Economic structure and foreign policy of Cuba

Pergamon

World Development, Vol. 23, No. 5, pp. 705-720, 1995 Copyright Q 1995 Elsevier Science Ltd

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Waiting for Change: Adjustment and Reform in Cuba

MANUEL PASTOR, JR Occidental College, L.os Angeles, California, U.S.A.

and ANDREW ZIMBALIST*

Smith College, Northampton, Massachusetts, U.S.A.

Summary. -Buffeted by the collapse of trading relations with the former socialist bloc and the continu- ing US embargo, Cuba has attempted to adjust to external crisis via tighter rationing to curtail demand and traditional planning and sectoral strategies to expand the supply of tradables. This overall program has failed and Cuba has recently begun timid steps toward a more market-oriented approach. We argue that the centerpiece of a new strategy should be a rapid privatization which can be designed to absorb the mone- tary overhang, widely distribute assets and control, and protect the social safety net that has characterized the Cuban economy.

1. INTRODUCTION

The end of “traditional” Cuban socialism has become apparent. After years of experimenting with sectoral fixes - principally, the reduction of food imports, the enchancement of biotechnological exports, and the energetic promotion of tourism- there are finally faint signs of systemic change. New policies have been adopted, including the depenaliza- tion of the use of dollars, the devolution of state farms to their workers, the legalization of self-employment and the emergence of new markets for agricultural commodities. While these policies remain modest in character, they nonetheless signal both a new flexibil- ity in the Cuban economy and the inevitability of a very different system emerging in the coming years.

What, however, will this system be? Should we expect a full-fledged adoption of Western capitalism - and if so, what happens to the political role of the Communist Party and the economic niche occupied by party managers? Is there another viable path that can be followed by a Party apparatus concerned about maintaining power even as they reform an economic system which is both internally and externally imbalanced? Can either of these sorts of transitions be accomplished in a way that at least partially preserves the social gains which have allowed the Cuban revo- lution to achieve a genuine degree of popularity? How are these possibilities affected by the state of US-Cuban economic and political relations and, in particular, the influence of US resident Cuban expatri- ates on those relations?

In this paper, we tackle some of these large issues of reform and transition. We argue that the prior sec- toral based-efforts to adjust to the trade shocks of the 1980s have been extremely limited in their success and offer no road out of the crisis; as such a transition away from socialism and toward some form of capi- talism (defined as the existence of ownership-based incentives and market-based allocation of most resources) is inevitable. Given that the recent spate of halfhearted measures in this direction has likely worsened distributional inequities, distorted incen- tives, and failed to improve the macroeconomy, we suggest an alternative centered on the massive priva- tization of state assets to Cuban nationals residing within Cuba. Aside from the salutary medium-term incentive effects, such a strategy would: (a) preemp- tively assure Cubans on the island a leadership role in the future economy, and, if done correctly, ameliorate the distributional injustice that would come from a less controlled privatization; (b) sop up accumulated

* This research was done as part of the Working Group on U.S.-Cuban Economic Relations sponsored by the Task Force on Scholarly Relations with Cuba of the Latin American Studies Association and funded by the Ford Foundation. We thank Elena Alvarez, Alfonso Casanova, Carmelo Mesa-Lago, Mieke Meurs, Omar Everleny Perez, Helen Shapiro and two anonymous referees for their helpful comments on earlier drafts and Lori Synder for able research assistance. Final revision accepted: December 9, 1994.

706 WORLD DEVELOPMENT

money balances and hence head off hyperinflation; and (c) along with tax reform, shore up state finances and thereby both allow for the maintenance of key health and education policies and facilitate the intro- duction of a convertible peso.

Of course, privatization is a complicated process and the order in which it takes place, as discussed below, is critical to its success. Moreover, privatiza- tion could destabilize the domestic economy and a series of supportive macroeconomic and adjustment policies that can both dampen inflationary pressures and shift resources toward tradables is important. Nonetheless, our key point here is that Cuban author- ities must consider the resurrection of private property within Cuba and accept the implicit political and eco- nomic risks; the alternatives, we will argue, are far worse both for the government itself and for the social welfare of the Cuban people.

The paper proceeds as follows. We begin by sketching the nature of the external shocks that have provoked crisis in the Cuban economy. We document the failure of the 1989-1993 response to these prob- lems and then turn to the recent efforts at liberaliza- tion; we find some hopeful signs in these new policies but remain skeptical either of their potential to resolve the problems or the government’s full commitment to the new policies. We then sketch out an alternative approach that would accelerate the process of reform and help to maintain some degree of macroeconomic stability. We close by considering the politics of such a reform effect within Cuba and the relationship of reform to US-Cuban relations.

2. EXTERNAL SHOCKS AND ADJUSTMENT

(a) The structural context

While the Cuban economy dramatically changed its social orientation in the years since the revolution, on the eve of the large trade shocks induced by the col- lapse of the Soviet Union and the socialist trading sys- tem it still retained several key features characteristic of dependent developing economies. Foremost among these was the reliance on a single major export, sugar, with the compounded problem of being dependent on a single large trading partner. Exports of sugar and sugar products, for example, averaged 77% of total exports over 1984-89 and nearly 70% of Cuba’s trade on both the import and export side was with the Soviet Union over that same period.’ A second related feature was the development of an industrial base which was dependent on imported capital goods to meet invest- ment demand and intermediates, particularly oil, to fuel industrial production; capital and intermediate goods rose from 60.9% of imports in 1958 to 89.6% in 1984-89.2 Finally, industrial commodities, as may be evident from the dominance of sugar in the export

composition, were produced mostly for domestic con- sumption.3

These basic structural features - nearly monocul- tural exports and reliance on imported intermediates to feed an industrial sector driven by domestic demand - meant that the Cuban economy was as open to neg- ative external shocks as most other middle-income export-dependent Latin American economies. In this sort of an economy, external shocks generally come in three forms: reductions in export volume, worsening the terms of trade, and shortfalls in financing. While the resulting scarcity of foreign exchange is likely to eventually prompt a devaluation, depreciation often has little expenditure-switching benefit in the short run because of relatively fixed import coefficients and relatively price-insensitive export demand/supply. As a result, each shock tends to directly reduce import capacity and therefore industrial production. This shrinkage in production essentially ratchets down supply in the economy; demand follows suit either because of policy action (fiscal tightening or a deval- uation which lowers real wages) or because of infla- tion (which tends to redistribute income upward and hence reduce worker-based consumer demand). It should be stressed that in a market economy, the infla- tion outcome is essentially an automatic adjustment mechanism; inflation will produce market-clearing even if no policy action is taken and price increases naturally will be higher the longer demand-reducing policy is postponed.4

The Cuban economy was potentially subject to the same sort of shocks with one crucial difference: a lack of price flexibility.5 This meant that any external shock would not find an automatic adjustment via inflation and induced redistribution but would rather require clear and quick policy action. If such action was not forthcoming, the result would be an accumu- lation of money balances: prices would not rise to clear the market and instead consumers would remain stuck with cash and not products (in which case stable real wages are consistent with a declining standard of living). Moreover, when foreign exchange is state- controlled and the exchange rate is as inflexible as other prices, this process of “nonadjustment” places pressure on black market premia: excess domestic cur- rency chases scarce dollars and the resulting “equilib- rium” exchange rate in a thin market for dollar assets can be as out of whack as the artificially low rate in the controlled market6 This becomes a recipe for both corruption and resource misallocation as individuals scramble to insure access to foreign exchange.

