Description
Cubas Economic Change In Comparative Perspective
NOVEMBER 2014
Cuba’s Economic Change in
Comparative Perspective
EDI TED BY:
RI CHARD E. FEI NBERG AND TED PI CCONE
Latin America Initiative
Foreign Policy at BROOKINGS
Cuba’s Economic Change in Comparative Perspective
i
Preface
Since Raúl Castro assumed the presidency in 2008,
Cuba has been engaged in a process of updating
its economic model aimed at modernizing state-
owned enterprises and institutions and opening
up more space for the non-state sector. Te highest
authorities are involved in a government-wide ef-
fort to implement this economic policy agenda. Te
Economic and Social Policy Guidelines (known as
the Lineamientos) passed by the Sixth Congress
of the Communist Party of Cuba in 2011 set forth
steps to put Cuba on a new growth path, including
identifying the need to unify the currency, among
other necessary changes.
Some important progress has already been made.
Te emergence of small-scale business is visible
throughout the island, demonstrating the entrepre-
neurial instincts and talents of the Cuban people.
Most Cubans are now free to travel abroad and use
of mobile telephones and the internet are slowly ex-
panding. To improve its international creditworthi-
ness, Cuba has successfully renegotiated some of its
outstanding bilateral debts. Furthermore, in 2013-
2014, the Cuban government announced a series of
structural reforms which, if implemented, could be
major steps forward. Deep reform of the system of
state enterprises, begun as a pilot project, has been
generalized, promising more autonomy for frms to
retain earnings and make decisions regarding invest-
ments, employment and prices. Te government has
authorized the formation of non-state cooperatives
outside of the agricultural sector. Recognizing the
need for foreign capital and technology, in spring
2014 the government announced with considerable
fanfare a new foreign investment law; it remains to
be seen if it will yield important new projects. Te
difcult tasks of monetary reform and currency re-
unifcation are also on the ofcial agenda.
Looking forward, many challenges remain to shap-
ing comprehensive and coherent economic strate-
gies that encourage sustainable economic growth,
facilitate Cuba’s international economic integration,
and contribute to the efciency and competitive-
ness of Cuba’s economy while simultaneously safe-
guarding the revolution’s gains in social inclusion
and equity. To confront these challenges, it is useful
to look to other international examples of economic
restructuring to identify best practices for inspira-
tion and possible application in the Cuban case.
In support of this efort, scholars at the Brookings
Institution’s Latin American Initiative and econo-
mists at the University of Havana’s Center for the
Study of the Cuban Economy (CEEC) and Center
for Research on the International Economy (CIEI)
embarked on a joint research project to examine
Cuba’s economic reforms from a comparative per-
spective. Te project delved into three specifc areas
of study: economic growth with equity, monetary
policy, and institutional change. Te comparative
perspectives focused mainly on the Latin American
and Caribbean region while also incorporating rel-
evant experiences from other regions like Eastern
Europe and Asia. Te papers on these topics were
presented by the authors at three workshops held
over the course of a year: Washington, DC (May
2013), Havana, Cuba (September 2013) and Chica-
go, Illinois (May 2014). Tey were subsequently re-
vised following discussions at the three workshops
among convened experts, including colleagues
from four international fnancial institutions acting
in their individual capacities. An executive summa-
ry, along with the fnal products and their recom-
mendations, are collected in this edited volume.
Each paper is the sole responsibility of its author(s).
Cuba’s Economic Change in Comparative Perspective
ii
WORKI NG GROUP MEMBERS
Omar Everleny Pérez Villanueva (Center for
the Study of the Cuban Economy – University of
Havana)
Richard Feinberg (University of California, San
Diego and Brookings)
Carmelo Mesa-Lago (University of Pittsburgh)
Richard Newfarmer (International Growth
Centre)
Guillermo Perry (Universidad de los Andes)
Ted Piccone (Brookings)
Antonio F. Romero (Center for Research on the
International Economy – University of Havana)
Alberto Trejos (Instituto Centroamericano de
Administración de Empresas)
Juan Triana Cordoví (Center for the Study of the
Cuban Economy – University of Havana)
Ricardo Torres Pérez (Center for the Study of the
Cuban Economy – University of Havana)
Pavel Vidal Alejandro (Pontifcia Universidad
Javeriana de Cali)
INVITED EXPERTS
Humberto Blanco Rosales (Center for the Study
of the Cuban Economy – University of Havana)
Augusto de la Torre (World Bank)
Raj Desai (Brookings)
Saira Pons Pérez (Center for the Study of the
Cuban Economy – University of Havana)
Andrew Powell (Inter-American Development
Bank)
Germán Ríos (CAF Development Bank of Latin
America)
Rafael Romeu (International Monetary Fund)
Jose Juan Ruíz (Inter-American Development
Bank)
Alejandro Santos (International Monetary Fund)
Harold Trinkunas (Brookings)
Cuba’s Economic Change in Comparative Perspective
iii
Acknowledgements
Te editors are deeply grateful to Ashley Miller for
her dedication, professionalism and skill in manag-
ing all aspects of what is inevitably a complex un-
dertaking. We would also like to pay special thanks
to Caitlyn Davis, Carmen Muñoz and Kevin Tuta-
sig for their assistance with translations, production
and logistics.
Support for this publication was generously provid-
ed by donors to the Foreign Policy program’s Lat-
in America Initiative at Brookings. Te workshop
series was made possible by donors including the
Government of Norway.
Te Brookings Institution is a private non-proft organization. Its
mission is to conduct high quality, independent research and, based
on that research, to provide innovative, practical recommendations for
policymakers and the public. Te Brookings Institution does not take
positions on any policy issues. Te conclusions and recommendations of
any Brookings research are solely those of its author(s), and do not refect
the views of the Institution, its management, its other scholars, or donors.
Cuba’s Economic Change in Comparative Perspective
iv
Table of Contents
Introduction and Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Richard Feinberg
Policies for Economic Growth: Cuba’s New Era. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Juan Triana Cordovi and Ricardo Torres Pérez
Economic Transformations and Institutional Changes in Cuba . . . . . . . . . . . . . . . . . . . . . . . . 29
Antonio F. Romero Gómez
Institutional Changes of Cuba’s Economic-Social Reforms:
State and Market Roles, Progress, Hurdles, Comparisons, Monitoring and Effects . . . . . . .48
Carmelo Mesa-Lago
Economic Growth and Restructuring through Trade and FDI:
Costa Rican Experiences of Interest to Cuba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Alberto Trejos
Monetary Reform in Cuba Leading up to 2016: Between Gradualism
and the “Big Bang”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva
Exchange Rate Uni?cation: The Cuban Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
Augusto de la Torre and Alain Ize
Cuba’s Economic Change in Comparative Perspective
Working Group Member Biographies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117
Cuba’s Economic Change in Comparative Perspective
1
Introduction and Overview
Richard E. Feinberg
T
he Cuban economy has been mired in stag-
nation for over two decades. Living standards
have declined, the revolution’s historic gains in
universal health and education and in social equal-
ity are eroding, the outdated productive apparatus
is sufering from de-capitalization and technolog-
ical obsolescence, and the nation’s balance of pay-
ments is under severe strain. Frustrated by the lack
of promising opportunities, too many of the best
educated youth are exiting the island. In response
to these accumulated challenges, the Cuban gov-
ernment has initiated a process of gradual but in-
creasingly comprehensive economic reforms that
eventually may resemble a form of mixed market
socialism open to the international economy.
Te six papers in this volume explore the roots of the
crisis in the Soviet-style central planning adopted de-
cades earlier, assess the initial reform measures under-
taken since Raúl Castro assumed the presidency in
2008, analyze the many obstacles to be overcome, and
suggest some ways forward. Among the many policy
recommendations, the Cuban government should
recognize the inter-related nature of economic vari-
ables—too ofen isolated reforms introduce further
distortions and fail to produce positive outcomes—and
should make clear its strategic development model.
More transparent goals could improve the coherency of
policymaking and help mitigate public anxieties about
the future.
Readers of the six papers will appreciate that Cu-
ba’s changing model has potential: it can build upon
the gains of the revolution, notably in human capi-
tal formation, better exploit its valuable natural re-
sources in a sustainable manner, and take advantage
of its strong and diverse diplomatic relations. Cuba
may also be able to exploit its geographic location
at the crossroads of the Caribbean—if the United
States fnally relaxes its onerous economic and f-
nancial sanctions.
Te authors welcome the growing list of policy
initiatives that expand space for private initiative
and market signals, even as they underscore that
the emergent private sector labors under many re-
strictions and state ownership and central planning
maintain their dominance. Te frst paper by Cu-
ban economists Juan Triana Cordoví and Ricardo
Torres Pérez focuses on the need to rebalance prior-
ities and to give greater emphasis to efciency and
growth as a sine qua non for sustaining social goals.
A new development model, in their view, should al-
low much more space to market mechanisms and
openness to global commerce and investment, but
a smart state would still perform a great many stra-
tegic functions in the economy.
Economists have increasingly recognized that insti-
tutions play a critical role in economic development.
In their companion contributions, Antonio F. Rome-
ro Gómez and Carmelo Mesa-Lago defne institu-
tions broadly, to encompass not only formal state
agencies, but also public-private relations and regu-
latory regimes as well as societal norms and values.
Understood in this broad sense, getting institutions
Cuba’s Economic Change in Comparative Perspective
2
right is an immense challenge. While their assess-
ments difer in some respects, both Romero and
Mesa-Lago make clear that Cuba has just begun its
long journey of institutional renovation.
Mesa-Lago also ofers comparative commentaries
from the reform experiences of China and Viet-
nam, and of various Latin American nations. In
comparison, Mesa-Lago fnds that Cuba lags be-
hind in many aspects, but could draw useful les-
sons, notably in freeing up agricultural producers,
guaranteeing property rights, and welcoming dias-
pora capital. It should be said, however, that those
Asian nations did not achieve their current levels of
development in a single day and are still engaged in
processes of continual improvements. Cuban social
scientists are carefully studying China and Viet-
nam: where countries exhibit political continuity,
economic gradualism appears a better ft than an
all-embracing and uprooting “big bang.”
Like Cuba, Costa Rica is a relatively small, middle-in-
come economy located in the Caribbean Basin. Cos-
ta Rican economist and former Foreign Trade Min-
ister Alberto Trejos explains his nation’s economic
successes, rooted in human capital development and
bold, decisive engagement in the global economy.
Te Costa Rica case demonstrates that economic
openness and social progress are not exclusive; in-
deed, the former may be a pre-requisite for the latter.
Notwithstanding obvious diferences, the parallels
between the Costa Rican and Cuban cases are strik-
ing and suggest some ways forward for Cuba.
Te fnal two chapters tackle two critical, interre-
lated hurdles: monetary reform and exchange-rate
unifcation. Tese issues pose extraordinarily tough
challenges, from both technical and political points
of view. Augusto de la Torre and Alain Ize, econo-
mists with the World Bank writing in their personal
capacities and drawing on vast international expe-
riences, argue strongly for achieving exchange rate
unifcation in a single blow. A single, competitive
exchange rate would immediately eliminate many
of the distortions plaguing the Cuban economy,
provide positive incentives to exporters, and set the
economy on a more efcient, upward growth path.
But de la Torre and Ize appreciate the dangers ahead,
and suggest measures to accelerate and cushion the
transition. Cuban economists Pavel Vidal and Omar
Everleny Peréz agree that currency unifcation is
necessary, but prescribe a somewhat more gradual
path in line with Cuba’s overall more cautious ap-
proach to reform. Moreover, an intermediate stage
of multiple exchange rates would give enterprises
more time to adjust to new market incentives.
If the crux of the matter is Cuba’s internal econom-
ic management, without a doubt many of the pro-
posed reforms are made much more difcult by the
comprehensive and punitive U.S. economic sanc-
tions. Ironically, the extraordinarily prolonged U.S.
sanctions are making it more difcult for Cuba to
adopt a more market-oriented economic system.
TOWARD A NEW GROWTH MODEL
Te entry by Juan Triana and Ricardo Torres ofers
a clear-eyed evaluation of past errors that have cre-
ated an economy burdened with severe distortions
and high transactions costs. Beref of efcient price
signals, the economy is laden with overly central-
ized, multi-layered bureaucracies unable to respond
promptly to economic opportunities. Tese ver-
tical, silo-ed structures further inhibit horizontal
exchanges across sectors of the economy and prej-
udice local decision making and provincial initia-
tive. Too ofen, the construction of socialism took
precedence over economic development: the social
agenda, however vital, overshadowed efciency
in resource allocation and labor productivity. Te
limited economic reforms of the post-Soviet 1990s,
which did nearly cut in half the number of minis-
tries and state entities, nevertheless fell short, due to
the restrictive regulatory framework and “ideolog-
ical and political prejudices regarding the market
and foreign investment.” Over the last two decades,
growth averaged an anemic 1.8 percent per year,
among the weakest in Latin America, and gross
capital formation (2000-2011) registered a woeful-
ly insufcient 10.3 percent, half of the hemispheric
average. A clear lesson from the Cuban experience:
Cuba’s Economic Change in Comparative Perspective
3
without growth, social gains cannot be maintained.
To be sustainable, progressive politics require eco-
nomic prosperity.
For example, Triana and Torres attribute the se-
vere housing shortage—among the most pressing
social needs—to defciencies in the state banking
system and the absence of capital markets. Te
construction industry sufers from “technological
backwardness, organizational problems, low levels
of quality and systematic failure to meet deadlines,
lack of motivation and scarcity of skilled labor, and
de-capitalization of the national base of production
of building materials, among others.”
Te good news is that the 2011 reform guidelines
(“Lineamientos”) adopted by the Cuban govern-
ment and Communist Party confrm these lessons,
and set forth 313 steps to elevate Cuba onto a new
growth path. Te Lineamientos, however, read like
a bureaucratic compromise, accepting the impor-
tance of market-oriented reforms but reafrming
the hegemony of socialist planning and state-owned
enterprises. As many commentators have noted, the
Lineamientos lack clarity with regard to Cuba’s fu-
ture development model.
Triana and Torres propose a future development
model that prioritizes growth and stresses market
signals, and progressively reduces the state admin-
istrative apparatus in favor of indirect regulation
with clear rules and incentives, compensating for
the “excesses in equality” with elevated standards
of private consumption and access to better quality
public services. An active industrial policy can help
to construct dynamic competitive advantages: bu-
reaucratic red tape has inhibited export initiatives,
leaving Cuba with a low export per capita ratio rela-
tive to other Latin American nations (U.S. sanctions
have also hurt). To complement low levels of nation-
al savings, Cuba must ofer a welcoming hand to for-
eign investment, not only for fnancing but also to
gain access to new technologies and markets and to
insert Cuban frms into regional and global supply
chains. Attracting at the outset a few large multina-
tional frms could serve as a valuable demonstration
on global capital markets. Moreover, the authors
suggest, Cuba should gradually engage with the
international fnancial institutions, including the
Bretton Woods system (the International Monetary
Fund and World Bank), the Inter-American Devel-
opment Bank, and the Andean Development Cor-
poration, and renegotiate its foreign debt such that
future debt payment schedules are sustainable.
Interestingly, Triana and Torres take note of the
emergence of middle-class sectors, and the con-
sequent necessity to design policies that integrate
them constructively into the reform process. At
the same time, Cuba’s educational system needs
updating, to incorporate new technologies and the
shifing demands of the labor market. Labor pol-
icies must also respond to a demographic profle
of low fertility rates and an aging population: the
authors suggest policies to stimulate birth rates and
the circular fows of migrants, such that Cubans
could readily work abroad and at home, and some
diaspora Cubans might return to their native land.
Triana and Torres conclude with a warning: in the
critical formation of new institutions that promote
well-functioning markets, Cuba’s “prior experience
[is] practically irrelevant.” Such market-oriented
institutions must defne and protect basic econom-
ic rights, promote competition, correct for market
failures and promote stability and growth, while as-
suring social cohesion and means of confict resolu-
tion. In assessing the evolution of Cuba’s economic
institutions, the papers by Antonio F. Romero Gó-
mez and Carmelo Mesa-Lago pursue these themes
in depth.
ECONOMIC INSTITUTIONS
Cuban economist Romero ofers an expansive def-
nition of institutions: a series of rules, laws, beliefs,
values, and organizations that together drive indi-
vidual and social behaviors. Among the most vital
tasks of economic institutions is to enable sustainable
growth, but also to determine and, as necessary, cor-
rect the distributions of wealth and income, correct
regional inequalities, and promote social cohesion.
Cuba’s Economic Change in Comparative Perspective
4
By these criteria, revolutionary Cuba had a strong set
of institutions, even as they now appear inadequate.
Romero reviews recent eforts to renew Cuba’s in-
stitutions, outlining a large number of reforms in
various stages of implementation, ofen beginning
with pilot projects, and with mixed results to date.
Te Cuban economist discusses on-going reforms
in the state, cooperative, and private sectors, as well
as the new laws governing foreign investment and
free trade zones, noting that the reform process
is still in its early stages and “much remains to be
done.” Excessive gradualism, he warns, can actu-
ally complicate matters, and “transformations of
various sectors should be done simultaneously in
order for the reforms to be efective.” Government
entities must be better coordinated and economic
and social policies need to be carefully integrated.
Romero adds that it would be an error to anticipate
an immediate improvement in living standards: the
pressing internal and external constraints are sim-
ply too great.
In considering a new institutionalism that would
broaden and regulate the market economy, Rome-
ro adds a number of additional priorities including:
strengthening a legal system that provides guar-
antees to all economic agents, including the new
private sector and cooperatives; designing a com-
petitiveness policy that removes the many existing,
ofen contradictory restrictions; legitimizing the
accumulation of profts, with institutional stimulus
to their productive re-investment; opening the ex-
ternal sector with strong supervisory institutions;
and policies that actively protect natural resources
and cultural patrimony.
THE STATE AND THE MARKET
In reviewing the multiple reforms underway, Car-
melo Mesa-Lago provides additional details, and a
somewhat more impatient assessment of progress
to date. While applauding the general thrust of
reforms, and that they have advanced much further
than previous reform episodes and are highly un-
likely to be reversed, he nevertheless bemoans the
slow progress and states baldly: “the greatest ob-
stacle seems to be the [central planning] model it-
self.” Mesa-Lago asserts: “If Cuba were to follow an
adapted ‘socialist market’ model, as in China and
Vietnam (the private sector, markets and foreign
investment, combined with an indicative plan
and decentralization of decision making) it would
achieve much higher sustained economic growth
under the Party rule” (emphasis is mine). Tat is, it
would be in the political interests of the elites of the
Cuban Communist Party to move faster and fur-
ther, Mesa-Lago suggests, citing comparative prece-
dents. Ten why don’t they? Mesa-Lago asserts that
stubborn opposition from within the government,
from orthodox, hardline factions—fearful of del-
egation and a “snowball” efect—accounts for the
frustrating delays and contradictory steps that have
marked the Cuban reform process to date.
In a detailed evaluation of the distribution in usu-
fruct of idle state lands, Mesa-Lago fnds that the
many restrictions on the use of land and on agricul-
tural markets, including the continued repression
of at-the-farm prices and inefcient state market-
ing of produce, explain the disappointing output
results. If only the restrictions on private property
and agricultural markets were lifed, Mesa-Lago be-
lieves, Cuba could accomplish food self-sufciency
in a few years, saving $2 billion in imports and gen-
erating a surplus for export.
Both Mesa-Lago and Romero applaud the visible
expansion of small-scale private enterprise (legal-
ly employing close to 500,000 persons), and most
recently of non-agricultural cooperatives, notably
in services (cafeterias, personal hygiene), agricul-
tural markets, transportation (taxis), and construc-
tion. Te ofcially stated goal is for two million
Cubans (40 percent of the employed labor force) to
be in the non-state sector by 2016.
1
Both scholars
1
In an earlier publication, I suggest that the percentage of non-state employment could rise even higher, if one adds workers in the un-authorized
informal sector and GESPI—government employees with signifcant private-sector income. See Richard E. Feinberg, Sof Landing for Cuba?
Emerging Entrepreneurs and Middle Classes (Washington, D.C.: Brookings Institution, 2013).
Cuba’s Economic Change in Comparative Perspective
5
lament the constraints on the expansion of these
potential engines of growth, including scarcity of
bank credit and certain anti-growth taxes, and the
arbitrary exclusion of white-collar professions from
private enterprise, which is especially frustrating
for recent university graduates.
Mesa-Lago urges more transparency in evaluating
reforms, to facilitate scholarly analysis and mid-
course corrections. No ofcial data is available, he
enumerates, on poverty incidence, income distribu-
tion, average salary by gender and race, nor on the
number of dwellings sold since the 2012 housing
reform. Te government and Communist Party re-
portedly conduct public opinion surveys but do not
publish them. Mesa-Lago also laments that the an-
ti-corruption campaign has not been accompanied
by transparency and accountability of state agencies
and enterprises.
COMPARATIVE EXPERI ENCES I N ASIA AND
LATI N AMERICA
Mesa-Lago’s paper notes that Cuba has seemingly
chosen not to learn some of the lessons from pre-
vious reforms, notably in China and Vietnam, and
in Latin America: that slow and partial change fails
to generate the sought-afer dynamic growth and
improvements in living standards. Long ago, he as-
serts, China and Vietnam developed their socialist
market models where the state’s role was reduced
to an indicative plan and decision making was de-
centralized. With regard to real estate markets,
Mesa-Lago notes that despite some recent liberal-
ization,
2
the buying and selling of homes in Cuba
remain highly restricted, particularly for foreigners.
In contrast, in China foreign permanent residents
don’t face restrictions and large international fnan-
cial frms have opened realty branches. However,
in comparing Cuba’s extensive social service pro-
grams to various reform eforts in Latin America,
Mesa-Lago advises that “the lesson for Cuba is not
to privatize but to create a new public pension sys-
tem for young workers, with a solid actuarial base,
appropriate reserves and efcient administration,
in order to ensure adequate pension in the long run
and be a source of productive investment.”
A defender of the Cuban reform process could re-
spond that the Asian reforms also began gradually,
were laden with errors and mid-course corrections,
and took decades to attain their current trajectories
(although in China, agricultural reform started with
a bolder approach, allowing more freedom to farm-
ers, and generated faster results). And the starting
points for the structural adjustment reforms that
set many Latin American countries on the road to a
more sustainable growth path were far diferent from
Cuba’s Soviet-imposed centrally planned economy.
When Latin American countries began their adjust-
ment processes in the 1980s, to correct their mac-
roeconomic imbalances and open their economies,
they already possessed essentially market-driven sys-
tems. Te challenges they faced pale in comparison
to the hurdles that Cuba must surpass.
To add to the debates on comparative econom-
ic strategies, the paper by prominent Costa Rican
economist Alberto Trejos explains the dramatical-
ly successful restructuring of his nation’s formerly
rather closed and protected economy, by opting for
an unambiguous openness to international trade
and active promotion of foreign investment. Of par-
ticular relevance to Cuba, Costa Rica’s comparative
advantage has been its well-educated and healthy
workforce, the results of years of public investments
in human capital; by constitutional mandate, edu-
cation expenditures cannot fall below six percent
of GDP and the entire population is covered by an
efcient national health care system. Nor is Costa
Rica an extreme neo-liberal story. Rather the state
remains a strong player through state-owned en-
terprises in numerous strategic sectors, including
energy and other utilities, telecommunications,
and banking. Workers’ rights are sustained through
mandatory pensions, generous severance pay and
other social assistance programs.
2
For more, see Philip Peters, Cuba’s New Real Estate Market (Brookings Institution, February 2014).
Cuba’s Economic Change in Comparative Perspective
6
Costa Rica’s annual infows of foreign direct in-
vestment have been around $2 billion, coinciden-
tally the number that Cuban minister of foreign
trade and investment Rodrigo Malmierca cited as
a goal for Cuba when explaining its new 2014 for-
eign investment law. As Trejos reminds us, FDI not
only injects capital but also transfers knowledge,
best practices and familiarity with global indus-
try to workers and to domestic suppliers. Attract-
ed by Costa Rica’s educated workforce, foreign
investment has diversifed in dynamic clusters in
electronics, medical equipment, life sciences and
business process outsourcin—sectors where Cuba
might also hope to be competitive. Notably, Costa
Rica did not wait passively for foreign investors to
discover its advantages, rather it created strong but
lean and agile investment promotion agencies.
A free trade regime ofers tax and other benefts (as
does the new regime governing Cuba’s Mariel spe-
cial economic development zone) but selection now
focuses on fostering international value-chains,
clusters of related companies, and linkages between
foreign and domestic frms. Drawing on his direct
contact with foreign investors, Trejos comments that
one attraction of the Costa Rican free trade regime is
that the public institutions in charge of it are virtual-
ly corruption free and predictable (e.g., attached to
the letter and spirit of the law) in their decisions. Not
that Costa Rica is without faws: infrastructure is in
poor condition, the educational system has not fully
adjusted to the evolving demands of the labor market,
and the exchange rate has appreciated substantially
in recent years. But Costa Rica has gotten enough
right to ofer its citizens relatively high and rising
living standards. Two indicators of success: indices
of global happiness typically rank Costa Ricans near
the top, and emigration rates are well below those of
other Caribbean basin neighbors.
TOUGH CHOICES: MONETARY REFORMS
AND EXCHANGE RATE REGI MES
Te fnal two papers tackle the extraordinarily
complex—and risk-laden—task of reforming the
inter-related dual currency and exchange-rate sys-
tems. Cuba has two currencies, the convertible peso
(CUC) which is pegged at 1 CUC: 1 US dollar, and
the Cuban peso (CUP) which is fxed at 24 CUP: 1
US dollar, or 1CUC:24CUP. Yet, for frms, the ex-
change rate is 1CUP:1CUC, a massively overvalued
Cuban peso. Recognizing that these monetary sys-
tems introduce huge distortions (segmenting the
economy, sending false price signals, and compli-
cating accounting mechanisms,) the 2011 reform
Lineamientos called for monetary unifcation by
2016. Subsequently, the government announced it
will eliminate the CUC in favor of a single currency,
the Cuban peso, probably in 2015.
As Cuban economists Pavel Vidal and Omar Ev-
erleny note, the government has yet to explain just
how it will implement these reforms, especially
with regard to the dual exchange rate system, and
manage the many inter-related economic variables,
including wage levels and prices. Te anticipat-
ed massive devaluation risks unleashing powerful
infationary pressures through three channels: the
devaluation will increase the costs of imports both
to consumers and frms; producers and retailers
will seek to pass through increases in costs to their
consumers; and fscal policy may incentivize the
government to pump liquidity into frms and fnan-
cial institutions whose balance sheets are adversely
afected by the monetary reform.
Te point regarding frm vulnerability is particularly
delicate. Te distorted monetary system has allowed
inefcient frms to disguise losses. Under monetary
reform, these inefciencies will become manifest, at
which point the government can choose either to
subsidize money-losing operations through com-
pensatory fscal injections or simply allow them
to go bankrupt and dismiss workers. Yet such a
cold-turkey approach could result in social unrest
and, possibly, a generalized collapse of the economy.
Vidal and Everleny also worry about the capacity
of even the more efcient state-run enterprises to
respond quickly to new price incentives. Te gov-
ernment has begun to implement a broad-based
reform of the state enterprise sector, allowing frms
Cuba’s Economic Change in Comparative Perspective
7
more autonomy in decision making, but it remains
to be seen how quickly frms are able to adjust, and
just how much fexibility the economic ministries
and holding companies, accustomed to issuing di-
rectives, are willing to allow subordinate frms.
Another challenge will be managing public percep-
tions. Vidal and Everleny worry that many Cubans
mistakenly attribute low wages in the state sector to
the dual currency system, and anticipate that cur-
rency unifcation will result in a sharp jump in real
wages and purchasing power. In fact, the low wages
are the result of massive featherbedding and low la-
bor productivity, problems that will not be resolved
by monetary reform alone. Vidal and Everleny urge
the government to be more transparent and clear in
defning and explaining its monetary policy strate-
gies going forward.
On the plus side, the Cuban government approach-
es monetary reform with some advantages over
free-market economies: the government still sets
most prices, enabling it in the short run to repress
infationary pressures, and control over the fnancial
sector and foreign exchange reduces the risks of capi-
tal fight and exchange-rate speculation and volatility.
Tactically, Vidal and Everleny suggest a gradualist
approach toward unifying the exchange rate. Al-
ready the government seems to be following such
an approach, introducing the new devalued ofcial
exchange rate sector-by-sector in purchases of some
agricultural products by hotels, of certain inputs
by transportation cooperatives, and in the sugar
agro-industry where, for example, various transac-
tions are recorded in three diferent exchange rates
varying from 4CUP:1USD to 12CUP:1USD. Tis
sector-by-sector approach follows the style of the
overall reform process, where pilot projects precede
generalized reform. It will allow economic agents,
notably state-run frms, to adjust more gradually to
monetary shocks. However, Pavel and Everleny un-
derscore that such a multiple exchange rate system
should be transitory, otherwise it would risk intro-
ducing further distortions as well as opportunities
for corruption.
A more comprehensive and rapid approach to ex-
change rate unifcation is proposed in the paper by
Augusto de la Torre and Alain Ize. Te World Bank
economists argue that accumulated international ex-
perience militates against multiple exchange rates.
Instead, they propose a combination of an imme-
diate unifcation of the exchange rate (whereby all
CUC are mandatorily converted into the new Cuban
pesos at 24:1—they discard the dollarization option)
and a gradual phasing out of the taxes and subsidies
implicit in the current dual exchange rate system.
To achieve the latter, the currently hidden taxes and
subsidies would be made explicit and converted into
lump-sum taxes and subsidies, which would then be
gradually eliminated in line with a pre-announced
timetable. Te authors propose this transitional re-
gime of lump-sum taxes and subsidies to sofen the
huge production and distributional dislocations that
would materialize under a “raw big bang” unifca-
tion option, where an immediate unifcation of the
exchange rate would be accompanied by an instan-
taneous disappearance of the currently hidden taxes
and subsidies. In their proposal, a system of lump-
sum taxes and subsidies would be allocated on an en-
terprise-by-enterprise basis to neutralize or compen-
sate for the initial windfall losses or gains resulting
from exchange rate unifcation.
For this “fscally-cushioned big bang” to produce
the sought-afer efciency gains, while minimizing
short-run pain, de la Torre and Ize propose a series
of urgent “habilitating reforms” including: the gen-
eration of a pre-exchange rate unifcation fscal sur-
plus (Cuba’s fscal position is currently in modest
defcit) to facilitate monetary control; new revenue
mobilization measures such as a value added tax;
deep public sector governance reforms to ensure
that state enterprises become more responsive to
market signals, as Vidal and Everleny also under-
score; and other market-oriented reforms, such as
encouraging non-state frms to grow sufciently
numerous and large as to boost supply and exert
competitive pressures on state enterprises.
While advocates of an immediate currency uni-
fcation, De la Torre and Ize suggest a gradualist
Cuba’s Economic Change in Comparative Perspective
8
approach toward establishing the future exchange
rate system. Tat is, initially Cuba could set a fxed
exchange rate, followed by an intermediate phase
of a fexible but managed rate, until fnally settling
upon a more fexible (but still managed) exchange
rate with infation targeting—the approach followed
by many other Latin American countries today.
De la Torre and Ize note that, from a comparative
perspective, the Cuba case is especially challenging
in several respects. Te current spread between the
two exchange rates in Cuba, at 2300 percent, is by far
the largest in post-World War II Latin American his-
tory, increasing the risk of a wage-price infationary
spiral. To counter this risk, the Cuban government
will need to maintain very tight control over mone-
tary expansion. Further complicating the task, Cuba’s
very limited access to international fnance means
that foreign exchange expenditures cannot exceed
income during the transition. Normally, the inter-
national fnancial institutions help marshal valuable
liquidity during major reforms, to fnance a surge in
demand-driven imports, dampen infationary pres-
sures, and facilitate debt service and other interna-
tional payments, but Cuba is not a member of the
Bretton Woods or other regional development agen-
cies. Cuba hesitates to seek membership, perhaps out
of ideological misgivings or fearing a U.S. veto, and
hence must manage its monetary adjustments alone,
relying on its own resources.
SOME ADDITIONAL THOUGHTS
In recent decades, the international community has
learned much about economic development. Te
six papers in this volume, by leading Cuban econo-
mists and international experts with broad experi-
ence in developing countries and drawing on the-
oretical advances as well as success stories from a
wide variety of economic models and geographies,
suggest many relevant conclusions for Cuba. But as
the authors underscore, none of these country cases
is a semi-tropical island in the Caribbean, emerging
from over fve decades of central planning, still fac-
ing economic sanctions from its largest neighbor,
but endowed with a remarkably well educated pop-
ulation, diversifed resource base, and a prosperous,
near-by diaspora. Felicitously, and unlike many
other emerging economies, Cuba does not have to
confront a demographic explosion, nor deep eth-
nic or religious divides. Despite hostility from the
United States, Cuba enjoys good diplomatic rela-
tions throughout the world, and much good will in
Latin America.
Tis volume makes plain that reforming the Cuban
economy will be no easy task. Severe distortions
have accumulated over many decades, institution-
al rigidities are manifest, and the government and
Communist Party appear divided and uncertain on
the best path forward. Success is not guaranteed,
such that continued stagnation remains a possible
outcome; and a botched monetary reform could
catalyze a dangerous infationary spiral. Moreover,
there remains the risk of negative external shocks,
against which the Cuban economy, highly depen-
dent upon imports for food and energy and with low
international reserves, remains highly vulnerable.
3
If author Romero is correct and most Cubans can
anticipate no major improvements in per capita in-
comes in the near term, the government will have
to work hard to build and maintain popular faith in
the reform process. Te long-forgotten Cuban con-
sumer will have to endure a while longer.
Yet, some important progress has already been
made. Te emergence of small-scale business is vis-
ible in Havana and provincial towns throughout the
island, demonstrating the entrepreneurial instincts
and talents of the Cuban people. Prices have been
lifed on a growing percentage of agricultural pro-
duction, improving variety and quality for some
consumers. Government spending is becoming
more efcient as unsustainable social subsidies are
being cut, the pension system has been partially re-
formed, and the educational and health care systems
3
For a discussion of Cuba’s energy vulnerabilities, see Ted Piccone and Harold Trinkunas, Te Cuba-Venezuela Alliance: Te Beginning of the End?
(Washington, D.C.: Brookings Institution, Latin American Initiative Policy Brief, June 2014).
Cuba’s Economic Change in Comparative Perspective
9
are being rationalized. Most Cubans are now free to
travel abroad and return without penalty, and mo-
bile telephones and the internet are becoming more
widespread, if slowly by international standards. To
improve its international creditworthiness, Cuba
has successfully renegotiated some of its outstand-
ing bilateral debts and has worked hard to remain
current in meetings its hard-currency obligations.
From the U.S. side, partial liberalizations of travel
and remittances by the Obama administration have
added some stimulus to the economy, including the
emerging private sector.
In 2013-2014, the Cuban government announced a
series of structural reforms which if implemented
could be major steps forward. Deep reform of the
system of state enterprises, begun as a pilot proj-
ect, has been generalized, promising more autono-
my for frms to retain earnings and make decisions
regarding investments, employment, and prices.
Te government has authorized the formation of
non-state cooperatives outside of the agricultural
sector, in what could be a fascinating experiment in
worker-owned small and medium-sized enterprises
benefting from ofcial encouragement. Recogniz-
ing the need for foreign capital and technology, in
spring 2014 the government announced with con-
siderable fanfare a new foreign investment law; it
remains to be seen if the government approval pro-
cess gets the message and can move with alacrity to
authorize important new projects.
At its most fundamental, economic reform is a polit-
ical process which alters the distribution of income
and opportunities. Te political economy of reform
is especially challenging because potential losers can
be keenly aware of their impending fate whereas
potential winners may not see the future so clearly.
Governments, therefore, must attempt to sequence
reforms such that winners quickly recognize their
good fortunes and join an expanding pro-reform
coalition. In the Cuban case, potential winners in-
clude farmers who beneft from new price incen-
tives, entrepreneurs working in the emerging pri-
vate sector, employees in joint ventures with foreign
investors, and managers in state-owned frms who
gain from decentralization. To the extent feasible,
losers, including employees dismissed from state
ministries, should receive compensations, such as
temporary monetary subsidies and retraining for
emerging labor market opportunities. Te reform
momentum should be strong enough to prevent
early benefciaries from seeking to protect their
gains by freezing forward movement; on the con-
trary, the expanding pro-reform coalition should
perceive the advantages of pressing forward toward
a development model of rising capital accumula-
tion and labor productivity as the only pathway to-
ward sustainable growth and the redemption of the
long-sufering Cuban consumer.
Revolutionary Cuba has proudly prioritized a pro-
gressive distribution of income, which pro-market
reforms can disrupt. Te Cuban polity will decide
its future equity preferences, but certainly it will
want to guarantee equal opportunities across race
and gender, and avoid distortions that drain re-
sources from the poorer provinces. In rebalancing
priorities, policies which seek social equity should
avoid disincentives to savings and investment.
Facing an uncertain future, many Cubans fear a
sudden onslaught of investments from South Flor-
ida and a rush of bulldozers that transform Havana
and the island’s distinct regional centers into a pale
ordinariness. To avert such an apocalypse, the Of-
fce of the Historian has been restoring colonial Old
Havana and other historic sites, to preserve past
glories and to create a major tourist destination,
demonstrating that strong far-sighted planning and
commercial viability can be compatible in the Cu-
ban setting. If the rest of Havana and other towns
are to become sustainable and attractive locations,
then capable institutions that plan and regulate
urban development, that provide smart aesthetic
guidelines for architects and investors, must be in
place before the predictable onrush of foreign cap-
ital. Similarly, only strong institutions, adequately
stafed and fnanced, can safeguard the island’s rich
bio-diversity and marine life. Cuba is too beautiful,
too special, to be abandoned to purely short-term
market-driven solutions.
Cuba’s Economic Change in Comparative Perspective
10
Raúl Castro has pledged to retire in early 2018, by
which time we will have a good sense as to wheth-
er Cuba has begun to build these new institutions,
to engineer a gradual, peaceful transition to a more
productive and sustainable economy. In this “sof
landing” scenario, Cuba would have re-engaged
with the global economy, attracting foreign invest-
ment into diverse sectors—tourism and energy but
also agriculture, bio-technology, entertainment and
sports—with more and more Cubans engaged in
competitive export-oriented businesses. Interna-
tional capital markets—including the internation-
al fnancial institutions and diaspora capital—will
have begun to add much needed investment to bol-
ster growth and productive job creation. At the cur-
rent pace, Cubans may grow increasingly frustrated
and look elsewhere for a brighter future.
As the authors suggest, now is the time for the
Cuban government to accelerate reforms. Among
possible policy priorities, more aggressive reforms
of domestic price mechanisms could quickly bol-
ster agricultural production, alleviating some of the
pressures on the balance of payments. More open
space for the expansion of the domestic private sec-
tor, notably in professional services, could not only
generate more employment and investment but
also build hope for the future: for a Cuban econ-
omy that is more productive and competitive, that
ofers more opportunities for creative innovation
and youthful employment. Productivity-enhancing
reforms within state-owned enterprises, however
challenging, must also be among the critical medi-
um-term goals. But getting to this sof landing will
require many tough decisions and probably some
good luck, as the following essays, steeped in eco-
nomic realism, reveal.
Cuba’s Economic Change in Comparative Perspective
11
Policies for Economic Growth:
Cuba’s New Era
4
Juan Triana Cordovi and Ricardo Torres Pérez
INTRODUCTION
Te changes in the Cuban economic model have given
rise to a notable reaction in academic circles, both in
Cuba and abroad. Te enthusiasm for and skepticism
of the initial moments have been followed by a more
in-depth and measured refection on the strategic is-
sues that will decide the nation’s future. Economic
issues have come to the fore in recent years, includ-
ing the increasingly evident need for a development
program in which the issues of economic growth take
precedence. Tis paper seeks to contribute to this
debate, discussing some aspects that are essential for
framing a strategy that is consistent with the needs of
Cuba and its people, which at the same time is viable
in the contemporary international environment.
Te article is organized into four main parts. First
is the introduction. Te second section addresses
the relationship between growth and development,
seen from the vantage point and particularities of
the Cuban economy today. Te third section ana-
lyzes in detail some factors tied to growth, based
on the theoretical contributions and empirical evi-
dence available. Accordingly, policy actions are sug-
gested to begin to correct the cumulative imbalanc-
es and to put the country on a path to high growth.
Te fnal section summarizes the conclusions.
DEVELOPMENT AND ECONOMIC GROWTH
Te Multidimensional Nature of Development
More than 70 years afer the seminal studies on de-
velopment
5
and afer an almost exclusive emphasis
on economic issues during those initial periods, it
is now understood that development is a multidi-
mensional phenomenon. “Development sustain-
ability” is defned by three dimensions (economic,
social, and environmental) and must be taken into
consideration in the new scenario that Cuba is con-
structing. Previously, especially in the period up
to 1990, the existence of a close link both between
these three dimensions and with the expected pos-
itive results was assumed, however reality proved
otherwise. Since the 1990s, the difculty in striking
an adequate balance among the three dimensions
has become more visible and much more costly
than expected in earlier periods, and therefore they
must be incorporated into the development strate-
gy ex-ante.
Te challenges to fully sustainable development are
signifcant and are infuenced by the cumulative
lag in some areas of development that are decisive
today:
6
the relatively high standard of social services
and conditions that Cuba achieved;
7
Cuba’s status
4
Tis paper has been translated from Spanish to English.
5
Te reference is to pioneers of the studies that constitute the rise of “development economics,” understood as the scientifc sub-discipline that stud-
ies the economics of the less developed countries, i.e. the conditions, characteristics, and policies relating to the economic development of those
countries. Among those authors one can cite Rosenstein-Rodan, Nurkse, Singer, Lewis, Gerschenkron, Myrdal, Hirschman, Scitovsky, Perroux,
Rostow, Myint, and Prebisch.
Cuba’s Economic Change in Comparative Perspective
12
as a small island territory with limited natural re-
sources; and a negative geo-economic situation due
to the blockade by the world’s leading economic
power, which impedes Cuba’s access to the largest
and closest market in the world and limits its par-
ticipation in international fnancial markets and in-
stitutions.
Cuba and Development 50 Years Later: Lessons
Learned?
A set of lessons can be derived from the 30 years of
development experience from 1959 to 1989:
8
i. Development has its own agenda. In the frst
30 years afer 1959, the development agenda
and the agenda of building socialism became
mixed together, yielding, on more than a few
occasions, contradictory results.
ii. Enjoying advantageous external conditions
does not appear to guarantee development
results. Accordingly, a large part of the advan-
tages received due to the special conditions
of insertion
9
did not translate into improved
productive capacities or radical changes to the
characteristics of Cuba’s productive sector.
iii. Social betterment should be an explicit goal of
the development strategy, but its sustainabil-
ity depends on social gains translating into
enhanced productive capacity.
iv. Te market plays an active role in that process;
ignoring it generates inefciencies that tend to
thwart the very purpose of development.
v. Te “local level” has its own characteristics; it
cannot be understood as merely a subcompo-
nent of the “national level.”
vi. Te export sector and the domestic market
should not be considered polar opposites, but
as complementary phenomena that are part of
a single process. Eforts are needed to ensure
that the “dynamic sectors” generate “spillover
efects” to the rest of the national economy.
vii. Isolation from the international trends in the
world economy may generate costs in the long
run that ofset the benefts obtained in the
short term.
viii. Te concentration of external dependency be-
comesa strategic weakness harmful to the pur-
poses of development.
Institutions and Economic Development in Cuba
One of the lessons of recent years is that the quality of
institutions is relevant for attaining development.
10
In-
stitutions are understood to include everything from
policies to state agencies and civil society organiza-
tions, along with the mechanisms for regulating them.
Te state and the market are likely the two most im-
portant factors for development. Development re-
quires not only the correct allocation of resources, a
function that the market is generally able to perform
efciently, but also the attainment of objectives for
which the market does not have a sufciently efec-
tive response, thereby guaranteeing opportunities for
access to services that are strategic for development,
such as education and health. On other occasions the
correct allocation of resources generates dynamics
that promote levels of inequality which in the medi-
um and long term are at odds with the aims of devel-
opment. Tis is not due to market failures, but rather
is the result of market dynamics, justifying and open-
ing the door for the corrective role of the state.
6
Such as: international insertion; productive development; incorporation of I+D+i to production and services; the use of information and commu-
nication technologies; and access to logistic and transport circuits on a global scale, among others.
7
UNDP, Human Development Report 2011– Sustainability and Equity: A Better Future for All, (New York: Palgrave MacMillan, 2011).
8
Juan Triana Cordoví, “De la actualización del funcionamiento al desarrollo económico,” in Miradas a la Economía cubana: el proceso de actual-
ización, eds. Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva, (Havana: Caminos, 2012).
9
Tis refers to the benefts Cuba enjoyed as one of the most backward/underdeveloped members of the Council for Mutual Economic Assistance
(CMEA). Tese include preferential access to these markets; attractive prices for its main export products (sugar, nickel, etc.); low-interest loans
with long amortization periods; renegotiation of debts in arrears; and technical assistance in science, sports, and the arts, among others.
10
Dani Rodrik, “Estrategias de desarrollo para el próximo siglo,” paper presented at “Developing Economies in the 21st Century” at the Institute for
Developing Economies, Japan External Trade Organization, Chiba, Japan, January 26-27, 2000.
Cuba’s Economic Change in Comparative Perspective
13
An important initial stage of the process of institution-
al redesign in Cuba occurred in the mid-1990s when
the State was reorganized and the number of ministries
and state units was cut practically in half, reducing the
number from more than 50 ministries and state units
to less than 30. Tat process also aimed to redefne the
functions of these institutions, especially the minis-
tries, to foster the “separation of state and enterprise
functions.” Tis objective was not attained at the time.
Meanwhile, the opening that had been promoted
from the early 1990s on allowed for market growth,
not only by the impetus created by the “self-em-
ployed”
11
sector and the opening to foreign capital
and foreign commercial enterprises, but also due to
a certain fexibility granted to the state enterprises
that did business in foreign currency.
In this case, several events signifcant for Cuba
came about at the same time. First, Cuba main-
tained a restrictive regulatory framework (even
though, without doubt, as of 1993 macroeconomic
decision-making became more fexible and open,
with positive impacts on growth). Second, the mac-
roeconomic distortions were generated and deep-
ened in the wake of the crisis from 1990 to 1993,
together with sustained ideological and political
prejudices regarding the market and foreign invest-
ment (which were tolerated but not assimilated into
the “normal” operations of the economy). Finally,
the impossibility of accessing the U.S. market has
been all the more critical since 1990. All this con-
solidated a climate not propitious for growth or for
national (state) or foreign investment.
Te Need for a Macroeconomic Environment that
Stimulates Growth and Investment
Increasing investment is crucial for achieving the
results pursued in any development efort. Tis is
a lesson learned. In addition, practically all the ex-
periences observed corroborate the need to ensure
a macroeconomic climate that stimulates growth,
rewards investors (national and foreign), and pro-
motes the spillover of its efects to the rest of the
economy. While the management of cross-cutting
policies is decisive for creating such a climate (fs-
cal, monetary, and exchange policies), these alone
are not totally sufcient.
Recognizing that the reform initiated in the 1990s
generated a legal framework for domestic invest-
ment that to some extent brought it closer to the
paradigm of the West,
12
at the same time peculiari-
ties are identifed in the operation of that same legal
framework that limit its contribution to investment
fnancing. Tese include: the poor performance of
the banking system and the absence of a capital
market; the lack of competitiveness of the banking
institutions resulting from excessive centralization;
and the marked short-term bias of Cuba’s banking
institutions.
13
With respect to domestic investment,
several kinds of limitations associated with the ca-
pacity to efectively promote a massive construction
program have been noted. Tese include: techno-
logical backwardness, organizational problems,
low levels of quality and systematic failure to meet
deadlines, lack of motivation and scarcity of skilled
labor, and de-capitalization of the national base of
production of building materials, among others.
Similarly, the structure of that investment is rele-
vant to development, although each experience is
particular in terms of sources and use. In this case,
while foreign investment was aimed at strategic
country objectives and had a positive impact on
exports and sales,
14
domestic investment did not ef-
fectively accompany foreign investment (Figure 1),
resulting in a missed opportunity to internalize a
major part of the benefts associated with foreign
11
Tis is the sector of small private enterprise in Cuba, which can only operate in activities authorized by the government, mostly simple services
and small artisan production.
