Tag Archives: Small Enterprise

A Major Slow-Down for the Public Sector Layoff / Private Sector Job Creation Strategy

Posted on March 1, 2011 by Arch Ritter

Raul Castro and the Council of Ministers, Granma, March 1, 2011

By Arch Ritter I had been looking in vain for any concrete information on public sector redundancies and the granting of self-employment licenses since December 2010.  After some searching in the Cuban press, the foreign press and various blogs, I came up empty handed. I was starting to think that the program had been aborted. Then yesterday, Raul announced in a publicized meeting of the Council of Ministers a major slow-down of the program, noting, in the words of the journalists, that “the up-dating of our model is not the work of a day or even a year but because of its complexity, it will require not less than a five year period to unfold its implementation” (Granma, 1 de Marzo de 2011) As far as I can determine, there have in fact been virtually no lay-offs yet in the public sector, although the original March 31 target for 500,000 fired workers is close at hand. Or at least, none have been clearly reported. The latest numbers for license-granting for the end of December 2010 indicated that some 75,000 new licenses had been issued with another 8,340 still in process – a slow start towards the March 1 target date. Granma, 7 de enero de 2011 The slow-down and delay in implementation is understandable.  Although the original proposal was in the right direction, it was seriously flawed and excessively hurried. The most obvious weakness of the strategy was that it called for lay-offs first, followed by or concurrently with job creation in the micro-enterprise sector which was only slightly liberalized in October 2010. As various critics quickly observed, this was placing the “cart before the horse”. The original time frame for the lay-off process – from July 20, 2010 to March 31, 2011 – became even more condensed as months of inactivity followed months. If implemented, this approach would have amounted to a draconian type of shock therapy. The process of firing workers is not easy under any circumstances. Though the Government stressed repeatedly that those made redundant would be supported by the state, the prospects of being laid off and having to establish one’s own micro-enterprise in a policy environment that is still difficult if not hostile must be unnerving for many people. It was to be implemented during the Cuban recession – (though Cuba is now appears to be in a process of recovery, due to higher nickel prices, increased tourism including US tourism, higher remittances.) Moreover, workers have no independent Unions to defend their rights during such a process of redundancies. (It was the Central de Trabajadores de Cuba that announced the lay-off strategy.) There was a potential for irregularities and perversions in the firing process as well, with redundancy being determined by factors such as Party faithfulness, personality issues,  or friendship with the relevant officials, rather than labor effectiveness, which is usually difficult to determine in any case. Moreover, the strategy, which was to be a defining component of economic reform and structural change, was adopted before the public discussions around the “Proyecto de Lineamientos de la Política Económica y Social del Partido y la Revolución,” There had been no public input or discussion in the media or public forums before this strategywas sprung on the Cuban people. Furthermore, it was clear from the start that the liberalization of self-employment was insufficient for the necessary level of job creation. (See Perez and Vidal, Ritter and Mesa-Lago for example.) There are some measures that are supportive of micro-enterprise expansion. These include a small increase in the permitted range of activities, minor relaxation of regulations and a small modification of the tax regime. More significant and positive are the liberalization of licensing and the “de-stigmatization” of the self-employed by the media and politicians. However, a variety of policies continues to constrain the activities of micro-enterprises and will prevent it from expanding as envisioned by the Government: –        Exceedingly onerous taxation continues. –        The tax on hiring workers will discourage job creation. –        A narrow definition of legal activities will limit enterprise and job creation. –        Exclusion of virtually all high-tech and professional activities blocks development of knowledge-intensive enterprises and wastes the training of the highly educated. –        Bizarre restrictions remain (such as a 20 chair limit on restaurant chairs). –        Restrictions and prohibitions on hiring workers remain. –        Taxes and regulations result in the stunting of enterprises which prolong inefficiencies and promote the underground economy. –        Unreasonable restrictions and heavy taxes breed contempt and non-compliance for the law. Under these circumstances, the necessary expansion of Small Enterprise will be slow and in fact probably would not occur. In this case, the Government will have two basic choices: either it can abort the structural change process or it can further liberalize the micro-enterprise sector in order to permit it to generate jobs for redundant state workers. In order to establish an “enabling environment” for micro-enterprise, here are some of the types of policy modification that would be necessary:

  1. Modify the tax regime: Eliminate the tax on hiring workers and permit all costs to be deductible from gross revenues for calculating taxable income;
  2. Broaden of permitted activities, including professional and high-tech activities;
  3. Relax vexatious regulations;
  4. Liberalize hiring restrictions;
  5. Establish microcredit institutions (international assistance is available for this)
  6. Improve access to wholesale input purchase – not done yet;
  7. Legalize “intermediaries” (permitting specialization between producers and venders)
  8. Permit Advertising
  9. Establish a “Ministry for Small Enterprise”!!!

