FIU The Cuban Economic Crisis

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VÁCLAV HAVEL PROGRAM FOR HUMAN RIGHTS & DIPLOMACY

THE CUBAN ECONOMIC CRISIS ITS CAUSES AND POSSIBLE POLICIES FOR A TRANSITION Carmelo Mesa-Lago and Jan Svejnar

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

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Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

ABOUT THE AUTHORS Dr. Carmelo Mesa-Lago is Distinguished Service Professor emeritus of Economics and Latin American Studies, University of Pittsburgh, visiting professor/researcher in eight countries and lecturer in 39, founder/ editor for 18 years of Cuban Studies, and author of 95 books/pamphlets and 318 articles/chapters published in eight languages in 34 countries, about half of them on Cuba’s economy. His recent books on Cuba are Market, Socialist and Mixed Economies: Comparative Policy and Performance (Johns Hopkins, 2002); Cuba’s Aborted Reform (with J. Pérez-López, University Press of Florida, 2005); Cuba Under Raúl Castro: Assessing the Reforms (with Pérez-López, Lynne Reinner, 2013). He is the main author of Voices of Change in Cuba from the Expanding Non-State Sector (U. Pittsburgh Press, 2018). Former President of the Latin America Studies Association and member of the National Academy of Social Insurance, he has received the ILO International Prize on Decent Work (shared with Nelson Mandela), the Alexander von Humboldt Stiftung Senior Prize, Sheth Distinguished Faculty Award for International Achievement, two Senior Fulbrights, praise for his work on Cuba from FIU, and was selected among the 50 most influential Iberoamerican intellectuals. Dr. Jan Svejnar is the James T. Shotwell Professor of Global Political Economy and director of the Center for Global Economic Governance at Columbia University. His research focuses on the effects of government policies and global governance. Professor Svejnar is the recipient of the 2015 IZA Prize in Labor Economics and 2012 Neuron Prize for Lifetime Achievement in Economics. He is also a founder and chairman of CERGE-EI in Prague (an Americanstyle Ph.D. program in economics). Prior to joining Columbia University, Svejnar was a professor at the University of Michigan, University of Pittsburgh and Cornell University. He received his B.S. from Cornell University and his M.A. and Ph.D. in economics from Princeton University. He is the author and editor of a number of books and has published widely in academic, policy and practitioner-oriented journals. In 2008, Professor Svejnar was one of two candidates for the President of the Czech Republic.

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

LETTER FROM THE DIRECTOR As the director of the Václav Havel Program for Human Rights and Diplomacy, I am pleased to present the timely and critical analysis contained in this document, The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition. The information presented here is the most important outgrowth of a seminar titled “Cuban Economy: The Current Situation and Way Forward,” which the Havel Program organized on February 10, 2020, in collaboration with the Center on Global Economic Governance at Columbia University in New York. I am very grateful to my colleagues Jan Svejnar and Carmelo Mesa-Lago for spearheading a compelling conversation at that event, which gathered some truly impressive minds to debate the possible evolutionary paths of the Cuban economy at a time when the island is experiencing significant economic dislocations. I am also exceedingly grateful to Professors Svejnar and Mesa-Lago for agreeing to author this document, which offers a full and detailed description of the Cuban economy today and suggests three possible scenarios for the future. We hope it will stimulate a productive discussion, while reminding us once more of our own point of departure: a comparative approach based on the Central European experience. What we have here is a unique collection of current economic data and the keen analysis of two top economists. However, we should not lose sight of what is, in our view, the necessary sequence of steps to be taken in a successful transition from totalitarianism to democracy: first, the Cuban constitutional system must be reconstructed, based on the principle of the rule of law and inalienability of natural human rights and freedoms; second, a way must be opened to multiparty elections in Cuba in which people will be able to choose the representatives they really want; and third, based on a transformation of the Cuban political system, the priorities for rational and socially just economic reform must be debated in the public domain with initial steps taken in this regard. This document is the first in what I hope will be a series of reports to be produced as part of the Havel Program’s Cuba-focused initiatives. The project aims to bring our contribution to the current Cuban debate, to offer a comparative framework based on the Central European democratization experience and to inspire global dialogues on how Cuba, after more than six decades of dictatorship and economic misery, can set itself on a path towards democracy, social justice and material prosperity. Yours respectfully, Martin Palouš Director, Václav Havel Program for Human Rights and Diplomacy Steven J. Green School of International & Public Affairs Florida International University Miami, Florida 4

October 2020

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Vรกclav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

INDEX EXECUTIVE SUMMARY................................................................................................................................................................................7 I. INTRODUCTION......................................................................................................................................................................................10 II. MEASURING THE MAGNITUDE OF THE CURRENT ECONOMIC CRISIS.......................................................................................11 A.

Macroeconomic Indicators......................................................................................................................................................11 1) GDP growth 2) Gross capital formation and fiscal deficit 3) Inflation and monetary liquidity

B.

Physical Output Indicators......................................................................................................................................................12 1) Industry and mining 2) Agriculture, cattle and fishing

C.

External Sector Indicators.......................................................................................................................................................16 1) Balance of trade and services 2) Direct foreign Investment 3) Foreign debt

D.

Remittances................................................................................................................................................................................19

E.

Tourism........................................................................................................................................................................................20

III. CAUSES OF THE CRISIS........................................................................................................................................................................23 A. Persistence of Central Planning.............................................................................................................................................23 B. Collapse of the Venezuelan Economic Relationship..........................................................................................................23 C. Donald Trump Economic Sanctions.......................................................................................................................................26 D. COVID-19....................................................................................................................................................................................28 E.

A Return to the Special Period of the 1990s?.....................................................................................................................29

IV. ALTERNATIVES TO CONFRONT THE CURRENT CRISIS

AND PROMOTE FUTURE DEVELOPMENT..........................................................................................................................................30 A. Government Strategy and Policies........................................................................................................................................30 1) The initial weak strategy: 2019 2) A push for the needed reforms? B. International and Bilateral Aid...............................................................................................................................................39 C. Proposals from International/Regional Organizations and Applicability to Cuba.......................................................40 D. Strategies for the Future Transition......................................................................................................................................42 1) Enhancing flexibility of the current model with a greater role for the market and non-state sector 2) Sino-Vietnamese path adapted to Cuban characteristics 3) Transition to a market model with regulation

V. CONCLUDING OBSERVATIONS AND LESSONS FROM

THE ALTERNATIVE STRATEGIES AND MODELS FOR CUBA...........................................................................................................58

REFERENCES.................................................................................................................................................................................................60

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List of abbreviations

List of Tables

ANPP

National Assembly of People’s Power (Cuban Legislature)

1. Mining and Manufacturing Production, 1989 and 2007-2018

CAF

Economic Development Bank for Latin America

CEE

Central and Eastern European Countries (former socialist countries part of Soviet camp)

2. Agriculture, Cattle and Fishing Output, 1989 and 2007-2018

CCS

Cooperatives for Credit and Services (Cuba)

CIS

Commonwealth of Independent States (former socialist countries part of Soviet camp)

CMEA

Council for Mutual Economic Assistance (socialist trade block of former Soviet camp)

CUC

Cuban Convertible Peso (similar to one U.S. dollar and 25 CUP)

CPI

Consumer Price Index

CUP

Cuban National Peso

ECLAC

U.N. Economic Commission for Latin America and the Caribbean

EU

European Union

FDI

Foreign Direct Investment

GDP

Gross Domestic Product

IADB

Inter-American Development Bank

IMF

International Monetary Fund

NASC

Non-Agricultural and Service Cooperatives (Cuba)

OECD

Organization for Economic Cooperation and Development

ONEI

National Office for Statistics and Information (Cuba)

SME

Small and Medium Enterprises

SOE

State-owned Enterprises

TVE

Township and Village Enterprises

USSR

Union of Soviet Socialist Republics

WHO

World Health Organization

WTO

World Trade Organization

ZEDM

Zone of Economic Development Mariel (Cuba)

3. External Balance of Goods and Services, 1989 and 2007-2018 4. Estimates of Cuban Foreign Debt, 2018-2019 5. Indicators of International Tourism, 1989 and 2007-2020 6. Cuban Trade Dependence on Venezuela: Goods and Services, 2012-2018

List of figures 1. GDP Growth in Cuba, 2006-2020 2. Gross Capital Formation and Fiscal Deficit in Cuba, 2007-2018 3. Inflation and Monetary Liquidity in Cuba, 1990-2018 4. Index of Industrial Production in Cuba, 1989-2018 5. Foreign Remittances Sent to Cuba, 2008-2020 6. Tourism Gross and Net Revenue and Number of Tourists in Cuba, 2007-2020 7. The Economic Relationship between Cuba and Venezuela, 2006-2017 8. Cuba-Venezuela Economic Relationship as a Percentage of Cuba’s GDP, 2007-2017 9. Structure of World Economy in 1978 % Based on GNI in USD and Current Prices 10. Structure of World Economy in 2018 % Based on GNI in USD and Current Prices 12. Development of Real GDP in Central and Eastern European Countries

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Executive Summary1 Cuba is currently facing the worst economic crisis since the severe crisis that occurred in the 1990s after the collapse of the Soviet Union. All key economic indicators have badly deteriorated: GDP fell from 12% to -8% in 2006-2020, averaging in the last five years -0.6% annually vis-à-vis the official target for sustainable development of 5% to 7%; gross capital formation averaged 9.7% annually in 20142018 compared to the official goal of 25% that has not been achieved since 1989; the index of industrial output decreased 32% in 1989-2018; mining, manufacturing, agricultural and fishing output shrank in 2007-2018, and the output level of several products is below the 1989 level. The systematic deficit in the trade balance of goods rose 220% in 1989-2018; starting in the 2000s, exports of professional services — the principal source of hard currency — offset the trade deficit of goods and generated a surplus in the overall balance of goods and services (mostly to Venezuela), but with the Venezuelan severe economic crisis this surplus halved in 2014-2018. Materialized direct foreign investment averaged $500 million yearly in the same period, one-fifth of the target of $2.5 billion. The foreign debt amounted to $67.5 billion in 2018, with most of it being restructured and condoned. Still, Cuba owed $25 billion and stopped debt payment in 2020, facing an ultimatum to repay by June 2021. Foreign remittances, the second most important source of hard currency, peaked at $3.7 billion in 2019 but declined by one-third in 2020. International tourism, the third main source of hard currency, crested at $3.2 billion in 2017 but dwindled by half in 2020. The current economic crisis has been caused by four factors, one internal and three external: 1) the persistence of an inefficient economic model based predominantly on central planning and state enterprises rather than on the market and private property; 2) the drastic decrease in Venezuela’s economic aid to Cuba since 2012; 3) Trump’s strengthening of the U.S. embargo in 2017–2020; and 4) COVID-19 in 2020. Between 2007-2016, Raúl Castro’s modest market-oriented structural reforms attempted to update the central planning model, but they were too slow, tightly regulated and hindered by many restrictions, taxes and policy zig-zags. These reforms failed to improve the economy (before the external adverse factors occurred, GDP had already contracted from 12% to 0.5%). Venezuela’s economic relationship with Cuba (buying Cuban professional services and supplying 1

oil and other commodities) reached $16 billion in 2012 but, due to Venezuela’s economic crisis, dropped to one-half in 2017; in addition, $8 billion in FDI was halted; in terms of GDP the trade relationship fell from 22% to 8% in this period. Trump’s strengthening of the U.S. embargo since 2017 encompassed several punitive measures that froze new foreign investment in Cuba; banned American cruises and most U.S. flights to the island as well as prohibited American visitors from lodging and eating at facilities managed by the military; sanctioned international banks that complete transactions with Havana and imposed $12 billion in fines; obstructed oil supply from Venezuela; set a cap on remittances sent from the U.S.; banned a French bank through which most of those remittances were processed; and reinserted Cuba on the list of foreign countries that collaborate with terrorist organizations. We roughly estimate a loss of $2.7 billion caused by these policies on tourism and remittances alone. The pandemic in turn led to a total closing of all tourism in April-July 2020 and a revenue loss of $2.4 billion, as well as more than a $1 billion expenditure to fight COVID-19. It was originally thought that the current crisis would be of a lesser magnitude than the one in the 1990s because of more diversified foreign partners and investors, as well as more tourism and remittances and lesser dependency on external oil supply, but the external factors (particularly Trump sanctions) are rapidly eroding those favorable circumstances. Cuban policies to confront the crisis started with a very weak strategy in 2019, criticized by Cuban academic economists as too cautious and lacking in innovation, boldness and speed. As the crisis worsened in 2020, a new strategy was approved in July, including some 31 measures (macroeconomic, financial and monetary) that suggested that there would be a resumption of the marketoriented reforms halted in 2016. However only two shortterm measures to capture U.S dollars were immediately enforced: expansion of hard-currency sales in state shops and elimination of the 10% fee on the exchange of dollars into national currency. The remaining 29 measures (mainly with the long-term objective of restructuring to solve fundamental economic problems) are basically goals, mostly vague and without concrete guides; they resemble similar policies previously announced during the revolution and never carried out. A detailed official analysis of all these

Information current to August 6, 2020. 7

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

policies, as well as the opinion of several Cuban academic economists, led to the conclusion that the strategy goes in the right direction (for instance, allowing the non-state sector to export and import, albeit though monopolistic state enterprises), but until they are implemented, central planning and market tight regulation would persist. In addition, the strategy postponed key reforms such as the unification of the dual monetary system (convertible pesos, CUC, and national pesos, CUP), compounded by the partial reintroduction of the dollar, and enactment of a law to legitimatize the non-state sector (microenterprises and new cooperatives expanded/introduced by Raúl Castro) and concrete policies to attract effectively foreign investment. Furthermore, the two implemented measures will have the effect of expanding the current segmentation and inequalities in the population. Finally, there is consensus that the most important obstacles faced by the new policies are internal: the bureaucracy, managers of state enterprises and the entrenched ideology. An assessment of the possibilities that international and regional financial organizations would come to Cuba’s rescue has led to the following facts: Cuba is not a member of these organizations (World Bank, IMF and IADB) and hence cannot receive aid from them; Cuba is a member of the CAF but other participant countries have changed their governments from left to right and that bank so far has not provided aid either. The possibility that developed countries, mainly Russia and China, could replace Venezuelan support is discarded although some lesser amount of aid might be provided; chances of EU help are improbable because of Cuba’s quasi default to its restructured debt with the Club of Paris; finally, there is no likelihood of change under a second Trump administration. A Democratic administration controlling the presidency and both chambers of Congress could bring about change, but it would take time and debate. Most regional-organization proposals for economic-social policies to cope with the crisis in Latin America have not been applied by Cuba. In the present study, we examine three possible strategies that could be deployed by Cuba in an attempt to achieve sustainable economic development. Presented in an order of increasing degrees of change, the strategies are: 1) increasing the flexibility of the current model with a greater role for the market and non-state sector, 2) a SinoVietnamese model adapted to the Cuban environment, and 3) a predominantly market economy model with state regulation, along the lines of the transformation in CentralEastern Europe

The enhanced flexibility strategy includes further expansion and legitimization of the non-state sector, particularly the private one; more opening to FDI in all economic sectors with stable and more flexible rules and proper guarantees; allowing commercial banks to finance state enterprises (which would be required to repay the loans or shut down) and provide loans to both state and non-state sectors; creation of an agricultural bank; allowing the non-state sector to import and export through the new commercial banks. Two antagonistic approaches to monetary and exchange-rate unification are examined, respectively without and with concomitant deeper economic reforms, and only the latter is found feasible. The Sino-Vietnamese path (market socialism) that combines state and private ownership of firms of various sizes and a greater role of the market has achieved very successful economic results in contrast to Cuba’s poor performance. Despite differences between Cuba and the two Asian countries, it is argued that many of the latter’s policies are applicable to Cuba, particularly the agricultural reform that achieved food self-sufficiency in the two countries (Vietnam becoming a net food exporter), hence overcoming a history of famines in both. Also analyzed are the transformation of the central plan into a decentralized plan as a guide for development; the significant decentralization of foreign trade by autonomous state enterprises and private firms (the later generating most of the GDP); the key and rising role of the private sector (total in agriculture) and its ample freedoms; the facilities given to FDI through multiple development zones and active participation of the diaspora; employment going well beyond self-employment and cooperatives into many diverse forms, with private jobs becoming predominant; the relatively fast and successful monetary and exchange-rate unification; the achievements in technological innovation, and the challenges faced. Transition to a market with regulation is exemplified by the transitions in Central-Eastern Europe. The CEE countries started from a Soviet model that has been also characteristic of Cuba, and they rapidly converted their economies into open market economies with democracy and a system of social protection. The transition of the CEE countries differed markedly from that of China in that it was relatively rapid. Almost all the CEE governments went ahead rapidly with macroeconomic stabilization, price liberalization and abandonment of central planning. They differed in the approach to and speed of privatization of large and medium-sized state-owned enterprises, establishment and enforcement of a market-oriented legal system and

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accompanying institutions, in-depth development of a commercial banking sector and the appropriate regulatory infrastructure, enactment of labor market regulations and establishing institutions related to unemployment and retirement systems. Many CEE governments carried out these reforms slowly, in part because of political resistance and in part because such reforms were more demanding in terms of know-how and logistics. Overall, while not matching China’s rapid economic growth, the CEE approach has led to more successful economic outcomes than the transition in the countries of the former Soviet Union (excluding the Baltic countries, which have done relatively well). Both the CEE countries and the countries in the former Soviet Union experienced a major recession or depression in the early years of the transition. This downturn may be avoided if the policymakers choose the dual track approach of China. The flexibility approach might provide some temporary respite to Cuba, but won’t tackle its fundamental problems and hence would likely be unsuccessful. With proper adaptation, the Sino-Vietnamese path would be more feasible than the first strategy, both economically and politically, and solve most structural economic problems. The market with regulation would enable both economic and political transition to a European-style market economy with democracy.

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

I. Introduction Cuba is currently facing the worst economic crisis since the 1990s after the collapse of the Soviet Union and the socialist camp. In 1960-1990, the USSR cumulative economic aid to Cuba amounted to $65 billion, three times the amount received by Latin America under the Alliance for Progress initiated by U.S. President John F. Kennedy in 1961; 60.5% of such aid was in non-repayable price subsidies to Cuban exports and imports, and of the remaining 39.5% repayable debt, Cuba only reimbursed 1.9%. Cuban trade with the USSR reached 72% of the island total trade volume (86% with CMEA), the Soviets supplied 92% of crude oil and derivatives, and were virtually the only source of investment in the island. Due to that heavy economic dependency, the disappearance of the socialist camp was a big blow to Cuba’s economy: GDP contracted by 35% in 1989-1993, the worst decline since the Great Depression. All economic and social indicators deteriorated in what was euphemistically labeled “The Special Period in Time of Peace” (Mesa-Lago, 2000). Starting in 1994, a slow and partial economic recovery took place, largely due to timid economic reforms introduced by Fidel Castro, but 26 years latter most economic indicators are still below the 1989 level.

At the start of the 21st century, another country came to the rescue of Cuba: Venezuela under populist socialist governments, first Hugo Chávez and, after his death, Nicolás Maduro. The new partner virtually replaced the USSR although not at the same level. The core of the relationship was the buying of Cuban professional services (mostly doctors and health-care personnel) that rapidly became Cuba’s first source of foreign exchange; in addition, Venezuela supplied about 60% of Cuban fuel needs and heavily invested in the island (including the completion of the Mariel oil refinery in Western Cuba). At its peak in 2012-2013, the total value of the economic relationship was equivalent to 22% of Cuban GDP, 44% of Cuban total trade volume was with Venezuela, which heavily subsidized the value of Cuban physicians, as the USSR had done with imports of Cuban sugar and nickel and exports of oil.2 The heavy dependence of the island on a foreign partner continued, therefore the huge Venezuelan crisis since 2017 has had adverse effects for the Cuba economy. By 2020, three factors combined to generate the “perfect storm” in Cuba. In addition to a sharp cut in the Venezuelan relationship, president Donald Trump reversed the short but beneficial normalization of relations with Havana under president Barack Obama and imposed heavy sanctions on Cuba, whereas COVID-19 aggravated the situation by forcing the closing of tourism (the third source of foreign exchange) and significantly reducing foreign remittances (the second source of hard currency). The continuation of Cuba’s model of central planning and large state enterprises, predominant over the market and private enterprises, have been another contributor to the crisis (Raúl Castro’s market-oriented structural reforms failed to improve the economy due to their slow pace, multiple barriers, restrictions and disincentives). The new president Miguel Díaz-Canel, who took over in 2018, as well as the new political constitution enacted in 2018, have bowed “continuity” and rendered the economy incapable to confront the severe crisis. After 61 years of revolution, Cuba is at a crossroads and there is an urgent need for change. There is consensus between Cuban academic economists and foreign experts that a mixed model would be the way out for the periodic crisis and a path for stable economic development in the future.

2  The USSR paid Cuban sugar exports as high as seven times the world market price and nickel exports 50% said price, whereas Venezuela paid for Cuban doctors seven times the average salary of Venezuelan physicians. 10

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II. Measuring the magnitude of the current economic crisis A) MACROECONOMIC INDICATORS Gross domestic product growth at constant prices peaked at 12.1% in 2006 (when Raúl Castro took power as provisional president) and fell to 0.5% in 2019 (Figure 1). For 2020, the U.N. Economic Commission for Latin America and the Caribbean first projected a decline of 3.7% and later worsened it to -8% (ECLAC, 2020a, 2020b) whereas the Economist Intelligence Unit projected -8.3% (EIR, 2020), reversing GDP to the 2014 level (ONEI, 2019). Before COVID-19, Cuban authorities insisted that the crisis was “conjunctural” rather than “structural,” ignoring a history of heavy economic dependency and the persistent problems accumulated under the revolution. Annual growth in 2016-2019 averaged 1.2%, virtual stagnation; if the ECLAC and EIU contraction for 2020 is added, said average decreases to -0.6% vis-à-vis an official target for sustainable economic development of 5% to 7%.

The analysis of the magnitude of the current economic crisis is based on a comprehensive collection of Cuban statistics compiled by Mesa-Lago through many years and submitted to reliability tests.3 The indicators used in this evaluation are macroeconomic data, physical output data, external sector data, remittance data and tourism data. The series usually covers the period 2007-2018 (macroeconomic and external-sector data for 2019 won’t be available until late Fall of 2020). In some cases, the year 1989 (eve of the 1990s crisis) is compared with recent data.

Figure 1. GDP Growth in Cuba, 2006–2020 (constant prices) 15

12.1

10

7.3 4.4

4.1

5

1.4

2.1

2.8

3.0

2.7

1.8

0.5

2.2 0.5

0.5

0 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

-5

- 8 .0 -10

Source: ONEI, 2008 to 2019; 2020 projection by ECLAC, 2020b.

3  The poor availability-reliability of Cuban statistics is proven by how few of them appear in ECLAC’s two major annual publications in 2019: the Estudio and the Balance (ECLAC, 2019a, 2019b). In the Estudio, out of 32 applicable tables, Cuba is fully absent in 24 and does not provide data for 2019 in five, so it is only included in five; in the Balance, out of 25 tables, respective figures are 19, four and two. Cuban data appears in two or three tables whereas Haiti appears in 19. Lack of Cuban data makes comparisons very difficult with countries in the region. 11

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

Cuba’s gross fixed capital formation averaged 9.7% annually in 2014-2018 (Figure 2), whereas 25% is officially required for adequate growth; said 25% was achieved in 1989 (on the eve of the 1990s crisis) and it has not been reached since then. In 2014-2018, gross capital formation in Latin America and the Caribbean averaged 19.1%, twice the Cuban figure (ECLAC, 2019b). After a decline in 2008-2013, the fiscal deficit rose from 1.3% to 8% of GDP in 2013-2018 (Figure 2); in 2018 it was four times the regional average of 2.1% (ECLAC, 2019b). The estimated fiscal deficit for 2019 improved to 6.9% (at the cost of a drastic cut in investment), still more than three times the regional average of 2.1% (ECLAC, 2019a). The deficit has been financed by public bonds with 20-year maturity sold to the state bank with an annual interest of 2.5% (Cuba Standard, 2018). The hefty rise in wages in half of the state sector in 2019 and climbing expenses due to the pandemic in 2020 forced a tight control of public expenditures, but the government has acknowledged an increase in the 2020 deficit (“Gobierno cubano informa…,” 2020). Since 1993, the worst year of the 1990s crisis, when it reached a peak of 26% of GDP, inflation fell to 0.6% in 2017 but jumped to 2.4% in 2018 (Figure 3), still lower than the regional average of 3.2%; there were at least three years with deflation over this period (1995, 2000 and 2016). But official data on the consumer price index measuring inflation is not reliable for three reasons: the government sets most prices, which are not determined by the market; the basket of goods and services used to estimate the CPI, as well as their weights, have never been published, so the methodology cannot be checked; and the CPI only includes prices in CUP and excludes prices in CUC, used by the population to buy a good part of consumer goods at state shops and services sold by the self-employed.4 Cuba Standard (2019) states that the CPI “is a metric that for several years now does not seem to match the economic reality” (p. 16). Another indicator of inflationary pressure is monetary liquidity in the hands of the population or monetary surplus (cash in circulation plus bank savings), shown in Figure 3. Said surplus more than doubled in 2007-2018 (from 25,500 to 58,900 million CUP); as a percentage of GDP, it jumped from 34.1% to 58.9%. The 2018 figure is the highest since the 1993 peak, and also higher than the percentages in 1992 and 1994. Note that monetary liquidity also excludes

prices in CUC. To avoid further inflation, the government has raised funds through public bonds held by state-owned banks, thereby creating a financial bubble; when banks exhaust their ability to buy such bonds, the government will have to resort to monetary emission, which will feed inflation. The interest rate for the bonds is set by the government at 2.5% below what would be the market rate, meaning that the ministry of finance is receiving funds at subsidized rates (Cuba Standard, 2018). Inflationary pressure in the second half of 2019 probably rose because of the cited wage increase.

