needed occupation to increase female participation in the employed labor force, which was 37 percent of the total in 2015;7 the low proportion is an outcome of resilient traditional gender roles at home and work. Based on eighteen cases in the town of Cojímar (in Havana) in 2013, the study found that all those self-employed in infant care were women, and half of them had previously been informal domestic employees. All said that their main attraction was a higher income, but all also complained of exhausting work and high responsibility with a monthly salary of 200 CUP per infant, with a maximum of five infants, equal to US$40, still three times the mean average salary in the state sector.

Open for Business by Richard E. Feinberg deals mainly with the economic events following the process of normalization between the United States and Cuba that started at the end of 2014, preceded by a summary of the previous state of the Cuban economy and Raúl’s reforms. Feinberg believes that the emerging NSS “offers the best hope for a more dynamic and efficient Cuban economy, especially if it is permitted to partner with foreign investment and with more efficient state-owned enterprises” (132). One chapter on emerging entrepreneurs is based on a monograph he published in 2013, which at that time provided substantial data and analysis on self-employment, preceding the other three books reviewed herein.8 One graph and one table are updated to mid-2015, but most of the text remains unchanged. The author and an assistant had in-depth conversations with twenty-five microentrepreneurs between March 2012 and April 2013, emphasiz­ing financial issues (averages of time open, number of employees, starting capital, and use of domestic and foreign capital). Interesting profiles of self-employed activities are given on paladares, cafeterias and cater­ing, bed and breakfasts, accounting, a shop selling handicrafts to tourists, building construction and house remodeling, electronic repairs, and renting of 1950s cars; from such profiles he extracts useful lessons.9 A stimulating innovation is the selection of twelve young Cuban “millennials” (aged 20–35), one of them the owner of a cafeteria, for appealing interviews based on ten questions.

Feinberg envisages four stages of capital accumulation of microbusinesses: primitive household accumu­lation, early-mover super-profits, growth and diversification, and strategic alliances with state enterprises and with foreign investors (not yet authorized). Like the other authors whose books I review here, he stresses the progress and achievements of self-employment, perhaps more so than other authors. But he also pin­points the many constraints the self-employed face: poor banking and meager credit, serious scarcity of inputs of all sorts (as a visible exception he gives the wholesale market “El Trigal,” temporarily closed in May 2016), shortage of commercial rental space, a very challenging business climate, and government restric­tions including persecution by government inspectors and heavy fines, as well as constraints on capital accumulation and business growth. He provides his own recommendations to alleviate these problems.

One fundamental question left unanswered is the size of the NSS. Unfortunately, there are no official data on the NSS, complete and disaggregated by components. Neither Ritter and Henken nor most Cuban authors provide such a figure (Torres estimates it as 27 percent of the labor force; p. 21). The only elaborated calculation in the four books is Feinberg’s, who states that “altogether, as many as 2 million enterprising Cubans—40 percent of total employment—and possibly even more can be counted within the private sector” and predicts that “in the next three to five years, total private employment could reach 45 to 50 percent of the active labor force” (Feinberg, 132, 139; emphasis added); this exceeds by 10 percentage points Torres’s middle-term estimate of 35 to 40 percent (24).

Feinberg overestimates the NSS’s size. First, an important semantic and substantive issue is that not all NSS participants are private, only most self-employed workers and their employees as well as small private farmers are. Usufruct farmers, NASCs, and other cooperatives’ members do not own their land or buildings; these belong to the state, which leases them to the workers. Second, several figures in Feinberg’s estimates are either questionable or not supported by specific sources; the main query is what he labels “other private activities (estimated),” such as full-time unregistered self-employment and partial self-employment done by state-sector employees, which add up to between 185,000 and 1,185,000, based on guesstimates (while it is true that some government employees work part-time as self-employed workers, it is impossible to know for how many hours, which makes it difficult to estimate average full days of work). Third is the inclusion of 353,000 members of credit and service cooperatives (CCS), because that number exceeds by 65 percent the total number of all co-op members in 2015, including agricultural production (UBPCs, Basic Units of Agricultural Production, and CPAs, Agricultural Production Co-ops), CCSs (Credit and Services Co-ops) and NASCs.10 Furthermore, many private and usufruct farmers are also members of CCSs, thus they are counted twice. Fourth, the category of “land lease farmers” (172,000) is confusing; on the one hand Feinberg does not specifically include usufruct farmers (312,296), and on the other hand the official data on land leasers (arrendatarios) is only 2,843.11 Fifth, employees of self-employed workers are counted since 2011 in the total number of the self-employed, mixed with owners, and we have shown that there is a double counting in the overall figure. In any case, the official statistics on the total NSS share in the employed labor force expanded from 17 percent in 2008, when Raúl officially became president, to 29 percent in 2015.12 In conclusion, there is no doubt that the NSS is important and growing, but certainly not as much as Feinberg estimates.

