For over 50 years, a heated debate has raged over developments in Cuba, dealing with everything from ideology, politics, and the economy to independence and sovereignty. Today, transformations taking place on the island have inspired a renewed interest in the country.



Processes of social and economic change are often a long march into the unknown. They require significant effort to build consensus on key issues and to define appropriate pace and scope. They are usually painful and face resistance from those who stand to lose the most. However, Cuba is nonetheless embracing the route of social and economic change in the context of a failing world economy; a long-standing conflict with the United States, the world´s largest economy and its closest market; an aging populace; no major international support from key institutions; no theoretical references; a difficult relationship with its diaspora; and mounting problems at home resulting from years of economic crisis.


International context


The world is going through one of the most challenging periods in its modern history. Since the terrorist attacks on the Twin Towers in New York, the political agenda in the United States and elsewhere has concentrated on terrorism rather than development in Third World countries. Cuba has become even less of a priority for the American government.


In the international arena, the global economic crisis has created an uncertain environment for business while tightening credit conditions and diminishing international aid at a time when developing countries are increasingly in need of it. Although emerging economies have performed fairly well, their relative importance is still low compared to more mature economies.


In Cuba, this crisis has stemmed the flow of tourists from Europe, its second most important market. Between 2008 and 2010, the number of European visitors to the island fell by almost 11 percent. Moreover, the prices of major export products such as nickel have recently declined.


Fortunately, despite this economic malaise, Cuba has fostered strong relations with various countries. It has benefitted from stronger integration with the markets of Latin America, which accounted for 40 percent of Cuba’s total trade in 2009. Venezuela and Brazil have also invested in large projects on Cuban soil. Additionally, Cuba has diversified its economic and political relations through increased partnerships with countries such as Russia, Angola, Algeria, and China.


Domestic Context


After 50 years of revolution, Cuba boasts social achievements equivalent in many respects to those of developed countries. The country’s infant mortality rate (4.5 per thousand), life expectancy (79 years), and mean years of schooling (10.5 years) rank among the best in the world. However, Cuba’s economic gains have been less impressive. Gross national income per capita (US$5,416) is lower than in many Latin American countries with worse social indicators. Especially in the last 20 years, Cuba’s rate of economic growth has been insufficient for the needs of the country, and inequality in income distribution and regional performance has increased. In turn, tensions remain in Cuba’s external balance, some of the traditional sectors of its economy have sharply declined, and manufacturing and construction industries have performed very poorly.


 



 


Even though closer economic relations with Venezuela allowed Cuba to achieve higher growth rates after 2004, in 2008, the country was hit by three powerful hurricanes that precipitated an increase in imports. Coupled with economic slowdown, these imports helped spark a financial crisis that resulted in the partial loss of convertibility of the Cuban Convertible Peso for Cuban enterprises, the freezing of funds from key suppliers, and the temporary suspension of payment of Cuba’s foreign debt service.


The Cuban government has tried hard to achieve macroeconomic stability in prices and the exchange rate and to restore its ability to honor the country’s international obligations in the short- and medium-term. To this end, imports were cut by 30 percent and stricter controls were put on public spending between 2009 and 2010.


This situation has been complicated by the fact that two different processes have been taking place simultaneously. The recent economic crisis is delaying the process of achieving other structural objectives such as the elimination of subsidies, the restructuring of public sector employment, and the rationalization of social services. At the same time, the accumulated stress of two decades of economic stagnation has caused a substantial reduction in living standards and greater stratification of Cuban society.


Another challenge for Cuba comes from an aging population. Because of emigration and a decline in the fertility of Cuban women, the population is shrinking and aging rapidly—a unique case for a developing country in the absence of serious natural disasters or epidemics. Should this trend continue, the coming decades will see more retirees than young job-seekers and an increased demand for cash benefits and expenditures on health and social care.


In 2025, the island will host the oldest population in Latin America and the Caribbean, according to the Center for Studies of Population and Development of the National Statistics Office (NSO). More than a quarter of its population will be above the age of 60. Enrollment in primary schools will fall to between one third and one fifth of its current level, and universities will lose one out of three current students. In eight years, the economically active population will start to decline, and the dependency ratio will deteriorate rapidly.


Faced with this aging population, Cuba’s most promising recourses are to increase productivity levels to cushion the economic impact of a shrinking workforce and stem the emigration of young, talented people by offering attractive domestic labor incentives.


One necessary measure to raise overall productivity is boosting capital formation. Following the crisis of the early nineties, investment levels declined rapidly in Cuba. Although there has since been a partial recovery, in the last 20 years the country has invested on average the equivalent of less than 15 percent of its GDP, falling short of the necessities of a rapidly growing economy. Additionally, a few dynamic sectors like tourism, biotechnology, oil and natural gas, power generation, and telecommunications have received the bulk of this amount. This situation reflects the difficulties Cuba has faced to secure long-term financing in international markets as well as its poor mobilization of domestic savings, already insufficient for the needs of the country.


 



 


The New Social and Economic Guidelines


Solving Cuba’s diverse and complex economic challenges eludes the country’s historical precedents and requires more than the limited establishment of a general framework of economic change. Thus, various new proposals have been set forth to revitalize the Cuban economy within the so-called Guidelines for Economic and Social Policy, which Cuba’s National Assembly passed in July, 2011.