 

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English Version of Partido Comunista de Cuba, “Proyecto de Lineamientos de la Politica Economica y Social”: Viable Strategic Economic Re-Orientation and / or Wish List ?

Posted on February 22, 2011 by Arch Ritter

A complete English translation of the “Lineamientos” has just been published by Walter Lippmann, the Editor-in-Chief of CubaNews , the free Yahoo news group on Cuba.

The “Draft Guide for Economic and Social Policy” for the Fifth Congress of the Communist Party is available here: http://www.walterlippmann.com/pcc-draft-economic-and-social-policy-guidelines-2010.html

What follows here is the Blog entry for November 11, 2010 on the “Guidelines”.

I. “Structural Adjustment” on a Major Scale

On Tuesday, November 9, a major document appeared for sale in Cuba entitled “Proyecto de Lineamientos de La Political Economica y Social” or “Draft Guide for Economic and Social Policy.”  The purpose of the “Guide’ presumably is to spark and to shape public discussion and education on the economic matters that will be the focus of the long-postponed Sixth Congress of the Cuban Communist Party to take place in April, 2011. It also provides the essentials of the new approach that will likely be adopted at the Sixth Congress.

It can be found in its entirety, courtesy of the Blog Caf Fuerte. (http://cafefuerte.com/, here: Projecto de Lineamientos de la Politica Economica y Social,

The “Guide” is a broad-reaching and comprehensive document that puts forward 291 propositions for the improvement of the functioning of the Cuban economy. It signals a break in the four years of near inaction that the Cuban economy endured since Raul Castro took over as acting and then actual President – and the ten years of paralysis from about 1995 to 2006 under President Fidel.  It amounts to a major process of “structural adjustment” of the sort that was begun in 1992-1994, but was then stalled when the Cuban economy appeared to rebound after 1994.  The document is also a contradiction and maybe a “slap-in-the-face” for Fidel Castro, as it indeed indicates that the Fidelista-style Cuban model – his life’s work – is not working. (See “Fidel’s No-Good Very Bad Day” and The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did.)

II. General Character of the Proposals

The Table of Contents provides a quick idea of the scope of the document:

Introduction

Contours of Economic and Social Policy

I           Economic Management Model

II          Macroeconomic Policies

III        External Economic Policies

IV        Investment Policy

V         Science, Technology and Innovation Policy

VI        Social Policy

VII       Agroindustrial Policy

VIII     Industrial and Energy Policy ix

IX        Tourism Policy

X           Transport Policy

XI         Construction, Housing, and Hydraulic Resource Policy

xii        Commercial Policy.

The Introduction summarizes the basic objectives required to overcome the principal problems of the economy. These include putting into productive use the unused lands constituting almost 50% of total, raising agricultural yields, developing new mechanisms to reverse the process of industrial and infrastructural de-capitalization, eliminating excess and redundant employment, raising labor productivity, recovery of export capacity in traditional exports, undertake studies in order to eliminate monetary dualism, and provide improved capacities for more decentralized regional development.

The “Contour” section then states that “…only socialism is capable of overcoming the difficulties and preserving the conquests of the Revolution, and the implementation of the economic model prioritizes planification and not the market”. However, the next paragraph states “…socialism is equality of rights and equality of opportunity for all citizens, not egalitarianism.” The latter sounds less like “socialism” and more like “social democrat” if not the common approach of most Western countries. The latter quotation makes the former somewhat hard to interpret if not meaningless.