In summary, the most studied NSS group is the self-employed; NASCs are briefly discussed by Ritter and Henkel and in Piñeiro’s chapter in Zavala et al. Largely excluded from the discussion are usufruct farmers, and totally omitted is the selling/buying of private homes. The historical approach is followed most inten­sively by Ritter and Henken, although several Cuban authors provide summaries of the evolution in their respective topics. The preferred methodology is interviews or conversations combined with research. There is a consensus that the NSS (mostly self-employment) has been successful despite considerable obstacles. We lack a reliable estimate of the NSS’s size.

Missing in the four volumes is an evaluation of the NSS’s macroeconomic effects.13 Ritter and Henken refer to some results of self-employment, such as job creation, noting the nonfulfillment of the official target of dismissing more than one million unneeded state employees. None of the books discuss the impact of usufruct farming on agricultural output, where NASC members are still minute and their impact is even more difficult to assess. It is true that the scarcity of available data hinder the task, but still some estimation could have been done on the NSS’s effect on produce sales, fiscal revenue, and GDP.14

Feinberg and Ritter and Henken are the only authors who explore the future of the NSS. Feinberg provides three broad overall scenarios, which are thought-provoking but touch little on the NSS: (1) “inertia” with little change, without citing potential precedents and projecting self-employment to 750,000, 48 percent higher than the March 2016 official figure of 507,342; (2) “botched transition and decay,” the most pessimistic, similar to former states of the USSR, but with self-employment expanding to 1 million, twice its 2016 size, as some restraints are removed; and (3) “soft landing” in 2030, the most optimistic, under market socialism as in Vietnam, where self-employment really takes off and reaches 2 million employees and 40 percent of the labor force—this is somewhat confusing because he refers to the private sector and had previously predicted, for the entire NSS, 45 to 50 percent in 2019–2021 (203–222).

Ritter and Henken offer three possible alternative routes for the NSS, without predicting its size: (1) reversal to Fidel’s hostile approach, which they judge very improbable because it is totally unfeasible and discredited (“unlikely to be reversed” for Feinberg, 131); (2) stabilization of Raúl’s current (2014) and cautious reform package to self-employment and NASCs, which would remain in place for the rest of his presidency, but with a significant expansion of both and the potential of creating a “mixed cooperative market economy”; and (3) acceleration of the reform and rebalancing among public, private, and cooperative sectors, with medium and large private enterprises advancing at the expense of co-ops and smaller private enterprises; the viabil­ity of this scenario, they say, could be helped by a “serious relaxation of US policy toward Cuba” that could “encourage the Cuban government pro-market openings” (311).

Cuba is always unpredictable, and none of the three scenarios by the above authors completely fit the situ­ation in August 31, 2016, when this review essay was finished. Ritter and Henken’s book was concluded in October 2014, thus this reviewer has the unfair advantage of almost two years that have brought significant changes, such as the evolution of US-Cuba rapprochement in 2014–2016 and the Seventh Congress of the Communist Party held in April 2016.15 In light of those events, their first and third alternatives are implau­sible, at least in the medium and long run; the second might be conceivable if the emphasis is placed on “stability” instead of significant expansion. By August 2016, however, rapprochement, rather than helping the reforms, appeared to have the opposite effect due to dread in the leadership caused by Obama’s visit and it effects, reflected in the results of the Seventh Party Congress. The number of self-employed workers peaked at 504,613 in May 2015, declined to 496,400 in December, and climbed again to 507,342 in March 2016, an increase of 0.7 percent in ten months, substantially lower that the expansion rate in 2014 and 2015 (14 and 3 percent, respectively). Furthermore, at the Congress, Raúl warned that although NSS forms are not antisocialist, “powerful external forces” try to “empower” them as agents of change, and could risk further “concentration of wealth and property” (the latter was not among the agreements of the Sixth Congress in 2011), making it necessary to impose “well-defined limits” on them.16 The Seventh Congress also recom­mended to halt the creation of new NASCs because of their deficiencies, and to concentrate on the existing ones instead.17 Finally, the only existing wholesale market was temporarily closed in May 2016. Feinberg’s book ended in early 2016, much later than Ritter and Henken’s, but his scenarios and predictions don’t cor­relate well with the facts explained above: “inertia” looks optimistic and even more so “decay”—both appear to be short- or middle-term effects—whereas the 2030 “soft landing” would require the drastic changes detailed by him, which are difficult to visualize now.

1 These basic principles of the reforms were set in the Sixth Communist Party Congress of 2011 and ratified in the Seventh Congress of 2016.