Under Cuba’s former relationship with the Soviet Union and its socialist trading partners, such unpleasant scenarios were avoided primarily because all external shocks were “stopped” at the door.’ First, export markets were guaranteed by bilateral (often barter) contracts, insuring a healthy volume of exports. Second, the terms of trade were tilted in

WAITING FOR CHANGE 70-i

Cuba’s favor, with sugar fetching a price significantly above that in the world market and Soviet oil usually arriving at prices below those ruling in the world mar- ket.* Third, any trade deficit with the Soviet Union, Cuba’s largest trading partner, was automatically financed via a ruble-clearing mechanism that amounted to a continual flow of (never-to-be-repaid) loans. Each mechanism shielded Cuba from the shocks and negative output effects experienced by most of Latin America in the early 1980s: while the Latin American region posted an average growth rate of less than 1% over 198245, Cuba obtained a healthy 5.1% average annual increase in output.

To understand the magnitude of the import capacity and growth cushion provided by these mechanisms, we should first note that the terms of trade and financ- ing effects were somewhat interchangeable: what was taken away on the price side could be (and was) eas- ily made up on the financing side. Thus, the terms of trade “subsidy” to Cuba fell from 20.3% of disposable income in 1983 to 11.2% in 1987 as the Cuba-USSR trade deficit rose from 2.7% of disposable income in 1983 to 11.0% in 1987. If we total these two effects, on average, roughly 22% of Cuban disposable income in 1980-87 was due to the largesse of the Soviet aid - and this does not even count the output prop pro- vided by guaranteed markets for Cuban sugar. Clearly, any disruption in the traditional arrangements would provoke a large fall in production and signifi- cant policy changes.9

(b) External shocks and the initial Cuban response

The disruptions in the traditional Cuban-Soviet arrangements began to pile up through 1990 and 1991. On the initiative of the Soviet Union, Cuba’s socialist (and former socialist) trading partners opted for a new trading relationship based on market prices and con- vertible currency, features which reduced the terms of trade benefits to Cuba and implied the eventual elimi- nation of Cuba’s ability to run perpetual ruble deficits. Soon thereafter, former state socialist economies in Eastern Europe began their slow reorientation toward both capitalism and the West, a phenomenon which shrank “traditional” markets for Cuban exports as well as Cuba’s access to Eastern European intermediate goods. Finally, Cuba’s special relationship with the Soviet Union was permanently shredded by the August 1991 events in Moscow, the rise of Boris Yeltsin and other anti-communist reformers, the com- plete dissolution of the former Union, and the tran- sition to capitalism undertaken in earnest, even if chaotically, by Russia and several other republics.

While the data on Cuban economic performance are scarce, sometimes unreliable, and often difficult to translate into more mainstream economic measures (partly because of problems revolving around the

information content of prices in a socialist economy), Table 1 offers some data on the performance of exports, imports. and output over 1989-93.‘O From the perspective of the model suggested above, what is crit- ical to note is the collapse in export revenue (prompted by shrinking markets and worsening prices as Cuba was forced to turn to the world market) and the even sharper reduction in imports (reflecting the collapse in deficit financing). The decline in import capacity is reflected in the estimated 50.2% shrinkage in GDP over 1989-93.

Of course, the Cuban authorities have not simply stood by as the economy was buffeted by the trade and finance shocks of the past several years. Until recently, however, the response seems to have been focused on a combination of demand reduction via austerity and resource-shifting to foreign exchange- earning (or -saving) sectors via planning directives. Starting with the demand side, the “Special Period in Peacetime” brought mandated cuts (generally across the board) in industrial energy consumption, similar reductions in gasoline consumption by citizens (with the now-famous reappearance of the bicycle as a com- mon mode of transport), and a dramatic extension of the rationing system for consumer goods (Deere, 1991). The severe rationing also “forced” an ideo- logical recommitment to moral incentives, since material incentives lack meaning when extra work simply adds to unwanted cash balances.

On the supply side, the Cuban authorities adopted what we label a sectoral strategy, principally: a new Food Program to reduce agricultural imports, a drive to increase biotechnology exports, and a significant effort to enhance tourism. Alongside this has been a general focus on increasing foreign investment, particularly in the tourist and other foreign exchange generating industries. None of these efforts have been sufficient to make up the gap. The Food Program involves investment in irrigation, expansion of import-substituting agriculture, and the use of “mobi- lized” urban labor (see Deere, 1991), all in an attempt to reduce food imports; however, since such imports constituted only about 10% of total imports in 1984-89, even an excessively optimistic 50% curtailment in food imports would at best restore only 5% of the country’s overall 1989 import capacity.” Biotechnology, while it does build on Cuba’s previous investments in science and public health, is also prob- lematic. Cuba has developed several products on the technological cutting edge and has begun to success- fully market many of these in the Third World on either a cash, debt reduction or barter basis. Further, partnerships with some multinationals are being developed. The total value of biotechnology and phar- maceutical exports is now several hundred million dollars and could rise to a billion dollars or more by decade’s end. Such a level would represent an impres- sive achievement, but would hardly be sufficient to lift

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Table 1. Indicators of economic pe~ormance* 1989-93

1989 1990 1991 1992 1993

GDP $ bn 32.5 31.5 23.6 20.3 16.2 Real GDP Growth Rate 0.1 -3.1 -25.0 -14.0 -20.0 Exports (goods) $ bn 5.4 4.9 3.6 2.2 1.7 Imports (goods) S bn 8.1 6.7 3.7 2.5 2.2 Exports (goods & services) % bn 5.9 6.2 3.9 2.9 2.6 Imports (goods & services) $ bn 8.6 7.7 4.6 2.8 2.4 Hard Currency Debt $ bn 6.2 7.0 8.4 10.0 10.8

* Data are author estimates based on Economist Intelligence Unit Quarterly Reports and data obtained from Cuban economists. GDP data are estimated to include informal economic activity.

Cuba out of its economic doldrums.‘* Moreover, if Cuba could become a player in this world market, it would likely face increased competition from large multinationals (see Cardoso and Helwege, 1992).

The biggest governmental hopes continue to be pinned on tourism. The optimism that this industry would flourish was based partly on the tripling of tourist income during 1980-89 (see Alvarez, 199la, p. 12) and partly on the interest of foreign investors. Tourism has indeed continued to increase, with gross revenues rising from $165 million in 1989 to some $720 million in 1993.‘) Net gains, however, have not been that large since the import coefficient for the tourist industry is high; indeed, Cuban economists generally calculate net revenues from tourism at only 40% of the gross. Using this ratio and netting out tourist-related imports from the 1989 import bill, the entire tourist boom of the last four years has been able to restore less than 3% of the 1989 import capacity. Moreover, while Cuban authorities remain optimistic about the future of tourism, competition from other Caribbean countries, the US government policy of prohibiting tourist travel to Cuba, the island’s own less-than-adequate tourist infrastructure, and other factors will continue to constrain growth in this sector.

Foreign investment also seems to have been less successful than hoped. While the Cuban government reports that, as of June 1994, there were over 140 joint ventures with foreign companies, hard data on invest- ment levels are scarce. The bulk of the earlier invest- ment was in tourism but there has been some recent diversification in the foreign investment portfolio and there appears to be increasing interest since late 1993, the most recent evidence of which was the sale of 49% of the telephone system to Mexican investors. The latter deal, with Javier Garza’s Grupo Domos from Monterrey, reportedly involves an up-front payment of $1.44 billion, of which $200 million will come from a debt swap partially liquidating Cuba’s $350 million debt with Mexico. (The Mexican government sells the debt to the Mexican investing company at a discount which uses the face value of the debt to purchase equity.) GrupoDomos will invest another $734 million over the next seven years in modernizing the Cuban

telecommunications system. Other Mexican deals have been struck in cement (with Cemex), petroleum refining (with Pemex). in hotels (with DSC), in cellu- lar phones (with GTIM), in textiles (with another Garza company) and in glass production (with Grupo Vitro).r4 Investments from Canada, particularly in mining and petroleum extraction, have also been increasing since mid-1993. Whether the most recent trends signal a permanent acceleration remains to be seen. At any rate, the immediate foreign exchange flows from new investment have probably been mod- est, possibly excepting the new telephone investment, and so the macroeconomic problems induced by a scarcity of foreign exchange continue.