The document then goes on to list the 291 propositions under the 12 different headings. A few of the more interesting propositions are summarized below:

  • Wholesale markets for supplying state, cooperative and self-employment enterprises will be established. (9)
  • State enterprises will decide themselves how to allocate their investment funds, and normally will not receive budgetary support for this. (13)
  • Insolvent enterprises will face liquidation. (16)
  • Workers incomes in state enterprises will be linked to enterprise performance (# 19)
  • Monetary and exchange rate unification will be “advanced” (54)
  • The taxation system will be advanced in terms of progressivity and coverage, and will be based on generality and equity of its structure. (56 and 57)
  • The centralized character of the determination of the planned level and structure of prices will be maintained. (62)
  • Recover the place of work as the fundamental means of contributing to the development of society and the satisfaction of personal and family needs. (130)
  • Modify the structure of employment, reducing inflated staffing and increasing employment in the non-state sector (158-159)
  • Eliminate the ration book as a means of distributing products. (162)
  • Improve agriculture so that Cuba is no longer a net importer of food, prioritizing import substituting activities, reviving citrus fruit production, augmenting sugar production. (166, 174, 179, 194.)
  • Promote export-oriented industry (197)
  • Develop a range of new industries such as tires, construction materials and metallurgy (213, 215, 216)
  • Restructuring of domestic retailing and wholesaling. (283-291)

III. Preliminary Evaluation

This document will receive a great deal of attention inside and outside Cuba. It provides fodder – along with the recent legislation on self-employment – for analysts and observers of Cuba, who have had little of hard substance on which to base their analyses of Cuban policy under the “Raulista” Presidency for some time.

In some senses, this document is remarkable. It sets out an ambitious reform program for much of the Cuban economy. It may indeed constitute a “Wish List” of all the types of policy improvements and changes that would be nice to have. The question is “can and will they be implemented?”

This document also is a major risk for the Raul Castro Administration. It provides a check-list of tasks that will be difficult to achieve. If future implementation and economic performance is far below the expectations that are now being raised to high levels, there could well be a serious fall-out for the Government and the Party.

The document is also broad and ambitious but does not set any clear priorities and does not propose a sequence of actions. Everything can’t be done at once. How should the policy changes be phased or sequenced?

Some observers are skeptical and perhaps cynical regarding the “Guide” – for good historical reasons. In her Blog Entry entitled The Art of Speaking Without Speaking (http://www.desdecuba.com/generationy/?p=2088) Yoani Sanchez states:

When you grow up decoding each line that appears in the newspapers, you manage to find, among the rhetoric, the nugget of information that motivates, the hidden shreds of the news. We Cubans have become detectives of the unexpressed, experts in discarding the chatter and discovering — deep down — what is really driving things. The Draft Guidelines for the Communist Party’s VI Congress is a good exercise to sharpen our senses, a model example to evaluate the practice of speaking without speaking, which is what state discourse is here.

The Guide undoubtedly could be seen as an economic rescue program designed to rescue also the Communist party of Cuba, which faces steady de-legitimation as the economy deteriorates – even as the official GDP statistics appear to rise steadily.

What is missing from the “Guide”? Here is a first brief listing. Further analysis will be incorporated here later.

1.      Nothing is said regarding labor rights. A vital part of the reform approach if labor is to be used effectively would be freedom of association, collective bargaining and the right to strike. In the absence of these, pressures and insights from the grass roots to improve economic policy and its effectiveness are suppressed.

2.      Nothing is said regarding freedom of expression and the right to criticize the policies and institutions openly, honestly and continuously. The absence of this right leads to economic inefficiency and corruption as argued elsewhere. ( Freedom of Expression, Economic Self-Correction and Self-Renewal)

3.      No further elaboration of how the self-employment or micro-enterprise sector is presented, suggesting that the recent reforms are the end of the journey not a first step.

4.      The dedication to centralized determination of prices is problematic. If maintained strictly, it would make the decentralized decision-making allotted to enterprises for investment, the hiring of resource inputs, etc. meaningless, and the problems of trying to run the economy from a few office towers in Havana would continue.

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Espacio Laical, Interview with Pavel Vidal, “Disarticulating the Monopoly of State Centralization”

Posted on February 17, 2011 by Arch Ritter

In its February 2011 issue, Espacio Laical has published an interview with Pavel Vidal by Lenier Gonzalez Mederos on the future of the Cuban economy.

In the interview, Vidal discusses Cuba’s current macroeconomic situation, the structural changes that he considers necessary for Cuba, the dual monetary and exchange rate systems, the Viet Nam mode’s implications for Cuba and the agricultural sector, among other things.