2 The pioneer book in the field is Jorge F. Pérez-López, Cuba’s Second Economy: From Behind the Scenes to Center Stage (New Brunswick: Transaction Publishers, 1995).

3 Oficina Nacional de Estadística e Información (ONEI), Anuario Estadístico de Cuba 2015 (La Habana, 2016).

4 Carmelo Mesa-Lago, Market, Socialist, and Mixed Economies: Comparative Policy and Performance; Chile, Cuba, and Costa Rica (Baltimore: John Hopkins University Press, 2000).

5 ONEI, Anuario Estadístico de Cuba 2015.

6 A series of interviews conducted by five authors in 2014–2015, in a much wider part of Havana City, agreed with the predominance of men over women, the highest participation of middle-aged adults, and the important role of education, but found a prevalence of whites and a higher level of satisfaction. Carmelo Mesa-Lago et al., Voces de cambio en el sector no estatal cubano: Cuentapropis­tas, usufructuarios, socios de cooperativas y compraventa de viviendas (Madrid: Editorial Iberoamericana Vervuert, 2016).

7 ONEI, Anuario Estadístico de Cuba 2015.

8 Richard E. Feinberg, Soft Landing in Cuba? Emerging Entrepreneurs and Middle Classes (Washington, DC: Brookings Institution, 2013).

9 These cases are more varied than those discussed by Ritter and Henken, but the latter provided the most comprehensive and profound analysis of paladares.

10 ONEI, Anuario Estadístico de Cuba 2015.

11 ONEI, Anuario Estadístico de Cuba 2014 (La Habana, 2015).

12 Mesa-Lago et al., Voces de cambio en el sector no estatal cubano; ONEI, Anuario Estadístico de Cuba 2015.

13 Valdés notes in the prologue to Pérez Villanueva and Torres’s book the absence of a macroeconomic essay to place all NSS forms in the proper context.

14 The percentage of GDP generated only by self-employment has been estimated as 5 percent by Saira Pons, Tax Law Dilemmas for Self-Employed Workers (La Habana, CEEE), but by 12 percent by Torres (in Pérez Villanueva and Torres, p. 24), a significant gap. For an assessment of some NSS effects see Mesa-Lago et al., Voces de cambio en el sector no estatal cubano.

15 After this essay was finished, the guidelines (lineamientos) for 2016–2021 were published; a rapid browse indicates no significant changes from the guidelines of 2011.

16 Raúl Castro Ruz, “Informe central al Séptimo Congreso del Partido Comunista de Cuba,” Granma, April 17, 2016 (emphasis added), 1–3. Mauricio Murillo mentioned, as examples of the limits to be imposed, the establishment of limits on the number of hectares that somebody may have (“Intervención en el VII Período Ordinario de la Asamblea Nacional,” Granma, July 9, 2016).

17 Carmelo Mesa-Lago, “El lento avance de la reforma en Cuba,” Política Exterior 30, no. 171 (2016): 94–104.155

 

 

Posted in Blog, Featured | Tagged , , , , , , | Leave a comment

ALTERNATE FUTURES FOR CUBA’S EMERGING NON-STATE ECONOMIC SECTOR

Presented at Florida International University, Cuban Research Institute Conference: “Beyond Perpetual Antagonism: Re-imagining U.S. – Cuba Relations.”

February 24, 2017

Complete Presentation:  FIU CRI 2017 Presentation


Posted in Blog, Featured | Tagged , , , , , , | Leave a comment

DEBATING U.S.-CUBAN RELATIONS: HOW SHOULD WE NOW PLAY BALL? 2nd Edition

Edited by Jorge I. DomínguezRafael M. HernándezLorena G. Barberia

© 2017 – Routledge

To Order: Routledge

ABOUT THE BOOK

The boundary between Cuba and the United States has become more and more porous, as have those with Latin America and the Caribbean. Never in the past half-century has Cuba’s leadership or its social and political fabric been so exposed to the influence of the outside world. In this book, an all-star cast of experts critically address the recent past and present in U.S.-Cuban relations in their full complexity and subtlety to develop a perspective on the evolution of the conflict and an inventory of forms of cooperation. This much needed approach provides a way to answer the questions “what has been . . .?” and “what is . . .?” while also thinking seriously about “what if . . .?”

To illustrate the most significant areas of U.S.-Cuban relations in the contemporary era, this newly updated edition of Debating U.S.-Cuban Relations adds six more themes to the study of this complex relation: political, security, economic, and cultural/academic issues; the triangular relations of the United States, Cuba, and Europe; and the politics of Cuban migration/emigration. Each topic is represented by perspectives from both Cuban and non-Cuban scholars, leading to a resource rich in insight and a model of transnational dialogue.