B) PHYSICAL INDICATORS Analyzed are physical production in industry and mining, as well as in agriculture, cattle and fishing. 1. Industry and mining Although there has been a clear recovery since 2013, the index of industrial production in 2018 was one-third below the 1989 level, due to industry decapitalization. Sugar output was 82% lower than in 1989 and the rest of the industrial sector was 22% beneath (Figure 4). Mining production faded from 0.6% to 0.5% of GDP in in 2007-2017 (ONEI, 2008, 2019). Table 1 exhibits the output of 11 key mining-manufacturing products in 1989 and in 2007-2018; the peak production level is denoted in bold. Output dwindled for 10 of the 11 products and grew for only two. In 2018, five products were below their 1989 level: sugar, steel, cement, textiles and fertilizers. In contrast, output increased significantly in oil and natural gas; the former decreased after 2015 due to the exhaustion of wells and the failure of deep-sea oil prospecting, while gas fell after 2015. Nickel grew through 2007 and then decreased (another decline was probable in 2019), while cigars increased until 2016 and then declined. Output of medicines grew until 2015; the series was deleted thereafter, which usually indicates a decrease in output, and was an outcome of declining imports of raw materials and losing Venezuela’s buying of Cuban medicines (see C-3).

4  Cuba has two currencies in circulation: the national peso (CUP) and the “convertible” peso (CUC) fixed by the government and not traded internationally; the CUC value is now similar to the U.S. dollar and equals 24 CUP. 12

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Figure 2. Gross Capital Formation and Fiscal Deficit in Cuba, 2007-2018 16

Source: ONEI, 2008 to 2019.

14.8

14

12 .0 12

10.9 10.2

10

10.1

9.4

9.6

8.6

8.5

8

9.4

8.7

7.6

6.9

10.3

8…

6.7 5.8

6

4.9 3.6

4

3.7

3.2

2.2

1.7

2

1.3

0 2007

2008

2009

2010

2011

2012

2013

Gross Capital Formation % GDP

2014

2015

2016

2018

Fiscal Deficit (%)

Figure 3. Inflation and Monetary Liquidity in Cuba, 1990-2018 80

2017

Source: ONEI, 1991 to 2019.

73.1

70

58.9

56.1

60

52.7

51.7

50

42.6

42.6

44.7

34.1

40 30

40.6

53.8

25.7

25.3 19.7

20 10

7.0

2.9

0.5

-3.0

0 -10

1990

1992

1993

1994

1995

2000

2004

1.6

2.8

2010

2015

- 2.9 2016

0.6

2.4

2017

2018

- 11.5 -20 Monetary liquity/GDP (%)

Inflation rate (%)

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

Figure 4. Index of Industrial Production in Cuba, 1989-2018 (1989=100)

Sources: 1989-1997 from CEE, 1991, 1998; 1992-2018 from ONEI, 1994 to 2019.

100

100 90 80

67.6

70

62.1

60

52.0

48.2

50

46.1

39.1

40

55

51.8 39.5

38.7

2003

2006

30 20 10 0 1989

1992

1993

1997

2001

2008

2013

2015

2018

Table 1. Mining and Manufacturing Production, 1989 and 2007-2018 (thousand metric tons) Products

1989

2007

2009

2010

2011

2013

2014

2015

2016

2017

2018

718

2,905

2,731

3.025

3,012

2,897

2,905

2,822

2.619

2,522

e

34

1,218

1,155

1.072

1,019

1,066

1,200

1,245

1.185

1,051

47

73

70

70

72

55

52

54

51

8,121

1,193

1,388

1.164

1,242

1,568

1,633

1,924

1.501

314

262

266

277

282

267

258

221

2018/ peak (%)

Oil Natural gas Nickel Sugar Steel

a

-17

970

-22

50f

-27

1,100

1,050

-87

205

210

188

-40

53

3,579

1,805

1,626

1.631

1,731

1,659

1,579

1,517

1.493

1,430

1,590

-56

Electricity b

15.4

17.6

17.7

17,4

17.8

19.1

19.4

20.3

20,4

20.6

20.8

0

Textiles

220

24

28

25

25

34

45

55

55

39

17

-92

Fertilizers

898

22

9

22

39

21

32

44

57

72

43

-95

Cigars

308

412

375

376

392

411

423

412

426

417

280

-34

78

397

639

770

712

868

1.338

Cement c

d

Medicines

1.435

NOTE: Figures in bold show production peaks. a Million cubic meters. b Thousand Gigawatts/hours. c Million square meters. d Million units. e There was a decline of 20% in the first quarter of 2019 [Torres, 2019]. f Estimate [RodrĂ­guez, 2019]. Sources: Based on CEE, 1991; ONEI, 2008, 2012, 2017, 2019.

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2. Agriculture, cattle and fishing Agricultural-cattle output as a percentage of GDP declined from 4% to 3.6% in 2007-2017 whereas its rate of annual growth at constant prices receded from 7.3% to -1.5%, and averaged 1.8% per year in the period. The value of agricultural exports decreased 48% in 2012-2018 whereas agricultural imports over the same period grew by 17% and their share in total value of imports rose from 11% to 17% (ONEI, 2013 to 2019). In 2018, Cuba imported $1.9 billion in agricultural products, 60% of which could be produced in the country. Raúl Castro’s principal agrarian reform was usufruct: transfer of idle state land to individual farmers, cooperatives and state farms for their cultivation, with the government keeping land ownership; its distribution began in 2008 and, because of

its very marginal effects, the law was relaxed in 2012 and in 2018; statistics discussed herein show that usufruct failed to increase output. Table 2 compares the performance of 13 key agricultural, cattle and fish products in 1989 and in 2009-2018; output peaks are indicated in bold. Production in 2018 was below the peak in 11 of the 13 products (and only grew for beans and eggs), with the decline ranging between 11% and 91% in eight of them (rice, corn, citrus, other fruits, tobacco leaf, cow’s milk, cattle heads and fish-seafood); for seven products, the 2018 production level was below 1989 (all of the above except other fruits). In contrast, in the period there were notable increases in five products: tubers, bananas, vegetables, beans and other fruits.

Table 2. Agriculture, Cattle and Fishing Output, 1989 and 2009-2018 (thousand metric tons) Products

1989

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2018/ Peak %

Tubers

681

1,565

1,515

1,445

1,452

1,580

1,670

1,743

1,843

1,828

1,801

-2

Plantain/ banana

291

670

735

835

885

658

836

890

1,016

1,015

961

-5

Vegetables

610

2,540

2,141

2,200

2,112

2,406

2,499

2,424

2,285

2,483

2,454

-3

Rice

536

564

454

566

644

673

585

418

514

404

461

-32

Corn

471

327

324

354

360

426

429

363

404

373

345

-26

14

111

80

133

127

129

135

117

136

132

161

Citric fruits

825

91

345

264

204

167

97

115

119

98

71

-91

Other fruits

219

748

762

817

964

925

884

943

944

926

861

-11

Tobacco leaf

42

25

20

20

19

24

19

24

19

31

30

-28

Beans

Cow milk Eggs b Cattle

c

Fish/seafood

0

924

600

630

600

604

589

588

495

613

536

577

-38

2,523

2,427

2,430

2,620

2,512

2,656

2,572

2,321

2,419

2,535

2,778

0

4,919

3,893

3,992

4,059

4,084

4,092

4,134

4,045

4,014

3,866

3,808

-22

192

65

55

49

48

56

57

52

52

51

-73

51

NOTE: Figures in bold denote production peaks. a Output in 2018 was below the 1989 level (CEE, 1991). b Million units. c Thousand heads. Source: CEE, 1991; ONEI, 2008, 2012, 2017, 2019.

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

C) EXTERNAL SECTOR INDICATORS 1. Balance of Trade: Goods, Services and Global Cuba does not publish the full balance of payments, only on the current account and excludes the capital and financial accounts; in addition, the last available year of the current account balance sheet was 2016; finally, there are serious doubts about the consistency of the official data. Throughout the revolution, there has been a systematic deficit in Cuba’s trade balance of goods (Pérez-Lopez, 2017). Such deficit reached a historical zenith of $10.4 billion in 2008 and then declined; while exports steadily dropped after 2011, imports were cut also. Exports and imports peaked in 2011; in 2018, exports of goods were 49% below their 1989 level and 56% below their 2011 level, while imports increased by 41% and decreased by 18%, respectively. Consequently, the goods deficit in 2018 grew by 220% compared to 1989 and 11% relative to 2011 (Table 3). Starting in the year 2000, Cuba began exporting professional services (mainly doctors, nurses and teachers) mostly to Venezuela, the buyer of about 75% of those services. As a result, there was a surplus in the balance of services trade that not only offset the goods trade deficit, but generated a surplus in the overall balance of trade of goods and services (except in 2008 because of the huge deficit in goods) that peaked in 2014. Due to Venezuela’s severe economic crisis, the aforementioned surplus decreased by 51% in 2014-2018. Table 3 calculates the value of Cuba’s professional services exports (subtracting the value of tourist revenue from total service exports): professional exports declined by 22% in 2013-2017 (with an uptick in 2018), which is a major cause of the GDP decline from 7.3% to 2.2% in 2007-2018 (ONEI, 2013, 2019). For the year 2018, ONEI (2019) revealed for the first time the value of total services exports distributed by type. The combination of human health and social care, education, other professional and technical services, and cultural and sports5 amounted to $6.7 billion. Due to the current crisis, it was reported that imports would decrease in 2020 and exports will decline due to decreases in nickel and sugar production (both aggravated by falls in their world price due to the global recession), as well as cigar (a reduction between 15% and 20%) and pharmaceutical production.

2. Direct Foreign Investment Despite the importance of direct foreign investment for Cuba, ONEI does not publish a series showing the number of those businesses and their financial contributions to the economy, a significant vacuum that does not help foreign investors. Only occasional figures are given by the investment minister or other authorities and they are not always comparable (references are to “projects agreed or approved,” “projects in negotiation” and “active business,” also may refer to general investment or that specific in Mariel duty-free zone, see below), hence it’s very difficult to assess the progress achieved. Between 2014, the year in which the law of foreign investment was enacted, and 2017, 175 projects worth $5.5 billion were approved; 40 new projects were agreed in 2018 for $1.5 billion (plus 30 in process), a total of 245 projects and $7 billion for an annual average of FDI of $1.4 billion (Pérez Villanueva, 2018). Despite this progress, said average was about half of the $2.5 billion annual bar officially set to achieve sustained economic development. Moreover, only about $500 million per year had materialized (including credits and donations), one-fifth of the total required. The minister of foreign commerce and investment reported that there were “287 active businesses” at the end of 2019 (Martínez, 2020c); although the comparison may not be accurate, it suggests 42 new investments over those in 2018. Reported obstacles to FDI are bureaucratic delays and red tape, market fears, prejudice against foreign investment, a ban on foreign entrepreneurs directly hiring and paying their employees, monetary and exchange rate duality, lack of knowledge, training and sufficient motivation of Cuban companies, and the US embargo reinforced by Trump (Terrero, 2017; see section III-C). The Cuban government has taken some steps to speed up the FDI approval process, such as the easing of some rules to assess foreign investors, the elimination of cumbersome feasibility studies and the announcement of the creation of a single channel (“ventanilla única”) for foreign investment. Finally, the definition of FDI was changed within the economic strategy, from complementary to an essential factor for development. All of these are positive steps but none of them correct the existing fundamental problems such as uncertainty of the future, financial risk (including repatriating profits), lack of crucial information, low confidence6 and the incapacity of

5  “Health and social care services” account to 57% of total services, while “educational services” are only 2% and the rest represent even smaller shares. 6  In the fourth quarter of 2019, 66% of foreign business believed that the economy will continue to deteriorate in 2020, whereas it increased to 87% in the first quarter of 2020 (a record low); 85% said that the financial situation of their business in Cuba was bad (Cuba Standard, Third Quarter 2019, and First Quarter 2020). 16

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Table 3. External Balance of Goods and Services, 1989 and 2007-2019 (million US dollars, current prices) ª 1989

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Goods Exports

5,400

3,966

3,940

3,020

4,754

6,170

5,899

5,566

5,149

3,572

2,546

2,704

2,742

Imports

8,139

10,118

14,312

8,938

10,689

14,019

13,869

14,773

13,101

11,745

10,302

10,212

11,527

Balance

-2,739

-6,152

-10,372

-5,918

-5,935

-7,849

-7,970

-9,207

-7,952

-8,173

-7,756

-7.508

-8,785

Exports

7,952

8,566

7,819

9,765

11,149

12,760

13,027

12,663

11,369

11,144

11,379

11,764

Imports

215

494

656

711

1,060

1,019

829

764

860

924

1,098

1,042

Balance

Services

7,732

8,072

7,163

9,054

10,089

11,741

12,198

11,899

10,509

10,222

10,281

10,722

Global balance

1,585

-2,300

1,901

3,119

2,240

3,771

2,991

3,947

2,336

2,464

2,774

1,937

Tourism gross revenue

2,236

2,346

2,082

2,218

2,503

2,613

2,607

2,546

2,819

3,069

3,302

2,903

Professional services b

5,716

6,220

5,737

7,547

8,646

10,147

10,420

10,117

8,550

8,075

8,077

8,861d

9.8

10.2

9.2

11.7

12.5

13.8

13.5

12.5

9.8

8.8

8.3

% of GDP

8.8

Official figures are given in “pesos” without specifying if in CUP or CUC; the consensus is that they are in CUC similar to the US dollar. b Author’s calculations: exports of services less gross revenue from tourist services. a

Sources: 1989 from CCE, 1991; 2007-2012 based on ONEI 2013, and 2013-2018 based on ONEI, 2019.

foreign enterprises to hire, pay and dismiss employees, all of them aggravated by Trump sanctions and COVID-19 (Cuba Standard, 2018, 2019). In addition to the above, there is FDI in the Special Development Zone of Mariel (ZEDM). It was established in 2013 as a duty-free zone with an investment of $800 million from the Development Bank of Brazil executed by the Brazilian company Odebrecht (later tainted by a corruption scandal). At the end of 2018, ZEDM had authorized investments of 41 users from 19 countries totaling $1.7 billion; out of a total of more than 400 proposals, only 15 had started operations and two had permits to start their projects. The annual pace of business approval grew sparsely in 2014-2017 and declined thereafter: one in 2014, 10 in 2015 and 2016, 12 in 2017, 10 in 2018 and three in 2019; in the last year there was a total of 44 FDI businesses, about seven per year (Izquierdo and Romeo, 2028; Pérez

Villanueva, 2018; Martínez, 2020c).7 In the Central American and Caribbean subregion, only Haiti had a smaller share of FDI in total investment than Cuba, and Monserrat and Curacao in the FDI percentage of GDP (Monreal, 2018b). In 2018, three Central American and Caribbean countries had FDI ranging from $2.4 billion to $5.1 million: Costa Rica, Dominican Republic and Panama (ECLAC, 2019a). 3. Foreign Debt ONEI does not publish comprehensive statistics on the total external debt and capital flows (loans and other financial transactions), only on “current debt” that reflects financial and trade transactions and their balances (“active debt”), and the last available year is 2016 when it amounted to $18.2 billion (ONEI, 2019). Table 4 compiles all the information available.

7  A foreign source gave different numbers of approved companies: 11 in 2016, 15 in 2017, 8 in 2018, and zero in 2019 and 2020 — the cumulative figure being 43 companies (HCG, 2020b). 17

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Table 4. Estimates of Cuban Foreign Debt, 2018-2019 (million U.S. dollars) Creditor Countries

Total Debt

Condoned Debt

%

Russia

32,200

29,000

Club of Parisa

11,084

8,484

China

6,000

2,830

47.2

Japan

1,750

1,400

487

341

51,521

42,055

81.6

Remaining Debt

%

Restructured debt

Mexico Sub-total

90.1

3,200

9.9

2,600

23.5

3,170

52.8

80.0

350

20.0

70.0

146

30.0

76.5

9,466

b

18.4

Outstanding debt Venezuela

11,367

11,367

100.0

Argentina

8,000

8,000

100.0

Brazil Subtotal TOTAL

1,150

1,150

100.0

16,067

16,067

100.0

67,588

25,533

Fourteen countries. b This sum is one-half of the published figure of $18,218 million of “active” or negotiated debt reported by ONEI for 2016, and it’s impossible to explain the difference. a

Sources: HCG, 2020a; Mesa-Lago, 2019; Argentina from “Deuda con Argentina…,” 2020.

The Cuban government secured notable concessions to reduce by 81.6% its external debt with 18 countries, from $51.5 billion to $42 billion with $9.5 billion remaining. Still Cuba has an outstanding debt with three countries: $11.4 billion to Venezuela, which obviously will not be repaid, $8 billion to Argentina, and $1.2 billion to Brazil.8 The total outstanding debt in 2019 was $26 billion or 45% of Cuban GDP that year (Table 4, and projection for GDP 2019). In 2015, Havana signed an agreement with 14 of the 20 Paris Club member countries to renegotiate debt accumulated since 1986 up to $11 billion; all interest and charges of $8.5 billion were forgiven and debt reduced to $2.6 billion to be paid in 18 years (through 2033). The 14 countries renegotiated their debts bilaterally with the Cuban government and, under the terms of the renegotiation, debt-investment swaps were allowed; for example, Spain and France, two of the major creditors, negotiated 10 swaps totaling $70 million.9 Out of the total debt with the Paris Club, Cuba paid $40 million in 2016, $60 million in 2017, $70 million in 2018 and owed $80 million in 2019. The amount

payable increases over time (based on a growing interest rate on debt from 1.6% in 2016 to 8.9% in 2033) so that it becomes more onerous and requires the economy to grow in order to cope with the growing burden, which has not happened. The failure of a payment leads to the imposition of an interest of 9%. The Paris Club gave Cuba an ultimatum to pay the 2020 and 2021 debts with interest in June 2021 (Pérez Chang, 2020). The island payments in 2016-2018 improved its external financial credibility and are critical to obtaining external credit, which is in desperate need for the economy, but forced a reduction in “non-essential” imports, including inputs for the economy and consumer goods, which had adverse effects on production and consumption, coupled with cuts in energy supply to businesses. In 2019 Cuba didn’t pay $33 million of its restructured debt of $80 million with the Paris Club, hence 9% interest could be charged until payment is done (Frank, 2020a). In May 2019, the Cuban government asked the Paris Club for a moratorium in 2019, 2020 and 2021, restructuring debt

8  In 2018 Cuba fell behind on the $17 million payment to Brazil and called for a restructuring, which was rejected by the new conservative Brazilian government (Reuters, September 18, 2018 and October 25, 2018). 9  The debt with Spain is about $2 billion, tantamount to two-thirds of the Spanish total debt with all Latin America (Cubanet, June 8, 2020) 18

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payments in 2022, hoping it will receive the same treatment as the G20 granted to African countries (Abiven, 2020). Moreover, Cuba has postponed payments to several of its suppliers (even to those in Mariel) and investment partners in the amount of $3.4 billion in 2015, current amount is not available. Major creditors are Chinese and Spanish enterprises (these countries are respectively the second and third largest of Cuba’s trade partners). Chinese enterprises that were major suppliers of raw materials for the Cuban pharmaceutical industry stopped said supplies, leading to a decline in pharmaceutical output in 2016 (already explained). Spanish enterprises (including 56 in the Canary Islands) that had orders for $44 million have reduced them by 86% (HCG, 2020a). In addition, Cuban debt to private banks reached $1.8 billion in 2015; the three main creditors grouped in the London Club hold $1.4 billion of that debt and, after 30 years of negotiation, sued Cuba in a British court.

Remittances increased at very high rates in 20092014 stimulated by the growing non-state sector under the structural economic reforms, particularly private microenterprises, as a portion of such monies were informally invested in new small businesses.10 President Barack Obama’s opening in 2015-2016, which removed restrictions on remittances, was a factor in accelerating them in 2016. Conversely, the government setback to microbusinesses in 2016, after Obama’s visit to Havana,11 led to a slowdown in remittances. Trump’s punitive policies included an annual top of $4,000 per person; it was speculated that this measure would not have a strong negative effect for two reasons: more than one person can send remittances to the same beneficiary, and most Cubans receive annual remittances of $337, below the cap imposed (see III-C-5). And yet the remittances growth rate deaccelerated in 2018 and was virtually stagnant in 2019. COVID-19 reduced remittances by an estimated 35% in 2020.

In his farewell address as president, Raúl Castro (2018) warned: “We cannot afford to fall into a spiral of indebtedness again, and to avoid it we must... not to make commitments that we are not able to honor promptly within the agreed deadlines.”

D) REMITTANCES After revenue from selling professional services abroad, Cuba’s largest source of foreign exchange are remittances; 92% of them are sent from the United States and are received by 65% to 70% of the Cuban population. The government does not release figures, but estimates from a foreign expert have been published for many years and indicate that cash remittances increased 156% from $1.45 billion to $3.7 billion in 2008-2019 (Figure 5). Within Central America and the Caribbean, in terms of remittances per capita, Cuba ranks fifth: El Salvador $578, Guatemala $452, Dominican Republic $427, Honduras $383, and Cuba $337 (ECLAC, 2019a). Annual cash remittances account for half of total income, higher than the volume of wages in the state and non-state sectors. In addition to cash remittances, a similar amount is sent in consumer goods either by mail or in person by relatives, friends and “mules”(traders) (Morales, 2018, 2020a).

10  The private sector in Cuba is mostly made up of self-employed workers that manage micro, small and middle enterprises (SMEs). The number of employees in each of the three groups are respectively 1-4, 5-19 and 20-49. Few are middle enterprises (Pérez-Villanueva, 2020c). 11  Obama and his family visited Havana in 2016 and he met with a group of microentrepreneurs. The day of his departure, Fidel Castro (2016) published one of his “reflexions” in Granma accusing Obama, among other things, of fomenting the private sector as a way to destabilize the Cuban regime. 19

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

Figure 5. Foreign Remittances Sent to Cuba, 2008-2020 (million US dollars)

Sources: Morales, 2020.

4000

3354

3500

3445

3575

3691

3716

3129 2834

3000

2605 Million US Dollars

2500

2415

2294 1920

2000

1653 1500

1447

1000

500

0 2008

2009

2010

2011

2012

2013

E) TOURISM Cuba’s best performance has been in international tourism, the third source of hard currency after the export of professional services and remittances. Tourism accelerated in 2015–2016 under Obama’s presidency, which facilitated visits, flights and cruises. In 2019, Cuba received 9.3% fewer tourists than in 2018 largely due to Trump’s sanctions; the 2019 target of five million tourists was unfulfilled by 15%. At the start of 2020, the government publicized Cuba as a “safe place for foreign tourists.” And yet, in January tourists fell 19.6% relative to the same month in 2019 whereas the decline in February was 13.2% and the decrease in March was 63.7%, this affected also by COVID-19. The combined decrease in these three months was 32.2% (ONEI, 2020a, 2020b, 2020c, 2020d). All airports and ports were shut down on April 2, 2020, and the reopening was first announced for June 30, 2020, and later moved to August 1,12 hence there were no tourists at least for four months. Assuming that tourism started on August 1, and that monthly arrivals were the same as in 2019 for the period August-December, the estimated number of

2014

2015

2016

2017

2018

2019

2020

tourists for the entire year 2020 would be 2,677,698 (60% of the official target of 4.5 million tourists). This estimated figure is highly improbable because the recovery process will be slow depending not only on Cuba’s reopening but on the fear and willingness of foreign tourists to travel, as well as the greatly reduced financial capacity of the tourists. A more realistic figure would be 2 million (Table 5). The distribution of tourists by country of origin was 26% Canada; 12% United States; 4% each Russia, Germany, France and Mexico; 3% each Spain, Italy and Great Britain; 22% from elsewhere and 15% representing Cuban nationals living abroad. Relative to 2018, Canadian visitors were stagnant, Cubans abroad increased and Americans declined (22%); Russians and Mexicans rose but they were a small fraction of the total, and all Europeans combined fell 15% (-20% in 2017-201913), hence the overall shrinkage in tourism was not only due to the Americans’ decline. These trends accelerated in January-March 2020 when, relative to the same quarter in 2019, total arrivals decreased 33%; the biggest decline was in

12  The US embassy in Havana informed that flights with the USA won’t start until August 1, 2020. The first international tourists were curbed to the keys (“Cuba: Llegan…’” 2020). 13  British tourism decreased 50% in February 2020 partly due to the bankruptcy of Thomas Cook. 20

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Table 5. Indicators of International Tourism, 1989 and 2007-2020 Indicators

1989

2007

2008

2010

2012

2014

2016

2017

2018

2019

2020a

Visitors (thousands)

270

2,152

2,348

2,532

2,841

3,006

4,036

4,654

4,712

4,275

2,677

Gross revenue (million US$)

168

2.236

2.347

2,218

2,613

2,367

2,907

3,185

2,903

c

2,633

1,646c

894

939

887

1,045

947

1,163

1,274

1,161

1,053c

658c

615

614

Net revenue (million US$)b Rooms (thousands)

21.4

Occupancy rate (%) Average expense per tourist US$

622

47.3

49.1

65.0

65.3

66.1

67.0

73.5

84.2

60.9

60.1

57.1

58.2

58.6

61.5

56.9

49.5

1,039

998

875

1,087

787

720

684

616

a Author’s projections. b Estimated as 40% of gross revenue, based on the 60% official figure of imports for tourists in 2018. cAuthor’s estimates.

Source: 1989 from CCE, 1991; 2007 to 2018 from ONEI, 2008, 2019; 2019 from Cuba Debate, 28 enero, 2020.

Americans (-72%), but there were also decreases in European visitors (-37%), Cubans abroad (-24%), Mexicans (-21%) and Canadians (-19%); Russians rose 33% but they involved only 6% of the total (ONEI, 2020a, 2020d). A cause for the decline of non-U.S. tourists is the low quality in state-managed tourism: poor infrastructure; deterioration of the physical plant due to lack of maintenance; low hygiene standards; inoperable air conditioners, TV sets and phones; poor quality and a limited variety of food; remarkable increases in hotel and restaurant prices, expensive car rentals, spotty and weak Wi-Fi connectivity, very few extra hotels amenities, and poor service. These reasons make Cuba less competitive in value than other tourist destinations in the Caribbean. For instance, the number of tourists going in 2019 to the Dominican Republic was 72% higher and to the Bahamas 69% higher than to Cuba (Perelló, 2020). TripAdvisor does not include Cuba in the ten most popular destinations in the Caribbean (Romeo, 2019; Herrera 2019).

year and barely twice the contribution of nickel to GDP. Based on the relationship revenue/number of tourists, gross and net revenue were estimated for 2019 as $2.6 billion and $1 billion, respectively, and for 2020 as $1.6 billion and $658 million. Declines related to the 2017 peak (gross revenue) were: 9% in 2028, 17% in 2019 and 52% in 2020 (Figure 6).