“The change of the planning model must grant a larger space to the market and the signals that it generates for prices, exchange rates and the diversity and complexity of demand. If we do not promote this type of environment for Cuban enterprise, I don’t think that we can improve its efficiency much.  The market has shortcomings and we have to regulate it. But regulation also has shortcomings, and we cannot let the remedy be worse than the sickness. Moreover, what we must try to do is to regulate it intelligently, not to replace it with a centralized system that has demonstrated itself one thousand and one times to be inefficient inside and outside Cuba.”

The interview is available only in Spanish, unfortunately. It can be found here:

Espacio Laical, February 2011, Interview with Pavel Vidal Desarticular el monopolio de la centralización estatal

Retailing a la Central Planning circa 1968, Photo by Arch Ritter

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Has the US Tourism Tsunami to Cuba Already Begun?

Posted on February 2, 2011 by Arch Ritter

By Arch Ritter

The Economist noted recently that the number of US tourists to Cuba in 2010 reached about 400,000 (January 20, 2011). Surprisingly, the Cuban Oficina Nacional de Estadisticas did not include the United States in its tourism statistics for 2010. (See Oficina Nacional de Estadisticas, Llegada de visitantes internacionales, Diciembre 2010). If the Economist’s number is correct, it represents a huge increase over the 2009 figure of 52,455 tourist arrivals from the United States. The US already appears to be the second source of tourists to Cuba, well ahead of every other country except Canada for 2010.

With the latest easing of travel restrictions for US citizens, one might expect a further large increase in US tourism to Cuba. In 2010, the increase in tourism was likely mainly of a family-reunification character. But in 2011, curiosity tourism will increase dramatically under the new travel rules. Much of this tourism will be in the cities and in Havana in particular – and not in the isolated beach areas where Canadians tend to go. One indeed can expect a surge in tourist services and activities in both the public sector and the reviving private sector. The  Paladares. Casas Particulares and other activities should be in expansion mode and should contribute – along with remittances – to a reconstruction boom in Cuba.

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

Posted on December 15, 2010 by Arch Ritter

 

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

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

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

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

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

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

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

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

But tight limits on self-employment remain.

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

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

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

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

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

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

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

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

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

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

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CARMELO MESA-LAGO, El desempleo en Cuba: de oculto a visible, in Espacio Laical Digital

Posted on November 22, 2010 by Arch Ritter

Espacio Laical, the publication of the CONSEJO ARQUIDIOCESANO DE LAICOS DE LA HABANA , has just published an excellent analysis by Carmelo Mesa-Lago, on underemployment, unemployment and the ability of the small enterprise sector to reabsorb redundant labor to be released from the state sector. Mesa-Lago, the “Dean” of analysts of Cuban economy, has focused particularly on the labor sector in Cuba since he was an employee of the Cuba’s Ministry of Labor in the early 1960s and wrote his Ph.D. Dissertation (The Labor Force, Employment, Unemployment and Underemployment in Cuba, 1959-1970, Beverley Hills, Sage Publications, 1972).

Espacio Laical continues to consolidate its position as a leading fora for economic analysis on the Cuban economy!

The first few paragraphs are presented below. The full analysis can be found here: El desempleo en Cuba: de oculto a visible

El desempleo en Cuba: de oculto a visible: ¿Podrá emplearse el millón de trabajadores que será despedido?

Por CARMELO MESA-LAGO

Mi disertación doctoral, escrita hace 42 años, analizaba los problemas de desempleo declarado o visible, y subempleo o desempleo oculto (subutilización de mano de obra, empleo excedente) en países socialistas. Comparando a Cuba, China, la URSS y Yugoslavia, aportaba evidencia contraria a la teoría entonces en boga acerca del pleno empleo en economías socialistas de planificación centralizada. En el capítulo sobre Cuba (1970-1989) argumentaba que la reducción del desempleo visible durante la Revolución se había logrado en gran medida mediante el empleo excedente o innecesario. Por ejemplo, una fábrica, granja o entidad estatal de servicios, necesitaba 100 trabajadores, pero ocupaba a 200, así reducía el desempleo nacional visible, pero  ambién la productividad y el salario a la mitad, a más de erosionar el incentivo del esfuerzo laboral (Mesa-Lago, 1968, 1972).