In short, the sectoral and foreign investment strat- egy has had very little success at raising import capacity and the Cuban economy has simply adjusted downward. The predicted effects of such a supply-side slowdown in an economy with no price flexibility have emerged: the monetary overhang is probably approaching 100% of domestic output. Continuing to add fuel to this fire is a state deficit which is on the order of 30% of estimated GDP. The level of accumu- lated balances was approximately 11 billion pesos in June 1994. The state budget deficit was 4.2 billion pesos in 1993 and the government hoped that increas- ing the prices of state-sold goods, reducing subsidies to state enterprises and putting in place higher taxes would reduce the 1994 deficit to around three billion pesos. This, however, would still imply a growth in peso balances to near 14 billion by the end of 1994.r5 The repressed inflation has put significant pressure on the black (now grey) market exchange rate, with the Cuban peso selling at around 2% of the official value.r6

Meanwhile, the political contradictions have been mounting. Distribution has worsened despite a strin- gent rationing system. Some Cubans in designated revenue-generating sectors, such as scientists, have had a more protected living standard and anyone with access to dollars is far better off than the rest of the population. Despite the earlier calf for rectification and a commitment to political/moral values, material incentives have run wild since economic agents have

WAITING FOR CHANGE 709

realized that their best bet at income earning and wealth preservation involves engagement in dollar- earning activities in informal markets and nonstate activities. In addition, the contrast between an adjust- ment strategy which stresses investment by foreigners but denies such opportunities to domestic citizens surely causes profound skepticism and cynicism. The combination of worsening distribution, a shrunken economy, and political anamolies has therefore been a recipe for the erosion of the goal of socialism and the moral authority of the Party and the Revolution.

(c) Modest liberalization

The essential lesson of 1989-93 is that the Cuban attempt to address new shocks with old methods - sectoral planning, moral incentives, and state rationing - did not work. Most of these efforts seemed to be an attempt to avoid systemic change but such change has been unavoidable both because the external scenario is not likely to turn around in the near term and because the productive integrity of the Cuban economy has been shattered.

Since late 1993, there have finally been some signs of more far-reaching structural or systemic change. These have included the beginnings of an effort to reorganize the agricultural sector, especially by trans- forming state farms into cooperative farms, albeit largely circumscribed by compulsory state sales.” It is hoped that this will both change the incentive structure and the agricultural mix thus helping to relieve some of the domestic food crisis.‘* A second major change has been the allowance of limited self-employment; while the restrictions are severe, this is once again an attempt to shift incentives and allow certain niches in the market to be filled by individual entrepreneurs.19 Note that the common theme in these two reforms is the restoration of material incentives through an alter- ation, however limited, in property relations.

A second reform theme has been an increasing use of the market. The first, and perhaps most signifi- cantly, move in this regard has been the depenalization of the use of dollars. This has essentially legalized much black market activity and also opened up another way for the state to resolve its foreign exchange problems through various attempts to cap- ture the dollar flow, including allowing Cubans to pur- chase goods in special dollar shops at inflated priceszO Accompanying this had been a loosening of the restrictions on the dollar flows that can be sent by Cuban expatriates to Cubans on the island.*’ In late August 1994, however, the United States, as part of a new initiative against Castro, prohibited all remit- tances from and nearly all travel by the US and Cuban-American community. The cash value of these past remittances is estimated to have been between $250 and $400 million annually and so the potential

foreign exchange problems are not insignificant rela- tive to Cuba’s $2.2 billion 1993 import bib. Of course, this effect will be ameliorated somewhat since the ille- galization of family remittances through the United States does not mean that other routes wiY not be acti- vated to restore a substantial part of the flow.

Another major move with regard to enhancing the use of the market has been the reemergence of “farm- ers markets” in which agricultural producers, includ- ing both private farmers and the cooperatives, can sell foodstuffs at uncontrolled prices. The government shut down these markets in the mid-1980s due to con- cerns about profiteering as well as the implicit con- flicts with state ideology (see Rosenberg, 1992, and Deere and Meurs, 1992), and so the resurrection of this approach marks a major change in policy. While there are limits on which commodities can be sold and state quotas reportedly must still be met before prod- ucts can be sold freely, the markets have sprung up rapidly and prices for key commodities have fallen below those ruling in the black market. In December 1994, the government followed up this measure with plans to allow nonagricultural retail sales at deregu- lated prices, again after meeting state quotas and with important restrictions. Perhaps most significant is that state-controlled firms will be able to sell unused raw materials, a feature which could be a boon to some of the self-employed and better allocate productive resources among firms.

A third major theme of market-oriented reform has been the attempt to reduce the state deficit, with noises in this direction made through 1993 and some price increases taking effect in 1994. The bulk of this effort, however, is not scheduled to really take effect until 199%96.** While such budgetary discipline has been in quest of macroeconomic balance, it also reflects an implicit attempt to apply market rules to state firms; when the infamous “soft” budget constraint is tight- ened by a fiscally strapped state, sales volume and profitability become central concerns for firms.

Of course, markets will become dysfunctional in the presence of high inflation and recent debate has focused particularly on the “monetary question.” Several policies authorized in May 1994 go beyond any previous measures designed to improve state finances and reduce monetary emission: the legisla- ture authorized the executive to impose taxes on the self-employed and private and cooperative agricul- ture, eliminate subsidies to state firms, raise prices on certain publicly provided goods and services, hike prices on the products of certain state firms, and adopt greater wage differentials to encourage labor productivity.23

Unfortunately, the policy formation process has been a bit confused: these measures were supposed to have been announced in December 1993, were then postponed several times in order to “prepare the pop- ulation,” and finally, the Cuban legislature essentially

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avoided responsibility for the new policies by simply handing authority to the executive to adjust the econ- omy along certain general “guidelines.“*4 This hem- ming and hawing raises the risk of reversal and hence limits the credibility of the reforms, a feature which is key to a change in the behavior of economic agents.

In addition, there is a certain incoherence to the overall package: in the name of “encouraging sav- ings,” the government has indicated that it will attempt to cut the monetary overhang by exchanging bank deposits for government bonds, an action which has not yet actually been taken. It probably should not be pursued since an effective confiscation of monetary holdings will move all pesos out of the formal bank- ing system and lend an air of insecurity with regard to emerging property rights, hardly the policy elements most often used to encourage savings. Moreover, the government announced that it would seize assets illegally obtained in the black market, a difficult task in light of the “grayness” of many markets and one destined to force entrepreneurs further under- ground.25

While the aforementioned measures can be read as yet another attempt to postpone true structural trans- formation, they are nonetheless significant in terms of the ideological breakage with past policies, particu- larly in their implicit acknowledgement of the power of the market and of property- and income-based incentives. Moreover, these modest reforms point the way toward other changes; as one Cuban economist told us, “These are just the first steps and they will inevitably lead to further transformations,” including the amplification of self-employment opportunities and the expansion of the realm for market-based price- setting. Indeed, there is a whole generation of Cuban reformers very interested in an expansion of the mar- ket system, even as they remain wed to the welfare commitments of the old socialist system.26