The future course of U.S.-Cuban relations will likely be more complex than in the past, not only because of the matrix of factors involved but also because of the number of actors. Such a multiplicity of domestic, regional, and global factors is unique; it includes the rise to power of new administrations in both countries since 2008. Raúl Castro became president of Cuba in February 2008 and Barack Obama was inaugurated president of the United States in January 2009. And it will feature the inauguration of a new president of the United States in January 2017 and a new president of Cuba, likely in February 2018.

 

TABLE OF CONTENTS

Chapter 1: Introduction: A Baseball Game. Jorge I. Domínguez and Rafael M. Hernández

Chapter 2: Intimate Enemies: Paradoxes in the Conflict between the United States and

Cuba. Rafael M. Hernández

Chapter 3: Reshaping the Relations between the United States and Cuba. Jorge I. Domínguez

Chapter 4: Cuba’s National Security vis-à-vis the United States: Conflict or Cooperation? Carlos Alzugaray Treto

Chapter 5: Cuban-United States Cooperation in the Defence and Security Fields: Where Are We? Where Might We Be Able to Go? Hal Klepak

Chapter 6: Terrorism and the Anti-Hijacking Accord in Cuba’s Relations with the United States. Peter Kornbluh

Chapter 7: The European Union and U.S.-Cuban Relations. Eduardo Perera Gómez

Chapter 8: European Union Policy in the Cuba-U.S.-Spain Triangle. Susanne Gratius

Chapter 9: U.S.-Cuba Relations: The Potential Economic Implications of Normalization. Archibald R. M. Ritter

Chapter 10: United States-Cuba Economic Relations: The Pending Normalization. Jorge Mario Sánchez Egozcue

Chapter 11: Cuba, Its Immigration and U.S.-Cuba Relations. Lorena G. Barberia

Chapter 12: U.S.-Cuba: Emigration and Bilateral Relations. Antonio Aja Díaz

Chapter 13: The Subject(s) of Academic and Cultural Exchange: Paradigms, Powers, and Possibilities. Sheryl Lutjens

Chapter 14: Academic Diplomacy: Cultural Exchange between Cuba and the United States. Milagros Martínez Reinosa

 

Posted in Blog, Featured | Tagged , , , | Leave a comment

“CUBA 2017: SLOW MOTION ECONOMIC REFORMS PLUS POLITICAL STASIS”

Attached here is a Power Point Presentation on Cuba’s current economic and political situation.  The complete presentation is attached here:  Cuba 2017: Slow Motion Reforms. January 4, 2017

By Arch Ritter

Posted in Blog, Featured | Tagged , , , , , | Leave a comment

ACADEMICS FROM CARLETON UNIVERSITY HELPED “JUMP-START” WESTERN ECONOMICS IN CUBA AFTER THE COLLAPSE OF THE SOVIET UNION.

How Carleton profs brought Western economics to Cuba

zzzzzzzzzJustin Trudeau speaks to a University of Havana audience plus officials in the Aula Magna, Universidad de la Habana, November 16, 2016

Here’s how it happened: after the Soviets ended their “special relationship” with Cuba, the faculty of economics at the University of Havana wanted to introduce supply-demand micro and macroeconomics into its curriculum.

This was no small problem. Soviet economics had virtually disappeared, and Cuban economists were left orphaned. They didn’t even speak the language of Western economics, and they found it difficult to communicate with their counterparts in the rest of the world.

Carleton economist Archibald “Arch” Ritter, an expert in economic development, was at the first meeting in Havana in December 1993. The meeting brought together academics from Canada, Chile, Argentina and the University of Havana as well as officials from the International Development Research Centre (IDRC) to hammer out a plan.

The  group decided to organize a joint master’s program in economics, mainly for young faculty members from Cuban universities, to be offered at the University of Havana. Carleton’s then-president Robin Farquhar approved the agreement. The program was up and running six months later.

Financed for the first two years by the IDRC and in its final three years by the Canadian International Development Agency with support from the United Nations Economic Commission for Latin America, the program was later expanded to include biology, business, linguistics, women’s studies and public administration. Professors were recruited from Canada and Latin American countries.

 “It was neat to jump-start the introduction of Western economics to Cuba,” says Ritter, who taught in Havana part-time for five years. “And we did it on a shoestring budget.”

The project had broad support at the University of Havana, but it was far from unanimous, says Ritter. The students, however, “were all most congenial and very keen.”

In his blog, former student Luis Casaco, who now lives in Uruguay, recalls the day a stranger arrived in a classroom while he was making a presentation. She identified herself as a member of the communist party. The presentation continued, but there was a confrontation and the students defended their position that Cuba needed a radical transformation towards a market economy and a democratic system.

The woman angrily left the classroom. The next day, Casaco was called in for an urgent meeting.