Casi medio siglo después, los hechos en 2010 confirman la hipótesis.

Este artículo: 1) prueba con estadísticas oficiales y de CEPAL, así como con análisis de economistas cubanos,  que el problema no es nuevo, sino que se remonta al inicio de la  Revolución; 2) estima la magnitud del desempleo actual y sus efectos; 3) evalúa las medidas del

Gobierno para abrir empleo privado a más de un millón de trabajadores excedentes, y 4) ofrece opciones para mejorar dichas políticas (sus efectos fiscales son analizados por Vidal y Pérez Villanueva).

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Partido Comunista de Cuba, “Proyecto de Lineamientos de la Politica Economica y Social”: Viable Strategic Economic Re-Orientation and / or Wish List ?

Posted on November 10, 2010 by Arch Ritter

I. “Structural Adjustment” on a Major Scale

On Tuesday, November 9, a major document appeared for sale in Cuba entitled “Proyecto de Lineamientos de La Political Economica y Social” or “Draft Guide for Economic and Social Policy.”  The purpose of the “Guide’ presumably is to spark and to shape public discussion and education on the economic matters that will be the focus of the long-postponed Sixth Congress of the Cuban Communist Party to take place in April, 2011. It also provides the essentials of the new approach that will likely be adopted at the Sixth Congress.

It can be found in its entirety, courtesy of the Blog Caf Fuerte. (http://cafefuerte.com/

, here: Projecto de Lineamientos de la Politica Economica y Social,

The “Guide” is a broad-reaching and comprehensive document that puts forward 291 propositions for the improvement of the functioning of the Cuban economy. It signals a break in the four years of near inaction that the Cuban economy endured since Raul Castro took over as acting and then actual President – and the ten years of paralysis from about 1995 to 2006 under President Fidel.  It amounts to a major process of “structural adjustment” of the sort that was begun in 1992-1994, but was then stalled when the Cuban economy appeared to rebound after 1994.  The document is also a contradiction and maybe a “slap-in-the-face” for Fidel Castro, as it indeed indicates that the Fidelista-style Cuban model – his life’s work – is not working. (See “Fidel’s No-Good Very Bad Day” and The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did.)

II. General Character of the Proposals

The Table of Contents provides a quick idea of the scope of the document:

Introduction

Contours of Economic and Social Policy

I           Economic Management Model

II          Macroeconomic Policies

III        External Economic Policies

IV        Investment Policy

V         Science, Technology and Innovation Policy

VI        Social Policy

VII       Agroindustrial Policy

VIII     Industrial and Energy Policy ix

IX        Tourism Policy

X           Transport Policy

XI         Construction, Housing, and Hydraulic Resource Policy

xii        Commercial Policy.

The Introduction summarizes the basic objectives required to overcome the principal problems of the economy. These include putting into productive use the unused lands constituting almost 50% of total, raising agricultural yields, developing new mechanisms to reverse the process of industrial and infrastructural de-capitalization, eliminating excess and redundant employment, raising labor productivity, recovery of export capacity in traditional exports, undertake studies in order to eliminate monetary dualism, and provide improved capacities for more decentralized regional development.

The “Contour” section then states that “…only socialism is capable of overcoming the difficulties and preserving the conquests of the Revolution, and the implementation of the economic model prioritizes planification and not the market”. However, the next paragraph states “…socialism is equality of rights and equality of opportunity for all citizens, not egalitarianism.” The latter sounds less like “socialism” and more like “social democrat” if not the common approach of most Western countries. The latter quotation makes the former somewhat hard to interpret if not meaningless.