Is this the beginning of a full-fledged transforma- tion to capitalism? We think not for several reasons. First, the timidity of the changes reflects not just the usual caution about experimentation but also the lack of a real commitment on the part of the highest levels of leadership; one gets the impression that this toying with capitalist-style incentives would be tossed away if another “oil-daddy” could be found to replace the former Soviet Union and this suggests that the sys- temic problems of Cuban state socialism have still not been fully recognized at the leadership leveL2’ Second, the mid-level technocrats, managers, and intellectuals who are more committed to change but less powerful in the political realm are themselves reluctant to move toward a real capitalist model because of concerns about the developmental and dis- tributional outcomes of such a strategy.28 Third, the poor state of US-Cuban relations, rather than provid- ing an incentive, may paradoxically constrain a shift to capitalism. Partly because of pressure by

Cuban-Americans, the United States will likely press any post-Castro regime for a quick transition to capi- talism, replete with all the economic chaos and uncer- tainty entailed; unfortunately, linking the fall of Castro with a draconian economic adjustment may raise the perceived costs of political change and hence impede reform. A friendlier and more patient Washington might be. more effective in achieving its goals but such rationality seems to have long ago been abandoned in the debate over the US approach to Cuba.

At any rate, there has been a modest liberalization on the economic front and reforms, all short of a full embrace of capitalism, are likely to continue. On the political side, the Party continues to hold an extremely tight rein on political power, giving the image of a Chinese-style approach to reform. Cuba, however, is not China: foreign investors are less interested, its exile community is more hostile (and unlikely to become less so even if market reforms produce eco- nomic growth), and the country’s geopolitical and economic importance is now so minor that the United States is not likely to forgive human rights transgres- sions in order to develop more positive bilateral rela- tions.29 Despite this, Cuban liberalization is likely to be asymmetric for the foreseeable future, with the eco- nomic reforms outpacing any shift toward a more open political system.

The package of reforms, however, does not yet add up to a coherent approach that can point the way to economic recovery, avoid macroeconomic chaos, and preserve some of the distributional and social gains associated with the Cuban revolution. In the next sec- tion, we explore the possibilities for an alternative that might meet those general requirements.

3. REFORMING THE CUBAN ECONOMY: A PROPOSAL FOR CHANGE

Any new approach to reform in Cuba must have consistent goals and methods. We define our goals as: (i) the shift of resources to the external sector to relieve the strangulation on domestic production posed by the current foreign exchange shortage; (ii) the achievement of internal macroeconomic balance such that the risks of a destabilizing bout of hyperin- flation are minimized; (iii) the creation of domestic incentives that will stimulate production and employ- ment; and (iv) the preservation, as much as possible, of the current “standard of living,” especially with regard to general social gains and particular benefits directed to the poorest sectors currently in Cuba.

Achieving these goals requires a set of interlocking policies. For the shift to the external sector, the Cuban economy needs production flexibility (so that

WAITING FOR CHANGE 711

resources can move to tradables and so that nontrad- able producers can reconfigure their operations for external markets), an appropriate exchange rate, and private foreign investors (who will bring with them knowledge of external markets, technologies, and management techniques).30 For macroeconomic bal- ance, the Cuban government needs to drastically cur- tail its deficit spending and sop up accumulated money balances; in the medium term, Cuba needs to liberal- ize its price structure in order to provide the automatic inflation/redistribution mechanisms that restore internal balance in market economies. To provide real incentives, the government must go beyond differen- tial wages and provide real ownership opportunities so that surplus production can accrue and be. retained by more productive units. Finally, to preserve some gen- eral level of social welfare, the Cuban government needs to introduce and improve taxation and reduce other state expenditures (especially subsidies to cover losses by state firms) in order to minimize the ongoing cuts in health and education actvities.

An essential piece in the program with the goals specified above is the privatization of state assets. In the particular situation that Cuba finds itself, a prop- erly executed privatization could be a key part of macroeconomic stabilization: it could sop up excess currency, stabilize the peso, reduce the government deficit and offer very direct incentives for the reac- tivation of production. Moreover, if Cuba uses the methods suggested below, privatization could help with both the external need for more foreign exchange and the internal imperative to retain some degree of social justice in the system. The latter may seem sur- prising in light of the usual socialist assumption that private property is incompatible with equality but, in the current setting, a rapid privatization could help maintain state-financed social welfare programs, insure that Cubans on the island retain some assets if there is eventually a more far-reaching transition, and provide for significant worker ownership of industry. Privatization, in short, is the centrepiece for a more coherent approach.3r

(b) Privatization and other speciJcs

How should such privatization take place and how can it be coordinated with macroeconomic policy? The first phase should involve a relaxation of self- employment and other-employment restrictions (per- haps to allow the formation of industrial cooperatives) in the urban areas as well as an acceleration of the cooperative movement and individual privatization in the agricultural sector. The urban strategy would allow ownership/profit incentives to activate various services to meet the population’s needs; the govem- ment should allow individuals or groups to work out of their homes and put no limits on the accumulation of

working capital. The agricultural privatization/coop- eration is, as with the current government strategy, designed to encourage domestic food production; we would argue for the reduction of compulsory sales to the state and the further liberalization of the recently resurrected farmers’ markets in order to legally and systematically market the products of this sector. To the idea that these initiatives will exacerbate inequal- ity, we can only respond that this will essentially legal- ize the ongoing black market in agricultural goods and urban services, thereby reducing transactions costs and perhaps allowing poor consumers to buy in. The appropriate vehicles for dealing with excessive inequality are progressive income taxation and/or income-maintenance programs.

A second phase of privatization should involve two separate but related initiatives. The first is the estab- lishment of small businesses in which entrepreneurs emerging from the first phase are allowed to purchase real estate for locating their businesses, to hire wage labor and to compete with large state firms in markets for raw materials and machinery.3z The hope again is to activate production; moreover, the competition on the input side should introduce some discipline and hence force efficiency on some of the state firms. As for the state firms, we would suggest that medium- sized firms be put up for sale at this point with the process managed by a Privatization Commission (see below). The only restrictions on purchase would be that the buyers must be Cuban nationals and that the purchase be in pesos; the reasons for this are also explained below. A final phase of privatization could involve the larger state enterprises; multiplant enter- prises might be broken up and privatized individually with the intention of providing competition for enter- prises remaining in the state sector. Along the way, the government should also be seeking to slowly restruc- ture large state firms and sequentially offer some to foreign investors who are willing to bring in foreign exchange and production know-how and offer clear plans to export Cuban products to world markets.

A few key elements of this privatization scheme should be highlighted before turning to the macroeco- nomic component of our alternative. First, all previous ownership claims should be set aside. Neither foreign claims nor those of Cuban nationals or expatriates for expropriated property should be recognized.23 Instead the slate should be wiped clean and the government should commit to guarantee the ownership resulting from this round of denationalization. The principle here is to establish the ownership rights of locals and award Cubans on the island first and lasting claim to the assets supposedly redistributed to them by the revolution.

Second, shares in the medium-sized enterprises should be purchased, as noted above, only by Cuban nationals. Rights to purchase should come in the form of equity transactable units (or ETCs), some of which

712 WORLD DEVELOPMENT

would be purchased or received on the basis of equity vouchers and some of which would be sold to any Cuban with peso holdings. The equity vouchers could come in two forms: one set (workplace vouchers) to be given to workers in a particular firm for use only at their workplace and one set (generic vouchers) to be given to any adult Cuban which could be applied to the purchase of any firm that is being privatized. The peso “value” of the workplace vouchers should be based on the individual worker’s wages at the enterprise (reflecting their likely past contribution given the presence of some merit pay in the Cuban economy); each adult citizen should receive an equivalent peso value of generic vouchers reflecting the notion that the state held the means of production in the name of all its citizens and in order to avoid the inequities created when only the active labor force receives assets.