“The woman started speaking in an irritating, slowly and softly way on the importance of the program, while emphasized the interest of some sectors in the university to dismantle it,” Casaco recalled. “She started to get angry, and said that the university belongs for the revolutionary people.”

Casaco’s professors came to his aid, including Ritter. “If they threaten you and intend to force you to stop free-speaking, I will shut down this program,” he recalls Ritter saying. “And then he added: ‘This is not a class of the communist Cuban party; this is a Carleton University class.’”

The program ran until 2001. Between 1991 and 1997, there was a shortage of food in Cuba after subsidies from the Soviet Union ended. “People were very thin,” said Ritter.

Many of the Cuban graduates went on to earn PhDs in economics both inside Cuba and at Carleton. Some left Cuba and built their lives elsewhere. According to Ritter’s count, 31 of the 76 graduates had left Cuba to go to Canada, the U.S. and countries in Latin America as of 2010.

“We contributed to a change in the climate of opinion, and changed the teaching of economics,” says Ritter.

zzzzzzzzzzzzzzzzzzzzzzzzCarleton University economics professor Arch Ritter, pictured in Cuba in 2015 in a 1955 Chevrolet, taught part-time for five years at the University of Havana.

Ritter is often called upon to answer questions about Cuba. So, what will happen in the wake of Fidel Castro’s death?

Ritter doesn’t think it will change much. Castro has been mostly out of the picture since he became ill about a decade ago. Castro’s brother Raúl, now 85, served under his brother for 46 years. He was officially made president in 2008, and instituted a major set of reforms in 2010-11, which have liberalized small businesses.

“I don’t see much of change in the short run,” says Ritter. “Raúl will pretty much pick his successor. The succession will follow Raúl’s line. Raúl is very cautious. It took him almost five years to decide on the reform package.”

Posted in Blog, Featured | Tagged , | Leave a comment

CANADA-CUBA ECONOMIC RELATIONS: AN UPDATE

By Arch Ritter                                                                                                  October 5, 2016

 Canada and Cuba have maintained a normal and mutually beneficial economic relationship from Colonial times to 2016.  With the beginning of Cuba’s “Special Period” in 1990 and its modest moves towards a mixed market economy in the 1990s, Canadian participants were optimistic about future economic relations.  In the 2000’s, this was replaced by some skepticism, but with the reforms of 2010-2012 and the beginning of the normalization of US Cuba relations, optimism has returned. This article provides an update on Cuban-Canadian economic relations, including trade, foreign investment, development assistance and migration and some speculation concerning the future of the relationship.

Canada-Cuba Trade Relations

Since the start of Cuba’s revolution, normal trade relations between Canada and Cuba have been maintained. However, trade has waxed and waned over the years as can be seen in Chart 1. The chief feature of the trade relationship in the 1980s was the large volume of Canadian exports which were mainly wheat. Trade expanded steadily in the 1990s with the ending of the special trade relationship with the Soviet Union, as Cuba’s economy began to recover and as it began to diversify its export markets and sources of imports.

q1After 2001, Cuba’s exports to Canada expanded and began to exceed Canada’s exports to Cuba due to high nickel volumes and prices. Canadian exports to Cuba have more or less stagnated since 2001 while other countries have increased their market shares.  By 2015, Canada was the fourth ranking exporter to Cuba following Venezuela, China, and Spain (Table 1.) In contrast, Canada was the second largest export market for Cuba after Venezuela in 2015, accounting for 11% of Cuba’s exports.

r1

Cuba’s exports to Canada have consisted almost totally of nickel concentrates, with cigars, rum, seafood and copper scrap (presumably a quirk in 2015) as very small foreign exchange earners (Table 2.).

By 2015, Canada’s exports to Cuba were reasonably diversified (Table 2.) Its agricultural exports remained significant, though overwhelmed by US agricultural exports. Minerals (sulfur for Cuba’s nickel industry, potash for fertilizer), metals (copper products for Cuba’s electrical system mainly) and machinery of various types have all been significant in the 2010s.

r2 Tourism

Cuba’s best and most faithful friend is the brutal Canadian Winter, which has driven millions of Canadians to warmer Caribbean climes during the December to April period. Canada has been the largest single national source of tourists consistently from 1990 to 2015 and accounted for almost 40% of all tourist arrivals in 2015.  But when US tourism opens up completely, there will likely be a deluge of US winter-escape tourism as well as curiosity tourism, convention tourism, medical tourism, March-break tourism and retirement relocation. The result will likely be that prices rise, and Canadian winter time tourism may well be squeezed out of Cuba into lower cost destinations.

q2Canadian Enterprises in Cuban Joint Ventures

In 1991, Cuba opened itself to foreign investment in joint venture arrangements with state firms. By the end of 1999, there were 72 joint ventures or “economic association” agreements between Canadian firms and Cuban state enterprises but few seem to have ever come to life.