The document then goes on to list the 291 propositions under the 12 different headings. A few of the more interesting propositions are summarized below:

  • Wholesale markets for supplying state, cooperative and self-employment enterprises will be established. (9)
  • State enterprises will decide themselves how to allocate their investment funds, and normally will not receive budgetary support for this. (13)
  • Insolvent enterprises will face liquidation. (16)
  • Workers incomes in state enterprises will be linked to enterprise performance (# 19)
  • Monetary and exchange rate unification will be “advanced” (54)
  • The taxation system will be advanced in terms of progressivity and coverage, and will be based on generality and equity of its structure. (56 and 57)
  • The centralized character of the determination of the planned level and structure of prices will be maintained. (62)
  • Recover the place of work as the fundamental means of contributing to the development of society and the satisfaction of personal and family needs. (130)
  • Modify the structure of employment, reducing inflated staffing and increasing employment in the non-state sector (158-159)
  • Eliminate the ration book as a means of distributing products. (162)
  • Improve agriculture so that Cuba is no longer a net importer of food, prioritizing import substituting activities, reviving citrus fruit production, augmenting sugar production. (166, 174, 179, 194.)
  • Promote export-oriented industry (197)
  • Develop a range of new industries such as tires, construction materials and metallurgy (213, 215, 216)
  • Restructuring of domestic retailing and wholesaling. (283-291)

III. Preliminary Evaluation

This document will receive a great deal of attention inside and outside Cuba. It provides fodder – along with the recent legislation on self-employment – for analysts and observers of Cuba, who have had little of hard substance on which to base their analyses of Cuban policy under the “Raulista” Presidency for some time.

In some senses, this document is remarkable. It sets out an ambitious reform program for much of the Cuban economy. It may indeed constitute a “Wish List” of all the types of policy improvements and changes that would be nice to have. The question is “can and will they be implemented?”

This document also is a major risk for the Raul Castro Administration. It provides a check-list of tasks that will be difficult to achieve. If future implementation and economic performance is far below the expectations that are now being raised to high levels, there could well be a serious fall-out for the Government and the Party.

The document is also broad and ambitious but does not set any clear priorities and does not propose a sequence of actions. Everything can’t be done at once. How should the policy changes be phased or sequenced?

Some observers are skeptical and perhaps cynical regarding the “Guide” – for good historical reasons. In her Blog Entry entitled The Art of Speaking Without Speaking (http://www.desdecuba.com/generationy/?p=2088) Yoani Sanchez states:

When you grow up decoding each line that appears in the newspapers, you manage to find, among the rhetoric, the nugget of information that motivates, the hidden shreds of the news. We Cubans have become detectives of the unexpressed, experts in discarding the chatter and discovering — deep down — what is really driving things. The Draft Guidelines for the Communist Party’s VI Congress is a good exercise to sharpen our senses, a model example to evaluate the practice of speaking without speaking, which is what state discourse is here.

The Guide undoubtedly could be seen as an economic rescue program designed to rescue also the Communist party of Cuba, which faces steady de-legitimation as the economy deteriorates – even as the official GDP statistics appear to rise steadily.

What is missing from the “Guide”? Here is a first brief listing. Further analysis will be incorporated here later.

1.      Nothing is said regarding labor rights. A vital part of the reform approach if labor is to be used effectively would be freedom of association, collective bargaining and the right to strike. In the absence of these, pressures and insights from the grass roots to improve economic policy and its effectiveness are suppressed.

2.      Nothing is said regarding freedom of expression and the right to criticize the policies and institutions openly, honestly and continuously. The absence of this right leads to economic inefficiency and corruption as argued elsewhere. ( Freedom of Expression, Economic Self-Correction and Self-Renewal)

3.      No further elaboration of how the self-employment or micro-enterprise sector is presented, suggesting that the recent reforms are the end of the journey not a first step.

4.      The dedication to centralized determination of prices is problematic. If maintained strictly, it would make the decentralized decision-making allotted to enterprises for investment, the hiring of resource inputs, etc. meaningless, and the problems of trying to run the economy from a few office towers in Havana would continue.

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

Posted on September 22, 2010 by Arch Ritter

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

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Fidel’s Phenomenal Economic Fiascoes: the Top Ten

Posted on September 17, 2010 by Arch Ritter

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

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

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

Top Ten Economic Fiascoes

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

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

Fiasco #8        The “New Man”

Fiasco #7        The “Budgetary System of Finance”

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

Fiasco #5        Revolucion Energetica

Fiasco #4 Shutting Down Half the Sugar Sector

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

Fiasco #2        Suppression of Workers’ Rights

Fiasco #1        Abolition of Freedom of Expression


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

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

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

The strategy was aborted in 1964.

Fiasco #9        The 10 Million Ton Sugar Harvest Strategy

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

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

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

This strategy was aborted in 1970.