Both the generic and workplace vouchers would be issued as entitlements (to be purchased with cash bal- ances) and as fiat. The entitlement vouchers would comprise two-thirds of the total voucher value and could be purchased with cash balances at a one-to-one ratio; this would help reduce the monetary overhang. The hat vouchers, comprising one-third of the total voucher value, would be issued gratis, so that Cubans without cash balances would also be able to gain equity rights in Cuban industry. Finally, anyone with peso holdings could also compete for ownership rights to any firm being privatized, by converting their peso balances to equity transactable units (ETUs) at a three- to-one ratio. The equity vouchers given to workers and citizens however, would not be part of any market; these vouchers would be nontransferable in order to assure that all Cubans will wind up with some equity position and also to insure that the peso overhang will wind up in state hands (and be retired) rather than accumulate to private voucher-sellers (and be spent).

The responsibility for managing this process would fall under the purview of a new Privatization Commission. Commission staff would conduct an assessment of state enterprises, decide which ones should simply be decommissioned rather than sold, suggest starting share prices for those to be privatized, and manage the ETU transactions. The Commission could also work with international agencies to provide management training for new managerial personnel as well as supervise managers in the transition process to provide for continuity and prevent fraud and abuse. Machinery and equipment from decommissioned enterprises would be made available on a market both to privatized firms and the emerging smaller enter- prises; in order to prevent the profiteering that has occurred in Eastern Europe, no members of the Privatization Commission would be allowed to par- ticipate in this market. Finally, workers at decommis- sioned enterprises would be given an extra allotment of generic vouchers in order to compensate for their lack of workplace vouchers.

With an estimated 14 billion peso monetary over- hang at the end of 1994, assuming that privatization involves only half of Cuban state enterprise value, and estimating that said 50% of Cuba’s corporate equity totals to 9.3 billion pesos,3“ one formula for this process might be to issue three billion pesos of entitle- ment vouchers and 1.5 billion pesos of fiat vouchers. The 4.8 billion peso balance of equity value would then be purchasable over time with 14.4 billion pesos of cash balances. The total use of cash balances, then, would come to 17.4 billion, providing a household incentive for saving during 1995 and enabling the Cuban government to use 2.4 billion pesos for infra- structural investments or social programs while elim- inating the monetary overhang. This formulation, of course, assumes that the Cuban government would be otherwise able to attain a fiscal balance in 1995.

There may naturally be concern about inequities, particularly since under the socialist system, workers did not necessarily decide their place of employment and so may be stuck at economically weaker firms. Note, however, the structure of the scheme above. Suppose that workers with equivalent pay across dif- ferentially efficient enterprises receive the same peso value to use for firm self-purchase. They now enter the market along those with citizen (or generic) vouchers and peso holdings; those at the “best” firms will find their ownership share dwindle and be shared with the general populace while those at the “worst” firms will find their vouchers stretching further (given the low price of firm assets) and will be able to take a strong ownership position that will produce large gains if they can turn the firm around. Note, too, that under this scheme worker ownership becomes more extensive at those firms that really need restructuring; meanwhile, everyone has a chance to buy into healthy enterprises. In both cases, however, the internalization of incen- tives that derives from worker ownership should encourage x-efficiency, with the effects larger at the firms most in need of such efficiency gains.

A related equity concern expressed by some Cuban and other analysts is that privatization will reward “criminals” who have accumulated pesos through black market activity and worse. This argument is, however, misplaced. First, our privatization scheme gives disproportionate ownership access to workers and citizens. Second, 60% of peso holdings are in banks, not a likely place for “criminals” to hold their money and one which suggests the presence of a ready group of local investors. Third, the value of all cash holdings is reduced by a factor of three under our sys- tem, discouraging excessive accumulation of ETUs and corporate assets by peso holders. Fourth, the state has the option, if desired, to impose limits on individ- ual ETU and asset holdings at any single firm. Finally, a relatively larger asset ownership by black marke- teers might not be all bad since this would reward past entrepreneurial behavior and thus encourage a greater

WAITING FOR CHANGE 713

entrepreneurial influence in the newly privatized enterprises.

An important feature of our privatization program is the restriction that purchases be in pesos. The notion here is simply that this will sop up excess liquidity, reward those who saved under the old system, and cre- ate a demand for the peso. The reduction or elimina- tion of the monetary overhang, the decrease in the state deficit (as money-losing enterprises are shed), and the possible appreciation of the peso (due to the privatization-induced demand for local currency) should all help with controlling inflation once prices are decontrolled. Indeed, we would suggest that most prices should be released quite quickly after the priva- tization of medium-sized firms. While we recognize that there would have been some prior inflation due to the emergence of small firms in urban services and agricultural products, releasing price controls right after absorption of the monetary overhang and a slight appreciation/stabilization of the peso would be ideal since there would be less pressure for a hyperinfla- tionary outburst.

There is, of course, an argument that one should free input and output prices before privatization so that potential buyers can appropriately assess firm worth; indeed, some of the Eastern European reform- ers have used price liberalization as the central way to absorb the monetary overhang. In our view, such a strategy amounts to a de facto confiscation of peso holdings and we prefer to use privatization to trade state assets for private assets, enriching the Cuban population in the process. 35 Moreover, the immediate freeing of prices is a recipe for hyperinflation and is not necessary for assessing state enterprise value since most buyers can estimate likely asset values based on black and gray market prices for various commodities (including those prices that will emerge for inputs from emerging competitive small businesses as well as world market prices as translated by the gray mar- ket exchange rate). Given that there will be some uncertainty about the prices that result from this process, assets will wind up being underpriced; while this might be a fiscal problem for a government want- ing to obtain maximum value, recall that the purpose of the privatization is really to shift incentives, sop up excess liquidity, and reward those Cubans who have remained on the island.26

As for the larger state firms, we think this will require a more lengthy process of restructuring during which time the state should maintain a continuous hard budget constraint; however, given the need for foreign exchange, strategic privatization to interested foreign investors should be encouraged under a set of liberalized regulations and the state should be open to changing the planned sequence of firm privatization if a multinational approaches the government with interest in a specific enterprise or joint venture.)’ Throughout this whole process, the state could retain

significant control over the credit system, providing loans for investment to the large state enterprises and the emerging private sector firms at a positive real rate of interest; the proceeds could be used to fund a slower shutdown of less profitable large enterprises and maintain social investment in health and education facilities.3* The smallest private firms would be expected to be mostly self-financing, with larger expansions financed through a state small business lending pool or internal finance. To help relieve the external constraint, the state could, as in South Korea, direct credit (i.e., to give preferential “points” on a loan application) to those firms, private or state, with the best export record or potential, giving local man- agers a reason to explore the possibilities in the trad- able sector.39

On the macroeconomic side, the key issues are fis- cal discipline, price liberalization, and currency con- vertibility. We have stressed above the need to reduce the state deficit; the likely reductions in state subsidies from current policy, the application of a hard budget constraint on state firms, and privatization revenues should all help in this regard. As for price liberaliza- tion, a feature which will introduce some automaticity in the adjustment process, our proposal envisions input price flexibility early on, followed by an open- ing on the output side after privatizing medium-size firms, and a much fuller liberalization (rather than simply price hikes) as more and more large state firms enter the world of the market. Recall that the delay is mostly to allow privatization to sop up accumulated money balances and stabilize the exchange rate; that way, the initial price freedom need not be accompa- nied by an explosion of inflation.@