12
Lidia Villar López and Víctor Rodríguez García, “El proceso inversionista y la fnanciación de inversiones en Cuba,” Economía y Desarrollo 148,
No. 2 (July-December 2012).
13
Ibid.
14
Omar Everleny Pérez Villanueva and Pavel Vidal Alejandro, “La inversion extranjera directa y la actualización del modelo económico cubano,”
(Havana: Center for the Study of the Cuban Economy (CEEC), 2012).
Cuba’s Economic Change in Comparative Perspective
14
direct investment (FDI) and considerably reducing
the multiplier efect on growth and employment.
It is also crucial to develop a policy to improve and
modernize infrastructure that cuts transaction costs
and contributes to the competitiveness of goods
and services. Despite the gains in infrastructure
development in the 1970s and 1980s, from 1990 a
signifcant quantitative and qualitative defcit has
accumulated. Te technological lag in the railway
system
15
and in coastal transport; decapitalization
in the ports,
16
technologies and systems for storage
and handling of freight; backsliding in the public
transportation system; the technological lag and the
low penetration of cellular telephones and of data
transmission (Internet), along with the high rates
charged for their use, all place Cuba far below com-
petitive standards in the region, and are disincen-
tives to growth and investment (both domestic and
foreign).
“Updating the Economic Model” and
Development: A New Opportunity
In the 1990s, the nature of the economic crisis
17
and
the existence of a more restrictive international en-
vironment, especially due to the reinforcement of
the U.S. blockade, made it such that eforts were
concentrated on managing the crisis to ensure sur-
vival. Nonetheless, at least in discourse, develop-
ment goals remained on the agenda. A heterodox
program that combined fscal cuts, wage anchors,
Infastructure
Goods
Commercial Services
Social and
Government Services
0% 5% 10% 15% 20% 25% 30% 35%
Percentage of total investment
FIGURE 1. INVESTMENT BY SECTOR IN CUBA (ACCUMULATED (1994-2012)
Source ONEI, Anuario Estadistico de Cuba 2012 (Havana: 2013)
15
As part of the policy set forth in the guidelines, today a project is under way to modernize the country’s railways.
16
Tree projects for port modernization are under way: one in Mariel, another in Santiago de Cuba, and the third in Cienfuegos.
17
Most specialists agree that the crisis that began afer 1989 was the result of a combination of internal and external causes. Among the internal
causes, one can cite mainly the exhaustion of the growth model and the limitations on the system for managing the economy. For example, from
1986 to 1989, cumulative GDP growth was null. Among the external factors one fnds the notable deterioration of the international economic
environment since the the mid-1980s, especially in regard to Cuba’s access to international fnancial markets and the collapse of the Soviet Union
in 1991.
Cuba’s Economic Change in Comparative Perspective
15
import adjustment, dollarization of the economy, a
fxed ofcial exchange rate and implicit devaluation
of the Cuban peso in the domestic market as well as
an overvaluing of the ofcial exchange rate, the loss
of the purchasing power of wages, along with the
opening to foreign capital, all made it possible for
the country to survive yet generated distortions that
continue to weigh down eforts to achieve growth.
Economic policy was marked by its focus on “cri-
sis management,” something which remained un-
changeable until the approval of the Economic
and Social Guidelines (Lineamientos Económicos y
Sociales). Macroeconomic distortions, balance of
payments restrictions, a high propensity to import,
alongside a technologically backward productive
sector with high levels of inefciency as well as a
major decline in real wages, are the conditions un-
der which the transformation eforts began in 2007.
Tere are two clearly distinguishable stages: the frst
from 2007 to 2010, in which crisis management
predominated, and the second, as of late 2010 (dis-
cussion of the Guidelines) and especially early 2011
(approval of the Guidelines), when the door was
opened to a more all-encompassing framework.
Te need for an economic development model ap-
peared aferwards and the concept is still unfolding;
hence the importance of examining diferent per-
spectives. Today one can identify points of consen-
sus on a set of issues, some of which are evident if
one looks to international experience, but which are
not so evident looking just at the case of Cuba:
1. Development is a necessary condition for the
sustainability of “Cuban socialism.”
2. Growth is essential for achieving develop-
ment in Cuba.
3. Achieving high rates of fxed investment is
essential for growth.
4. Foreign direct investment is necessary and plays
a central role in eforts to achieve future growth.
5. Production structure policies should supple-
ment the growth efort. In particular, chang-
ing the energy and import matrices, export
orientation and the production of goods with
a higher value-added should be an explicit
goal of those policies.
6. Modernization of the infrastructure, with
special emphasis on information and com-
munication technology (ICT), should ac-
company growth.
7. Research, development, and innovation sys-
tems should be modernized and adapted to
the growth efort.
Te Agents of Development: Te State,
“Self-Employed Persons,” Members of
Cooperatives, and the “Highly Skilled Labor
Force”—Is it Possible to Have a Middle-Income
Sector Committed to Development in Cuba?
Te role of each of these actors in the future devel-
opment of Cuba is not fully defned. While progress
has been made on the central idea that their dy-
namics should be aligned with the common devel-
opment goals, past experience shows that the role
of these diferent agents has swung back and forth.
Accepting that at present this pendulum-like per-
formance is a thing of the past and that what is at
stake is developing, it seems logical that the State
should take the lead in the process and align itself
with all the other actors. At the same time, this is
a process riddled with difculties and uncertainties
that will require a carefully-designed legal frame-
work.
Yet what is truly novel in that development process
is the role of the (still incipient) middle-income sec-
tor. At present the positive role of the middle class
in the development processes is recognized in dif-
ferent countries and regions.
18
Te case of Cuba is
more complex because the specifc socio-economic
18
Francisco H. G. Ferreira, Julian Messina and Jamele Rigolini, La movilidad económica y el crecimiento de la clase media en America Latina, (Wash-
ington, DC: World Bank, 2012).
Cuba’s Economic Change in Comparative Perspective
16
and political characteristics require thinking about
a “middle-income sector” diferently than other
Latin American countries, not only in terms of its
origins, but also in light of the roles it must play in
the process of economic modernization.
Te role of social classes in the Cuban Revolution
undoubtedly continues to be a polemic issue.
19
More than 40 years afer social segments that could
be described as middle class practically disappeared
from the national reality, this process of updat-
ing (which today makes Cuban social actors “less
equal”),
20
creates opportunities for a “relatively new
social diferentiation” compatible with the aims of
growth and development. It is a question of know-
ing how viable the creation, consolidation, and ex-
pansion of a middle-income sector of sorts are in
the new Cuban socioeconomic structure, and how
that sector is distinguished from Cuba’s “principal
actors.” If it is viable, then it is necessary to design
policies that permit the integration of that new so-
cial sector into the new agenda of changes.
From the Path of the Unknown to a Vision of the
Country: What Does Prosperity Mean in Cuba?
What are the Challenges to Sustainability?
If development is always a process with a high level
of uncertainty, in the particular case of Cuba this
process fts within another process, also highly
complex, which consists of maintaining/consoli-
dating Cuban socialism, a goal which the political
leadership described from the outset, in one way or
another, as a “road to the unknown.”
Moving towards development generally involves an
ex ante understanding of the country one wishes to
have. In this respect, the political leadership itself
has formed a skeletal understanding of the desired
paradigm which constructs a vision of the country
as “a prosperous and sustainable socialist soci-
ety”
21
that is “less egalitarian but more just”.
22
Tis
is the most recent conceptualization of that desired
future, which lays out the contours but does not de-
fne the details. Hence de-codifying the details of
the components of that vision is an essential exer-
cise in the country’s future planning.
What specifcally will defne Cuban socialism in
terms of the economy? An interpretation of recent
events suggests that state ownership and manage-
ment of key sectors and leading enterprises, along
with the expansion of the private, cooperative, and
foreign capital sectors, have resulted in mixed man-
agement of the economy (a type of planning dif-
ferent from the current one, with the addition of
the active incorporation of the market) with direct
and decisive state support for health and education.
Tese elements appear to constitute the central core
of that future socialism, an inalienable element of
which is preserving independence.
What does a prosperous country mean in the case
of Cuba? Te relative ambiguity of the concept (be-
cause it entails a major subjective component asso-
ciated with people’s perceptions) requires that one
look to specifc indicators to clarify the answer.
One such proxy could be the Human Development
Index and some of its components,
23
whose evolution
over time is observed in the following fgure (Figure
2). Several readings could be done of this indicator
for Cuba, but all of them confrm the need to supple-
ment it with other indicators, especially if one com-
pares it to the country’s evolving economic and social
trends. Te frst comparison highlights the contrast
between the improvement of this indicator and the
relative stagnation of the rate of growth of per capita
19
Carlos Rafael Rodríguez, “Cuba en el tránsito al socialism: 1959-1963” in Letra con flo, vol. 2, Carlos Rafael Rodríguez (Havana: Ciencias Sociales,
1983).
20
Raúl Castro Ruz, “La mayor satisfacción es la tranquilidad y serena confanza que sentimos al ir entregando a las nuevas generaciones la respons-
abilidad de continuar construyendo el socialismo,” Granma, February 25, 2013.
21
Raúl Castro Ruz, “Valoramos que la actualización del modelo económico marcha con paso seguro y se empieza a adentrar en cuestiones de mayor
alcance,” Granma, December 14, 2012.
22
Castro, Granma, February 24, 2013.
23
But it should be understood that it is merely an initial approximation and is not reduced to this Index.
Cuba’s Economic Change in Comparative Perspective
17
GDP in these same years and the deterioration of the
real wage experienced in that same period.
24
A sec-
ond element that calls into question the results of this
index is that even in the 1990s, when GDP sharply
declined, the HDI not only did not deteriorate, but
improved. Te HDI improved even though there was
a general deterioration of indicators of economic ef-
fciency and quality of life, such as diminished access
to food and the quality of food, as well as a decline
in transportation and electricity generation, and an
increase in hidden unemployment.
Te level of access to jobs that require skilled labor,
improve productivity, and are adequately remuner-
ated, as well as the level of access to modern ser-
vices, could be included within the concept of pros-
perity along with the degree of equity in income
distribution. In contrast to the rest of Latin Amer-
ica, Cuba has attained high standards of equality—
although it is increasingly clear there is a setback
in this area, partly as a result of the development
process, but also due to the peculiar way in which
Cuba is moving toward a new economic model. Te
path to development, in this case, should compen-
sate the excesses in equality with improved stan-
dards of private consumption, especially associated
with the increase in consumption in absolute terms
and access to better quality public services.
In the case of sustainability
25
(a characteristic or
state according to which the needs of the current
population can be met without compromising the
capacity of future generations or populations in
other regions from meeting their needs), being a
small island territory no doubt imposes a signif-
cant challenge.
26
Nonetheless, other indicators of sustainability sug-
gest the major challenge Cuba faces on its path to
development. Cuba’s demographic dynamic—the
availability and use of water and arable land, for
example—contributes another perspective, which
in one way or another points toward the better use
of existing resources and an improvement in Cuba’s
24
José Antonio Alonso and Pavel Vidal, “Reglas, incentivos e instituciones,” in ¿Quo Vadis, Cuba? La incierta senda de las reformas, edited by José
Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013) pp. 256-297.
25
Te fgures used are from Human Development Report 2011 – Sustainability and Equity, p.164.
26
Mindful of said study by the United Nations, Cuba’s environmental footprint is 1.9 (UNDP, 2011), much less than other countries with similar
levels of per capita income, yet the consumption of fossil fuels as a percentage of the total is practically 90 percent and urban pollution is also rel-
atively high. In others, such as per capita greenhouse gas emissions, forest cover and its variation, the indicators are relatively favorable. Another
angle of analysis is to refer these indicators not to population but to the country’s productive capacity.
0.8
0.78
0.76
0.74
0.72
0.7
0.68
0.66
0.64
0.62
1990 2000 2005 2008 2009 2010 2011 2012 2007 2006
FIGURE 2. HUMAN DEVELOPMENT INDEX, CUBA (1990-2012)
Source: UNDP “International Human Development Indicators,” 2013. http://hdr.undp.org (accessed March 31, 2013).
Cuba’s Economic Change in Comparative Perspective
18
technological and organizational levels. In the me-
dium and long-term, however, they point to the im-
perious need to achieve signifcant “technological
leaps forward” that make it possible to create bet-
ter conditions for attaining that sustainability. No
doubt a policy that stimulates growth and makes
it possible to achieve these goals of prosperity and
sustainability is decisive in Cuba’s immediate future.
Te Need to Grow to be able to Develop: Te Cuban
Experience Post-Crisis.
Te economic growth of any country is not an aim in
itself, but constitutes an essential vehicle for attain-
ing other important societal objectives. High growth
may help create more productive jobs and reduce
poverty. It also helps to obtain the resources neces-
sary for health services, education, science, sports,
and culture, among other key benefts and services.
Analyzing the determinants of economic growth is
one of the most dynamic core areas of economic sci-
ence. Te breakdown of growth based on its immedi-
ate determinants (capital and labor), and the result-
ing residual—Total Factor Productivity (TFP) has
a long history and has been the subject of intense
theoretical and empirical debates.
With the profound economic crisis of the early
1990s, the predominant focus in managing the econ-
omy was on the short-term, to address urgent situ-
ations in an exceptional period. Nonetheless, this
need has shed light on the importance of addressing
the country’s prospective development by granting
greater space to strategic matters. While Cuba be-
gan the recovery in 1994, the average growth rate of
Cuba’s gross domestic product (GDP) in the last 20
years has been approximately 1.8 percent annually,
making it one of the lowest-performing countries
in Latin America. If one takes into account only
the years afer 1993, the average rises to 3.2 per-
cent.
27
Tis is still less than average for the region
in the same period and is perhaps the most meager
performance in the area. Certainly, a series of neg-
ative factors converge in Cuba that do not afect the
rest of the countries in the region, but one cannot
discard the possibility of this record being unsat-
isfactory even discounting the country’s particular
conditions
28
(Figure 3).
27
Calculations based on Economic Commission for Latin America and the Caribbean (ECLAC) CepalStat, consulted in February 2013, http://web-
sie.cl/sisgen/ConsultaIntegrada.asp.
28
In 2014, GDP growth was planned at 2.2 percent. At the end of the frst half of the year, it has only managed to grow 0.6 percent and was expected
to close at 1.4 percent, confrming the tendency of continued poor economic performance.
FIGURE 3. RATE OF GROWTH OF REAL GDP, CUBA (1990-2014)
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
P
e
r
c
e
n
t
a
g
e
s
Source: Author’s calculations based on ONEI (several years).
Cuba’s Economic Change in Comparative Perspective
19
In recent decades international experience has
shown that growing at high rates is necessary for
attaining development.
29
Yet that experience also
tells us that along with the magnitude of growth,
the quality of that growth is decisive.
30
Or similar-
ly, if those high growth rates are attained based on
deepening and consolidating a disadvantageous
situation in international trade, or on extensively
exploiting a country’s natural advantages, or if that
growth does not achieve signifcant changes in the
structure of the economy and does not reach into
those very sectors helping to increase their techno-
logical complexity, then the development impact
will be signifcantly reduced, in part because the
impacts on labor productivity and income distribu-
tion will not be long-lasting.
Cuba has experienced sustained growth since 1994,
of course at rates signifcantly lower in the last 20
years (approximately 3 percent, depending on the
reference year taken).
31
While there has been a no-
table structural change in the composition of exports
from goods to services, this growth is also the prod-
uct of a combination of the emergence of new sectors
and the decline of others that had a long tradition and
had traded in great volumes, such as sugar. Similarly,
if one looks at the structure of output, non-commer-
cial services (generally with lower productivity) con-
tinue to account for a decisive proportion of output
and greater share of employment.
Table 1 confrms the essential diferences in the
style of growth and the means of addressing the cri-
sis which began to take shape in the 1980s. Te frst,
basically extensive, typifed by relatively low restric-
tions on access to resources and fnancing, where
the “opening” also meant implementing the System
for Direction and Planning of the Economy, had
positive efects, shown by the fact that the contri-
bution of TFP is greater than that of capital. In the
second and third period, TFP refected the inertia
in the style of the adjustment employed to manage
the crisis in the frst stages, with a preference for
substantial cutbacks over major economic policy
changes. Te last of the periods, 1994-2003, shows
how regulatory changes had a positive impact on
29
Yenier Mendoza, “¿Ha sido importante el capital humano en el crecimiento económico de Cuba?” (Havana: Facultad de Economía, 2007).
30
Yaima Doimeadios, El crecimiento económico en Cuba: Un analisis desde la productividad de los factores, (Havana: Facultad de Economía, 2007).
31
Juan Carlos Palacios “Determinantes y restricciones del crecimiento económico en Cuba”, Revista de la CEPAL No. 110, (August 2013).
32
Commission of Growth and Development, Postcrisis World in Developing Countries, (Washington, D.C.: World Bank, 2010).
33
ECLAC, Cambio Estructural para la Igualdad: Una visión integrada del desarrollo, Trigésimo cuarto período de sesiones de la CEPAL, San Salvador,
August 27-31, (Santiago: United Nations, 2012).
34
Always calculated at constant prices. Tere are several papers in which the rate ranges from less than 2 percent annual average, if one takes 1990 as
a point of departure, to just over 3 percent if one takes 1993-94 as the starting point.
TABLE 1. ESTIMATIONS OF THE CONTRIBUTION OF ECONOMIC GROWTH FACTORS IN CUBA
Period ?PIB ?K ?L ?PTF
1976-1985 6 3,42 1,49 1,09
Mendoza (2003)
29
1986-1993 -4,75 1,76 0,91 -6,11
1994-2000 3,81 -1,03 0,08 4,75
1975-1985 6,45 1,7 2,56 2,19
Doimeadiós (2007)
30
1986- 1989 0,52 1,99 1,25 -2,71
1990- 1993 -10,03 -0,57 0,41 -9,87
1994- 2003 3,33 -1,52 0,27 4,58
1986-1993 -4,70 3,08 0,67 -8,45
Palacios (2010)
31
1994-2003 4,42 0,81 -0,22 3,83
2004-2008 6,28 1,21 1,96 3,11
Source: Prepared on the basis of works consulted.
Cuba’s Economic Change in Comparative Perspective
20
the recovery, even though they did not reach the
necessary depth and breadth. Te permanence of
institutional arrangements particular to the devel-
opment style of the 1980s prevented the adjustment
and structural changes that began in 1994 from
having a greater impact.
35
Additionally, the de-
creasing support shows the labor force in the frst
two models suggests that investment in education
requires other supplements (incentives, physical
capital, infrastructure, and information and ICT) to
fully utilize the human capital formed.
ANALYSIS OF THE STRUCTURAL FACTORS
OF ECONOMIC GROWTH
While economic theory and empirical evidence are
not conclusive as to the essential causes of sustained
economic growth, a tacit consensus has formed
around a group of elements that appear to deter-
mine countries’ performance, albeit in diferent
proportions depending on the specifc context and
particular priorities derived from diverse cultures.
Te analysis incorporates some of these essential
factors, grouping them along two main axes: supply
and demand. Within supply, the aspects related to
the simple accumulation of factors and their quality
are addressed. Te second group includes those el-
ements associated with demand, with a special em-
phasis on external markets.
In the fnal analysis, the interaction between them
and the policies decided upon by governments leads
to a certain path, subject to the restrictions and op-
portunities imposed by the international sphere.
Tis sphere has become ever more important in re-
cent decades, and requires special attention on the
part of small countries whose very open economies
are dependent on the external fows of goods, capi-
tal and knowledge.
Dynamics of the Population/Workforce: Te Case
of a Middle-Income Economy with an Advanced
Demographic Transition
Te labor force is one of the fundamental factors of
production. Cuba’s demographic profle suggests a
near future contraction of the labor force, increas-
ing the non-working age population and pressure
on public fnances. Te aging of the population
36
and the increase in the dependency index (from 54.7
at present to 67.7 in 2025) are distinct aspects of this
process. Tis trend could constitute a threat to sus-
tained long-term growth, bearing in mind that due
to Cuba’s stage of development, it still depends on a
greater availability of factors to sustain a path of high
growth. Growth in such circumstances would be al-
most unprecedented for a developing state, since the
experiences of high growth in the last 50 years oc-
curred in countries with a growing and mostly young
labor force during most of that process. Cuba will
face a diametrically opposed situation.
In this regard, although one recognizes the long pe-
riod over which these demographic processes have
unfolded, and the fact that a change in the current
trend would only begin to be perceived within a
few decades, one could put a number of measures
in place to cushion the current explosive path. Tis
would allow more time to formulate other policies
and begin to reap the benefts of the more immedi-
ate measures.
Tis process began, in fact, in 2008, with the re-
form of the Law on Social Security. Te changes
were geared toward increasing the maximum age of
retirement, from 60 to 65 years for men; and from
55 to 60 years for women. Tis made it possible to
delay, for a time, the moment when the rate of new
entrants to the job market would be lower than the
35
Tere are other more recent papers that obtain a breakdown of Cuban economic growth, with slight changes in the periods and methodologies
employed, including, among others, Yordanka Cribeiro, Contribución de la fuerza de trabajo califcada al crecimiento económico en Cuba, (Havana:
Facultad de Econmía, 2011). Nonetheless, the fundamental conclusions do not vary signifcantly.
36
In 2011, 18.1 percent of the population was over 60 years old; that proportion will increase to 26.1 percent in 2025.
Cuba’s Economic Change in Comparative Perspective
21
rate of those who are retiring. Tere was also an in-
crease in the number of years necessary for bene-
fting from a pension in the general regime. Tese
changes may help alleviate the negative impact of
the country’s demographic shif on the availability
of public resources for covering expenditures for a
growing over-60 population.
A comprehensive program is needed to stimulate
the birth rate, as low fertility is one of the direct
causes of the current trend. In this respect, one
could work to establish a program to provide assis-
tance to couples who have more than one child. In
subsequent stages one could extend this plan to in-
corporate some type of facility to acquire or expand
the housing of families with two or more children,
increase the spaces available in day care centers (cír-
culos infantiles), or cover part of the expenses asso-
ciated with child care by private certifed day care
centers, as well as a certain amount of food. Tese
programs, which have been tried with relative suc-
cess in very diferent contexts, such as the Scandi-
navian countries, are highly dependent on an im-
provement in the fscal position of the state.Tus,
they should be implemented once a stable fow of
resources has been secured such that macroeco-
nomic equilibrium is not compromised.
In addition, immigration regulations should con-
tinue to be adapted in order to consolidate, in the
medium term, a process of circular emigration that
attenuates the drain of qualifed personnel to other
countries. One could think about extending addi-
tional guarantees for migrants of working age. Te
idea would be to guarantee, in the best of conditions,
a strengthening of the ties with the country of origin.
Tis efort runs up against a high degree of endog-
eneity, and this characteristic should be a sufcient
argument for accelerating the transformations that
take place in the economic model, especially those
that have a direct impact on the capacity of persons
to use their multiple talents to create individual and
collective wealth and well-being, not only in the non-
state sector, but also the public enterprises in which
most Cuban workers are employed. Improving the
living conditions of vast segments of the population,
albeit to a relative degree, could help contain the fow
of migrants. For the time being, as a result of the
changes in the migration regulations and uncertainty
about the country’s prospects, the negative balance of
migration in 2012 (46,662 persons) was the highest
since 1994, the year of the “crisis of the rafers.” Tis
refects the complexity of the problem and the fore-
seeable negative impacts of this brain drain in the
medium term.
Moreover, it may be necessary to develop closer
relations with the Cuban emigrant community to
facilitate greater exchange with Cuba, while at the
same time extending these contacts beyond afec-
tive ties, family visits, or remittances, and toward
the intellectual-productive realm so as to create
conditions for some to consider a partial return to
their country of origin based on identifying con-
crete interests in the work and business worlds.
Te Quality of the Workforce
Most experts recognize that Cuba is well-endowed
with human capital, the direct result of a very active
education policy that includes higher education. In
2010 Cubans had approximately 10.57 average years
of schooling,
37
the highest of any country in Latin
America and the Caribbean, and one of the highest
in the developing world (trailing only South Korea
and Taiwan). On the education component of the
HDI, Cuba has great educational achievement (87.6
percent of the highest possible score), once again
the best in Latin America and most of the under-
developed world (except former socialist countries
and others in East Asia).
Research capabilities have also been created in sev-
eral areas, with particular distinction in agricultural
sciences, medicine, and biotechnology for applica-
tions related to human health. Nonetheless, in the
last two decades, due to a multitude of factors close-
ly related to the economic crisis of the early 1990s,
37
Robert J. Barrow and Jong Wha Lee, “Educational Attainment for Total Population, 1950-2010,” v. 1.0, 2010.
Cuba’s Economic Change in Comparative Perspective
22
the quality of the education system has gradually
deteriorated while other essential complements
for the development of human capital such as the
quantity and quality of the means of production,
and expanding capabilities for basic and applied
research, among others, have also experienced set-
backs. Added to this is the weakness of the produc-
tive system, whereby a sufcient number of jobs
are not created to efciently absorb highly-skilled
workers.
Added to this is a structure of skills in the profession-
al and technical personnel that has not been updated
fast enough to fully assimilate the major technolog-
ical advances of the last two decades. Tese short-
comings are especially noteworthy in information
and communications technologies (ICT) and foreign
languages (Table 2). In addition, education and train-
ing in engineering and the natural and exact sciences
were substantially cut back with the crisis. Finally,
the major efort to extend the reach of higher educa-
tion did not translate into a signifcant improvement
in the quality of the graduates.
Tere are baseline conditions that depend on a
greater endowment of resources, from more in-
vestment in updating the equipment available for
training professional and technical personnel, to
greater deployment of ICTs, which would help in-
crease access to knowledge generated elsewhere. In
addition, exposure to international trends should
be furthered through education-abroad programs,
including graduate-level education. In this area one
could also make progress through coordinated ac-
tions in relation to foreign investment strategy. Such
requirements have been applied by other countries
to expand the spillover efects of such fows.
On another topic, increased technical training for
teachers and professors is also subject to an im-
provement in economic performance that would
make it possible to increase salaries. At the same
time, gradually eliminating the monetary duality
would foster a better scenario for evaluating the im-
pact of these movements on price stability.
Physical Capital Accumulation
Current levels of investment do not guarantee the
replenishment of physical capital or its expansion
at the required rates. In the presence of very low
domestic savings, one must substantially increase
access to external savings, especially through FDI.
Tis not only guarantees fnancing, but also new
knowledge, technologies, markets, and insertion
in global and/or regional value chains, and diver-
sifes risk. One could put together a comprehensive
strategy along these lines that includes at least these
three axes.
First there is the need to increase the volume of re-
sources and to improve efciency in the use of do-
mestic savings. Tis requires a proper framework
that stimulates productive investment by national
actors, public or not, which matches their treatment
to that granted to foreign companies.
Tis requires the progressive updating and mod-
ernization of the national fnancial system so as to
facilitate the use of new instruments and the deploy-
ment of a specialized banking system such as de-
velopment banks, agricultural banks, microfnance
institutions, and venture capital. Here the human
resource training component is crucial, along with
introducing new information and communications
TABLE 2. SELECT INDICATORS OF ICT INFRASTRUCTURE
Cuba Latin America
Fixed telephone lines (/100 pop.) 10.6 18.5
Mobile telephone lines (/100 pop.) 11.7 106.7
Internet Users (/100 pop.) 23.2 39.4
Broadband Internet subscriptions (/100 pop.) 0.04 7.5
Source: By the author based on ONEI, Anuario Estadístico de Cuba (several years) and World Development Indicators (2013).
Cuba’s Economic Change in Comparative Perspective
23
technologies. One can look to successful experienc-
es in this area in Latin America, both of govern-
ments and of numerous fnancial institutions and
regional integration bodies. One must note that as
growth rates improve and global productivity in-
creases, one should generate larger volumes of do-
mestic savings, which would amplify the scope and
impact of such transformations.
A notable reserve of investment resources (and oth-
er resources, including labor) lies in progressively
reducing the administrative apparatus of the Cuban
State and Government. Such an initiative would
free up a huge sum of resources for other productive
purposes, while at the same time is consistent with
an economic mechanism in which indirect regula-
tion and the use of modern systems for planning
and managing economic activity will have greater
weight. It would be a substantial supplement to ef-
forts to increase the contribution of national sourc-
es to the fnancing of productive investment.
Nonetheless, it is understood that due to both the
conditions at the starting point and the present stage
of Cuba’s development, external fows of fnancing
will be key for many years, representing all together a
larger contribution than could be achieved from na-
tional sources. One must bear in mind that the aver-
age invested in the last two decades is only 10 percent
of GDP, far less than the rates of 25-30 percent that
have been observed for many years in high-growth
economies. For that reason, a series of actions should
be proposed to improve access to international fnan-
cial markets that includes a gradual approach to the
most important fnancial institutions (the Bretton
Woods system), but also to other regional fnancial
institutions, such as the Andean Development Cor-
poration (CAF), the Inter-American Development
Bank (IDB), and the Bank of the South. Tere are
numerous political and technical obstacles, but the
magnitude of the benefts suggests integrating these
eforts within the transformations under way.
At the same time, there should be continued eforts
to renegotiate the largest tranches of Cuba’s exter-
nal debt on sustainable bases. To date, favorable
results have been reached with Japan and Russia,
both members of the Paris Club; but steps in this
direction should be accelerated. One important
channel for supporting the aforementioned strat-
egy has to do with negotiating preferential associ-
ation agreements with partners with great weight
in the world such as the European Union and the
Union of South American Nations (UNASUR).
Both blocs have some favorable conditions for suc-
cessfully concluding those processes. One notable
characteristic of the above-mentioned actions is the
“avalanche” efect, whereby the extent to which tan-
gible gains are attained in an area, more propitious
conditions would be created for success in all other
respects. Tis extends to the country’s credit scores,
which impose a huge additional cost derived from
the high country risk and by the fact that only one
of the three major credit rating agencies includes
Cuba in its analyses.
38
In order to capture larger-scale fows of foreign capital,
a new comprehensive strategy for attracting FDI needs
to be designed. Such an initiative is both essential and
promising in current conditions. Along these lines,
one must make progress in grasping the many contri-
butions that can be expected from such a movement
if it is conceived of as part of a vision of development
looking to the future that takes into account the con-
ditions and rules of the contemporary world. Here one
can include the usual capital, technology, and market
along with values of a new generation such as the cre-
ation of high-skilled jobs, insertion into global and/or
regional value chains, risk-sharing, etc. In view of its
expected impact, one should design a special policy
for attracting large foreign businesses that can have a
signifcant “demonstration” efect for other partners.
Existing niches could also be tapped to attract more
funds to small- and medium-scale projects with a lo-
cal and regional impact.
38
Moody´s. In April 2014, this agency downgraded Cuba’s sovereign debt to Caa2, citing, among other things, the high exposure of Cuba’s balance
of payments to reduced ties with Venezuela.
Cuba’s Economic Change in Comparative Perspective
24
At present, the Law on Foreign Investment is un-
der review and it is anticipated that there will be a
specifc regime for the Special Development Zones
(Zonas Especiales de Desarrollo, or ZEDs), among
which the Port of Mariel is a pioneer. In both cases
one of the bases of current tax revenues should be
consistent with international practice and progress
in the immediate regional environment. Otherwise
it would be very difcult to ensure the success and
sustainability of such policies. Te same reason-
ing, if applied to special projects such as the ZEDs,
could be extended to certain economic sectors for
the purpose of fostering the best possible condi-
tions for their subsequent advance.
Structure of Accumulation and Complementarity
among Productive Factors
Te previous considerations are relevant only to the
extent that it is understood that one essential principle
for the policy recommendations that stem from this
approach is that—more important than the specifc
aspects—consolidating a successful and sustainable
strategy for accumulating factors lies in the degree of
complementarity that must be found at each point in
time. Given that planners’ information needs are very
high, a steady advance depends on progressive decen-
tralization and changes in the rules of the game at the
microeconomic level, including the strong promotion
of innovation and external competition.
Progressively reducing the distortions present in
the fundamental prices of the economy plays a role
here. Correcting the disequilibria associated with
the dual monetary circulation and the multiplic-
ity of exchange rates is a necessity that cannot be
put of. Tis should be supplemented successively
by mechanisms that make it possible to transmit
changes in international prices to the domestic
economy so as to guide the internal allocation of
resources. Tis is especially relevant taking into ac-
count the size of the Cuban economy and its high
dependence on foreign trade.
Te other main component of these macroeconomic
changes is situated at the level of the meso-economy.
It would be especially important to design an indus-
trial policy that would boost the competitiveness of
those activities that have a special impact on accu-
mulation and on Cuba’s external insertion. In this
regard, not only is the quantitative and qualitative
increase in the availability of productive factors im-
portant, but in addition, a regulatory framework
with adequate rewards and penalties is needed for
establishing clear rules that make it possible for
the economic actors to correctly channel their de-
cisions related to the combination of available fac-
tors. Accordingly, a sufciently fexible and mod-
ern framework is needed so that enterprises of any
size and type of ownership can increasingly make
fexible decisions about their levels of production,
prices, type of ofering, choice of suppliers and tar-
get markets, and establish various partnerships,
including with foreign companies. Moreover, prog-
ress is needed on the institutional framework that
supports progressive fulfllment of the fundamental
markets of the economy, such as the fnancial mar-
ket, the labor market, and the capital goods market.
Access to International Markets
One of the secular characteristics of the Cuban econ-
omy has to do with its high external dependence and
the prejudicial nature of that relationship over histo-
ry. Cuba’s most profound economic crises have had
to do with disturbances whose origins are in the ex-
ternal sector. In this context, one notes the country’s
scant export dynamism, the maintenance of a profle
of low levels of diversifcation, specialization tied to
products that are hardly dynamic in the internation-
al market, and dependency on a large commercial
power at diferent stages. In the Latin American
region, Cuba has one of the least commercially-in-
tense economies, especially if one bears in mind its
size and level of development. Tis condition has not
changed substantially in the last 25 years, even if one
takes into account the efect of the sales of services
(Table 3). Tis performance is inconsistent with a
history of high growth for open economies.
Te Cuban central government should accord high
priority to attaining greater trade integration based
Cuba’s Economic Change in Comparative Perspective
25
on negotiating mechanisms for preferential access
with diferent partners. In Latin America, Cuba is
one of the countries with the fewest preferential
trade agreements, which puts its producers at a
clear disadvantage vis-à-vis their competitors in the
rest of the world. Preferential agreements need to
be negotiated with more countries, extending to in-
vestments, protection for intellectual property, and
technical barriers to trade given the strong relation-
ship between fows of productive capital and trade
in the modern world. Certainly the U.S. blockade
is a major obstacle in this regard, with profound
bilateral and multilateral implications. In trade,
the United States accounts for almost one-fourth
of world imports, but it is an even more important
buyer for the countries of Latin America, which
means that the cost to Cuba is much higher than
what one can predict based on a static analysis. To
this is added a signifcant qualitative dimension: it
is not just one more trading partner, but a world
leader in the supply of advanced technologies and a
major source of investment fows.
Another sphere in which substantial changes are in
order is the regulatory framework for exporters. For
example, even though Cuba has negotiated some
trade agreements with Latin American countries, at
present most of the items subject to preference re-
main inactive on the Cuban side. One of the most
common complaints from Cuban exporters is the
large number of regulations that apply to export
operations and all the red tape one must wade
through. A relatively small sum of resources could
go a long way toward simplifying these procedures.
One very important aspect is related to modifying
the nature of the intermediation between producers
and commercial operators in the external markets.
At present, it is still administrative in nature, caus-
ing great inertia and infexibility, further distanc-
ing the producers from the trends in international
markets. Here one could further strengthen a group
of key institutions such as chambers of commerce,
both general and those that represent specifc sec-
tors, while at the same time strengthening an ex-
port promotion agency with a clear mandate. Tese
organizations could fll the needed space, advising
Cuban companies to expedite the process of com-
ing out successfully in the external market. To this,
other more specialized ones could be added based
on the type of product or geographic area.
Te Domestic Market
Ofen forgotten or undervalued, the role of the
domestic market takes on new importance today
as a factor for promoting growth. In this case,
it is important to understand that the change in
the scenario of the current Cuban economy and
future trends promote an expanded role for new
economic actors (small and medium enterprises,
TABLE 3. EXPORT POTENTIAL OF SELECT COUNTRIES OF LATIN AMERICA
Countries Total exports/GDP
Exports of
goods /GDP
Per capita total
exports
Per capita
exports of goods
1990 2012 1990 2012 1990 2012 1990 2012
Bolivia 20 45 17 41 147 1149 125 1067
Chile 31 34 25 29 775 5205 635 4482
Costa Rica 27 38 19 25 639 3542 441 2381
Cuba 21 22 19 9 562 1474 512 567
Dominican Republic 20 25 8 15 255 1416 102 876
Ecuador 29 36 24 34 318 1708 265 1591
Guatemala 23 25 18 20 176 832 136 670
Uruguay 23 27 18 20 694 3870 544 2928
Source: Authors’ estimates based on United Nations Conference on Trade and Development UNCTADStat (consulted February 2013).
Cuba’s Economic Change in Comparative Perspective
26
cooperatives, and private actors). Te role of these
new actors in creating capacities for accumulation,
the process of completing the productive chains,
and the introduction of process and product inno-
vations should radically change the structure and
dynamics of Cuba’s domestic market. One of the
essential challenges has to do with achieving the
full integration of these new actors to productive
activity, including access to knowledge and new
technologies.
Other countries’ experiences show that horizon-
tal relations are essential in a modern economy.
Along with traditional commercial relations, one
also notes an increase in agreements related to in-
vestments, joint project management, integrating
research and development units, strategic partner-
ships for accessing new markets, and many more.
Tis type of behavior is associated with a more fex-
ible type of organization that responds to the chang-
es more nimbly and that is capable of constructing
and sustaining competitive advantages, intelligently
combining their capacities with those of other insti-
tutions that operate in their milieu.
Te Cuban economic model has worked with a
wide variety of barriers that limit the development
of horizontal relationships among institutions,
parceling up a domestic market that is already
small. Tis creates additional difculties for the
social division of labor and specialization, which
are fundamental forces for increasing productivity
and, therefore, for improving incomes and eco-
nomic and social development. Among the most
visible barriers, one can cite the highly vertical and
centralized structure of the economic system, the
placement of the entities by provinces, the type of
currency with which current transactions are con-
ducted, the form of ownership, and ministerial af-
fliation, among others.
Given that the economic system works on the basis
of a vertical and centralist model, most decisions
are made at the higher-level structures for coordi-
nation. Tis means that the duration of the whole
process is drawn out, as proposals have to be dis-
cussed and approved at the various levels, to later
be implemented in the companies. In addition,
given that in general these actions involve the ex-
ecution of resources, and that such expenditures
should be included in the annual plan of the entity
and corresponding ministry, approval is even more
complex because it depends on the real availability
of resources in keeping with the external fnancial
balance sheet. Tis presupposes certain very strong
disincentives for managers when it comes to seri-
ously thinking of undertaking an action in this re-
gard.
In other cases, the possibility of associating or es-
tablishing some type of exchange is prohibited or
limited administratively. Tis is the case of service
companies assigned to a specifc territory (province
or municipality) or those that address their respec-
tive ministerial structures. As a rule, they cannot
engage in transactions with entities other than
those approved for purchasing their inputs, selling
their production, contracting a specifc service, etc.
Te same holds for diferent types of ownership, al-
though this has improved formally in the last year.
All these barriers are much more severe if the coun-
terpart is a foreign company.
An examination of the overlap of these limitations
reveals an evident contradiction. On one hand the
entities are constantly called on to improve their
performance, while on the other hand those same
enterprises cannot respond with agility to the op-
portunities they identify. In the contemporary
economy this capacity depends crucially on being
able to establish a dense network of ties with their
counterparts in a wide array of areas, but depriving
them of that ability translates into a substantial re-
duction in their possibilities of success. Tis takes
on a larger dimension for those that are closely tied
into external markets.
Moreover, the current monetary arrangement is
based on the circulation of two currencies and mul-
tiple exchange rates. It has resulted in the establish-
ment of numerous distinct markets that operate
simultaneously. Some difer in the mechanism of
Cuba’s Economic Change in Comparative Perspective
27
price formation (regulated, fxed, freely formed),
others use diferent monetary signs (CUP, CUC,
USD), and there are both formal and informal mar-
kets. In many cases one observes an overlap of sup-
ply, in terms of trading in goods and services that
are very similar or even substitutes at very diferent
prices. Tis process ends up feeding an informal
market that operates on the basis of the arbitrage
of those price diferences. In addition, the growing
importance of the non-state sector of the economy,
which is not administratively subject to the rules of
the Annual Economic Plan, has most intensely re-
vealed that the development of markets for factors
of production is lagging considerably with respect
to consumer goods. In addition, the restrictions in
which Cuban monetary policy has operated in the
last 20 years have resulted in monetary mechanisms
in which price stability has depended excessively on
containing real salaries, which keeps the actual con-
sumption of families at very depressed levels. Tis
conspires against the necessary increase in aggre-
gate demand, so as to make it possible to accommo-
date a larger and more specialized supply.
Tese distortions result in the process of allocation
of productive resources taking place without clear
signals of the relative scarcity of the various inputs,
factors of production, and structure of demand.
Tis inevitably leads to a very inefcient distribu-
tion, precisely the least desirable outcome in a con-
text of scarcity. On top of that, the dynamic efect
of this mechanism could be the most dangerous
aspect. For example, the diferences in remunera-
tion among certain occupations may be inducing a
shif in the skilled labor force to positions that do
not necessarily require a high professional level.
Tis may represent a gain in the short run for the
individual, but it may be a waste of resources from
society’s point of view. Unfortunately, once a cer-
tain amount of time has gone by in such conditions
it is very costly to reverse the situation, since the
non-use of certain skills and know-how may result
in a partial disqualifcation. Similar processes may
be occurring in other markets, while the enormous
current distortions are maintained.
CONCLUSIONS
Cuba is a special case of the paradoxes of develop-
ment. Cuba is a pioneer in explicitly introducing
social policies into a development strategy, with un-
questionable accomplishments in terms of standard
of living and social mobility indicators. Yet going
back to the years prior to 1990, it is also notable for
its limited capacity to tap into that unquestionable
advantage, especially in the last two decades, given
its scant fexibility when it comes to accommodat-
ing to a changing and ofen hostile external envi-
ronment. A signifcantly less prodigious scenario
and 20 years of attrition managing a crisis that be-
gan in the 1990s, have led to a re-thinking of the
future in the medium to long term and to an efort
to fnd a model of sustainable development that en-
sures prosperity and gains for the nation in specifc
areas.
Te paradoxes, however, are unquestionable. On one
hand, Cuba is a country with limited resources that
has not succeeded in coming up with a macroeco-
nomic and institutional design that allows it to ex-
ploit those scarce resources intensely and efectively.
On the other hand, it enjoys a relative abundance of
highly skilled labor for which the economic mod-
el is not able to generate adequate, productive, and
sufciently well-remunerated employment. Tere is
also increasing recognition of the insufciencies of
the state sector along with hesitations and sustained
restrictions on greater expansion of a non-state sec-
tor that has already proven it can be functional to
the purposes of Cuban socialism. Characteristics in-
clude: unquestionable evidence of the insufciency
of its own resources for undertaking development
and signifcant technological lags along with de-
lays that are hard to understand in the opening to
foreign capital; time restrictions, both political and
economic, in the face of procedures that at times are
excessively drawn out for making and implement-
ing economic decisions, with an opportunity cost
that has yet to be calculated (but is no doubt high);
a strong aspiration to decentralize decisions in the
face of a profound centralizing culture that perme-
ates the very process of “decentralizing”; the need
Cuba’s Economic Change in Comparative Perspective
28
for “institutional innovations” that accompany the
“updating of the model” in the face of the survival
of institutions that were born and developed in the
past that have not been able to change their modus
operandi in any essential respect and that generate
high transaction costs.
Tat is why the policies for stimulating growth
must not be considered in isolation from the con-
text in which they are implemented. Just in the
last two years there has been a much more explicit
intent to integrate that vision of growth and devel-
opment in Cuba as part of the strategy for “mod-
ernizing Cuban socialism.” Nonetheless, there is
still a long way to go not only in terms of design,
but also when it comes to applying the approved
policies and learning from those experiences. One
must also acknowledge that as the process advanc-
es it will be more complex, as the Cuban economy
and society will become more diverse. It will then
be much more necessary to truly fne-tune and co-
ordinate those policies to be able to minimize the
costs of that process.
Technical difculties are also encountered in the
initiative to move toward policies with an emphasis
on economic growth. First, the skills and knowl-
edge that Cuba’s decision-makers manage to in-
corporate will be key. Tis is due essentially to the
fact that for 50 years they have trained in a context
and with mechanisms that are part of the problem
today, and a consensus appears to be emerging in
the direction that some of the coming tasks have
to do with making substantial changes to the eco-
nomic model. Even though certain terms are not
used, it seems clear that Cuba is moving toward a
model more like a market economy
39
, yet the fnal
objective does not appear to be to transition into a
typical capitalist country. Tis has a value that goes
beyond the sphere of political economy, given that
the reconfguration under way implies that the tools
and policies to be fostered (for example, economic
growth), would be increasingly similar to those em-
ployed by most countries. Hence the importance of
drawing on the lessons learned from the experienc-
es of other nations.
Te microeconomic level is another area that may
be a source of bottlenecks in implementing these
policies since there have been no frms or con-
sumers in Cuba for many decades in the standard
meaning of these terms. As a result, the institu-
tions that support the sound working of markets
40
(in which these economic actors increasingly have
to make their decisions) are very weak and do not
have the skills or know-how in the public adminis-
tration to construct them, again due to the previous
experience being practically irrelevant. Tis line of
reasoning indicates that the scenario that Cuban
decision-makers will face in the future will be no
less difcult with regards to the mix of policies and
instruments for directing an increasingly complex
and decentralized economy. Tis would be the case
even if economic indicators were to improve sig-
nifcantly.
39
Tis can be observed in a number of spheres, such as: the growing weight of the non-state sector (private and cooperative); greater decentraliza-
tion in decision-making for all economic actors as a whole (consumers, state enterprises, private enterprises, cooperatives); greater functionality of
the price system in the allocation of productive resources; and the growing role of direct taxes (applied to the net earnings of a productive activity)
in fnancing the State, among others.
40
Including, among others, the defnition and promotion of basic economic rights, the promotion and defense of competition, correction of market
failures, promotion of stability and growth, and social cohesion and efective dispute resolution. For more details on this issue see Alonso and
Vidal.
Cuba’s Economic Change in Comparative Perspective
29
Economic Transformations and
Institutional Changes in Cuba
41
Antonio F. Romero Gómez
INTRODUCTION
In recent years (2011-2014) a process of major
changes has been set in motion in Cuba that afects
core aspects of the previously existing economic
model. Te economic transformation—structural
in nature, also including reforms in management
mechanisms, and in economic and administra-
tive organization—entails changes in the political
sphere and equally key institutional challenges.
Te relationship between economic change and
institutional change is a two-way process: institu-
tional change is necessary for enforcing economic
reform, and economic reform, in itself, changing
the rules of behavior of economic and social actors,
implies an institutional change. At present, Cuba
is going through an economic transformation of
greater reach than the country had experienced in
earlier periods. Given the irreversible nature most
analysts attribute to these changes, they must be
accompanied by a profound institutional change,
understanding this as a change in the rules, norms,
and values that had prevailed in Cuba until recent
years.
In light of the aforementioned, it is useful to study
the institutional changes that accompany—and
also those that should accompany—the process of
economic and social transformation currently un-
der way in Cuba.
Obviously, the Cuban case is characterized by a set
of elements—both objective and subjective—that
explain certain points of resistance to the process
of change, and which make it such that this process
has been based on the implementation of gradual
yet continuous modifcations
42
that are leading the
system towards an economic, social, and institu-
tional environment unknown to most Cubans born
afer the triumph of the revolution.
Te fundamental purpose of this paper is to study
the economic and institutional changes that have
occurred in Cuba in recent years. To do so, the
analysis is organized in four sections. Te frst high-
lights some recent conceptual notes regarding the
discussion about institutions and economic change.
Te second section addresses considerations con-
cerning the starting point of the economic and in-
stitutional changes in an efort to contextualize the
Cuban reality up to the end of the last decade. Te
third section undertakes an analytical summary of
the economic and institutional changes that have
taken place in Cuba in the most recent period. Te
fourth section describes some of the most import-
ant institutional changes facing Cuban society to-
day, highlighting what remains to be done. Finally,
41
Tis paper has been translated from Spanish to English.