Tourism gross revenue (without subtracting the value of imports for the sector) grew at a lower rate than that of visitors in 2007-2018: 29% and 118%, respectively, because average expenditure per tourist declined 40% in that period (Table 5). Since the early-1990s, no data on tourism net revenue had been released; in 2019 the minister of economy and planning reported that for every dollar of revenue generated by the tourism industry, more than 60 cents of imports were required (Gil, 2019). Using this percentage, net revenue of the tourism industry was calculated for the entire period: in 2018, it was $1,161 million, only 1.1% of GDP that

21

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The Cuban Economic Crisis: Its Causes and Possible Policies for a Transition

Figure 6. Tourism Gross and Net Revenue and Number of Tourists in Cuba, 2007-2020 3500

3185 2907

3000

2503 2500

4712 4654

2236

2347 2080

2325

2218

2000

2348 1500

2430

2532

2717

2367

2855

2841

894

939

832

2633

3532

3006

2677 1646

2152 1101

1000

4036

2601

2613

4275

2903

1045

930

887

947

1040

1163

1274

1161

1053 658

500

0

2007

2008

2009

2010

2011

Gross revenue

2012

2013

2014

Net revenue

2015

2016

2017

2018

2019

2020

No. tourists

Sources: Gross revenue and number of tourists from Table 5; 2019-2020 and net revenue are authors calculations.

Cuban investment has given priority to expanding hotels and beds for foreign tourists14: the number of beds increased 27% in 2014-2018. At the same time, hotel occupancy rates shrank from 61.5% to 49.5% in 2016-2018 whereas daily expenditure per tourist dwindled from $1,087 to $616 in 2012-2018. The reason for the buildup was the significant raise in U.S. tourists but did not take into account the decline in non-U.S. tourists, and the expansion of beds continued in 2017-2018 when Trump was already in power. His sanctions against Cuba and the pandemic may change that policy in the future. The government placed hope in the expansion of both domestic tourism and that of Cubans abroad that steadily expanded until COVID-19, but there are several problems with

this strategy: a) disposable income to spend in tourism by the small sector of the Cuban population with income above the mean is considerably lower than that of international tourists with overnight stays by the former were 26% of the latter in 2018; b) income of the domestic group with higher income has been badly affected by the pandemic and subsequent economic crisis (many micro and SMEs have been shut); c) national tourists mostly use camping and motels whereas international tourists resort to 4- and 5-star hotels, where state investment has been concentrated; and d) a percentage of Cubans visiting the island from abroad take lodging in relatives’ home and consequently don’t spend as much as other visitors on tourism (Monreal, 2020c).

14  A 5-star hotel has been built, the luxurious Gran Manzana Kempinski in old Havana, with room costing as much as $400 a night and $1,000 for a suite (the latter more than twice the annual mean salary of a Cuban worker in the state sector). 22

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III. Causes of the Current Crisis There are four main causes of the Cuban economic crisis, the first internal and the other three external: 1) the persistence of an inefficient economic model of predominant central planning and state enterprises over the market and private property; 2) the significant decrease in Venezuela’s economic aid to Cuba after 2012; 3) the sanctions imposed by President Trump in 2017–2020, strengthening the U.S. embargo; and 4) the COVID-19 pandemic.

A) THE ECONOMIC MODEL Raúl Castro’s structural reforms in 2007–2017, oriented towards the market, tried to “update” the central-planning model that has failed all over the world. The state sector was reduced from 84% to 68% of the labor force by dismissing unneeded state employees through the expansion of the nonstate sector. In 2018-2019 the latter constituted 32% of the labor force, distributed as follows: private farmers (97,963); self-employed managing micro and SMEs (620,000); usufruct farmers (274,635) who cultivate state idle-land small plots (the state retains land ownership and grants the plots to farmers and co-ops, which keep part of production but must sell the largest part to the state at prices set by the government below the market price — acopio); members of agricultural production cooperatives — UBPC, CAP and CCS — (451,800); and members of new non-agricultural production and service cooperatives — NASC — (18,100) (ONEI, 2019). Free buyingselling of dwellings was reauthorized; “gratuities” and socialservices costs were reduced, and taxes were reformed (MesaLago et al, 2018; Mesa-Lago, Pérez Villanueva and Vidal, 2012).

The currency duality (CUP and CUC) and multiple exchange rates (1CUC=1CUP in the state sector whereas 1CUC=24 CUP in the population) create severe distortions, e.g., it impedes determining which exports are profitable, and the population is paid in CUP but must buy many goods-services in CUC. Since the Cuban Communist Party congress in 2011, unification has been a key goal, but duality continues despite much discussion and announcements. Other reforms were too slow, tightly regulated and hindered by many restrictions, taxes and policy zigzags. The successful Chinese-Vietnamese model of “market socialism” was virtually discarded by the leadership. Due to these flaws, the reforms were unsuccessful in improving the economy (e.g., usufruct failed to increase agricultural output; the non-state sector did not expand enough to absorb all surplus labor in the state sector). President Miguel Díaz-Canel and the new Constitution vow to continue previous policies (continuismo).

B) THE IMPACT OF VENEZUELA’S AID REDUCTION A constant in the 61 years of the revolution has been heavy dependence on a foreign nation, first with the USSR ($65 billion in 1960–1990) and later with Venezuela ($122 billion in 2007–2017 alone, save for FDI). Despite such huge external economic support, Cuba has been unable to restructure its economy to finance imports with its own exports and without foreign aid and subsidies.

Table 6. Cuban Trade Dependence on Venezuela Goods and Services, 2012-2018 (million US dollars) Goods

2012

2013

2014

2015

2016

2017

2018

Change 2017/2012

Change 2018/2012

8,563

7,067

7,258

4,232

2,224

2,214

3,103

-74%

-64%

Venezuela’s Total trade goods % of total trade Exports

44.1

35.4

40.5

28.1

17.6

17.6

22.4

-26pp

-22pp

2,484

2,266

2,069

1,437

642

375

462

-84%

-81%

Imports

6,079

4,802

5,188

2,794

1,582

1,838

2,642

-70%

-56%

Deficit

-3,595

-2,536

-3,119

-1,357

-940

-1,463

-2,180

-59%

-39%

% of total deficit Export professional servicesa

43.7

26.9

38.1

16.2

12.0

19.0

28.9

-24pp

-15pp

7,610

7,815

7,588

6,412

6,056

6,057

6,646

-23%

-13%

Estimated as 75% of total value of professional service exports. This series is not always equal to that in Figure 6 due to different methods of computation and statistical sources. a

Source: Based on ONEI, 2017, 2019. 23

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Figure 7. The Economic Relationship Between Cuba and Venezuela, 2006-2017

18,000

Sources: Mesa-Lago y Vidal, 2019

16,017

16,000

Million Dollars

14,000 12,000 10,000 8,000 6,000 4,000 2,000

8,338

8,036

6,079

6,832

5,822

5,902

4,287

2,484

2,243

1,838

455

376

0 2007

2008

Total relationship

2009

2010

2011

2012

Export professional services

Table 6 shows how the value of Cuban-Venezuelan trade of goods and services decreased from a peak of 44% of the island total trade volume in 2012 to 17.6% in 2017, with an uptick to 22.4% in 2018, decreases of 26 and 22 percentage points, respectively. Starting in the 2000s, Cuba began exporting professional services and Venezuela bought 75% of them. As a result, a surplus in the balance of services was obtained, which not only offset the balance of goods deficit but generated a surplus in the total trade balance that peaked in 2014. Due to Venezuela’s severe economic crisis, said surplus halved in 2014–2018 (see table 3). The evolution of the total economic relationship between the two countries and its three major components in 2006-2017 is shown in Figure 7 (the subsequent analysis is based on Mesa-Lago and Vidal, 2019). The value of the overall relationship peaked in 2012 and shrunk by 50% in 2017 (a loss of $8 billion). The first component is Cuban exportation of professional services to Venezuela (the major source of the island’s foreign exchange) that involved some 40,000 doctors, nurses and other health personnel; it peaked in 2014 and dwindled by 30% in 2017, a loss of $2.5 billion. In addition, Bolivia, Brazil, Ecuador and El Salvador changed governments and ended contracts of 9,624 Cuban physicians, an annual loss of about $1 billion, and some African countries have revoked their contracts (Farber, 2020). Still, the export of professional services,

2013

2014

Import fuels

2015

2016

2017

Trade non-oil goods

mainly to Venezuela, remains Cuba’s first source of foreign revenue and, with the increasing international demand for physicians prompted by COVID-19, Cuba has sent about 2,000 physicians to 14 countries, including 600 to Mexico and 200 to Argentina, but these new exports can’t compensate for the loss of more than 9,000 physicians that returned home from Brazil and other countries (not counting losses in Venezuela). The second component of the relationship is Venezuelan exports of oil to Cuba that declined by 69% in 2011-2017. At its peak, Venezuela exported 105,000 oil barrels per day (b/d) to Cuba, but the figure dropped to 40,000 b/d in January– May 2019. In addition, a substantial amount of Venezuelan crude oil was processed at the refinery in Cienfuegos, Cuba; part of the refined oil was sent back to Venezuela, and Cuba exported the surplus to other countries for a juicy gain (the same practice that Cuba enjoyed with the USSR). The supply of crude to be refined in Cuba was halved in 2016 and so were its exports. Aggravating the vacuum, Cuban crude oil production decreased 17% in 2010–2017 (ONEI, 2011, 2018). Cuba’s oil deficit is estimated from 60,000 to 70,000 b/d on average (a value of $1.1 billion at the barrel price of $43.30 on August 1, 2020). Venezuela’s oil output declined 51% between 2018 and March 2020; in June output was 393,000 b/d whereas exports were 379,000 b/d, both the lowest in 77 years, hence making even more difficult the supply to Cuba. And yet, Venezuela lacks capacity to store

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Figure 8. Cuba-Venezuela Economic Relationship as a Percentage of Cuba’s GDP, 2007–2017 25.00

21.00 20.00

21.90 19.00

17.90

18.50

15.40 15.00

12.00

11.70 10.00

9.90

8.80

8.20

5.00

0.00 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Sources: Mesa-Lago and Vidal, 2019.

crude oil while Cuban capacity is 3 million barrels (storage for 45 days of imports); Maduro sent Cuba an average of 70,359 b/d in 2019 and 78,040 b/d in 2020, part of which is being exported by Cuba (Piñón, 2020a, 2020c).15 The latter financed the import of Venezuelan oil with the export of professional services, but their prices were inflated (the Cuban state was paid for one of its doctors seven times the average salary of a Venezuelan doctor), so there was a significant hidden subsidy. An intriguing question is how the collapse of world oil prices in 2020 due to the global economic crisis could affect Cuba. The third component of the relationship was non-oil trade that peaked in 2012 and decreased by 85% in 2017, a loss of $2 billion. Finally, in 2001–2014, the Intergovernmental Commission of the two countries approved 475 Venezuelan investment projects in Cuba worth $8 billion. An additional $2.5 billion was allocated by three Venezuelan agencies. Some of these projects were not carried out or stopped after 2014, but Venezuela’s foreign direct investment has been substantial, especially in the Cienfuegos refinery.

The total value of Cuba-Venezuela’s relationship, excluding investment, as a percentage of Cuban GDP, tumbled from 22% to 8% in the period, a fall of 14 percentage points (Figure 8). The fall of the current Venezuelan political regime or a collapse of its economy would have a severe impact on Cuba’s economy: a) the loss of an economic relationship estimated at $8 billion annually; b) a significant drop in exports of professional services (professionals returning from Venezuela to Cuba would have to be provided jobs; otherwise, open unemployment and underemployment would rise); c) loss of about $1.8 billion in oil supplies at favorable financing terms; d) a deficit in the balance of payments, the halting of payments on the restructured debt (already happened in 2019 with failing to pay to the Paris Club), a worsening of defaults to foreign suppliers that would make it even more difficult to access foreign credit; e) a harsh cut in imports that would have an adverse effect on industry and agriculture, thus worsening current food and consumer goods scarcities (these also happened in 2019-2020); f) electricity blackouts affecting the population, interruption of work of factories,

15  Carlos Vecchio, the president of Venezuelan National Assembly Juan Guaidó’s designated ambassador to the United States, reported that Maduro sent Cuba 33 oil takers with 14 million barrels at a value of $348 million in the first half of 2020, an average of 70,000 b/d (“Venezuela opposition …,” 2020). However, Cuban exports of fuel from blending operations in Cienfuegos decreased 91% from $431 to $38 million in 2013-2019 (Piñón, 2020b, 2020c).

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and transportation problems; g) a serious retreat of the private sector (is taking place due to Trump’s sanctions and COVID-19); h) two-digit inflation arising from significantly rising monetary liquidity to levels similar or close to those in 1993; i) a depreciation in the exchange rate; and j) a decline in GDP of 5-7%

C) THE IMPACT OF TRUMP’ SANCTIONS In addition to the sanctions imposed by the Trump administration against Venezuela that have adverse repercussions for Cuba, his administration has implemented drastic measures on the island by strengthening the embargo. Trump’s sanctions are discussed by order of their damage to Cuba (this section is largely based on Mesa-Lago, 2019a and 2020b, updated with more recent events). 1. Foreign investment. Starting in May 2019, President Trump ordered the application of Title III of the Helms-Burton Act (embargo), authorizing U.S. citizens to sue in U.S. courts Cuban and foreign companies that profited from property confiscated by the Cuban government from their owners (Title III had been suspended every six months, from presidents Clinton to Trump). Sued companies are mostly Canadian and Spanish, but also French, Mexican and British, even U.S. airlines and cruise ships. In addition, based on Title IV of the embargo law, the State Department has to deny U.S. visas to foreigners who traffic in property confiscated by Cuba or executives or shareholders of companies that have conducted such activities. There are 5,913 “certified” lawsuits worth $1.9 billion; adding accrued interest, the amount of the claims rose to nearly $8 billion. The application of Title III could lead to filings regarding some 200,000 uncertified claims worth “tens of billions of dollars” and would pack U.S. courts. The European Union and Canada took legal actions to impede the application of Title III against their nationals, including the rejection of any U.S. judicial claim because Helms-Burton cannot be applied outside its territory, a demand to the WTO and countersuits against those presented in U.S. courts (Doncel, 2019). An evaluation of the 26 suits filed in the year after the implementation of Title III (many fewer than expected) found that out of 76 companies named as defendants, 50 were U.S. companies (American Airlines, Carnival Corporation, Visa, Mastercard, Amazon, Expedia, etc.) and only 26 were European hotel chains and other foreign corporations. U.S. companies that hold the largest claims are reluctant to sue European, Canadian and other companies that are corporate partners and may take advantage of “blocking statutes” passed by their

governments that prohibit them for complying with the Act. On the other hand, smaller claimants may be deterred by the paperwork involved, as well as high cost and prolonged length of litigation (Bellinger, 2020). A more powerful effect than the lawsuits has been to deter potential foreign investors. For instance, three big European corporations that had signed contracts with Cuba for important projects cancelled them for fears of U.S. sanctions: the expansion and management of airports in Havana and another city, the renovation of the Cuban railways workshops in Havana and Camagüey, and the selling of two turbo aircrafts. Other projects have been abandoned, such as one by a Spanish corporation that planned to build a golf course, two hotels (one 5-star and another 4-star), a convention center, a spa, a shopping center and 3,000 apartments (HCG, 2020b). According to ECLAC (2019d) the application of Title III represents an important disincentive to attract new flows of direct foreign investment, a flow that already is quite low. Potential investors will evaluate the totality of risks involved in doing business with Cuba before making a decision to invest. The Helms-Burton sanctions may have the worst impact in Cuba due to the island’s need to generate US$2.5 billion annually in foreign investment. 2. Tourism. In June 2017 the Trump administration banned American tourists from staying in hotels and eating in restaurants run by the military, and alerted those tourists to the danger of “sonic attacks” that U.S. diplomats had experienced in Havana. The U.S. executive compiled a list of restricted Cuban entities out of limits for American tourists that included military and intelligence agencies; the list has been periodically expanded. These restrictions prompted U.S. airlines to eliminate 2,574 flights and flight occupancy declined from 61.3% to 52.4% between January-September 2017 and the same period in 2018. In June 2019, the State Department banned all travel to Cuba not for family purposes, including travel via cruises, yachts and flights by private and corporate airplanes, as well as educational and cultural group tours. People-to-people travel (authorized by Obama in 2016) was the allowed category easiest to meet by American tourists seeking to visit Cuba. As 53% of U.S. tourists arrived by cruises and most air travelers used people-to-people tours, this is the second most damaging measure imposed by Trump. In October 2019, U.S. airlines flights to provinces other than Havana were also halted and in May 2020 a cap of 3,600 annual flights was imposed to charters flights to Havana, a measure that affects Cuban-American trips to the island (“Estados Unidos…,” 2020). In June, Trump ordered Marriot International to cease operations in Cuba, as the

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U.S. government license won’t be renewed (Frank, 2020e). The number of U.S tourists rose 3% in 2018 but that was a significant slowdown relative to the 2017 increase of 117%, a decrease due to Trump’s measures. U.S. tourism shrank 22% in 2019 and 72% in January-March 2020. The cost to Cuba of these sanctions is difficult to calculate because the decline was not only from American tourists but from other countries as well and because the decrease in 2020 was also caused by COVID-19. Based on the gross revenue peak reached in 2017 (Figure 6), the losses would be: $282 million in 2018, $555 million in 2019 and $1,539 million in 2020, for a total of $2.4 billion.16 Private micro and SMEs have been severely affected by the drop in U.S. visitors: renters of houses/rooms, restaurants and taxis. 3. Venezuela’s oil supply. In March 2019, the U.S, government ordered a suspension of shipments of Venezuelan oil to Cuba. In July, the Treasury Department sanctioned Cubametales (Cuba’s state oil importer) as well as two foreign transport companies and a ship carrying oil and blocked ownership of 34 PDVSA-owned tankers, as well as two companies based in Liberia and Greece. As there are 4,500 oil tankers globally, enforcement through banning individual ships is complicated and may be partially ineffective: just after the sanctions were announced, Maduro sent one million oil barrels to Cuba on two ships and the Venezuelan foreign minister declared that his country will honor its oil commitments to Cuba; already mentioned is the alleged sending of 14 million barrels by 33 vessels in the first half of 2020. Several oil tankers have been renamed to avoid the sanctions and others have delivered oil incognito (Kassai and Bartenstein, 2019). Trump also ordered the seizure of revenue from Venezuelan oil sales in the USA, but Caracas diverted those exports to other countries and transferred the accounts of its oil companies to the Russian bank Gazprombank. In March 2020, Russian oil giant Rosneft sold all its Venezuelan assets to a firm owned by the Russian government; in May the U.S. government set a deadline for Rosneft to stop sending oil to customers like Cuba but a Mexican oil firm replaced Rosneft as intermediary of Venezuelan crude (Párraga, 2020). In August 2019, the failure of an oil tanker to arrive in Cuba provoked fuel shortages; a slowdown in the output of some factories, sugar mills, and hotel construction; reduced work-hours in state enterprises, offices and schools; induced long lines at gas stations; and cuts in the liquid gas supply to 1.7 million families, but not

large power blackouts. In 2020, another oil tanker with a cargo bought by Cuba refused to dock in Havana, and the vessel had to be bought for $1 million. 4. Strengthening sanctions on international banks that do business with Cuba. In late 2018, the Federal Reserve Bank imposed a fine of US$1.3 billion on Societé General for violations of U.S. sanctions against Cuba and two other countries. In 2019, Panamanian Multibank closed multiple bank accounts of Cuban companies with which it had had transactions. Fines were also levied on financial transactions (“U-turn”) in dollars by international banks, in which the Cuban government or citizens receive funds transferred from abroad. Altogether, fines of $12 billion had been imposed to foreign banks by March 2020. In addition, the Havin Bank of Cuban capital, headquartered in London, was placed in 2020 on the U.S. list of entities managed by the military that are banned from completing transactions with the United States (“EE.UU. sanciona a Havin Bank…,” 2020). These punitive measures make it very difficult for Cuba to complete transactions with foreign banks, which is considered by the government as one of the embargo’s toughest actions. 5. Foreign remittances. As explained, in April 2019, U.S. remittances to Cuba were limited to $1,000 per person quarterly, half the $2,000-per-quarter limit imposed by President George W. Bush in 2004 and later abolished by President Obama. This measure probably will not have a very strong impact for two reasons: remittances could be sent by several people in the United States, for example, a group of family members, to the same individual on the island, a trick that was used to circumvent Bush’s remittances cap; and most Cubans abroad do not send such a high level of remittances, as the annual average is $337 (see II-D). However, the cap could affect micro-entrepreneurs on the island, many of whom have plans to establish or expand their activities counting on money sent from abroad by partners, relatives or friends, but in September 2019, the U. S. government exempted micro-entrepreneurs from the cap. A more effective impact on remittances has been the reduction of U.S. flights to Cuba, which were used by relatives, friends and traders to bring cash and goods to Cubans. Based on the latter, a decline of $1.3 billion has been estimated for 2020 (Figure 5). In 2020, Western Union that handles remittances to Cuba halted those coming from outside of the United

16  A calculation limited to American tourists was done as follows: based on the annual growth rate of U. S. tourists in 2015-2017, one million American tourists were projected to visit Cuba in 2018; to this figure the number of actual U. S. visitors was subtracted and the outcome was multiplied by the average of $616 daily per tourist from Table 5. This alternative estimate resulted in a loss of $1.1 billion. Morales (2019) estimates $1.3 billion. 27

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States, but only 25% of total remittances were affected by this measure. In May, Cubans abroad were permitted to open bank accounts in foreign currencies and deposit remittances in them through Fincimex — a financial entity owned and managed by the military — and to use those accounts to import goods through the ministry of foreign trade (Resolución 73, 2020) and later to buy goods in new state hard-currency shops. In June, the Trump administration included Fincimex on the list of Cuban entities that Americans are banned from doing business with and the one used by Western Union and two other companies to send remittances; the U.S. government asked Cuba to replace Fincimex with another company not operated by the military otherwise remittances will be halted (Frank, 2020d). At the end of July, the remittances flow was interrupted because the French bank Credit Mutuel halted the transactions with Fincimex due to fear of U.S. sanctions (Gámez and Pentón, 2020). If this problem is not solved, Cuba would lose about $3 billion. 6. Other restrictive measures. In May 2020, Cuba was reinstated to the list of countries that do not cooperate with the U.S. government in “its fight against terrorism,” and in June was returned to the list of countries that sponsor terrorism from which Obama pulled it in 2015, after being so listed since 1982 (Gámez, 2020a; Cubanet, June 24, 2020). Finally, Trump stated in April 2019: “If Cuban troops and militias do not immediately cease military and other operations with the purpose of causing death and destruction to the Constitution of Venezuela, a full embargo will be imposed on the island of Cuba, along with sanctions at the highest level.” For his part, U.S. Secretary of State Pompeo warned that “military action is possible and if that is required, the United States will [take such action]” (cited by Casey, 2019, Rogers, 2019). In view of similar threats unfulfilled against Venezuela, such action is highly unlikely.

D) THE COVID-19 PANDEMIC The Cuban government did not react immediately to the pandemic. In fact, the island was touted as a safe tourist destination. Cuba maintained its open policy even after March 11, 2020 when the World Health Organization declared COVID-19 a pandemic (on that day four cases of the contagion were reported on the island). It was not until 21 positive cases were confirmed on March 20, most imported by tourists from Italy and Spain, that the first actions were taken. The delayed action contributed to the initial expansion of the virus. On the other hand, the centralized nature of the political-economic regime and the existence of a unified national health system

helped implement strict preventive measures (this section is mainly based on Mesa-Lago, 2020b; Mesa-Lago et al, 2020). Conversely, “the low quality and high cost of internet connectivity and spotty coverage reduced practically to zero the options of telecommuting and online classes… Education will be among the sectors most affected by the technological gap” (Cuba Standard, 2020: 5). Several of the measures implemented damaged tourism: the temperature-taking of travelers arriving at airports and, in cases of fever, quarantining them for 14 days in hotels and public buildings; the return of 60,000 tourists who were lodging in tourist facilities to their home countries as new arrivals were limited to Cubans and returning foreign residents; the closure on April 2 of all entry and exit by air and sea (reopening was announced for August 1); the shutdown of 80% of the hotels and all clubs and cabarets with restaurants remaining open but later limited to meal delivery; the suspension of interprovincial transport by buses and trains (local transport remained operative until mid-April) and the suspension of automobile rentals. The pandemic has had adverse impacts on Cuba’s health system, especially among those age 60 and above who make up 20% of the population and endure an 85% death rate. Queues to buy scarce food are made without keeping distance and are sources of contagion; the government has urged the population to avoid crowding, promising to deliver rationed food to those staying in their homes, but the already scarce food has been worsened by the cut in its import, the disappearance of tourism and its corresponding revenue and the decline in agricultural production provoked by a reduction in imported fertilizers, pesticides and fuel (Frank, 2020b; Nova, 2020). The complete halting of tourism caused a fall estimated at $2.4 billion in gross revenue, worse than the cut in American tourism by Trump’s policy calculated at $1.1. In addition, it’s estimated that Cuban-American remittances would drop $1.3 billion in 2020 alone, due to the closing of U.S. flights to Cuba, the rise of unemployment to 38 million in the United States and the decline of its GDP by 11% in the first quarter of 2020 and 9.5% in the second quarter (Casselman, 2020). Cuban losses combined amount to $3.7 billion, or 6.5% of Cuba’s GDP in 2019 (ONEI, 2019). This calculation is smaller than ECLAC’s projection of 8% GDP decrease in 2020, but the former is limited to tourism and remittances. Another important cost was the resources assigned to fight COVID-19, which exceeded $1 billion (Falcón et al, 2020).