Sherritt International has been by far the most successful Canadian-Cuban joint venture.  Its formula for success is one that cannot likely be replicated by any other enterprise.  In effect, it exchanged 50% of its ownership in the nickel refinery in Alberta Canada for 50% ownership of the Moa mine and concentrator in Cuba and shared in the ownership of the marketing enterprise.  This made Cuba a significant foreign investor in Canada!  The Sherritt experience was explored in the previous issue of this publication.

A number of mineral exploration companies established joint ventures in Cuba by 1994 in association with Geominera S.A. It was thought that Cuba was an ideal location for mineral exploration because much of the country had been covered by aero-magnetic and geological surveys in the Soviet era.  Among the enterprises involved in exploration projects in joint ventures with Geominera were Holmer Gold Mines, Joutel Resources, CaribGold Resources, Northern Orion, and MacDonald Mines. Unfortunately, the exploration undertaken from 1992 to 2007 yielded disappointing results and none of the exploration projects led to producing mines. This suggests that either the quality and/or magnitude of the deposits are lower than in other regions of the world. Alternatively, perhaps the investment conditions, the policy environment and/or the political risk situation were worse than elsewhere. It would be surprising if there were another mineral exploration rush in the medium term future, unless mineral prices were to rise to very high levels.

Canadian enterprises in real estate development have also had difficult experiences in Cuba. One project announced in October 1998 by an association between Cuba’s luxury hotel chain, Gran Caribe and Cuban Canadian Resorts International proposed U.S. $250 million set of four condominiums with hotel and resort facilities. It would have opened up an important new type of tourism for Cuba.  However, in May 2000, the Ministry of Foreign Investment and Cooperation announced a prohibition of foreign ownership of condominium units killing this and other such projects for the time being.

Another project was that of Leisure Canada for the construction of some 11 hotels and two golf courses, a marina. (Leisure Canada Incorporated, 2000). This project fizzled out. In 2011 Leisure Canada, having changed its name to 360 VOX Corporation, was bought out by Dundee Corporation in May 2014.  Any mention of this project has disappeared.

One successful venture was the construction of five airports in Cuba, including Varadero and Havana International Airports by Intelcan Technosystems of Ottawa. The CDN$ 52 million investment in the Havana Airport, was financed in part by Canada’s Export Development Corporation (33%) and 15% from Intelcan. Since 2000, the ultimate payment has come from international passengers who pay U.S. $25.00 (CUC 25.00) as an airport tax on departure.

Unfortunately brilliant successes for Canadian-Cuban joint ventures seem to be few and far between.  Indeed, a number of executives of Canadian trading enterprises and joint ventures, Cy Tokmakjian and Sarkis Yacoubian, were jailed and tried on corruption charges –a cooling factor in the foreign investment process. The moral of the story is that establishing a joint venture in Cuba can work, but it must be done with patience, intelligence, and scrupulous awareness of Cuban regulations and processes and with clear benefits for the Cuban partner enterprise and the Cuban people.

Canadian Development Assistance

The Canadian International Development Agency (CIDA) has provided some interesting development assistance to Cuba since 1994. A major proportion of this has been “economic” in character, aimed at the “modernization of the state.”  Some has been used to support the initiation of projects by Canadian enterprises with Cuban counterparts or to promote Canadian exports. Some of the economic programs were micro-enterprise tax administration, economic management, support for technical training and computer acquisition at the Central Bank, a program to help strengthen administration and professional economics at the Ministry of Economics and Planning and training/certification programs for tradesmen in some basic industrial areas. Various types of commodity assistance were provided as well. Much of the assistance provided by NGOs was aimed at community level activities.  A small amount of assistance was directed towards human rights and governance initiatives including a “Human Rights Fund Pilot Project” and “Dialogue Fund” with multiple Canadian and Cuban partners.

r3Canada’s active development assistance projects in Cuba as of mid-2016 are listed in Table 3. The annual expenditures of these multi-year projects for 2014-2015 was $CDN 2.42 million, a very

 International Migration

 An interesting dimension of Canadian-Cuban relations is migration. As indicated in Chart 3, Cuban migration to Canada has risen from levels in the hundreds in the 1980s to around 1,400 in 2014-2015. However, an unknown number of the Cuban immigrants to Canada move on to the United States, especially Florida, reflecting the attraction of the large Cuban-American population there and the weather.

 q3

Detailed sociological information on Cuban migrants is not available. However, my impressions are that, generally speaking, they are relatively well-educated, industrious, self-activating and entrepreneurial. They also seem to be relatively young, for the most part, many having recently finished their education and just starting out on their careers. Many Cuban immigrants seem to have done reasonably well and have found work in their professional areas, something that is not easy in a new society, culture and language.  This migration represents a “brain drain” or a loss of human capital for Cuba and a corresponding gain for Canada.