42
In efect, not a year has gone by in Cuba since 2008 in which some regulation typical of the past has not been modifed.
Cuba’s Economic Change in Comparative Perspective
30
the main ideas contained in this essay are summa-
rized in the conclusion.
GENERAL CONTEXT OF THE DISCUSSION
ON INSTITUTIONS AND ECONOMIC CHANGE
Institutions defne the framework of incentives and
penalties, of values, norms, and beliefs that shape
and regulate social interactions. In so doing, institu-
tions not only reduce their own risk and transaction
costs, but also spur on collective action, resolving
certain problems of coordination that arise among
institutions that make decisions independently in a
framework of generalized interdependence.
43
In the recent period the most modern theories re-
garding economic growth and development em-
phasize the relevance of institutional quality in the
processes of modernization and growth of econo-
mies.
44
With respect to both the discussion of the
relationship between institutions and economic
development, and the adaptability to change or the
socially acceptable distribution of the benefts of
collective action, there is a strong focus on the idea
of institutional quality and its main determinants.
In estimates by Alonso and Garcimartín,
45
institu-
tional quality is the most solid and robust factor
explaining countries’ development, no matter the
indicator used to measure it. Many analysts tried
to identify the variables that explain institutional
quality, having recourse to historical or geographic
factors in each country. In an earlier article Alon-
so and Garcimartín adopted a more analytical ap-
proach, trying frst to identify the criteria that defne
a “quality” institution.
46
Tey suggest the following
criteria for gauging institutional quality: (i) the ca-
pacity of an institution to promote equilibria that
exhaust the possibilities aforded by the technolog-
ical frontier; (ii) the capacity of the institution to
draw up credible inter-temporal contracts; (iii) the
capacity to reduce the uncertainty associated with
human interaction; and, (iv) the capacity of the in-
stitution to anticipate changes in the social reality.
Change theory has evolved to greater complexity in
explaining the economic dynamic, incorporating
new factors and new economic conditions, moving
from the realm of the tangible (physical capital) in
identifying the factors that promote growth to an-
other realm in which less tangible factors play an
important role, such as externalities, knowledge,
technology, and human capital.
47
Sustained economic growth implies macroeconom-
ic stability, for which there must be a stable, credible,
and predictable legal and regulatory framework in
the country. In addition, public fnance, with its two
components of revenues and expenditures, needs to
be efcient, fexible, fair, and efcient. Clearly, both
the regulatory activities of the state and those as-
sociated with its redistributive functions depend
on the scale of and capacity for managing the pub-
lic treasury. Finally, to ensure sustained economic
growth, it is essential to have adequate institutions
for promoting macroeconomic stability through
monetary, fscal, and exchange policy instruments.
Also among the determinants of sustained econom-
ic growth are considerations associated with the
distribution of income and assets, which requires
that the state correct that distribution, to that end
drawing on the possibilities aforded by its regula-
tory activity and the policy for revenues and pub-
lic spending. Tis task, intrinsic to every modern
state, is essential given that the market strengthens
43
José Antonio Alonso and Pavel Vidal, “Reglas, incentivos e instituciones,” in ¿Quo vadis, Cuba? La incierta senda de las reformas, ed. José Antonio
Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 256-279.
44
Nonetheless, we are far from having a unifed and consensus-based theoretical framework for analyzing institutions and their change processes.
45
José Antonio Alonso and Carlos Garcimartín, “Factores determinantes de la calidad institucional. Un estudio empírico”, Revista de Economía
Aplicada, Vo. XIX, No. 55, (2011) pp. 5-31.
46
José Antonio Alonso and Carlos Garcimartín, “La calidad de las instituciones: una panorámica internacional,” Cuadernos de Información
Económica, no. 202, (February 2008).
47
José Antonio Alonso and Juan Triana Cordoví, “Nuevas bases para el crecimiento,” in ¿Quo vadis, Cuba? La incierta senda de las reformas, ed. José
Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 25-64.
Cuba’s Economic Change in Comparative Perspective
31
dynamics of accumulation conducive to increasing-
ly polarized income distribution.
48
Finally, promoting social cohesion—an indispens-
able component of any development strategy and
any sustainable pattern of growth—requires the
existence of solid and credible institutions to rep-
resent and channel the interests of the most diverse
social groups. Given that the market does not guar-
antee adequate distribution of economic activity
throughout the national territory, promoting social
cohesion also requires setting in motion regional
and institution policies to correct exclusionary ter-
ritorial dynamics.
HISTORICAL CONTEXT AND STARTI NG
POI NT OF THE CURRENT ECONOMIC AND
INSTITUTIONAL CHANGES I N CUBA
From the triumph of the Revolution until 1976, a
period referred to as one of provisional institution-
al arrangements (de provisionalidad institucional),
the Revolutionary Government centralized and
concentrated executive and legislative functions in
Cuba. It did not distinguish between state functions
and governmental functions. Te laws issued by it
were constitutional in nature and aimed to address
all areas of social life from this single organ of pub-
lic power.
49
Te permanent hostility of the U.S. administrations
—through political pressures, the imposition of dip-
lomatic isolation, espionage, economic sanctions,
direct aggression in various forms including orga-
nizing plans to assassinate President Fidel Castro,
and military harassment—helped to install a siege
mentality in Cuba’s institutional culture. In this
context, the political leadership of the country un-
derstood that the concentrated control of resources
and forces, the armed mobilization of the popula-
tion, and discipline in citizen conduct were the best
resources for gathering forces that would deter the
intent of direct aggression and would make it pos-
sible to address the challenges raised by the indirect
aggression.
50
Concurrently, the revolutionary state
grew in size, infuence, and degree of programming
of social life, on the legitimate grounds of national
defense.
In economic terms the model included—and still
does, albeit with signifcant modifcations—attrib-
uting decisive weight to state ownership over prac-
tically all the means of production, and according
priority to large state enterprises as the fundamen-
tal form of economic organization. Te direction of
the economy has been based on planning with very
high doses of centralization and, consequently, the
role of monetary-mercantile relations in economic
operations has been marginalized.
To the aforementioned one must add the efects
stemming from the profound process of income
and opportunity redistribution through social jus-
tice policies via state action, with the consequent
social ascent experienced by broad sectors of the
Cuban population during this period. Tis rein-
forced the perception that it was necessary to en-
shrine the state as the only instrument capable of
carrying out the great revolutionary transformation
and ensuring national independence.
51
Te socialist Constitution promulgated on Febru-
ary 24, 1976 institutionalized the new state. It had
three fundamental objectives: (i) to regularize the
decision-making process, (ii) to decentralize state
power, and (iii) to enshrine the catalogue of citizen
rights. Tese objectives were to be attained through
the dynamic of centralization-decentralization
48
Te public institutions should set in motion corrective mechanisms that prevent the consolidation of exclusionary processes and strengthen equal
opportunity among economic actors.
49
See Santiago Díaz de Sarralde and Julio César Guanche , “Descentralización y desconexión del poder estatal,” in ¿Quo vadis, Cuba? La incierta
senda de las reformas, ed. José Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 226-255.
50
Ibid.
51
Ibid.
Cuba’s Economic Change in Comparative Perspective
32
established in the text of the Constitution. None-
theless, the institutional system would preserve
strong features of state concentration and, at the
same time, determined that in the dynamic of cen-
tralization-decentralization, the central level of the
State would be favored.
Since 1992, when the Constitution was amended to
bring it into line with the post-Cold War scenar-
io, the state structure has been notably reduced:
there was a cutback in public sector employment,
state organs were downsized, certain state functions
were redefned, an efort was made to decentralize
power downward (to the provincial and munici-
pal governments), and laterally (to the ministries),
there was an increase in the autonomy of the parts
(ministries and other states institutions) and dif-
ferent levels (national, provinces and municipality
levels), and measures were adopted for their oper-
ations that granted more space—albeit limited—to
the market forces, with prices established by supply
and demand.
52
Tese changes became much more
evident as of 2011, with the gradual implementa-
tion of several policy measures incorporated in the
Economic and Social Policy Guidelines, which were
approved at the Sixth Congress of the Communist
Party of the Cuba and aferwards reafrmed by the
National Assembly of People’s Power, a process that
will be addressed in the next section.
53
In any event, the Cuban State continues to exhibit, at
the beginning of the second decade of the 21
st
cen-
tury, a notable degree of centralization that was ex-
pressed both territorially, with respect to the scope
of authority of provinces and municipalities, and
functionally, on concentrating the decision-making
processes of a good part of the economic agents,
mainly of the state enterprises, which are at the core
of the national productive structure. Te current
economic and institutional reform is called upon
to reduce those degrees of centralization, allow-
ing for greater autonomy for the state enterprises
and the new non-state productive actors that have
been consolidating, as well as for the geographical
entities. Certain advances can be noted along these
lines. Obviously, this process is not easy, since it af-
fects one of the key axes for articulating power and
defning spaces for citizen participation.
ECONOMIC MODI FICATIONS AND
INSTITUTIONAL CHANGES: IMPLEMENTI NG
THE ECONOMIC AND SOCIAL POLICY
GUI DELI NES I N CUBA
Any assessment of Cuba’s economic performance
afer the triumph of the Revolution in 1959 would
have to recognize periods in which there were gains
and positive results, but also structural rigidities
and bottlenecks that ultimately have held back the
development of the productive forces in Cuba.
From 1959 to 1989 Cuba’s total output grew at an
average annual rate of 4.3 percent, which deter-
mined per capita growth of 2.8 percent, for which
signifcant investments were made, and average an-
nual gains in labor productivity came to 2 percent.
54
More signifcant is that those results were record-
ed at the same time as a progressive redistribution
of income was brought about stemming from the
profound transformations in the social structure
based on the radical revolutionary process begun
in January 1959, and in the midst of the iron-fsted
economic sanctions—commercial and fnancial—
imposed by the government of the United States on
Cuba as of early 1962.
Te changes in the international scene in the late
1980s, and in particular the disappearance of the
socialist system from the world economy, undercut
52
Indeed, the State, since the early 1990s – with the economic adjustment and reform measures begun in 1993 – renounced part of its monopoly
over the economy, employment, and control of the population’s incomes.
53
Cuban Communist Party, VI Congress of the Cuban Communist Party, Lineamientos de la política ecónomica y social del partido y la Revolución,
April 18, 2011.
54
José L. Rodríguez, “La economía cubana,” in Estado, nuevo orden económico y democracia en América Latina, (Caracas: Editorial Nueva Sociedad,
1992), pp. 217-223.
Cuba’s Economic Change in Comparative Perspective
33
the bases that sustained Cuba’s foreign economic
relations and set in motion an acute critical dynam-
ic in the Cuban economy starting in 1990. Tose
transformations required re-articulating the coun-
try’s external economic relations. Tat re-articula-
tion of Cuba’s foreign engagement, begun in 1993,
resulted in some changes in the forms of economic
management as well as perceivable—though not
radical—changes in the structure of ownership and
employment. For some observers, the emergence
of new actors who shook up the “traditional social
values” of the Revolution was a “necessary evil” that
should be corrected once past the critical stage and/
or once the external conditions for the country’s de-
velopment changed.
With the ushering in of the new century, and with
a gradually expanding economic relationship with
the Bolivarian Republic of Venezuela—later in the
context of the Bolivarian Alliance for the Peoples of
Our America (ALBA)—as well as consolidated re-
lations with the People’s Republic of China, the pro-
cess of changes in economic policy and economic
management (weakened since the late 1990s) came
to a halt and there was a certain turning back of
the process of economic decentralization that had
been experienced earlier. Yet the new modalities
of foreign engagement, with major revenues for
Cuba from the export of professional services and
favorable conditions for fnancing fuel imports, did
not prevent the re-emergence of a period of clear
economic stagnation, with serious macroeconom-
ic disequilibria and severe fnancial limitations,
since the middle of the last decade. Te structural
obstacles that impeded Cuba’s economic and social
development were felt once again, as has happened
repeatedly. Tose obstacles include: (i) lack of ade-
quate internal linkages in the productive structure,
(ii) lack of any change in the profle of productive
specialization (of goods), (iii) signifcant depen-
dence on intermediate and capital goods from
abroad to complete the cycle of major production,
(iv) technological obsolescence in several areas of
production, and, (v) very low economic efciency
and return on capital, which do not correspond to
the levels of education and training of the Cuban
workforce.
In large measure the insufciencies of the country’s
economic structure and dynamic could perhaps be
explained by the general characteristics of the Cu-
ban enterprise system. In a study of the systems for
managing the economy since 1959 and their impact
on the productive trajectory of the enterprises,
55
two essential elements stand out. First, the develop-
ment strategies promoted in this period were char-
acterized by the absence of a systemic approach,
impeding the attainment of key long-term objec-
tives; it was not possible to implement a coherent
set of strategies, policies, and instruments aimed at
generating a favorable context for innovation. And
second, the regulation and control mechanisms
were characterized by their centralization and verti-
cality, leaving little space for enterprises, and result-
ing in the predominance of large state enterprises
and a practically ceremonial role for cooperatives,
relegating individual entrepreneurship to a margin-
al role.
56
On taking stock of the above-noted structural prob-
lems the highest-level authorities in Cuba proposed
the need for a major process of structural changes in
the management of the economy and in economic
policy, under the rubric of “updating the economic
model,” which was approved at the Sixth Congress
of the Communist Party of Cuba.
57
As part of that
program, many changes have been introduced in
the economy and regulatory system.
Among the recent modifcations, several have as
their purpose the restructuring of the national econ-
omy in terms of employment, ownership structure,
55
Ileana Díaz Fernández, “La productividad en la empresa estatal cubana,” in Economía Cubana, ensayos para una reestructuración necesaria, eds.
Omar Pérez Villanueva and Ricardo Torres Pérez, (Havana: Centro de la Economía Cubana (CEEC), 2013), pp. 193-220.
56
See Isabel Álvarez and Ricardo Torres, “Tecnología, innovación y desarrollo,” in ¿Quo vadis, Cuba? La incierta senda de las reformas, ed. José
Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 102-147.
57
Cuban Communist Party.
Cuba’s Economic Change in Comparative Perspective
34
and scale of production. Tis restructuring opens
up more spaces and promotes a scenario in which
market considerations are becoming incorporated
into the design of economic regulation policies.
58
At the same time—and as a result of the dynam-
ics described above—non-state forms of ownership
and management are beginning to be consolidated,
including the proliferation of new enterprises that
can be classifed as micro, small, and medium en-
terprises (MSMEs).
In large part the changes have been promoted
through a procedure that is beginning to become
the norm in Cuba: First an experiment is carried
out; then the results are verifed; the proposal is ad-
justed; and it is then adopted generally through the
design and approval of the new legal framework.
59
It is in the area of economic relations where most
of the changes have taken place in Cuba from 2011
to 2014. Accordingly, a growing sector of self-em-
ployed workers has emerged, this time with “cuen-
tapropistas” (persons engaged in self-employment)
who can hire other workers. A major transforma-
tion has also taken place in the agricultural sector,
which is becoming stronger and developing coop-
erative and non-state economic entities (including
not only agro-food mini-industries). New impetus
has been given to the process of “perfeccionamien-
to empresarial” (entrepreneurial enhancement) in
several production and state services institutions,
which on occasion inspires new methods of orga-
nizing and managing productive entities. Finally,
commercial, technical, and personal services in-
stitutions that had been structured as state-owned
provincial and municipal enterprises are becoming
cooperatives of various sorts.
60
Te process of de-statization of agricultural is es-
pecially important. One should bear in mind that
the State disburses some US$2 billion annually to
import food, about half of which could be saved
since such food items could be produced nationally.
Tis was explained by Marino Murillo Jorge, Vice
President of the Council of Ministers and Chief of
the Commission on Implementation and Develop-
ment of the Guidelines.
61
For that reason, accord-
ing to him, from the Sixth Congress of the Cuban
Communist Party until mid-September 2013, 14
principal policies inherent to the agriculture sector
had been approved, with varying degrees of imple-
mentation.
62
Among these, special mention could
be made of the following structural and institution-
al changes:
i. As of 2008 idle lands began to be turned over
to individual and cooperative agricultural
producers for usufruct for 10 and 25 years, re-
spectively, with the possibility of renewing the
contract at the end of the period. In 2012 new
rules were approved that make the process
more fexible: (a) increasing the ceiling on the
maximum area per producer from 40 to 67
hectares; (b) facilities for obtaining inputs; (c)
the possibility of building housing and infra-
structure on the lands, among others.
ii. In addition, a radical transformation began
in the operation of the Basic Units of Agri-
cultural Production (UBPC: Unidades Bási-
cas de Producción Agropecuaria), the type of
agricultural productive entity which since the
mid-1990s had the largest agriculrtural land-
holdings.
iii. Since mid-2011 there has been a legal change
associated with the agricultural sector and the
substitution of imports aimed at developing
tourism. Approval was given for agricultural
cooperatives to sell directly to hotels. Now,
58
In any event, the decision is that the plan will continue to play a central role in giving direction to the economy. In this respect, Guideline No. 1
states: “Te socialist planning system will continue to be the principal means to direct the national economy….”
59
See Alonso and Vidal.
60
In addition, authorization has been given for public sector institutions of the economy to enter into contracts with private entities; a cooperative
sector is emerging that is not limited to agriculture; and major reforms are under way in the system for agro-food distribution and in agricultural
markets, among other changes.
61
Te critical assessment of the authorities themselves with respect to the agricultural sector includes the fact that of the economically active popu-
lation in Cuba, 20 percent are tied to the Ministry of Agriculture, yet it contributes only 3 percent of national GDP.
62
“Agropecuarios por la seguridad alimentaria y el avance de la economía,” Granma, September 16, 2013, p. 8.
Cuba’s Economic Change in Comparative Perspective
35
the regulations have been updated, expanding
their options. Resolutions from the minis-
tries of agriculture, tourism, and fnance and
prices, published in the Extraordinary Of-
cial Gazette No. 24 on September 9, 2013, set
forth guidance for the transformation of the
agricultural output collection and marketing
system through more expeditious mecha-
nisms that simplify the linkages between pri-
mary production and the end consumer. Tus
small farmers—owners and usufructuaries of
the land—have the option to sell their output
directly to tourism entities, something they
could previously only do through the Credit
and Service Cooperatives (CCS: Cooperativas
de Créditos y Servicios). Also, new products
were added to the list of approved products.
In addition, according to determinations
by the Central Bank of Cuba (BCC: Banco
Central de Cuba), they may open current ac-
counts in Cuban pesos (CUP) in the country’s
commercial banks to guarantee the direct ties
between tourism entities and small agricul-
tural producers.
63
iv. Also tied to agriculture, through the publica-
tion of Extraordinary Ofcial Gazette No. 35
a regulation came into force that allows for
experimental development of new formulas
for commercializing agricultural output in
the provinces of La Habana, Mayabeque, and
Artemisa. Tis decision is aimed at studying,
on a sub-national scale, other approaches
to commercializing agricultural output that
make it possible to modify, expand, improve,
and then extend these provinces’ experienc-
es to the remaining provinces. Tis address-
es the need to transform commercialization
to eliminate the mechanisms that currently
make it cumbersome, so as to make it more
dynamic, efcient, and fexible. Te idea is
also to organize and improve the commer-
cial network for agricultural goods—both
wholesale and retail—making it more acces-
sible for producers and consumers, and also
more competitive in relation to all forms of
production. Te fundamental principles be-
hind these provisions include giving life to
more fexible management mechanisms that
contribute to reducing losses in the process of
commercialization and simplifying the links
between agricultural producers and the fnal
consumer, including the possibility of pro-
ducers going to market on their own.
64
v. Similarly, the Extraordinary Ofcial Gazette
published Resolution No. 673 of 2013 from
the Ministry of Agriculture, which approves
the updating of the social purposes of the Ba-
sic Units of Agricultural Production (UBPC),
the Agricultural Production Cooperatives
(CPA: Cooperativas de Producción Agro-
pecuaria), and the Credit and Service Coop-
eratives (CCS). Tat social purpose includes
the activities of production, services delivery,
and commercialization. Tus, in addition to
producing and selling their products, the co-
operatives may buy from other forms of pro-
duction and small agricultural producers—
owners and/or usufructuaries—to sell them
elsewhere.
65
Te economic changes incorporate various dimen-
sions and afect a variety of sectors. For example,
Extraordinary Ofcial Gazette No. 4 of February
21, 2013, published updated rules by which natural
persons who seek bank loans may ofer new forms
of collateral to the branches. In addition to cash,
potential borrowers can present other goods in sup-
port of their application, which now include jewels,
precious objects, and motor vehicles, among others.
Tis measure supplements Decree-Law 289, in force
since 2011, which updated Cuba’s credit policy and
expanded those who could potentially access such
loans to include small farmers who show that they
have legal land tenure, self-employed workers and
63
“Nuevas opciones en la comercialización directa de productos agropecuarios,” Granma, September 9, 2013, p. 2.
64
“Ajustar la comercialización a la realidad de cada día,” Granma, November 6, 2013, p. 4.
65
Ibid, p. 5.
Cuba’s Economic Change in Comparative Perspective
36
those engaged in other forms of non-state econom-
ic activity, and persons who intend to hire labor or
purchase building materials.
66
In this respect, one
should recall that Instruction No. 7/2011 of the
Ministry of Economy and Planning (MEP: Minis-
terio de Economía y Planifcación) indicated that
contractual relationships between legal persons and
self-employed workers or other forms of non-state
economic management would operate like any oth-
er, and their payment would be in keeping with the
spending limits established in the plan or budget
approved for each entity. With the publication of
the new rules, the payment among these actors was
updated.
67
As has been indicated, the process of economic re-
form in Cuba includes moving some of the small
and medium state enterprises in services and small-
scale industry to non-state forms of management,
especially cooperatives. In early 2013, vice presi-
dent Marino Murillo Jorge proposed to the Coun-
cil of Ministers the approval of the frst group of
124 non-agricultural cooperatives, which included
various activities: 99 for agricultural markets, fve
for passenger-transport services, six for auxilia-
ry transport services, two for recycling waste, and
12 for construction-related activities. Of this frst
group of cooperatives, 112 are from the state sec-
tor, and 12 are from the non-state sector, the latter
formed mainly by self-employed workers.
68
Since the rise of the frst non-agricultural coopera-
tives in Cuba in July 2013, 498 have been approved
by the Council of Ministers; of these, 249 have been
constituted. Some 68 percent of these cooperatives
have been created by governments at the provincial
level.
69
In the opinion of the governmental author-
ities, the results of these new forms of non-state
economic activity have been satisfactory. In this re-
spect, they fnd that the cooperative members are
content, and are well-remunerated for their eforts;
the quality of the services has improved; there is a
more stable presence—with greater variety and se-
lection—of goods in the markets. One also notes
a sustainable improvement in the appearance of
the establishments that have been leased. Follow-
ing government approval of the second group of
non-agricultural cooperatives, a bidding process
on state-owned restaurants that were closed years
ago has begun, in which several cooperatives have
participated so far. Nonetheless, there are problems
that limit the potential of these new forms of eco-
nomic activity, including: (a) the lack of a wholesale
market where one can purchase goods, parts, and
spare parts for the production or services provided
by them; (b) limits on the availability of transpor-
tation equipment; (c) excessive hiring of labor; (d)
defcient fnancial control; and, (e) refusal of some
state enterprises to sell supplies and inputs to these
cooperatives.
70
In examining the impact that the changes have
been having, one should consider that where-
as in September 2010 Cuba had a total of 157,371
self-employed workers, by June 2014 this fgure
had reached 467,000,
71
particularly in restaurants
and cafeterias, taxi services, retail, and rentals of
houses and apartments. Tis last activity accounts
for 15 percent of the supply of lodging available for
international tourism. At the same time, as part of
the changes, public-sector employment continues
to fall, while non-state employment has climbed
steadily since 2011.
72
66
“El Banco actualiza sus garantías. Nuevas normas del Banco Central y los Ministerios de Finanzas y Economía actualizan las garantías bancarias y
los pagos entre personas naturales y jurídicas,” Granma, February 23, 2013, p. 3.
67
Ibid.
68
“Comienzan a funcionar cooperativas en diversos sectores de la economía,” Granma, July 1, 2013, p. 3.
69
“Recuperar ritmos de avance que aseguren el desarrollo socialista sobre bases sostenibles e irreversible,” Granma, July 7, 2014, p. 4.
70
“Cooperativas no agropecuarias habaneras exhiben satisfactorios resultados,” Granma, November 20, 2013, p. 3; and “Recuperar ritmos…”
71
Information from Vice President Marino Murillo Jorge, when addressing the third session of the National Assembly of People’s Power, corre-
sponding to the 8
th
Legislature, Havana. “Recuperar ritmos…”.
72
Omar E. Pérez Villanueva, “Análisis de la evolución reciente de la economía cubana,” in Miradas a la Economía cubana. Entre la efciencia económi-
ca y la equidad social, eds. Omar E. Pérez Villanueva and Ricardo Torres Pérez, (Havana: Editorial Caminos, 2013), p. 24.
Cuba’s Economic Change in Comparative Perspective
37
By way of contrast with the liberalization that has
been unfolding in the private and cooperative sec-
tors, the allocation and control of resources in the
state enterprise sector had continued to rely on
centralized planning. Nonetheless, in the last two
years major changes have taken place or have been
announced for the enterprise sector that point to an
accelerated—and very complex—transformation as
of the second half of 2014. Accordingly, in a meet-
ing of the Council of Ministers of April 3, 2013, it
was emphasized that the transformations in the
Cuban enterprise system were vital for achieving
better economic development in Cuba. “Only by
transforming the enterprise system, which is where
the wealth is produced, will we attain sustainable
economic development,” said Vice President Mari-
no Murillo Jorge. Among the regulations recently
approved for modifying the institutional environ-
ment in which Cuba’s state enterprises operate are:
• In a session of the Council of Ministers held
in April 2013, the Minister of Finance and
Prices announced that as of 2014 the state
enterprises—in line with Guideline No. 19 —
will be able to decide what to do with up to 50
percent of afer-tax profts, once the commit-
ments to the State have been carried out. So
the enterprises may earmark those additional
resources to increasing their working capital,
investments, research, and training, and also
pay their workers based on the results ob-
tained.
73
• With a view to pursuing the same objective,
a total of 11 High-level Organizations for En-
terprise Management (OSDE: Organizaciones
Superiores de Dirección Empresarial) have be-
gun to operate since 2013; these constitute a
type of corporate entity that groups togeth-
er the state enterprises in each sector. With
respect to the OSDEs, the second leading
ofcial in charge of the Permanent Commis-
sion for Implementation and Development of
the Guidelines told the Cuban legislature that
most of the enterprises in the Cuban public
sector should be grouped in 26 to 30 OSDEs.
To that end, work is under way to prepare the
documents that will govern that relationship
based mainly on the principles of orienta-
tion, coordination, and control.
74
Nonethe-
less, part of this structural reorganization of
the enterprises has resulted in many of them
becoming “basic enterprise units” (UEB: uni-
dades empresariales de base), a sort of process
of absorption which does not contribute at all
to efciency or productivity, insofar as those
new entities lose degrees of autonomy. In ad-
dition, according to several analysts the very
creation of the OSDEs constitutes de facto a
step backwards away from decentralization,
there are serious contradictions between that
structure and its governing documents, and
with the general logic of the reform and up-
dating of the model, and therefore they could
have adverse economic results, both individu-
ally (i.e. for each enterprise) and socially.
75
• Trough Resolution No. 134 of 2013 of the
Ministry of Economy and Planning, pub-
lished May 20 in Extraordinary Ofcial Ga-
zette No. 14, the corporate purposes of the
economic entities have been made more fex-
ible. Tis includes giving the enterprises more
independence, which will make it possible to
increase their levels of production and ef-
ciency. Te idea is to leave behind the rigid-
ity with which the corporate purposes of the
enterprises were determined, which result-
ed in a failure to tap many capacities in the
Cuban economy. Now it will be possible for
the economic activities set forth in each enti-
ty’s corporate purpose to be provided to any
73
“Raúl: avanzamos a buen ritmo a pesar de los obstáculos. Sesionó reunión del Consejo de Ministros,” Granma, April 4, 2013, p. 3.
74
Information from Leonardo Andollo Valdés, second chief of the Standing Commission for the Implementation of the Guidelines to the National
Assembly of People’s Power. “Resumen de debates en Sesión de la Asamblea Nacional,” Granma, July 8, 2013, p. 7.
75
See, among others, Juan Triana Cordoví, Competencia y desarrollo: una mirada desde la economía cubana, (Havana: Center for the Study of the
cuban Economy (CEEC), University of Havana, 2014); and Ileana Díaz Fernández, Los cambios en la empresa estatal cubana en el contexto de la
actualización del modelo, (Havana: Center for the Study of the cuban Economy (CEEC), University of Havana, 2014).
Cuba’s Economic Change in Comparative Perspective
38
legal or natural person. With this new rule,
the management of each enterprise will de-
cide on secondary activities to be carried out
that are derived from the principal activity
defned in the corporate purpose. According-
ly, each enterprise will be able to determine
what to do with the materials that remain as a
by-product of the productive process, engage
in other transactions such as renting out lo-
cales and warehouses, parking, sales at one’s
own disposal, etc.
76
• Another decision aimed at strengthening the
management of the state enterprises was to
begin to apply a new concept of “charge en-
trusted to the state” (“encargo estatal”) on an
experimental basis. Tis experiment—which
involves various enterprise structures served
by the ministries of Industry, Construction,
and Energy and Mines—will also contrib-
ute to the gradual expansion of the whole-
sale market. Tis consists of authorizing
the directors general of these enterprises to
engage in wholesale to legal Cuban persons
of certain surplus output and authorized
services (taking into account market de-
mand), once contracts have been fulflled.
Te enterprises may approve the wholesale
prices as per the correlation between supply
and demand, and these prices will be ap-
plied in Cuban pesos (CUP) or convertible
pesos (CUC), or both; discounts may be of-
fered based on quality, conditions of deliv-
ery and commercialization, large volumes
sales, or other commercial considerations.
Te start-up of this experience will make it
possible for the enterprises to increase their
sales volumes and profts, thereby help-
ing to increase fnancial resources for their
recapitalization, and boost workers’ incomes.
To accomplish all that, resolutions Nos. 641
and 471 of the Ministry of Economy and
Planning and the Ministry of Finance and
Prices, respectively, were approved. Tis ex-
periment constituted a step towards what
gradually began to be implemented in the en-
terprise system as of January 2014.
77
• Associated with the transformations aimed at
benefting the state enterprises and their envi-
ronment, Decree-Law No. 315—published in
Extraordinary Ofcial Gazette No. 37, of No-
vember 15, 2013—sets forth a new regulation
for treating and managing inventory, in par-
ticular slow-moving and idle inventory. Tis
new legal provision opens the way to solving
the problem of the accumulation of idle or
slow-moving inventories that have a negative
impact on the national economy, although
according to Alfonso Regalado—Chief of
the Group for Other Sectoral Policies of the
Standing Commission for the Implementa-
tion and Development of the Guidelines—
this may be remedied once and for all when
the restructuring of wholesale commerce
is completed. Te new provisions establish
the means for liquidating those inventories,
and to that end the Ministry of Finance and
Prices also issued Resolution No. 386, which
authorizes the adoption of prices determined
by supply and demand as between the parties
for the wholesale commercialization of such
merchandise; they also establish the fnancial
procedure to which entities should apply to
receive the economic efect derived from the
mobilization of inventories. It also creates
mechanisms that encourage reducing them
or that penalize those who increase them.
78
• In addition, it should be noted that in 2013,
Resolution No. 242 was published in Extraor-
dinary Ofcial Gazette No. 17; it contains the
indications for the wholesale commercializa-
tion of food products, other consumer and in-
termediate goods, and services. Tis provision
specifes that wholesale commercialization can
76
“Flexibilización de los objetos sociales. Desplegando potencialidades,” Granma, May 21, 2013, p. 3.
77
“Continúa el fortalecimiento de la empresa estatal socialista, Granma, November 22, 2013, p. 2.
78
“Inventarios ociosos. Y sin embargo, se mueven…,” Granma, November 15, 2013, p. 16.
Cuba’s Economic Change in Comparative Perspective
39
be done by authorized legal and natural per-
sons. In that regard, it will be aimed at those
entities engaged in retail sales to the popu-
lation; social consumption and the priority
programs; non-state forms of management
and associated productive agricultural enti-
ties; and supporting the needs of the entities
of the national economy. According to Vice
President Marino Murillo Jorge, this restruc-
turing of wholesale circulation will guarantee
greater efects for the country.
79
• Some export enterprises have also begun to
beneft from the changes taking place insofar
as they are gaining autonomy in the manage-
ment of their budgets through the implemen-
tation of what are called Closed Arrangements
for Financing in Foreign Exchange (Esquemas
Cerrados de Financiamiento en Divisas).
Te changes adopted in recent months that notably
modify the general framework for the functioning of
state enterprises has led to the de facto extinction of
Decree-laws No. 252 and No. 281, which regulated
the process of enterprise enhancement (perfecciona-
miento empresarial) for the exceptional prerogatives
they gave the enterprises undergoing the “enhance-
ment” process (those “en perfeccionamiento”) have
become generally applicable with the adoption of the
new regulations. In any event, new Ministry of Labor
and Social Security (MTSS) regulations on salaries
and their being tied to job performance, and of the
Ministry of Finance and Prices (MFP) on the fnan-
cial relations among enterprises in the new condi-
tions, are being discussed, drawn up, and reviewed.
80
Te changes under way have also been refected in
the dynamic of the fscal accounts. In 2008 total ex-
penditures in the state budget came to 78 percent of
GDP; since then the government has been applying
a policy of fscal adjustment. By 2013 expenditures
were budgeted that totaled 68 percent of GDP, i.e.
a reduction of 10 percentage points in relation to
GDP. Tis has also been associated with a reduction
of the fscal defcit from 6.9 percent of GDP in 2008
to 1.7 percent in 2013.
81
As part of this efort a review has been undertak-
en of subsidies and expenditures associated with
social policy. Te entire ministerial and enterprise
management system has been reorganized, the goal
being to signifcantly reduce payroll: there are plans
for more than one million workers to stop working
for the State by 2016, and to relocate in the emerg-
ing private and cooperative sector. Te fscal ad-
justment has contributed to the gradual exit from
a default crisis which in 2008 and 2009 prejudiced
outside investors, suppliers, and creditors.
Notable changes have also taken place in fscal rev-
enues. In 2013 a new tax law came into force that
seeks to promote local development, agriculture,
the formation of cooperatives, and environmen-
tal protection all through the use of tax incentives.
Te new law adds tax exemptions for self-employed
workers and microentrepreneurs in the frst three
years of the start-up of their businesses. Te chang-
es in the country’s budget policies and laws indicate
progress, moving towards fscal decentralization
while at the same time greater autonomy will be
granted to the local governments. Experiments are
being conducted along these lines in the new prov-
inces of Mayabeque and Artemisa to learn lessons
that could be applied more widely.
In addition, policy instruments were adjusted in
2013 to maintain control over the printing of mon-
ey, and modifcations were approved in the struc-
ture of fnancing the state defcit, all in the frame-
work of a taking a new look at how to improve the
use of macroeconomic policy tools in Cuba. Espe-
cially important, no doubt, is the proposal for a Law
79
“Comercialización mayorista. Hacia una forma de abastecimiento más coherente,” Granma, June 5, 2013, p. 3.
80
Information ofered by Ms. Grisel Tristá, staf member of the Commission for Implementation and Development of the Guidelines, 24
th
Annual
Scientifc Sessions of the INIE, Teatro del MEP, Havana, November 28, 2013.
81
Author’s calculations based on information ofered by the Minister of Finance and Prices when speaking at the third session of the National As-
sembly of People’s Power, corresponding to the 8
th
Legislature, Havana. “Recuperar ritmos…”
Cuba’s Economic Change in Comparative Perspective
40
on Financing of the State,
82
which will be submitted
to the National Assembly for approval in late 2014.
In the current process of economic transformations
that Cuba has embarked upon, with the co-ex-
istence of various forms of property, the role of
planning must necessarily be subject to profound
reconsideration; likewise the separation of enter-
prise functions from state functions must also be
reconsidered. As such, 80 percent of the precepts
and organizing principles of the entrepreneurial
experiments that were approved in the directives
of the national economic plan for 2014 were adopt-
ed. A signifcant change was also made to the in-
dicators used at the enterprise level to evaluate the
performance of these state entities
83
so as to aford
the enterprises greater autonomy and at the same
time to enable their managers to defne on their
own which indices should be used to assess their
work in accordance with their priorities. Finally,
the directives for the 2014 national economic plan
support implementing the guideline that proposes
the extinction, merger, restructuring, or transfor-
mation of those enterprises which for at least two
consecutive years show negative economic and f-
nancial results into other non-state forms,
84
which
will require signifcant legal and regulatory changes
insofar as it will require adopting legal provisions
for regulating bankruptcies of enterprises in Cuba.
Te Cuban enterprise system—and within it, the
state enterprise system—is going to have to become
associated with foreign capital in order to obtain f-
nancial resources, overcome the technological lag,
and fnd entry into international markets; this is
the only way it will be able to overcome its com-
petitive limitations. Te economic reform under
way requires reaching consensus on a new policy
of openness to the outside world that goes beyond
the limits in place since the 1990s. Major steps
were recently taken in this direction by approving
a whole set of provisions to regulate the businesses
to be established in the so-called Special Develop-
ment Zones, and with the adoption in late March
2014 by the National Assembly of a new policy
and a new Foreign Investment Law. Tese statu-
tory provisions imply changes in the institution-
al framework of the external sector of the Cuban
economy. Te provisions that will govern the con-
solidation of the Mariel Special Development Zone
(ZEDM: Zona Especial de Desarrollo del Mariel),
along with the modern infrastructure that zone will
have, provide special benefts to the investments
made in it. Among other aspects, it is noted in the
approved provisions that the process of approving
business operations will be more expeditious and
all the administrative procedures will be entrusted
to a “single window” that will be part of the Ofce
of the ZEDM. According to the corresponding de-
cree-law, this entity will have only 45 to 90 days to
approve or deny investors’ proposals. In addition,
and according to the Minister of Foreign Trade and
Foreign Investment of Cuba, the Council of Minis-
ters will only intervene in the process of approval
of investments in the ZEDM in exceptional cases,
such as exploration and exploitation of natural re-
sources, when the concession holder or user pro-
vides public services, or when an attempt is made
to create a frm that is 100 percent foreign. In ad-
dition, a legal determination was reached as to the
prioritized sectors and activities in this frst stage
of the ZEDM: (i) biotechnology and pharmaceuti-
cal industries, (ii) renewable energy, (iii) agro-food
industry with the potential for import substitution,
and (iv) the bottling and package industry.
85
Te recently-approved legal framework of the policy
for attracting foreign investment is made up of: (a)
the Law on Foreign Investment, which establishes
the guarantees, the sectors receiving foreign invest-
ment, the modalities, the authorization regime, and
the provisions regarding environmental protection
82
Information from Ms. Juana Lidia Delgado, of the Commission for Implementation and Development of the Guidelines, at the 24
th
Annual Scien-
tifc Sessions of the INIE, Havana, November 28, 2013.
83
Just six directive indicators, similar to the number of the so-called “limit indicators” (“indicadores límites”). Te rest of the indicators will be
defned autonomously by each particular enterprise.
84
Information from Ms. Grisel Tristá, staf member of the Commission on the Implementation and Development of the Guidelines, 24
th
Annual
Scientifc Sessions of the INIE, Teatro del MEP, Havana, November 28, 2013.
Cuba’s Economic Change in Comparative Perspective
41
and the use of natural resources, dispute settlement,
and special regimes (banking, exports and imports,
labor, taxation, and reserves and insurance); (b) the
Regulation issued as a Decree, and which includes
the procedures for the presentation, negotiation,
monitoring and control of businesses, establishing
the composition and functions of the Commission
for the Evaluation of Businesses with Foreign Invest-
ment; (c) two Decisions (Acuerdos) of the Council of
Ministers, the frst of which is the publication of the
approved policy and the other by which the power
to authorize some international economic associ-
ation contracts is delegated to the ministers of the
Ministry of Foreign Trade and Foreign Investment
(MINCEX) and Ministry of Tourism (MINTUR);
(d) two Resolutions of the MINCEX that regulate
the operation of the Commission for the Evaluation
of Businesses with Foreign Investment and estab-
lish the methodological bases for the submission
of the technical-economic feasibility studies of the
projects; (e) the Resolution of the Ministry of Labor
and Social Security (MTSS) that regulates the labor
regime for foreign investment; and (f) two Resolu-
tions of the Central Bank of Cuba, one regulating
the opening of bank accounts for the cash deposit
of capital contributions of foreign investors, and the
other regulating the transfer abroad of foreign natu-
ral persons’ assets.
Te new Law that was approved features some sig-
nifcant diferences with respect to its predecessor,
Law No. 77 of 1995. Tese include:
1. In relation to the modalities of foreign in-
vestment established in Law 77 (mixed
enterprises, enterprises with 100 percent for-
eign capital, and international economic asso-
ciation contracts), the scope of the association
contracts was expanded to incorporate admin-
istration of production and services, hotel man-
agement, and professional services.
2. Te regime for approving business opera-
tions was modifed based on their character-
istics,: (a) the Council of State will approve
business operations related to the exploitation
of non-renewable natural resources, except for
at-risk contracts (los contratos a riesgo), the
operation of public services or publicly-owned
assets and construction of public works; (b)
the Council of Ministers will approve enter-
prises with 100 percent foreign capital, busi-
ness operations in which property rights or
other rights over state property are transferred;
business operations associated with at-risk
non-renewable resources when a foreign pub-
lic enterprise is involved or when it is aimed at
developing renewable sources of energy, and
investments in the enterprises systems of the
public health, education, and the armed forc-
es; and, (c) the Council of Ministers may dele-
gate the power to approve and authorize other
business operations with the participation of
foreign capital to heads of agencies of the Cen-
tral Administration of the State.
3. Preferences regarding foreign trade are to be
granted to the purchase of national goods in
competitive conditions.
4. A chapter is introduced that regulates the ac-
tions for controlling the modalities of foreign
investment, and environmental protection is
expanded to incorporate aspects related to
technology and innovation.
5. More details of the dispute settlement regime
are spelled out, particularly regarding the role
of national courts.
6. Te procedure for evaluating and approving
businesses is amended to expedite it.
7. Provisions are made for the treatment of for-
eign investment once a single currency ad-
opted.
8. It is established that foreign investment is
covered by the 2012 tax statute (Ley Tributar-
ia No. 113 of 2012) with the adjustment indi-
cated in the special tax regime provided for
in the Law for mixed enterprises and national
85
“Zona Especial de Desarrollo del Mariel consolidará relaciones comerciales y económicas,” Granma, November 6, 2013, p. 2.
Cuba’s Economic Change in Comparative Perspective
42
and foreign investors that are party to inter-
national economic association contracts.
No doubt the elements associated with the tax bene-
fts and guarantees given to investors in the new law
are key mechanisms to attract foreign investment.
Finally, some decisions have also been made that have
required adopting legal provisions to implement the
timetable agreed upon by the Council of Ministers
with a view to unifying the currency. Afer carrying
out activities to train the personnel and various in-
stitutions associated with this complex process, the
government issued price and accounting regulations
for the state enterprises, and the Council of Ministers
approved those tied to planning, the state budget, the
banking system, and statistics that will guide the cur-
rency unifcation process; moreover, the provisions
in force that have been issued in the dual currency
scenario and that need to be modifed this year have
already been identifed.
86
Cleary, it can be said that despite existing contra-
dictions, signifcant changes are taking place in the
economic-productive, social, and institutional fab-
ric of Cuba. Among these, a network of small and
medium enterprises is beginning to emerge in the
non-state sector of the economy
87
(although these
new forms of property and management have not
been labeled as such); in addition, a restructur-
ing process is under way in the state sector, with a
greater role being accorded to market relationships
in Cuba’s economic and social dynamic.
Nonetheless, in the process of consolidating the
new Cuban economic model, which is in its frst
stages,
88
much remains to be done to implement a
set of policy measures and statutory provisions to
ensure that the economic and social transformation
is integral and consistent, as it must be.
FUTURE DI LEMMAS AND CHALLENGES
TO THE ECONOMIC AND INSTITUTIONAL
CHANGES I N CUBA
Te formal institutional framework in Cuba sure-
ly maintains part of the institutional and norma-
tive structures that were particular to the preceding
model, albeit with corrections. But it is true that the
government has taken important steps to address the
most evident institutional and political shortcom-
ings. Indeed, changes in the Constitution are antic-
ipated to bring it in line with the new characteristics
of the system towards which the country is moving.
Analyzed in short- and long-term perspective, the
new development conditions of the Cuban econo-
my—as a result of the changes that are being im-
plemented—make it necessary to devise an integral
strategy for supporting the enterprise sector in gen-
eral, and also specifc policies and provisions for the
development and consolidation of a dynamic sector
of small and medium enterprises (SMEs). In this
context, the institutional changes—a result of the
changes that have been articulated—must answer
to the needs of the country’s network of enterpris-
es and contribute to progress and social wellbeing.
In other words, the process of economic transfor-
mation under way demands greater institutional
changes so as to expand and regulate the activity of
the market. Tough there may be various proposals
in this regard, the Cuban authorities could consider
the following to be priorities in future institutional
changes:
1. Strengthening the institutional framework
to promote a regime of legal certainty for all
economic actors who play a part in the na-
tional economy, for which it is necessary to
design, discuss, and approve a Law on En-
terprises. Tat law and its complementary
86
Information ofered by Vice President Marino Murillo Jorge in the third session of the 8
th
Legislature of the National Assembly of People’s Power,
July 5, 2014.
87
In any event, one should reiterate that one of the main limitations—about which no changes have taken place to date—is the exclusion from activ-
ities allowed for private work of those services with the greatest value added, associated with professional activities.
88
Vice President Marino Murillo Jorge indicated at the last session of the Cuban legislature of 2013 that the most complex transformations associat-
ed with the implementation of the Guidelines will be carried out in 2014 and 2015. Granma, December 20, 2013.
Cuba’s Economic Change in Comparative Perspective
43
legal regulations should take note of the
great dispersion and heterogeneity of the
existing network of enterprises and those
that are emerging as part of the process of
changes, most of them marked by a very
low level of technological development,
limitations in access to information and
communication technologies (ICTs), little
progress in terms of participation and, in
general, low productivity. At the same time,
progress should be made approving the
provisions necessary for consolidating en-
tities that provide services to the enterprise
sector (such as legal, consulting, auditing,
accounting, market research, and product
and process design). Clearly, the Law on
Enterprises should be consistent with pub-
lic policies that support the formation of
enterprise clusters that more fully tap the
linkages among industries and economic
sectors so as to support the aggregate ef-
ciency of the system.
2. Under current conditions it seems sensible
to assume that the prospects for the country’s
development will be associated directly with
greater and better integration in internation-
al markets, thus it is urgent to put in place
policies that support this process and facili-
tate adequate management of the associated
costs.
89
Tis requires reform of the institu-
tional framework that regulates Cuba’s for-
eign trade with a view to conferring greater
fexibility to ofset the level of concentration
and centralization that still characterizes the
country’s foreign trade operations, and allow-
ing non-state entities access to the export and
import markets. Tis could help introduce a
gradual diversifcation of the matrix of Cuba’s
entry into foreign trade.
3. In a country such as Cuba, establishing a
competition policy as well as determining
its regulations and scope of application is es-
sential given the economic transformation
under way. Te appearance of new forms
of ownership and new economic actors; the
modifcation in the mechanisms of state
regulation and control of the economy; the
changes in planning and economic man-
agement; the new attributes that are begin-
ning to be assigned to state enterprises; the
presence of various actors in foreign trade
operations; and the decentralization of the
processes for determining prices (wholesale
and retail) are economic changes that have
propelled the appearance of markets and
spaces for competition in Cuba.
90
It is important to understand that objective
conditions for competition exist in Cuba, yet
the Cuban context includes major distor-
tions that could be overcome by designing a
public policy and, consequently, legal provi-
sions to promote and regulate competition.
According to research studies, while there
is no statutory or regulatory framework for
competition in Cuba, several statutes are in
force that contain provisions related to it.