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According to the World Trade Organization (2020), due to the pandemic the world trade volume will shrink from 13% to 32% in 2020, which will badly hurt Cuba. The government has already announced a decrease of imports in 2020; exports will also fall due to declines in nickel and sugar production17 (both aggravated by dwindling global prices due to the global recession), as well as cigar output (a reduction between 15% and 20%) and pharmaceutical production (which has been falling since 2016). A report released by a group of self-employed (AUGE, 2020) analyzed the adverse effects of the combined external factors described above on micro and SMEs: temporary shutting down of 139,000 enterprises; reduction in income, inputs, investment and employment (particularly since June because employee salaries cannot be paid for more than two months); demotion of activities from complex and highvalue-added to basic products and services; and unpaid taxes of $101 million. The self-employed in 38 activities were divided into three groups according to the degree of damage endured: 1) high impact, 198,000 workers in 15 activities (including renting of homes/rooms, restaurants, cafeterias and luxury transportation all related to tourism); 2) medium impact, 66,000 workers in 9 activities (including restaurants, cafeterias and transportation not related to tourism, beauty parlors, tailors); and 3) low impact, 72,000 workers in 14 activities (including retail sales, bakery work and transportation of passengers and freight).

E) A RETURN TO THE SPECIAL PERIOD OF THE 1990S? Despite the ominous effects analyzed in this and the previous section, the current crisis in Cuba might not be as dire as that of the 1990s (Special Period) because of differences between the two periods (based on Mesa-Lago, 2000; ONEI, 2019): •

• •

more diversified trade by partners: Cuba’s goods-trade concentration with the USSR was 72% in 1987 and with Venezuela was 22.4% in 2018; main-partner share of Cuba’s total trade deficit: 82% with USSR in 1989 and 28.9% with Venezuela in 2018; higher and more diversified direct foreign investment: none in 1989, except from the USSR; officially there were 287 active businesses for about $7.7 billion approved in 2019 but only $4.7 billion in operation;18

• • • • •

much higher hard-currency revenue from tourism: $168 million in 1989 and $2.9 billion in 2018; foreign remittances: zero in 1990 and $3.7 billion in 2018; lower dependency on imported fuels: 92% (from the USSR) in 1988 and 50% (mostly from Venezuela) in 2018; private sector: tiny in 1989 and 21% of the employed labor force in 2018; and lower overall economic dependency: Cuba’s economic relationship with USSR at its peak was 28% of Cuba’s GDP, whereas with Venezuela it was 8% in 2017.

All the above positive variables, however, are being shaken by the reduction in the economic relationship with Venezuela, Trump’s sanctions and the pandemic. We have discussed already the significant declines in exports of professional services, remittances and tourist revenue, the freezing of FDI, the obstacles to get oil supplies and the reversal in the expansion of the non-state sector. Foreign trade and investment minister Rodrigo Malmierca (2020) said in late April 2020 that measures “similar to those of the Special Period” could be taken. Cuban economist Pavel Vidal stated in May: “the economy is already close to a Special Period without [electricity] blackouts” (Cuba Standard, 2020: 5). Furthermore, Cuba in 1985-1989 had its best economicsocial performance under the revolution whereas now the economy is in the worst situation since the 1990s. In addition, the crisis would be politically more difficult to manage because Fidel Castro is gone; Raúl Castro’s structural reforms raised high expectations for improvements of the economy and living standards, which did not materialize, hence generating discontent among the population; and Díaz-Canel doesn’t have power himself but mainly relies on Raúl’s. Finally, making the reforms under the current crisis will be quite difficult because of the severe scarcity of domestic economic resources, the lack of aid from international/regional financial organizations, and eroded confidence in the real will of the government to undertake the needed changes, issues that will be discussed in the next section.

17  Sugar production in the 2020 harvest was estimated at 1.1 to 1.2 million metric tons (vis-à-vis an official target of 1.5 million), one of the lowest in a century; 700,000 tons are for domestic consumption and 400,000 tons are committed to China, hence virtually nothing was left for export to other countries (Frank, 2020c). 18  Díaz-Canel (2019b) reported a total of $5.5 billion. 29

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IV. Alternatives to Confront the Current Crisis and Promote Future Development A) GOVERNMENT STRATEGY AND POLICIES In this section we describe the initial weak set of measures the government took in 2019, and then analyze whether the “strategy” announced in July 2020 is a real new move towards market-oriented reforms or not. 1. The initial weak strategy of 2019. Cuban leaders did not elaborate an urgent, innovative, cohesive and appropriate strategy to confront the crisis. In mid-2019 the legislature (ANPP) approved a long-term plan to 2030 in three stages, without offering details for each. Measures were vague and reiterated old unsuccessful policies, emphasizing central planning and state enterprises with scarce mention of the needed acceleration-deepening of the reforms. Not a single measure advanced by the ANPP was new and specific enough to adequately confront the grave problems that the island suffered and worsened in 2020. Pointing out the huge and urgent problems that Cuba faces, several Cuban economists criticized the government strategy as marred by excessive caution, inadequacy, immobilism and lack of innovation, boldness and quickness to confront such challenges. Absent in the discussion were the long-standing, broad consensus on needed economic reforms that have been postponed or obstructed; the potential application to Cuba of the successful policies of China and Vietnam; measures regarding private property and microenterprises that should be given priority and the widespread scarcity of essential food items which may be a harbinger of a second Special Period19 (see a compilation of these opinions in Mesa-Lago, 2019b). The minister of economics Alejandro Gil (2019a) identified key sectors to confront the crisis (e.g., tourism, exports of professional services, energy), but acknowledged that exports had not grown enough (they actually declined), foreign investment was low, and energy sources were poorly used (for Gil’s other proposed policies see Cuba Standard, Third Quarter 2019, p. 5-6). President Díaz-Canel (2019a) acknowledged important economic problems such as: increasing foreign debt due to insufficient revenue from exports, unpaid debts to suppliers, an “import mentality” that contravenes initiative and creativity, widespread corruption (e.g., stealing gasoline) and very low level of savings. To confront those problems, he

promised to replace administrative controls in planning with financial incentives, decentralize and bestow real autonomy to state enterprises allowing them to use a bigger part of their revenue to invest and pay higher salaries based on their performance, enact an enterprise law to eliminate restrictions to microbusiness, decentralize foreign trade and increase FDI. Two concrete policies were an increase of 37% in wages of the state non-enterprise sector, as well as pensions, and the reintroduction of the U.S. dollar to buy durable consumer goods (e.g., motorcycles, domestic appliances, cars) in 82 new state shops, although minister Gil dismissed a return to full dollarization as in the 1990s. These measures were flawed. Many of the measures were quite schematic, vague and confusing; they needed further elaboration and also an implementation plan. Several measures had been tried before in Cuba and then disregarded. For instance, enterprise autonomy and decentralization as well as allocation of resources through financial-economic indicators rather by administrative tools (self-financing) were the subject of discussion during the economic policy debate of 19611966; they were attempted in the 1980s and Raúl’s reforms included decentralization of state enterprises, but these measures were not implemented. The partial reintroduction of the U.S. dollar (particularly after further expansion in 2020) would reproduce segmentation and distortion within the economy; working with three currencies will raise transaction costs even more, and make more difficult the calculation of financial risk and investment return, as well as monetary unification. The government failed to define a precise goal, as the guidelines for 2016-2021 and the economic and social development plan for 2030 did not specify it (Cuba Standard, Fourth Quarter of 2019). Some of the measures were conflicting. For instance, the capping of prices in the private sector in August 2019 — to avoid inflation induced by the wage increase — was a typical administrative action, previously used unsuccessfully. Urgently needed measures were not addressed, such as monetary unification, overall price reform, removal of obstacles to self-employment (key among them authorizing professionals to practice their profession, replacement of the list of authorized activities by one specifying which are the ones banned), establishing and expanding wholesale markets for the non-state sector, elimination of acopio, ending the experimental stage for

19  “The Díaz-Canel team has been intolerant of criticism…, and disconnected from younger generations” (Cuba Standard, 2019 Third Quarter, p.6) 30

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non-agricultural and services cooperatives, creating second degree cooperatives, and so forth. More than one year later, none of these promises had materialized. At the start of 2020, a journalist asked Gil about the results of the government’s alleged 28 measures to cope with the crisis. He mentioned only three, failed to give concrete data and conceded: “Unfortunately these measures, some more than others, have been dealt with in a slow fashion… because changing the mentality takes time.”He admitted delays in payments to foreign suppliers, no advances in foreign investment (“Its solution depends on us and has nothing to do with the U.S. blockade”), that the goal of replacing imports for tourism with domestic production had not been achieved and that sales of goods in dollars was limited due to high dependence on their imports (Gil, 2020). COVID-19 became an obstacle to the reform because shutting down the economy halted vital resources such as foreign remittances and tourism, as has been explained. Actually, during the first weeks of coronavirus, economic minister Gil praised the advantages of centralized planning, state enterprises and price controls to successfully fight the pandemic (Cuba Standard, First Quarter 2020). The Council of Ministers held an extraordinary session at the start of May 2020 to adjust the 2020 plan and initiate the elaboration of the 2021 plan in view of the problems caused by COVID-19 and Trump’s punitive sanctions. Intriguingly, the party newspaper published two different versions of the meeting: the first (Martínez, 2020a) was twice as large, gave a more dire vision of the crisis and listed more stringent measures than the second version (Martínez, 2020b). Two sources agree that the first version was deleted, revised and republished in a blander form, but none speculated about the reasons (Gámez, 2020b; Veiga, 2020; see the end of this section). In the first version, economic minister Gil reported that many projects would be postponed or reduced, new investments halted and current investment paralyzed,20 budget expenditures cut and workers harmed because “we cannot distribute wealth that has not been created,” sales of food and hygiene products would be controlled and their prices maintained, savings increased — without explaining how — and the fiscal deficit recalculated, probably upward. In turn, minister of external commerce and foreign investment Malmierca stated that the plan of exports of goods and services for 2019 was not fulfilled due to external factors as well as “internal factors such as

the limited proactive action of state enterprises.” Neither minister revealed any new concrete policies. On the other hand, president Díaz-Canel appeared to ask for more progress in the reform: a) “planning must be more intelligent and precise;” b) we have to innovate, “cannot continue to do things in the same manner as before, we must do different things… because doing the same won’t solve our problems and allow us to advance;” c) we “must implement, in a more rapid and decisive manner, a series of issues that have been approved and are pending in the implementation of the conceptualization of the new model [as well as] in the party guidelines on economic and social policy and the plan to 2030;” d) among the latter, he mentioned a reconstitution (“redimensionamiento”) of the state enterprise and private sectors and the adequate relationship between the two, of which “we have good experiences under the pandemic” (Martínez, 2020a). The second version of the council meeting did not publish the bulk of the above. Conversely, minister Gil set as principles for any policy “centralized planning and market regulation” (no mention about a “more intelligent and precise” central plan). He added that the recovery stage would start in the forthcoming months in three vague stages. Prime minister Manuel Marrero warned that “many things have to be accelerated but not hastily and with a shock therapy that would lead to do them wrong,” thus muffling the tone of president Díaz-Canel. The latter repeated that the barriers to the liberation of the productive forces had to be lifted and quoted Raúl Castro: “What we agree must be implemented and, if we need to modify any agreement, there should be consultation at the proper level” (Martínez 2020b). Another meeting of the Council of Ministers, held at the end of May, seemed to incline to the president’s stand in the first version of the meeting early in that month. Díaz-Canel called the gathering to do “a profound exercise in innovative thought that lead to a real strategy to face the world crisis generated by COVID-19.” He stated that such exercise could not be “more of the same [but] it should question and revise everything [in order] to decide what should be kept and what have to be improved… [to achieve] a “more firm and rapid implementation of the conceptualization of the model and the party guidelines,” because there are “institutions that cannot continue to function as now.” Prime minister Marrero added that the meeting objective was to find “the productive transformation that the country needs to guarantee progress

20  It’s said that the announcement of investment halting annoyed the military whose business arm Gaviota wants to finish some hotels in construction (Pérez Villanueva, 2020e). 31

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with more efficiency, productivity and revenue, meet internal demand and promote exports” (Martínez, 2020c). These zig-zags in the debate confirm the view that, despite the official rhetoric, there was not unified thought within the leadership: the president tried to push for more reforms whereas the hard-liners in the party resisted them to maintain the status quo, meaning their power and privileges (MesaLago, 2019a; Monreal, 2020b). This indecision continued for about 13 years while the economy increasingly deteriorated, hence a more profound reform was urgently needed to untie the Cuban Gordian knot.21 2. A push for the needed reforms? In July 2020, the manytimes announced strategy to confront the growing economic crisis was revealed, suggesting that the president had won the battle over the old guard; said strategy comprises 16 key economic areas, demands the application of 209 party guidelines and is based on nine principles. The strategy was first approved by the political bureau of the central committee of the Communist Party presided by its first secretary Raúl Castro, and then by an extraordinary meeting of the Council of Ministers on July 16. It won’t be submitted for discussion at the National Assembly of People’s Power until October and based on an evaluation of its results. President Díaz-Canel and Minister of Economics Gil explained the strategy to the nation at a televised roundtable (“Gobierno cubano informa…,” 2020). To legitimize the strategy, the president quoted Fidel Castro, 20 years before, on the “need to change all that must be changed.” Díaz-Canel emphasized the necessity for economic transformation with “boldness, intensity and innovation” (the same features that critics pinpointed were lacking in the 2019 strategy). He then justified the changes arguing that “the lower the capacity of our socio-economic-political institutions to solve the pending problems, the greater would be the success of the enemies of the revolution.” However, he noted that “some of these policies convey risks [such as] cases of corruption and the illicit hard-currency market [that] we will have to confront in a decisive and strong manner,” but “the worst risk would be the lack of transformation because it would lead to the loss of popular trust”; he added that “in order to help all the people, we need to take measures that… seem to favor a few, but in the long term they will aid all.” Finally, he pinpointed that the policies would be “applied gradually but systematically…some will be faster and others

would take more time.” Minister Gil warned that “the current situation is not the same to other tense moments faced by the Cuban economy” and that the strategy must not lead to “improvisations.” The announced policies are of three types: macroeconomic, financial and monetary. First, we summarize the macroeconomic measures starting with the nine prioritized as “principles” by Gil and following the same official ranking; next we recap other measures (all quotes, unless specified, are from Díaz-Canel and Gil cited in “Gobierno cubano informa…,” 2020).

Macroeconomic policies: 1. Preserve the central planning system because “facing increasing incertitude, more planning is necessary, but this doesn’t mean a centralized allocation of resources. We are taking steps towards a decentralized nonadministrative type of allocation.” There is nothing new about this, it repeats what was advanced in June 2019 and no specific details were provided. 2. Defense of national production and eradication of the import mentality. A vague and customary goal under the revolution lacking any implementation guides. 3. Market regulation “mainly through indirect means [which] is not contrary either to Cuba’s economic model nor to the party guidelines.” Same comment as in # 1. 4. Connection of various economic actors in the state and non-state sector. Same comments as in #1. 5. Dynamizing role of internal demand “that will generate employment.” Unclear goal. 6. Grant more autonomy to management of enterprises, “This requires preparation to take over new responsibilities as well as efficiency in state enterprises… we have good examples also in the non-state sector, the idea is that both sectors work under the same conditions.” Save for the last phrase that will be discussed in our analysis below, nothing is new here; it also was part of the initial set of policies in 2019 (which noted that “financial incentives would replace administrative allocation”), and a recurrent theme in government policies under the revolution, as discussed before. 7. Implementation of key pending aspects in the ‘actualization’ [reform] of management and ownership

21  A noted Cuban economist argued, however, that the government game was to gain time hoping that a recovery of tourism, foreign investment, remittances and oil prices — helpful to Venezuela and to Cuban exports of the oil refined surplus — would get Cuba out of the crisis. The scheme — he said — continued to be a very moderate reform: minor decentralization within central planning and little space given to the market and the private sector (Monreal, 2020d).

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8.

9.

forms; “We will work also in the reconstitution (“redimensionamiento”, unclear meaning) of the state enterprise, the non-state sector and the relationship between the two.” Same comment as in # 1. Promoting competition to guarantee the efficient use of material and financial resources, as well as savings; “Savings means to do more with the resources available” in addition, “we will introduce labor motivation through a system of incentives that should function both in the state and non-state sectors.” With the exception of the last phrase that lacks details, nothing is new here; actually, the 2019 strategy was more specific, stating that “state enterprises would be allowed to use a bigger part of their revenue to invest and pay higher salaries based on their performance.” Respect to environmental norms. This is good but not a measure to cope with the crisis.

Several other policies, not ranked among the nine above but included in the strategy, are new and some provide details (quotes are from “Resumen de la estrategia…,” 2020; see also “El gobierno cubano…,” 2020): •

Authorization to the non-state sector to import and export. This won’t be direct but “through contracts with 37 state enterprises that will guarantee the needed processes and the quality of the products.” Several of these measures won’t be implemented immediately as they are under study. “Non-state entities, such as self-employed and cooperatives, will have to open bank accounts in hard currency to finance their imports and deposit revenue from their exports; prices will be set by mutual agreement between the state enterprise that provides the service and the non-state entity; a percentage for custom duties and transportation will be charged to non-state entities for their exports and imports; non-state entities would be able to keep hard currency in their bank accounts to get inputs and continue producing; payments may come through transfers from abroad or national banks; magnetic cards may be used to withdraw national currency [CUC and CUP] but not hard currency; sales to ZEDM may also be done under the same procedures.” This measure has the potential for greater autonomy and decentralization of foreign trade as well as access to hard currency. Wholesale and retail selling of goods and inputs in hard currency for productive activity and the population through state stores.22 The corporation CIMEX managed by the

military is importing and selling — since the end of 2019 but expanded since July 20, 2020 — in hard currency (mainly U.S. dollars but also euros, etc.) and huge markups thorough 72 state stores, home appliances, motor bikes, cars and now other durable consumer goods, food (beef, pasta, grains, canned food), hardware and hygiene products (soap, detergent, shampoo), which are virtually unavailable in state shops that sell in CUC and CUP (this measure is counter to Gil’s previous statement that sales in dollars would not be expanded). “Part of the revenue obtained from the sales will be invested in the national industry to expand its capacity to meet future domestic demand. State shops selling goods in CUC and CUP will continue to do so,” but with a reduced stock, such as essential food (particularly powdered milk, beans, rice and chicken in limited amounts) and hygiene products (not-specified). The strategy noted that the continuation of these sales will be at a high cost for the state. “The non-state sector will be able to sell in hard-currency products they manufacture such as clothing, shoes, furnishings, etc., which the government can’t import and sell in the new stores.” Designing wholesale markets for the non-state sector. The government is designing wholesale markets to sell inputs needed by the self-employed in their microbusiness (a demand asked by them for a long time), “supported in hard currency by co-ops that export in hard currency or by enterprises established in the ZEDM.” Elimination of the charge of 10% imposed in the exchange of the U.S. dollar. Such charge was established in 2004 and generated hard currency for the state every time that dollars were exchanged for CUC. Eliminating this charge was among the first two policies implemented, on July 20. Direct payment between producers and distributors. Unclear measure.

Other goals, lacking specific policies, are “increase food production…attract FDI… improve (“perfeccionar”) non-state work… expand self-employment through more flexibility in licensing… and promote co-ops.” The unification of the dual currency and multiple exchange rates was postponed again, “until the final analysis is completed.” This is seen as “the crucial step to eliminate the remaining obstacles to develop the economy.” The financial policies of the strategy were explained by the Minister of Finance and Prices Miesi Bolaños whereas the monetary, exchange and credit policies were presented by the

22  In 1994, under the severe crisis, Fidel Castro authorized the use of dollars to buy consumer goods in state shops; he took the dollar out of circulation in 2004. 33

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President of the Central Bank Marta Wilson, both appearing in a televised roundtable broadcast on July 28, 2020. Financial policies alone involve more than 30 measures (Falcón et al, 2020, quotations below are from this source). A summary of those policies follows: Financial policies: • Search for mechanisms to achieve the state budgeted equilibrium between revenue and expenditures as well as fiscal sustainability. This is to be done promoting “more flexibility in the budget.” Fiscal sustainability “must not be limited to social expenditures but include economic development also…creating an investment fund in the state budget.” Also, “authorize enterprise participation to buy sovereign debt and later adding natural persons… to diversify participation of economic actors in financing the fiscal deficit and contribute to fiscal sustainability.” Another goal is “more rationality in expenditures and setting priorities.” “A state enterprise or budgeted entity that lacks control of its resources won’t receive budget financing because we cannot pilfer resources.” No specific measures were given to implement these goals. • Implement a program to strengthen and infuse better discipline in accounting and financing. Same comment as above. • Increase the autonomy and self-sufficiency of each territory or municipality to make the use of funds more flexible. This includes “access to additional channels for short-term financing through bank credit or Treasury letters…municipalities should have the capacity of indebting to finance certain lines of production and that the debt be amortized in the short term.” Also “municipal contributions should be redesigned through fiduciary instruments to finance local development projects [such as] food programs and micro-industry... those projects must be profitable in order to pay back the debt… Unutilized resources at the end of the year would be available in following years.” Finally, “municipalities would be able to keep 10% of the over-fulfillment of the resources granted in a fiscal year.” • Make available fiscal incentives to all economic actors that produce goods or services for export. “The incentives should be based on the increase in production or income, collection of export revenue and reduction of the import coefficient.” • Grant discounts on the profit tax to entities that produce goods and services for export or to the ZEDM. “State enterprises and societies will receive discounts from 10% to 40% [unexplained is the criteria to apply such percentages]; mixed enterprises and contracts of

international economic association will get 10% to 30%, and cooperatives will get 5% to 20%... the self-employed would receive a discount of 5% to 15% of their personal income tax…the sum discounted could be distributed among workers as profit sharing.” Design fiscal incentives to promote development, giving priority to entities involved in high technology, agricultural production, micro-industry and renewable energy. “High technology will be imposed a 15% for-profit tax, will be exempted from the sales tax and from tariffs on imports of equipment and technology.” No specific fiscal incentives were revealed for the other activities. There was a suggestion that agricultural producers should receive their state payments on time (avoid payment delays). Poor productivity of those working on idle state lands (usufruct farmers) will be penalized by the raising of their taxes. Establish in a gradual manner a price policy that is unified, inclusive and with equal conditions for both the state and non-state sectors. “Those more efficient will get more benefit regardless of type of organization.” “Fixing prices will be more flexible via decentralization,” although with several caveats: “The state will continue regulating prices of products that are of crucial importance to the population; price control and inspections will be strengthened to avoid speculative and abusive prices, and penalizing illicit economic activities.” Develop insurance products for the non-state sector to protect their participants and their employees. No specifics given. Reduce the proportional state participation in financing social security pensions through new financing sources. Among those sources, “life insurance” and “personal contributions” (workers) are mentioned. The reason for this measure is that the pension system faces a huge deficit due to aging as Cuba has the oldest population in the Western Hemisphere.

Monetary, exchange-rate (unification) and credit policies: • Achieve stability in the purchasing power of money. “Improve monetary programming and the statistical tools to achieve more precise estimations of the variables that affect the monetary equilibrium and a better knowledge of the liquidity needs in the economy.” Still another example of elusiveness and absence of concrete policies. • Advance in the convertibility of the national currency. “Exchanges rates should contribute to meet the foreign trade goals,” quite a vague statement. “We are advancing in the monetary and exchange-rate unification and we have identified the challenges of that complex task.” Also, “creation of a public debt market, design an exchange

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market, develop a fund for international reserves to support the exchange scheme to be chosen,” all hazy objectives lacking specific instruments. Promote the role of credit and expand it to more economic sectors. “Stimulate access to credit through monetary and fiscal incentives related to interest rates,” an unclear sentence lacking even examples of such incentives. “Possibility of creating or specializing an existing bank to provide credit to the agricultural sector, ensuring that the loans go directly to the producer.” It should be noted that in the 1950s, Cuba had an agricultural-industrial bank specialized in subsidized loans for these activities, which was shut down by the revolution. Finally, “search for solutions to bad credit granted by banks” and “implement a system of guarantees for banks and a capitalization program so they can better respond to actual challenges.” These statements attest that, after more than 60 years, Cuban banks lacks these fundamental security norms.