 Prospective Canadian-Cuban Economic Relations

The future economic relationship between Canada and Cuba will be shaped mainly by three factors: the strength and durability of Cuba’s economic recovery; the nature of Cuba’s economic policies affecting trade, and foreign investment; and the character and timing of complete normalization of relations with the United States.

A sustained recovery of the Cuban economy would promote a deepened and broadened economic relationship with Canada. A growing Cuban economy would permit increases in imports from all trading partners, including Canada.  At the same time, economic recovery in Cuba also requires expansion of its exports of goods and services.

Is an enduring recuperation of the Cuban economy probable in the next decade or so? First, the driving force for the Cuban economy, namely export earnings, at this time depends mainly on tourism, medical services and nickel exports.  Nickel and tourism should continue to be strong, but the obscured subsidization from Venezuela is over. Cuba’s medical service exports will likely be transitory as other countries develop their own medical systems and increase medical personnel.  Pharmaceutical exports may hold promise in the longer term but have been somewhat disappointing relative to the high hopes once placed in their prospects. Little progress appears imminent regarding the expansion of other merchandise exports. New exports of manufactured products have not appeared on the scene in a significant way and are obstructed by some public policies.

Some continuing problems may prompt skepticism regarding Cuba’s economic prospects in the near future. Among the difficulties often cited are: a dual exchange rate system with negative consequences for export diversification and expansion; a blockage of people’s initiatives, energies and entrepreneurship due to the unwillingness to extend further the reform process especially for medium scale enterprise; and the deterioration of parts of the infrastructure, most notably housing.

The second set of factors that will shape Canada’s future economic relations with Cuba in is Cuba’s policies relating to trade, foreign investment and tourism. These policies are unlikely to undergo dramatic change under Raul Castro’s leadership. This implies that the basic Canadian-Cuban economic relationship should not be affected seriously by changed Cuban policies in the next few years. The state-trading that in part characterizes these relationships is not intrinsically beneficial for Canada.

Thirdly, the complete normalization of U.S. – Cuban relations especially regarding trade and US investment in Cuba, will have a major effect on the Canada-Cuba economic relationship. Complete normalization will permit expansion of Cuban exports, US foreign investment in Cuba, US tourism in Cuba, financial flows and the possibility of open and vigorous collaboration of Cuban-America and Cuban citizens in business activities.  Greater prosperity will be the result.

Normalization with the United States will lead to expanded exports of goods and services to Cuba from the U.S. and vice versa.  This is due to geographic and transport factors.  More frequent freighter connections, high speed hydrofoil passenger boat connections, a re-connection of U.S. and Cuban railway systems and a proliferation of airline connections will lead to a reintegration of the two economies. The diversified U.S. economy can provide a broad range of consumer and capital goods and services competitively with other countries and with low transport costs and quick delivery times.

Canadian exporters to Cuba therefore will face a challenge after US – Cuban normalization. The location and logistical advantages of U.S. exporters, plus the interest, activism and advantages of the Cuban-American business community will outweigh any lingering “goodwill effect” with Canada. Overnight or next-day delivery of products ordered from the U.S. makes continuation of some types of exports from Canada difficult, as delivery from Canada currently may take up to two weeks or more on ships leaving Canada every week or ten days on average.

On the other hand, some of Canada’s current exports to Cuba are competitive with U.S. products and should increase in a post-embargo Cuban economic recovery. This might include fertilizers (potash), cereals, animal feed stocks, lumber, wood and paper products and fabricated non-ferrous metals products. Canada also is competitive in certain types of capital equipment such as minerals machinery and equipment, some paper making equipment, Bombardier aircraft, railway rolling stock and equipment, urban transit vehicles, communications equipment, electrical generation and distribution equipment, and some specialized vehicles. However, some Canadian exports may be threatened by U.S. competition.

In summary, the recovery of the Cuban economy and the increase in foreign exchange receipts that U.S.-Cuban normalization in time should bring about will be of benefit for some Canadian exporters while others may be replaced by U.S. suppliers.  Will the “expansionary effect” outweigh the costs of the “displacement effect” for Canadian exporters?  Perhaps, but this is not assured.

Normalization will also induce U.S. enterprises to invest in Cuba. With no further changes to the foreign investment law and within the current policy environment, one can imagine some but not many U.S. firms entering joint ventures.  But with policy liberalization in a post-Raul Castro situation, one can imagine large numbers of U.S. enterprises investing in Cuba. Cuban-Americans would also enter Cuba to set up small businesses or to finance business ventures with their Cuban relatives or counterparts.  The “geo-economic” gravitational pull of the U.S. will be strong. After U.S.-Cuba rapprochement Canadian trade and investment as a proportion of total trade and investment will likely diminish even though both might increase in absolute terms.