91
Nonetheless, the category “competition”
does not appear in the programmatic docu-
ment for the current transformations in the
economic and social model. In this respect,
Triana asks whether the market is possible
without competition, and notes that “wheth-
er or not it is ofcially acknowledged, com-
petition exists, it’s just that its repudiation
(or its non-recognition) could minimize
and even eliminate its positive efects on the
dynamics of the economy and aspirations
for development.”
92
89
Ricardo Torres Pérez, Ricardo “Algunas contradicciones del desarrollo económico cubano contemporáneo,” in Miradas a la Economía cubana.
Entre la efciencia económica y la equidad social, eds. Omar E. Pérez and Ricardo Torres, (Havana: Editorial Caminos, 2013), p. 38.
90
Competition in Cuba expressed in the growing diversity of entities that engage in the same activity has led to the appearance of a clear economic
diferentiation expressed in terms of prices, quality, guarantees, and post-sale services, all of which constitute typical indicators of competitive
relationships.
91
Johana Odriozola Guitart, “Derecho de la Competencia Strictu Sensu. Una aproximación a la realidad cubana,” (Doctoral thesis, School of Law,
Universidad de La Habana, 2003).
92
Triana Cordoví.
Cuba’s Economic Change in Comparative Perspective
44
Te process of designing and implement-
ing a policy and rules for regulating com-
petition in Cuba should consider, among
other aspects, the following:
(i) At present there are many restric-
tions on competition in Cuba, most
of which have to do with legal provi-
sions and administrative decisions of
governmental entities, which indeed
in some cases contradict established
policies.
(ii) Some of the distortions observed to-
day in the operation of the Cuban
economy—and which stand in the way
of an adequate environment for com-
petition to generate favorable stimuli
for the network of economic actors –
include the direct assignment of pur-
chasers or suppliers, limitations on the
rights to acquire goods or services, or
the discretional exclusion of econom-
ic actors.
93
Other restrictive practices
include the limitation of trades in the
new non-state sector of the economy,
the exclusion of professionals from
self-employment, barriers to entry,
and collusion and corruption asso-
ciated with excessive controls. Tese
barriers limit the positive impact of the
so-called “emerging sector” on the na-
tional economy, in terms of production
and services and in terms of generating
employment, and artifcially reduce the
possibility of elevating the technologi-
cal complexity of goods and services,
enabling some to obtain undeserved
revenues.
94
(iii) Granting diferentiated conditions of
competition to economic actors is of-
ten a common practice for “stimulat-
ing” certain sectors (for example, it is
ofen the case with industrial policies)
and while one should not discount its
possible positive efect in the short
term, one mustn’t forget that such mea-
sures should be temporary.
(iv) Designing a competition policy does
not mean defending competition to
the end, but establishing the spaces in
which it should unfold and ensuring
that it operate adequately, promoting
innovation, economic efciency, and
productivity.
4. Another area of public policy to be developed
by the State in these new conditions has to do
with policy towards the regions, and conse-
quently the adoption of the set of provisions
that guarantees the rights of the territories in
the context of a process of administrative de-
centralization. Tose provisions should help
achieve a more homogenous distribution of
productive capacities throughout the nation-
al territory. Moving forward with the adjust-
ments, the economic transformations, and
their inevitable modifcations opens up new
theoretical and practical concerns regarding
the inequalities as among diferent regions
or territories in Cuba, which for now do not
appear to be coming to a halt.
95
Nonetheless,
one should bear in mind that this phenom-
enon is directly related to the design of the
structure and mechanisms of public deci-
sion-making. Tis is a highly complex issue,
given that it involves decisions that afect the
system of organization and representation of
democratic sovereignty.
96
Te reasons why
the transfer of budget powers to the sub-cen-
tral governments could give impetus to
93
Tese constitute characteristics which, according to Triana Cordoví (2014), are almost always the result of highly centralized styles of “planning”
such as those that have been used in Cuba.
94
Triana Cordovi, “Competencia y desarrollo”.
95
Luisa Íñiguez Rojas, “Desigualdades territoriales y ajustes económicos en Cuba” in Miradas a la Economía cubana. Entre la efciencia económica y
la equidad social, eds. Omar E. Pérez and Ricardo Torres, (Havana: Editorial Caminos, 2013), p. 115.
96
See Díaz de Sarralde and Guanche.
Cuba’s Economic Change in Comparative Perspective
45
economic activity run a wide gamut.
97
Obvi-
ously, in order for the benefts of fscal decen-
tralization to be felt, the institutions by which
inter-governmental relations are channeled
must be adequately designed.
5. Tere are also very important areas for sus-
tainable economic development in which in-
ternational experience shows that the action
of the state is key. Innovation, which is a fun-
damental part of research and has the charac-
teristics typical of a “public good”; the protec-
tion of environmental resources, goods, and
services caring for and protecting cultural
heritage: all are strategic areas that cannot be
marginalized among state priorities and for
which the design and development of com-
plex yet efcient institutions is needed.
Many economic, social, institutional, and political
reforms remain to be implemented for Cuba to be
able to make the most of its potential for progress, at
the same time as it preserves the gains made during
the revolutionary period. Obviously, the process
will require great imagination and a consolidated
decision to change so as to seek specifc respons-
es to a very peculiar economic and social reality, in
which there is, therefore, no room for any automat-
ic transplants of foreign experiences.
Te greatest challenges facing the general dynam-
ic of economic and social changes in Cuba (which
makes the required institutional change all the
more complex) include:
1. While a consensus has been reached that
the logic that governed the Cuban economy
over the last 40 years has run its course, and
therefore structural and institutional changes
cannot be put of,
98
the future scenario for the
country is not clearly defned. In any event,
the ultimate goal—which according to many
theoretical analyses on social change is a key
factor for reducing uncertainty—has nev-
er been totally clear for the common citizen
or for the leadership in those countries that
have undertaken a change as profound as that
which Cuba now faces, insofar as the very
implementation of specifc or sectoral trans-
formations involves changes in the vision for
the future.
2. Tere is a clear will on the part of the Cuban
leadership to reform, though there are obvi-
ous points of resistance in various economic
and social sectors.
99
Terefore one must un-
derstand the continuing yet paused sequence
of changes decided upon by the highest-lev-
el Cuban authorities. In the case of Cuba,
this excessive gradualism could also imply a
more complex undertaking. In many cases,
the changes in one specifc aspect or sector
require, to make them operative, changes in
other complementary spheres; that is, simul-
taneous transformations are needed in sev-
eral areas if the reforms are to be efective.
Given the interconnection among a wide di-
versity of areas to be included in the changes,
it is practically indispensable for the reforms
to be undertaken simultaneously in an efort
to create the conditions for the new forms of
economic organization to operate efciently.
3. According to some analysts, excessive-
ly gradual changes result in their benefts
barely afecting living conditions. Terefore
they run the risk of creating increased re-
sistance to the reform. Nonetheless, mind-
ful of the magnitude of the challenges Cuba
faces and the adverse internal and exter-
nal conditions, it is practically impossible
to expect an immediate improvement in
the economic performance of the nation.
97
In any event, fscal decentralization does not always imply more efcient delivery of services. In some cases the university supply at the national
level has advantages that should be considered.
98
It was clearly formulated by President Raúl Castro, when he indicated that the country was walking along the edge of a precipice.
99
Tere are several factors, in the Cuban case, that explain resistance to change, which are also tied to the starting point of the current transforma-
tions, summarized in the second section of this paper.
Cuba’s Economic Change in Comparative Perspective
46
Tat would be a false reference when judg-
ing the advance in the process of economic
transformations.
100
Nonetheless, one must
recognize that the changes implemented have
begun to systematically address the contra-
dictions in the country’s economic and social
reproduction, so they constitute an opportu-
nity to build a more prosperous country.
4. Te Economic and Social Policy Guidelines,
which set forth the guidelines for change,
are themselves not a long-term economic
and social development program. Tere has
been discussion and review of the proposals
for conceptualizing the economic model that
will be built, as well as the long-term devel-
opment program (to 2030), but theoretical
and practically consistency is needed among
these three platforms: the guidelines, the pre-
liminary vision of the model to be construct-
ed, and the long-term development program.
Possible inconsistencies among these pro-
grammatic platforms could lead to the re-
form in Cuba facing contradictions whose
resolution would prove costly.
5. Te right to accumulate earnings in the
emerging non-state sector is another matter
for which a new approach should be imposed,
making a break with the accumulated weight
of prejudices in this regard. At present, there
are severe limitations governed by a logic that
is not adapted to the current moment of the
Cuban economy and its medium- and long-
term development challenges. Te possibility
of reinvesting these surpluses—and institu-
tional stimuli to help make it happen—would
complete the cycle of appropriating the re-
sults of innovation, understanding that it is
likely that those who have generated those
resources have identifed and successfully ex-
ploited present opportunities in the new na-
tional economic context.
In sum, Cuba is in the midst of a process of pro-
found institutional change that accompanies and
at the same time is functional to the economic and
social transformations that have been required as
part of implementing the Economic and Social Pol-
icy Guidelines. Given the specifcities of the Cuban
case and the particular economic and social system
that make up the starting point, institutional change
requires a permanent exercise of institutional inno-
vation, experimentation, and adaptation. Analyzing
and comparing other international experiences will
be useful, but inevitably the options chosen must
always be adapted to a social reality that is very
peculiar. No doubt institutional change entails not
only approving a new legal framework, but progres-
sively changing social actors’ perceptions and judg-
ments regarding the new rules. Approving new laws
and regulations occurs at a given moment in time,
whereas changing perceptions requires more time,
in part because they are directly associated with
perceptions rooted in individuals’ behavior.
SUMMARY AND CONCLUSIONS
Te process of economic changes in which Cuba is
immersed, and the institutional changes that have
taken place, are beginning to remove some of the
regulatory and incentives obstacles that have ob-
structed the progress of Cuba’s economy and insti-
tutions to date.
Going forward with the process of reforms will nec-
essarily involve an exercise in institutional innova-
tion. To encourage that process, Cuba has some as-
sets that should be considered. Te main one is the
high educational level of the population. Cuba has a
notable advantage from the outset, despite the nega-
tive impacts the education sector has absorbed since
the crisis of the 1990s. One of the main criticisms
made of the current economic system in Cuba is its
incapacity to harness the huge investments made in
human capital for innovation and economic growth.
100
Torres Pérez, p. 39.
Cuba’s Economic Change in Comparative Perspective
47
Reducing the state apparatus, clearly delimiting
enterprise functions from state functions, and cre-
ating a network of heterogeneous enterprises, all
recognized as economic actors who should make
decisions without being tied to anything beyond
observing the basic economic regulations estab-
lished by the Government—by means of clear and
transparent rules and norms—will no doubt pro-
mote a better institutional environment that will
facilitate economic growth by improving the con-
ditions for microeconomic operations. Te ratio-
nalization and modernization of the government
institutions and the creation of spaces for decentral-
ization that strengthen “inclusion” in the efort to
achieve growth are unquestionable, and that should
be accorded priority in the agenda of transforma-
tions. Re-launching the non-state sector and the
consequent modifcation of the tax system creates
prospects for a signifcant change in the nature of
the relationship between the State and the citizenry;
yet this will take time and in any event will depend
on the scale actually achieved by the private and co-
operative sectors.
Te discussion around the social equity challenges
in the current process of economic and institution-
al changes is also crucial. Tis presupposes not only
valuing the possible medium and long-term efects
of the measures implemented, but also analyzing
their consequences for diferent social groups and re-
gions. One important—indeed essential—challenge
is to maintain the articulation and interconnec-
tion of social policy with economic policy, which is
grounded in an integral conception of development
in Cuba, which had promoted economic growth
alongside a more equitable distribution of wealth,
universal access to basic social services, and atten-
tion to existing social problems. While in previous
decades social development was accorded greater
priority than economic development, the guide-
lines and changes implemented also introduce el-
ements of economic efciency and sustainability in
social policy. Accordingly, the challenge in this case
is to keep these spheres interconnected.
101
Yet economic and administrative decentralization,
the emergence of a non-state sector that is begin-
ning to occupy important spaces in terms of gen-
erating income and employment, and the growing
signifcance of market signals in the process of di-
recting and managing the economy should ft with-
in constructs of popular sovereignty, a process that
is still incipient. In this respect, the editorial in the
newspaper Granma marking July 26, 2013, recog-
nized: “What we need is a people as cultured as it
is educated that is the subject and not the object of
the transformations, a people with broad democrat-
ic participation by all the ways and means and that
accelerates the efective operation of the institutions
as the only guarantee for the continuity of the Rev-
olution.”
102
101
María del Carmen Zabala Arguelles, “Retos de la equidad social en el actual proceso de cambios económicos” in Miradas a la Economía cubana.
Entre la efciencia económica y la equidad social, eds. Omar E. Pérez Villanueva and Ricardo Torres Pérez, (Havana: Editorial Caminos, 2013), p.
171.
102
“Asalto al cuartel del futuro,” Granma, July 26, 2013, p. 2.
Cuba’s Economic Change in Comparative Perspective
48
Institutional Changes of Cuba’s
Economic-Social Reforms:
State and Market Roles, Progress, Hurdles, Comparisons,
Monitoring and Effects
103
Carmelo Mesa-Lago
INTRODUCTION
Tis chapter studies Cuba’s ongoing process of in-
stitutional change, focusing on
fve central struc-
tural reforms: updating the economic model; dis-
tribution in usufruct of idle state land; dismissal
of unneeded state employees and expansion of the
non-state sector; modifying wage policies; reducing
gratuities (including rationing) and social services;
and selling/buying houses.
104
As other chapters in
this volume discuss themes of monetary policy, dual
currency and exchange rates, foreign direct invest-
ment, and banking, they will not be addressed here.
Te chapter is divided in three sections: I) institu-
tional changes analyzed on fve factors in each of
the reforms: state and market roles (including state
regulations and ownership), progress achieved,
persistent hurdles, and comparisons with reforms
in China, Vietnam and Latin America; II) monitor-
ing of the reforms and evaluation of macroeconom-
ic efects; and III) conclusions and ways forward.
INSTITUTIONAL CHANGES, PROGRESS,
HURDLES AND COMPARISONS
Updating the Economic Model
State and market roles. Te VI Party Congress
agreements of 2011 do not substantially transform
the current economic model, but seek to “update” it
in a gradual manner, preserving the predominance
of the central plan and state ownership of property
over the market and non-state ownership of prop-
erty. Te agreements avoided the terms “reform”
and “private” (though the latter was accepted in
2014), lacked specifcs on the role of planning and
the market and their interactions, had many gaps
and were vague in key aspects of the model. Ma-
rino Murillo, chief of the Permanent Commission
to implement the agreements, reiterated this pre-
dominance in 2013 and stated: “Tere will be not a
transformation of property but modernization of its
management,” including expansion of the non-state
sector and the recognition of the market. He and
Raúl Castro declared that they will neither restore
capitalism nor implement shock therapy.
105
How-
ever, government rhetoric may have been a euphe-
mism to disguise actual practice.
Progress. Te analysis in the following sections
shows that the reforms have generally been posi-
tive and market-oriented; the agreements give the
market a greater role than it has had since 1961
when central planning began. In 2013, Murillo an-
nounced a more complex and profound stage of
the reform that would tackle more difcult issues
in 2014, transforming and deregulating the larg-
est state enterprises: mining (nickel, oil), steel and
103
Te author alone is responsible for this essay but gratefully acknowledges comments or materials from Richard Feinberg, Marc Frank, Armando
Nova, Omar Everleny Pérez Villanueva, Pavel Vidal and Mao Xianglin.
104
For a comprehensive analysis of Cuba’s economic-social reforms and their efects see Carmelo Mesa-Lago and Jorge Pérez-López, Cuba under
Raúl Castro: Assessing the Reforms (Boulder-London: Lynne Rienner, 2013).
105
Raúl Castro, “Discurso en la Clausura del Segundo Período de la Asamblea Nacional del Poder Popular,” Granma, December 23, 2013; Marino
Murillo, Informe a la Asamblea Nacional, Granma, July 8, 2013; Marino Murillo, report in Granma, July 5, 2013.
Cuba’s Economic Change in Comparative Perspective
49
textiles. As Omar Everleny Pérez Villanueva has
noted, everything must come from the overly rigid
and centralized plan; instead of a facilitator, it is an
obstacle and discourages enterprise performance;
the government centrally assigns resources to en-
terprises that are not allowed to use their own re-
sources to solve their own problems; and produc-
tion levels are not decided by enterprises since most
are dependent on domestic output or imports.
106
However, these obstacles are gradually being elimi-
nated. Instead of shifing all profts to the state and
the latter deciding the budget allocation to enter-
prises, large enterprises may retain 50 percent of
their profts net of taxes for reinvestment and wage
raises, giving managers more decision-making
power and creating incentives to increase efciency
and production. State enterprises will be allowed to
sell idle inventories at a price agreed to with buyers.
Enterprises with losses for two years or more will
have to turn a proft or be downsized, merged with
others or shut down.
107
Enterprises could use funds
assigned for the purchase of imports to instead
purchase goods produced locally, without previous
state approval.
108
Hurdles. According to Raúl, updating the model
has “a long and complex road ahead.”
109
Several lo-
cal and foreign economists believe it is a mistake
to preserve a model dominated by central planning,
which history has proven (in the USSR, Eastern
Europe, China and Vietnam, as well as in Cuba) to
be inefcient and which has caused the economic
problems the nation faces.
110
Some reforms planned
for 2014—including deregulation and self-fnanc-
ing of key state enterprises, closing those with loss-
es, and using part of their profts for investment and
wage funds—were tried in Cuba in the 1970s and
1980s, but were later abandoned. In mid-2013, two
years afer the agreements were approved, Murillo
informed the National Assembly that a team had
just been appointed “to study and understand the
updating of the economic model;”
111
at the end of
2013 he reported that “the frst version of the pro-
posal for the conceptualization of the model had
been elaborated”.
112
Out of the 313 agreements ap-
proved in 2011, only 46 (15 percent) had been im-
plemented by the end of 2013. Tis indicates the
slow progress achieved toward a concrete model,
enforcing the agreements, flling their gaps and
clarifying vague points. Another barrier to success
is the leaders’ commitment to “avoid[ing] the con-
centration of wealth,” which generates disincentives
and ignores the large income inequalities already
in existence. Murillo pushed to eliminate all obsta-
cles involved in updating the model, and yet, the
greatest obstacle seems to be the model itself that
interferes with the reforms and their success. Final-
ly the reforms have created some winners, but have
also raised concerns among the general population
about the future.
Comparisons. Cuba and North Korea are the two
socialist economies with the largest role of a planned
economy and state property and the smallest role of
the market and private property. Conversely, China
and Vietnam developed a “socialist market” mod-
el where the private sector, markets and foreign
investment, combined with an indicative plan and
decentralization of decision making, have spurred
the highest economic growth rates in the world.
Twarting the party bureaucracy and resistance
to deeper economic changes, a recent China Party
meeting agreed to push forward new reforms which
mandate that, in the relation between the govern-
ment and the market, the latter should play a de-
cisive role in fnancing and allocation of resources,
106
Omar Everleny Pérez Villanueva, “Cuba, continuidad y cambio: El impacto de la implementación de las reformas” (La Habana, CEEC, unpub-
lished paper, September 2013).
107
Decreto No. 323, Deregulation of state enterprises, March 4, 2013.
108
Marino Murillo, reported in Juventud Rebelde, June 3, 2013; Marino Murillo, Informe a la Asamblea Nacional, Granma, July 8, 2013; report in
Granma, July 5, 2013.
109
Raúl Castro, “Intervención en la Primera Sesión Ordinaria de la VIII Legislatura de la Asamblea Nacional,” Granma, July 7, 2013.
110
José Antonio Alonso and Pavel Vidal Alejandro, “Reglas, Incentivos e Instituciones,” in ¿Quo vadis, Cuba? La incierta senda de las reformas, eds.
José Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 256-279.
111
Murillo, Informe a la Asemblea Nacional, 2013.
112
Granma, December 21, 2013.
Cuba’s Economic Change in Comparative Perspective
50
that competition be strengthened and restrictions
on land ownership be overhauled.
113
In Vietnam,
both the state and the non-state sectors generate
40 percent of GDP, while the latter has the highest
investment share: 38.5 percent versus 37.2 percent
from the state and 24.3 percent from foreign invest-
ment.
114
Structural reforms in Latin America have
mainly consisted of shock therapy and privatiza-
tion; Cuba rejects this approach and takes a gradu-
alist, slow tack that preserves the predominance of
the state role. In the region, Cuba also leads in the
size of the state sector, far ahead of some countries
that have strengthened the role of government, like
Argentina, Bolivia, Brazil, Nicaragua and Venezue-
la; in these countries as in the rest of the region, the
market still plays the predominant role.
Distribution in Usufruct of State Idle Land
State and market roles. Te only agricultural land
owners are farmers who received small plots from
the state at the start of the revolution, whose num-
bers have been steadily declining.
115
Two laws in
2008 and 2012, the second more fexible than the
frst, regulated the usufruct distribution of idle state
land in small plots to individuals, cooperatives and
state farms/entities.
116
Te state keeps ownership of
the land whereas the usufruct farmer (usufructu-
ary) has the right to cultivate the plot and appro-
priate its fruits.
117
Although the state owns the land,
tightly regulates contracts and mandates the selling
of part of the crop (acopio), the practice of usufruct
is still a step closer to the market. Moreover, if more
liberalized, the use of usufruct could signifcantly
increase agricultural output and reduce costly food
imports. According to Nova,
118
essential issues to
be solved in agriculture are: real land ownership
(rights to decide what to grow, to decide to whom
to sell the produce and to set the price); recognition
of the market’s key role; elimination of monopolies
and diversifcation of marketing with autonomous
marketing cooperatives; and free labor hiring.
Progress. Te usufruct law of 2012 made several
improvements over the 2008 law, which was quite
restrictive and didn’t produce results. Te plot size
rose from 13.4 to 67.1 hectares (165 acres), provided
the usufruct is linked to a cooperative or state farm.
Te contract length remains unchanged for persons
(10 years)
119
but it increases for cooperatives and
state entities (20 to 25 years). Despite the advantage
of the latter two forms, 98 percent of usufruct land
has gone to individuals. Te usufructuary is allowed
to build homes (more than one if relatives work the
land) and barns on the plot, as well as to plant or-
chards, all of which had previously been banned. If
the contract is not renewed, the state must evaluate
the investment made and reimburse the usufructu-
ary. In case of usufructuary death or incapacity, rel-
atives working the plot can inherit the usufruct and
the investment. Te tax reform granted the usufruc-
tuary a two-year exemption on personal income
tax, land value and hiring labor; said exemption
may be extended if the usufructuary cleans the land
of marabú (a thorny bush difcult to eradicate). Tax
on inactive usufruct land was also suspended one
year.
120
Since 2011, the state has ofered microcredit
to those holding land in usufruct and allows them
113
Chris Buckley, “China to ease long-time policy of 1-child limit,” New York Times, November 16, 2013.
114
Armando Nova González, El modelo agrícola y los lineamientos de la política económica y social en Cuba (Havana: Editorial Ciencias Sociales,
2013).
115
In 1959 there were some 200,000 private farmers but their number dwindled to 23,000 in 2012 (Ofcina Nacional de Estadística e Información
(ONEI), Anuario Estadístico de Cuba 2012, (Havana, 2013).
116
Decreto-Ley regulation of usufruct, No. 259, July 10, 2008; and decretos-leyes Nos. 300 and 304, October 22, 2012.
117
For a comparative analysis of the right of ownership in Cuban structural reforms, see Carmelo Mesa-Lago “Los cambios en la propiedad en las
reformas económicas estructurales de Cuba,” Espacio Laical, No. 223, February 2013 and José Manuel Palli, “Superfcie and Usufruct Rights in
Cuba: Are Tey Really Insurable Rights?’ Cuba in Transition, No. 23 (Miami: ASCE), 2013. Te best study on Cuban entrepreneurship is Richard
E. Feinberg, Sof Landing in Cuba: Emerging Entrepreneurs and Middle Classes, (Washington D.C.: Brookings Institution, 2013).
118
Armando Nova González, “La propiedad en la economía cubana: Recientes cambios en las formas de propiedad y su impacto en el sector agrícola
cubano,” in Cuba: Hacia una estrategia de desarrollo para los inicios del siglo XXI, eds. Mauricio Miranda and Omar Everleny Pérez Villanueva,
(Cali: Editorial Javeriano-SSRC, 2012), pp. 127-164.
119
In contrast, Decreto-Ley 273 (2010) grants the land-surface right to foreign investors in luxury golf courses for up to 99 years.
120
Ley 113, Tax reform, Gaceta Ofcial, November 21, 2012; also Resoluciones Nos. 41-42 and 353, 2013.
Cuba’s Economic Change in Comparative Perspective
51
to open bank accounts. All agricultural produc-
ers, including usufructuaries, are permitted to sell
more to the market (47 percent in 2012) and since
2013 directly to tourist entities without co-ops in-
termediation.
121
Decreto 318/2013 reformed acopio,
ended the state marketing monopoly in three prov-
inces, allowed competition and market-price sales
of chicken, pork, vegetables, eggs and non-citrus
fruits. Te frst wholesale market to sell agricultural
supplies was created in the Isle of Pines in 2014.
122
At the end of 2012, 1.5 million hectares of idle state
land had been distributed to 174,271 individual usu-
fructuaries and 2,700 legal entities.
123
Te Ofcina Na-
cional de Estadísticas e Información (ONEI) reports
300,810 total usufructuaries in mid-2012, of which
157,948 were under the usufruct law of 2008 (the
2012 law entered in force in December) and 142,862
were authorized during the crisis of the 1990s and are
now under the 2012 law.
124
Table 4 shows the changes
in thousand hectares in agricultural, cultivated and
uncultivated land by type of tenant (state, UBPC/
CPA cooperatives, and CCS/private sector).
125
In De-
cember 2007 (before the frst law was enacted) there
were 6.6 million total hectares of total uncultivated
agricultural land, and by June 2012, it was reduced
by 62 percent to 1.4 million hectares. Te state share
was cut by 1.1 million hectares and that of UBPC/
CPA by another million, whereas land cultivated by
CCS/private grew by 1.2 million.
126
Usufructuaries
neither own land as private farmers nor are they nec-
essarily CCS members, but they ought to be in the
CCS/private sector group because they were only re-
ceiving state land. Te table suggests that the increase
in total CCS/private agricultural land by 1.04 million
hectares in 2007-2012 was probably due to state land
distributed in usufruct, a fgure that is 30 percent
lower than the cited 1.5 million hectares. Te state
and UBPC/CPA shares of total agricultural land fell
whereas the CSS/private sector share rose from 18
percent to 35 percent of agricultural land and from
26 percent to 40 percent of cultivated land (Table 4).
Hurdles. Despite its increased fexibility, the 2012
law is still restrictive and creates uncertainty. Te
usufructuary’s 10-year contract will be terminated
or not renewed if he fails to fulfll his obligations,
such as “using the land in a rational manner” (a spec-
ifcation lef to government interpretation—9,000
contracts were cancelled for this reason), compul-
sory sale to the state of about 70 percent of the crop
at state-fxed prices (acopio, modifed in 2013), hir-
ing more workers than allowed, selling the plot in-
vestment or investing without state permit, and for
public need or social interest. Despite a legal cap
of 108 days, plot measurement can take up to two
months due to faws in public records and thou-
sands of applications are delayed by lack of quali-
fed personnel and negligence. To obtain inputs and
services and market their produce, the usufructuary
must be linked to a state farm or cooperative, pref-
erably either UBPC or CPA, the two with the least
autonomy.
127
It is incongruous that the usufruct was
introduced to increase agricultural output, but forc-
es linkage to UBPC and state farms, recognized as
inefcient production forms.
128
More rational would
be to authorize voluntary cooperatives of usufruc-
tuaries. Regardless of the noted progress, in 2012,
usufruct shares in total agricultural and cultivated
land were 17 percent and 13 percent respectively,
and still 21 percent of the land was uncultivated (81
percent under state/UBPC/CPA). Marabú covers 50
percent of all the land in usufruct; it must be cleared
to start production, but state credit cannot be used
121
Murillo, Informe a la Asemblea Nacional, 2013; Marc Frank, “Cuba reports Little progress fve years into agricultural reform,” Reuters July 30,
2014, http://uk.reuters.com/article/2013/07/30/uk-cuba-reform-agriculture-idUKBRE96T0VK20130730.
122
Marc Frank, “Cuba experiments with wholesale market for farmers,” Reuters, June 1, 2014, http://uk.reuters.com/article/2014/06/01/cuba-re-
form-agriculture-idUKL1N0OG11I20140601.
123
“Con el corazón puesto en la tierra,” Juventud Rebelde, November 10, 2012.
124
Ofcina Nacional de Estadística e Información (ONEI), Anuario Estadístico de Cuba 2012, (Havana, 2013). Available at www.one.cu.
125
UBPC: basic units of cooperative production; CPA: agricultural production cooperatives; CCS: credit and service cooperatives.
126
Out of uncultivated land, the total idle part was 1,232,800 hectares in 2007 and had been cut only by 21 percent to 975,500 in mid-2012. In 2007
the idle land was 51 percent state, 44 percent UBPC/CPA and only 5 percent in CCS/private (ONEI, Anuario Estadístico de Cuba 2012).
127
A law of 2012 restructures UBPC and gives them more autonomy; another of 2013 permits cooperatives ties with CCS.
128
CCS coops and private farms produce 57 percent of all output with only 24 percent of the cultivated land (Nova).
Cuba’s Economic Change in Comparative Perspective
52
for that purpose. Hence, tax exemptions are not
granted. Usufructuaries can only hire relatives or
seasonal workers either self-employed or in cooper-
atives, and the investment size is limited to one per-
cent of the plot size. Ofcially, these disincentives are
ofcially justifed as preventing wealth concentra-
tion. Around 77 percent of usufructuaries lack ex-
perience in agriculture;
129
the government may ofer
training but it does not release public information
detailing how many have been trained. Te state sets
the acopio price below the market price, which is a
production disincentive. State microcredit is
grossly insufcient, as are markets that sell inputs to
farmers at high prices. Rules to request usufruct, sign
and extend the contract, and approve or modify in-
vestment (even building a house) are cumbersome.
130
Decreto 318/2013 bans sales of beef, milk and milk
byproducts, cofee, cocoa and honey; it also keeps rice,
beans, corn, potatoes, sweet potatoes, taro, onions,
garlic, oranges and grapefruit under acopio in 2013
and 2014, hence keeping these the most important ag-
ricucultural products out of the free market.
TABLE 4. DISTRIBUTION OF AGRICULTURAL, CULTIVATED AND UNCULTIVATED LAND IN THOUSAND HECTARES
AND PERCENTAGES, BY TENANT SECTOR IN CUBA: 2007 AND 2012
Years and categories Total State
Non state
UBPC/CPA CSS/Private
Area (1,000 hectares)
2007 (December)
Agricultural land 6,620 2,371 3,034 1,214
Cultivated 2,988 694 1,495 799
Uncultivated 3,631 1,677 1,539 415
2012 (June)
Agricultural land 6,405 2,007 2,139 2,260
Cultivated 5,040 1,413 1,634 1,994
Uncultivated 1,365 594 505 266
Change 2007/2012
Agricultural land -214 -364 -895 1,045
Cultivated 2,052 719 139 1,194
Uncultivated -2,266 -1,083 -1,033 -149
Distribution (percent)
2007
Agricultural land 100.0 35.8 45.9 18.3
Cultivated 100.0 23.2 50.0 26.7
Uncultivated 100.0 46.3 42.4 11.4
2012
Agricultural land 100.0 31.3 33.4 35.3
Cultivated 100.0 28.0 32.4 39.6
Uncultivated 100.0 43.5 37.0 19.5
Source: Author’s calculations based on ONEI, Anuario Estadístico de Cuba 2011 (Havana, 2012) and Anuario Estadístico de Cuba 2012 (Havana
2013).
129
“Con el corazón puesto en la tierra”.
130
Usufruct regulations take six pages of the Ofcial Gazette (Decreto-Ley 304) versus four pages of the basic Decreto-Ley 300.
Cuba’s Economic Change in Comparative Perspective
53
Comparisons. Cuba’s agricultural usufruct re-
form is much more modest than their counterparts
in China and Vietnam, which have a much larger
market role and fewer state regulations. In all three
countries the state retains land ownership, but in the
two Asian cases virtually all agriculture is managed
privately or by autonomous cooperatives; contracts
are for 50 years or indefnite periods time (instead
of Cuba’s 10 years renewable under tight conditions
and the risk of cancellation); there is freedom to
hire workers, and investment fully belongs to own-
ers; farmers freely decide what to sow, to whom to
sell the produce and set the price based on supply
and demand. Tere is neither acopio nor are pric-
es set by the state below the market price in China
or Vietnam, although in late 2013 acopio began to
be curtailed in Cuba. Te Sino-Vietnamese reform
features resemble what Nova noted was needed in
Cuba and their results have been impressive: coun-
tries that historically sufered from hunger are now
food self-sufcient and export a surplus. Vietnam is
the second largest world exporter of rice and sup-
plies 250,000 tons to Cuba annually, half of its con-
sumption needs.
131
Despite these notable diferences,
within the historical context of Cuban socialism, the
usufruct is a step toward the market, albeit modest
and quite restricted. In contrast, in Latin America,
the usufruct is normally granted by a private farm
owner, the free market and private land ownership
dominate, state farms are rare, and cooperatives,
where they exist, are typically autonomous.
Dismissals of State Employees and Expansion of
the Non-State Sector
State and market roles. Ofcial estimates of un-
needed state employees range from 1.3 to 1.8 mil-
lion or between 26 percent and 36 percent of the
employed labor force in 2011. Cuba’s very low open
unemployment rate (1.6 percent in 2008—virtually
full employment and the lowest in the world) was
achieved through “hidden” unemployment—un-
derutilization of labor or unneeded state jobs—
which reduced labor productivity and wages.
132
Te
huge fscal cost of this policy forced the government
in 2010 to recognize the problem and the need to
dismiss the labor surplus. But that, in turn, re-
quired the expansion of “non-state” jobs including
self-employment, non-agricultural-production and
services cooperatives (hereafer “new cooperatives”
or “new co-ops”) and usufruct. Tese market-ori-
ented policies aim to cut fscal costs and improve
productivity and wages. Self-employment had been
authorized before but not at the current magnitude
and speed; the self-employed own their micro-busi-
nesses but in the new co-ops (as in usufruct), the
state keeps the property and leases it to co-op mem-
bers who manage the business and keep the profts.
Progress. From 2006 to 2013, approved self-em-
ployed activities expanded at a rate of 28 percent,
from 157 to 201 authorized categories of jobs, in-
cluding the addition of some skilled jobs. By the
end of 2013 there were 2,000 small restaurants (pal-
adares) and 7,500 rented rooms.
133
New cooperatives
began in 2011 with barbers, hairstylists and man-
icurists. 222 new co-op activities were approved in
2012, and 71 more in 2014, including construction,
transportation, garbage collection, produce mar-
kets, bird and shrimp breeding, light manufactures
and food services.
134
Some 77 co-ops were created
to market agricultural products in Havana City with
the same functions as supply and demand markets.
135
In 2013, 2,401 state-premises were leased to 5,479
co-op members. In March 2014, 224 co-ops were op-
erating and 228 more had been authorized.
136
Tere
are 2,150 barber and hairdresser co-ops with 5,500
members.
137
Te goal of this policy is for 40 percent
131
ONEI, Anuario Estadístico de Cuba 2011 (Havana, 2012).
132
Carmelo Mesa-Lago, “El desempleo en Cuba: de oculto a visible,” Espacio Laical, 4, 2010.
133
Resoluciones, New regulations on self-employed, Nos. 353 and 41, September 26, 2013; El País, June 1, 2014.
134
Nuevo Herald, April 29, 2013.
135
Granma, July 1, 2013; Granma, July 6, 2013.
136
Marino Murillo, “Nuevo grupo de cooperativas no agropecuarias,” Granma, March 3, 2014.
137
Vivian Bustamante, “Comercio Interior: vender y vender bien,” Bohemia, August 6, 2013, http://www.bohemia.cu/2013/08/06/nacionales/comer-
cio-exterior.html.
Cuba’s Economic Change in Comparative Perspective
54
of the employed labor force to be in the non-state
sector by 2016. Efects of new co-ops cannot be eval-
uated due to their recent creation.
138
Co-op members pay monthly rent to the state, pur-
chase inputs, and freely set prices (the latter also
being true for the self-employed). Spurred by the
proft motive, members improve the locale, ofer
better services, earn fve to six times their previous
state salary and raise fscal income. Co-ops and the
self-employed are permitted to buy from, sell and
lease to the government and tourist facilities includ-
ing joint venture hotels, hire employees (not limit-
ed to family members), open bank accounts, receive
micro-credit, and import household appliances. In
2013, some taxes were temporarily suspended or
made more fexible. As a result, 20 state restaurants
were transferred to co-op operation, and a whole-
sale enterprise began in the Isle of Pines to sell food,
intermediate and consumer goods (computers, fur-
niture, technical tools), and rent storage, frigorifc
and transport equipment. Tese products/services
are sold to the state, cooperative and private sectors
(including farmers and the self-employed) to stim-
ulate their inception and development.
139
In June
2013 the wholesale market was regulated through
contracts, competition, and free market prices set
by supply and demand.
140
As a result, a co-op in Ha-
vana, Mayabeque and Artemisa now manages the
frst wholesale market leased by the state, based on
supply and demand, breaking the state monopo-
ly.
141
State enterprises can lease wholesale and sup-
ply markets of produce to the new co-ops, trucks
to all producers, retail markets to co-ops and the
self-employed (that sell at market prices), and con-
tract produce with all co-ops that directly contract
with consumers.
142
Hurdles. Permitted activities for the self-employed
are quite specifc and mainly non-skilled (clowns,
mimics, carters, bathroom caretakers), though few
are skilled (realtors, translators, insurance agents),
and university graduates cannot work on their own.
Tus, an architect can be a taxi driver but not prac-
tice his or her trained profession privately. Such
constraints waste Cuba’s huge investment in educa-
tion and obstruct the dismissal of state professional
employees as well the expansion of the non-state
sector. New co-ops must go through four bureau-
cratic stages to get approved and the fnal decision
is lef to the Council of Ministers. Te government
usually decides to transfer an activity to a co-op and
workers can join it or be laid of, but the degree to
which co-ops will be fully independent from state
intervention remains unclear. Independence of the
new co-ops vis-à-vis the state is questioned. Work-
ers can be hired with a cap of 10 percent of total la-
bor hours being worked by the co-op members and
only for 90 days.
143
Inspectors burden the self-em-
ployed and ofen ask for bribes. Norms strictly reg-
ulate all activity, even renting public bathrooms for
self-employed caretakers.
144
Co-ops must obtain a
license and pay high monthly fees and taxes, in-
cluding taxes on sales, services, hired labor, social
security and personal income—the progressive rate
is 50 percent above $2,000. Over fve employees,
the tax on labor applies a rate over the base salary
that climbs from 50 to 200 percent according to the
number of employees. Hence, the tax system pe-
nalizes the self-employed workers who create more
jobs and it conspires against the state goal of laying
of its unneeded workers—the tax rate is justifed to
avoid concentration of wealth.
145
Tax levies are high
and deductible expenses low, thus inducing under-
reporting.
146
In addition to disincentives caused by
138
Castro, “Discurso en la Clausura,” 2013.
139
Ministry of Interior Trade (MINCIN) Resolution MINCIN No. 52, February 14, 2013.
140
Nuevo Herald, June 5, 2013.
141
Marc Frank, “Cuba steps back from its wholesale produce monopoly,” Reuters June 20, 2013, http://www.reuters.com/article/2013/06/20/cuba-re-
form-agriculture-idUSL2N0EW1K420130620.
142
Decreto No. 318, Marking of agricultural products, October 20, 2013.
143
Marc Frank, “Cuban state begins to move out of the restaurant business,” Reuters, August 26, 2013, http://www.reuters.com/article/2013/08/26/
us-cuba-reform-cooperatives-idUSBRE97P0R620130826. Archibald Ritter, “Te Movement towards Non-Agricultural Cooperatives in Cuba,”
Miami: ASCE Meetings, August 2013, http://www.ascecuba.org/publications/proceedings/volume23/pdfs/ritter.pdf.
144
Resolución 512, Ministry of Economics and Planning on bathroom rentals has six pages in the Gaceta Ofcial, October 31, 2013.
145
Ley 113, 2012.
146
Alonso and Vidal, 2013.
Cuba’s Economic Change in Comparative Perspective
55
taxation, micro-credit granted and inputs sold are
grossly insufcient,
147
state retail sales have a prof-
it of 200 percent, imports are not allowed, and ex-
ports have dwindled.
148
Wholesale markets in the
experimental stage give priority to the state over the
non-state sector. Prices are rising and Murillo has
said they will not stabilize until output increases.
149
Self-employment uncertainty (successively allowed,
reduced and reauthorized) has been reinforced by
recent actions: the closure of tiny business set in Ha-
vana building porches; the imposition of high taxes
on sales of imported clothing and the later banning
of those sales afecting 20,000 self-employed that
might go underground; and the closure of home-
based cinemas (including 3-D that state theaters do
not show) and video-game arcades.
150
Decree-Law
315/2014 permits the confscation of businesses
and fnes violators. In many cases, bureaucrats fear
competition: a state-restaurant manager ofering
bad food and service is threatened by a nearby ex-
cellent private restaurant.
At the start of 2014, 596,500 state employees had
been dismissed, amounting to 10 percent of the la-
bor force and tantamount to 60 percent of the of-
cial target of one million layofs at the end of 2011
and 33 percent of the goal of 1.8 million dismissals in
2014-2015. However, the creation of non-state jobs
has been insufcient to absorb those who have been
fred. Te open unemployment rate grew from 1.6
percent in 2008 to 3.5 percent in 2012. Although the
latter was the lowest in Latin America, it has been ar-
tifcially reduced because of exclusion of workers not
actively seeking employment.
151
Poor statistics are
an obstacle to evaluating the expansion of the non-
state sector. Table 5 shows the available ofcial data
in 2005-2013 on the employed labor force by state
and non-state employment (the latter disaggregated
by co-ops, self-employed and other private work-
ers), but excludes private farmers, usufructuaries
and land renters. Additionally, the categories are not
consistent through time. Until 2011 co-op members
were limited to the agricultural sector and showed a
declining trend, but they rose in 2012 because new
co-op members (barbers, hairstylists and manicur-
ists) were added; “other private workers” also fell
until 2010, but have increased since 2011 as workers
hired by self-employed were clustered with the latter.
Self-employment also declined from 3.6 percent to
2.9 percent in 2005-2010 and then rose to 9 percent
in 2013. Te state-sector share grew from 80.2 per-
cent to 83.8 percent but fell to 75.2 percent in 2012;
conversely the non-state share fell from 19.8 percent
to 16.2 percent but jumped to 24.8 percent in 2012
due to the increase in all three components. If ofcial
data for 2012
152
on all usufructuaries (300,810), land
renters and private farmers (125,812) were added to
the estimated non-state sector (1,219,000), the sum
would be 1.6 million, or 34 percent of the employed
labor force. However, if this sum were put together
with 75.2 percent of the state sector, the total would
be 109 percent.
153
In December 2013 there were 444,109 registered
self-employed workers (18 percent of which were
hired workers), a net of 291,509 afer subtracting the
152,600 self-employed previously approved prior to
the expansion of the number of authorized occupa-
tions. Te 2012 goal was 695,300 and only 42 percent
of that was met by the end of 2013. Te 2015 goal is
147
In 2012, 133,291 loans were granted to individuals, averaging $250; 90 percent was for purchase of building materials, leaving 10 percent for
self-employed, coops and usufructuaries (Granma, December 21, 2012). In 2011-2013, 218,400 loans were granted, averaging $141 and only 0.2
percent to self-employed (Juventud Rebelde, December 19, 2013; Juventud Rebelde, December 27, 2013).
148
Havana Times, May 9, 2014.
149
Bohemia, August 29, 2013.
150
Granma, September 26, 2013; Marc Frank, “Cuba shutters private theaters, threatens other businesses,” Reuters, November 2, 2103, http://www.
reuters.com/article/2013/11/02/cuba-reform-idUSL1N0IN08Q20131102.
151
Economic Commission for Latin America and the Caribbean (ECLAC), Preliminary Balance of the Economies of Latin America and the Caribbean
2013 (Santiago, December 2013); “Un magnífco congreso obrero,” Juventud Rebelde, February 23, 2014; Marc Frank, “Cuba continues to trim
state payroll,” Reuters, February 24, 2014.
152
ONEI, Anuario Estadístico de Cuba 2012; Raúl Castro, “Discurso en las Conclusiones del XX Congreso de la CTC,” Juventud Rebelde, February
24, 2014.
153
Feinberg, adding estimates of unregistered and part-time self-employed, reaches 2 million workers, 41 percent of the employed labor force and
116 percent of the labor force.
Cuba’s Economic Change in Comparative Perspective
56
1.8 million, thus demanding a six-fold increase of the
2013 net amount in just two years. Out of the total
self-employed, 68 percent did not have a prior work
record, but were probably illegal workers that became
legalized; 18 percent kept state jobs while earning ex-
tra money on the side, and 14 percent were pension-
ers. Only 16 percent had been fred from state jobs in
2012. Te primary work activities were food, trans-
portation, house leasing, public vendors and home-
good sellers; 61 percent was not specifed.
154
Comparisons. Te Sino-Vietnamese reforms have
advanced much more than Cuba’s in this area, as
employment in the private sector goes beyond
self-employment and new co-ops, engaging wage
workers, and professionals can work on their own
or in the private sector. In China, 75 percent of the
employed labor force is in private enterprises and
self-employment; they contribute between 50 per-
cent and 60 percent of the GDP and half of total
taxes; cooperatives are autonomous and usually
own their business.
155
In the most developed Lat-
in American countries, formal salaried work in the
private sector predominates, but self-employment
still accounts for 18 percent to 24 percent of the la-
bor force. In less developed countries, self-employ-
ment rises to between 40 percent and 58 percent of
the labor force (the highest of which is in Bolivia
and Peru), and is an important source of income
and wealth, without the tough restrictions imposed
in Cuba.
156
Latin American co-ops normally joint-
ly own their businesses, are more autonomous and
submit to fewer regulations than in Cuba as well.
Wage Policy, Reduction of Gratuities and Social
Services, and the End of Rationing
State and market roles. Wages are centrally fxed
and quite depressed in real terms, and severe re-
strictions provoke labor-efort disincentives. Te
TABLE 5. EMPLOYED LABOR FORCE BY TYPE OF EMPLOYER IN CUBA: 2005-2013 (IN THOUSANDS AND PER-
CENTAGE OF THE EMPLOYED LABOR FORCE)
Years
(Dec)
Employed
Labor Force
(000)
State Sector
Non-State Sector
a
Cooperatives
b
Self-employed
c
Other Private
d
Total
e
(000)
(per-
cent) (000)
(per-
cent) (000)
(per-
cent) (000)
(per-
cent) (000)
(per-
cent)
2005 4,723 3,786 80.2 271 5.7 169 3.6 496 10.5 936 19.8
2006 4,755 3,889 81.8 257 5.4 153 3.2 456 9.6 866 18.9
2007 4,868 4,036 82.9 242 5.0 138 2.8 453 9.3 834 17.1
2008 4,948 4,112 83.1 234 4.7 142 2.9 460 9.3 836 16.9
2009 5,072 4,249 83.8 232 4.6 144 2.8 448 8.8 823 16.2
2010 4,984 4,178 83.8 217 4.4 147 2.9 442 8.9 806 16.2
2011 5,010 3,873 77.3 209 4.2 392 7.8 537 10.7 1,137 22.7
2012 4,902 3,684 75.2 213 4.3 405 8.3 600 12.2 1,219 24.8
2013 4,919 444 9.0
a
Excludes usufructuaries, private farmers and land renters (see text).
b
From 2005 to 2010, members of agricultural cooperatives; since 2011, likely
also includes non-agricultural-production and services cooperatives.
c
Since 2011, data includes also their hired wage earners.
d
From 2005 to 2010,
includes wage earners in mixed enterprises and hired by self-employed and private farmers; since 2011 those hired by self-employed are reported in
the self-employed column.
e
Sum of cooperatives, self-employed and other private activities.