Analysis of the strategy: resumption of structural reforms or more of the same? On paper, the strategy appears to be a proper resumption of the structural reforms halted in 2016, another moderate push towards the market and hence in the proper direction, but it’s essential to analyze the policies in practice. Out of a total 31 policies summarized above, only two have been implemented already (expansion of hard-currency sales at state shops and elimination of the 10% charge imposed on the dollar exchange) and both are intended to collect the desperately needed dollars. Dropping the 10% charge also helps the population that get more in the exchange. The remaining 29 measures are basically goals or intentions, mostly schematic, vague (sometimes difficult to understand) and unaccompanied by concrete guides or clarifying examples. Furthermore, they have been recurrent themes in government policy under the revolution but never carried out. Quite often the policy enunciation starts with words like “search for,” “design,” “develop”, “study” or “promote.” We made similar observations concerning the announced policies in the 2019 strategy and several of their policies are repeated in the 2020 strategy, in some cases the former having more details that the latter. Therefore, we have to wait for further clarification, policy design, testing and implementation. Moreover, none of the first nine prioritized policies-principles involve a significant change of previous practice — although a few have positive nuances; on the other hand, some policies outside the prioritized nine are indeed new but, again, they are mere proposals that must be submitted to complex processes before implementation, if they ever take place. Among the

nine prioritized “principles,” the first is the maintenance of the centralized planning system, albeit with the caveat of replacing administrative allocation (vertical commands) by “steps” towards the use of decentralized tools; the third prioritized principle is the regulation of the market, although “mainly through indirect means.” In both cases, no specifics are offered on what type of tools or means will be used. Market regulation is typical of mixed economies where it impedes monopolies and oligopolies, promotes a progressive distribution of income and solves problems that are not tackled by the market such as poverty and social welfare (De Miranda, 2020a), but the market could also be excessively regulated, making it inconsequential, hence the definition of the type of regulation is more than semantical. Despite the vagueness of these statements, the authorities hurriedly explained that none of these two policies are contrary to the economic model or the party guidelines, an indication that there might not be a real intention to depart from current orthodoxy. The strategy, at least rhetorically, raises the importance on the non-state sector, but some of its policies are inconsistent with said aim. For instance, opening the possibility of exports and imports to that sector is restrained by the mandate to do it through monopolistic state enterprises that will be in a strong position to set prices and greatly charge for their services. The statement that conditions will be the same for the state and non-state sectors is incongruous with the discrimination against the self-employed and NASC as they are granted much lower tax discounts than those given to state as well as mixed enterprises in which the state plays a key role, hence maintaining the previous diverse treatment among various types of ownership of the means of production. (It’s unclear if high technology activities are open to the non-state sector.) The enterprise law to legitimize the non-state sector, particularly microenterprises, has been announced several times including in the 2019 strategy, but is not even mentioned among the 2020 policies; conversely, Minister of Foreign Trade Malmierca stated that the new export-import authorization to self-employed and NASC can be implemented without a previous legal recognition of either (Cubanet, July 16, 2020). The non-state sector is still not allowed to receive foreign investment or even reinvest its domestic profits in other microbusiness including chains of its own current activity. The expansion of selling urgently needed consumer goods in dollars at state shops should withdraw resources to invest in microenterprises (Amor, 2020). There are some policies that address old demands from the non-state sector (in addition to export and import already mentioned), like the reestablishment of wholesale markets, connection of actors in the state and non-state sectors, 35

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more flexibility in licensing the self-employed, promotion of more NASC and direct payment between producers and distributors, which of course still have to be implemented. And yet, not only the basic enterprise law was postponed, but other key claims of the non-state sector were not granted, such as replacing the list authorizing specific selfemployed activities with a list banning some activities and giving freedom to work in all others, or permitting university graduates to perform their professions as self-employed. Some policies, although vague, are in line with decentralizing state enterprises, such as granting more autonomy and responsibilities to managers, promoting competition, strengthening accounting, authorizing enterprises to buy sovereign debt, and so forth. Once again these are goals that need to be executed. Also, it has been noted that the 2019 strategy gave a target unmentioned in the 2020 strategy: allow enterprises to keep more of their profits for investment and paying higher salaries based on performance. An important issue that has been the subject of discussion throughout the revolution is the elimination of state subsidies to enterprises that are unprofitable. The 2019 strategy clearly stipulated that those enterprises would be shut down and subsidies stopped. The 2020 strategy is more opaque: When the state enterprise “lacks control of their resources, it won’t receive budget financing.” Last but not least, the strategy does not give any role to workers in the decision-making process either in the design of the plan or at the enterprise level, the only reference being that discounts from taxes could be distributed among workers as profit sharing. Shockingly, foreign investment that is desperately needed in all economic sectors is not among the nine priorities of the strategy and is only briefly mentioned — “attract foreign direct investment” — without giving one concrete way to accomplish that goal. For instance, a key measure to attract FDI, not mentioned, is to allow foreign investors to directly hire and pay their employees, freely setting their wages (the first demand of foreign investors). In order to attract foreign capital, it’s essential to establish a legal framework, transparent and stable, with a juridical system of arbitration independent from the government (De Miranda, 2020b). Although there are many proposals on the non-state sector, nothing is said either about the possibility that private microbusinesses and NASC will be allowed to receive FDI. The

strategy also missed the opportunity to invite Cubans abroad to invest in the island. In addition, several policies will cause adverse effects, some acknowledged by the Cuban authorities themselves. For instance, sales in dollars at state stores have a 240% markup (Amor, 2020) and prices are so high that access is limited to a minority of the population with a stock of dollars, which will expand the existing segmentation among the population as well as income inequalities. Recall that workers and pensioners are paid in CUP and the exchange now is 25 CUP for one dollar.23 This negative effect was addressed by Díaz-Canel who said that some measures could be seen as favoring part of the people but would benefit all in the long run. The elimination of the 10% charge on the dollar and the expansion in this currency to buy scarce consumer goods have provoked a jump in the dollar price (according to Minister Wilson, the dollar exchange to the CUC and its bank deposits rose about 200% over a week). If this trend continues, the exchange rate could reach the previous peak of about 4 CUC per 1 dollar in 1990s. The CUC value has dropped considerably: the official value that was par with the dollar deteriorated at the end of July to 1.50 CUC for one dollar, and a continuation of this trend will render the CUC worthless. Concerning the CUP, it is essential to devaluate it but that is the task of the exchange-rate unification that has been postponed again. It should be noted that dollars coming from abroad can be only accredited to electronic cards with the sole purpose of buying goods in state stores; if the card owner wants to withdraw money it is given in CUC or CUP, not in dollars (Morales, 2020b). Black-market money traders are buying dollars, discarding CUC, hoping to make a profit as the dollar value raises (Pérez Chang, 2020). The government is prosecuting speculation and corruption, but history shows their resilience: prosecuting speculators will treat the symptom but doesn’t solve the cause, namely, to increase supply (“Pedro Monreal…,” 2020). The expansion of sales in hard currency and the probable contraction of sales in CUC and CUP (Díaz-Canel acknowledged the severe dearth of goods sold in these currencies24) means that most consumer goods will only be available in hard currency. All these factors may push up inflation. In addition, the increase in the circulation and use of the dollar and the euro will add to the current circulation of the CUC and the CUP, creating more obstacles for monetary and exchange-rate unification.

23  At the new state shops, end of July, one pound of beef was as high as $6.80, tantamount to one-fifth of the state mean salary of 777 CUP and half of the mean pension of 303 CUP, both in 2018 (“Carne de res…,” 2020; ONEI, 2019). 24  For a report on the severe scarcity of goods sold in CUC at the old stores, and the substantial increase in their prices see J. E. Rodríguez, 2020. 36

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The above analysis raises the question of whether the policies announced in July 2020 constitute a comprehensive and integrated strategy not only to cope with the current crisis but also, and most importantly, to promote official long-term goals such as a transformation of the current economic structure, adequate economic-social development and financial sustainability. Based on the only two policies implemented, it appears that the leadership is resting its strategy on the capture of dollars from abroad to import consumer goods that are sold to a minority of the population at very high prices, and part of the resulting revenue is used to import more goods while another part is expected to be invested in domestic industry hoping that eventually its output would gradually increase and reduce such imports. As a consequence, economic dependency will continue, more focused than ever on the Cuban community abroad (Miranda, 2020a). There is no plan to expand domestic agricultural and cattle production (save for a reference to the creation of an agricultural-industrial bank to promote credit) through a significant change in the current and unsuccessful agrarian policy that relies on the failed usufruct (to be taxed even more) and inefficient agricultural production cooperatives. There is no plan either to expand exports; the only policies announced are to give the non-state sector the possibility to export but through monopolistic state enterprises that would charge for their services plus other fees. Surprisingly, the strategy does not address either what to do with tourism that is constrained not only by the pandemic (nobody knows how long its devasting effects on the arrival of foreign tourists will be) but also by Trump’s punitive sanctions and the poor quality of Cuban services. The previous policy of overbuilding tourist-room capacity, despite a decline in both tourist arrivals and tourist expenditures, and shifting resources to improve quality of services and amenities is not even mentioned in the strategy (Monreal, 2020e). Finally, after almost a decade of debate, enacted legal regulation and several failed promises of monetary unification, the two brief statements on the subject by ministers Gil and Wilson make clear that it will not be carried out in the near future and that the government still lacks a plan to accomplish this urgent and fundamental task. Another reason to doubt the seriousness of the strategy is the seventh “principle”: implementation of key pending aspects in the reform of management and ownership forms. Said reforms were approved at the party congress in 2011 after a debate in which millions of Cubans participated. They have been

discussed for nine years by two presidents, the National Assembly of People’s Power, countless councils of ministers and roundtables broadcast on TV. So why have they not been implemented, and what assurance is there that they will be enforced in the near future? Cuba may be playing its cards on the possibilities of changes in the U.S. presidency and Congress as well as U.S. policies vis-à-vis Cuba, the continuation of Venezuelan oil supply despite the terrible crisis in that country, and the return of tourists in substantial numbers and with a willingness to spend more than during previous visits. The realistic probabilities of those hopes are analyzed in the following sections. Opinion of Cuban economists on the strategy The announced strategy has led to diverse opinions among Cuban academic economists. In general, the reaction has been positive but stressing the need for implementation of the announced policies and steady continuation of the reforms. Herein we summarize interviews with some of them on several key issues (main source, unless specified, is “Análisis sobre la estrategia…,” 2020; other opinions in Vicent, 2020; Frank, 2020f).25 The summary of these opinions below largely ratifies our analysis and evaluation of the strategy. General opinion and cautions. Virtually all the economists state that the strategy is in the correct direction but with caveats: “The large majority of us has received the announcements, overall, with approval, although with certain skepticism on their reach… [there are] key elements that, if implemented without interruptions and setbacks, would create a beneficial economic dynamism” (Fernández). “Only the areas of transformation have been outlined, save for the dollar measures; the success of the program depends on its effective implementation, something that has failed before… and great expectations have been raised” (Torres). “It is in the right direction although insufficient [and] requires rapid results…its success will rely on the coherence in the implementation” (Maqueira). “Measures announced are not the only needed; we suppose that the reform process will continue, but the policies announced are an import step in the correct direction” (Carranza). “Very positive that the crisis has prompted a resumption of the structural transformations…it’s important that they speed up” (Vidal). Key issues and effects. There is a difference between shortterm measures (partial dollarization) and long-term measures (economic structure and its transformation). Tthe former is a

25  Economists whose opinions are summarized herein are: Julio Carranza, Oscar Fernández, Ana María Maqueira, Pedro Monreal, David Pajón, Omar Everleny Pérez Villanueva, Ricardo Torres and Pavel Vidal. Translation were done by Mesa-Lago who hopes to have properly interpreted Cuban economists’ thoughts. 37

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means to cope with the current crisis and facilitate the latter, which is the principal target” (Torres). “Although the current situation was aggravated by COVID-19, its causes are found in the historical structural deformation of the Cuban economy [therefore] structural change measures will have the greatest impact in the future…such as the implementation of SME, the diversification of non-state forms and the transformation of the state enterprise (Maqueira). The dollarization measure is the most important short-term step but will “deepen the dual monetary system that is the major economic impediment for productivity and competition in the long-run [as well] as “generate segmentation, more distortions and won’t guarantee inclusive and sustainable economic growth in the long term” (Vidal). “Partial dollarization was attempted in the 1990s targeting the capture of hard currency, hence limiting other changes and the results were not good [and] it contributes to economic segmentation, which is not good in the long run… a positive difference of the new approach is that it will allow the acquisition of capital means to all property forms (as announced)…potentially this is good but demands swift and effective implementation (Torres). “The sustainability of the scheme [selling goods in hard currency at state stores] will depend on giving priority to meet the commitment with [external] providers” (Pajón). “Captured hard currency in states stores should maintain a decent supply of goods at the state shops in national currency — CUP and CUC” (Maqueira). The majority of the economists stress the importance of expanding the nonstate sector — this term should be abolished and replaced by “private,” says Torres — and the legitimation of SME (Fernández, Pajón). Others pinpoint the importance of the promised autonomy of state enterprises “but we will have to wait to see if said autonomy overcomes the reaction of enterprises accustomed to the antiquated vertical practices” (Pajón). On the “sketchily” announced change in centralized planning, it is crucial that the leadership maintains a “willingness to unroot this distortion, which needs practically an alphabetization campaign” (Fernández). It’s expected that “inflation, which is already experienced in the part of the economy where planned prices don’t work, [would expand], hence measures are required to impede an inflationary spiral” (Maqueira). “Queues [to buy food and consumer goods] are a manifestation of ‘repressed inflation’ [because] state fixed prices don’t stimulate the supply and the effective demand exceeds the available supply, which is insufficient and depletes quickly, hence the queue” (Monreal, 2020f).

Obstacles. There is virtual unanimity that the major impediment is the “internal resistance” from the “bureaucracy, managers of state enterprises that fear the competition of the non-state sector, ideological rigidity, entrenched structures,” the ANPP and other “actors, some disguised other directly.”26 Other factors are “the excessive gradualism in the implementation of the measures,” the “lack of incentives for the bureaucracy,” “the current economic crisis and lack of financing,” and the “traditional incapacity of agriculture to generate new and creative solutions” (Pajón, Torres, Vidal, Fernández). Last but not least is the “complex access to hard-currency revenue by the non-state sector that generates exports” and to finance its imports (Maqueira). Other policies needed. “The most urgent is to do the announced and do it well” (Maqueira). On the external sector: There are “doubts on the capability of the new state enterprises to conduct external commerce. Currently they have great difficulties to serve a reduced number of large state enterprises [and] charge a percentage for their services and another to cover their expenses, all of which foments inefficiency; payments to those enterprises should be based on competitive prices for services provided under clear standards… if the private and cooperative sectors are tied to the inefficiency of the state enterprise, we won’t advance” (Torres). Hence allow “the non-state sector to directly import and export, with an option instead of an obligation, to use state enterprises;” also “promote and regulate a set of property rights for foreign capital willing to invest in the non-state sector” (Pajón). In addition, set a “contracting system of employment for foreign investors” (Vidal); “make more flexible custom tariffs to permit free importation of certain amount of food and other essential consumer goods…establish centers to promote exports by the non-state sector [and] create a wholesale market in national currency for inputs and capital goods for private farmers (Maqueira). On the non-state sector, in addition to the measures cited above: “shift from the current perception that the private and cooperative sectors are ‘necessary evils’ towards fully integrating them into the national production system (Torres); “recognize SME with capacity to associate with the state sector,” which would “give them legal security and stimulate long-term, productive projects, including manufacture, generation of knowledge and professional services”; promote the creation of NASC voluntarily organized by their members” instead

26  “The key question is whether Cuban elites will accept the market to function autonomously instead of a space to arbitrarily abolish or restrain, as it’s now…persisting pockets of ideological intransigency … identify as neoliberal any recommendation in favor of the private sector integration in the economy” (López-Levy, 2020) 38

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of by the state (Fernández, Pajón). “Eliminate the current list authorizing self-employment activities and replace it with a list of banned activities” (Maqueira, Pajón). Finally, several economists addressed the fundamental issue of social policy, omitted in the strategy: “Definitely, the new measures increase inequality in Cuban society [hence] the urge to assign more [state] resources to the most needy based on restricting access to those that don’t need those resources…new mechanisms are required to allow access of new resources to the most vulnerable” such as selling food and other essential consumer goods; “is urgent to recognize that Cuba is a much more unequal society than what we are willing to accept… the current tax code is obsolete thus a new one is needed” to provide resources to the needy and get revenue from those with high income (Pajón, Maqueira). We conclude with a warning of another potential stagnation or reversal of the reform process: “The undeniable popular enthusiasm that accompanied the debates of the VI Congress of the party and the beginning of the ‘actualization’ of the economic model in 2011 were followed by a fatal disenchantment with the pause and reversal of most advances in such process, whose culminating political event were the controversial restrictions imposed on the exercise of self-employment [in 2016]. Such economic and political cost cannot be recuperated. That such an episode may be repeated is possible” (Fernandez).

B) INTERNATIONAL AND BILATERAL AID Herein we explore the possibilities that international and regional financial organizations could come to Cuba’s rescue, as well as powerful countries that are strong allies of the Cuban government (Russia and China) or other developed nations. 1. Aid from International and Regional Financial Organizations Latin American countries are turning to international financial aid, which is expected to give priority to poor countries with little access to external credit, but Cuba does not have that option because it is not a member of the World Bank, the IMF or the Interamerican Development Bank (IADB). There is no realistic chance that Cuba will be invited to join such international agencies because the Helms-Burton Act prevents it. One exception is the Economic Development Bank for Latin America. In 2016, the bank signed a collaboration agreement with Cuba, which took place when President Obama was promoting the normalization of relations with the island and there were seven countries, out of the total of 14

CAF members, led by left-wing governments that were willing to provide financial assistance to Cuba: Bolivia, Brazil, Chile, Colombia, Ecuador, Uruguay and Venezuela. Currently, with the exception of Venezuela that is suffering the worst crisis in its history, the other six countries have moved to the right, making very difficult substantial assistance from the CAF to Cuba. To help with the COVID-19 and economic crises, CAF is lending to several countries in the region but so far Cuba has not been a recipient. One of CAF’s priority areas is support for micro and SMEs, which would be great for Cuban selfemployed workers that manage such microbusinesses, but it is doubtful that the Cuban government would allow its citizens to accept such assistance. 2. Bilateral Aid from Developed Countries: Russia, China, United States The chances that in the midst of the global recession, Russia or China would replace Venezuela or grant billiondollar loans to Cuba is almost nil. In 2018 Russia was Cuba’s seventh-largest trading partner. Its trade of goods reached 3.3% of the total. Its deficit in the trade balance of goods amounted to $430 million, the largest since the Russian Federation was created (Cuba imported $440 million and only exported $11 million), while professional services did not factor in as the Kremlin does not buy such services. However, in 2017 the trade of goods with Russia had risen 95%, after a four-year decline and stagnation — the increase was only 20% over 2007 (ONEI, 2019). In November 2018, Havana signed several agreements with Moscow concerning modernization of electricity production and steel; rail transport; exploration of bituminous oil deposits; and recovery of citrus production. The amounts of these projects were unknown and several of them had been agreed upon earlier. In October 2019, Russian Prime Minister Dimitri Medvedev visited Cuba and signed eight agreements — some of them related to previous ones — providing some data on the amounts: renovation of the railroad system including selling 75 locomotives — 51 had been delivered already ($2 billion, but only $200 million by 2020); offshore oil prospecting by a Russian company ($100 million); application of atoms to medicine in agriculture (not energy); and selling military equipment ($43 million) (Granma, October 7 to 18, 2019). The revealed sums of short-term aid totaled $343 million. Although this aid is important to Cuba at this difficult juncture, it accounts for only 14% of the $2.5 billion in foreign investment that the island needs annually and represents only 4.3% of the $8 billion provided by Venezuela. Russia has supplied oil to Cuba that was partly paid for by Venezuela. It is virtually impossible for Cuba to pay for the value of Russian imports because production 39

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of sugar, nickel, citrus, tobacco and fisheries — which constituted Cuban exports to the USSR in the 1980s — have declined sharply (see II-B), and it is unlikely that Cuba will compensate Russian oil with exports of doctors and other professionals, who would have to learn the language. In addition, Venezuela pays Cuban doctors up to seven times more than an average Venezuelan doctor. Russia’s GDP slowed down to 1.6% in the first quarter of 2020 (the world price of oil has dropped dramatically) and the IMF projects a GDP decrease of 5.5% for the entire year; Russia’s number of COVID-19 cases is rising (it is now the fastest growing in the world after Brazil and the United States), so there will be more shutdown measures and a recession. Cuba still owes Russia $3.2 billion after the condonation of $29 billion in debt the island accumulated with the former USSR. China could be another potential replacement: It is Cuba’s second trading partner, with a 16% share in total goods traded, but in 2018 said exchange was 1% below the 2017 level and 23% below the 2016 level. The trade deficit with China was $1.1 billion (Cuba imported $1.5 billion and exported only $456 million), 23% of Cuba’s total trade deficit, the largest after Venezuela’s (ONEI, 2019). Relations between Beijing and Havana have strengthened in recent years, with an agreement signed in 2017 worth $164 million to acquire Chinese construction equipment and a $129 million donation for cybersecurity. However, these sums are minute when compared to huge Chinese investments in Latin America, especially in large countries that produce raw materials needed by China. By contrast, Cuba has virtually no products to export to China — except 400,000 tons of sugar that must be sent annually — and it is even more difficult for it to export professional services, for language and cultural reasons. Finally, China is going through a period of slowing economic growth — the 2018 growth rate was the lowest since 1990 — and Trump’s raising of tariffs also had an adverse effect on the Chinese economy in 2019. China suffered a 7% decline in its GDP in the first quarter (a positive rate of 2.5% in all of 2020 is projected, but this would be the lowest in the last 44 years). Nevertheless, Beijing has offered $2 billion in aid to developing countries afflicted by the pandemic, yet so far has resisted debt forgiveness and has imposed harsh conditions on loans, such as high interest that Cuba would not be able to pay, as well as collateral guarantees in the event of default. Cuba lacks the assets to provide such guarantee for a substantial loan: its industry has been decapitalized, in particular the sugar industry whose production in 2018 was 82% lower than in 1989; the nickel industry partially recovered with the investment of Sherritt International Inc., which holds 49% of

the shares, but its production has declined in recent years; the tourism industry is based on foreign investment (mainly from Spain and international consortia such as Kempinski) so that China would have to negotiate with them; the largest asset is the port of Mariel whose investment was about $734 million and is the key to any future economic development. In addition, China reduced its trade volume with Cuba by 23% in 2015-2018 (ONEI, 2019). In summary, although Russia and China could provide some minor economic aid to Cuba, none of them would replace Venezuela Concerning aid from other developed countries, there is a severe obstacle: Cuba’s default in 2019 of $33 million on the restructured debt to the Paris Club and likely default in 2020, as well as the possible imposition of 9% interest on the unpaid debt. This makes it doubtful that Club members, who suffer from recession, would grant new loans or forgive past-due payments. Havana’s best hope would be for the Club not to decree a default and to hold its interest of 9%. Finally, the Democratic candidate for the U.S. presidency Joseph Biden has said that, if elected, he would return to Obama’s normalization policy, which helped Cuba considerably, especially with the leap in American tourism. If Biden succeeds in November, he would not take office until January and the return to detente would take time to design and implement; in the optimal scenario, Cuba would have to wait a year to benefit from any potential help from the United States.

C) PROPOSALS OF INTERNATIONAL AND REGIONAL ORGANIZATIONS AND THEIR APPLICABILITY TO CUBA This section examines the economic and social policies to confront the crisis recently proposed to Latin America and the Caribbean by ECLAC (2020) and the IADB (2020), and explores their potential implementation in Cuba. According to ECLAC, the pandemic will cause a bigger economic contraction in the region than that of the Great Recession of 2008. Both agencies point out that the regional economic situation before COVID-19 was weaker than in the 2008 crisis; Cuba is included in that observation as was analyzed in section 1. 1. Economic Measures • Government-funded rescue packages. Most governments in Latin America have implemented domestic rescue packages to revive their economies or at least avoid a deepening recession. Because of the current crisis, Cuba lacks the resources to finance a substantial package: “The government has already used its reserves and

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fiscal maneuver room to soften the blow of previous shocks. Therefore, its capacity to unleash an economic relief program is close to zero” (Cuba Standard, 2020: 4). A substantial monetary emission combined with the widespread shortage of goods would lead to strong inflation that would further destabilize the country’s finances and trigger prices that are already high compared with devalued wages and pensions that have not regained their 1989 level, despite the 2019 increases.27 A short-term debt issuance by the Central Bank to finance such a package is also difficult because said debt is already very high; long-term debt could be issued, but such peso bailout is limited because Cuba’s CUC is not really convertible and its value is rapidly declining, so there is little that most enterprises can do with that type of financing. Opening of side lines of credit: The self-employed unsuccessfully asked the government for credit at low interest to buy inputs, pay debts and protect employee wages (AUGE, 2020). Tax relief: Cuba has suspended the payment of license taxes by the self-employed when they have had to shut down their microenterprises, and also postponed the payment of social security fees without interest; some such taxes having been cut by as much as half. The request for a tax holiday of two-three months and permanent elimination of the tax on the labor force that is a barrier for job creation was made in vain. (AUGE, 2020). Suspension of payment of electricity, gas and water tariffs: This measure has been limited to vulnerable groups such as those with chronic diseases and nursing homes for the elderly; the self-employed requested condonation of owed taxes and public utility tariffs but they were not granted (AUGE, 2020). Issuance of subsidized loans or credit to help companies maintain employment: They were demanded by the self-employed and not granted (AUGE, 2020). Liquidity mechanisms for small and medium businesses (SMEs): Some measures have been announced for the self-employed, but they have not been implemented (Torres, 2020).

• •

Lower interest rate by central banks: This monetary policy is not important in Cuba. Currency devaluation: The exchange rate CUC per U.S. dollar has been devalued by the black market; in October 2019 Cuba partially reintroduced the U.S. dollar for the purchase of some durable consumer goods (such as cars, motorbikes, domestic appliances, etc.) in 77 state stores;28 the government had said that it will not extend such use to other sectors, but in July expanded it to 72 state hard-currency stores and for imports through state agencies — the CUC is no longer accepted in those stores and is becoming increasingly useless (Resolución 73, 2020; Borges, 2020). It is likely that eventually the dollar will become legal tender (as happened in 1994 during the Special Period).

2. Social Measures • Help for the unemployed, establishing or expanding unemployment insurance: Such insurance does not exist in Cuba, however, those dismissed from closed enterprises that cannot be reassigned to other jobs are sent home with 100% of their salary in the first month and 60% in the following months for the duration of the pandemic.29 During the severe crisis of the 1990s, open or visible unemployment peaked at 7.9% of the labor force, but there was also “invisible” or hidden unemployment (redundant labor in the state sector causing low productivity) up to 32% of the labor force. Several Cuban economists have pointed out that the government kept unneeded workers in their jobs to prevent a social explosion, but the postponement of layoffs led to a drop in productivity and wages, which in 2010-2011 forced a measure to lay off more than one million unnecessary state workers (“inflated payrolls”) to be employed in the non-state sector, especially selfemployment. The non-state sector expanded, but not enough, due to legal hurdles, taxes and limitations, hence it only absorbed half a million dismissed workers and about one million were left redundant in the state sector (Mesa-Lago, 2010). The closing of all economic activity in Cuba by the current crisis should increase visible unemployment, but the government is likely to adopt the same policy as during the 1990s crisis and continue

27  In 1989-2018, real wages decreased by 58% whereas real pensions shrunk by 46% (Mesa-Lago, 2019c). In 2028, the state mean wage of 777 CUP only covered half of the cost of the basket of goods and services whereas the mean pension only covered one fifth of it (ONEI, 2019; Anaya and García, 2019). 28  These stores had markups of 140% whereas the new stores created in 2020 raised them to 240% (Pérez-Villanueva, 2020d; Amor, 2020). 29  In addition, employers of SMEs that has continued to work but at a reduced level, must pay their employees proportional wages to the time they have worked, and the sum cannot be lower than the minimum wage (Ministra de Trabajo…, 2020). 41

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to pay wages at least temporarily. It’s unknown what would happen if enterprises are shut down permanently; if workers kept receiving wages there will be another slump in productivity and real wages (which adjusted to inflation in 2019 was 46% below the 1989 level), which will create a severe problem after the recovery, as happened in 2011 and was never fully resolved. Expansion of social assistance to protect vulnerable groups afflicted by the crisis through universal and temporary transfers and distribution of food: In 20072018 poverty grew in Cuba, demanding an expansion of social assistance, but instead such assistance was cut from 5.3% to 1.6% of GDP and reduced from 2.1% to 0.3% of the total population (ONEI, 2008 a 2019). The government has expanded the definition of vulnerability but has so far not published statistics comparable to previous series in order to determine whether there has been an increase in beneficiaries, and it is very difficult to reverse the previous declining trend due to the crisis and lack of resources. Neither universal cash transfers nor free distribution of food are feasible; food packages are sold to certain groups of the population. In the face of the growing shortage of food and other consumer goods, rationing is expanding, opposite to the previous contraction as part of the structural reforms of 2007-2017.