Fiasco #8        The “New Man”

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

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

Fiasco #7        The “Budgetary System of Finance”

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

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

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

This system was also terminated in 1970.

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

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

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

Fiasco #5        “Revolucion Energetica”

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

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

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

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

Fiasco #4        Shutting Down Half of the Sugar Sector

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

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

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

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

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

Fiasco #2        Suppression of Workers’ Rights

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

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

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

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

Fiasco #1        Abolition of Freedom of Expression

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

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

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

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

Fidel Castro: The Cowardice of Autocracy

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

Fidel’s No-Good Very Bad Day

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

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Fidel’s No-Good Very Bad Day

Posted on September 15, 2010 by Arch Ritter

A “Senior Moment”? On Wednesday September 8, former President Fidel Castro was quoted as saying: “The Cuban model doesn’t even work for us anymore”, when asked if Cuba’s economic system was still worth exporting to other nations, by Jeffrey Goldberg, of The Atlantic. A few days later, Friday September 10, Fidel said that it was a misunderstanding though Jeff Goldberg and Julia Sweig insisted that this is what he said. Had Fidel been experiencing a “Senior Moment?” Had he been speaking in jest- a throw-away line in a jocular conversation, but also revealing concerning his legacy to Cuba and the world? Was he misunderstood or misheard or mistranslated?

Fidel’s Economic Legacy: Rejected by Brother Raul and Questioned by Cuba’s Government

Then on Monday September 13, the Pronunciamiento de la Central de Trabajadores de Cuba announced the new policy on lay-offs in the state sector and expansion in the self-employment and cooperative sector employment. This statement outlines a new direction for the Cuban economy, namely towards greater reliance on the market mechanism, private ownership and entrepreneurship and a reduced role for the state and (attempted) planning. Cuba already had a “mixed economy” with a substantial private sector in agriculture and some 143,000 in non-agricultural activities, not to mention all those in the underground economy. However, the statement by the Cuban Federation of Labour indicates a major shift of emphasis towards a more marketized, decentralized, private-sector economy. This shift in direction for the Cuban economy negates all that Fidel has stood for regarding the economy in the past. Fidel was responsible for

  • the initial nationalizations of almost all the private sector, including self-employment in 1961-1963 and 1968 (with the “Revolutionary Offensive” )
  • the continuous fulminations against the self-employment and “capitalism” from a variety of perspectives
  • the shut-down of the farmers’ markets in 1986 with the “Rectification program”
  • the tight containment of self-employment after 1995 and
  • discrimination against self-employed Cuban citizens vis-à-vis foreign enterprise in joint ventures in terms of tax regimes.

President Raul Castro’s new approach instead is placing its faith in the small enterprise and cooperative sector, hoping that these will to come to the rescue of the economy by absorbing the underemployed labour in the state sector to be laid off in the next six months. . This is strong confirmation that President Raul Castro himself is convinced that the Cuban model is not working any more – if it ever did. It also is likely that the Communist Party and the National Assembly will not contradict Raul on this. I argued earlier that none of the variants of the “Cuban Model” had worked effectively. (The “FIDEL” Models Never Worked; Soviet and Venezuelan Subsidization Did) Many foreign analysts and observers had of course questioned the value of Fidel’s legacy in the economy as well as politically and in terms of human rights. It now appears that Fidel’s legacy is questioned by his own Government. President Raul Castro has implicitly rejected Fidel’s life work regarding the economy of Cuba.

A Difficult Day – and Situation – for Fidel

Fidel Castro allegedly said to the judges in his famous 1953 speech in his own defense at his trial after the unsuccessful attack on the Moncada army barracks “Condemn me, History will absolve me.” However, “History” will not absolve Fidel. It appears also that even the official versions of “history” under Cuba’s current Communist system will not absolve Fidel either. Small wonder that he is attempting to portray himself as the elder statesman, altruistically offering advice and warnings on international issues, many of which appear to him to be apocalyptic in character. How will Fidel respond to the official Cuban rejection of his vision of “socialism” that he has been attempting to impose on Cuba for almost half a century? . PS. It is instructive that the labour federation, the CTC, is placed in charge of implementing the lay-offs on the part of the government rather than trying to defend the interests of the state sector workers. This pretty much confirms the view of the CTC as an arm of the regime not an organization to defend workers’ rights and interests.

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