Source: Absolute fgures from ONEI, Anuario Estadístico de Cuba 2010 (Havana 2011), Anuario Estadístico de Cuba 2011, Anuario Estadístico de
Cuba 2012, and Panorama Económico y Social de Cuba, 2013 (Havana 2014); self-employment in 2013 from AP, January 15, 2014; the author has
estimated state, other private and non-state fgures from ONEI fgures, and calculated all percentages.
154
“Aumenta el trabajo por cuenta propia,” Juventud Rebelde, August 17, 2013.
155
Mao Xianglin, Interview with the author on China reforms. Beijing, November 8, 2013.
156
ECLAC, Social Panorama of Latin America and the Caribbean 2011 (Santiago, June 2012).
Cuba’s Economic Change in Comparative Perspective
57
state provides “gratuities” and generous social
services: universal free access to health care and
education; large subsidies to the cost of social se-
curity pensions (prior to the 2008 pension reform,
workers did not pay contributions and could retire
at 55 for women and 60 for men, among the low-
est ages in the region); rationed goods at subsidized
prices; cheap meals in work-center cafeterias; and
home ownership for most of the population. Start-
ing in 2003, under the “Battle of Ideas” launched by
Fidel, 3,000 municipal university campuses were
created, signifcantly increasing the percentage
of people in higher education. While enrollment
jumped 40 times in the humanities and fve times
in physical education, it fell 39 percent in natural
sciences and math, both essential to development.
A social workers training program was also estab-
lished, but those graduates were used inefciently.
Social services costs peaked in 2007-2008 taking 55
percent of the budget and 37 percent of GDP; 88
percent of the cost of rationed goods was subsidized
at the cost of 25 billion CUP ($1 billion USD) in
2013.
157
Even during the grave crisis of the 1990s,
gratuities and social services were not trimmed.
Despite high costs, the quality of such services de-
clined: the real average pension fell by half in 1989-
2011; due to an acute shortage of teachers (prompt-
ed by very low wages), “emerging teachers” were
trained in only a few months, worsening the level
of incoming students at universities; health-care in-
frastructure, equipment and services deteriorated.
Additionally, Cuba has the second most aged pop-
ulation in the hemisphere and rapid aging raises
pension and health-care costs substantially.
158
Such
economic and fscal largesse is unsustainable in the
medium and long term.
159
Raúl Castro acknowl-
edged these problems, stating that social services
must be subordinated to fscal resources and eco-
nomic capacity, and launched a program to reduce
social services, eliminate gratuities and rationing.
Tese reforms are oriented towards the market but
rule out any supplementary or partial privatization
of social services.
Progress. Salary reform in 2008 strived to raise
wages and incentives by authorizing multiple jobs
and payment for results, eliminating the salary cap
and legalizing enterprise stimulus bonuses in CUC
or hard-currency. Other social reforms seek to re-
duce budget expenses by shutting down inefcient,
costly programs such as schools in the countryside,
thousands of municipal university campuses and the
social-workers program; setting entry quotas and
tightening entrance exams to universities, and sharp-
ly cutting enrollment in humanities and physical
education while enlarging enrollment in natural sci-
ences and math. Te number of hospitals and clinics
was cut by 32 percent in 2007-2012 and health pro-
fessionals by 16 percent;
160
the expansion of herbal
medicine and acupuncture attempts to compensate
for cuts in health-care curative services. Te pen-
sion reform increased retirement ages by fve years
for both genders and established contributions made
by workers, but tied to a raise in their wages. Since
1995, Cuban economists have warned that universal
rationing benefts the high income group that does
not need this subsidy and have hence recommend-
ed eliminating rationing and establishing social as-
sistance targeted to the needy. Accepting this idea,
in 2006-2013, Raúl Castro gradually removed cer-
tain goods from rationing and began selling them at
market price, several times higher than the rationed
price. Tese goods included beef, tubers, lard, chick-
peas, cocoa, cigarettes, toothpaste, detergent, soap
and liquid gas. He also cut the quota for beans and
eggs by half, and reduced the sugar quota by 20 per-
cent. Utility tarifs and prices in foreign-currency
shops (TRD) were also elevated.
Hurdles. Table 6 exhibits the results of multiple so-
cial reforms. No data are available on the efects of
the 2008 salary reform, which possibly helped to
157
Rosa Tania Valdes, “Cuban food ration system marks 50 years amid controversy,” Reuters July 12, 2013, http://uk.reuters.com/article/2013/07/12/
us-cuba-reform-ration-idUSBRE96B0NP20130712.
158
In 2010, the population age 60+ (17.8 percent) exceeded that age 0-14 (17.3 percent); the former grew to 18.7 percent in 2013 (ONEI, Panorama
Económico y Social de Cuba, 2013 (Havana, April, 2014).
159
Carmelo Mesa-Lago, Social Protection Systems in Latin America and the Caribbean: Cuba (Santiago de Chile: ECLAC, 2013).
160
ONEI, Anuario Estadístico de Cuba 2011 (Havana, 2012).
Cuba’s Economic Change in Comparative Perspective
58
increase the average real wage by two percentage
points by 2011, though this was still 73 percent low-
er than the 1989 level. Expenditures in state-budget-
ed social services shrank from a peak of 55 percent
of the total state budget related to current expens-
es in 2007 to 48 percent in 2012. In terms of GDP,
these expenditures declined from 37 percent to 27.3
percent between 2008 and 2013. Te most afected
sectors were social assistance, housing, health care
(despite population aging which increases health
costs) and education. Social assistance was slashed
by 76 percent while benefciaries as a percentage
of the population were reduced by 72 percent.
Housing expenditures combined with communal
services were cut from 2.9 percent to 1.3 percent;
housing alone was 0.3 percent of GDP in 2012.
161
Te pension reform reduced the sate-funded fnan-
cial defcit (annual revenue minus expenditures)
from 41.5 percent to 39 percent of expenditures in
2009-2010, but it increased again to 48 percent in
2013, the highest on record. Relative to GDP, the
defcit rose slightly to 3.1 percent. In the long run,
the actuarial defcit (projected revenue to pay future
obligations) will intensify due to population aging
and the high life expectancy at retirement age. De-
spite some nominal increases, the average real pen-
sion in 2012 was one half of its 1989 level.
Some social reforms have harmful social conse-
quences. Cuts in health services afect the popula-
tion, e. g., reductions in personnel, especially family
doctors (reduced to one third of former numbers
due to their export to Venezuela and other coun-
tries)
162
closure of some hospitals and clinics, and
cuts in diagnostic tests and specialist consultations.
Workers’ cafeterias with subsidized prices have been
shut down and replaced by a voucher system that
is insufcient to buy lunch. Ending rationing is the
toughest social reform. Although quotas are meager
and only cover food needs for seven to ten days a
month, the system is still vital for low income groups
that do not receive foreign remittances. Hence, its
TABLE 6. RESULTS OF STRUCTURAL SOCIAL REFORMS IN CUBA: 2006-2013
Indicators 2006 2007 2008 2009 2010 2011 2012 2013
a
Real average wage (1989=100) 23.9 24.5 25.0 26.0 27.1 27.1 27.1 27.1
Real average pension (1989=100) 39.3 39.3 48.2 50.0 50.0 50.0 50.0
Social current expenditures
b
percent of state budget 53.4 55.4 53.1 54.0 53.1 53.6 48.2 51.1
percent of GDP 28.9 33.2 36.6 36.3 33.9 32.6 29.6 27.3
Education (percent of GDP) 10.0 12.1 14.1 13.1 12.9 12.8 12.0 10.8
Health care (percent of GDP) 7.1 9.9 10.3 11.3 9.7 10.1 8.0
Social security pensions (percent GDP) 6.7 6.4 7.1 7.6 7.6 7.4 7.3 7.2
State ?nanced de?cit
c
(percent) 37.4 35.3 40.5 41.5 39.1 41.0 43.1 48.1
percent of GDP 2.5 2.2 2.9 3.2 3.0 3.0 3.1 3.1
Housing &communal services
d
(percent GDP) 2.8 2.8 2.9 2.8 2.7 1.9 1.8 1.3
Social assistance (percent of GDP) 2.2 2.0 2.1 1.5 1.1 0.5 0.4
Bene?ciaries (percent total population) 5.3 5.3 5.2 3.8 2.1 1.6 1.5
a
Preliminary data.
b
Peak denoted in dark font.
c
[(current revenue - current expenditures)/current expenditures] x 100.
d
In 2012, housing received only 14.4 percent of the combined total, and communal services 95.6 percent.
Sources: Real wages and pensions from Mesa-Lago and Pérez López, 2013; rest author’s calculations and updating based on ONEI Anuario Estadísti-
co de Cuba 2012 (Havana, 2013) and Panorama Económico y Social de Cuba, 2013 (Havana, April 2014).
161
ONEI, Panorama Económico y Social de Cuba, 2012 (Havana, April 2013).
162
ONEI Anuario Estadístico de Cuba 2012 (Havana, 2013).
Cuba’s Economic Change in Comparative Perspective
59
elimination faces wide opposition. Te vulnerable
population has expanded due to substantial price
raises in goods and public services (TRD charge a
240 percent markup), dismissals that doubled the
open unemployment rate, and reduced access to
family doctors. About 480,000 citizens age 60 and
over are in need but only 15,825 slots are available in
nurseries/asylums.
163
Raúl promised that no afict-
ed needy would not be lef unprotected, but social
assistance has been severely curtailed. Although tar-
geting is appropriate to detect benefciaries not real-
ly in need, the VI Party Congress agreements ended
assistance to benefciaries with relatives who can
help them, failing to address the generalized level of
need and the expanding vulnerable population.
Comparisons. Te Sino-Vietnamese reforms dis-
rupted the pension and health systems because they
were tied to big state enterprises now largely decen-
tralized, as well as rural communes now disbanded.
In China, formal and informal co-payments were
typical in education but now it is free. New systems
are emerging: urban areas have medical care funds
fnanced by the state, employers and workers, and
users have a 15 percent co-payment; in rural areas,
co-ops provide health care and the copayment is 30
percent; the new pension system is still in an early
stage.
164
Tese reforms in social-service fnancing
are more radical than Cuba’s.
Afer a signifcant increase in social spending in
Latin America, a leveling of or decline, includ-
ing in Cuba, began in 2010-2011. Despite this, the
share of GDP used for social spending in Cuba is
still twice the regional average.
165
In several Latin
American countries, structural reforms privatized
part of social services, ofen with adverse results.
In health care, competing private for-proft corpo-
rations (HMOs) were created and expected to im-
prove care and reduce costs, but in practice HMOs
charged high premiums and co-payments, exclud-
ed pre-existing conditions, and imposed higher fees
to women in their child bearing years and the el-
derly. In Chile, a pioneer in social reform, services
in the public health sector deteriorated and later
required signifcant investment, but as they im-
proved, the population enrolled in HMOs declined
from 25 percent to 16 percent whereas the public
sector expanded. Te Cuban pension reform was
modest, limited to altering some parameters rather
than fostering structural change.
Half of Latin America fully or partially privatized
social security pensions from 1981-2011, increas-
ing the capital accumulated in private funds and
improving managerial efciency of individual
accounts. However, reforms failed to expand la-
bor-force coverage, in most cases competition did
not work, administrative charges were very high,
and transition costs have been much greater and
lasted longer than initially projected. Re-reforms
in three countries between 2008 and 2010 have in-
creased the state role in such pensions. Two closed
the private system and moved all the insured and
their funds to the public system. Chile kept the pri-
vate system but improved it with higher pensions,
enhanced social solidarity and gender equity, and
strengthened competition. Aside from a few excep-
tions, public pension systems face growing fnancial
and actuarial defcit, as well as inefciencies, and
pay low pensions.
166
Selling and Purchasing Dwellings
State and market roles. Te urban reform of 1960
confscated most housing, forbade its sale and rent-
al, decreed that homeowners could only keep one
home, virtually banned private construction, abol-
ished mortgages and granted tenants the right to
pay monthly rent to the state for 20 years to become
homeowners. A positive outcome was that 95 per-
cent of the population now owns their own homes,
163
“Los retos de enevejecer,” Juventud Rebelde, November 14, 2014.
164
Xianglin.
165
ECLAC, Social Panorama of Latin America and the Caribbean 2012 (Santiago, March 2013).
166
Carmelo Mesa-Lago, Reassembling Social Security: A Survey of Pension and Health Care Reforms in Latin America (Baltimore: John Hopkins
University Press, 2012); Carmelo Mesa-Lago, “Re-reforms of Privatized Systems,” Zeitschrif für ausländisches und internationales Arbeits- und
Sozialrecht (Munich, 26: 3), 189-316.
Cuba’s Economic Change in Comparative Perspective
60
but there were adverse efects as well. Te rate of
state housing construction was much lower than
population growth, and many homes are in severe
disrepair due to lack of maintenance (resulting from
absence of construction materials, state restrictions
on building, and the inefciency of the government
agency for repairs) and hurricanes that in the last
ten years damaged one million dwellings, equating
to 28 percent of the stock of 3.88 million units.
167
Te ofcial housing defcit is 600,000 units, but the
true amount is closer to one million by the author’s
estimate. Te National Institute of Housing reports
1.17 million homes (30 percent of the stock) to be in
mediocre or poor condition.
168
In Centro Habana,
49 percent dwellings are in bad shape and 9 percent
are in critical situation; 230 edifces collapse daily,
and 24,311 residents live in temporary shelters.
169
To ameliorate these problems, building of private
homes (termed “self-efort”) was permitted as were
housing swaps (permutas) of homes of supposedly
similar value. However, in practice permutas trig-
gered bureaucracy and corruption. Te housing re-
form
170
is an important move towards the market.
Progress. Te 2011 reform authorizes the sale and
purchase of homes for Cuban citizens and foreign
permanent residents at a price freely fxed by seller
and buyer, ownership of a second home for recre-
ation in the countryside or the beach, the right to
inherit a home and for emigrants to pass it to rel-
atives (or sell it before leaving the island). In addi-
tion, the reform permits sales of building materials
at market price, grants subsidies for those in need
with homes damaged by hurricanes to buy such ma-
terials, concedes some tax exemptions, and expands
state microcredit (90 percent of which is to build/
repair homes). Tose eligible for the subsidy in-
clude home owners, tenants in a multifamily dwell-
ing, and renters of state buildings. Two Supreme
Court rulings in 2013 implicitly acknowledged a
previous illicit transaction and authorized its pay-
ment in dollars, suggesting that the government
wants to legalize prior transactions and improve
market security.
171
In 2013, the market-set collater-
al guarantee was reintroduced on jewels, precious
metals, agricultural equipment, cattle and crops, as
well as mortgages on recreation houses and empty
lots but not on principal homes.
172
Housing capital,
which had been frozen for 50 years, can now be sold
to change residence, invest in microbusiness, buy a
cheaper dwelling and use the remaining funds to
improve life, or get a small capital to settle abroad.
Dwellings transferred between November 2011 and
March 2012 totaled 14,310, of which 80 percent
were donations (probably legalization of prior ille-
gal sales) and 20 percent were sales. In November
2012, 45,000 accumulated transactions were report-
ed (without disaggregating those sold and donated)
and 80,000 more in 2013 alone for a total of 125,000,
or 3 percent of the stock.
173
And yet, it is reported
that 100,000 homes were informally sold, similar to
the number of formal transactions. A 2013 survey
gave an average house sale price of $31,498 (a for-
tune in Cuba), ranging from $21,464 in Villa Clara
to $59,191 in Playa Havana, but $500,000 in Mira-
mar and $2 million for a penthouse in Havana.
174
Subsidies for poor families to repair their homes
damaged by hurricanes were 566 million CUP from
January 2012 to March 2013, granted to 33,431
benefciaries, an average of 16,960 CUP ($700)
per person/household. Te maximum subsidy to
build a dwelling of 25 square meters is 85,000 CUP
167
ONEI, Informe Final del Censo de Población y Viviendas 2012 (Havana, 2013).
168
Daniel Benítez, “Cuba’s Housing Situation,” Havana Times, July 9, 2013.
169
Marcelo Martín Herrera, Documentary “Elena,” exhibited in ICAIC, Havana, April 2013.
170
Decreto-Ley No. 288, Housing reform, November 22, 2011.
171
Circular 265, April 2013; Cubaencuentro, September 10, 2013.
172
Cuban Central Bank, Instrucción 1, 2013.
173
“Aumenta la compraventa de viviendas en Cuba,” EFE, December 3, 2013.
174
John Arlidge, “Cuba, home of the oddest property market,” Financial Times, June 21, 2013; Peter Orsi, “Despite hurdles, Cuba real estate market
buzzing,” AP, April 30, 2013; Benítez 2013; Emilio Morales and Joseph Scarpaci, “Mercado inmobiliario en Cuba: Una apertura a medias,” Miami,
Te Havana Consulting Group, May 2013.
Cuba’s Economic Change in Comparative Perspective
61
($2,500), a substantial sum in Cuba, and 5,000 or
10,000 CUP ($208 and $417) for repairs depending
on the work needed.
175
Afer peaking at 111,400 in 2006, the number of
dwellings built dwindled to 25,600 in 2013, while the
rate of units built per 1,000 inhabitants fell from 9.9
to 2.3 (Table 7). Despite positive steps taken, houses
constructed by the population declined from 70 per-
cent of total construction to 29 percent from 2006
to 2012 whereas those built by the state rose from
27 percent to 70 percent. Preliminary data for 2013,
however, show a reversal to 48 percent and 52 per-
cent respectively, an indication that reforms might be
having better results on this front.
Hurdles. Te major impediment to the sale of
homes is that supply is higher than demand due to
Cubans’ low purchasing power. Te average annual
wage is 5,580 CUP ($232) and a very cheap house
costs $5,000 so it would take 21 years of wages. Cu-
bans also lack basic knowledge on how to evaluate
their property and set a market price: no appraisers
exist, and, due to the bad state of most dwellings,
the buyer must invest about 50 percent over the ask-
ing price to repair the house, a fact that few know.
Mortgages on primary residences are still banned
and lending banks for housing don’t exist.
176
To sell
a home it must be recorded in the municipal prop-
erty registry and the transaction must be conducted
by a notary public (notario). Te registry was virtu-
ally abandoned and out of date because few cared to
record their home or update its status; an attempt
to create a national cadaster in the 1960s was aban-
doned. Only 17 percent of home owners have reg-
istered or updated their property status.
177
Tere
are additional hurdles to home sales including the
insufcient amount of public notaries; until late
2013, realtors were banned, although they worked
illegally and now charge a 5 percent commission;
architects cannot work as self-employed, obstruct-
ing dwelling construction and repair. Advertising is
limited to signs at homes, places where buyers and
sellers meet, and a few web sites with low popula-
tion access. Te Cuban TV also began announcing
sales in 2013, a step in the right direction.
178
Previ-
ously a 4 percent sales tax on the selling price was
levied, but that requirement was suspended in 2013.
As noted, state budget allocation for housing com-
prises the second lowest amount of public spend-
ing and has been decreasing. Te 2013 state plan
for the sale of housing construction materials was
2.3 billion CUP or $96 million,
179
but actual sales
reported in the frst quarter were 539 million CUP
175
Acuerdo Consejo de Ministros No. 7,387, Regulation of housing subsidies, May 6, 2013; Granma, May 6, 2013.
176
Morales and Scarpaci; Jef Franks, “Cubans on the move as new real estate market grows,” Reuters, March 20, 2013, http://uk.reuters.com/arti-
cle/2013/03/20/uk-cuba-housing-idUKBRE92J05A20130320.
177
Based on ONEI, Informe Final del Censo de Población y Viviendas 2012 (Havana, 2013).
178
Arlidge; Granma, July 11, 2013. Te website EspacioCuba has 2,500 listings and 30-40 daily customers (Orsi). According to Morales and Scarpaci,
100,000 homes were listed in mid-2013.
179
Murillo, Informe a la Asamblea Nacional, 2013; Franks.
TABLE 7. HOUSING CONSTRUCTION TOTAL AND BY BUILDER IN CUBA: 2006-2013
Indicators 2006 2007 2008 2009 2010 2011 2012 2013
Dwellings built
Thousand units 111.4 52.6 44.8 35.1 33.9 32.5 32.1 25.6
Units per 1,000 inhabitants 9.9 4.6 4.0 3.1 3.0 2.8 2.8 2.3
Dwellings built by (percent of total)
a
Population 69.9 52.0 52.8 40.4 33.7 27.5 28.9 47.7
State 26.7 42.6 41.8 55.4 64.0 70.6 69.6 52.3
a
Dwellings built by cooperatives made the diference to 100 percent.
Source: ONEI Anuario Estadístico de Cuba 2011 (Havana, 2012); Anuario Estadístico de Cuba 2012 (Havana, 2013); and Panorama Económico y
Social de Cuba, 2013 (Havana, April 2014).
Cuba’s Economic Change in Comparative Perspective
62
($22 million) below the plan, because of insufcient
equipment, low quality products, high prices and
slow stock mobilization due to price rigidity.
180
Legal procedures and regulations on building homes,
selling houses and receiving subsidies are all cumber-
some as well. A building application requires eight
visits to four state agencies, which takes at least 132
days.
181
Nationals cannot own more than two homes
and non-resident foreigners are forbidden to buy
houses; it is unclear if foreigners can own apartments
built by Cuban companies in authorized luxury re-
sorts.
182
Municipal authorities decide who qualifes
to build and also set priorities for subsidies, inspec-
tors evaluate the applicant construction plan, materi-
als needed and transportation costs, and the munic-
ipality makes the fnal decision. Detailed rules also
defne what goods can be bought with the subsidy at
TRD.
183
Corruption, fraud and law infractions exist:
to cut taxes the sale price is given as a fraction of the
real one; donations hide new purchases; subsidies
and construction materials are provided to persons
that are neither needy nor have dwellings damaged
by hurricanes; ofcials are bribed to approve illegal
deals; foreigners buy homes and place their titles in
the name of a Cuban relative or friend.
184
Comparisons. China’s ownership rights are much
more liberal than Cuba’s. Te property law of 2007
allows national and foreign investors to own homes
under construction on state-owned land and, once
completed, grants the right to sell, lease and mortgage
such rights for 70 years for residences (automatically
renewable) or 40-50 years for industrial and com-
mercial businesses. China does not have a unifed
national housing system; in Beijing a resident family
can buy two homes and a child 18 years old or older
can buy another two, and there is no limitation on
commercial use. Tere are no restrictions on foreign
permanent residents and large international com-
panies (Blackstone, Morgan Stanley, and Goldman
Sachs) have realty branches in China. Such property
rights have led the real estate industry to make huge
profts from a frenzy of eager buyers (many foreign-
ers) that keep real estate prices bubbling.
185
Te home
ownership rate in Cuba is the highest in Latin Amer-
ica, but no other country has so many restrictions
and regulations on ownership, investment, buying/
selling, building and repairing of homes imposed on
its nationals and particularly on foreigners. Mexican
trusts (fdeicomisos) allow foreigners, through a do-
mestic bank, to hold real estate titles for 100 years,
generating huge investment with little risk.
186
Mort-
gages exist throughout the region and most countries
have housing lending banks that facilitate credit and
construction. On a positive note, Cuban subsidies to
the needy for home construction/repair are generous
by regional standards.
REFORM MONITORI NG AND EVALUATION
OF MACRO RESULTS
Reform Monitoring
Te VI Party Congress neither provided a timeta-
ble to implement the agreements of 2011, nor set
priorities or a sequence of actions. Te Permanent
Commission reporting to the Council of State is in
charge of coordinating, monitoring and overseeing
implementation of the agreements. Chief of the
Commission Murillo said that it has the authori-
ty to make changes to the agreements or propose
new ones, and that it was developing a plan through
2015 that would be strictly fulflled.
187
Twice a year,
Murillo reports to the National Assembly on the
agreements’ progress. Te PCC First National Con-
180
Buenítez; Bustamante.
181
Granma, July 8, 2013.
182
Palli.
183
Acuerdo No. 7,387, 2013; Granma, May 6, 2013.
184
Tere is a two-tier market: Cubans mostly buy small, cheap houses whereas foreigners with Cuban connections acquire the most expensive prop-
erties (Franks). Diario de Cuba, March 20, 2013; Murillo, Informe a la Asamblea Nacional, 2013; Granma, October 4, 2013.
185
Palli; Xianglin.
186
Palli.
187
Gerardo Arreola, La Jornada, March 28, 2012.
Cuba’s Economic Change in Comparative Perspective
63
ference in 2012 stipulated that the Party is respon-
sible for fostering and overseeing compliance of the
agreements, especially updating the model, and to
ensure that they do not become a “dead letter”.
188
Te Central Committee meets twice annually to
review progress and prepare a report on the agree-
ments’ implementation. Te leadership of the Party
and of the government should closely oversee the
process and, when appropriate, make adjustments
to correct negative trends. Te General Comptroller
Ofce also exercises control over the reforms afect-
ing the non-state sector; Director Gladys Bejarano
reported a new stage in the implementation process
in which statistical information would be a tool of
management and monitoring, facilitating informed
criticism, and the fght against corruption.
189
Te
National Ofce of Tax Administration (ONAT)
controls taxes in the non-state sector. Te mass me-
dia must also provide regular, reliable information
on the progress achieved and hurdles faced to keep
the population informed regarding the reforms and
any alterations that are made.
Te creation of oversight entities and mechanisms
to monitor the agreements’ implementation is an
important step as well, but several agencies are in-
volved in the process without clear coordination
and data exchanges. Reports are brief and broad
with scant fgures; in some cases, years pass without
reporting a policy outcome or updating key data.
Additionally, the National Assembly does not allow
for frank debates on the progress of the economic
reforms, and is not provided with sufcient data for
informed discourse. Evaluating the efects of the re-
forms demands a robust statistical base. Te Perma-
nent Commission may gather such data, but it has
not publicly released it despite Raúl’s call to do away
with secrecy and to keep the people informed. ONEI
lacks statistics on usufruct; the number of usufruc-
tuaries began to be published in 2013, but fgures are
still needed on cultivated land, production, yields,
sales and prices, disaggregated by producers (state
farms, cooperatives, private farms and usufruct).
Meager data is available on credits given to farmers,
their purpose, and repayment performance, and also
on inputs sold to them. No data has been published
on the impact of the 2008 salary reforms, poverty
incidence, income distribution, average salary by
gender and race, and number of dwellings sold or
donated since the end of 2012. Te party and the
government conduct public opinion surveys, but
don’t publish them (although a few scholars con-
duct and publish limited surveys). So far no surveys
have been released about the people’s views on the
reforms and desired changes. In 2013, Minister of
Finance and Prices Lina Pedraza reported a signif-
icant quantity of unpaid personal income tax and
under-declaration of income due to weakness in the
state tax collection system. ONAT has an obsolete
information system (e.g., deceased self-employed
are still enrolled, payment delays on fle for those
who actually paid on time) that must be updated in
2014 and must make short-run changes to adjust to
the new stage of the reforms.
190
Moreover, the fght
against corruption, one of Raúl’s key targets, has not
been accompanied by transparency and account-
ability of state enterprises and agencies.
191
Macroeconomic Results
In most cases it is not possible to attribute macro-
economic performance to the reforms because of
other factors that could not be isolated; but as Table
8 illustrates, macroeconomic indicators have not
improved since the implementation of the reforms.
GDP. Growth rates declined from 2007 to2009
due to domestic problems and the global crisis.
Although a partial recovery process began to take
place, growth slowed to 2.7 percent in 2013 (below
a 3.6 percent goal), the sixth lowest rate in Latin
America; the ofcially projected growth for 2014 is
1.4 percent below the goal of 2.2 percent.
192
Growth
188
Granma, January 29, 2012.
189
Granma, July 5, 2013.
190
Granma, July 6, 2013.
191
Antonio Romero, “Transformaciones económicas y cambios institucionales en Cuba: Una aproximación crítica,” (Washington, D.C.: Brookings
Institution, August 2014).
192
“Reunión del Consejo de Ministros: Tomando el pulso a la economía cubana,” Granma, June 23, 2014.
Cuba’s Economic Change in Comparative Perspective
64
averaged 2.5 percent in 2009-2013 whereas 5 to 6
percent is needed to spur adequate development.
Minister Yzquierdo blamed the poor growth on
Hurricane Sandy, non-fulfllment of hard-cur-
rency revenue, planning faws, bad investments,
insufcient credit and low labor productivity.
193
Raúl recognized that “still GDP performance is not
noted in the average Cuban family economy.”
194
Gross fxed capital formation fell from 10.8 percent
to 7.7 percent in 2008-2011, vis-à-vis 25.6 percent
in 1989, with a regional average of 22.7 percent, ver-
sus 50 percent in China and Vietnam.
195
In both in-
dicators, performance has been well below planned
targets.
Agriculture: Nova argues that the agricultural sec-
tor is decisive and strategic because of its spillover
has multiplying efects in other sectors of the na-
tional economy.
196
If this sector does not have the
expected results, as has happened in recent years,
the multiplying efect is negative. Agricultural out-
put decreased 5 percent in 2010 and grew 0.5 per-
cent in 2012 (a quarter of the goal of 2.2 percent);
as a percentage of GDP it was stagnant from 2007
to 2013 (Table 8). Te output index shows that by
2010, two years afer the frst usufruct law, output
in all crops except cereals was substantially below
2005, although by 2013 also beans and some fruits
had exceeded that level. ONEI preliminary reports
TABLE 8. REFORMS AND MACROECONOMIC PERFORMANCE IN CUBA: 2006-2013
Indicators 2006 2007 2008 2009 2010 2011 2012 2013
a
GDP constant prices (percent) 12.1 7.3 4.1 1.4 2.4 2.8 3.0 2.7
Capital formation
b
(percent
GDP)
10.4 9.7 10.8 5.4 8.6 7.7
Agricultural output (percent) -7.5 19.6 0.6 3.3 -5.1 5.0 0.5
Ibid (percent GDP) 3.2 3.7 3.6 3.7 3.5 3.5 3.7 3.6
Crops output (2005=100)
Tubers and plantains 85.5 92.0 83.5 86.8 87.4 88.5 90.7 86.9
Vegetables 83.4 81.2 76.1 79.5 66.8 68.8 65.9 75.1
Cereals
c
101.3 110.7 104.3 118.9 106.7 126.0 137.2 150.4
Beans 66.4 91.5 91.5 104.2 75.7 125.2 119.6 122.2
Citrus fruits 67.2 84.5 70.6 75.6 62.2 47.7 36.7 30.0
Other fruits 91.1 95.7 90.1 91.3 93.0 99.7 117.8 112.9
Cacao 102.5 66.7 53.2 67.1 82.6 73.0 98.0
Tobacco 114.2 98.5 82.6 96.9 78.8 76.5 75.0
External trade (billion pesos)
Import of goods 9.5 10.1 14.2 8.9 10.6 14.0 13.9 14.8
Export of goods 2.9 3.7 3.7 2.9 4.5 5.8 5.9 5.7
Agricultural
d
(percent of total) 0.5 0.4 0.4 0.5 0.3 0.4 0.4
Balance of goods -6.6 -6.4 -10.5 -6.0 -6.1 -8.0 -8.0 -9.1
a
Preliminary data.
b
Gross fxed capital formation.
c
Rice and corn.
d
“Agricultural/cattle products by groups.”
Sources: ONEI Panorama Económico y Social de Cuba, 2012 (Havana, April 2013); ONEI Anuario Estadístico de Cuba 2012 (Havana, 2013); ONEI
Panorama Económico y Social de Cuba, 2013 (Havana, April 2014); and author’s calculations including crops output index.
193
Adel Yzquierdo, Informe a la Asamblea Nacional,” Juventud Rebelde, December 19, 2013.
194
Castro, “Intervención en…”
195
ECLAC, Preliminary Balance of the Economies of Latin America and the Caribbean 2012 (Santiago, December 2012); Pérez Villanueva.
196
Nova.
Cuba’s Economic Change in Comparative Perspective
65
show that in 2013, non-sugar agricultural output
grew 2.6 percent but there were signifcant de-
clines vis-à-vis 2012: citrus 18 percent, tubers and
plantains 4 percent (plantains 26 percent and pota-
toes 18 percent) and non-citrus fruits 4 percent.
197
In 2012, milk and eggs fell 17 percent. Converse-
ly, vegetables grew 14 percent, cereals 9.7 percent
and beans 2 percent.
198
With very few exceptions,
all output indicators are well below 1989 levels.
199
Cuba’s General Auditor attributes the lack of results
in usufruct to the failure to change the mentality of
state entities and their leaders.
200
Te usufruct efect on agricultural output is difcult
to measure because it is not disaggregated within the
CCS/private sector (where it must belong) but usu-
fructuaries were the only to receive idle state land.
Also, the more fexible 2012 usufruct law entered in
force in December and its full potential cannot be
assessed until fnal data are available for 2013. Te
CCS/private sector share in total cultivated land by
crop expanded in 2011-2012 and in the latter year
ranged from 89 percent to 97 percent, except for cit-
rus and beans where the state had a majority. Te
sector share in total agricultural output also rose and
oscillated between 85 percent and 97 percent with
the same two exceptions noted. Finally, sector yields
in most crops were higher than those of the state.
Total agricultural output virtually stagnated in 2012,
but while state production declined in nine out of
ten products, CSS/private sector output rose in six
out of ten, which could be interpreted as a usufruct
outcome.
201
And yet, data for 2013 contradict such
interpretation: CSS/private sector output contracted
in six areas and rose in four whereas the opposite
was true of the state sector.
202
One explanation for
this oddity is that private and usufruct farmers are
diverting output from state acopio to the market, but
this should have been the case in 2011-2012 also.
Exports/imports: Te balance of trade in goods
ended in a defcit for the entire period (2006-2013),
reaching a record of $10.5 billion in 2008,
203
which
led to debt insolvency. Afer proper policies were
enacted, the defcit shrank but rose again to $9.1
billion in 2013, the second highest in history. Due
to poor domestic performance, the share of agri-
culture and livestock in total exports was minimal
and fell from 0.5 percent to 0.4 percent; food im-
ports account for 70 percent of consumption and
rose from $1.5 billion to $2 billion in 2011-2013.
204
Cuba’s heavy trade-economic dependence on Ven-
ezuela is risky because of the latter’s economic-po-
litical problems, coupled with the lack of tangible
macroeconomic results.
Comparisons. In the initial six to seven years of the
Vietnam reform, more aggressive reforms led to it
having higher GDP growth rates, investment, agri-
cultural output and exports than Cuba, despite be-
ing under a similar US embargo.
205
People in China
and Vietnam are satisfed with the reforms because
they resulted in improvement in living standards
but in Cuba the lack of economic results and some
adverse social efects have not generated such pos-
itive feelings.
CONCLUSIONS AND WAYS FORWARD
Institutional reforms are advancing in Cuba and are
positive overall. Tey include the establishment of
microcredit, bank accounts and wholesale markets
for the non-state sector, the sale of homes which was
previously banned, and inheritance rights of usu-
197
ONEI, Panorama Económico y Social de Cuba, 2012; ONEI Anuario Estadístico de Cuba 2012.
198
ONEI, Panorama Económico y Social de Cuba, 2013.
199
Mesa-Lago and Pérez-López.
200
Gladys Bejarano, “Octava Comprobación Nacional de Control Interno,” Granma, March 3, 2014.
201
Based on ONEI Anuario Estadístico de Cuba 2012.
202
ONEI Sector Agropecuario Indicadores Seleccionados, enero-diciembre 2013 (Havana, February 2014).
203
ONEI yearbooks refer to “pesos” not specifying if they are CUP or CUC; ECLAC gives same data in US dollars.
204
Granma, December 15, 2012; Raúl Castro, “Intervención en la Primera Sesión Ordinaria de la VIII Legislatura de la Asamblea Nacional,” Granma
July 7, 2013; ONEI Anuario Estadístico de Cuba 2012.
205
Pavel Vidal, “Reforma y crecimiento económico: Comparación entre Cuba y Vietnam,” Chicago, unpublished paper, LASA Congress, May 2014.
Cuba’s Economic Change in Comparative Perspective
66
fructuaries and home owners. Tese are the most
important reforms under the revolution. Further-
more, many of them either lack a precedent—mass
dismissal of unneeded state employees, elimination
of or reductions in gratuities and social services,
home sales, and commercial relations between the
state and non-state sectors—or they have advanced
much more than previous reforms, like self-employ-
ment. Te reforms are oriented towards the market.
For example, prices are set by supply and demand
in home sales and self-employed/co-op services; the
self-employed own their tiny businesses; new co-
ops are managed by their members who enjoy the
profts; and the number of economic agents has ex-
panded, as has the competition between them. Te
reforms try to increase efciency and production,
but while they have not improved legitimacy, levels
of uncertainty have grown.
206
Key structural chang-
es and components of the new model are still miss-
ing: integral price reform, elimination of monetary
duality, a realistic exchange rate, and bank system
restructuring. Te reforms are being implemented
slowly (albeit with more dynamism in the last two
years), and they have not produced tangible results.
Te reforms still fall far behind the Sino-Vietnam-
ese reforms, and Raúl has less than four years lef to
complete them. Cuba’s reforms run counter to the
shock therapy typical of Latin America, where the
market and private property predominate even in
countries that in recent years have reinforced the
state role. It is highly unlikely that the reform pro-
cess be reversed, as has happened before, because
of the magnitude of the socio-economic troubles
accumulated over 55 years of centralized state so-
cialism and the lack of feasible alternatives. Sum-
marized below are the most important conclusions
and some suggestions for moving forward.
Updating the model. Te Cuban economic mod-
el is not being transformed but updated gradually,
preserving the supremacy of the central plan and
state property over the market and non-state prop-
erty (though with the latter expanded). Most Cuban
academic economists seek a more balanced mix of
planned economy and state-owned property with
an open market and non-state-owned property. Up-
dating the model will be a long and complex pro-
cess which has been unsuccessful in other former
socialist countries, as it has in Cuba. Several key
components of Cuba’s changes in 2014in the larg-
est state enterprises were attempted before and then
abandoned. It took 33 months to organize a team to
study and conceptualize the frst version of the new
model. Te greatest obstacle to the reforms seems to
be the model itself. If Cuba were to follow an adapt-
ed “socialist market” or mixed economy model, as
in China and Vietnam (which have a private sector,
open markets and foreign investment, combined
with an indicative plan and decentralization of de-
cision making) it would achieve much higher sus-
tained economic growth under the Party rule.
Usufruct. Te Sino-Vietnamese experience shows
that agricultural reform is pivotal. Cuba’s agricul-
tural reform is mainly executed through usufruct
and has required a second law, more lax than the
previous law but still restrictive. At the end of 2012
there were 174,271 usufructuaries but 142,862 had
been working the land for 20 years without a sig-
nifcant role in increasing agricultural output. Of-
fcially, usufructuaries received 1.5 million hectares
of agricultural land, but it is possible they only re-
ceived one million. Te average plot size was either
six or nine hectares, much lower than the 13 or 67
hectares respectively allowed in the two usufruct
laws of 2008 and 2012. Either 33 percent or 54 per-
cent of usufruct land was not yet producing at the
end of 2012, probably the result of the hurdles an-
alyzed. New usufructuaries have been working for
fve years but agricultural output declined in 2010,
stagnated in 2012 and possibly rose slightly in 2013.
Cuba could accomplish food self-sufciency in a
few years, save $2 billion in imports and generate a
surplus for export, if it shifed to indefnite usufruct
contracts with the right to decide what to plow, to
whom to sell produce and to fx all prices. Acopio
should be eliminated completely.
206
Alonso and Vidal.
Cuba’s Economic Change in Comparative Perspective
67
Dismissals and expansion of the non-state sector.
Statistics for 2012-2014 that include accurate disag-
gregated data by type of employment are needed.
Te dismissals plan is far behind the goal, yet open
unemployment still rose to 3.5 percent in 2012, even
excluding those not seeking jobs. Since 2010, the
state sector has declined whereas the non-state sec-
tor has expanded. Despite the increase in self-em-
ployment, members of new co-ops and their hired
manpower, total net job creation has not grown
enough to absorb the state-employment surplus. To
dismiss unneeded state employees, save substantial
resources and raise state wages, more fexibility is
crucial to expanding the non-state sector. To ac-
complish this, the state must permit self-employ-
ment in skilled, high-value-added jobs for univer-
sity graduates, authorize medium-sized enterprises
and co-operative ownership of businesses, allow
true co-op independence, reduce excessive taxes on
non-state workers, halt government measures that
create uncertainty, and expand microcredit and
wholesale markets.
Social reforms. Social expenses were cut 7 per-
centage points relative to both the state budget and
GDP. Most cuts are rational and efcient but ris-
ing unemployment, fewer goods sold by rationing,
ending gratuities and escalating prices have caused
adverse social efects and expanded the vulnerable
population while social assistance expenditures
were slashed by 76 percent. Te pension reform
neither reduced the fnancial defcit funded by the
state nor improved actuarial equilibrium. And yet,
universal free access to education and health care
continues, and pension coverage of the labor force
is one of the highest in Latin America.
Cuba has rejected the structural social reforms in
the region that privatized pensions and health care,
and also avoided the Sino-Vietnamese disruption
of those systems. But access and quality of social
services have deteriorated and, despite salary re-
form and nominal increases, the real average wage
is 27 percent of its 1989 level and the real average
pension 50 percent of its 1989 level. A social safe-
ty net to protect the needy and vulnerable should
be fnanced with tax-reform revenue. Allocation
of health funds could improve targeting the most
essential needs (water and sewage infrastructure,
as well as geriatric hospitals and asylums, instead
of reducing the already quite low infant mortality).
Education expenses could also be reduced, elimi-
nating costly programs such as foreign student fel-
lowships. Te Latin American lesson for Cuba is not
to privatize pensions but to close the current system
and create a new funded public pension system for
young workers (with supplementary individual
accounts), with a solid actuarial base, appropriate
reserves and efcient administration in order to en-
sure adequate pensions in the long run and provide
resources for productive investment.
Housing. Tis is considered the most serious social
problem even though 95 percent of the population
owns their own home, the highest home owner-
ship rate in Latin America. Despite steps to stim-
ulate home building, the rate of new homes built
fell by 77 percent from 2006 to 2013 and from 70
percent to 29 percent of those built by individu-
als although an upbeat reversal occurred in 2013.
Te sale and purchase of dwellings at market prices
liberates housing capital that has been frozen for
half a century. Tere were 125,000 home transac-
tions between 2011 and 2013, which accounts for
3 percent of the housing stock. Tese were mainly
donations but another 100,000 homes were sold re-
portedly informally. Tese meager results are due
to a number of complicating factors: supply far
outstrips demand given low purchasing power; for-
eign investment is precluded (although it happens
anyway); owners lack knowledge of the market; ex-
cessive regulations; the property registry has been
outdated for half a century and only has 17 percent
of owners registered; no mortgages are permitted
on main residence and there is a lack of housing
fnancing banks; architects are banned from work-
ing privately; there is an insufcient number of
public notaries and realtors were only authorized
in 2013; and Cuba has experienced a slowdown in
construction-materials sales. To get better results,
foreigners—including émigré Cubans—should be
permitted to buy houses or help their relatives do
Cuba’s Economic Change in Comparative Perspective
68
so, mortgages should be allowed on main residenc-
es, credit should expanded with the help of foreign
countries and NGOs, architects should permitted
to work privately, the non-state sector should play a
key role in the construction industry, and a housing
lending bank should established as in many Latin
American countries
Monitoring. Several state agencies and mecha-
nisms have been created to monitor the reforms,
the most important being the Permanent Com-
mission, but appropriate coordination and sharing
of data among them is needed. Despite periodic
Commission reports, there is no statistical series
on the reform efects, which are essential for prop-
er assessment and adjustments, transparency, and
accountability. More public debate at the National
Assembly on the reform results is necessary, as well
as critical evaluations by the news media.
Macro efects. Te macroeconomic efects of the
reforms are difcult to evaluate due to a lack of sta-
tistics and the inability to isolate other factors that
may have an impact on performance, but agricul-
tural output fell or was stagnant in three of the last
four years. Efects on GDP are even more arduous
to assess, but growth rates in 2011-2013 were among
the lowest in the region and the reforms have not
helped to increase them. Agricultural exports are a
tiny fraction of the total and the reforms have not
reduced costly food imports due to negative/stag-
nant agriculture output.
Why are the reforms so slow and cramped with ob-
stacles, taxes and disincentives that conspire against
their success? According to Raúl, the reforms are
complex and difcult, take time to achieve results
and must not be hurried so as to avoid costly errors.
Alonso and Vidal argue that the slow path may be a
way to face the resistance of potential losers like the
bureaucrats.
207
Critical opponents claim that there
is no real intent to reform and that all the reform ef-
forts to date have been a ploy to win time. It is plau-
sible that a confict exists within Cuban leadership;
the most advanced members push for the reforms
but the hard-liners—fearful of delegation and loss
of economic power and a “snowball” efect—attach
controls, regulations and taxes which they justify by
arguing that they avoid wealth concentration. Such
confict leads to compromises that breed an inefec-
tive hybrid model, unable so far to bear the results
required to improve living standards and get the
population support and legitimacy. Raúl has been
in power for more than seven years and his reforms
have not yielded tangible results. He has promised
to retire in February 2018 when his second fve-year
term expires and he will be 86. Tus, less than four
years are lef for him to complete the key institu-
tional changes the nation urgently needs.
208
207
Alonso and Vidal.
208
Cuban economist Ricardo Torres has stated: “We don’t have the luxury to spend six more years dealing with relevant issues in which we must
advance much faster” (“Las perspectivas dependen de nuestra habilidad,” Trabajadores, September 18, 2013).
Cuba’s Economic Change in Comparative Perspective
69
D
evelopment is the result of many policies and
national characteristics regarding economic
and extra-economic issues. No country in Lat-
in America is developed or even close to it, a stark
reminder that the job is hard and largely pending.
But the region is very heterogeneous, not only in
terms of income—where there is a 15 to 1 diference
between the richest and poorest nation—but also in
terms of relative strengths and achievements. Sev-
eral Latin American countries display, along with
salient policy failures, some successes worthy of
study and, perhaps, emulation.
Te purpose of this paper is to discuss one of those
examples of progress—namely, the international-
ization of the Costa Rican economy afer economic
reform beginning in the mid-1980s—and the extent
to which it represents a useful reference when dis-
cussing policies aimed at the growth prospects of
another nation in the region: Cuba.
209
Over the last 30 years, Costa Rica has implement-
ed, in a fairly consistent manner, signifcant reform
in its trade, foreign investment and other related
policy areas. Tis yielded some valuable results in
terms of the volume and composition of its exports,
the sectorial composition of its economy, and the
volume and nature of the foreign direct investment
(FDI) it attracts. Overall, the nation has made some
progress over the years; for example, it ranks sec-
ond in Latin America in terms of cumulative output
growth (PPP) in the three decades afer 1980, and
frst in the proportional fall of its extreme pover-
ty rates.
210
Costa Rican progress can be largely at-
tributed to this trade and investment performance.
INTRODUCTION: CUBA AND COSTA RICA
Some of the strengths on which Costa Rica built this
successful trade policy strategy are similar to the
most salient advantages of the Cuban economy, in
Economic Growth and Restructuring
through Trade and FDI:
Costa Rican Experiences of Interest to Cuba
Alberto Trejos
209
For comprehensive—albeit old— surveys of the academic literature on the efect of trade liberalization on income and growth, the classic
reference is Sebastian Edwards, “Openness, Trade Liberalization and Growth in Developing Countries” in Journal of Economic Literature 31
(September 1993), pp. 1358-1393 and “Openness, Productivity and Growth: What do we really know?” in Journal of Economic Literature 108
(March 1998), pp. 383-398. For some more recent references, see the introduction of Pedro Ferreira and Alberto Trejos, “On the Output Efects of
Barriers to Trade” in International Economic Review 47, No. 4 (November 2006) pp. 1319-1340 and “Trade in Intermediate Goods and Total Fac-
tor Productivity” in Review of Economic Dynamics (2012). For an excellent and modern summary of the more applied literature, see Juan Blyde,
Carlo Pietrobelli and Christian Volpe, Políticas de Internacionalización para el Desarrollo Productivo, Mimeo, (Inter-American Development
Bank, 2013). In the context of this project, and specifcally directed at the Cuban case, see Richard Feinberg, Te New Cuban Economy: What
Roles for Foreign Investment? (Washington, D.C.: Brookings Institution, 2012).