Currency convertibility is also key but we must first acknowledge that Cuba essentially has that in the gray market; indeed, we are trying to have an impact on that market (and the effect of the exchange rate on infla- tion) in our notion that asset purchases should be only in pesos. Given this backdrop, full convertibility should not occur until after the “big bang” of medium- size firm privatization. It should then proceed rapidly, beginning with removals of restrictions first on hard currency purchase and sales of goods and services. Capital account liberalization should come much later, in order to prevent destabilization.4’

Neither privatization nor the macroeconomic poli- cies outlined above guarantee that resources will move to the tradable sector, an outcome so desperately needed in the Cuban economy. To do this, we repeat our suggestion that a credit system can, a la Korea, allocate finance partly based on export success an&or plans; this could certainly be legitimately factored in as both a social good and a reduction in firm risk. In addition, we would encourage the development of small private businesses to fill in certain niches in the tourist industry (bicycle rental, fast food, artesenal stalls, etc.) and hence raise net earnings in that sec-

714 WORLD DEVELOPMENT

tor4* We also believe that medium-size firms, once privatized, would seek external markets as a hedge against both political risk and inflation. Finally, for- eign direct investment in the productive structure should be encouraged; given their own needs, foreign firms are likely to steer activities to dollar-generating production.

Finally, we turn to the issue of distribution, justice, and social welfare. We should stress that the standard by which to judge our proposed alternative is not the system characteristic of Cuba in the mid-1980s: after the last five to six years of shocks, the Cuban social safety net is tattered and will never be repaired if Cuba cannot restore fiscal and economic health.43 We believe that the real baseline scenario is either the cur- rent situation - in which those with relatives in the United States or other forms of access to dollars are relatively privileged - or a dramatic Miami-led march to capitalism in which the safety net may be shredded with purposeful glee. By contrast, we think that privatization as designed above can be distribu- tionally progressive - it rewards those on the island, doling out one set of equity opportunities to adult cit- izens in an equal fashion and another to workers in accordance with their labor even as it allows those with accumulated peso savings to unload them for a future return. Moreover, some portion of these cash flows from selling public assets can be used to create other public assets - e.g., infrastructure - thereby using privatization revenues to somewhat soften the blow to employment and income. Some portion of the privatization funds should simply be set aside for deficit reduction but some could also be used to main- tain a reasonable level of expenditures in health and education; in addition, we believe that defence expen- ditures can be cut further to make room for social spending.

There are numerous qualifications and questions that may be raised in connection to our analysis and program above. First, it would obviously be much bet- ter for Cuba if the US embargo on trade and invest- ment were ended. Alvarez’s careful study of the embargo’s continuing effects on the Cuban economy suggests that a partial lifting of the embargo (includ- ing the removal of restrictions on visits by US tourists, nonenforcement of the Torricelli Act, a reduction of US pressure on non-US financial institutions) would lead to a relatively swift doubling of import capacity; this, in turn, could lead to an improvement of output by at least 25% (see Alverez, 1994, p. 36). The strat- egy outlined above may prompt some policy move- ment on the part of the United States, a point we return to below, but this should not be the major motivation for its adoption; instead, Cuban officials must come to realize that this sort of privatization is better for Cuba itself.

Second, if the embargo is lifted, what is the role for Cuban-American investors? Obviously, this is a

likely group to purchase state firms and operate eco- nomic enterprises in Cuba; they know the culture and language and have a deep emotional tie. Further, sev- eral mutural funds have been set up in South Florida that are accumulating capital for eventual investment in Cuba. Whether this group will play a role as investors depends on US policy - and US policy in turn depends on them - but note that we are essen- tially trying to use privatization to create an island- based investing class prior to the introduction of Miami-based investors. Such a group would be a use- ful political and economic counterweight to the eco- nomically well-endowed Cuban-American population.

Third, will the sort of privatization we propose cause an economic slowdown? There will almost cer- tainly be some transitional costs as workers are shed from restructuring firms. This process, however, is already occurring; the Cuban state has been so fiscally constrained that much of its role as an investing agent has been discarded. Moreover, the Cuban economy in late 1994 shows signs of having bottomed out. Some of the reasons are fortuitous: would sugar prices have risen by some 40% and nickel prices have practically doubled, offering the potential to raise Cuba’s export revenues by $700 million (or by over 25%) at current production levels. In addition, foreign investment has spurted since August 1993, and there are now more than 150 joint ventures with foreign capital, compris- ing over $1.5 billion in value. The furthering of eco- nomic reform, especially the reopening of farmers’ markets in September 1994, the cooperativization of state farms, and the opening of industrial and con- sumer goods markets in December 1994, have also provided a significant stimulus to economic activity. The already buoyant informal economy combines with these and other developments to augur a modest economic turnaround for 1995.

Fourth, is our program too capitalist to be digestible by the Cuban government while Castro is still in power? As stated in the introduction, the program clearly has capitalist tones since it encourages owner- ship-based incentives and market discipline. It is how- ever, “softer” in its social impact and more nationalist in its programs than most other feasible transitions; in addition, the strategy of encouraging ownership in industry is not that different from the private and cooperative ownership forms becoming increasingly prevalent in Cuban agriculture.@ Indeed, this strategy might be thought of as a way to better prepare for a more dramatic capitalist transition, should that hap- pen, by creating local ownership and sanitizing the fis- cal side to maintain a modicum of social services. Moreover, it must be acknowledged that efforts to “perfect socialism” are generally questionable (see Komai, 1992); in the Cuban case, in particular, it is probably too late for modest programs involving price adjustments and the decentralization of decision- making authority to firms as we ourselves have rec-

WAITING FOR CHANGE 715

ommended in the past (see Pastor, 1992b; Zimbalist, 1992, 1993, 1994). In addition, while the decentral- ization of authority implicit in the market and the countervailing power to the state implicit in the resur- rection of private property may worry some Cuban officials, a liberalization of political life and the cre- ation of a space for civil society would be positive for the Cuban people and is, we believe, inevitable.45

Finally, we realize there are numerous particulars that we have not included in our discussion. Health and education should remain state responsibilities but a purely state-controlled delivery system may be dif- ficult when so much of the economy slips from state control; the financial model we have outlined is under- specified with regard to the respective roles of gov- ernment, foreign, private and informal credit, etc. Nonetheless, there is a coherence to the basic elements of this program and each relates directly to the goals of incentivizing production, shifting resources to trad- ables, stabilizing the macroeconomy, and preserving key aspects of Cuba’s social gains. We would suggest that such an approach is worth a try by either the present government or some successor and welcome the debate our views, especially on privatization, are likely to provoke.

4. CONCLUSION

The collapse of the socialist trading system has delivered a series of irreparable shocks to the Cuban domestic economy. With an economic downturn whose force has been barely dented by domestic aus- terity and sectoral strategies, the Cuban government has introduced a set of liberalization initiatives that have both raised the possibility of systematic change and made such change inevitable. While high-level authorities, for example, view the depenalization of dollar use as a stopgap measure, it will be very hard to reverse; the question then is how to go forward in a way that promotes production, aids in achieving macroeconomic balance, and protects some of the distributional gains of the Cuban system.

We have argued that an appropriately phased and planned privatization might be one key element of a strategy for going forward. Privatization could sop up the monetary overhang, create incentives, and insure an important role for island Cubans should the economy eventually become open to US and

Cuban-American investors. It could also be done in a way (i.e., using workplace and citizen vouchers as well as peso holdings) which works against the per- verse distributional outcomes generated by the infor- mal dollarization of the economy; the revenues could also be devoted to generating some public employ- ment in infrastructure and reducing the ongoing real cuts in social services. In this circumstance, espe- cially if coupled with other crucial fiscal and credit policies, devolving state ownership of assets to the people themselves may generate both greater effi- ciency and equity.