D) STRATEGIES FOR FUTURE SUSTAINABLE ECONOMIC DEVELOPMENT The Cuban government can do virtually nothing to change the external factors causing the crisis, hence it should concentrate on changing the flawed internal economic model. Cuban academic economists have a consensus that the proper model for the future should be a mixed economy, but there is no clear agreement on the roles of the state, the plan and state enterprises on one hand and the market and private property on the other. Herein we explore three potential paths for sustainable development in the future, with increasing degrees of change: 1) Flexibilization of the current model with higher roles for the market and the non-state sector; 2) Sino-Vietnamese path (market socialism) adapted to Cuban characteristics; and 3) a predominant market model but with substantial state

regulation and a role in production. It is assumed that lesser degrees of change less would bring less-positive results. 1. Making the Current Model More Flexible This first alternative would not require a radical reform of the current model, but would imply a greater acceleration or increased flexibility of previous and current policies or the implementation and expansion of the 2020 strategy (the policies recommended below explain how they go further than those in the 2020 strategy). The Cuban government talks about “unleashing the productive forces” but has been vague about the meaning of that phrase.30 Cuba’s National Association of Economists and Accountants submitted to president Díaz-Canel proposals to revitalize the economy by “unblocking it,” including a law for enterprises, decentralization of foreign trade and greater state business autonomy (the latter two are outlined in the 2020 strategy) so they can choose their management model, determine prices, salaries and investment. Cuban economist Monreal welcomed these measures but observed that they failed to address the reform of central planning, with the thought that technical improvements in management may circumvent that key issue (AFP, February 11, 2020).31 Expansion of non-state and private sector. There is a wide consensus among Cuban academic economists on the need to expand the non-state sector (particularly self-employment and small and middle enterprises: SMEs), which was very dynamic before COVID-19 and will be essential in the recovery, in the creation of productive employment and in the elimination of redundant state employment. To achieve that end such economists recommend enacting immediately the law regulating private enterprises and associations that was postponed by the 2020 strategy and now is scheduled for 2022; replacing the list of authorized self-employed activities with a list of banned activities; authorizing university graduates to work as self-employed in their own professions and eliminating excessive barriers to the non-state sector; establishing wholesale markets (even managed by foreign enterprises) to supply needed inputs to the non-state sector; creating banks — and allowing in foreign banks — that provide micro-credit to the non-state sector and also state training to the latter; allowing the non-state sector to import and export directly (the 2020 strategy does this indirectly

30  Laureated Cuban novelist Leonardo Padura (2020) has asked: “If the leadership wants to unleash the productive forces, what impedes them to do so? Are they afraid of neoliberalism or that unwanted reactions are caused by those actions? Are they concerned that a street vendor will become a millionaire?” 31  Minister of economics Gil has said that planning should be “flexibilized” but maintaining its centralized management (Cuba Standard, Fourth Quarter 2019, p. 5) 42

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though monopolistic state enterprises); eliminating the toughest taxes on SMEs; imposing levies on profits rather than on gross revenue and permitting the full deduction of expenses; ending the experimental stage for NASC, approving more such cooperatives (promised in the 2020 strategy) and authorizing second level co-ops (for instance, NASC that provide services to first level co-ops); empowering the private and cooperatives sectors; authorizing an independent association of SMEs with power to negotiate conditions with the government and get involved in pertinent legislation; and creating a channel to denounce corrupt state officials that collect bribes from non-state workers (Mesa-Lago, 2019b; Díaz, 2020; Torres, 2020b). Monreal (2020a) asserts that the SMEs represent the best channel to raise employment and productivity in Cuba in the short term and help substantially in the economic recovery, hence they should be legalized right away by an enterprise law. In 2008-2019, the non-state sector increased net employment at an annual rate of 4.9% achieving 31.8% of national employment in 2019; 86% of the non-state sector employment is made up of self-employment (SMEs) and private agriculture. In 2008-2018, the state sector lost 25% in total employment, whereas the non-state sector added 75%, out which the private-sector share was 60%. The legalization of the private sector and subsequent elimination of the current limited activities that impede the development of that sector’s technical capacities would fully utilize that key productive resource. Monreal estimates that employment would increase from the current 600,000 to 800,000 in six months, whereas productivity would rise (in two different scenarios) from either the current 15% to 20% or from the current 20% to 25%, and the added contribution of the private sector to GDP would be 1.5% or 1.7%. Policies proposed to decentralize agriculture are, among others, the elimination of the acopio system; the granting of autonomy to farmers of all types, including private, usufructuaries and members of agricultural cooperatives; the provision of micro credit to usufruct farmers to clean and plow their parcels. (None of them is included in the 2020 strategy). Foreign investment. There is also a consensus among Cuban academic economists on the need for foreign investment in all sectors of the economy (perhaps excluding social services) but with changes such as permitting foreign investment (including Cubans abroad) in micro, SMEs and NASC; letting foreign companies directly contract and pay their employees; implementing monetary and exchange-rate unification; and publishing in a transparent manner updated

statistics in key areas where there are gaps, in order to instill confidence abroad, such as on the balance of payments, the total external debt (not just the negotiated), the debt to external suppliers and direct foreign investment; explaining how the CPI is calculated (including transactions in CUC that are now excluded); and releasing more detailed data on public finances (Monreal, 2018b; Pérez Villanueva, 2018; Mesa-Lago, 2020b). None of these measures were included in the 2020 strategy that virtually ignored FDI. To diversify and ensure inventory in hard-currency state shops, Pérez Villanueva (2020d) suggests the licensing of international chains, such as Carrefour, Auchan/Alcampo, Mercadona, etc., allowing them to establish outlets in Cuba, with the obligation that a percentage of sales goes to the state as a sales tax, another percentage would cover the operational costs of the chains and another the cost of the products (not included in the 2020 strategy). Sales could not be in CUC but in hard currency or using the new magnetic cards against bank checking accounts in hard currency. Banking system. The role of the Central Bank and its dependent banking system should be enhanced so that commercial banking becomes the financier of state enterprises instead of the state through the budget. Banks would grant loans to enterprises with interest and both have to be paid back, hence the enterprise must have profits and these should be assessed by the bank before providing a loan; if the enterprise does not pay and lacks resources, it should be shut down — a bankruptcy law is needed for that purpose (Benavides, 2020). New functions of commercial banks should be to obtain commercial hard-currency credit to finance client enterprises; b) to make available to all state and private enterprises as well as co-ops bank accounts in both national currency and hard currency — the latter to be able to import and export through their banks; c) and in the case of a special agricultural bank, to get resources from international banks to invest in micro, SMEs and co-ops in order for them to increase their production and exports. In turn, the Central Bank should be trusted with the negotiation of all Cuban debt with international creditors (banking credit is cheaper than commercial credit) as paying such debts fully and promptly is essential to guarantee confidence in the nation abroad. In addition, financial entities (not banks), subordinated to the Central Bank, should finance hardcurrency imports of exporting enterprises, ad hoc financial entities could be entrusted with financing key industries such as nickel, sugar and tobacco, as well as the ZDEM. A few of these measures were outlined in the 2020 strategy but lacking concrete guides for implementation. 43

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Monetary and exchange rate unification. Some economists propose monetary and exchange-rate unification without harming the population, an integral reform of salaries and pensions, and comprehensive price reform. However, as the following section demonstrates, monetary unification, wage increases and price reform won’t be sustainable without profound economic reforms to increase production and supply. This issue strongly suggests that the flexibilization of the current model alone, without deeper reforms, won’t solve the crucial problems of the Cuban economy. The former director of the central planning board Humberto Pérez (2020), in a recent debate on the ways to unification, disagrees with the above opinion: “My proposal for monetary and exchange rate unification combined with a raise of salaries and pensions, won’t have to wait for an increase in production and supply, neither for a GDP growth of 5-6% nor for the officially needed $2.5 billion in foreign investment nor for external financing” (p. 4). His proposal starts with the elimination of the CUC, in a 2-3month period, both in the population and in the enterprise sectors. The population that has CUC in cash or in banking accounts should change them for CUP whereas state enterprises and co-ops should shift their accounts to CUP, and the annual plan be recalculated in CUP. The exchange rate to be set by the government should be lower than the current rate of 1US$=24 CUP, for instance 1US$=15 CUP.32 Simultaneously there will be an integral salary and pension increase setting the minimum wage at 1,000 CUP, the median wage at 3,000 CUP (about four times the current median) and the minimum pension at 1,000 CUP (about five times the current one). After this process is completed, a reform of wholesale prices would be implemented by successive approximations. The new system would start on the first day of 2021. Pérez predicts that there would be a significant increase in enterprise costs because hard-currency imports would be paid with a devalued CUP, hence wholesale and retail prices will also rise, which would hurt the population. He argues, however, that losses would occur only in net importing enterprises but not in those that are net exporters of goods/services. If the net result is a surplus in the balance of goods and services, the state would centrally compensate, temporarily, gains and losses among enterprises, hence avoiding both an increase in retail prices

and damage to the population. In this point he disagrees with Pérez Villanueva (2020d) who predicts strong inflation and retail price increases that would hurt the population and force a higher increase in salaries and pensions. Humberto Pérez does not address however what would happen if the net result is a deficit in the balance of trade and services, which seems to be what would occur during the current crisis in view of the previous declining trend in such surplus.33 In order to finance the initial parallel wage increase, it would be necessary to penalize those in the population that receive foreign remittances or earnings in hard currency (Pérez argues that they are a “privileged minority” but according to official data they are two-thirds of the population) because the exchange rate would be with a devalued CUP, hence they would be the losers as there would be a transfer from them to the winners who are those that do not receive hard currency (and benefit from wage-pension increments), alas, he concludes that inflation would not take place. 2. The Sino-Vietnamese Path of Market Socialism as an Option in the Cuban Environment Cuban economist Ricardo Torres (2020) states about the need for deeper reforms: “... an extreme situation like this [the current crisis] should serve as a catalyst for the transformations required by the Cuban model... it is time to recognize that the current production and distribution scheme is a resounding failure and needs to be revised from its fundamentals.” In this section we therefore discuss the Chinese and Vietnamese reforms from the perspective of representing possibilities of medium-sized reforms that could be undertaken in Cuba. In Section 3, we then examine the lessons from the more fundamental Central-Eastern European transitions from plan to market relative to the transition in Russia and the other countries of the Newly Independent States (former Soviet Union), China and to a lesser extent also Vietnam. The experiences with the various reforms and transitions provide a menu of options that could be used by policymakers in Cuba and elsewhere. One option is for Cuba to follow, with some adjustments, the Sino-Vietnamese economic model, called by various analysts and observers “market socialism” or “socialist market.” This

32  Pérez Villanueva, 2020b, notes that such change would significantly increase the purchasing power of the population to buy consumer goods sold in hard currency in state shops, hence either their prices would have to be increased to match the added demand or the government import such goods, which is almost impossible now. 33  Monreal et al, 2020 ratifies this point: “the current surplus is insufficient to generate the revenue required to pay the foreign debt.” Benavides et al 2020, adds: “the only realistic possibility to increment the supply of consumer goods is in the private and cooperative sector in agriculture, they must be liberated of state-imposed cap prices, which was one of the gravest errors committed in recent times.” 44

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Figure 9. Structure of World Economy in 1978, % Based on GNI in USD and current prices

Figure 10. Structure of World Economy in 2018, % Based on GNI in USD and Current Prices

2% 2% 2% 2% 3% 3%

2% 2% 2% 2% 2% 2%

6% 6% 29%29%

9% 9% 11%11%

20%20% 25%25%

EU EU USAUSA RoWRoW Japan Japan Russia Russia Brazil Brazil Russia Russia India India

25%25% 16%16%

24%24%

22%22%

RoWRoW USAUSA EU EU China China Japan Japan India Brazil Brazil India

Russia Russia

Source: WDI and Maddison Project Database (for Russia) as reported in Svejnar, 2020

Source: WDI as reported in Svejnar, 2020

model combines state and private ownership of firms of various sizes with the political rule of the Communist Party, as is the case in Cuba.34 As we discuss in Section 3, the more recent developments of the Chinese model tend to emphasize private property, market forces and more indirect government regulation of the economy, with the model often being called “state capitalism.”

compared with Cuba’s annual average of 2.5% in 2007-2019.

Economic performance. When China and Vietnam began their market-oriented reforms their GDP per capita were respectively 12 and 6 times lower than Cuba’s (Monreal, 2018d). And yet, for over 40 years China has had the highest economic growth rates in the world (9.5% annual average in 1993-2019), and Vietnam averaged 5% in 1995-2019

Importantly, as may be seen from Figure 11, in terms of GDP growth, China is quite phenomenal and surpasses all the rapidly growing economies of recent decades.

Focusing on China, it is clear that its economic rise over the last four decades has been nothing short of phenomenal. Deng Xiaoping launched the reforms in 1978. At that time, China is estimated to have accounted for only 2% of the world Gross National Income (GNI), measured at current exchange rates (see Figure 9). Yet, by 2018 China’s share stood at 16% (Figure 10) and has grown since then. During the same time period, the share of the United States (USA) decreased slightly from 25% to 24%, while the shares of the European Union (EU) and Japan dropped dramatically from 29% to 22% and from 11% to

34  Another Asian country that has adopted market socialism is Laos that have had one of the highest GDP growth rates in the world (7.6% annual in 2008-2017 higher than Vietnam). It was very poor before the reform but has been able to reduce poverty and improve food self-sufficiency, education and health; the reform replaced the central plan by the market and an active private sector, opened the economy to trade and foreign investment, liberalized prices in agriculture, gave more autonomy to state enterprises, and unified multiple exchange rates (Monreal, 2018e). 45

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Figure 11. Fastest Growth Spells in the World Economy

10%

8%

Even faster growth rates achieved occasionally by countries recovering from severe problems, e.g. from wars

6%

4%

2%

Ch ina (19 82 -20 11 ) Ko rea (19 66 -19 95 ) Sin ga po re (19 65 -19 Ch 94 ine ) se Ta ipe i (1 96 3-1 99 2) Jap an (19 51 -19 Ho ng 80 Ko ) ng ,C hin a( 19 62 -19 91 ) Th aila nd (19 66 -19 95 ) Ma lay sia (19 68 -19 97 ) Ind on esi a( 19 68 -19 97 ) Ind ia ( 19 82 -20 11 )

0

Source: OECD Survey of China, 2013.

6%, respectively. For several years now China has been the second largest national economy in the world.

that introduced significant economic decentralization and a rapidly growing market economy.

What accounts for China’s rapid growth over the last four decades? One reason is the rise of a new political leader, Deng Xiaoping, who had a vision for a shift in the economic paradigm. Among the economic factors, the first one to consider is the fact that China started its transformation from a very low base. While it is estimated to have been the most advanced economy in the world as late as 1820, it experienced long-term stagnation that was later exacerbated by conflicts with Western countries and Japan, civil war and the costly economic and social experiments — the Great Leap Forward and Cultural Revolution — under communism after 1949. Since 1978 China has maintained centralized political control, while instituting effective economic reforms

Vietnam carried out less fundamental reforms during the last several decades, but it made major steps forward by attracting foreign investment and allowing small and medium sized private firms to operate relatively free of government interference. Comparisons between Cuba, China and Vietnam. A comparison of economic statistics across Cuba, China and Vietnam is instructive. As a percentage of GDP, Chinese gross fixed capital formation averaged 40% annually in 1985-2018, whereas Vietnam averaged 31% in 1995-2018, vis-à-vis 10% in Cuba in 2007-2018, respectively four times and three times the Cuban average (World Bank, 2019 for China and Vietnam;

46

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Figure 1 for Cuba). Chinese reforms were implemented 29 years after the Communist Revolution, compared to 30 years in Vietnam and 48 years in Cuba. The Chinese and Vietnamese reforms also were much faster and deeper, delivering quicker and better results. The case of Vietnam is particularly important for Cuba because the former was under a U.S. embargo for almost two decades and began its economic reforms still under such an embargo and without access to aid from international financial organizations (Vidal, 2015). There are also other significant differences between the two Asian countries and Cuba: China has a much larger territory and the highest population in the world, and, at the time of the reform, agriculture was much important in China than in Cuba. In addition, since the early 1980s China has enjoyed sizable foreign investment. Vietnam also has a larger territory and population than Cuba (albeit the difference is not as big as with China), the Vietnamese non-state sector contributed 60% to GDP and 85% to national employment (there were fewer large state enterprises in Vietnam than in Cuba); agriculture contributed 40% to GDP; the USSR was economically helping and the Soviet collapse did not cause as significant economic disruptions as it did in Cuba because the Vietnamese reform had already started (Vidal, 2014; Monreal 2018d). These features are very different from those of Cuba, where the non-state sector contribution to GDP is less than 10% and its contribution to national employment is 32%. In comparison, agriculture contributes 3.7% to GDP (ONEI, 2019). Finally, Cuba is enduring a drastic decrease in Venezuelan aid, Trump punitive measures and a severe economic crisis. Agricultural reform. A fundamental starting step would be reforming agriculture, which is the weakest link in the Cuban economy. Armando Nova (2013, 2020), Cuba’s best-known agricultural economist, documents the current situation: 88% of the national output of food of vegetal origin is produced by the non-state sector, out of which 79% is by the private sector and the most independent cooperatives (CCS), they also produce 35% of the output of food of animal origin and 65% of milk output. Historically, the government tried to increase food production with a centralized model that was not successful; as part of the structural reforms, state idle land was transferred to farmers (usufruct) but agricultural production had a declining annual output; due to increasing demand and diminishing supply, prices increased; a rising amount of food imports ($2 billion in 2018) was necessary

to cope with food scarcity; that was equivalent to 21% of the value of total imports and was required to cover from 65% to 69% of domestic food needs; those percentages could be reduced from 35% to 40% if internal productive capacity was fully utilized: “Now more than ever, there is a need for innovative, daring [decentralization] measures instead of the current pushing for centralization that leaves very scarce margin for decision-making and autonomy to agricultural producers…The current centralized model in agriculture must be replaced by a totally new model” (2020: 3-4). Nova then recommends two key measures to achieve that goal: a) agricultural producers must feel that they are real owners and, for that, three rights should be granted to them: plant what they want, sell all their crops to whomever they please, and let prices be set by supply and demand (these rights will eliminate the current high monopolist and vertical centralized decisions and shift them to autonomous decision makers); and b) recognize the real and objective existence of the market to complement the plan. Such a model was applied in China and Vietnam ending their periodic famines and making Vietnam a net exporter of agricultural products. For example, it sells 350,000 tons of rice to Cuba, which the island could produce. This transformation would allow Cuba to become self-sufficient in food production in six or seven years, survive the current crisis, end the annual importation of $2 billion in food and become a net food exporter. The reform would require the elimination of acopio, the mandatory collection system that is criticized as inefficient and a disincentive even by some official authorities: compulsory state purchases of most crops at prices set by the state below the market price. The privatized agricultural segment should be expanded to unleash productive forces (Monreal, 2019).35 In 2020, the League of Independent Farmers sent a letter to President Díaz-Canel reinforcing the above arguments, asking for a dialogue and not to be silenced and requesting autonomy for the production and distribution of harvests, to set prices by the market, to import and export directly (even from the United States, because the embargo law does not prohibit it) and for elimination for 10 years of all taxes on food producers and processors and the delivery of permanent ownership titles to all agricultural producers (LCI, 2020). Plan and foreign trade decentralization. The Sino-Vietnamese model relies on a decentralized plan, which is not a straightjacket as Cuba’s central plan is, but a guide for development that informs the economic actors of the intended state

35  As part of Raúl’s the structural reforms, there was an attempt to reduce the acopio in four eastern provinces (including Havana), but due to rising prices of consumer goods by intermediaries and sellers, the acopio was reintroduced and increased in 2016, capping minority selling prices (Resoluciones 157-C y 162, 2016). 47

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actions in the middle term in order for such actors to make informed decisions (Mesa-Lago, forthcoming). Both Asian countries have significantly decentralized foreign trade, moving away from the previous monopolistic state control towards more decentralized decision-making and autonomy to enterprises both state and private, national and foreign. These are topics that we discuss in Section 3 below. Ownership, enterprises and private sector. In Cuba, China and Vietnam, the state retains land ownership, but in the two Asian countries virtually all agriculture is managed privately, by individuals, families, autonomous co-ops or villages. Contracts are for 50 years or an indefinite time (versus Cuba’s 10 years renewable under tight conditions for usufruct). There is freedom to hire workers, and investment is not limited. China’s ownership rights are larger and more liberal than Cuba’s. Due to the rapid process of privatization, by 2005, 50% of China’s GDP was generated by the private sector and soon reached 70% (Brandt and Rawski, 2008). In Vietnam, the “Strategy for Socio-economic Development 2001-2010” promoted the evolution of an economy with multiple forms of ownership. The central committee of the Communist Party enacted a resolution in 2017 setting rising goals for the contribution of the private sector to GDP from the current 40% to 50% in 2020 and 60-65% in 2035 (equivalent to 2 million private enterprises). On the other hand, the ministry of planning and investment set a target of 375 state enterprises to be privatized by 2020. The current enterprise law of 2015 (the third one, none has been enacted in Cuba yet) allows full freedom for enterprises to engage in any activity not prohibited and they can expand into new activities without previous notification to the authorities as once they have been established they can change their registry. The latter has been simplified and any change only takes three days to process (Monreal, 2018d). This is opposite to the Cuban law where only specific activities are allowed to SMEs and the expansion to others is not allowed and procedures are quite lengthy and bureaucratic. The Chinese property law of 2007 permits national and foreign investors to own constructions on state-owned land and, once completed, grants the right to sell, lease and mortgage such rights for 70 years, automatically renewable for residences, or 40-50 years for industrial and commercial businesses. Foreign permanent residents don’t have restrictions on the number of houses they may own, and big international groups (Blackstone, Morgan Stanley, Goldman Sachs) have realty branches in China. Such property rights have led industry to make huge profits from a frenzy of eager buyers (many foreigners) that keep real estate prices bubbling (Palli, 2013; Xianglin, 2013).

Foreign investment. It took China and Vietnam 30 years to open to foreign investment but 45 years for Cuba, made possible by the passage of a law in 2014 that is considerably more restrictive than China’s and Vietnam’s at a similar time period. Instead of Cuba’s one special development zone, China started with six in 1980 and four years later added 14 coastal cities with such zones. Vietnam also has several development zones. An objective of the Chinese and Vietnamese opening to foreign investment was to attract capital from their citizens abroad, and it was quite successful, whereas Cuba has not done so. Legally, the two Asian countries allow foreign investment in all sectors (in Cuba social services are excluded), but China and Vietnam avidly seek it as an integral factor in development while Cuba sees it as “complementary,” with specific priorities tied to the needs of the country and excluding vital social services, as well as giving preference to international economic associations and large companies. In Vietnam since 2015 there is a “negative list” that identifies those activities were private investment is banned (these were reduced from 51 to six), while all other activities are permitted. Foreign investment flowed to China after domestic investment had developed and growth had started, none of which is the case in Cuba (MINCEX, 2014; Pérez-López, 2014, 2018; Monreal, 2018d; Pérez-López and Xiao, 2018). Employment. In the Sino-Vietnamese reforms, employment in the private sector goes beyond self-employment and cooperatives, engaging wage workers, and professionals can work on their own or in the private sector. Early in the reform process, China had regulations for joint ventures to hire their employees, but salaries were set as percentages of a salary range in the location, and employers were free to dismiss workers. These regulations were less stringent than Cuba’s and were relaxed later (Pérez-López and Xian, 2018). About 75% of China’s employed labor force is in private enterprises and self-employment; they contribute from 50% to 60% to GDP; cooperatives are autonomous and usually own their business (Xianglin, 2013). In Vietnam there were 610,000 private enterprises in 2017 (vis-à-vis 2,700 state enterprises) that contributed 40% to GDP (vis-à-vis 30% state enterprises) and generated 85% of the new jobs created (from 1.3 to 1.5 million posts). In Cuba the non-state sector share of total employment was 32% in 2018 and the private sector was 21%; the latter contributed less than 10% to GDP. The percentage distribution of Vietnam employment by type of enterprise was 60% non-state enterprises, 29% enterprises with foreign capital and 11% state enterprises. The distribution of enterprises by capital was 49.8% non-state enterprises, 31.4% state enterprises and 18.8% enterprises

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with foreign capital (Montreal, 2018d). These advances obviously go well beyond the modest measures recommended in the previous section. Although there is still some surplus labor in China, the process of privatization and competition have largely eliminated it; the unemployment rate has been stable since 1990 at an annual average of 4.4%, 4.3% in 2019. In Vietnam open unemployment was even lower 2% in 2019 (ILO, 2020). Monetary and exchange rate unification. Unification of the dual currency and exchange rates in Cuba has been under discussion for at least 10 years, a resolution was enacted to guide the process back in 2018, and a couple of times the government has announced the start of the process without fulfilling such promise (for a recent discussion on monetary unification see, Benavides, Carranza and Monreal, 2020; Pérez, 2020; Pérez Villanueva, 2020b, 2020d). In pre-communist China several currencies circulated mostly denominated yuán but with diverse names. In 1948, the People’s Bank of China started to issue a unified currency for the controlled territories, denominated yuán but also with different names until 1949 when they were unified into the renmimbi (RMB). In 1978 a dual-track currency treatment was established: the RMB used domestically and foreign exchange certificates for foreigners. In 1993, the dual-track system was abolished and the RMB made more convertible and with more realistic exchange rates with subsequent devaluations (Horesh, 2011). In 2010-2013, there were successive steps to make the RMB internationally convertible with the ruble, the Japanese yen, the Australian dollar, the British pound and the European Central Bank. Currently, the RMB is the 8th most internationally traded currency. In Vietnam, between the unification in 1975 and 1989 there were many currencies until one only currency (dung) was adopted. In addition, there were even more exchange rates until they were unified in 1989, at the same time that the economic reform (Doi Moi) began moving from a central planning towards a decentralized market-oriented system. At that time there was a severe economic crisis, a huge food deficit, rising inflation and large deficits both fiscal and in external trade. There were successive devaluations in several exchange rates prior to the unification into one single official exchange rate (“big bang”) — while in 1986 the parallel market rate was 2.3 times the official rate, in 1989 both converged; there were many devaluations in the previous two years but in 1989 it was only 22% (several devaluations followed); inflation that was very high, decreased from as much 487% in 1986 to 28% in 1989 and then became

negative; that year GDP grew by 8%, agriculture by 7% and services by 17% compensating the decrease in industry. Lower inflation in Cuba (save for the 1990s) is an advantage, but repressed inflation is quite significant. Vidal (2014) predicts that the unification and the market-oriented reforms would increase inflation considerably. Vietnam had an advantage over Cuba concerning unification: the Cuban gap between the official exchange rate in the state sector (1CUC=1CUP) and the rate in Cuban exchange agencies (CADECA: 1 CUC=24 CUP), is 2,300% compared with the Vietnam gap at the time of the unification between the official and black-market exchange rates (Vidal, 2014). On the positive side, Cuba had higher fiscal deficit than Vietnam in the 1990s, but thereafter the deficit decreased at least until the current economic crisis. Cuba also has expansive land resources that are not properly utilized and a well-educated labor force also underutilized. The most important lesson of the Vietnamese unification was that it was accompanied by a profound economic reform that so far is not taking place in Cuba. Therefore the urgency of undertaking several reforms on the island that have been proposed before and should precede monetary and exchange unification, such as: a) agricultural reform (including elimination of the acopio) to achieve food self-sufficiency and contribute more to GDP; b) establishment of a legal framework to solidify and expand SMEs; c) more autonomy to state enterprises; d) elimination of the state monopoly of foreign trade, allowing all exporters to export and both state and non-state enterprises to import intermediary and capital goods; and d) more flexible rules to attract FDI, particularly from the Cuban diaspora. In addition, successive devaluations should precede the unification (Monreal, 2018a). Because of the high number of Cuba’s large state enterprises, the unification process should be more gradual than in Vietnam and it may take more years; to ameliorate inflation, fiscal restraints and labor adjustment (including an integral salary reform) as well as liberalization would be crucial (Vidal, 2014). In order to match the significant increase in prices of consumer goods prompted by unification and devaluation, it will be necessary to raise wages (and pensions) in tandem (Pérez Villanueva, 2020a).36 However, Carranza (2020) notes that such wage increases would only be sustainable in the medium and long term if the proper conditions are created to significantly increase the supply and respond to the rise in purchasing power. If this were not achieved, another increase in official or black-market prices would occur leading to a vicious circle. This stresses the fundamental importance of conducting a deeper reform.