One calls for a mixed economy in which greater room is granted to the non-state sector, allowing more scope for private businesses and cooperatives. Such an economy could lead to improved living standards through more efficient delivery of many services and goods. This idea has been gaining momentum, and although state-owned companies remain dominant, old systems that marginalized the private sector are gradually being replaced. The non-state sector could play an even more active role in the Cuban economy once it is more effectively integrated into the country’s production structure and allowed to engage in more complex activities.


Another suggestion is for Cuba to espouse more decentralized decision-making on two levels. Regional and local governments would have greater power and access to more resources to enable them to plan and design development projects. Such a system would reveal productive alternatives that usually remain hidden to the central government and foster greater intra-governmental coordination and communication. At the same time, public companies would transform into more autonomous entities, controlling key areas of their operations and strategic development.


A third solution involves progressively lifting restrictions on consumption and creating a limited market for goods such as cars and houses. Parts of this proposal have already been implemented. Though they do not currently impact economic activity significantly, they demonstrate Cuba’s shift toward the Western mainstream in terms of basic property rights. The further development of an asset market could also provide a limited source of funding for start-ups in allowing entrepreneurs to either sell an asset or use it as collateral for a bank loan.


A final set of proposals aims to promote private over social consumption, arguing that private consumption has a more direct impact on economic performance. Specific measures such as phasing out rationing cards and other universal subsidies, focusing social policy on vulnerable groups, and eliminating caps on employee compensation would serve this structural shift.


The latter two proposed measures would bring about a significant change in the incentive structure of the Cuban economy. Their underlying view is that when salaries are directly linked to individual effort in both the private and public sectors, growing incomes could establish the domestic market as a significant source of growth for many firms. A strong domestic market could also strengthen horizontal relations among Cuban production units.


Challenges Ahead


These proposals cannot address all of Cuba’s economic difficulties at once. However, initial steps toward policy reform can eventually generate momentum and opportunities for further action to tackle larger economic challenges.


 



 


In the coming years, Cuba must adopt bold measures to stabilize its exchange rates and relative wages. Distortions in relative prices currently prevent the discovery of true, underlying production costs, thereby affecting the competitiveness of businesses and investment decisions. It is urgent to address this situation if Cuba wishes to improve its future resource allocation.


Cuba will also face new challenges if it continues to increase the economic role of the non-state sector. In doing so, the country could improve economic productivity and efficiency and generate new jobs to allow for restructuring of the state sector. However, in order to harness such benefits, the country must ensure internal integration of the economy.


While there has been progress in this regard, there remain obstacles to the growth of the non-state sector and especially to its potential impact on the domestic economy. The state maintains control over import and distribution channels, and the state sector is still the primary motor of technological advances. Cuba must work to enhance private sector access to modern production services like connectivity and financial and legal advice and promote a wholesale market in which this sector can competitively buy inputs needed for production.


Cuba should also look to expand employment opportunities within the non-state sector and for self-employment. Today, a significant proportion of the private sector is composed of professionals and technicians, but most allowed occupations are still basic, low value-added jobs that do not require a high level of qualification. This situation does not reflect the educational profile of Cuba’s workforce, its main asset for economic development.


Though it remains unclear if Cuba’s emerging private sector would be allowed to export and compete freely in international markets, expanding employment opportunities within this sector would still have several positive domestic effects. It would ensure that Cuba’s huge investment in education yields higher returns by more effectively harnessing skilled labor. In addition, it would curb the emigration of highly qualified Cubans seeking better jobs. To accommodate the educational needs of new entrepreneurs, Cuba’s higher education system should also prepare to offer more accessible and comprehensive training in fields such as finance, investment analysis, accounting, marketing, logistics and even human resources and knowledge management.


Finally, though Cuba’s current medium-term emphasis has been on higher rates of economic growth, requiring an increase in the volume and a change in the structure of exports, it would be desirable to instead focus on increasing the rate of capital formation. Doing so would lift production capacity and improve the country’s physical infrastructure, in turn putting Cuba in a better position to boost economic growth and improve the external balance. Given the restrictions on access to external financing, Cuba should also take decisive action to attract foreign investment, not only for national projects but also at the regional and local level. Moreover, the country could benefit from studying the experiences of other Latin American nations to design a framework for more productively using remittances, though Cuba’s unique political situation must be taken into account.


 



 


Final Remarks


There is a tendency among some analysts to compare Cuba’s process of economic transformation to those of countries like China or Vietnam. However, the Cuban case differs significantly from these precedents in scope, pace, and environment. Both China and Vietnam have built their own economic models in better conditions than those in Cuba. Moreover, their population dynamics and relative endowments of natural resources have benefited their transformative processes in a way Cuba’s cannot. Both nations are located in arguably the most vibrant region of the world, and in recent decades they have not suffered economic sanctions to that extent that Cuba has for 50 years, and they actively participate in major international institutions, such as the World Bank and the International Monetary Fund.


Thus, Cuban authorities and the majority of the Cuban people share the belief that changes in the country should be tailored to its unique needs. The normalization of relations with the United States, a rapprochement with the Cuban diaspora, and new connections with international financial institutions would facilitate Cuba’s necessary adjustment process, providing greater opportunity for economic growth and social adaptation.


 



 


Ricardo Torres Pérez is a professor at the Center for the Study of the Cuban Economy at the University of Havana. His current research focuses on the effects of structural change on economic development in Cuba. He was a Fall 2011 visiting scholar at the David Rockefeller Center for Latin American Studies at Harvard University.