How likely is such a program to be adopted by the current government? We are not optimistic for reasons outlined earlier: the top-level leadership is troubled by even the modest moves thus far and the leadership in waiting is doing just that - waiting. Moreover, the US government seems unwilling to recognize and reward any cautious steps toward economic and polit- ical change, a strategy which surely reduces incentives and weakens the hands of reformers.

Nevertheless, there are few viable options left for the Cuban government. If it is serious about integra- tion into the work market in general, Cuba must move toward structures allowing prices, exchange rates and tariffs rather than direct control to determine trade flows. This requires financial balance which, in turn, depends on absorbing the monetary overhang and maintaining fiscal discipline. Our program provides for this in a way that will minimize inflationary pressures (and hence the need for contractionary macropolicies) and provide for direct ownership of corporate equity by the Cuban people.

Further, a bolder and more coherent plan of reform is more likely to shake the US administration from its obdurate policy toward Cuba. In our view, a US deci- sion to relax the embargo would help make possible the kind of program outlined; essentially, the Cubans would be forced by freer trade to liberalize the domes- tic economy and to try to create a domestic business class which is both prepared to compete and holds some allegiances to the former social system that delivered them property rights. Thus, the decisions key to determining Cuba’s future, as has been com- mon throughout the last century, will be made by two capitals, Washington and Havana. In the meantime, the Cuban people, belts tightened and hopes dashed, continue to wait for change.

NOTES

I. This 77% is, however, based on the inflated prices paid structural diversification of Cuba’s exports is more apprecia- for Cuban sugar by the former Soviet Union. At market ble than the value diversification, but even in the former case prices, the share of sugar in Cuban exports would fall to dependence on sugar remained heavy. Data on composition 6045%. depending on the weighting scheme employed, see of trade are taken from Awario Estadisrico de Cuba. 1989, Zimbalist and Bnmdenius (1989, p. 144-150). That is. the the last data yearbook released by Cuban authorities. As for

716 WORLD DEVELOPMENT

the excessive reliance on a single trading partner, the Soviet Union, the product by product dependence is even more striking; Rodriguez (1991, p. 14-U) reports that 100% of Cuban wood, cotton, and wheat imports, 99% of oil imports, and 80% of fertilizer imports came from the Soviets. For gen- eral reviews of the reliability of Cuban data, see Perez-Lopez (199lb) andzimbalist (1988).

2. Official figures indicate that industry’s share in gross social product rose from around 25% in 1962 to around 45% in 1984-89; see Anuario Estadistico de Cuba, 1989; even if these figures overstate the increase, estimates from Zimbalist and Brundenius (1989, p. 27) at least indicate that industrial growth far outpaced GSP growth (taken from Zimbalist and Eckstein, 1987, p. 10) over 1962-85. The import composi- tion figures come from Anuario Esfadisrico de Cuba, 1989, p. 261. For a review of structural shifts in the Cuban econ- omy, see Figueras (1991a).

3. In a June 1991 presentation at the Centro de Investigaciones de la Economia Mundial in Havana, researcher Miguel Figueras noted, for example, that Cuban industry had a high energy coefficient (with oil mostly imported) and a low export coefficient. The excessive use of energy seems to have been typical of centrally planned economies.

4. For formal models of adjustment in such an economy see Krugman and Taylor (1978) and Pastor (1992a). The adjust- ment pattern described above - falling GDP, accelerating inflation, depreciating currency, and declining real wages - was quite typical of Latin America in the early 1980s. Many economies either eventually bottomed out or adopted appro- priate restrictive policy (or both) and, after the long adjust- ment periods, production responses to the shifts in relative prices began to kick in. Of course, helping the recent recov- ery has been the recent restoration of capita1 flows to the region (see Kuczynski, 1993).

5. Most economists have stressed how the lack of price flexibility in a classical socialist economy impedes efficient microeconomic allocation; as noted here, the impact of price stiffness on macro adjustment is equally important.

6. There were certainly elements of this imbalanced cur- rency market in Cuba. In 1994, the official rate was l/50 of the black market rate; yet that “free” rate was surely not at purchasing parity since it required nearly the equivalent of an average worker’s monthly wage in pesos to purchase one chicken in dollars.

7. Cuba also had trade with nonsocialist countries that took place using convertible currency. In 1980-89, this amounted to an annual average of 23.6% of exports and 15.6% of imports; this portion of trade was actually in surplus for 1986-89 since a collapse in hard currency linancing due to debt problems constrained the ability to run current account deficits on the convertible side of the overall trade accounts. The bulk of trade, however, was with the socialist bloc which explains why we focus on those shocks.

8. Actually, since the last few Soviet contracts to deliver oil used a five-year average of world prices to set the ruble price, Cuba was hurt when world oil prices fell dramatically in

the second half of 1985 and 1986 (Perez-L&z, 1991a). Nonetheless, the oil arrangement did, on average, benefit Cuba - indeed, during the early 1980s reexports of Soviet oil became the largest hard currency earner - and certainly the high guaranteed prices for sugar were a plus.

9. There has long been a debate about whether Soviet help constituted a subsidy and how one might calculate that. Numerous points by Cuban economists in this regard are meritorious: using world sugar prices to calculate a “sub- sidy” is problematic since almost all other countries have bilateral arrangements for sugar with above-market prices, the Soviets benefited by having a guaranteed market for over- priced industrial commodities, and perhaps any subsidy is simply the “just” transfer of aid from North to South. Be that as it may, calculating the extent of the shock involves no notions of justice and necessitates the use of world prices as a benchmark (see the argument in Zimbalist, 1992). This implies that we should also correct for Soviet overpricing and we have done so following Ritter (1990). For an analysis of the trade shocks in Eastern Europe and how they provoked a large fall in output given the unique trading rules (shared by Cuba), see Rodrik (1992); Rodrik usefully stresses the “mar- ket-loss” effect which we think is important in the Cuban case but do not attempt to estimate in our analysis here.

10. The data are estimates since the last official yearbook only takes us up to 1989 and data on economic performance have become scarcer as the crisis has worsened. Moreover, Cubans have only recently been attempting to rework their national accounts to conform with those of most other devel- oping countries; as a result, GDP estimates are particularly

sketchy.

11. Figures on food and live animal imports taken from Attuario Estadistico de Cuba, 1989, p. 276275. For a criti- cal analysis of the Food Program, see Mesa-Lag0 (1993a, p. 227-244).

12. For a detailed study of the industry, see Feinsilver (1992). Mesa-Lag0 (1993b. p. 621) reports that biotechnol- ogy only employed 400 workers in 1990, suggesting that the employment impacts of a biotechnology export drive might be limited.

13. The Cuban government projects that these gross incomes will rise to $900 million in 1994 and $1 billion in 1995.

14. See “Garza’s Cuba Venture,” Financial Times, May 7, 1994, “Mexico Plays Growing Role in Helping Cuba Withstand U.S. Trade Embargo,” The Wall Street Journal, “Fidel’s End Run Around Uncle Sam,” Business Week, May 9, 1994, p. 47 and “Let’s Make a Deal,” Maclean’s, May 23, 1994. pp. 22-23.

15. Roughly 60% of peso balances are deposited in savings accounts with the rest held as cash by the population. For a discussion of state finances, see Alvarez (1994, p. 21).

16. Recent reports from visitors to Cuba suggest that the black market exchange rate hovered in the 50-60 pesos per dollar range. This is a substantial appreciation from summer

WAITING FOR CHANGE 717

1994 levels and likely reflects the use of the peso in the emerging farmers’ market.