210
According to the World Development Indicators, the fraction of the Costa Rican population living under the extreme poverty line ($1.25 per per-
son per day) fell from 9.2 percent in the early 1990s to 2.2 percent in the mid-2000s. Te fall regarding the alternative poverty line ($2 per person
per day) fell from 18.8 percent to 6.4 percent. Proportionally, no Latin country achieved a larger fall in the former, and only Chile in the latter.
Cuba’s Economic Change in Comparative Perspective
70
particular the relative abundance of human capital.
As such, it is worth considering the applicability of
Costa Rica’s policy experience to Cuba. Costa Rica’s
poor showing in other areas, such as infrastructure,
only enhances the interest in this case.
211
Costa Rica and Cuba make an interesting compara-
tive case for other reasons, besides the fact that both
have made investments in education and health-
care—which far exceed expectations given their
(similar) levels of income and development:
• Both nations place a high value on the role
of the state in promoting more equity in in-
come distribution.
212
• While Costa Rica has moved away from its
past leanings toward central planning, the
country has not shared the privatization
impetus of the rest of the region and still
holds a very large fraction of its economy
in the form of state-owned enterprises.
213
In other words, some long-held aspects of
the Costa Rican economy, as compared to
other Latin American examples, would be
more familiar to the contemporary Cuban
analyst.
• Minerals and fossil energy resources play a
small role in Cuba’s resource endowment,
as in Costa Rica but unlike most of the re-
gion. Tis implies that both countries must
confront their growth challenges while fac-
ing deteriorating terms of trade; both growth
and signifcant change in the industrial com-
position of output and exports are necessary
in order to move toward their development
objectives. Human capital is at the forefront
of the strategy. Employment must improve in
quantity and quality, along with the creation
of economic conditions that reduce incen-
tives to emigrate. Tese are parallel challeng-
es on which Costa Rica has done well, largely
due to its export performance and ability to
attract the right kind of FDI.
Before the mid-1980s, a closed Costa Rican econo-
my exported barely $1 billion annually in goods and
services. Tese exports were largely concentrated on
three undiferentiated and unprocessed agricultural
commodities (cofee, bananas and sugar), and sales
from the import-substitution manufacturing base to
a captive regional common market. Since then, afer
signifcant trade liberalization and further promo-
tion policies, the volume of exports has multiplied by
18. More to the point, exports have also diversifed so
that those original commodities represent less than
8 percent of the total, no other product represents
a similar concentration, and 3000 diferent lines of
211
Most analysts agree on several policy areas where improvement has been slow and irregular. Reform worked toward macroeconomic stabiliza-
tion, a reduction of the role of the state in the economy and, especially, internationalization. In other areas, policy has been erratic and govern-
ment has lost efectiveness. Te problems—fnancial and administrative—in its capability to execute infrastructure projects in transportation and
energy, the inability to cope with some safety and security issues, the perception of corruption in government ofcials by the general population,
recent concerns about the long-term fnancial sustainability of the current pension schemes and healthcare institutions and the slow pace with
which the formal educational system has adapted to new challenges, needs and opportunities, are all examples of policy areas where Costa Rica
has not been a success.
212
For instance, according to UNDP data, in 2009 Costa Rican household income derived from the market displayed a far from enviable 0.452 Gini
coefcient, and a 31.2 to 1 ratio between the top and bottom deciles. However, through social services, transfers and other policies, the corre-
sponding numbers afer the intervention of government transform into net household incomes with a far better 0.324 Gini and a 6.9 ratio. Other
UNDP data show that, despite the high disparity in pre-government market incomes, the heads of household that can be described as “Upper and
middle class, owners, experts, professionals and management” has grown from 28.5 percent of the labor force in 1987, to 32.3 percent in 1998,
to 40.9 percent in 2008, clearly a positive trend. Some other social indicators, on the other hand, have not improved in the same period. Besides
direct redistributive policies through the transfer system, the Costa Rican state mostly seeks equity through the provision of universal healthcare
and education, the funding for the housing of the poor, a social security (solidary pensions), and the protection of worker´s rights. Health eforts
are singularly important, as the country has—for instance—the second highest life expectancy in the hemisphere (second afer, precisely, Cuba).
According to the last census, the proportion of households in “precario” (irregular property rights over their dwelling) has fallen to 0.8 percent,
the number in “tugurio” (dwellings of unacceptable quality or characteristics that do not satisfy the legal requirements) to 0.5 percent, and adding
those in “cuarterías” (rented rooms), it reaches 0.7 percent. Before the eforts of the housing funding system, these numbers were in double digits.
213
In Costa Rica, the government still has a legal monopoly on fuel and fuel distribution, electricity distribution, water, alcohol production and a few
other activities. In other activities, the legal monopoly has been broken, but the government still keeps dominant companies with overwhelming
market share in telecoms, power generation and insurance, and over 50 percent market share in banking.
Cuba’s Economic Change in Comparative Perspective
71
goods and services are exported.
214
Further, with di-
versifcation has come sophistication; the prevalence
of diferentiated products and services
215
—mostly
those in which the availability of human capital, sci-
entifc and technical abilities can be utilized—and the
capacity to meet quality standards are the key com-
petitive characteristics. As Umaña et.al have docu-
mented, nearly all manufacturing exports by the late
1980s consisted of product lines typically prevalent
in either very poor or very closed economies. Since
then, the country has shifed the composition of pro-
duction—with exports as a driver—towards the kind
of product lines that one would associate with devel-
oped nations. An updated version of their analysis is
presented in Figure 4.
216
Some of the previous results would not have been
possible if the country had not managed to attract
signifcant FDI. Multinational corporations provide
capital that enhances domestic labor productivity
without using funds from the domestic savings pool
and import new technology to the country, improv-
ing current productivity and transferring knowledge,
best practices and familiarity with global industry to
workers or domestic suppliers. More importantly,
FDI provides a diferent kind of “market access” as
it is ofen the case that a country possesses the labor
and other resources that enable it to competitively
produce a particular good or service, but lacks orga-
nizational capability of an entrepreneur or compa-
ny. Costa Rica’s infows of FDI have grown rapidly,
reaching a record level of $2.3 billion in 2012. Even
if it no longer has the highest per-capita levels of
jobs, income, exports or implied change in output
composition and productivity, Costa Rica arguably
has the most successful FDI receipts in the region,
since almost all of this investment is in advanced
manufacturing and services (which carry smaller
price tags than, say, infrastructure projects or min-
ing investments, yet have larger transformative po-
tential).
217
Our thesis is that some aspects of trade and invest-
ment experience in Costa Rica, particularly in terms
of policies and strategies, are applicable to Cuba. To
that end, the rest of this paper proceeds as follows.
Te next section describes the key strategic policies
that allowed the above-mentioned performance in
exports and FDI in Costa Rica, along with the rea-
sons why some of those choices could be relevant
214
Despite the prominence of electronic and computing equipment (about $2 billion) and medical equipment (about $1.2 billion), these categories
are in fact composites of a variety of diferentiated goods and companies and their weight relative to total exports is far below the historical levels
of concentration. For instance, back in 1982 the four traditional commodities represented 61.4 percent of the exports of goods, with cofee alone
amounting to 27.2 percent.
215
Service exports are an increasing share of total Costa Rican exports, now approaching a quarter of the total gross exported value (and, since ser-
vice activities tend to be very vertically integrated, they represent an even higher share of exported value added). Te originally successful service
export industry since the late-1980s was, of course, tourism; Costa Rica now receives nearly $2 billion in net tourism revenues and well over 1
million tourists. Tis is, of course, very important in a country of 4.5 million people and approaching $45 billion GDP. Costa Rican tourism is
very well positioned in a high-value niche (ecological and adventure travel), with enviable levels of service, duration of stays, repetition of stays,
expenditures per day and other similar industry indicators. More recently, there has been a fast growth in business process operations: IT and
sofware development, outsourcing, call centers and, professional and management services of increasing complexity and value. Afer 2010, these
services have made a net contribution to the balance of payments exceeding that of tourism; unfortunately, there are no statistics about gross
exported value, employment levels, remuneration, or the like.
216
Umaña et.al group manufacturing products in fve categories, depending on whether the most important competitive driver in the industry is
the availability of 1) cheap unqualifed labor, 2) a key natural resources to process, 3) a captive market or specifc capital good, 4) the capability to
diferentiate and add quality or 5) the availability of scientifc and technical personnel. Manufacturing exports in the last two categories—which
one could associate with the manufacturing supply of a developed country—grew from nearly zero before reform, to 25 percent by 1994 (when
total manufacture exports reached $1.6 billion) and an impressive 53 percent by 2011 (when the total reached $8 billion). Meanwhile, the frst
two categories—the more typical manufacturing supply of a poor economy—are now below 32 percent. Similar changes have occurred in service
exports, where tourism and call centers are giving way to much more complex business processes. Sanjaya Lall, John Weiss and Jinkang Zhang,
“Te ‘Sophistication’ of Exports: A New Measure of Product Characteristics,” Working paper 123, QEH Working Paper Series (Oxford University,
2009) create a measurement technique for what they call “sophistication of output”, apply it cross-country, and come to similar results in the case
of Costa Rica. To the extent that the sectorial makeup of the economy relates to development—say, because the reward structure of antiquated
industries or their degree of positive externalities falls short of new activities with more sophisticated technologies and better resource require-
ments—this is the kind of change we would like to see in most of Latin America, and in particular in Cuba.
217
FDI comes in many forms: green-feld, when the investing company is creating an operation from scratch; acquisitions, when it is acquiring
a running enterprise; real estate, obviously when it is purchasing domestic land and its resources, perhaps to develop them or infrastructure
concessions, when it is forming a domestic company that builds or operates an asset for the state, etc. In terms of value, mining acquisitions and
infrastructure concessions ofen carry the larger price tags.
Cuba’s Economic Change in Comparative Perspective
72
and applicable to Cuba. Section 3 discusses some
errors that Costa Rica may have committed along
the way and that may be avoided in the Cuban case,
while Section 4 delves on the key diferences be-
tween the Costa Rican strategic starting point in the
mid-1980s, and the Cuban situation today. Finally,
Section 5 concludes, pondering what is reasonable
to expect and what cannot be achieved from a strat-
egy like this, especially in the absence of comple-
mentary action in other areas of economic policy.
THE COSTA RICAN TRADE AND
I NVESTMENT STRATEGY
A large number of policy choices, social decisions
and intangibles underlie the Costa Rican perfor-
mance in exports and FDI attraction. Here, we
attempt to organize them around the following cat-
egories.
Education and Human Capital
Te key competitive advantage for Costa Rican ex-
ports and, more saliently, for Costa Rica’s FDI in-
fows, is the remarkable productivity of the Costa
Rican labor force and, in particular, its compara-
tively high levels of training and education. For over
a century, Costa Rica has spent signifcantly in pub-
lic education, training, and healthcare. Enrollment
rates are high: by constitutional mandate, education
expenditure cannot fall below 6 percent percent of
GDP and scores on internationally comparable tests
(like PISA) are slightly better than those of other
developing countries of similar income. Traditional
FIGURE 4. COMPOSITION OF MANUFACTURING EXPORTS, SORTED BY THE KEY COMPETITIVE DRIVER OF
THE INDUSTRY
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1994 2011
Science and human capital
Natural resources
Differentiated products Scale or capital
Cheap labor
Source: PROCOMER
Cuba’s Economic Change in Comparative Perspective
73
academic education is complemented by technical
education (in high schools) and a job training sys-
tem, which tends to be in tune with the specifc in-
dustry needs. Life expectancy is very high, with the
entire population covered by an efcient national
health care system.
Costa Rica was already relatively well endowed
in human capital before economic reform, but its
economy demanded little of that resource. Man-
ufacturing and services catered to a closed and
underdeveloped domestic market, and very sim-
ple unprocessed agricultural products for export
require little training and technical sophistication
in their production and management. Te state
bureaucracy was a very large part of demand for
human capital. Tis means that, as reform has pro-
gressed, the entry of qualifed labor into the export
segment of the economy has been facilitated not
only by the fow of entrants to the job market, but
also by a stock of older qualifed workers already in
the system who shif from jobs where their abilities
are underutilized.
Costa Rican blue collar workers, in general, have a
strong and well-earned reputation for productivity;
they seem to possess strong “sof-skills” that enable
them to operate well in demanding markets or as
part of global corporations. Tese skills include the
ability to work in teams, learn from abstract content
(as opposed to only direct experience), adapt and
learn as they progress, communicate efectively, and
remain disciplined and rebelliously creative.
218
Consequentially, a more open Costa Rican econ-
omy has proven a competitive export location for
products, services and niches in the market that
demand high technical standards and specialized
knowledge. In a Hecksher-Ohlin sense, its com-
parative advantage lies in products that use human
capital intensively. Furthermore, the nature of the
labor market has been changed by the emergence
and entry of national and international companies
that produce those products for export. Because
human capital abundance is hard to fake or substi-
tute, the position in the market of those companies
and products is strong.
Openness to Trade
A country that is closed for imports is closed for
exports. Tis is a well-argued fact in basic economic
theory. When an economy is closed to imports, the
resulting artifcial proftability of the protected sec-
tors aimed at the domestic market diverts resources
that otherwise would have been allocated to export
activities. Furthermore, domestic prices of tradable
intermediate inputs will be higher if the market is
protected, raising costs and creating an anti-export
bias that drains the competitiveness of the fnal, ex-
portable product.
In Costa Rica, unilateral trade liberalization came
quickly during the 1980s. Early in the decade, as
in the previous two or three decades, tarifs aver-
aged over 100 percent, including prohibitive rates
for most products. By the mid-1980s tarif rates be-
gan to steadily fall, with the average at 85 percent,
reaching 6 percent in 2002 and only 2 percent to-
day. Tis means that for the overwhelming major-
ity of products, producers for the domestic market
face international competition. Tis has created a
competitive pressure that helps raise productivity,
allowing consumers to buy and producers to source
their inputs at lower prices. It has also allowed, in
most industries, a base on which to build export
growth.
Market Access
Costa Rica belongs to the Central American Com-
mon Market (CACM), an integration efort which
has been fairly successful in generating trade. Es-
tablished in the late 1950s, CACM was initially
218
See Ronald Arce, Ricardo Matarrita, Alejandro Roblero and Alberto Trejos, Desarrollo del talento humano para competir en la atracción de
inversión extranjera directa, Mimeo, (INCAE and CINDE, 2012) for a description of the surveys and measurements available to assess the Costa
Rican historical strength in human capital, as well as the current challenges being faced by its educational system, which are detailed in the next
chapter.
Cuba’s Economic Change in Comparative Perspective
74
intended to be a mechanism to enlarge the domes-
tic market and, thus, properly implemented an im-
port substitution strategy. As import substitution
came to an end and these economies opened to
global trade, the regional market lost importance.
Recently, however, the market has grown quite dra-
matically, representing as much as in $11 billion of
intraregional trade in 2012. Now its driver is not the
common external barrier, but rather the geographic
proximity and the complementarity of these econ-
omies— so it makes sense for companies to see the
region, rather than a single country, as the “domes-
tic market.” Te integration efort is quite mature—
there is a common external tarif on most products;
free intra-regional trade on all but one good (sug-
ar); customs legislation, regulation, registries, san-
itary and phyto-sanitary protection; coordinated
technical norms; and regionally-negotiated block
trade agreements with several large parties.
Preferential market access is enjoyed not only for
exports to the neighbors, but also for markets rep-
resenting over 90 percent of non-oil trade. In par-
ticular, Costa Rica has negotiated free trade agree-
ments, on its own and as part of CACM, with its
three largest trading partners (the United States,
the European Union and China), other developed
nations (Canada, Singapore), other immediate
neighbors (CARICOM, Mexico, Panama) and oth-
er countries in the hemisphere (Peru, Colombia
and Chile). Terefore, Costa Rican products enter
those markets paying lower tarifs and confronting
fewer non-tarif barriers than their more relevant
competitors, like Asian manufactured products
or South American tropical agriculture. Further-
more, these agreements provide a binding legal
basis for trade and investment. Since Costa Rica is
the “small” partner in most of these relationships,
it tends to do better when there is a binding legal
basis, rather than informal interaction.
Exchange Rate and Currency-Related Policies
Management of the exchange rate is perhaps the
most important macroeconomic measure afecting
export growth. On the one hand, the exchange rate
level determines the proftability of exports, since
a local company would mostly face costs in the
domestic currency and obtain revenues that are
linked to foreign currency, so the relative value of
costs to revenues—that is, the proft rate—would be
proportional to the exchange rate.
On the other hand, the volatility of the exchange
rate is also important. It adds signifcant risks to
production for export since it introduces a variable
wedge between the units in which costs are mea-
sured in the present and the units in which reve-
nues are measured in the future. Export activity
typically carries some additional risks as compared
to normal domestic production, including inter-
national logistics, international marketing, perfor-
mance of foreign economies, etc. As such, it is clear
that adding risk to the proposition of exports does
very serious damage to growth prospects.
Some countries have chosen to intervene in the
currency market in order to undervalue the local
money, hence pushing their exports growth strat-
egy. Perhaps the clearest example of this is China.
Although it is not the most desirable of options for
other objectives, like reducing infation or keeping
the value of domestic incomes, it is a tempting op-
tion to push export competitiveness with such a
simple instrument.
Other countries in Latin America do not necessarily
push down the value of their currency, but rather try
to compensate market forces. Tis is the case of ex-
porters of raw materials who are enjoying unusually
good terms of trade, but whose non-commodity ex-
ports are afected by the “Dutch disease.” Tis is also
true of countries, such as Costa Rica, facing signif-
icant infux of capital due to the current distortions
in global interest rates and fnancial markets.
Costa Rica aggressively managed its exchange rate
between 1985 and 2006 by keeping the real ex-
change rate nearly constant with the purpose of
increasing the competitiveness of its exports. Te
actual policy was to make very small daily adjust-
ments to the nominal fxed exchange rate, which
Cuba’s Economic Change in Comparative Perspective
75
were pre-announced and calibrated to equal the
diference between domestic and international in-
fation rates.
Te original purpose of the policy was to simply
to take the real exchange rate variance out of the
equation, but as time progressed and productivity
growth (especially in the export sectors) exceeded
that experienced by trading partners the exchange
rate level was arguably distorted towards under-
valuation, further pushing exports. Te conse-
quences of this are studied in the next chapter.
Incentives
Back in the mid-1980s, when Costa Rica’s push
towards export promotion started, one of the key
instruments for export promotion was a subsi-
dy known as a Certifcado de Ahorro Tributario
(CAT). Tis certifcate was an asset tradable in the
fnancial market which could be used (by the re-
cipient or the purchaser) as a credit at tax-payment
time. Exporters would be issued a CAT worth 15
percent of the gross value whenever they shipped
a new product (meaning anything but the original
four traditional agricultural exports) to a new mar-
ket (meaning not Central America).
Blunt as this instrument was—in the sense that
some recipients of the incentive probably were al-
ready proftable without it, others were in the busi-
ness only to get the incentive, and still others easily
found ways to corrupt the system—it did compen-
sate the initial entrepreneurs (at the time, mostly lo-
cal) who entered export businesses in new lines for
the frst time. Entry was risky and involved a lot of
previously unmeasured costs (fguring out the true
nature of the international market, organizing in-
ternational logistics, assuming new risks, etc.) that
were not present when producing for the domestic
market.
In other sectors—in particular, in tourism—similar
incentives and subsidies were applied, at least in the
early stages of the growth process. With a better de-
sign, they not only targeted entry into the activity,
but also linked to performance indicators and the
qualitative evolution of the industry.
It is hard to argue that the CAT was not efective in
inducing some eventual exporters into the market—
just like it is easy to imagine, at least in theory, a bet-
ter system of incentives. Today, something like this
would be legally untenable before the WTO and po-
litically impossible to justify. CATs lasted for nearly
a decade, until the late-1990s, when it became clear
that they were unnecessary, unforgivably expensive
and a large source of corruption. Nevertheless, in
other places where there has been little room for en-
trepreneurship and the initial risks associated with
entry into export activities would be large, some-
thing like this incentive may play a role.
Free Trade Zone Regime
Another intervention, considered by some a subsi-
dy, is the existence of a free trade zone (FTZ) re-
gime. In the case of Costa Rica, this is less related
with government-run locations and serves more as
an alternative legal/fscal regime in which compa-
nies can choose to participate.
219
A company may enter this regime whether it is
physically located in a privately-owned, industrial
park designed for this purpose or in a stand-alone
location. To qualify for the regime, the company
must meet certain conditions and subject itself to
strong controls and measurements.
In the frst version of the regime (the law that existed
until 2007) the main requirement for an FTZ compa-
ny was a performance requirement: that it would ex-
port a certain percentage of its output. In exchange,
the main concession was the exemption from cer-
tain taxes (including taxes on profts) for a period
typically lasting 15 years, renewable under some ex-
treme conditions. Instead, companies paid a much
lower “canon” for the space and services occupied.
219
In many countries, especially in Africa, FTZs consist of government-owned industrial parks, ofen near ports or in disadvantaged areas, ofering
special conditions to any company operating from them.
Cuba’s Economic Change in Comparative Perspective
76
Companies were also allowed to bring in imported
inputs and capital goods free of tarifs through an
expedited process signifcantly simpler than the or-
dinary import-export process.
220
In the current ver-
sion of the law (passed through congress in 2007)
the tax exemption is no longer total—although FTZ
companies still pay signifcantly less than regular
companies—and its magnitude depends on features
like a company’s expenditure on training Costa Ri-
can workers, investment in research and develop-
ment, local reinvestment, growth, etc. Furthermore,
under the new law qualifcation for the regime is
harder for companies located in San Jose’s Great
Metropolitan Area and looser for those established
in regions of lower human development. Te key
condition is no longer a performance requirement,
which was illegal through a WTO ruling that in-
terprets a fscal incentive designed that way as an
export subsidy. Rather, conditionality is linked to
the industry and other operating characteristics of
the company. Emphasis is now placed on fostering
international value-chains, clusters of related com-
panies and linkages between domestic and foreign
companies. In particular, the tax exemption to a di-
rect exporter is extended proportionally to its do-
mestic suppliers of key inputs. Nationality is not a
condition to participate in the regime.
Manufacturing exports from FTZs in Costa Rica
have a gross value roughly 2.5 times that of non-
FTZ manufactures, while non-tourism exports of
services are roughly half in FTZs and half not. Te
dynamic clusters in electronics, medical equipment,
life sciences and business process outsourcing are
taking place mostly within the regime.
Some analysts have argued that this type of regime
is just a subsidy scheme by another name and that
by competing with each other diferent locations
are just engaged in a “race to the bottom” that only
benefts multinational corporations. While some of
that may be so, the fact of the matter is that compa-
nies in certain key industries do face very attractive
fscal conditions in other places and a country that
does not compete along this dimension may have a
tough time growing in those industries.
221
Further-
more, it is interesting to note that companies whose
fscal beneft expires choose to remain in the FTZ
regime although the legal controls and limitations
are stricter, meaning that the other aspects of the
regime (in particular, the expedited import-export
processes and the geographical proximity of similar
companies) hold value.
222
Fostering Institutions
Costa Rica has three key institutions with the man-
date of promoting development through the suc-
cessful internationalization of the economy.
First, it has a specialized Ministry of Foreign Trade
which is not part of an Economy or a Foreign Rela-
tions Ministry, as in other Latin American countries:
Ministerio de Comercio Exterior (COMEX). CO-
MEX is small but agile and historically has not been
subjected by law to all the civil-service restrictions
that afict the rest of the state (for instance, it attracts
better professionals, pays more, and can hire and fre
at will). Despite its size and limited mandate, it is a
politically infuential institution, especially due to the
public attention to the negotiations of international
220
If an FTZ company chooses to sell part of its output in the domestic market, it does pay income tax on that portion of its profts and pay tarifs on
that portion of its inputs.
221
An interesting example of an alternative is the case of Mexico, Chile and Ireland, which no longer ofer a diferentiated fscal regime for this type
of industries. In order to do so they signifcantly reduced the tax rates for all companies. In Costa Rica, ordinary companies pay 30 percent proft
tax and, if foreign, an additional 15 percent on the repatriation of the dividends. Cutting these rates for the economy as a whole would perhaps be
unafordable for fscal reasons and expecting that local and foreign companies that pay zero elsewhere would stay here facing 40.5 percent total
tax rates would simply be naive.
222
Te author has also heard from some executives in these companies that a reason to stay in the regime is that the public institutions in charge of
it are virtually corruption free and predictable (e.g, attached to the letter and spirit of the law) in their decisions, while being outside the regime
makes one subject to problems of transparency and rule of law coming from the rest of government.
Cuba’s Economic Change in Comparative Perspective
77
trade agreements. In addition to the negotiation,
implementation and oversight of those instruments
and of trade policy in general, COMEX is charged
with promoting a competitive business climate for
export promotion.
Second, and organizationally linked to COMEX, is
Costa Rica’s Trade Promotion agency (PROCOM-
ER). PROCOMER, funded by fees from adminis-
tering the export-import process and the canon
paid by FTZ companies, is in charge of fostering
the quantitative and qualitative growth of exports
through very varied activities. PROCOMER is ex-
ceptionally fexible within the usually rigid rules for
the Costa Rican state (the law describes it as an in-
stitution of “maximum deconcentration”). Among
its programs are training initiatives like the Crean-
do Exportadores program, which teaches interna-
tional marketing and logistics to the management
of established domestic frms; market intelligence
about specifc products and places; advisory ser-
vices for small exporting companies; events for po-
tential buyers to see samples of Costa Rican prod-
ucts and even promotion of the “image” of Costa
Rican output. It also runs a program (Costa Rica
Provee) to promote linkages between large multina-
tionals operating in the country and local small and
medium enterprises that could be their providers. It
has small ofces in a few key capitals.
Tird is the Costa Rican Investment Promotion
Agency (CINDE), an NGO founded with USAID
support in the 1980s to help train and encourage
small agricultural exporters of new products. As the
years passed—and especially as Costa Rica ceased
to be a natural target for foreign aid—the institu-
tion evolved into a small, local private organization
funded through an endowment and the sale of ser-
vices, whose main purpose is to promote hi-tech
greenfeld FDI. It does this by acting as an informa-
tional bridge and informal competitiveness expert
to potential investors by channeling their concerns
and problems afer establishment and advising or
lobbying the government and congress on problems
that the country encounters in the competition for
FDI. Much smaller than other institutions of its
kind, CINDE is almost always cited among the best
investment promotion agencies in the world and is
quite distinct from the others as it is not a part of
government or funded by the Treasury.
While economic theorists are ofen fond of assum-
ing that, if proftable opportunities exist, entrepre-
neurs will fnd them, the Costa Rican experience is
that if a country is small enough it will take a while
for foreign companies to fnd it and if it is poor
enough the same will happen with the local entre-
preneur. In the absence of institutions that solve the
immediate problems, channel information in both
directions and reduce the riskiness and entry costs,
it is likely that multinationals would pass up places
like Costa Rica and go to “safer” (by which we mean
larger, or better known, or easier to argue from the
distance of corporate headquarters) locations and
small local companies would more ofen stick to the
comfortable domestic market.
Tis institutional arrangement also has the beneft
of avoiding certain conficts of interest regarding
FDI and the FTZ regime, since PROCOMER, the
organization in charge of overseeing and collect-
ing fees and canons from the companies, is sepa-
rate from both the institution promoting their en-
try (CINDE) and the institution authorizing their
participation in the FTZ regime (COMEX). Te
arrangement has also created an environment that
is very welcoming to the potential FDI, by provid-
ing a predictable set of rules, plenty of information
that facilitates decisions and reduces risks, a media-
tor than can help investor and regulator understand
each other and, in general, a “voice on its side” that
speaks its language and sees its points.
Costa Rica already provides a fairly welcoming le-
gal regime for FDI. By Constitutional mandate, any
frm operating legally in the country is endowed
with certain common rights, which are not subject
to the nationality of the company or its owners.
Te country has also signed a number of FTAs and
over 40 bilateral investment treaties which grant in-
vestors an extra layer of guarantee over both those
rights, and the right to arbitration (typically at the
Cuba’s Economic Change in Comparative Perspective
78
UN or the World Bank’s arbitration units) in case
of violation. Added to the simplicity of the paper-
work and the role of the supporting institutions,
greenfeld, productive FDI aimed at exports fnds a
very welcoming and trustworthy environment and
access the excellent human resources that make up
Costa Rica.
223
Industrial Policy (or Lack Tereof)
Traditionally in Latin America, policy was inclined
to distort across diferent industries, with the state
making very strong interventions by determining
which industries to enter as an entrepreneur and
which industries to promote the entry of the private
sector through taxation, subsidies and other “blunt”
policy mechanisms. Tis type of industrial policy
seemed to be based on a view that certain sectors
and activities were desirable and part of a devel-
opment process, even if their growth did not come
from becoming better at producing in those sectors.
It was also based on the notion that government has
enough information and probity to make these pol-
icy decisions wisely and transparently.
Afer the 1980s crisis, many policymakers in the
hemisphere became of the view that this type of dis-
tortions caused by sector-specifc policies was very
damaging; neutrality across industries was a better
choice. Unless there was clear evidence of external-
ities, public goods or other well-justifed market
failures that the policy was compensating for, hor-
izontal policy (i.e., common across industries) was
thought to be better.
We are now seeing the intellectual pendulum swing-
ing back on this issue, as a number of scholars have
raised the point that the success of some Asian
countries seems to emerge largely from well selected
“vertical” industrial policies, according to both data
and to narrative. Furthermore, the argument goes,
proftability across diferent sectors is not the sole
determinant regarding the desirable composition
of the economy, as clearly there are some activities
that can be more strongly associated with develop-
ment and others with poverty.
Do Costa Rican export promotion and FDI attrac-
tion policies focus on fostering “picking winners” in
specifc industries? Perhaps the best way of describ-
ing the existing policy is that government does not
pick winners, but rather follows them. Tat is, the
Costa Rican state does not apply any blunt policy
instruments (like credit restrictions diferentiated
taxes subsidies etc.) that select across sectors. How-
ever, the fostering institutions have plenty of sof in-
struments (like selecting in which activities to train
labor, or to conduct research, or contact companies
etc.) which strongly target specifc industries, based
on the market evidence of existing entrants in those
industries or in “similar” activities.
Take, for instance, the growth of the emerging
sector that produces medical devices and, more
broadly, inputs to the global hospital industry. It
would be false to claim that policy considers this
type of activity as equivalent to others—say, sew-
ing cotton garments. Medical devices are the kind
of product in which we would like to grow, as it re-
quires high-technology, uses well qualifed workers,
provides space to diferentiate products according
to quality, and possesses other characteristics that
make this industry more likely to emerge in a de-
veloped country than in a poor one.
It would be naïve for the fostering institutions to
ignore the fact that we have already managed to ac-
quire some companies in that activity. Once some
223
One must add the caveat that the above is true for export-oriented greenfeld FDI, but not for other forms of FDI. For instance, Costa Rica
is closed to mining investment (the law specifes that due to environmental concerns, there is a moratorium on most mining endeavors) and
the facilitating institutions don’t see as their role to help investment aimed at the domestic market, real estate investment, or the acquisition of
ongoing operations. Furthermore, the laws granting rights to minority stockholders are weak and the restrictions on large acquisitions, especially
of companies registered in the stock exchange, are arcane. Finally, companies who do business with the government (build infrastructure, BOT
public facilities, or provide services to the general public charged to the Treasury) fnd a nightmare of controls and, worse still, harshly inquisitive
attitudes by Congress, press and the Comptroller General. But, all this aside, for private, aimed-at-export, greenfeld FDI, the legal and institu-
tional regime in Costa Rica is as attractive as any in the world.
Cuba’s Economic Change in Comparative Perspective
79
participants in that industry are present, it becomes
easier to convince others to enter. Furthermore,
once some key companies in those industries four-
ish, there is more value in attracting the providers
of their key inputs to the country as part of intelli-
gent “cluster” policy.
Does this mean that the country should ofer stron-
ger instruments like diferentiated tax rates or pub-
lic services, government subsidies, or something
else to promote that industry at the expense of
others? Te answer seems to be no, as government
is still in general inefcient and corruptible when
making this type of decision.
Regarding some policy areas, government is simply
“doomed to choose,” paraphrasing Ricardo Haus-
mann. It is impossible, for instance, to create infra-
structure and other public goods without making
choices about design and location) that are not neu-
tral across industries. Te same goes for specialized
training and college education.
What about farming? What policies afect the land
usage in diferent crops, for example? In agricul-
ture, the key policy instrument has been the remov-
al of tarifs and other barriers to imports. Trough
its efect on relative prices, trade liberalization
has induced a shif in land use, from some of the
crops the domestic market consumes, to others for
which the land is better suited. As tarifs in agri-
culture have fallen over the last 20 years, 120,000
hectares (or a quarter of the available arable land)
shifed from certain grains, like yellow corn, to
exportable products where comparative advantages
are present. Tis change along the extensive margin
explains almost all the productivity growth in Costa
Rican agriculture in that period, the fastest in the
hemisphere.
224
In a way, opening the economy and
fostering exports has been the agricultural industri-
al policy in this period.
225
As another example of Costa Rica dabbling in pro-
ductive development policy, the changes in the new
FTZ laws are aimed at promoting linkages between
domestic and foreign frms, participation of do-
mestic companies in international value chains and
healthy dynamics in productive clusters like elec-
tronics, advanced manufacturing, medical devices
or BPOs. In those, more than choosing a particular
sector to promote, the policy aims to get the market
dynamics right.
Competitiveness
Costa Rica’s competitiveness performance—under-
stood as the quality and availability of traits and insti-
tutions that are outside the control of specifc frms,
yet afect total factor productivity—is quite varied.
Look, for instance, at the results in the Global Com-
petitiveness Index compiled by the World Economic
Forum. Costa Rica’s rank in what the index considers
to be simple, basic tasks is dismal, especially in all
categories related to infrastructure.
226
Meanwhile its
performance in the indicators of those more com-
plex things that one would associate with develop-
ment—especially all that relates to human capital
and technological readiness—is very high.
224
In the meantime, according to FAO data and TradeStat, Costa Rica has become the sixth largest agriculture exporter per capita and second largest
per area in the world outside of intra-European trade. Output per worker in agriculture has grown from 40 percent to 75 percent of output per
worker outside agriculture, with the corresponding convergence between rural and urban human development and poverty indicators.
225
Tis is not ideal. One would have hoped to combine the cleansing and productivity-enhancing efects of trade liberalization along the extensive
margin, with a more active government policy along the intensive margin to deal with the many externalities, public goods, social and other mar-
ket distortions that are common in agriculture. Sadly, these types of eforts by the Costa Rican state regarding agriculture were sacrifced during
the fscally-lean decades of the 1980s and 1990s. Tis implied that the social cost of this efcient shif in land use was higher than necessary:
many farms ended up changing owners in order to change crops. For further analysis of these matters, see Alberto Trejos, “Trade, the Efcient
Use of Land, and Agricultural Productivity: the Case of Costa Rica and Lessons for Africa” in Perspectives In Agriculture: Strengthening Africa’s
Performance, Discussion paper 2010/06, (Brenthurst Foundation, 2010).
226
Te fact that many of the components of the index are measured on the basis to opinion polls rather than hard data, on the other hand, leads
to exaggeration. Costa Rica, for instance, ranks in “seaports” below some landlocked African countries and below Nicaragua, a neighbor whose
frms actually utilize Costa Rican ports instead of their own. On matters that evolve very slowly—again, like infrastructure—the index tends to
oscillate very wildly, and to be very correlated to the short-term popularity of the government. Nevertheless, the data do paint a broad picture.
Cuba’s Economic Change in Comparative Perspective
80
Part of the issue is the philosophy with which many
Costa Rican productive services are organized.
Take, for instance, infrastructure. Te network is
organized in a very bottom-up way, with noticeable
underinvestment in the key arteries (large ports,
airport, and the main highways) but a very rich
network of capillaries. For example, while the ex-
pressway linking the two main cities with the air-
port has half the lanes that it should, and boasts a
perennial trafc jam, almost every little town has a
paved road entry, power, clean water and telecoms,
plus schooling and healthcare infrastructure. Te
former failure is very visible and clearly document-
ed, but perhaps the latter success is more important,
especially for the competitiveness of sectors like ag-
riculture and tourism and the participation of the
rural population in the dynamic labor market of the
new sectors.
Like infrastructure, the paperwork and bureau-
cratic cost of regulation is also extremely burden-
some. Construction permits ofen take months to
be granted, regulatory decisions are ofen guided
by form rather than content, private operators are
ofen lef in a legal limbo. Several eforts of trade of
paperwork facilitation and simplifcation have been
performed over the years, but have in general failed
because the bulk of the regulatory burden seems to
be court-mandated. Further, the current political
mood of the country leads to more regulation, not
less. To some extent—but only some—export com-
panies and especially FDI are somewhat isolated
from this problem by the nature of the FTZ regime.
Yet, while Costa Rica’s institutional and legal en-
vironment would seem like heaven for companies
that utilize private resources to export,—thus relat-
ed to government only in its regulatory role—those
frms that need to interact with government as a key
supplier or costumer may instead fnd themselves
in a hell of unclear rules, corruption, slow bureau-
cracy and erratic decisions.
Costa Rica has invested consciously in its brand
name, making sure that the label “Made in Costa
Rica” adds rather than subtracts value. In a 1996
study, researchers at the INCAE business school
measured that being located in Costa Rica allowed
tourism companies to charge prices with a 15 per-
cent premium, and campaigns like “No Artifcial
Ingredients” have positioned the environmental
merits of the country very well in the mindset of
potential travelers. Rather than wasting large bud-
gets in very expensive mass advertising, CINDE
and PROCOMER focus their message to industry
events and one-to-one public relations where the
returns are maximized.
A fnal topic that may be worthy of mention, in
which Costa Rica performs comparatively well in
the Global Competitiveness Index, is the area of
labor relations. Tis is an area that varies very sig-
nifcantly across countries and strongly determines
productivity, the fexibility of the productive sector
and the well-being of the general population.
Workers’ rights are very important and need to
be protected if the fruits of growth are to be well
shared, but the way in which workers represent
their interests and the means by which their rights
are implemented may be in some places an addi-
tional institutional strength –building consensus,
facilitating information fows, creating healthy in-
centives to performance—while in other places it
becomes a source of cost and volatility, impair in-
tra-industry mobility and creative destruction, pro-
long unemployment and foster a misallocation of
resources that would afect labor productivity.
Costa Rica demonstrates a very interesting case
with regard to this issue. Costa Rican labor is very
strongly protected by laws ranging all the way back
to the 1940s. Tese include mandatory coverage by a
national healthcare insurance scheme, a universal—
now fully-funded—mandatory pension scheme,
generous severance pay, workers compensation,
maternity and disability and a myriad of other so-
cial schemes. Tese rights are granted by law to all
workers, are not specifc to certain labor employer
relationship and can be demanded by the worker
through the state, which allocates resources to the
oversight and compliance of labor laws.
Cuba’s Economic Change in Comparative Perspective
81
Tis means that workers are adequately protect-
ed, in a manner predictable by law, and companies
know exactly what are they getting into, through an
institutional arrangement that is signifcantly less
confrontational and wasteful than collective bar-
gaining. Union membership in the private sector
is, therefore, remarkably low, with most employers
and employees preferring instead to organize along
“Solidarismo”, a very peculiar labor arrangement.
Solidarism organizes labor through associations
that operate independently at a frm rather than in-
dustry level, usually with a close direct connection
between the employee, the union ofcer and the
employer. Tey are funded by contributions from
the employer, who provides a monthly deposit to
the union in the worker’s name for what would be
the worker’s severance, to be utilized in a savings-
and-loans type arrangement for the workers. Te
worker keeps the money regardless of whether
the termination of the labor contract is of a sever-
ance-induced nature or not.
Many solidarity unions branch their activities in
other directions; for example, some frms outsource
to their solidarity associations certain services and
inputs, or engage them into proft-sharing mech-
anism. In that way, the employer fnds a route to
improve the well-being, morale and productivity
of the worker, while the worker benefts and fnds
his interests aligned with those of the company.
An overwhelming majority of Costa Rican private
sector employees choose to participate in solidar-
ity unions, rather than the more traditional and
aggressive unions.
227
Tis allows for a situation in
which labor and player relationships are almost
entirely devoid of aggressiveness and friction. Em-
ployer-employee relationships are, as a result, very
non-adversarial.
MISTAKES AND LESSONS ALONG THE WAY
We have said that Costa Rica’s wealth of human
capital, the ofspring of many decades of invest-
ment in health and education, is the country’s main
competitive advantage. But there are some growing
weaknesses in the educational system which put in
danger not only the sustainability of the success ex-
perienced so far, but also the capability to extend
services to the entire labor force and the rest of the
economy.
228
In the last few years, education planning has fo-
cused on raising the budget allocated to the task
and raising enrollment rates at all levels, especial-
ly the fraction of the corresponding age group that
completes high school. Tese matters are, of course,
important, but not the only dimension along which
the system can improve.
First, consider the mix between technical and vo-
cational education, on the one hand, and tradition-
al humanities education on the other. Despite the
fact that students demonstrate signifcantly higher
interest in the former (with very low dropout rates),
it only involves 7.5 percent of available high school
seats, and falling.
229
Meanwhile, the traditional
route is still designed—as half a century ago—as
a preparation for university, seemingly useless for
students who know they will not follow that path.
Both employers and students believe education
ends with the “third cycle” (that is, end of ninth
grade), with the rest of high school being valued
only as a university requirement, with no apparent
intrinsic value.
Another mix problem happens in public universi-
ty, where the fraction of the seats assigned to en-
gineering, basic sciences, computing and health
227
Some analysts question whether this is really a choice, as employers are ofen as keen to encourage solidarism as they are to discourage the forma-
tion of unions. But clearly, in my experience, workers seem to value the opportunity of solidarism strongly and sincerely, while the radicalism of
traditional unions—which prevail among public sector workers—and their inclination to engage more in political matters than in labor represen-
tation, weakens their appeal.
228
Te ideas and data in this section largely come from Arce, et al.
229
As a reference point, technical and vocational high school reach 75 percent of the students in Finland, 66 percent in Germany, and over 50
percent in most other European countries, despite the fact that those countries have much higher enrollment rates in higher education than Costa
Rica.
Cuba’s Economic Change in Comparative Perspective
82
professions falls well short of student and job mar-
ket demand. A high fraction of applicants to those
felds are being pushed against their will away from
opportunity and into social sciences and education.
Tirty consecutive years of excess applicants in
some felds and excess places in some others has not
led the system to reallocate resources. Tis problem
is made more difcult because the university curric-
ula are very rigid, forcing students to become spe-
cialists in a feld, with little fexibility to mix train-
ing in that feld with other abilities, or to graduate
as a generalist familiar with several felds. Today’s
production processes, especially in the provision of
exportable services like BPOs, demand and reward
workers that have mixed abilities in several areas,
while specialists are already quite available. Sof
skills among Costa Rican university graduates are
worsening, while similar skills measured on blue
collar workers are exemplary.
Te process of tarif reduction, key for the export
success, also could have been fne-tuned. Costa Rica
managed to open to trade very aggressively through-
out the 1980s through unilateral tarif phase-out, and
then at the slower pace of barrier reduction associ-
ated with international trade negotiations afer the
1990s. In general, doing this was politically difcult,
but the results have been very satisfactory. Still, three
weaknesses deserve attention.
First, the phase-out process was unbalanced across
goods, with tarifs coming down very quickly for
most sectors, with exception to a few products
(mostly crops), whose growers had the necessary
political clout and were able to maintain untouched
protection. Te discrepancies and price distortions
this generated were great, and the political vested
interests proportional.
230
Second, some of those phase-outs were very quick,
without any parallel support ofered to the afected
producers. Many farms needed to change ownership
in order to change crop output. In those cases, the
transitional cost could have been much lower had a
diferent combination of policies been implemented.
Tird, the industries of import, distribution and
retail of certain goods are very concentrated in oli-
gopolies or monopolies, and in those cases the re-
ductions in import barriers do not refect automati-
cally and fully in domestic relative prices, impairing
the benefts from trade. Costa Rican antitrust leg-
islation is somewhat modern, but the institutions
in charge are weak and, more to the point, mostly
focus their attention to other industries.
Te choice of reducing to almost zero the short-
term volatility of the real exchange rate was wise, as
it created a much safer environment for entrepre-
neurs to experiment with entry in export markets
and for local and foreign companies to add predict-
ability to their proftability.
Te mechanism chosen, on the other hand, im-
plied that the average level of said real exchange
rate remained roughly constant for nearly 30 years.
Because productivity grew faster than in trading
partners, by the end of the period the Central Bank
required such large transactions in the currency
market to implement the policy that it largely lost
command over its overall monetary policy. Tis
also implied that, once the system was reformed to
allow better monetary control and the reduction
of infation, the massive appreciation that came as
a result was a very large obstacle for future export
growth performance.
231
230
Perhaps the worst case is rice, a crop with a few large and very competitive industrialized producers who do not need protection to be proftable,
along with a number of very small growers in land without proper irrigation, for whom the best support would be to help them transit to another
product better suited to their location. Although the policy has been to maintain high protection and a vast system of subsidies in the name of the
latter, these instruments are designed in a way that implies the benefts are mostly received by the former. Interesting descriptions of the situation
appear in Umaña (2009) and Jorge Cornick, La organización del sector público para PDPs exitosas, Mimeo, (Banco Interamericano de Desarrollo,
2011).
231
As the currency started to foat, other phenomena have conspired to the appreciation of the colón, including the signifcant infow of short-term
fnancial capital caused by the distortions in the international markets afer the great recession. At the moment of this writing (mid-2013) the
colón has appreciated in real terms nearly 40 percent relative to four years ago, thus bringing along a signifcant deceleration and difculty in
further export growth.
Cuba’s Economic Change in Comparative Perspective
83
Te design of the CATs, the export subsidy de-
scribed in the previous chapter, lef much room for
improvement. Te design choice was to make the
subsidy proportional to an easy-to-calculate vari-
able—in this case, the gross value of export—so
that there would be little room for subjectivity in
the calculation. Despite this rationale, the CAT sys-
tem was very easy to manipulate (by, say, falsifying
invoices) or even corrupt. For example, a company
was found to be simply exporting ice, at a loss, to it-
self. Additionally, while many entrepreneurs clearly
needed a push to take this leap into the unknown,
giving everybody a push of the same size was prob-
ably suboptimal. Calibrating the parameters of the
support to more specifcs of the transaction prob-
ably would have been better, especially if the pay-
ment had not been in a cash-equivalent but rather
into the assigning of resources to reduce some real
inefciencies and real costs that the exporter had to
face. Finally, it was clear that the subsidy lived for
far too long and should have at best been a transito-
ry policy very early in the reform process.
We described also in the last chapter the system of
FTZs and the way it was reformed in 2009. While
controversial, we hold that such a system is necessary
to remain competitive in certain sectors for which
the terms of tax treatment are simply too hetero-
geneous across countries. In Delgado and Trejos
232
calculations of direct and indirect contributions to
taxation by one specifc large frm in the FTZ sys-
tem reach the conclusion that indirect contribution
(the extra payment that workers, service providers
and owner of resources make to the state because
their income is more valuable than it would have
been selling to somebody else) is larger than tax ex-
emption. So, in net terms the system is probably not
even a drain—at least not a large one—on the tax
revenues. Nevertheless, the design, negotiation and
lobbying of the 2009 reforms demonstrated sever-
al lessons that would have been useful earlier on.
First, giving a complete tax exemption was probably
unnecessary, since there are positive yet small rates
that can be applied and yield some revenues, if de-
signed in a way that they net out from tax credits ap-
plicable in their home country. Second, once one has
a positive tax, even if the rate is low, one can provide
incentives as credits against that tax for companies
to do things that government fnds desirable or that
the market under-provides, like training or R&D.
Tird, the incentive did not diferentiate between the
conditions to enter an FTZ in the developed heart
of the country, versus its very poor periphery. Tis
similarity in the rules implied that government could
not push companies to establish themselves in areas
of lower development. Further, as the country made
progress, companies in very backward sectors would
leave the Metropolitan Area. However, but of real-
locating to a poorer part of Costa Rica, they would
move to another country altogether. Fourth, and f-
nally, the FTZ system should have contained or oth-
erwise extended not only direct exporters but also
their local suppliers from the beginning. At the very
least, the rules should have been designed to avoid
creating a negative distortion that led companies to
try to source abroad, because sourcing locally was
administratively onerous.