36  In the Spring of 2020, list of food price increments resulting from monetary unification were circulating in Cuba, based on those increments Pérez Villanueva estimated that the current state median salary should be risen by 275%. 49

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Monreal et al (2020) amplifies that important point: “Monetary devaluation would not have sense if the production units lack the conditions to increase supply, which is the case in current Cuba’s economy, and that such production units be the oxen capable of pulling the devaluation cart.” Income distribution, poverty and the tax system. A negative effect of the Sino-Vietnamese reforms is a worsening of income inequality. China and Vietnam publish indicators to measure that inequality such as the Gini index, whereas Cuba has not published it since 2003. Although accurate comparisons are not feasible, a Cuban economist argues that the Cuban Gini could be worse than China’s (Monreal, 2018d). One key goal of the Cuban government is to avoid the concentration of wealth and property, inducing a policy to impose many barriers and limitations on the non-state sector and particularly the private one. On the other hand, poverty has declined and living standards have increased in the two Asian countries, whereas the opposite is true in Cuba (Mesa-Lago, 2018), and have become worse under the current economic crisis. Monreal (2018d), considers that poverty incidence in Cuba around 2019-2020 could possibly be 25% of the population, 13 times China’s incidence (1.9% in 2013) and almost nine times Vietnam’s incidence (2.8%). Even if inequality is lesser in Cuba, a key question is what is worse: lower poverty and higher living standards cum income inequality, or higher poverty and lower living standards cum less inequality. Actually, income inequality could be substantially reduced through a progressive tax system, imposing higher tax brackets on the richest and using those resources to mitigate poverty and improve living standards among the lowest income groups. The problem is that the Cuban tax system, despite some improvements since 2012, is still highly regressive: in 2018, 51.7% of tax revenue was indirect (came from sales taxes on goods and services) and 48.3% was direct (out of which 16.7% came from enterprise profits and 9.4% from personal income) (based on ONEI, 2019). Taxes on personal income and profits should be raised, but the contributors are mostly in the non-state sector and taxes are a major disincentive to grow.37 Structural changes, technological innovation and challenges. China’s and Vietnam’s key achievements are obviously their ability to avoid the deep “transition recession” that occurred after the fall of the Berlin Wall in all the economies

of the former socialist camp and to sustain fast economic growth over several decades. Increasingly, China has succeeded in spearheading rapid innovation in a number of key areas, including digital technology and artificial intelligence, advances that pinpoint the rising dynamism of and government support for the entrepreneurial part of China’s economy. China has very successfully invested in the development of advanced technologies, with firms such as Baidu, Alibaba and Tencent being widely recognized as world leaders in the technology arena; they are followed by a large number of unicorns, many of which they have created and/ or control. Vietnam has so far not registered a similar rise of advanced technology firms. Structurally, China has succeeded in increasing total factor productivity by reallocating labor from low productivity agriculture to much more productive industry and, later, services, maintaining a high rate of capital accumulation, transfer of technology and know-how, and innovation (including investment in research and development), significantly unifying the fragmented internal market by building up infrastructure and establishing faster transportation,38 and taking advantage of strong external demand and liberalization of external trade.39 Recently, it has also started to liberalize and further develop the financial market, staying a step ahead of Vietnam. China has been tackling its structural challenges, but they still include a relatively low rate of consumption, inefficiency of many state-owned enterprises (SOEs), inefficiency and fragility of the financial sector, high level of corporate and provincial government debt, persistent overcapacity in a number of industries, and an unfinished reform of the exchange rate system. They are aggravated by rising wages, aging population and persistent bureaucratic red tape. From a broader standpoint of economic development, China faces the challenge to avoid what has happened to a number of promising emerging market economies, namely getting stuck in the so called “middle-income trap.” Overall, it is important to realize that even if China avoids major problems, including a protracted crisis brought about by the COVID-19 pandemic, its economic growth is likely to be decelerating, just as has happened in the Republic of Korea, Hong Kong, Taiwan and Singapore in the past. The key is to avoid the long-term stagnation and slow growth that has plagued Japan, an earlier economic juggernaut, over the last three decades. Vietnam is

37  A tax on employment charged to non-state sector employers (mainly self-employed) imposes an increasing tax-bracket based on the number of employees hired, hence punishing those that create more jobs; this tax generates 18% of tax revenue and most economists recommend to eliminate it. 38  China has achieved similar (but more hidden) real unification of its internal market as the EU. 39  China benefitted considerably from joining the World Trade Organization in 2001. 50

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Figure 12. Development of Real GDP in Selected CEE and CISCountries (1989= 100)

210.0 190.0 170.0 150.0 130.0 110.0 90.0 70.0 50.0

Croatia

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovaki a

Slovenia

Russia

Ukraine

12

11

20

10

Bulgaria

20

09

20

08

20

07

20

06

20

05

20

04

20

03

20

02

20

01

20

00

20

99

20

98

19

97

19

96

19

95

19

94

19

93

19

92

19

91

19

90

19

19

19

89

30.0

Source: EBRD Transition Report, various issues

at an earlier stage of economic development and hence not yet expected to experience a slowdown in growth associated with a more advanced level of development.

predominance of state enterprises. Summarizing, the island has a long way to go before achieving the impressive economic results and facing the type of challenges of China and Vietnam.

Cuba lags way behind China and, to a lesser extent, Vietnam in technological innovation, investment in research and development (it is small and declining), transfer of knowhow and innovation, electronic communications (despite some recent advances), infrastructure and transportation, rate of consumption, labor productivity, development of the financial sector (there is no stock exchange in Cuba), real wages (they declined one-third in 1989-2019) and efficiency of state-owned enterprises (for decades, Cuba has unsuccessfully tried to improve the functioning of SOEs applying diverse approaches). Furthermore, in terms of the age structure of population, Cuba is one of the most aged country in the Western Hemisphere, compared to less aged China and a relatively young population in Vietnam. Moreover, Cuba’s bureaucratic red tape appears to be worse than in the two Asian countries due to excessive centralization and

3. Transition to a Market Model with Regulation The transitions in Central-Eastern Europe and the Commonwealth of Independent States — the former Soviet bloc countries — after 1989 constitute another set of possible models for Cuba’s transformation.40 The CEE and CIS countries all started from a Soviet model that has been also characteristic of Cuba. The CEE countries converted their economies relatively rapidly into open market economies with democracy and an adequate system of social protection. The CIS countries remained more closed and authoritarian, while proceeding more arduously and less successfully with their economic transition. In a way, the strategies of the CIS countries resembled that of China in that they were relatively gradual, but they were strikingly less successful in terms of economic outcomes. The transition strategies of the CEE countries, in turn, differed markedly from that of China in that

40  The CEE countries (Czech Republic, Hungary, Poland, Slovakia and Slovenia) are often seen as including also the Baltic states (Estonia, Latvia and Lithuania). They have been more recently viewed as including also the South East European Countries (Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia, Monte Negro, Romania, and Serbia) and termed, jointly, CEESEE. 51

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they were relatively rapid and while not matching China’s rapid economic growth, they registered more successful economic outcomes that the countries in CIS. The abandoning of tight central planning in China, Vietnam, CEE and CIS stemmed from the recognition that the “pure” centrally planned system, while effective for resource mobilization and extensive growth, failed with its inability to generate innovation and provide effective incentives. As in Cuba, all these countries tried in vain various reforms during the decades when decentralization was visibly needed but politically unacceptable. In this section we focus on the experience of the CEE countries in relation to China because these countries represent alternative approaches with arguably successful economic outcomes. Moreover, China’s increasing reliance on private property, entrepreneurship and market competition has given rise to its model being called “state capitalism” and moved it closer to a capitalist market model.41 The most striking difference between the start of the transition in the former Soviet bloc and China is that the Soviet bloc countries pursued a strategy that resulted in a deep economic recession that took the form of a true depression in some of them. As may be seen from the evolution of real GDP in the selected group of CEE and CIS countries in Figure 12, there was a precipitous and unexpected economic decline in the first three to eight years of the transition. In the CEE countries this was followed by relatively impressive growth thereafter. In fact, while China adopted a gradual approach and appears to have benefited from sensible policies and relative absence of adverse shocks, the CEE and CIS policymakers underestimated economic problems associated with rapid transformation and made a number of problematic choices in the first years of the transition. As they started the transition, China’s policymakers adopted dual track reforms that maintained existing levels of production by permitting only gradual relaxation of the plan of deliveries in the state-owned enterprises (but permitting these firms to sell additional output on the market) and allowed the large-scale expansion of township and village enterprises. These measures expanded economic activity (Byrd and Lin, 1990, Qian, Lau and Roland, 2000, and Naughton, 2002). The policymakers in the former Soviet bloc adopted transition strategies that led to the abandonment of central planning and development of a market system in the

context of macroeconomic stabilization and microeconomic restructuring, together with institutional and political reforms. While China adopted a relatively gradual approach with experimentation at the local level, the CEE and CIS countries proceeded relatively fast. It is also important to realize that while China shared many systemic initial conditions with the transition economies in CEE and CIS, it had a more agricultural economy and a more stable political-economic system than many CEE and CIS countries. Unlike most of the CEE and CIS economies, China adopted a strategy of gradual economic transformation that maintained the existing system and created new economic activities on top of it. This enabled China to avoid the transformation depression observed in CEE and CIS, and to generate high rates of economic growth that have now lasted for over four decades. In retrospect, the tradeoff for avoiding an initial depression appears to be the willingness to maintain most of the existing economic system rather than embarking on a rapid but incomplete economic transformation. Of course, with rising economic instability and political pressure, countries such as Poland and the Soviet Union had little choice but to proceed relatively fast. Others, such as East Germany and Czechoslovakia, might have been able to maintain central planning, but they abandoned it and communism rapidly for political reasons. Over the last several decades, China and the CEE countries have belonged to the fastest growing regions of the world. In the late 1980s and early 1990s a major debate took place about the merits of fast or “big bang” reforms vs. gradual reforms. In the CEE countries, virtually all governments embarked on what Svejnar (2002, 2007) calls Type I reforms, consisting of macroeconomic stabilization, price liberalization and abolishing of central planning. At the macroeconomic level, the emphasis was on restrictive fiscal and monetary policies, incomes policies (wage controls), and in some cases also a fixed exchange rate. The micro strategy involved price liberalization, dismantling the Council for Mutual Economic Assistance — the Soviet bloc trading area — opening up to international trade (leading to more efficient allocation of resources based on world prices), restructuring and reducing subsidies to SOEs. The strategy also stimulated the creation of new firms and banks, carrying out small-scale privatization, breaking up the “monobank” system, and allowing the creation of new independent banks. Finally, the strategy led to the development of a social safety net. The Type I reforms turned out to be relatively sustainable.

41  In this section we draw significantly on Svejnar, 2008. 52

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Significant policy differences developed across the CEE countries in what Svejnar (2002, 2007) calls Type II reforms, which entailed the privatization of large and medium-sized SOEs, establishment and enforcement of a market-oriented legal system and accompanying institutions, further indepth development of a commercial banking sector and the appropriate regulatory infrastructure, labor market regulations and institutions related to unemployment and retirement systems. Many CEE and CIS governments carried out Type II reforms slowly and incompletely, in part because there was political resistance and in part because the governments lacked know-how and logistics. We next present the key dimensions of the two sets of reforms in the CEE and China to provide a perspective on possibilities for a transformation of the Cuban economy. Later on in this section, we examine the resulting performance of the different economies. Privatization. While China proceeded relatively fast in the first decade with establishing local public ownership through TVEs and assigning cultivation rights to individual farm households, it proceeded slowly with privatization. In CEE, different countries pursued different strategies of privatizing large and medium-sized firms, but all countries proceeded relatively fast. For example, Poland and Slovenia privatized slowly, while Hungary privatized its SOEs by selling them oneby-one, frequently to foreign owners. Finally, Czech Republic, Lithuania and, to a lesser extent, Slovakia carried out voucher privatization, with a majority of shares of most firms being distributed to citizens at large. While this approach was arguably fair, it did not generate a new source of funds for investment or revenue to the government. It resulted in dispersed ownership of shares, however, and often resulted in poor corporate governance. In the early phase of the transition the poor corporate governance allowed managers or majority shareholders to appropriate profit and/or assets of the firms at the expense of minority shareholders. Banking System. At the start, China only slowly supplemented the traditional Soviet-style monobank system with new banks and financial institutions, but gradually it permitted the rise of new financial institutions and welcomed foreign financial institutions taking minority stakes in virtually all the major core financial institutions. The CEE countries almost all abolished the monobank system as part of Type I reforms. Russia allowed spontaneous creation of new banks from the bottom up, resulting in hundreds of banks being created almost overnight. In CEE, the government controlled the process,

but even so, dozens of small private banks rapidly emerged. The CEE banking systems had a number of weaknesses. Numerous small banks collapsed. Most large banks started with a sizable portfolio of non-performing enterprise loans and even after restructuring they often accumulated new non-performing loans. The need for repeated bailouts of the large banks made countries such as Hungary, Czech Republic and Poland sold virtually all domestic banks to Western banks in the late 1990s. There were later similar privatizations in Slovakia, Bulgaria, Romania, Croatia and other countries. The CEE region thus became a laboratory for observing the introduction of a Western banking system with few locally owned banks. Overall, both China and the CEE countries experienced problems associated with soft budget constraints in state-owned banks and failures of new private financial institutions. The CEE countries opted for a banking system dominated by foreign banks, while China for a long time gave Western banks and financial institutions only limited presence. Legal System and Institutions. China only gradually reformed its legal and institutional system as part of its gradual economic reform. The systemic transformation in the CEE countries needed completely new laws and institutions. However, no country succeeded in rapidly developing a legal system and institutions that were highly conducive to the preservation of private property and functioning of a market economy, although some countries did better than others. This inability to develop a fully functioning, market-oriented legal structure was one of the main weaknesses of the first decade of transition in all the former Soviet bloc countries. Most policymakers underestimated the importance of a good legal system for the struggle against corruption and for the functioning of a nascent market system. The more Western transition economies benefited from the pre-World War II legacy of a functioning legal system. Moreover, in the late 1990s and early-to-mid-2000s, an important impetus for carrying out legal and institutional reforms in the CEE countries was the need to conform to the European Union as a prerequisite for accession. In China, an important driver of legal and institutional developments was the desire to enter the World Trade Organization. In both China and the CEE countries, foreign investment also contributed to legal and institutional changes as foreign investors pressed governments to enact legislation creating a more predictable business climate. Having outlined the systemic, structural and policy changes, in the next sections we examine the performance during the transition. 53

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Economic Performance. China’s superb economic performance has varied across provinces and regions, just as performance has varied widely across the CEE and CIS countries. The Central European countries of Poland, Slovenia, Hungary, Slovakia and the Czech Republic initially performed better than the Baltic states of Estonia, Latvia and Lithuania and the Balkan states of Bulgaria and Romania, which in turn performed better than Russia, Ukraine and other countries in the CIS. The situation has changed in various ways, however, over time. We next discuss macroeconomic performance and then turn to more microeconomic measures. Gross Domestic Product. Calculating the evolution of GDP was difficult in the early phases of the transition because the Soviet bloc countries used gross material product, a measure that ignored the production of services (this indicator was also used in Cuba until the collapse of the Soviet Union). Moreover, the entry and growth of new firms was not fully captured in official statistics. Statistical offices and international organizations tried to estimate GDP for the pre-transition years and trace it accurately thereafter, but the data for the early transition period obviously have to be interpreted with caution (see e.g., Ren, 1997, Filer and Hanousek, 2000 and 2002, and Brada, King and Kutan, 2000). With the above caveats in mind, one may carry out some comparisons. In 1990, at the start of the transition in CEE and CIS, the sectoral structure China’s economy resembled most that of Ukraine and Kazakhstan. Agriculture accounted for a bit over 25% and industry, including mining and construction, for 41-45% of GDP. In Russia the shares were 17% and 48%, respectively. Since then, the CEE and CIS economies moved from agriculture and industry to services, while China moved from agriculture to both industry and services. In terms of GDP growth, China’s performance since 1978 has been very strong, while that of the CEE and CIS was disappointing to disastrous in the early-to-mid 1990s and fairly strong in CEE thereafter. While China grew fast and continuously since the start of the reforms, the transition economies experienced sizable declines in output at the start of the transition. The decline varied from 13% to 25% in the Central European countries; over 40% in the Baltic countries; and as much as 45% or more in Russia and almost 65% in Ukraine (see Figure 12). The CEE countries reversed the decline after 3-4 years, but in Russia and many CIS countries there was no turnaround through most of the 1990s. Almost all the CEE countries have generated fairly steady economic growth since the early to mid-1990s and the CIS countries have done so since the late 1990s.

The depth and length of the early transition depression in the CEE and CIS countries were unexpected. A number of explanations have been offered and are discussed in Roland (2000). They include tight macroeconomic policies (Bhaduri et al., 1993, and Rosati, 1994); a credit crunch stemming from the reduction of state subsidies to firms and rise in real interest rates (Calvo and Coricelli, 1992); disorganization among suppliers, producers and consumers associated with the collapse of central planning (Blanchard and Kremer, 1997, and Roland and Verdier, 1999); a switch from a controlled to insufficiently regulated monopolistic structure (Li, 1999, and Blanchard, 1997); problems with implementing sectoral shifts in the presence of labor market imperfections (Atkeson and Kehoe, 1996); and the dissolution in 1990 of the CMEA. Most of these explanations contain an element of truth, but none is in itself completely convincing. All the CEE and CIS countries have gone through the decline, yet cross-country differences in initial conditions and the nature of reform are substantial enough to make one question the universal applicability of any single explanation. Interestingly, China avoided the above phenomena. Inflation. While China experienced a 15-25% annual inflation in the 1993-95 period, for most of the subsequent period it has kept inflation below 10%. In CEE and CIS one observes several countries that experienced high or hyperinflation as the command system faltered. Poland, Slovenia, Albania, Bulgaria and Romania all experienced at least one year from 1990 to 1993 when consumer price inflation was above 200%; Estonia, Latvia and Lithuania all had one year with inflation around 1000%; and Russia, Ukraine, and Kazakhstan registered at least one year when inflation was in excess of 2000%. Some of these bouts of inflation appeared after the lifting of price controls, in other cases inflation grew out of financial sector crises. By the late 1990s policymakers were able to reduce inflation with considerable effectiveness and by the beginning of the 2000s inflation rates were often in single digits. Even countries with very high rates of inflation during the 1990s — Russia, Ukraine and Bulgaria, for example — reduced inflation rates to the range of 8-10% by 2006. Exchange Rates, Current Account and Exports. Over the last four decades, China has increasingly opened its economy and made domestic demand an important engine of growth. Yet, it remains the world’s largest exporter. Most CEE and CIS significantly reoriented their foreign trade away from the old CMEA region and towards market economies — primarily Western Europe. Most of the CEE economies became very open economies, while the CIS

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economies have on average remained relatively more closed. Both China and the large CIS economies have thus remained relatively closed, but China’s manufacturing exports and CIS resource exports have gained in importance. External Debt and Financial Crises. China launched its transformation without foreign debt and gradually became a major creditor to the world, accumulating sizable foreign exchange reserves. It also avoided the worst effects of the Asian financial crisis and the Great Recession because it was sufficiently insulated from the global financial markets and substituted domestic public investment for falling external demand. Many transition countries started the 1990s with high foreign indebtedness. In 1990, Bulgaria, Hungary and Poland had external debt that exceeded 50% of GDP, and in Russia it was 148% of GDP. In contrast, other transition economies, such as Romania, Slovenia, Czech Republic and Slovakia had conservative regimes, and in 1990 their foreign debt was less than 20% of GDP. By the mid-1990s, a number of the highly indebted countries reduced their debt/GDP ratio, while many of the less-indebted countries increased theirs. But since about 1996, foreign indebtedness has risen in the relatively more indebted countries and in 1988 Russia defaulted on its sovereign debt. Budget and Taxes. China has proceeded gradually in reforming its tax system and ensured adequate budgetary revenues from the rapidly growing economy. In contrast, the CEE and CIS governments had to develop a number of new fiscal institutions for collecting taxes and this proved to be one of the hardest Type II reforms to achieve. While tax collection was relatively effective even at the start of the transition in the CEE region, Russia and some other countries of the CIS initially struggled with declines in tax revenues as many producers avoided paying taxes either by operating through barter or by accumulating tax arrears. While Russia and some other CIS economies have successfully reduced tax rates and simplified the tax system dramatically to improve tax collection, many of the CEE economies have higher tax rates plus social security contributions than other countries at a similar level of GDP per capita. Privatization and Creation of New Firms. As mentioned above, while experimenting with private ownership, the Chinese leaders delayed for over two decades substantial

privatization of SOEs. However, within a few years they eased access to critical inputs through the dual track system and permitted a major expansion of the township and village enterprises. The TVEs filled niches where central planning created shortages. They also became suppliers to the SOEs, and many TVEs eventually started competing head on with the SOEs, thus creating a more competitive system. The TVEs generated considerable economic activity and provided industrial and service employment in rural areas. Since the 1990s, most have turned into private firms and thus added to the process of de-etatizing China’s economy. The CEE and CIS transition economies proceeded relatively quickly with permitting the creation of private firms. One channel was that in the early 1990s most transition economies privatized small enterprises, usually through local auctions. This small-scale privatization was instrumental in creating small and medium-sized enterprises in countries where most firms were, by ideological and practical design, very large. This shift in ownership rapidly increased productivity and product quality. Parallel developments were the breakups of SOEs, restructuring of firms and management, and increased competition. Breakups of small, average and somewhat above-average size appear to have increased efficiency of both the remaining master enterprises and the spun-off units (Lizal, Singer and Svejnar, 2001). Most of the brokenup firms were subsequently privatized. A large number of new (mostly small) firms were spontaneously created in most transition economies. Like the TVEs, these firms filled missing areas in which there was unsatisfied demand and they started to compete with SOEs. Because many of the transition economies became relatively open to international trade, the new private firms were also competing with imports and some started exporting to foreign markets or supplying foreign producers. The growth of new firms has varied across countries and in general proceeded faster in the CEE than in the CIS countries. Finally, in most countries, a large part of the private sector was created through large-scale privatization. The method of large-scale privatization differed across countries, but it proceeded quite fast irrespective of the particular privatization method that was used. In 1989, only Poland and Romania, for instance, had more than 10% of GDP produced by private sector firms, and in most countries private sector share was around 5% of GDP, similar to Cuba’s share now. But these shares rose rapidly. As early as the mid-1990s, the private sector accounted for more than 30% of GDP in most 55

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of the transition economies and generated over one-half of GDP in many countries, including Russia. By the turn of the century, the share of private sector in GDP stood at or above 60% in all of the transition economies and in most of them accounted for more than 70%. In most countries the private sector share has grown steadily since then. Given the optimistic expectations, the estimated effects of privatization on economic performance have in the first two decades been in many respects sobering or even disappointing. At the country level, some of the fastest growing economies — e.g., Poland and Slovenia (but also China) — have been the slowest to privatize. At the microeconomic level, studies from the late 1990s and early 2000s make assessments that range from finding no systematically significant effect of privatization on performance (Bevan, Estrin and Schaffer, 1999) to concluding cautiously that privatization improves firm performance (Shirley and Walsh, 2000, Megginson and Netter, 2001, and Djankov and Murrell, 2002). A later survey of literature by Estrin, Hanousek, Kocenda and Svejnar (2007) finds that privatization to foreign owners tends to increase efficiency and scale of operations, while privatization to domestic owners leads to mostly insignificant effects. Many of the early microeconometric studies suffer from serious methodological and data problems: small and unrepresentative samples of firms; misreported or mismeasured data; limited controls for other major shocks that occurred at the same time as privatization; a short period of observations after privatization; and above all, not controlling adequately for selectivity bias. Selectivity bias is likely to be a particularly serious problem since Gupta, Ham and Svejnar, 2001 show that better performing firms tend to be privatized first. This means that simply comparing the post-privatization performance of privatized firms to the performance of the remaining SOEs without controlling for selectivity bias, as many studies do, erroneously attributes some of the inherent superior performance of the early-privatized firms to privatization. More recent econometric studies that use long panel data and are able to handle carefully the selection bias (e.g., Hagemejer, Tyrowicz and Svejnar, 2018) show positive effects of privatization on productivity, scale of operations (output) and employment, but also find that carrying out privatization in a rush (privatizing unusually many firms in a given year) does not have these positive effects and may have negative effects, presumably because the matching of firms to investors is of lower quality in rushed settings.