To conclude, there are future uncertainties and challenges regarding the Canadian-Cuban economic relationship.  The character and intensity of future economic performance in Cuba, Cuba’s policy environment and the timing of the complete normalization of relations with the United States are still ambiguous and uncertain. These factors will have mixed effects, but effects that on balance should be positive for Canada and Cuba.

Bibliography

Citizenship and Immigration Canada.  http://www.cic.gc.ca/english/resources/statistics/facts2014/permanent/10.aspAccessed October 23, 2016

Cuban Club Resorts. 2000. Web site: www.cubanclubresorts.com

Global Affairs Canada, Cuba – International Development Projects, http://www.acdi-cida.gc.ca/cidaweb/cpo.nsf/fWebCSAZEn?ReadForm&idx=00&CC=CU.  Accessed 3 October 2016

Industry Canada, Trade Data Online (TDO), Trade by Product (HS Codes) http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home

Leisure Canada Incorporated. (2000, August, 17). Press Release. Reproduced in   www.cubanet.org

Nolen, Stephanie. 2015. In tourist-deluged Cuba, Canadian firms are noticeably absent. The Globe and Mail December 13.

Oficina Nacional de Estadisticas, Cuba.  Anuario Estadistico de Cuba. (Various issues) http://www.one.cu/ . Accessed various times and October 4 2016.

Sequin Rob. 2013. Leisure Canada now a defunct Cuba real estate development brand.  Havana Journal September 25,

 

 

Posted in Blog, Featured | Tagged , , , , | Leave a comment

THE SHERRITT–CUBA JOINT VENTURE: UNCERTAINTIES FOR BOTH PARTNERS

By Arch Ritter  

September 6,  2016

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

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

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

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

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

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

 I.         The Nickel/Cobalt Operation

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

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

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

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

 II.        Petroleum, Natural Gas and Electric Power

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

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

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

 III.      Energy Costs, Transport Costs and Potential Relocation

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

 zz3

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

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

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

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

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

 V.        “Nickel Pig Iron”

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

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

 zzzzz2

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

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

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

Posted in Blog, Featured | Tagged , , , , , | Leave a comment

DOES CUBA HAVE A FUTURE IN MANUFACTURING?

By Archibald R. M. Ritter

June 7 2016.

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

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

I.       THE COLLAPSE OF MANUFACTURING, 1989-2014

zz1

zz2

zz3

zz4

II.   CAUSAL FACTORS ANE CONSEQUENCES

III.  THE “LINEAMIENTOS” ON MANUFACTURING

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

V.  A POLICY ENVIRONMENT FOR THE PROMOTION OF MANUFACTURING

 CONCLUSION

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

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

.But Cuba also has important advantages:

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

So, does Cuba have a future in manufacturing?

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

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

Posted in Blog, Featured | Tagged , , , , , | Leave a comment

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

By Arch Ritter, March 14, 2016

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

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

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

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

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

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

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

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

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

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

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

 Will “El Cheapo” Canadian Tourism be Squeezed Out?

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

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

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

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

yyyy

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

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

Will Other Caribbean Destinations Lose Out to Cuba?

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

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

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

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

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

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

 The Zika Virus Risk to Cuba’s Population and Tourism

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

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

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

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

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

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

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

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

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

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

 Conclusion

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

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

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

yyyyyy

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

z Playa-Guardalavaca-vista

……………………………………………………………………………………………………………………………………………

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

> on February 26, 2015 in Havana, Cuba.

Posted in Blog, Featured | Tagged , , , , | 2 Comments

ALTERNATIVE INSTITUTIONAL FUTURES FOR CUBA’S MIXED ECONOMY

Archibald Ritter                                                                                          

February 1, 2016

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

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

The possible institutional structures to be examined here include:

1. Institutional status-quo as of 2016;

2. A mixed economy with intensified “cooperativization”;

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

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

 Option 1. Institutional Status-Quo as of 2016

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

Table 1 z zz

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

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

 OPTION 2. Mixed Economy with Intensified “Cooperativization”

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

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

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

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

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

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

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

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

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

 This approach does have some advantages.

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

However, there would also be disadvantages such as:

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

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

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

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

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

 This approach has some major advantages:

 Oligopoly power would be more curtailed compared to Option 3;

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

There would be some disadvantages with this approach.

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

Conclusion

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

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

Bibliography

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

Oficina Nacional de Estadísticas, Anuario Estadístico de Cuba, 2014

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

 

Posted in Blog, Featured | Tagged , , , , , , , , | Leave a comment