Finally, we address issues related to export compet-
itiveness. A lesson from every successful exporting
country is that rather than hoping to be ideal in
every possible aspect of productivity and the busi-
ness climate, the target should be to fnd a winning
combination of attractive traits or advantages. One
can argue that, in the case of Costa Rica, the macro-
economic environment, human capital and quality
of the labor force, clarity of the rule of law, favorable
fscal regime, assisting institutions and very wel-
coming labor relations constitute such a winning
combination. Nevertheless, some of the current sa-
lient weaknesses do hurt and carry a serious cost.
Te poor condition of the country’s infrastruc-
ture is perhaps the largest competitive weakness in
232
Félix Delgado and Alberto Trejos, El Impacto macroeconómico de la presencia de INTEL en Costa Rica, (Consejeros Económicos y Financieros,
2006).
Cuba’s Economic Change in Comparative Perspective
84
Costa Rica. For reasons that are not pertinent
here,
233
the government simply lost its ability to le-
gally perform any infrastructure project of signif-
icant size, afer the decade-long hiatus in such in-
vestments that took place as a consequence of the
fnancial crisis of the early 1980s. We are getting to
the point where the costs caused by bad logistical
infrastructure, and the complexities and delays as-
sociated with dealing with government and regula-
tion in general, are too onerous to compensate for
other positive traits, valuable as they may be.
Another aspect of general competitiveness that
causes concern is energy. As of the late 1990s, Cos-
ta Rica became one of the few nations in the world
that required no fossil fuels for electric power gen-
eration, due to decades-long investments by the
public utility, ICE, in renewable energy capability.
Not only was this a very signifcant environmen-
tal achievement, but also provided a guarantee
of high-quality energy whose price did not need
to vary along with the oil price. Over the last few
years, however, construction of generation capaci-
ty has fallen behind, and today 9 percent of energy
is generate through hydrocarbons. If no large new
plants come in line till then, this percentage could
reach 50 percent by 2021. Tis problem is due to the
combination of the same limitations to public in-
vestment mentioned above, a set of barriers erected
by the state and congress against private investment
for these purposes (driven by ideological reason-
ing) and poor decisions regarding pricing and ex-
change conditions.
CONCLUSIONS: ON THE APPLICABI LITY
OF THIS STRATEGY TO CUBA
Te remaining question is the applicability of the
Costa Rican story to the Cuban reality. Te simi-
larities between the potential competitive strengths
of the two countries lead us to believe that some of
the experiences that are described in the previous
chapters could be of some value and use for Cuban
policy makers. Other similarities and opportunities
need to be ascertained, including a more detailed,
quantitative comparison between the human-cap-
ital endowment of the two countries, in order to
assess the value of the efort and to guess where the
low-hanging fruits could be.
Some concerns and pending questions arise right
away, however. One of them is the role of the Cuban
entrepreneur. While prominent, FDI is not the lead
character of the Costa Rican story, the domestic ex-
porting company is. One can easily imagine that
Cuba could aim, with limited adjustments within its
current economic structure, to attract similarly im-
pressive multinational corporations as Costa Rica. But
the applicability of this story to Cuban growth largely
depends on the capability for the Cuban entrepreneur
to do its part or the Cuban state enterprise to take its
place. It is not our objective or place to recommend an
appropriate economic design for Cuba. One is com-
pelled, however, to identify points where the Costa Ri-
ca-Cuba analogy gets most tightly challenged.
Another difculty in applying some of this story in
the case of Cuba comes from timeframe. Te global
economy is very diferent now from what it was in
the early 1980s. One example is the willingness, be-
fore the current wave of FTAs, which rich countries
had then to grant unilateral preferential market
access to poorer partners. Another example is the
infexibility of current multilateral rules regarding
the design of new FTZs or, in general, other exports
subsidy schemes, for mid-income countries.
Finally, the current global macroeconomic cli-
mate—let alone the peculiarities of Cuban macro-
economic management—pose some limitations on
matters like real exchange rate policy, currency con-
vertibility, etc.
Despite these difculties we contend that there are
components of the Costa Rica story that are appli-
cable and interesting for Cuba, yielding purpose to
the broader project to which these pages belong.
233
See instead Jorge Cornick and Alberto Trejos, “Political and Institutional Obstacles to Reform”, in Growing Pains in Latin America, ed. Lilliana
Rojas-Suarez (Washington, D.C.: Center for Global Development, 2009), pp. 153 – 191.
Cuba’s Economic Change in Comparative Perspective
85
INTRODUCTION
Te general objectives of the Cuban economic re-
form were set forth, in broad strokes, in the docu-
ment “Guidelines for Economic and Social Policy”
(“Lineamientos de la Política Económica y Social”),
approved in 2011 during the Sixth Congress of the
Communist Party of Cuba (PCC). Two objectives
stand out in the chapter on monetary and fnancial
policy: First, expanding microfnance, an objective
for which legislation is already in force and which is
gradually moving forward; and second, mention is
made of the dual currency, a matter on which spe-
cifc actions have yet to be decided, and on which
there is great uncertainty. Tese two appear to be
the most important elements of change in mone-
tary and fnancial policy as part of the ongoing re-
form of the Cuban economy, and 2016 has been put
forth as the deadline for attaining the objectives.
235
As of December 20, 2011, three commercial state
banks began to ofer bank loans and fnancial ser-
vices to self-employed persons and microentrepre-
neurs, and expanded banking facilities for private
agricultural workers. Te new legislation has already
ofered positive, yet discrete, results.
As of late 2013, new expectations have been raised
regarding the dual currency since the ofcial note
published in the newspaper Granma announced
that soon a group of actions would be taken in the
enterprise sector, and then in the social sector, with
the aim to move the economy toward a single cur-
rency—the Cuban peso.
236
From 2011 to 2013 the
government had organized some monetary-ex-
change experiments in certain enterprises and se-
lect sectors, which ofer hints as to the type of mon-
etary reform that is considered most likely.
Whatever strategy is ultimately decided on, the
main measure that the Central Bank must take to
eradicate the distorting parallel circulation of two
national currencies—the Cuban peso (CUP) and
the convertible peso (CUC)—is the devaluation of
the ofcial exchange rate of the Cuban peso, a mat-
ter that has been put of for more than 20 years.
It is in this context that this article examines the mon-
etary experiments already in place and what they tell
us about future monetary reform, so as to then ana-
lyze the costs and benefts, as well as economic policy
responses, associated with the eventual devaluation
of the ofcial exchange rate.
Monetary Reform in Cuba Leading up
to 2016:
Between Gradualism and the “Big Bang”
234
Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva
234
Tis essay is the result of the project carried out by the Universidad de La Habana and the Brookings Institution, which made possible the debate
about these monetary-fnancial issues and others at the workshop held in Havana in September 2013, and thereby included the impressions and
suggestions of Augusto de la Torre, Richard Feinberg, Antonio Romero, Carmelo Mesa-Lago, Guillermo Perry, Saira Pons, Ricardo Torres, José
Juan Ruiz, Alberto Trejos, and Juan Triana, among others. It has been translated from Spanish to English.
235
For a lengthy description of the current reform in Cuba one can see the texts by Carmelo Mesa-Lago, Cuba en la Era de Raúl Castro: Reformas
Econónomico-Sociales y sus Efectos (Madrid: Editorial Colibrí, 2012) and Omar Everleny Pérez, “La economía cubana en el 2012: La actualización de
su modelo económico,” in Miradas a la Economía Cubana, eds. Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva (Havana: Caminos, 2012).
236
See the newspaper Granma, October 22, 2013.
Cuba’s Economic Change in Comparative Perspective
86
One of the key aspects to be decided is the pace of
monetary reform. Te analyses and conclusions of
this article show a group of arguments that would
justify guaranteeing, in all areas possible, a gradual
transition as the best strategy for Cuba’s monetary
reform. Nonetheless, given the major gap between
the two exchange rates, at certain moments abrupt
devaluations (“big bang” style) will be required to
meet the goal of having a single currency in 2016.
Te analyses set forth in this text do have not em-
pirical backing, as they have to do with actions that
have yet to start; moreover, they do not have prece-
dents in the Cuban economy. Te assessments that
are presented take into consideration the mecha-
nisms of monetary and fnancial transmission rec-
ognized by theory and international experiences,
and in that context an efort is made to select those
that will have the greatest chance of fnding expres-
sion in the Cuban economy given the characteris-
tics and particularities of its monetary policy and of
Cuba’s banking and fnancial system. It is also cru-
cial to be able to understand the origins of the dis-
tortions present today, which go back to the crisis
of the 1990s and to the economic policy responses
adopted at that time. Terefore, the value-added of
the conclusions presented rely on this evaluation of
the origin and context of the monetary and fnan-
cial problems that the Cuban government is now
proposing to resolve.
For reasons of length it is not possible to address at
the same time the issue of microfnance and dual
currency. Tis paper focuses on the second issue.
THE BANKI NG SYSTEM AND REFORM
In the 1990s the Cuban fnancial system was sub-
ject to a profound transformation. A two-tier bank-
ing system was created that replaced the previous
scheme of a single bank that performed at the same
time central banking functions and commercial
banking functions, as was typical in socialist sys-
tems. In 1997 the Central Bank of Cuba was estab-
lished as the lead organization for banking super-
vision, the payments system, and monetary and
exchange policy.
To some extent the banking system was able to ac-
commodate the reform pushed in those years afer
the disappearance of the socialist bloc. Tis process
also included opening up tourism, foreign invest-
ment, and remittances, restructuring the state en-
terprise system, and partially freeing up spaces for
the small-scale private sector, among other changes
approved at that time by President Fidel Castro.
237
New commercial banks and non-banking fnancial
institutions appeared in the fnancial system. All are
state-owned, but they have the power to make de-
cisions on loans within certain general parameters
defned by the Central Bank. Te door was opened
to international fnancial institutions, which legally
were established as ofces representing the parent
companies. Some of them have been engaging in
credit operations and fnancial services, yet their
operations are subject to the many pressures and
limitations that stem from the sanctions imposed
by the United States government on Cuba.
At present, the Cuban fnancial system is made up
of eight state commercial banks, one mixed bank
with Cuban and Venezuelan state capital (Banco In-
dustrial de Venezuela-Cuba), nine non-bank state
fnancial institutions, and 15 ofces of foreign f-
nancial institutions. Te fnancial system achieved
certain progress in the modernization, computeri-
zation, and development of new services and instru-
ments for capturing savings and allocating credit.
238
Te Central Bank has continued to set interest rates on
demand deposits and fxed-term deposits in the state
banks, while it has defned narrow ranges for interest
rates on loans. A certain degree of competition was
237
A lengthy description of the Cuban reform of the 1990s can be found at ECLAC, La Economía Cubana: Reformas Estructurales y Desempeño en
los Noventa, (Mexico City, D.F.: Fondo de Cultura Económica, 1997).
238
For more details on the changes the Cuban fnancial system has experienced, see Carlos Pérez, “Metodología para la Planifcación y Gestión de la
Política Monetaria en el Segmento Población de la Economía Cubana,” (Doctoral thesis, Universidad de la Habana, 2012).
Cuba’s Economic Change in Comparative Perspective
87
established among the diferent fnancial institu-
tions, albeit within a very limited framework. Te
interbank market never took of, beyond interbank
deposits and specifc credit operations among the
fnancial institutions.
Te reform of the fnancial system, like all the oth-
er transformations of the 1990s, came to a halt in
the 2000s; several proposals for change were lef
pending, some of which are trying to resume today
under the presidency of Raúl Castro. For example,
the development of the interbank market and the
fnancing of the fscal defcit by means of issuing
public debt are two aspects mentioned in the cur-
rent reform, even though there is not much clarity
as to the steps that will be taken to advance such
aims. In this new stage it appears that the more in-
depth changes to the banking system will be associ-
ated with the expansion of microfnance.
Cuba’s fnancial institutions have been giving loans
mainly to the state enterprise sector, and only in a
very controlled way in the sector of households and
private agricultural producers. Te fnancial restric-
tions on the private sector had to do not only with
credit, but also the impossibility of using bank pay-
ment instruments and current accounts.
Te new legal framework in which self-employed
persons, microenterprises, and private agricultur-
al workers could operate fnancially was published
in the Ofcial Gazette 40 of November 2011.
239
Te current fnancial measures of the Cuban gov-
ernment allow one to classify the new policy as an
opening to micro-lending and microfnance. Te
volume of expected loan amounts (a few hundred
dollars), the recipients of such loans (individuals,
small agricultural producers, and microenterpris-
es), as well as the characteristics of the guarantees
allowed (not backed by mortgages) situate the new
fnancial operations in the feld of microcredit. Te
opening also extends to microfnance, given that
microentrepreneurs will receive fnancial services
in addition to loans, specifcally managing current
accounts and the use of bank payment instruments.
As of July 2013, a total of 271,152 loans had been
made for more than 1.5 billion pesos (62.5 million
dollars at the exchange rate for the population). Te
banking authorities themselves consider the fgure
of loans applied for by the private sector to be dis-
crete. Given Cuban banks’ scant prior experience
with microcredit, the technological difculties, and
the limited alliances with local actors, among oth-
er limiting factors, the fgure of loans made so far
should be considered positive and as an indicator of
the potential that could be deployed if appropriate
measures continue to be adopted. No eforts should
be spared in this regard, given that the growth of the
private sector requires such fnancial support for its
take-of and sustainability.
MONETARY AND FI NANCIAL EQUI LI BRIA
Figure 5 shows infation since 1990 measured by the
consumer price index (CPI) in Cuban pesos. One
notes that in the period from 1991 to 1993, infa-
tion climbed to two- and three-digit fgures, yet as
of 1994 the economic authorities succeeded in con-
trolling price increases.
240
Te main determinant of
infation in the 1990s was the increase in the fscal
defcit, which rose to more than 30 percent of GDP.
Te government increased fscal spending to support
the public enterprises that became unproftable as a
result of the crisis, and thereby was able to contain
unemployment, which reached only 8 percent. At
the same time, social spending in nominal terms
was held steady (education, health, social assistance,
and subsidies for the food basket), and thousands
of families were kept from falling into extreme pov-
erty. Te fscal defcit was monetized and provoked
an excessive increase in the money supply at a time
when, moreover, demand for money for transactions
diminished due to the 35 percent contraction of
239
Ministry of Justice, Gaceta Ofcial de la República de Cuba No. 40 (Havana, November 2011).
240
Te measurement of the Cuban CPI has accumulated some defciencies such as not including the markets in convertible pesos and not changing
the basis for weighting goods and services since 1999; the result of which it is likely that ofcial infation is underestimating actual infation by
several percentage points.
Cuba’s Economic Change in Comparative Perspective
88
GDP. Te result was increased infation and the loss
of more than 80 percent of the value of state wages,
which were frozen in nominal terms but in real terms
absorbed the cost of the crisis. In this way, the cost of
the crisis was distributed among state employees; it
was the alternative to massive unemployment and to
extreme poverty for thousands of families.
Later, fscal adjustment measures and the gradu-
al recovery of economic growth made it possible
to control infation. While the Central Bank has
helped keep infation below 10 percent, it does not
have an infation objective explicitly defned, nor
has it developed a monetary policy scheme that
would enable it to propose one.
Monetary policy does not yet use conventional
monetary policy instruments. Planning and cen-
tralization have been the main instruments used
to regulate aggregate demand in the economy. It
does not appear that monetary policy is designed
to transition from the current moment to the use of
conventional indirect instruments such as open
market operations, reserve requirements, and the
discount rate. In a context of controlled interest
rates, low competition, and the absence of an inter-
bank market, the transmission mechanisms through
the banking system—in order to indirectly infu-
ence credit levels, the money supply, and ultimately
demand and prices—have turned out to be inopera-
tive for monetary policy. In addition, the possibility
of using open market operations has been vetoed
by the non-existence of a market in internal public
debt. Nor are there Central Bank bonds or any oth-
er instrument that can be used to collateralize any
type of operation for expanding or contracting the
monetary base through the discount window.
Price stability during the decade has some visible fun-
damental determinants: First, the government’s direct
control over part of the prices (more than 40 percent of
the CPI in Cuban pesos); second, having maintained
on average a low fscal defcit (approximately 3 percent
of GDP); and third, control over the exchange rates of
the Cuban peso and the convertible peso.
Low infation is a major advantage of the current
Cuban reform in relation to the 1990s, when a
FIGURE 5. INFLATION IN CUBAN PESOS (1990-2011)
90 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 11
91.5
76
18.3
7.3 5.7
1.6
1.1
Source: Created using data from the Central Bank of Cuba (2008) and the National Ofce of Statistics and Information (ONEI) Anuario Estadístico
de Cuba (several years), www.one.cu.
Cuba’s Economic Change in Comparative Perspective
89
group of fscal and monetary stabilization measures
had to be proposed. Monetary policy can therefore
focus on other objectives, such as eliminating the
dual currency and promoting the convergence of
exchange rates.
Nonetheless, the currency reform to be implement-
ed may well pose challenges to maintaining mone-
tary and fscal stability. Te strategies set in motion
to eliminate the dual currency, to devalue, and to
achieve convergence of exchange rates will require
compensatory fscal measures (at least transitory
ones) for the enterprises and families afected; all of
that could squeeze fscal accounts on the spending
side, and ultimately usher in infation. In addition,
the necessary devaluation of the exchange rates will
be passed on to consumer prices. In other words,
both the fscal defcit and infation will receive pres-
sures through monetary reform, which will have to
be navigated by the economic authorities.
Moving on to other aspects of monetary policy,
while the Central Bank has been able to keep infa-
tion under control, it has not been able to avoid the
occurrence of other types of monetary imbalances.
Since 2008 the Cuban economy began to sufer a
crisis that was, all at once, a debt crisis, a banking
crisis, and an exchange crisis. Te external shocks
and the fnancial centralization measures decided
upon in prior years were the fundamental causes.
Te mistakes in the monetary policy design that ac-
companied the convertible peso afer the de-dollar-
ization in 2003 and 2004, including the lack of rules
or transparency in relation to the issue of the CUC,
TABLE 9. CAUSES OF THE CUBAN FINANCIAL CRISIS IN 2008
1. Balance of payments crisis since 2008 triggered by three external shocks: worsening terms of trade, a ne-
farious hurricane season that required additional food imports (as well as supplies for repairs to housing and
infrastructure), and the international crisis with its transmission channels to external ?nancing and Cuban
exports. These shocks acted on a balance of payments that was already suffering from fragilities after the
slowdown in the export of medical services to Venezuela.
2. The elimination, since 2003, of the currency board (caja de conversion) that controlled the issue of convert-
ible pesos (CUC), without setting any monetary rule to replace it. Previously, for each convertible peso in cir-
culation there was a dollar on reserve at the Central Bank, but when this system was ended, and not replaced
by another monetary rule, the Central Bank had unrestricted freedom to print convertible pesos. Although the
data is not public, the facts show that up to 2009 a sum of convertible pesos was issued far greater than the
reserves in foreign currency required to support its convertibility.
3. The recentralization of ?nancial resources since 2005. In 2005, the Single Account of the State (Cuenta Única
del Estado) was established, where businesses are required to deposit their pro?ts, pay taxes, and make
other payments in foreign exchange and convertible pesos. Centralization may be considered another factor
promoting the banking crisis to the extent that it provoked a concentration of the ?nancial risk in a single
economic agent, in this case, the central government. It was not the ?rst time the government has confront-
ed a crisis in its ?nances; the difference is that previously it did not have such strong repercussions on the
balance sheets of the banks, as liquidity was more diversi?ed among the current accounts of the different
state enterprises.
4. Another factor that aggravated the ?nancial crisis is the ?xed exchange rate policy. A timely and gradual
devaluation of the exchange rate of the convertible peso would have helped re-establish equilibrium in the
balance of payments. It would have generated incentives in favor of import substitution, increased exports,
and made tourism prices more competitive. From 2005 to March 2011 the exchange rate was kept ?xed
at 0.92 CUC for 1USD. Only in March 2011 was it devalued 8 percent to return to the parity of 1CUC:1USD.
Source: Pavel Vidal and Mario González-Corzo, “Cuba’s Banking Crisis: Macroeconomic Antecedents, Principal Causes, and Recent Policy Re-
sponses,” in International Journal of Cuban Studies 2, No. 3/4 (December 2010), pp. 201-213.
Cuba’s Economic Change in Comparative Perspective
90
also contributed to the Cuban fnancial crisis. Table
9 summarizes the main causes of the 2008 Cuban
fnancial crisis.
Te stabilization of the Cuban banking and fnan-
cial system could not count on the help of an in-
ternational lender of last resort, given that Cuba is
not a member of the main international fnancial
institutions.
241
Venezuela’s own economic problems
have rendered impossible an exercise of this type on
behalf of its main economic ally or from the newly
established Bank of the South, of the Bolivarian Al-
liance for the Peoples of Our America (ALBA).
Te only option for the government is to implement
a pro-cyclical adjustment policy to resolve the sol-
vency problems behind the liquidity crisis and to
be able to generate fnancial surpluses so as to pay
of the debts little by little. Te government of Raúl
Castro has implemented an adjustment of imports,
investments, and fscal outlays; controlling spend-
ing has been almost an obsession for the new gov-
ernment. As a result, it was able to reduce the cur-
rent accounts defcit of the balance of payment, the
fscal defcit returned to values close to 3 percent of
GDP, and the banking crisis was solved.
In addition, the government has been able to make
a series of agreements with its international credi-
tors to reduce the external indebtedness. It secured
an agreement to postpone payments of the debt
service with China until afer 2015, Japan forgave
80 percent of the debt pending since the 1980s (ap-
proximately US$ 1.4 billion), Mexico also forgave
70 percent of a debt valued at US$ 487 million,
while there is also an debt agreement with Russia
with the defunct Soviet Union.
ORIGI N AND CURRENT STATUS OF THE
DUAL CURRENCY
Te dual currency began with partial dollarization
in the 1990s, associated with the economic crisis,
the disequilibria, infation, and depreciation of the
exchange rate in the informal market. In response to
the resulting lack of confdence in the Cuban peso,
the U.S. dollar began to replace it in informal mar-
kets as the means of payment and unit of account.
In 1993 dollarization was ofcially recognized and
extended to the business sector, both national and
foreign, which was beginning to grow as part of the
policy of attracting foreign direct investment. Ever
since, both the Cuban peso and the U.S. dollar cir-
culated in tandem, with institutional recognition.
Afer the recovery of fscal and monetary stability
for several years, in 2003 and 2004 the government
set in motion a group of actions that shifed to the
convertible Cuban peso, or CUC, the functions
played by the U.S. dollar. Tis has led to the current
situation in which the economy is no longer dollar-
ized, but the parallel circulation of two currencies is
maintained, now between the Cuban peso and the
convertible peso, both issued by the Central Bank
of Cuba.
Te convertible peso was frst printed in 1994 but its
circulation as a means of payment in retail markets
was very limited. It was created with an exchange
rate pegged to the U.S. dollar (1CUC:1USD) and a
currency board that backed it until 2003. Nowadays
the convertible peso maintains parity with the dol-
lar, but there is no rule to regulate its issue.
In the 1990s, along with the dual currency, another
factor was introduced that was much more distort-
ing: the duplicity of exchange rates. Te exchange
rate for the Cuban peso sufered an enormous
depreciation with respect to the dollar in the in-
formal market during the 1990-1993 period, when
it climbed from 7CUP:1USD to 100CUP:1USD,
which was a main determinant of infation in those
years. In response to a set of adjustment measures,
mainly fscal measures, the exchange rate appreciat-
ed from 1994 onward. Since then, the exchange rate
has held stable (see Figure 6).
241
See Richard Feinberg, Reaching Out: Cuba’s New Economy and the International Response (Washington, D.C.: Brookings Institution, 2011) for an
analysis of Cuba’s possibility of becoming a member of the IMF and other international fnancial institutions.
Cuba’s Economic Change in Comparative Perspective
91
As we indicated, the depreciation of the Cuban
peso began in the 1990s in the informal market.
In 1995 this parallel exchange rate was assumed
by the recently-established state network of cur-
rency exchanges that engages in operations with
the population and with the tourists (Cadeca: Ca-
sas de Cambio S.A.). Nonetheless, the new value of
the Cuban peso never extended to the accounting
and exchange operations of the enterprise sector.
Te public enterprises and organizations contin-
ued operating with the exchange rate of the 1980s:
1CUP:1USD. Even today the population and tour-
ists change at 24CUP:1USD at the currency ex-
changes, but the ofcial exchange rate that is used
to record national accounts and the fnances of the
state enterprises and public organizations continues
to be 1CUP:1USD. It is prohibited for the enterpris-
es to turn to the currency exchanges and arbitrate
with the diferences in exchange rates, which is dif-
fcult anyway as the currency exchanges only en-
gage in operations involving small amounts of cash.
Foreign and mixed capital frms also use the ex-
change rate of 1CUP:1USD to record their expendi-
tures in Cuban pesos, which are basically limited to
payment of wages to national personnel.
Table 10 summarizes the exchange rates of the Cu-
ban peso and the convertible peso for the exchange
operations of the population and tourists at the cur-
rency exchanges (Cadeca) and for the fnances and
accounting of the public enterprises and organiza-
tions.
TABLE 10. EXCHANGE RATES (2013)
Population
and tourists
(Cadeca)
Public
enterprises
and
organizations
(Of?cial)
Cuban peso/
convertible peso
24.0 1.0
Convertible
peso/U.S. dollar
b
1.0
a
1.0
Cuban peso/U.S.
dollar
b
24.0
a
1.0
a
A 10 percent tax is applied to the exchange of dollars in cash.
b
Te exchange rate with respect to the Euro and other foreign curren-
cies varies daily depending on the value of the dollar in the interna-
tional market.
Source: Authors’ calculations based on ofcial data from the Central
Bank of Cuba (several years).
FIGURE 6. EXCHANGE RATE OF THE CUBAN PESO TO THE U.S. DOLLAR (1990-2012)
90 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 11
7
20
100
45
21.2
26.0
22.2
24
Source: Created based on ofcial data from the Central Bank of Cuba (several years).
Cuba’s Economic Change in Comparative Perspective
92
Te excessively overvalued exchange rate of
1CUP:1USD has enormous costs for the enterprise
sector, distorts economic measurement, and ac-
cordingly has a negative impact on the efciency of
economic decisions and resource allocation. Te ex-
cessive value of the Cuban peso hides subsidies and
keeps a series of enterprises artifcially proftable
and another group deceptively unproftable; in other
words, it distorts the enterprises’ balance sheets and
fscal accounts. In particular, it has a negative impact
on the export sector and all national producers with
the potential to compete with imports.
Te overvaluation of the exchange rate of the Cu-
ban peso has also impeded its free convertibility
for the enterprise system.
242
Te enterprise sector
is divided into two based on the predominant type
of currency, which operates as a disincentive to for-
eign investment, provokes absurd segmentations,
and reduces linkages, weakening the economy in
the extreme.
243
By understanding the origins of the duality of cur-
rencies and its interrelationships with the dual ex-
change rates, one is able to appreciate that the main
measure the Central Bank should take to eliminate
the dual currency is devaluing the Cuban peso in
the enterprise sector, a matter that has been post-
poned for more than 20 years. Partial dollarization
and the monetary and exchange duality was the
monetary policy strategy of the 1990s that was use-
ful for avoiding devaluation of the exchange rate in
the enterprise circuits. Tat strategy was extended
in time, leading to the accumulation of enormous
distortions throughout the network of enterprises.
MONETARY ILLUSIONS
As we already noted, the Guidelines approved at
the Sixth Congress of the Cuban Communist Party
ratifed the elimination of the dual currency as one
of the economic policy objectives, yet details of
the plan of action were not ofered. Te Guidelines
do not say much about the dual currency, just this
paragraph:
244
Progress will be made toward the establish-
ment of a single currency on the basis of labor
productivity and efective distribution and
redistribution mechanisms. Te complexity
of this goal will require rigorous preparation
and implementation, both objectively and
subjectively.
Te paragraph confrms that eliminating the dual
currency will be a gradual process. Tere is talk of
preparation on the subjective level, since for the
population at large the dual currency tends to be
associated with the low purchasing power of wages
and inequalities, which is not so. A few comments
are in order on this aspect.
Te low wages in Cuban pesos and the possibility
of being able to have greater private income in con-
vertible pesos or foreign exchange has created the
impression that the dual currency causes inequali-
ties, when in reality it is the low productivity of the
state sector that conditions the low wages and, ac-
cordingly, fosters inequalities.
Te strategy for distributing the cost of the adjust-
ment in the 1990s among state workers, in combi-
nation with the opening of the economy to tourism,
remittances, foreign investment, self-employment,
and other private sources of income for the family,
has revealed a huge income gap between families
dependent on wages, pensions, assistance, and state
subsidies, and those families that have been able to
gain access to other private sources of income. Te
inability of the state enterprise sector to recover
242
If the convertibility of the Cuban peso at the exchange rate 1CUP:1USD were opened up today, international reserves would not cover the
demand for dollars. Tat is why the state enterprises that operate in Cuban pesos receive the foreign exchange for imports through the centralized
allocation in the annual economic plan.
243
Pavel Vidal, “Monetary Duality in Cuba; Stages and Future Perspectives,” in Cuban Economic and Social Development: Policy Reforms and Chal-
lenges in the 21st Century, ed. Jorge I. Domínguez, et al, (Cambridge: Harvard University, 2012).
244
Communist Party of Cuba, Lineamientos de la Política Económica y Social del Partido y la Revolución, Sixth Congress (Havana, April 2011).
Cuba’s Economic Change in Comparative Perspective
93
productivity and wages more than 20 years afer
the disappearance of the Soviet Union has made in-
equality a structural (and not monetary) problem.
Te dual currency has actually helped to conceal the
real structural causes of low state wages and difer-
ences in income, which are associated with the low
productivity and inefciency of the state enterprise
sector. It is interesting to note that a system that has
promoted equality by statizing the economy is to-
day creating inequalities due to the inefciency of
its state enterprise system.
A monetary illusion has been created among the
population that by eradicating the dual currency
family incomes will automatically rise and inequal-
ities will vanish; yet people do not understand that
the fundamental costs of the dual currency are in
the enterprises, therefore, that is where the immedi-
ate benefciaries will be found, and it is through this
means that the benefts will reach families. Some
generations of Cubans still hold the economy of the
1980s in Cuban pesos as the ideal, and the expecta-
tion of returning to that status once all prices and
incomes return to that currency. Tey forget, how-
ever, that that status depended on Soviet subsidies,
and that today a harsh adjustment is required along
with a revision of the model that makes it possible
to boost productivity as the only way to increase
wages and reduce their disadvantage with respect
to other sources of income.
POI NTS OF CONSENSUS AND UNKNOWNS
WITH RESPECT TO MONETARY REFORM
Based on partial information that has been pro-
vided and the characteristics that defne the Cuban
monetary and exchange scenario, one can consider
the following options as the most likely to be fol-
lowed by the Central Bank in an eventual program
for doing away with the dual currency. Perhaps they
are the points on which there is greatest consensus
among the economic authorities, which were con-
frmed in one way or another in the ofcial note
published in the newspaper Granma on November
22, 2013:
• Te Cuban peso is the currency that will
remain as the only monetary sign; the con-
vertible peso should disappear over time. Te
government’s preference for the Cuban peso
is based on several factors: (i) it’s the histor-
ic currency; (ii) most family savings are in
Cuban pesos; the population maintains con-
fdence in this currency, which is bolstered
by public expectations that it will become
the only currency in circulation; (iii) wages
are denominated in Cuban pesos, paying the
equivalent in CUC would further cast light
on the low level of real wages in the state sec-
tor; this does not have an efective economic
impact, yet it does have a political and psy-
chological impact on people; (iv) the national
accounts, state budget, and decisive sectors
such as agriculture record their operations in
Cuban pesos.
• Te main measure that the Central Bank will
adopt to eliminate the dual currency is deval-
uation of the exchange rate of the Cuban peso
in relation to the U.S. dollar in the enterprise
sector (the 1CUP:1USD exchange rate will in-
crease), so as to bring it closer to the exchange
rate for the population (24CUP:1USD).
• It is expected that the 1CUC:1USD exchange
rate will remain constant in the coming years.
Although there could also be a simultaneous
devaluation of the CUC in relation to the
dollar, this does not appear to be the path se-
lected according to ofcial statements and the
exchange actions taken on an experimental
basis until then.
• Te exchange rate of the Cuban peso in the
currency exchanges would remain constant
or, if possible, it would be revalued (the
24CUP:1USD would decline, and with it the
24CUP:1CUC exchange rate).
• Te elimination of the dual currency will be
a gradual process. While 2016 is the deadline
for meeting the objectives of the Guidelines
and the monetary reform begins in 2014, one
would be considering a three-year period for
Cuba’s Economic Change in Comparative Perspective
94
doing away with the dual currency. Perhaps
by then the peso will not have been fully rees-
tablished as the only currency, but one would
expect that by then all the enterprises will be
operating with the same exchange rate as that
which applies to the population, and that all
prices would be recorded in Cuban pesos.
Te CUC could survive a few more years as
a reserve currency and for opening savings
accounts. Even though the preference is for
a gradual transition, the major gap between
the exchange rates of the Cuban peso in the
enterprise sector and for the population
(2,300 percent) would require, at some point,
a faster pace in the devaluations. Te exper-
iments that have been implemented, in fact,
assume a devaluation of the Cuban peso in
the enterprise sector that is quite signifcant,
as the rate of 10CUP:1USD represents a 900
percent devaluation in relation to the ofcial
exchange rate of 1CUP:1USD.
While there has always been a preference for gradu-
al monetary reform, confrmed several times by the
Cuban authorities, and which moreover is consis-
tent with the pace at which the rest of the reform is
being carried out, there has been a debate between
two possible ways to implement it. In other words,
there appears to be two alternative strategies for
gradually devaluing the ofcial exchange rate of the
Cuban peso:
(i) Comprehensive reform: It would consist of
implementing gradual devaluations of the ex-
change rate of the Cuban peso for all enter-
prises.
(ii) Reform by sectors: Gradual incorporation of
some sectors to a particular exchange system
with a devaluated ofcial exchange rate.
In summary, “gradual” can refer to either time or
sectors, or a combination of the two. Some ofcial
statements and certain experiments already imple-
mented point to a monetary reform that above all
would follow the second strategy. Let’s take a look
at these experiments.
As of December 1, 2011, the use of a special ex-
change rate of 7CUP:1USD was begun for direct
transactions (without intermediaries) between
hotels and restaurants, on the one hand, and ag-
ricultural cooperatives on the other. Te decision
benefts the hotels and restaurants, which can now
acquire national products with their income in
CUC (or dollars) at lower prices due to the devalua-
tion of the peso from 1CUP:1USD to 7CUP:1USD.
It also benefts the agricultural cooperatives, which
can gain direct access to a national market to which
they did not have access due to the dual currency.
Although ofcially that decision is not recognized
as a devaluation, the decision de facto creates a
new special rate of exchange for those transactions.
Later, in 2013, by Resolution 9 of the Ministry of
Finance and Prices, the special exchange rate in-
creased to 10CUP:1USD.
Another clue to future monetary changes comes
from the experiment that began in 2013 with a
group of state enterprises. Tis experiment is aimed
at endowing them with greater powers in their eco-
nomic and fnancial management, and greater au-
tonomy in relation to control by the ministries. On
the monetary level, it has been announced that all
these enterprises’ transactions will be carried out in
Cuban pesos; they will operate with a diferent ex-
change rate, and will be able to buy and sell foreign
exchange at the Central Bank without exchange
controls. Tere is no precise information on the ex-
change rate that will be used, but it appears that it
will be situated at 10CUP:1USD or 5CUP:1USD.
Moreover, in some media the story has circu-
lated that from the second half of 2013 the sugar
agroindustry began to use multiple exchange rates
for its accounting and transactions diferent from
the ofcial rate of 1CUP:1USD. As of this writ-
ing, it is known that three diferent exchange rates
are used, 12CUP:1USD for recording export rev-
enues, 7CUP:1USD for recording imports, and
4CUP:1USD for oil imports from Venezuela. Tis
would suggest a transition to a much more elabo-
rate/extensive multiple exchange rate regime as an
alternative to the overvalued ofcial exchange rate
of 1CUP:1USD.
Cuba’s Economic Change in Comparative Perspective
95
Te last available sign that provides information
about the future strategy of monetary policy is to
be found in the recently created transportation ser-
vice cooperatives, which will be able to purchase
imported and domestic inputs such as fuel, tires,
parts, space parts, and others, not at the ofcial ex-
change rate of 1CUP:1USD but at an exchange rate
of 10CUP:1USD.
245
In summary, the new exchange rates for the en-
terprise sector will probably be situated around
10CUP:1USD, and given that the convertible peso
maintains parity with the U.S. dollar, it means that
10CUP:1CUC, which represents a 900 percent de-
valuation of the Cuban peso in relation to the U.S.
dollar and the convertible peso. Evidently, the solu-
tion to the dual currency will also follow the style of
the rest of the reform, in which frst experiments are
organized, and then a general program is adopted
based on the experiences.
Te convergence of the exchange rates would be
more transparent and direct with a comprehensive
reform; it would avoid passing through arrange-
ments with more multiple exchange rates, which is
complicated to manage and control. Te disadvan-
tage is that it may entail great costs to the sectors
least prepared for a new exchange rate scenario.
Te pressure from these less prepared sectors for
the devaluation could delay the adjustment of the
exchange rate.
Te second strategy makes it feasible to accelerate
the evaluation in those sectors that are best pre-
pared to assume and respond to a new exchange
rate, but has the disadvantage that it may complicate
even further the exchange rate scenario and one
may lose control over the possibilities of arbitrage
among the diferent exchange rates. Te multiple
exchange rates in the enterprise sector would allow
space for arbitrage, and would render accounting
and exchange operations difcult and extremely
complicated, which would be a breeding ground for
bureaucracy and corruption.
Te economic literature is abundant in showing
the inefciencies such an exchange policy option
would entail for the allocation of resources and the
deformations it can cause in measurements of in-
ternational competitiveness, which means, when it
comes to establishing exchange rate subsidies and
taxes, discretionally promoting quasi-fscal policy
approaches and a lack of transparency in State ex-
penditures and revenues.
Te period of multiple exchange rates is a thing of
the past internationally as an efective option for
exchange policy regimes, due to their proven inef-
fciency and due to the high costs they entail. Te
most recent experiences in the region, in both Vene-
zuela and Argentina, provide new evidence of those
costs. Tis is why one would hope that devaluations
by sector in Cuba represent just a transitory mecha-
nism for garnering experiences and accelerating the
devaluation, but that the fnal intent should be to
generalize the devaluation to the entire enterprise
system, and to obtain a defnitive convergence with
the exchange rate for the population.
Te experiment with several exchange rates for the
sugar agroindustry, in particular, should not be gener-
alized to other sectors. Te trend toward convergence,
putting in place general rules, and looking to inter-
national best practices should prevail over the trends
that today still indicate that Cuba is continuing to con-
struct a “handmade economy,” far from international
standards, and in which discretion prevails.
Let us now examine the unknowns that remain un-
answered in the ofcial statements and in the exper-
iments under way, and with respect to which it is not
possible to infer the future trajectory with any rea-
sonable certainty. Next, a few of these elements of the
strategy for eliminating the dual currency are related
that the Central Bank has yet to defne publicly:
• Pace of the devaluations and how long the
sector-based diferences will remain. It re-
mains to be known how and when the
245
Te newspaper Juventud Rebelde, October 13, 2013.
Cuba’s Economic Change in Comparative Perspective
96
experiments will be extended to the rest of
the enterprise sector and how the devaluation
of the ofcial exchange rate will continue to
the point of convergence with the exchange
rate for the population.
• Te way the impact of the devaluations on
prices will be managed, whether price con-
trols will be maintained and whether the
pass-through will be directed administrative-
ly, or whether an autonomous adjustment in
wholesale and retail prices will be allowed.
Tat will defne to what point the nominal
devaluation will represent a real devaluation
of the exchange rate.
• Response of fscal policy to the impact of the
devaluation on the enterprises, families, and
consequently the structure and balance sheet
of the State budget.
• Te decisions that will be made in relation to
the enterprises that remain unproftable afer
the devaluation and the forms of support that
will be given to the state enterprises with the
potential to take advantage of the new ex-
change rate.
• General timetable for the measures and role
in each stage of the state enterprise sector, the
non-state enterprise sector, and families.
• Te extent and manner in which foreign
investment and mixed capital investment
would be included in the circuit in Cuban pe-
sos. Two important points here are whether
they need to move their balance sheets to Cu-
ban pesos, and the changes that could occur
in the wages that foreign and mixed capital
enterprises pay to the state employer institu-
tions.
• Role of the market in determining the equi-
librium single exchange rate. Possibility of
creating a foreign exchange market for enter-
prises, banks, and other organizations.
• Degree of convertibility of the Cuban peso.
Exchange regime that will accompany the
Cuban peso. Whether or not an exchange
control will be established for the purchase of
foreign exchange with Cuban pesos.
• Monetary policy that will sustain the Cuban
peso afer eliminating the duality of currency
and rates of exchange.
Te defnition of these points will mark the true
depth of the monetary reform and the scope it will
have on the functionality of the real sector of the
economy. One of the disadvantages of a gradual re-
form compared to a “big bang” strategy is the un-
certainty it casts on future monetary changes. Tis
has repercussions in the form of investment proj-
ects coming to a standstill, higher transaction costs,
and the loss of credibility of monetary policy. Te
only way for the economic authorities to mitigate
this uncertainty is by announcing the sequence in
which the monetary reform will be carried out from
now until 2016.
COSTS AND BENEFITS OF THE DEVALUATION
OF THE OFFICIAL EXCHANGE RATE AND
ECONOMIC POLICY RESPONSES
Given that the devaluation of the ofcial exchange
rate of the Cuban peso is the main action that the
Central Bank has to decide to take in order to over-
come the dual currency, it is worthwhile analyzing
the consequences of a measure of this nature, as
well as the economic policy options for taking them
on. It is actually very difcult to anticipate, much
less to measure, the various efects that the ofcial
devaluation will have on the Cuban economy, since
prices have not changed for decades in the enter-
prise sector. Combining economic theory with the
particular characteristics of the Cuban economy,
next we related some of the impacts that appear to
be more foreseeable:
Efect on Balance Sheets
Te devaluation of the Cuban peso will result in
changes in almost all the proportions, relative pric-
es, and fnancial results of the enterprises, banks,
Cuba’s Economic Change in Comparative Perspective
97
and other institutions. Te balance between assets
and liabilities of the enterprises will change, as they
will be multiplied by a diferent exchange rate. Te
losers will be the fnancial balance sheets that show
a mismatch of exchange rates, that is, whose debts
in convertible pesos and foreign currencies are
greater than their assets in those same currencies.
And those institutions whose situation is the oppo-
site in their balance sheets from that just described,
will be favored by the measure.
Te devaluation will create traumas in the fnan-
cial situation of the enterprises, but it is aimed at
promoting more transparent accounting balances
that more accurately refect the economic realities.
Tis is probably one of the most difcult balances to
strike through economic policy. On the one hand,
one must get the devaluation to have an impact (it
should be a real devaluation, not just a nominal
one), that changes the fnancial situation of the en-
terprises and that leads to a better allocation of re-
sources. Te “maladjustment” that comes from the
measure is its main contribution, since one starts
from an initial situation in which the overvaluation
of the Cuban peso deforms the fnancial indicators
of the enterprises and distorts the correct price sig-
nals for efcient decision-making. Yet on the other
hand, this shock cannot be unmanageable for the
enterprises, so as to provoke a collapse of economic
activity. Gradually introducing the devaluation may
indeed help strike a satisfactory balance between
the two efects.
Infation
Costs in convertible pesos and foreign exchange,
expressed in Cuban pesos, will increase when
multiplied by a higher exchange rate. Enterpris-
es can pass this increase in cost to the fnal prices
of the goods and services they sell. Many of those
goods and services represent costs for other com-
panies. High transfer is expected in an economy in
which two currencies circulate and there is a high
dependency on imports.
246
Tus, through infation,
there would be consequences for almost all organi-
zations and markets.
Te economic authorities should avoid an infation-
ary spiral, with a view to conserving monetary sta-
bility and with the objective of having the nominal
devaluation of the exchange rate becoming a deval-
uation of the real exchange rate. Te ministries of
Economy and Planning and of Finance and Prices
have control over most prices in the enterprise sys-
tem, so the transfer of the costs to the fnal prices
will be a matter for economic policy decision-mak-
ing. To keep infation from reaching consumers,
the price subsidy for the retail markets should be
increased, a decision that will put pressure on the
fscal accounts balance.
It is worth reiterating that it appears that actions
need to be defned to cushion (albeit not eliminate)
the efects of the devaluation. Economic policy
should guide and regulate the maladjustment” the
economy will experience when the real exchange
rate is changed, but in reality the efects should not
be avoided, but managed, so as to avoid creating in-
fationary spirals or unmanageable shocks for the
enterprises, or shocks that would have excessively
high social costs.
Banks
Te banks Banco Popular de Ahorro (BPA), Ban-
co de Crédito y Comercio (BANDEC), and Banco
Metropolitano (BM), which are the ones that take
in deposits and make loans in Cuban pesos and in
CUC, will sufer the direct balance sheet efect. Yet
actually all the banks, including the remaining ones
that operate only in CUC and foreign exchange,
could be impacted by the sequelae/afermath of the
devaluation given the various fnancial interrela-
tionships among the enterprises, and between them
and the banks.
246
Eduardo Hernández, “La Elección Cambiaria: Propuesta para Cuba,” (Doctoral thesis, Universidad de la Habana, 2011).
Cuba’s Economic Change in Comparative Perspective
98
A worsening of the fnancial situation of certain en-
terprises due to the balance sheet efect in a situa-
tion of an exchange rate mismatch, would reduce
their ability to pay their debts and, as a result, would
hurt their creditors. Te banks should therefore take
the necessary measures and prepare their portfoli-
os, simulating said scenario. Stress tests need to be
used to determine the vulnerabilities of the banking
system to devaluation and to prepare it to make the
appropriate decisions.
Tradable Goods and Services Sector
Evidently, devaluation has a number of impacts and
costs for the business sector, but it will also generate
benefts. Exporters will see increased proftability and
competitiveness. All the domestic output in the trad-
ables sector will see a relative improvement in its com-
petitiveness vis-à-vis imported goods and services.
For these benefts to materialize the state enterprises
must have greater autonomy. Terefore the sectoral
experiment being designed should not only help
transform the enterprises’ exchange system, but also
their management mechanisms, so as to move to
greater autonomy. Te state enterprises, which will
be most impacted by the devaluation, need some
room for maneuver to respond to the new environ-
ment and to react so as to tap into the opportunities
that generate changes in relative prices.
One of the weakest points to ensure the benefts of
devaluation surpass its costs is the fact that the real-
ization of benefts depends on the responsiveness of
state enterprises, yet there is always doubt as to their
fexibility to respond to a new set of incentives, par-
ticularly in a centrally planned economy and where
the bureaucracy has become too strong. Accordingly,
the structure of the Cuban economy, supported by
great state enterprises that answer to a central plan,
makes for additional challenges to the devaluation.
Financial Account of the Balance of Payments
One should not expect the devaluation of the of-
cial exchange rate to provoke an outfow of capital
in the balance of payments, as could be the case in
a market economy with an opening in the fnancial
account. As just indicated, the enterprise struc-
ture of the Cuban economy is based on state frms,
whose fnancial operations are controlled through
the annual central plan that is approved and moni-
tored by the Ministry of Economy and Planning. As
part of the reform, steps are beginning to be taken
to make the centralized planning mechanisms more
fexible, but not to the point that the government
loses control of the enterprises’ international fnan-
cial fows.
Foreign and mixed capital enterprises, for their part,
operate mainly in dollars or in convertible pesos, so
they would not have the opportunity to engage in
speculative operations in Cuban pesos, which are
also restricted by the lack of convertibility of the
Cuban peso for the enterprises.
Families’ fnancial assets and their currency portfo-
lio decisions would not have to be directly impacted
by the devaluation of the ofcial exchange rate. In
the family sector there would be speculative fnan-
cial movements based on changes that may occur
in the exchange rate in the currency exchanges (to-
day set at 24CUP:1USD) and related to the expecta-
tions that they create as to the consequences of the
monetary reform for the value of their savings. Te
authorities have experience on how to handle these
events; for example, the Central Bank has in its re-
cent history the de-dollarization of 2003 and 2004.