17. This transformation is potentially a first step forward toward privatization. While ownership of cooperative lands remains formally in state hands, the cooperative holds per- manent usufruct rights (see Deere, Perez and Gonzales, 1994).

18. The state, while still insisting that the cooperative farms meet their delivery quota of key products like sugar cane, will allow some land to be set aside for self-provision- ing; given the general food shortage, cooperatives are likely to be both extremely efficient on that land and explore ways to expand such production. See the discussion of unit self- sufficiency in food consumption in Alvarez (1994, p. 26) and the more detailed discussion of the cooperativization of state farms in Deere, Perez and Gonzales (1994).

19. The restrictions include ruling out the hiring of any other person; entrepreneurs get around this by forming “cooperatives” which charge workers a fee for use of the owner’s capital equipment.

20. For information on the emegence of dollar shops for Cubans, see Joel Millman, “Fidel’s New Friends”. Fo&es, February 28, 1994, pp. 6668. The stores, called dip/oriea- das, also attract informal service businesses such as taxis, bicycle parking, and fast food.

21. See Mesa-Lag0 (1993~) for a discussion of this strategy and the loosening of restraints on dollar “remittances.”

22. Cuban Trade Minister Manual Vila Sosa, for example, has said that state farms will, in 1995, receive only 40% of their current subsidies and that they will be expected to be self-financing in 1996.

23. See “Awaited ‘package’ is half-unveiled,” Lntirr American Weekly Report. May 12, 1994, p. 195.

24. In early August 1994 the National Assembly finally approved a package of new taxes, featuring an individual income tax, that is slated to take effect in 1995.

25. As of early August 1994.377 Cubans had been charged with economic crimes and the courts had ordered the seizure of goods from several dozen people who had “illegally” acquired their riches. Seized goods included: 373 cars, 166 motorcycles, 92 trucks, 270 houses, 71 tractors, nine boats and tens of thousands of dollars.

26. This is our impression from numerous visits and dis- cussions See also Rota (1993, p. 5788560).

27. In his December 29. 1993 speech to the Cuban national assembly, for example, President Fidel Castro noted that the legalization of dollar holdings by Cuban citizens “would never have been approved in normal conditions” and argued that “authorizing private commerce would be a political and ideological turnaround” (“Castro delays his ‘monetary’ package,” Latin American Weekfy Reporr, January 13, 1994, p. 6-7).

28. We base this both on our own interviews and contacts and on the observations of others. See, for example, the dis- cussion in Mesa-Logo (1993a. p. 244-24.5).

29. An additional, historical difference between China and Cuba has to do with the history of central authority. While China has had some degree of central control, it has always included a strong component of regional and local autonomy, a characteristic which made the country conducive to decen- tralizing economic reform. Central control in Cuba, in con- trast, has always been strong and this, along with Castro’s ideological position, helps to explain why market reform has come only begrudgingly.

30. Recent research suggests that “learning’ impacts of external orientation - including the transference of “mod- em” techniques to domestic sectors - may partially account for the positive impact of exports on long-run growth. For a review of the debate and evidence, see Edwards (1993).

3 1. There are some, such as Perez-L6pez (1994) who place priority on macroeconomic stabilization and would view this as a primary goal, with privatization a step or two behind. We agree on the need for such stabilization but argue that priva- tization may, in the current Cuban conjuncture, actually be an important part of the stabilization process.

32. The government might consider at this point the devel- opment of a market in residential as well as commercial real estate. To distinguish between the two would involve the adoption of general land use plans.

33. There is ample historical precedent for proceeding thusly. In the worst case, it may he necessary to offer long- term state bonds in compensation. One possible exception might be in negotiation with foreign investors who refuse to come in unless the price is discounted to reflect past owner- ship claims. This would mostly arise with US investors who are, however, not likely to be early purchasers of privatized state assets given the embargo. For a view contrary to our own “starting over with local ownership scenario,” see Ritter (1993).

34. The estimate for corporate equity value was made for illustrative purposes as follows: in 1989, Cuban current dol- lar GDP, based on the purchasing power parity methodology, was $32.5 billion. In the US economy in 1993 corporate equity value was 57.3% of GDP. Applying this percentage to Cuba yields an equity value of $18.6 million (based on 1989 GDP and installed capacity). Using the US percentage proh- ably yields a conservative estimate for Cuba given the inef- ficient use of Cuban productive capacity. We then assumed that the Cuban privatization process would involve one-half of the country corporate assets, apart from those acquired by foreign capital, in the first stages; this yields $9.3 billion which we then converted at one-to-one with the US dollar. This conversion corresponds closely to the peso-dollar pur- chasing-power-parity estimates for Cuban GDP in the mid- 1980s. Clearly, using the black market rate currently prevailing in Cuba would leave the Cuban people with little effective purchasing power to acquire productive assets.

35. Moreover, other privatizations, such as in Bulgaria, have started first with selling dwellings to residents. In Cuba,

718 WORLD DEVELOPMENT

however, almost all dwellings are already defacro owned or in the process of being owned and this leaves less room for monetary absorption. In addition, we are very interested in devolving productive (and not just consumption-stream) assets for all the reasons indicated in the text.

36. In addition, the “underpricing” due to risk should work against the potential asset loss if the peso appreciates in the wake of demand for pesos to buy into privatixed Cuban firms. Fisher and Gelb (1991, p. 99) do worry about the fiscal effects of privatization without firm restructuring and seem to suggest a slower pace. Cardoso and Helwege (1992) agree that gradualist privatization is usually best, but only for state- dominated capitalist economies; for a socialist economy like Cuba’s they recommend “instant” privatization, mostly to avoid granting old state firms effective monopolies. We are arguing for a phased privatization, mostly for inflation-fight- ing reasons, but we are discounting fiscal worries -the goal is not to make the state wealthy but to shed enterprises, empower local owners, and adjust the economy.

37. The issue of privatizing !arge firms has been problem- atic through the East European transitions and few satisfying models have emerged (see Bruno, 1994). a fact which partly explains our caution and relative vagueness on this question. On the need to restructure large firms prior to privatization, see Fisher (1994, p. 240-244).

38. The experience of South Korea and other successful capitalist developing nations suggest that the state can use the financial system to successfully steer investment (Amsden, 1990); what is problematic is when a national credit author- ity allocates credit with no regard to profitability and imposes no “hard” budget constraint on underperforming firms, fea-

tunes that are unfortunately typical of socialist finance.

39. McKinnon (1991) offers a similar segmenting of credit markets as part of a capitalist transition strategy.

40. We would not argue for a heterodox strategy of incomes policy/price controls (as in Castaheda, 1993); we think this would damage expectations (which would, by con- trast, be. improved if our “mopping up” strategy works) and require an economically more effective government than cur- rently exists.

41. For more on the issue of sequencing current and capi- tal account liberalization in Latin American countries see Edwards (1984). Mann and Pastor (1989) and Pastor (1992a).

42. This would also allow the tourist economy to have mom of a direct multiplier impact on domestic income and end the relative disjunction between the two economies.

43. For more on the deterioration of the safety net and whether it was too large, see Mesa-Lag0 (1993~).

44. For examples of transition strategies which are more dramatic and more committed to a market system (albeit with some social protection), see Cardoso and Helwege (1992) and Svejnar and Perez-Mpez (1993)).

45. Even Castro acknowledged in early August 1994 to the Madrid daily El Pair: “We would be ready to sacrifice our particular preferences, such as socialism, for integration (with other Latin American countries), peace and social justice.”

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