Studies of China provide a similar though less negative picture (Estrin et al., 2007). For instance, studies of productive efficiency find somewhat diverse results, with the effect of non-state ownership being mostly positive. As in the studies of CEE and CIS, the effect of foreign ownership is more positive than that of other forms of non-state ownership. In China, an especially important role has been played by joint ventures. Their contribution to GDP has been sizable and has grown over time. Domestic and Foreign Investment. Ever since 1978 China has maintained a high rate of investment. In this sense, China has joined the East Asian tigers in emphasizing investment at the expense of consumption. China has also attracted a major inflow of foreign direct investment (FDI) that has had a positive effect on China’s economy. In recent years, one observes also a reverse flow in the form of Chinese FDI to other countries under the heading of the Belt and Road Initiative. Under central planning, the Soviet bloc countries, as well as the more decentralized former Yugoslavia, also had high rates of investment, often exceeding 30% of GDP. Investment rates declined to about 20% of GDP in the 1990s in a number of transition economies (EBRD, 1996), although some countries, such as the Czech Republic and Slovakia, maintained relatively high levels of investment for a number of years. Unfortunately, in the early years of the transition, much of this investment appears to have been allocated inefficiently in a number of these economies by inexperienced and sometimes politicized or corrupt commercial banks (e.g., Lizal and Svejnar, 2002). In the first five years of the transition, Hungary was the only transition economy attracting a sizable inflow of FDI. This was in part because from the start Hungary established a friendlier business climate than other transition countries and in part because it created well-defined laws and regulations for FDI. But by the late 1990s, major flows of FDI went to the Czech Republic, Poland, Slovakia and the Baltic countries. Overall, having about a one-tenth of the population of China, the CEE economies received during the first decade about one-half of the annual FDI inflows going to China. These sizable foreign investments have had a major positive effect on GDP growth and on export competitiveness of the CEE countries, in some of which foreign-owned firms account for a strong majority of exports. Cuba could in principle benefit similarly from FDI. Employment, Wage Setting, Unemployment and Income Distribution. China’s labor market evolution has been different from that observed in the CEE and CIS transition economies,

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although the limited system of social transfers made some labor market features in China similar to those in the CIS. The CEE and CIS economies adjusted employment considerably already in the first several years of the transition while China’s SOEs started adjusting employment on a major scale only in the second decade of reforms. A big employment adjustment occurred in China with the creation of the TVEs, which enhanced employment of the rural labor force. Since the mid1990s, China’s private firms have been creating employment on a significant scale. Open unemployment is a significant phenomenon in the urban areas but less in the countryside. With declining administrative limitations on migration, Chinese workers have moved substantially in search of lucrative employment opportunities. Finally, with the rapid economic growth, China’s income and wealth distributions have become quite unequal. In the CEE and CIS countries, firms absorbed the negative output shock in the early 1990s by decreasing employment and/or real wages (Svejnar, 1999). Hungary, for instance, registered a more than 20% reduction in industrial employment while real wages rose almost 20%. At the other extreme, in the Czech Republic industrial wages fell almost 25%, with employment declining less than 10% (Basu, Estrin and Svejnar, 2005). In Russia and the rest of CIS, the transition brought a mixture of wage and employment adjustment (Desai and Idson, 2000), with the wage decline being more substantial than that observed in CEE (Boeri and Terrell, 2002). In Central Europe, firms’ labor demand elasticities with respect to output and wages rose quickly to Western levels as the transition unfolded, suggesting that SOEs started behaving efficiently as cost-minimizing firms. The GDP and employment data indicate that enterprise restructuring in the transition economies led to an initial decline in labor productivity because output fell faster than employment. Labor productivity has since risen as output growth has exceeded that of employment. In fact, more recently (before the COVID-19 crisis) the question arose as to why wages were not rising faster, given that many firms were complaining of labor shortages and posted vacancies often exceeded substantially the number of unemployed workers. Unemployment was an unknown phenomenon in CEE before the transition, but it emerged rapidly. Within two years the unemployment rate rose into double digits in most CEE economies. High unemployment reflected large flows from employment into unemployment as firms laid off workers, and relatively low outflow from unemployment as the unemployed found it hard to find new jobs. The Czech labor market was special in that it was an ideal model of a

transitional labor market, characterized by high inflows as well as outflows, with unemployment being for many workers only a transitory state between old and new jobs (Ham, Svejnar and Terrell, 1998, 1999). Unemployment became a serious problem more slowly in the CIS, where firms were on average slower in laying off workers and relied instead on reduction in real wages and wage arrears as mechanisms to keep workers with low reservation wages attached to firms. Over time, the patterns and dynamics of unemployment became more diverse. The Czech Republic was the only country in CEE to enter recession in the second half of the 1990s and its unemployment rate rose from the extremely low 2-3% to 8-10%. At the same time, the fast-growing economies (Poland, Hungary, Slovenia and, to a lesser extent, Slovakia) succeeded in reducing their unemployment. The CIS and Baltic countries witnessed gradual increases in unemployment as their transition proceeded. In recent years the unemployment rate in most transition economies has been below the levels observed in the old members states of the European Union. The transition brought about considerable destruction and creation of jobs, as well as mobility of labor. Contrary to the main theoretical models of the transition process, however, job creation in new firms was not necessarily linked to job destruction in the old SOEs as many new jobs have been created even in economies that experienced low rates of job destruction (see e.g., Jurajda and Terrell, 2001). Sabirianova (2000) provides important related evidence that much of the initial labor mobility in Russia consisted of occupational rather than geographic mobility, with people switching from one occupation to another within regions, as jobs in old occupations were destroyed and opportunities in new occupations were created. The communist countries had highly egalitarian income distributions, but inequality increased in the 1990s and 2000s. Between the late 1980s/early 1990s and late 1990s/ early 2000s, the Gini coefficient rose from 20-25 to 2432 in Central Europe, low 20s to low 30s in Bulgaria and Romania, 23 to 30 in Ukraine, and 26 to 40 in Russia. Income inequality in the transition economies, hence became comparable to that in advanced capitalist economies and developing countries. However, the official Russian and Ukrainian data, at least initially, likely underestimated the extent of income inequality. In particular, the data from the Russian Statistical Office (Goskomstat) were based on contractual wages, but in the 1990s many Russian firms were not fully paying these contractual wages (Desai and Idson, 2000). Inequality calculations based on survey data from the Russian Longitudinal Monitoring Survey of households 57

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suggested that income inequality in Russia reached much higher levels — a Gini coefficient of 52 — being similar to inequality found in China and developing economies with relatively uneven income distribution. It is noteworthy that the relatively egalitarian income distribution in the CEE countries was generated by social safety nets that by and large offset inequality that was created by the introduction of a market economy (Garner and Terrell, 1998). In Russia the social safety net was regressive, making the distribution of income more unequal than it would have been without it (Commander, Tolstopiatenko and Yemtsov, 1999). Overall, existing studies indicate that income and consumption inequality rose during the transition and that the increase was much greater in CIS than CEE. The rise in inequality depended on the relative importance of shifts in the distribution of wages, employment, entrepreneurial incomes and social safety nets. In Russia, there was a sizable rise in wage inequality, which in turn had a strong effect on income inequality (Mitra and Yemtsov, 2007). The single most important common cause of rising inequality in all the transition economies appears to have been wage decompression, resulting from the abolishing of centralized wage setting and the rising returns to skills associated with globalization (Munich, Svejnar and Terrell, 2005, and Mitra and Yemtsov, 2007). Performance by the Financial Markets. Western capital markets and rating agencies have gradually increased their assessment of China, CEE and CIS. The most advanced countries now have ratings that place them among the lower-to-mid tier of developed countries. Overall, the CEE model represents a complete economic transition from plan to market and a political transformation from a one-party Soviet-style system to a European parliamentary democracy. The principal positive economic outcomes include good long-term economic growth, macroeconomic stability, low unemployment in the medium to long run, limited poverty and a relatively equal distribution of income. On the negative side one needs to mention the (arguably avoidable) initial economic recession and unemployment, corruption and non-transparent transfer of wealth (asset stripping) during privatization in a number of countries as the legal and institutional system took a while to develop.

V. Concluding Observations and Lessons from the Alternative Strategies and Models for Cuba Cuba’s policies aimed at resolving the current economic crisis (let alone ensuring sustainable economic development) lack coherence, innovation, concreteness, pragmatism, effective implementation and a clearly defined goal of deeper reforms. The situation makes it clear that an open and inclusive discussion about different options is essential. In what follows we recapitulate the main features and results of the alternative approaches that Cuba could take to transform its economy in order to both end the current crisis and achieve adequate and sustainable economic development in the future. Recall that, as we move from one strategy to the next, the roles of the central plan and the large state enterprises diminish (the central plan disappears), whereas the roles of the market and the nonstate sector (particularly the private sector) increase. We also note the positive and negative aspects/effects of each strategy and discuss its feasibility in Cuba. 1) Increasing the flexibility of the current model. This strategy attempts to maintain the essential features of the current model but introduces moderate reforms in the hope of making it more efficient and successful: expansion of the nonstate sector through a relaxation of some rules (particularly those relating to self-employment), while maintaining the predominance of state enterprises; more autonomy for state enterprises; agricultural reform; more effective involvement of foreign investment; making commercial banking the financier of state enterprises instead of the state budget; and monetary and exchange-rate unification. The model shuns three fundamental issues: a) decentralizing the inefficient central planning system that has failed all over the world, including Cuba during the last 60 years; b) recognizing the non-state sector (particularly the private one) as being essential rather than merely complementary to the state sector; and c) acknowledging the pivotal role of the market, albeit with appropriate regulation. Most of these policies have been discussed for years or even decades, but they have not been implemented.42 We conclude that the approach of increasing flexibility of the existing system might provide some temporary respite but would not tackle

42  For instance, autonomy to state enterprises and cutting subsidies to those unprofitable (hence shutting them down, for which bankruptcy legislation is needed) was debated/attempted in the 1960s, 1980s, and 2007-2017; an enterprise law to legitimize and expand SMEs was announced several times and has been postponed to 2021; the “experimental” stage for NASC has persisted for one decade; acopio was first criticized and reduced to reinstate it later, and the unification of the dual monetary system and multiple ex58

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Cuba’s fundamental economic problems and hence would not be successful. 2) Sino-Vietnamese Path (Market Socialism). This strategy, reflecting the early phases of China’s economic transformation, avoids transition recession by making firms maintain for a period of time existing production and deliveries, but allowing them to sell on the market all output that they generate above plan. It gradually converts central planning into a decentralized guidance mechanism. In parallel it allows a significant expansion of the private sector, recognizing that it will become the most dynamic sector in the economy and also the principal generator of GDP and employment. It grants considerable autonomy to state enterprises but limits state subsidies, restructuring or eventually shutting down those that are loss making. It cautiously opens up the country to foreign investment (including from the diaspora) as an integral rather than complementary factor of development. It transforms agriculture by gradually granting farmers the freedom to decide what to produce, to whom to sell the harvest and set the price by supply and demand (acopio vanishes). It places emphasis on exports while protecting (some areas) from imports, and generally decentralizes foreign trade by allowing enterprises, to a large extent, to import and export. It unifies the currency and exchange rates, accompanied by profound reforms in the economy (prices, wages, agriculture, etc.). When the reforms began in China and Vietnam, their GDP per capita were respectively one twelfth and one sixth of Cuba’s. The performance of China’s and Vietnam’s economies improved dramatically: the world’s highest GDP growth and gross capital formation in China for decades (very high in Vietnam); development of the financial and banking sectors; notable expansion of infrastructure and transportation (particularly in China); food self-sufficiency and large export surplus (Vietnam); rapidly rising total factor productivity, particularly in China; transfer of technology and innovation; poverty reduction and increasing standards of living. On the other hand, the approach also led to increased wealth and income inequality; a relatively low rate of consumption (high rate of saving), continuing inefficiency of many state enterprises, high level of corporate and provincial debt, and persistent bureaucracy and red tape.

Despite the success achieved by both countries, in early 2020 president Díaz-Cannel (2020) rejected the Sino-Vietnamese path: “Concerning the proposals of Cuban economists of analyzing the Chinese and Vietnamese economic models and adapting them to Cuba, we have studied such experiences, but neither of these countries has been subjected to an embargo for six decades... some of those economists only think about the private sector, whereas the government’s premise is that the principal economic actor is the state sector and the private sector plays a complementary role.” At the end of April and in May 2020, several Cuban economists suggested key measures (some of them inspired by the Sino-Vietnamese approach) that could be adopted internally, without the need of international aid, in order to recover from the current crisis and promote future sustainable socioeconomic development, such as agricultural reform, expansion of the non-state sector, particularly SMEs, and more flexibility to attract foreign investment including from Cubans abroad (Mesa-Lago and eight other authors, 2020; Montreal, 2020a). An article in the party newspaper Granma rejected the Sino-Vietnamese experience, due to different historical and geopolitical factors; it also censored the SMEs as channels for the creation of employment and to replace the state in some minor activities as an “attempt to induce regime change in Cuba,” even linking them to Obama’s visit to Havana and his meeting with microentrepreneurs; it also advised not to try “hastily simplified adventures” without a responsible investigation; finally concluding that “the economy is something to leave to economists” (Tuque, 2020). This radical criticism was aimed not only at the Sino-Vietnamese strategy, but also at the increased flexibility approach and even at Raúl Castro’s moderate reforms. It is true that there are some important differences between Cuba and the two Asian countries: geopolitics, territory and population size, an agricultural sector initially much larger than that of Cuba. The U.S. embargo alleged difference doesn’t hold for Vietnam, although it lasted one-third of the time of that in Cuba. Nevertheless, the Vietnamese reforms began when the country was still under the embargo. These differences are not insurmountable obstacles for the feasibility of the market socialist model provided that it is adapted to Cuba’s conditions. Furthermore, politically, it presents less of a challenge than would a transition to a full

change rates have been discussed for one decade, regulated and heralded but still pending. A former central planning economist recommends monetary unification but without the badly needed parallel deep economic reforms and within the context of a central plan and state monopoly of foreign trade; this proposition relies on trade surpluses (despite their sharply declining trend) for the government to compensate the losers (net-importing state enterprises) and pay the foreign debt, arguing also that inflation will be avoided by transfers from people receiving foreign remittances (the majority of the population) to those lacking those sources. 59

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market economy because the communist party retains its power. Some of the negative effects of the Sino-Vietnamese strategy pale in comparison with its positive effects, whereas others could be tackled with appropriate policies. For instance, excessive inequality could be curtailed through progressive income and corporate taxes. Finally, Cuba has a long way to go before facing some of the challenges the model may eventually encounter in China. 3) Transition to a Market Model with State Regulation. China shared many systemic, initial conditions with the transition economies of Central-Eastern Europe and the Commonwealth of Independent States, but it started its economic transformation with a more agricultural economy and a more stable political-economic system than many CEE and CIS countries. Unlike most of the CEE and CIS economies, China adopted a strategy of gradual economic transformation that maintained the existing system and created new economic activities on top of it. This enabled China to avoid the transformation depression observed in CEE and CIS, and it allowed China to generate high rates of economic growth that have now lasted for four decades. Except for the times of global crises, the CEE economies have also completed almost three decades of respectable economic growth, demonstrating that numerous forms of transition can generate long-term economic growth. In retrospect, the tradeoff for avoiding the initial transformation recession appears to be the willingness to maintain for a while centrally planned deliveries rather than abolishing the plan and not having the market system, including the legal framework, adequately operational, thus embarking on a rapid but incomplete economic and political transformation. With rising economic instability (especially hyperinflation) and political pressure, countries such as Poland and Russia (CIS) had little choice but to proceed relatively fast. Others, such as East Germany and Czechoslovakia, could have retained the centrally planned system, but they abandoned it and communism rapidly for political reasons. Overall, the lessons from Central-Eastern Europe, China and Vietnam indicate that there are a number of feasible models of economic reforms and transitions that result in long-term economic development and growth. Cuba has so far not adopted any one of them. It would greatly benefit by embarking on some of the above discussed reforms and/or transitions.

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______ (2020b). “Widespread shortages in Cuba as economy collapses,” Miami Herald, May 16.

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______ (2020a). “El establecimiento de las PYMES en Cuba…,” ElEstadocomotal, April 29. ______ (2020b). “Eramos pocos y parió Catana:¿Una oposición de izquierda en Cuba?,” ElEstadocomotal, May 7. ______ (2020c). “Recuperando el turismo en medio de la mayor crisis…”, ElEstadocomotal, May 23. ______(2020d). Letter to Mesa-Lago, Paris, May 11. ______ (2020e). Facebook comment, July 27. ______ (2020f). “Colas, inflación reprimida y permeabilidad de los mercados,” Facebook, August 4. Morales, Emilio (2019). “Un fantasma recorre la economía cubana,” Café Fuerte, March 8. ______ (2020a). “COVID-19 puede hacer declinar las remesas a Cuba….”, THCG Business Report, No. 2, April, p. 7-10. ______ (2020b). Cited by “Cuban government desperate to capture dollars…,” Diario de Cuba, July 28. Münich, Daniel, Jan Svejnar and Katherine Terrell (2005). “Returns to Human Capital Under the Communist Wage Grid and During the Transition to a Market Economy,” The Review of Economics and Statistics, 87 (1), February, 100-123,. Naughton, Barry 2002). “ Provincial economic growth in China: causes and consequences of regional differentiation,” China and Its Regions: Economic Growth and Reform in Chinese Provinces, Cheltenham: Edward Elgar, 57-86. Nova, Armando (2013). El Modelo Agrícola y los Lineamientos de la Política Económica y Social en Cuba. La Habana: Editorial Ciencias Sociales. ______ (2020). “Agricultura: Urgen medidas descentralizadoras,” Progreso Semanal, May 2. Oficina Nacional de Estadística e Información (ONEI). (2008 to 2019). Anuario estadístico de Cuba 2007 to 2018. Havana. ______. (2020a). “Turismo: Llegada de visitantes internacionales, enero-diciembre 2019.” Havana. ______. (2020b). “Turismo: Llegada de visitantes internacionales, enero 2020.” Havana. ______. (2020c). “Turismo: Llegada de visitantes internacionales, febrero 2020.” Havana. ______. (2020d). “Turismo: Llegada de visitantes internacionales, enero-marzo 2020.” Havana. Padura, Leonardo (2020). “Las frutas de la memoria,” Miradas Cubanas, June 10. Palli, José M. (2013). “Superficie and usufruct rights in Cuba: Are they really insurable rights?’ in Cuba in Transition. No.

23, Miami: ASCE. Párraga, Marianna (2020). “Venezuelan oil exports up in April…,” Petroleumworld, May 5. “Pedro Monreal: ¿De dónde van a sacar las divisas los cubanos…?,” Diario de Cuba, August 6. Perelló, José (2020). “Compendio de Indicadores,” Havana, 15 julio. Pérez, Humberto (2020). “Comentarios sobre los artículos de Omar Everleny Pérez Villanueva…,” ElEstadocomotal, March 6. Pérez Chang, Ernesto (2020). “El dólar sube y sube…hasta las nubes,” Cubanet, July 28. Pérez-López, Jorge (2017). “Cuba’s Never Ending External Sector Crisis,” in Cuba in Transition. Miami: ASCE, Vol. 27. Pérez-López, Jorge and Yu Xiao (2018). “Foreign Investment and Economic Growth in Cuba: Lessons from China,” in Paths for Cuba: Reforming Communism in Comparative Perspective, Scott Morgensten, Jorge Pérez-López and Jerime Branche, eds.. University of Pittsburgh Press, pp. 85-16. Pérez Villanueva, Omar Everleny (2018). “La inversión extranjera directa en Cuba: Una necesidad para su desarrollo.” Horizonte Cubano, Columbia University, December 30. ______ (2020a). “Cuba: ¿Se acerca el día de la unificación monetaria?,” On Cuba News, March 5. ______ (2020b). “Unificación monetaria en Cuba…,” ElEstadocomotal, April 14. ______ (2020c). “Cuba en espera: las micro, pequeñas y medianas empresas…,” Horizonte Cubano, Columbia Law School, April 29. ______ (2020d). “Las tiendas recaudadoras de divisas en Cuba…,” IPC, June 9. ______ (2020e). E-mail menssage, Havana, June 29. Piñón, Jorge (2020a). Information on Venezuelan oil production, University of Texas, May 4. ______ (2020b). Information on Cuban fuel exports, University of Texas, June 26. ______ (2020c). Information provided to Mesa-Lago, Austin, July 29 and August 1. Qian, Yingiy, Lawrence Lau and Gerard Roland (2000). “Reform without Losers: An Interpretation of China’s Dual Track Approach to Transition” Journal of Political Economy,

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Vicent, Mauricio (2020). “Cuba impulsa el sector privado en medio de la crisis del coronavirus,” El País, July 19. “Venezuela opposition to probe possible resale of oil by Cuba” (2020). Reuters, July 23. Vidal, Pavel (2014). “Money and exchange rate reform in Cuba; Lessons from Vietnam,” in No more Free Lunch, Claes Brundenius and Ricardo Torres, eds. Springer, pp. 63-81. ______. (2015). “Cuba’s reform and economic growth: A comparative perspective with Vietnam,” Journal of Economic Policy Reform,” January, pp. 1-18. World Bank (2019). GDP growth and gross capital formation/ GDP. Washington DC., April 18. World Trade Organization — WTO (2020). “Trade set to plunge as COVID-19 pandemic upends global economy,” Press Release, Paris. Xianglin, Mao (2013). Answers to Mesa-Lago’s questions on China reforms. Beijing, November 8.

Roland, Gerard and T. Verdier (1997). “Transition and the Output Fall,” Economics of Transition, 7 (1), 1-28. Romeo, Lisandra (2019). “Trabajadores del turismo: necesidad de elevar la calidad…,” Cuba y la Economía, April 21. Rosati, Dariusz (1994). “Output Decline During Transition from Plan to Market,” Economics of Transition, 2 (4), 419-442. Shirley, Mary and Patrick Walsh (2000). “Public versus Private Ownership: The Current State of the Debate,” The World Bank, Washington, DC. Svejnar, Jan (1999). “Labor Markets in the Transitional Central and East European Economies,” in Orley Ashenfelter and David Card, eds. Handbook of Labor Economics, North Holland, Vol. 3B, Chapter 42 ______ (2002).“Transition Economies: Performance and Challenges” Journal of Economic Perspectives, 16 (1), 3-28. ______. (2007). “Strategies for Growth: Central and East Europe,” in The New Economic Geography: Effects and Policy Implications, Federal Reserve Bank of Kansas City. Terrero, Ariel (2017). “Inversión extranjera en Cuba: Amenazas de la lentitud,”Cuba Debate, November 6. Torres, Ricardo (2019). “Se exacerban las presiones en la balanza de pagos cubana,” Red Ecolatin Cuba, July 23. Veiga, Roberto (2020). “El COVID-19 en Cuba ¿Un Rubicón?,” Programa Cuba, Bogota, May.

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About Florida International University Florida International University, a public university located in Miami, has a passion for student success and community solutions. The university is classified by Carnegie as “R1.” FIU is among the top 100 public universities in U.S. News and World Report’s 2019 Best Colleges and 18 academic programs are individually ranked. FIU was recently ranked as the second best performing university in Florida and graduates are among the highest-paid in the state. FIU has multiple stateof-the-art research facilities including the Wall of Wind Research and Testing Facility and FIU’s Medina Aquarius Program. FIU has awarded more than 330,000 degrees since 1972 and enrolls more than 57,000 students in two campuses and centers including FIU Downtown on Brickell, FIU@I-75, the Miami Beach Urban Studios, and sites in Qingdao and Tianjin, China. FIU also supports artistic and cultural engagement through its three museums: Patricia & Phillip Frost Art Museum, the Wolfsonian-FIU, and the Jewish Museum of Florida-FIU. FIU is a member of Conference USA with more than 400 student-athletes participating in 18 sports. For more information about FIU, visit www.fiu.edu

About the Steven J. Green School of International and Public Affairs Launched in 2008, the Steven J. Green School of International and Public Affairs at FIU educates the leaders and changemakers of tomorrow through innovative teaching and research that advances global understanding, contributes to policy solutions and promotes international dialogue. One of the largest schools of its kind in the world, the Green School enrolls more than 5,700 students and employs 360 fulltime faculty. It offers 38 interdisciplinary degree programs at the bachelor’s, master’s and doctoral levels, as well as 54 undergraduate and graduate certificate programs. The Green School encompasses eight signature departments: Criminology and Criminal Justice, Economics, Global and Sociocultural Studies, History, Modern Languages, Politics and International Relations, Public Policy and Administration and Religious Studies. Home to 16 of the university’s most prominent international centers, institutes and programs, the Green School is an affiliate member of the Association of Professional Schools of International Affairs (APSIA).

About the Václav Havel Program for Human Rights and Diplomacy The mission of the Václav Havel Program for Human Rights and Diplomacy is to study and explore the politics of human rights, the processes of democratization in societies that were once under autocratic or totalitarian governments, and the experiences of societies currently in transition around the world. Our ambition is to foster partnerships, international dialogue, and greater global exchange in the areas of human rights, democratization and diplomacy. Our experiential basis and point of departure is Eastern and Central Europe, the home of Václav Havel. As the struggle that concluded in 1989 with the rebirth of democracy from totalitarianism in said region recedes from the attention of younger generations, the values upheld and the freedoms won more than 30 years ago must be preserved in research, publication, and implementation in all areas of public affairs and in service to the concept of an open society.

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