In summary, the controls on capital movements and
exchange control will annul any chance of a massive
outfow or infow of capital to the Cuban economy and
overreaction of the exchange rate as a result of mone-
tary reform, beyond specifc speculative episodes that
could occur in families’ fnancial decisions.
Domestic Economic Integration
Te benefts of the monetary reform would not
be limited to the changes in relative prices and to
greater transparency in accounting balance sheets;
rather, the correction of the exchange rate will make
Cuba’s Economic Change in Comparative Perspective
99
it possible to open up convertibility of the Cuban
peso for enterprises, which would have a very pos-
itive efect on the strengthening of the domestic
market. Once the enterprise sector that has reve-
nues in Cuban pesos can freely buy convertible pe-
sos and foreign exchange with that currency, it will
be more integrated to the rest of the domestic econ-
omy and with international trade; in addition it will
begin to be more attractive for foreign investment.
By opening up to convertibility of the Cuban peso
in the enterprise sector, the economy will be more
integrated and interrelated, segmentations would
be eliminated, and linkages among the organiza-
tions would appear.
Performing all transactions in a single currency and
with an exchange rate that is not overvalued will
enormously reduce transactions costs, will entail
gains in efciency, competitiveness, and business in-
tegration, and will strengthen the domestic market.
Tese benefts, which will be perceived at the end
of the monetary reform, are what should lead the
monetary authorities to persist and expedite in all
possible respects the convergence of the exchange
rates. Te short-term complications must not lead
one to lose sight that the economy as a whole stands
to gain (national enterprises, government, foreign
investors, and families) once all transactions can be
done in a single currency.
Foreign Firms
Te devaluation of the Cuban peso would not appear
to have major consequences in the short term for for-
eign investors, given that today they operate in con-
vertible pesos and foreign exchange, and their ties
with the economy in Cuban pesos are limited due to
the lack of convertibility of that currency. Obviously,
foreign investors should monitor the consequences
of the devaluation on the state enterprise system as
a whole, monetary-fnancial stability, and the fscal
balance, given that these are macroeconomic factors
in which they are indirectly implicated.
Te efect on wage costs is uncertain, since foreign
companies do not hire or pay their employees’ wages
directly, but rather do so through a state enterprise
employer, which today receives the wages in dollars
and then pays the state workers in Cuban pesos.
Monetary unifcation, in the medium term, would
render that mechanism pointless, yet one would
still need to know under what new rules the inter-
national hiring of Cuban workers would operate. To
learn more about the consequences for wages one
must await further information about the future
monetary strategy.
In the medium term, foreign and mixed capital en-
terprises could gain space when the Cuban peso is
fully convertible and operates as the only means of
payment nationally. Te domestic market would
be more attractive for foreign investment, for their
opportunities—today limited to exports and the
sectors that operate in convertible pesos – would
be expanded. When the currencies are unifed, the
whole economy will potentially be of interest to
the international investor. When all the enterprises
work with the same means of payment, the foreign
and mixed capital enterprises could become more
integrated with the national enterprises and thereby
reduce their costs while at the same time having a
greater multiplier efect over the domestic economy.
One would have to know in the future whether
frms with international capital would be required
to put all their accounting and fnancial balance
sheets in Cuban pesos. In that case, the exchange
risks for the foreign investor would be associated
not with the convertible peso, but with the Cuban
peso and the monetary policy and exchange regime
that will support it.
Families
It is most likely that the elimination of the dual cur-
rency would not have direct and immediate efects
on the population. Te population already sufered
the direct efect of the devaluation of the exchange
rate in the 1990s; the agricultural markets and all
private business have been working since the 1990s
with the exchange rate of 24CUP:1USD. Obvious-
ly, multiplying the prices of the markets that today
Cuba’s Economic Change in Comparative Perspective
100
operate in convertible pesos by 24 , to take them
to Cuban pesos, has almost no implications for the
population.
In the event that the transfer from convertible pe-
sos to Cuban pesos in retail prices is done at an
exchange rate below 24, then there could be a fa-
vorable wealth efect. Nonetheless, one should not
have much hope in a possible revaluation of the
exchange rate of the Cuban peso in Cadeca in the
short term; international experiences indicate that
in situations of multiple exchange rates convergence
also tends to the highest (most devalued) exchange
rate, which is usually closer to equilibrium.
In the medium term there would be an apprecia-
tion of the exchange rate at the currency exchanges
once the devaluation of the exchange rate and cur-
rency unifcation efectively promote exports, larg-
er infows of foreign investment, and a fall in the
demand for imports.
Returning to the possible short-term impacts, it
should be noted that while one should not expect
direct impact on the population, there would be in-
direct mechanisms of transmission, given that the
ofcial devaluation of the Cuban peso impacts en-
terprises that pay wages and intervene in the chain
of value that infuences the prices of consumer
goods and services. Terefore, one must learn how
the authorities will manage those potential impacts
on wages and consumer prices, that is, how they
will manage the infationary implications of the
devaluation; whether, for example, they will allow
the enterprises favored by the devaluation to be
able to pay their workers higher wages, or allow the
increase in production costs in Cuban pesos to be
charged in the prices to the end consumers.
Fiscal Policy
Te devaluation of the Cuban peso will efectively
give rise to costs and benefts, the diference is that
most of the costs of the devaluation are certain and
immediate while the benefts appear as opportunities
and will take time to completely materialize. Tat is
why it is essential that economic policy accompany
monetary reform, in particular fscal policy. A group
of compensatory measures should be designed for
those enterprises that are impacted by the immediate
costs of the devaluation yet have the potential to ben-
eft from the new exchange opportunities.
Economic policy should adjust its instruments to
bufer this temporary gap between the costs and
benefts of the devaluation: subsidies, taxes, credit
policy, and the allocation of resources through the
economic plan should defne measures to support
exporters and all the enterprises that have the poten-
tial to take advantage of the devaluation. Tat would
mean tension in the fscal balance on the expendi-
ture side that should be ofset by a renewed tax poli-
cy. One option is to capture a percentage of the pos-
itive balance sheet efects in state enterprises. Fiscal
policy, in this frst stage of the monetary reform, is
even more important than monetary policy.
247
Unfortunately, the country will have to take on this
complex process of monetary unifcation without
the help of the international fnancial institutions,
with very limited international reserves, and in a
moment of low economic growth. Nonetheless, one
cannot continue waiting for the “ideal moment” to
undertake it; the structural reforms need the mon-
etary reform.
Monetary Policy
In the frst phase of the reform, monetary policy
could continue to be implemented as it has been to
date, supported by direct instruments of monetary
control and in coordination with fscal policy, which
depend on the mechanism of monetization of the
fscal defcit. Nonetheless, by 2016 one would expect
that the minimal conditions will have been created
to begin to implement a monetary policy that more
efectively sustains the credibility and stability of the
single currency. To that end one must continue the
247
Te design of fscal policy required for these circumstances is beyond the intended scope of this article.
Cuba’s Economic Change in Comparative Perspective
101
transformations of the banking system that were lef
pending since the 1990s, while completely eradi-
cating the practice of fnancing the defcit by mon-
etization. Tere is a need to develop the inter-bank
market, the primary and second market for public
debt, to make interest rates fexible and subsequently
freed up, and to use conventional indirect monetary
policy instruments such as open-market operations,
reserve requirements, and the discount rate.
Lessons should be drawn from the mistakes made
in monetary policy associated with the convertible
peso and the de-dollarization of the economy, and
that were determinants of the Cuban fnancial crisis
in 2008. Monetary policy for the Cuban peso as of
2016 has to consider transparency and the explicit
defnition of objectives and rules as an essential part
of its instruments and ultimate objectives. Perhaps
by 2016 all the changes that monetary policy needs
will not be completed, but as much as progress as
possible should be made in those areas considered
most essential to the credibility and guarantee of
stability of the Cuban peso.
CONCLUSIONS: BETWEEN GRADUALISM
AND THE “BIG BANG”
Monetary and fnancial policy have two main ob-
jectives through 2016: the expansion of microf-
nance and the resolution of the dual currency. For
the frst objective a legal framework is already in
place and some results can be reported afer more
than two years of implementation. For the second
objective, there is less information about the strate-
gy to be followed; available signs point to a gradual
reform by sectors.
Carrying out the monetary reform by sectors will
make it possible to gain experience and promote
more pronounced devaluations for some enterpris-
es, but it will be complicated to control arbitrage,
corruption, and the other costs associated with mul-
tiple exchange rates. Multiple exchange rates should
constitute only a frst step in monetary reform; by
2016 there should be defnitive convergence of the
value of the Cuban peso for the entire economy.
Te structure of the Cuban economy, based on
large state enterprises, justifes a gradual devalua-
tion of the exchange rate and not the application of
a “big bang” approach. Te domestic private sector
(self-employed persons, microentrepreneurs, and
private agricultural producers) have already been
working since the 1990s with a devalued exchange
rate. Nor will there be direct efects of the devalua-
tion of the ofcial exchange rate on foreign invest-
ment. Terefore, the gains from devaluation will
have to be guaranteed by the response of the state
enterprise sector, which needs more time to react
due to the greater bureaucracy, rigidity, and subor-
dination to the ministries. In order for the response
to be efective, more room for maneuverability? is
required for its management, making the central
planning mechanisms more fexible and aligning
the workers’ and managers’ incentives with the im-
pacts of devaluation in their enterprises; that is, the
efects of the devaluation should not remain on the
balance sheets of the state enterprises, but rather
should reach the wages they pay.
Gradual change will not only facilitate the response
of the state enterprises, but also the response of eco-
nomic policy. One cannot anticipate all the impacts
of devaluation, given that this is a price that has not
changed for decades in the Cuban economy. One
cannot start from the assumption that the economic
actors and the government will know how to man-
age the exchange-rate shock. While it is necessary
frst to defne the sequence of monetary transfor-
mations and the general rules under which it will be
possible to respond and cushion the exchange-rate
shock, corrections will have to be made along the
way to fscal policy, and credit policy for exporters,
among others. In addition, a time is needed to ad-
just accounting dynamics, IT systems, contracts,
bureaucratic mechanisms, among other operation-
al aspects that have to be accommodated, for they
are designed to operate with an exchange rate that
has not changed in decades. Terefore, introducing
the changes gradually will also give the economic
authorities time to react.
Cuba’s Economic Change in Comparative Perspective
102
Te 2016 deadline implies that, even though there
is a preference for gradual introduction of the re-
form, there will have to be pronounced devalua-
tions of the exchange rate to attain converge of the
ofcial rate 1CUP:1USD and the exchange rate for
the population, 24CUP:1USD. Indeed, the experi-
ments that began in 2013 consider an exchange rate
for some enterprises around 10CUP:1USD, which
means a 900 percent devaluation of the ofcial
exchange rate, which could be classifed as a “big
bang,” albeit reduced to some companies and on an
experimental basis.
A question that will have to be defned going for-
ward is the monetary and exchange regime of the
Cuban peso as of 2016. It seems sensible to think
that initially such a regime should prioritize con-
vertibility and credibility, which could be guar-
anteed with a fxed exchange-rate system, or with
some monetary rule. Second, the exchange-rate
regime should include fexibility as the top priority
and move progressively to arrangements that make
viable a larger foat in the value of the currency and
monetary policy independence.
One of the disadvantages of a gradual reform in re-
lation to a “big bang” strategy is the uncertainty it
casts over future monetary changes. Te econom-
ic authorities have as a factor in their favor control
over capital fows; that certainly reduces the specu-
lative options and overreaction of the exchange rate
associated with expectations on future monetary
and exchange actions. Nonetheless, monetary un-
certainty may paralyze investment projects of the
emerging non-state sector, or of foreign business
interests, and complicate management in state en-
terprises. Te only alternative the economic author-
ities have to mitigate this disadvantage is to more
clearly explain the monetary reform up to 2016.
Cuba’s Economic Change in Comparative Perspective
103
INTRODUCTION
Since 2011, the Cuban authorities have placed ex-
change rate unifcation as one of their top policy
priorities. Indeed the current dual exchange rate
system—whereby a one-to-one exchange rate for
the “convertible peso” coexists with a twenty four-
to-one exchange rate for the “Cuban peso” (both
against the US dollar)—introduces severe and per-
vasive distortions with costly consequences for re-
source allocation and the growth potential of the
Cuban economy. At the same time, the unusually
large (by international comparison) spread between
the two exchange rates exacerbates the transition
costs and thus constitutes one of the main reasons
delaying their unifcation.
249
Tis paper reviews from an international perspec-
tive the challenges faced by Cuba in unifying its ex-
change rate system and compares various options to
meet this objective. It argues in favor of an immedi-
ate unifcation cushioned by a system of lump-sum
taxes and subsidies to be phased out during a prean-
nounced transition period. By allowing for relative
price changes to operate in full from the start, the
immediate unifcation would maximize efciency
gains. At the same time, by cushioning the Cuban
economy from potentially large transitional pains—
including fscal revenue losses, productive dislo-
cations, infationary outbursts and distributional
efects—the lump-sum taxes and subsidies would
ease the transition, thereby boosting policy credi-
bility. Tese lump-sum taxes and subsidies would
be set on an enterprise-by-enterprise basis so as to
fully neutralize, initially, the windfall losses or gains
that individual enterprises would otherwise make
upon the unifcation of the exchange rate.
By replacing at the outset the taxes and subsidies
implicit in the current exchange rate spread with
Exchange Rate Uni?cation:
The Cuban Case
248
Augusto de la Torre and Alain Ize
248
Te authors work for the World Bank as, respectively, Regional Chief Economist ([email protected]), and Senior Consultant (aize@
worldbank.org). Te paper beneftted from comments by Aquiles Almansi, Tito Cordella, Eduardo Fernandez-Arias, Daniel Lederman, Sergio
Schmukler, and other participants at an internal World Bank workshop (August 2013), and comments by Richard Feinberg, Andrea Gallina,
Guillermo Perry, José Juan Ruiz, Alejandro Santos, Alberto Trejos, Juan Triana, Pavel Vidal, and other participants at a University of Havana
workshop held in Havana (September 2013). Magali Pinat provided excellent research assistance. Te views in this paper are entirely those of the
authors and do not necessarily represent the views of the World Bank, its executive directors, or the countries they represent.
249
For information on the economic situation in Cuba and the circumstances underpinning the exchange rate system, see Roberto Orro, “Te
Cuban Dual Monetary System and Challenges Ahead,” in La Economia Cubana: Reformas Estructurales y Desempeño en los Noventa, eds. David
Ibarra and Jorge Máttar (ECLAC, 2000); Gabriel Di Bella and Andy Wolfe. “A Primer on Currency Unifcation and Exchange Rate Policy in Cuba:
Lessons from Exchange Rate Unifcation in Transition Economies” Cuba in Transition 18 (2008): 50-62; Silvia Dreher, “Monetary Policy in Cuba,”
Cuba in Transition 19 (2009): 286-291; Pavel Vidal, “Monetary Duality in Cuba: Stages and Future Perspectives,” in Cuban Economic and Social
Development: Policy Reforms and Challenges in the 21
st
Century, eds. Jorge I. Domínguez, Omar Everleny Pérez Villanueva, Mayra Espina Prieto
and Lorena Barberia, (Cambridge: David Rockefeller Center for Latin American Studies, Harvard University, 2012); Pavel Vidal, “Monetary and
Exchange Rate Reform in Cuba: Lessons from Vietnam,” Institute of Development Economies, Japan External Trade Organization, 2012; Pavel
Vidal and Omar Everleny Pérez Villanueva, La Reforma Monetaria en Cuba hasta el 2016 : Entre Gradualidad y “Big Bang” (Washington, D.C. :
Te Brookings Institution, 2013); and Richard Feinberg, Sof Landing in Cuba: Emerging Entrepreneurs and Middle Classes, (Washington, DC: Te
Brookings Institution, 2013).
Cuba’s Economic Change in Comparative Perspective
104
explicit taxes and subsidies of equivalent magnitude,
the traumatic efects the unifcation would have on
impact would be eliminated. Tereafer, however,
both the enterprises and the government will have to
adjust, albeit gradually, because the lump-sum tax-
es and subsidies would be phased out according to a
preannounced timetable. But such adjustment process
would be facilitated by efciency gains, given that—at
the margin—the incentives faced by existing enter-
prises to invest and produce would be completely in-
dependent of the lump-sum taxes or subsidies which,
by defnition, would be set as an absolute amount that
does not vary with productive efort (or lack thereof).
In efect, the incentives faced by existing enterprises
would be at par with those faced by the new enterpris-
es. However, to facilitate a positive supply response
(i.e., to ensure that the change in relative prices asso-
ciated with the exchange rate unifcation leads to an
early materialization of efciency gains) and to fur-
ther ease transition pains as lump-sum subsidies are
phased out, important habilitating reforms will be
needed, particularly as regard the governance of state-
owned enterprises and a retargeting of subsidies.
Te rest of the paper is organized as follows. Sec-
tion 2 briefy reviews the international experience
on exchange rate unifcation, based on the academ-
ic literature, some statistics about the evolution of
exchange rate regimes across the world, and a com-
parison of current Cuban spreads and macroeco-
nomic conditions with those prevailing at the onset
of unifcation in other Latin American countries
that underwent similar experiences in the not too
distant past. Section 3 focuses on what is special
about Cuba and what this implies for policy. Sec-
tion 4 compares and contrasts the pros and cons of
four policy options. Sections 5 and 6 provide rough
sketches of how the proposed fscally-cushioned big
bang option would work for two specifc sectors of
the Cuban economy, specifcally the foreign-man-
aged tourism industry and the state-owned import-
ers and local producers, respectively. Section 7 con-
cludes by discussing key habilitating reforms (fscal,
monetary and public sector governance) and some
sequencing issues. It also briefy addresses the relat-
ed yet distinct issue of currency unifcation.
SOME LESSONS FROM INTERNATIONAL
EXPERI ENCE
Understanding well what caused the original dislo-
cation that led to a multiple exchange rate regime
is the inescapable starting point for defning a suc-
cessful policy agenda towards exchange rate unif-
cation. Typically, multiple rate systems emerge afer
a large shock hits the economy that exerts substan-
tial pressure on the foreign exchange market and
calls for a major depreciation of the equilibrium
real exchange rate. Te shock can be a supply shock,
such as the deterioration in the terms of trade that
severely weakens the external trade account or an
increase in world interest rates that sharply raises
the servicing costs of the country’s external debt. Or
it can be a demand shock, such as a surge in local
demand for foreign assets (capital fight) triggered
by fnancial repression and/or unsustainable mac-
ro policies. In the frst case, the required exchange
rate depreciation refects the deterioration in the
country’s purchasing power; in the second case, it
refects the relative price change needed for reduc-
ing the country’s demand for tradable goods so as
to allow its citizens to transfer their assets abroad.
To avoid a politically explosive fall in real wages
and a rise in infation due to an increase in the cost
of imported inputs, governments may introduce
a dual exchange rate regime. Te more depreciat-
ed “free rate” (the market determined rate) is used
for capital account transactions and “non-basic”
imports, while the “ofcial rate” is used for “basic”
imports and “must-surrender” export proceeds. In
theory, this can help limit infation, protect socially
sensitive economic activities, channel resources to
developmental priorities, and redistribute income
progressively (including by avoiding rewarding the
owners of foreign currency-denominated assets
through devaluation-induced valuation gains).
In practice, however, dual exchange rates typical-
ly cause large efciency losses. Te exchange rate
spread acts as a tax on exports (through surrender-
ing requirements) and a subsidy on “basic” imports,
which are detrimental to the country’s exporting and
Cuba’s Economic Change in Comparative Perspective
105
import-substituting productive activities, thereby
hindering economic growth and job creation. Dif-
ferentiating between “basic” and “non-basic” im-
ports can give rise to similarly severe resource mis-
allocations and opacities. In all cases, the exchange
rate spread causes growing wedges between private
and social interests that translate into enforcement
nightmares and multifaceted, socially destructive
rent seeking activities. Te costs of such distortions
accumulate and worsen over time, particularly in
the case of a supply shock that calls for a perma-
nent real exchange rate adjustment. As dual rates
persist and become fossilized throughout the econ-
omy, they end up causing increasingly pernicious
and ingrained segmentations between the winning
sectors (that found access to preferential exchange
rates) and the losing sectors (that did not).
250
Ex-
change rate unifcation should therefore originate
both static efciency gains (i.e., a better allocation of
existing resources, so that more income and output
can be generated with the same labor, land, and cap-
ital that are already available today) and dynamic
efciency gains (i.e., the income expansion arising
from the process of accumulation and better use of
resources over time).
Refecting the growing awareness of such efcien-
cy costs, but also improved macro-monetary policy
frameworks, the share of countries with multiple
exchange rate regimes across the world has steadily
declined over the last forty years, albeit with a slight
resurgence in the last 5 years (see Figure 7). In Lat-
in America, this resurgence included some churn-
ing between the return of parallel rates in coun-
tries that had successfully unifed their exchange
rates (Venezuela and Argentina) and the successful
250
Pierre-Richard Agenor, “Parallel Currency Markets in Developing Countries: Teory, Evidence, and Policy Implications,” Essays in International
Finance No. 188 (Princeton University, 1992) provides a good summary review of the literature on parallel exchange rates, including causes, wel-
fare impacts and policy implications. Jacob A. Frenkel and Assaf Razin (“Te Limited Viability of Dual Exchange Rate Regimes,” NBER WP No.
1902, (1986)) analyze the restrictive conditions under which a dual exchange rate system that separates capital from current account transactions
can be sustained indefnitely.
FIGURE 7. WORLD SHARE OF MULTIPLE VS. SINGLE EXCHANGE RATE REGIMES, 1973-2011
1
9
7
3
1
9
7
5
1
9
7
7
1
9
7
9
1
9
8
1
1
9
8
3
1
9
8
5
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
100
90
80
70
60
50
40
30
20
10
0
A
s
a
s
h
a
r
e
o
f
t
o
t
a
l
n
u
m
b
e
r
o
f
c
o
u
n
t
r
i
e
s
Multiple Unified
In Latin America:
- Argentina
- Cuba
- Venezuela
Sources: Kenneth S. Rogof, Aasim M. Husain, Ashoka Mody, Robin Brooks, and Nienke Oomes, “Evolution and Performance of Exchange Rate Re-
gimes,” IMF Working Paper WP/03/243 (International Monetary Fund, 2003) and International Monetary Fund (IMF), Annual Report on Exchange
Rate Arrangements and Exchange Restrictions (AREAER), Washington, D.C., various years.
Cuba’s Economic Change in Comparative Perspective
106
recent unifcation of the exchange rate in countries
with formerly dual exchange rate regimes (such as
the Dominican Republic; see Figure 8). Arguably,
however, multiple exchange rates appear to be for
the most part a species on the verge of extinction.
Conversely, the persistence of multiple exchange
rate regimes in the few remaining countries that still
have them is likely to refect in part the challenges
and costs associated with exchange rate unifcation.
Tese costs depend on the roots of the original split.
In countries where the originating shock was a de-
mand shock resulting from fnancial repression or
poor macro-monetary management, a reversal to-
wards sounder macro-fnancial policies may be all it
takes to discourage capital fight and, hence, absorb
the pressures that led the parallel rate to deviate from
the ofcial rate in the frst place. Instead, in countries
where the shock came from the supply side and where
the factors behind the shock still endure (for example
a permanent worsening in the terms of trade), unif-
cation is likely to have more substantial costs. Tis
is because in these cases unifcation is likely to take
place at the most depreciated (parallel) rate, rather
than at the most appreciated (ofcial) rate. Tus, ab-
sent ofsetting mechanisms, a large depreciation of
the ofcial rate can have substantial infationary and
redistributive implications.
Te post-unifcation equilibrium exchange rate
is typically expected to lie somewhere within the
two exchange rates in efect before the unifcation.
Te reasoning behind this expectation is straight-
forward. A depreciation of the more appreciated
(ofcial) exchange rate should reduce the demand
for basic imports—thereby freeing some foreign ex-
change—or promote exports—thereby allowing ad-
ditional foreign exchange to come in. As this addi-
tional supply of foreign exchange fnds its way into
the market, it should allow the more depreciated
(parallel) rate to strengthen. Tus, as one continues
depreciating the ofcial exchange rate, the two rates
should gradually move towards each other, eventu-
ally converging somewhere inside the initial spread.
FIGURE 8: CHURNING BETWEEN MULTIPLE VS. UNIFIED EXCHANGE RATE REGIMES, 1999-2011
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1999 2011
such as Cuba
such as Argentina
and Venezuela
such as
Dominican Republic
multiple multiple (unitary in 1999) unitary (multiple in 1999) unitary
Notes: Countries with multiple exchange rates in 2011 but with a unifed rate in 1999 are Angola, Argentina, Eritrea, Georgia, Guinea, Kyrgyz
Republic, Malawi, Maldives, Mongolia, Nigeria, Sao Tome and Principe, Sudan, Ukraine, Uzbekistan, and Venezuela. Countries with a unifed rate
in 2011 but with multiple rates in 1999 are Afghanistan, Belarus, Botswana, Cambodia, Dominican Republic, Egypt, Iran, Lao, Libya, Russia, and
Turkmenistan. Source: IMF AREAER online database.
Cuba’s Economic Change in Comparative Perspective
107
In practice, however, because the demand for basic
imports is generally fairly inelastic and the response
of exports to a more competitive exchange rate
tends to take time to materialize (e.g., it is short-
run inelastic), the depreciation of the ofcial rate
is unlikely to free much foreign exchange, at least
in the short run. If so, unless there is a sufcient-
ly deep, forward-looking foreign exchange market
that anticipates future foreign exchange infows, the
two rates will tend to meet close to the bottom of
the range, i.e., close to the parallel market rate.
251
Moreover, the above reasoning assumes that there
is no change in the demand for foreign exchange
coming from the capital account. But this will not
be the case if expectations of post-unifcation in-
fation (more on this below) induce a shif towards
the dollar (e.g., if there is a private portfolio shif to-
ward the dollar), or if the central bank starts accu-
mulating foreign reserves afer the unifcation (e.g.,
if there is a public portfolio shif toward the dollar).
In both cases, the post-unifcation single exchange
rate could well depreciate (overshoot) beyond the
pre-unifcation parallel rate.
252
Unless ofset through fscal adjustments (more on
this below) a one-time post-unifcation infation
can generally be expected from the pass-through of
the ofcial exchange rate depreciation to infation
(e.g., cost-based infation).
253
Moreover, the rise in
TABLE 11: POST-UNIFICATION INFLATION IN SELECTED LATIN AMERICAN COUNTRIES
Country
Beginning of
Uni?cataion
Process
Pre-
Uni?cation
Premium Phasing
Point-to-Point Annual In?ation
3 months
before
uni?cation
begins
...3
months
after
...12
months
after
...24
months
after
Venezuela Mar. 1989 202 percent Fast 36 per-
cent
103
percent
81 per-
cent
36 per-
cent
Argentina Feb. 1989 53 percent Gradual 372
percent
460
percent
8163
percent
232
percent*
Peru June 1989 166 percent Gradual 3414
percent
5704
percent
1968
percent
207
percent*
Ecuador Sept. 1992 27+ percent Gradual 50 per-
cent
64 per-
cent
46 per-
cent
27 per-
cent
Dominican Republic Oct. 2003 10+ percent Fast 26 per-
cent
40 per-
cent
52 per-
cent
0 percent
Cuba ? 2300 percent ? 4 percent ? ? ?
Notes: Premium is defned as the average spread between the parallel and ofcial rates as a percent of the ofcial rate in the last quarter before unif-
cation. Phasing is defned by the duration of the coexistence of ofcial and parallel rates afer unifcation—“fast” is less than 3 months. * 28 months
afer, to capture the efects of the formal introduction of Convertibility in April 1991 (Argentina) and the fnal currency unifcation in August 1991
(Peru). Sources: Te Economist Intelligence Unit; International Currency Analysis, Inc., World Currency Yearbook (formerly Pick’s Currency Year-
book), (Brooklyn, N.Y.: various issues); AREAER (several publications); Pick’s currency yearbook (several publications); Miguel Kiguel and Stephen
A. O’Connell. “Parallel exchange rates in developing countries,” Te World Bank Research Observer 10, no. 1 (1995): 21-52; Nancy P. Marion, “Dual
exchange rates in Europe and Latin America.” Te World Bank Economic Review 8, no. 2 (1994): 213-245; Ethan Ilzetzki, Carmen M. Reinhart, and
Kenneth S. Rogof, “Exchange Rate Arrangements in the 21
st
Century: Which Anchor Will Hold?” (2008), Steven Kamin, “Argentina’s Experience
with Parallel Exchange Markets, 1981-1990,” Board of Governors of the Federal Reserve System International Finance Discussion Papers, no. 407,
1991; International Financial Statistics (IFS) database.
251
Tis is what Agenor fnds in the experience of exchange rate unifcations in a number of African countries during the 80s. He concludes that “the
post-unifcation exchange rate is typically close to the pre-reform parallel rate, casting doubts on the argument that the equilibrium exchange rate
is an average of the ofcial and parallel rates”.
252
See Saúl Lizondo, “Unifcation of Dual Exchange Markets,” Journal of International Economics 22 (1987): 57-77and Pierre-Richard Agenor and
Robert P. Flood, “Unifcation of Foreign Exchange Markets,” IMF WP/92/32, 1992.
253
However, such supply side pressures may be relatively subdued in countries where domestic prices already refected for the most part the parallel
rate (rather than the ofcial rate).
Cuba’s Economic Change in Comparative Perspective
108
the price level may turn into a permanent rise in the
rate of price increases when the initial supply shock
leads to wage-price spirals that are accommodated
by a weak (or not credible) monetary policy (e.g.,
expectations-based infation); or when the unif-
cation gives rise to lasting fscal imbalances (e.g.,
demand-based infation) resulting from the loss of
quasi-fscal income generated by the dual exchange
rate regime (in particular, an abrupt reduction in
the implicit taxation of exports).
Table 11 provides a bird-eye view of post-unifcation
infationary experiences in Latin American coun-
tries that have unifed their exchange rate in the not
too distant past. Te table shows that post-unifca-
tion infation tended to be higher in countries with
high pre-unifcation infation (Argentina, Peru)
or in countries with high pre-unifcation spreads
(Venezuela, Peru). By contrast, for countries with
relatively low pre-unifcation infation and spreads
(Ecuador, Dominican Republic), post-unifcation
infation was relatively subdued. For Cuba this is
both good news and bad news. While pre-unifca-
tion infation is low, the spread is way above any-
thing observed in other countries of the region.
THE CASE OF CUBA
Te Cuban dual exchange rate system overlaps with
a dual currency system. Te latter consists of the
Convertible Peso (CUC)—a fully convertible cur-
rency that exchanges at one to one against the dol-
lar—and the Cuban Peso (CUP)—that exchanges at
24 to one dollar.
254
Hence, the dual currency entails
dual exchange rates. For simplicity, we will use in
what follows “CUC” to refer to the more appreci-
ated CUP rate (1 per 1 USD) and “CUP” to refer to
the more depreciated CUP rate (24 per 1 USD).
Te two systems responded to the same initial shock
although they are sustained by diferent motives.
Te dual exchange rate system goes back to the ear-
ly sixties when a separate exchange rate was used
for trade with the socialist countries, particularly
the former Soviet Union. Te market segmentation
was abruptly exacerbated during the 1990-1993 pe-
riod when the political changes in the former Soviet
Union led to a redefnition of commercial relations
with Cuba that resulted in a huge worsening in Cu-
ba’s terms of trade. Te CUC was subsequently cre-
ated (in 1994) to limit dollarization—by providing
an alternative to the US dollar as a unit of account
and a store of value—in the environment of rapid-
ly rising and highly volatile infation that followed
the adverse terms of trade shock. Tis overlap and
common origin has led many observers to see the
dual exchange rate and the dual currency systems as
“joined at the hip.” But they are clearly driven by dif-
ferent motives and pursue diferent objectives. Ex-
change rate unifcation can thus be conceptually and
practically de-linked from the currency unifcation.
What makes the case of Cuba special when com-
pared to other cases of dual exchange rate regimes
in Latin America? At least four features stand out.
First, because the origin of the Cuban dual exchange
rate system is primarily real (linked to a terms of
trade shock) rather than fnancial (linked to capital
fight), it basically amounts to a quasi-fscal scheme.
It taxes exports and some other types of foreign
exchange incoming fows while subsidizing basic
imports. Tis is both good news and bad news. It
is good news because it mitigates concerns about
speculative fnancial turbulence during unifcation.
Such concerns are further limited by the fact that
much of the population’s savings are already held
in the form of cash dollars (hence do not generate
a pent-up demand for dollars) while most bank de-
posits (whether in CUPs or CUCs) belong to public
enterprises (hence are unlikely to trigger specula-
tive shifs into dollars). However it is also bad news
because, unless fscally neutralized, the exchange
254
Actually, the CUP exchanges at 24 CUP per dollar households and at 1 CUP per dollar for the state enterprises and institutions. Persons can
exchange dollars or CUCs for CUPs (at 24 to 1), as well as CUPs for CUCs (at 25 to 1), in the exchange bureaus (Cadecas). State enterprises and
institutions conduct exchange transactions with the Central Bank and are prohibited from using the Cadecas to arbitrage between the exchange
rates. Tere are no indications at this time, however, of a signifcant spread between the 24 per 1 USD rate at the Cadecas and the rate in informal
transactions on the street. For details see Vidal “Monetary Duality in Cuba…”.
Cuba’s Economic Change in Comparative Perspective
109
rate unifcation will unavoidably have large re-dis-
tributional implications, making the former sellers
of CUCs better of and the former purchasers (and
their clients) worse of. While such re-distributions
can be ofset through bold yet temporary fscal
means, the sustainability of the unifcation in the
medium-term will require comprehensive fscal re-
forms (more on this below).
Second, the spread between the two exchange rates
in Cuba, at 2,300 percent, is by far the largest in post-
World War II Latin American history. Tis implies
that there is a signifcant risk that the pass through ef-
fects of the depreciation of the CUC rate may unleash
a wage-price spiral. To avoid it, a premium will need
to be placed on maintaining a very tight control over
monetary expansion during and afer the unifcation.
Tird, the Cuban the government can exert control
over the actions of public enterprises arguably more
than in other countries. Tis may complicate some
things and facilitate others. Te materialization of
efciency gains would require a sufciently elastic
supply response (in the form of decisions to increase
investment and production) to the changes in relative
prices. But this supply elasticity depends on the quality
of relative price signals and on the responsiveness of
decentralized economic actors to such signals (and to
other market incentives), both of which are likely to be
weak or sluggish in the large state sector of the econo-
my. On the plus side of the ledger, however, the control
of public enterprises by the government can also help
limit price increases on the most basic goods during
the transition (more on this below).
Fourth, Cuba has limited access to international f-
nance. Tis is an important further complication.
Indeed, concessional fnance, if available, could fa-
cilitate unifcation by allowing expenditure to ex-
ceed income during the transition.
EXCHANGE RATE UNI FICATION OPTIONS
In view of the constraints mentioned above, the key
challenge for Cuba is to balance the short-term real-
location pains of the exchange rate unifcation with
its medium and long-term efciency gains. Over time,
by boosting the size of the cake, efciency gains should
provide plenty of room to ofset the initial reallocation
pain. Tus, in the end, unifcation should be a win-
win for all. Indeed, the achievement of such efciency
gains is the raison d’être of unifcation. Te problem
is that the size of the cake is likely to be largely given
in the short-term, as the increase in the capital stock
(including in foreign direct investment—FDI) and re-
allocation of resources that are required for efciency
gains will likely take time to materialize. Tus, unless
cushioned in some way, the raw initial impacts of uni-
fcation (fscal revenue losses, productive dislocations,
infation outbursts, and regressive distributional ef-
fects) could be quite painful.
A successful transition strategy should thus pursue
two objectives. First, to limit the short-term pains
until efciency gains materialize and come to the
rescue. Second, to boost the pace at which such ef-
ciency gains materialize. Te extent to which these
two objectives are fulflled should therefore provide
the basic measuring rod with which to compare and
rank available unifcation options. We distinguish
four typological options.
Option One may be labeled raw big bang. It con-
sists in unifying the exchange rates on day one. To
limit initial income efects (hence balance of pay-
ments and foreign exchange market pressures),
the CUP rate would remain unaltered—that is, the
rates would be unifed the rate of 24 (new) pesos
per dollar. Te elimination of the CUC exchange
rate would thus imply that all exchange transac-
tions would thereafer take place at the single new
rate. Te main advantages of this option are its sim-
plicity and initial credibility. It can be implement-
ed with the stroke of a pen. Moreover, by doing the
whole adjustment up-front and not leaving any-
thing hanging, it would signal at once the authori-
ties’ full commitment to unifcation. On the minus
side, however, it does not address at all the objec-
tive of mitigating the pain while efciency gains
materialize. Te one time devaluation of the CUC
rate would have large up-front fscal, redistributive,
reallocation, and infationary costs. Te economic
Cuba’s Economic Change in Comparative Perspective
110
and political consequences could thus be so trau-
matic as to render the whole experiment unviable.
Option Two can be labeled sector-by-sector gradual-
ism. It would consist in gradually depreciating the
CUC rate towards the CUP rate on a sector-by-sec-
tor basis, that is, in diferent degrees and at difer-
ent speeds for diferent sectors. On the plus side, by
spreading the pain by sectors (hence over time), this
option would be less traumatic than Option One. In
addition, it could give the authorities some scope
for experimentation, hence better control over the
entire unifcation process. On the negative side of
the ledger, however, this option would also spread
the gains over time. By delaying the relative price
changes across sectors (hence the supply response)
it would limit the scope for efciency gains. Tus,
Option Two would meet the objective of mitigating
the pain better than Option One, but at the cost of
falling behind as regard the objective of front-load-
ing and maximizing the gains. In addition, the more
Option Two seeks to give the authorities a margin
of control (i.e., unannounced, discretionary adjust-
ments), the more policy uncertainty it would create,
especially because there may be a tendency to post-
pone dealing with the most distorted sectors. At the
extreme, Option Two might even raise doubts as to
whether the unifcation reform will ever be com-
pleted. Such uncertainties would likely promote a
wait-and-see attitude, thereby further delaying the
supply response. Last (but not least), the even great-
er multiplicity of exchange rates during the transi-
tion could further segment markets and distort
price signals, impeding in particular the efcient
resource allocation across sectors.
Option Tree may be labeled economy-wide grad-
ualism. It would consist in preannouncing a path
of gradual convergence of the CUC rate toward
the CUP rate, which would apply uniformly to all
sectors, actors, and activities in the economy. By
spreading the pain over time, Option Tree would
be less traumatic than Option One. Because of its
economy-wide application, it would be “cleaner”
than Option Two, thereby avoiding the additional
cross-sector distortions of this latter option during
the transition. On the minus side, however, Option
Tree sufers from similar, albeit less intense, draw-
backs as Option Two. It is quite comparable to Op-
tion Two in terms of mitigating the initial pain. And
while it would do much better than Option Two in
terms of front-loading efciency gains, the materi-
alization of these gains would likely be insufcient
to ofset the transitional pain. Te pain would be
of lower intensity but would last over a more pro-
longed period. Moreover, Option Tree carries a
risk of policy uncertainty leading to self-fulflling
failure. As in Option Two, by spreading the ad-
justment over time, investors under Option Tree
would also be induced to pursue a wait-and-see at-
titude, just in case the unifcation’s pain would lead
to a policy interruption. By postponing efciency
gains, the lack of supply response could further
raise transition costs. In turn, by eventually induc-
ing the authorities to abandon the preannounced
adjustment path, this could end up validating the
initial skepticism and turn it into a self-fulflling
prophecy.
Option Four may be labeled fscally-cushioned big
bang. As in the case of Option One, the two exchange
rates would be unifed on day one at the (new) rate
of 24 pesos per dollar. However, to mitigate the ini-
tial pain, the shadow taxes and subsidies implicit
in the dual exchange rate would be replaced by ex-
plicit, revenue neutral, non-distortionary lump-sum
taxes and subsidies. Te latter would apply to each
enterprise that is currently conducting any transac-
tions at the CUC rate.
255
Take the example of an en-
terprise that sold X dollars at the CUC rate during a
full calendar year prior to the unifcation (hence re-
ceived in exchange X pesos). Afer unifcation, the
enterprise would now receive 24*X pesos at the uni-
fed exchange rate. Hence, on year one afer the uni-
fcation, the enterprise should be subject to a lump-
sum tax of 23*X pesos, leaving it with the same X
255
Te amount of, say, the annual subsidy or tax implicit in the exchange rate spread that is received or paid, respectively, by each individual enter-
prise is known because the central bank keeps records on the amounts of CUCs sold to or purchased from each enterprise.
Cuba’s Economic Change in Comparative Perspective
111
pesos afer the unifcation as before. Te lump-sum
tax would then be gradually phased out over a pe-
riod of n years. For example, the tax might decline
to 15*X pesos on year 2, 7*X pesos in year 3, and
might be altogether eliminated in year 4. Similarly,
an enterprise which beneftted from purchases of Y
dollars at the CUC exchange rate during a full cal-
endar year prior to unifcation would beneft from
a lump-sum subsidy equal to 23*Y pesos during a
full calendar year afer unifcation. As in the case of
the lump-sum taxes, the lump-sum subsidies would
then be gradually phased out.
Option Four would maximize efciency gains be-
cause it would allow from the start all economic ac-
tors (both old and new) to operate under a new set
of relative prices, hence market-oriented incentives.
Indeed, provided that appropriate safeguards are put
in place (more on this below), the enterprises’ deci-
sions on investment and production would be totally
unafected by the lump sum taxes and subsidies. In
efect, the virtue of lump-sum subsidies or taxes is
that their absolute magnitude does no change with
the intensity of production and efciency-enhancing
efort (or lack of efort) of the enterprise in question.
Yet, unlike Option One, Option Four would be far
more efective in shielding the economy from the
transition pains, frst by neutralizing them through
lump-sum taxes and subsidies and then by ofsetting
(much if not all of) their impact through efciency
gains. Tus, this option would much better address
the pain/gain balance.
256
It does require, however, an
adequate and non-trivial preparation, including ma-
jor concomitant changes in economic policy, as dis-
cussed in Section 7. Before doing so, however, in the
next two sections we illustrate the basic features of
Option Four (fscally-cushioned big bang) by sketch-
ing how it would be implemented in the case two key
sectors of the Cuban economy: the foreign-managed
tourism industry and the sector of importing state
enterprises.
THE FOREIGN-MANAGED TOURISM
INDUSTRY
Te current system for foreign-owned tourism ser-
vices entails very large efciency losses. Because for-
eign hotel operators must pay for labor in dollars at
the CUC exchange rate but the employee receives
her payment in CUP, the CUC-CUP spread implies
a heavy tax on local labor. Out of every dollar paid
by the hotel operator, the worker receives only 1/24
dollars (about 4 cents), with the state retaining the
remaining 23/24 dollars (about 96 cents) as a tax.
257
While this arguably allows the Cuban government
to capture and redistribute much of the rents from
the tourism industry, the tax distorts the allocation
of productive resources in a major way and the high
labor costs faced by the hotel operator severely dis-
courages job creation, undermines the quality of
hotel services, hinders new FDI, reduces tourism in-
fows, and promotes stealth employment (direct but
not legal sale of labor services) in the tourism sector.
A raw big bang unifcation (Option One) would be
traumatic on impact because of its major re-distri-
butional efects. As long as average wages remain
where they are today (which is likely to be the case if
hidden unemployment remains prevalent in Cuba)
and hotel prices do not decline (which is likely to
be the case as long as competitive pressures do not
build up), foreign operators would efectively ben-
eft from rents conducive to large windfall profts.
Conversely, fscal revenues would collapse, thereby
undermining the government’s ability to compen-
sate the losers and generating (via a widening fscal
defcit) demand-side upward pressures on prices.
Foreign operators would have more dollars to re-
patriate and this would weaken the balance of pay-
ments (BOP) to the extent that such repatriation is
not compensated by new FDI infows, which would
take time to materialize.
256
Unifying at the CUP rate (24 pesos per 1 USD), rather than any other rate, is critical to fully neutralize the initial income efect of the unifcation,
since the lump-sum taxes and subsidies would be computed that rate.
257
Labor payments are made not directly to the worker but to a state-managed employment agency.
Cuba’s Economic Change in Comparative Perspective
112
Instead, the windfall gains and losses that would
occur under a raw big bang could be initially fully
neutralized under a fscally-cushioned big bang (Op-
tion Four) through a dollar-equivalent lump-sum
tax paid by each hotel operator in accordance with
the average value of foreign exchange transactions
at the CUC rate it conducted over the previous
year(s). Once set for the frst year, the lump-sum
tax would be gradually phased out over a predeter-
mined period according to a preannounced phase-
down schedule. Because each operator would have
to pay the tax no matter what and the amount to
be paid would be independent of what the opera-
tor does (or does not do) in Cuba, the tax would be
non-distortionary (i.e., it would have no impact on
the operator’s investment or production decisions).
For the system to work, however, the operator
should not have the option to default on its tax ob-
ligations, for example by selling out its Cuban ven-
ture and exiting the country. Te simplest way to
prevent such default is via internationally binding
contracts, so that operators would have to honor
their commitments whether they leave Cuba or not.
As long as competitive pressures remain moder-
ate, the exchange rate unifcation, by lowering la-
bor costs, should boost the marginal proftability
of both existing investments (i.e., expanded hotel
occupation) and new investments (i.e., expanded
capacity). Tus, existing enterprises should expand
capacity and improve quality of service so as to se-
cure and expand their market share in anticipation
of greater competition. On impact (with the cur-
rent stock of FDI), employment and service quality
should rise, thereby raising tourism infows. As a
result, BOP and fscal pressures should ease. Over
time, the new rules of the game should boost new
FDI and promote local investment, further bene-
ftting the BOP and fscal accounts. Tis would in
turn allow for a smooth phasing down of the lump-
sum taxes. Over the longer term, labor productivity
should steadily increase, allowing for real wages to
rise and the real exchange rate to appreciate, much
as has happened in other economies in transition.
While the existing hotel operators would not incur
any competitive disadvantage (at the margin both
new and old would compete under the same plain
level feld), they could object to the deal by arguing
that the lump-sum taxes will erode their average
proftability looking forward. Tey could fear that as
new entrants come in and/or existing operators start
competing more aggressively against each other, ho-
tel prices would fall, thereby eroding their average
(afer lump-sum tax) proft margins. Yet, there are at
least three strong counter-arguments to this line of
reasoning. First, because the existing hotel operators
can take full advantage of their installed capacity and
knowledge of the local market, they should be the
main benefciaries of the initial boost in proftability
and can position themselves to take the best advan-
tage of any new business opportunity that becomes
available as a result of unifcation. Second, even if
proft margins become compressed due to increased
competition, volume increases should ofset much, if
not all, of the decline in proft margins. Tird, even in
the worst-case scenario of a transient decline in the
average proftability of existing Cuban hotels (due to
the payment of lump-sum taxes in a more compet-
itive environment), because the current owners (or
managers) of these hotels are mostly large interna-
tional chains, they should be able to absorb this de-
cline without much impact on their bottom line.
STATE-OWNED IMPORTI NG INDUSTRI ES
Consider now the case of the state-owned import-
ing industries. Again, the current system entails
huge efciency losses. Using the CUC rate for ba-
sic imports and the CUP rate for wages amounts
to subsidizing basic imports while penalizing the
consumption of non-basic imports. While this may
contribute to evening out welfare across Cubans,
the implicit subsidization weakens the central gov-
ernment’s fnances, penalizes the employment-gen-
erating production of importables and promotes
instead the importation of basic fnished goods or
of the inputs needed to produce them locally, there-
by pressuring the BOP. Exchange rate unifcation
should thus result over time in a much improved
allocation of resources as enterprises take full ad-
vantage of the low local labor costs and other com-
parative advantages.
Cuba’s Economic Change in Comparative Perspective
113
However, as in the case of the tourism industry, a
raw big bang unifcation could be quite traumatic on
impact. Tis would be the case if the state enterpris-
es responded to the unifcation as private enterpris-
es would, i.e., by seeking to cut their losses. Tey
would raise prices, thereby triggering supply-side
infation, and cut down on employment in the face
of declining demand, thereby exerting contraction-
ary pressures on the economy. While this would
improve the BOP and (depending on public fnance
responses) the central government fnances as well,
it would raise unemployment and erode the pur-
chasing power of low-paid workers.
Alternatively (and perhaps more realistically), the
initial impact under a raw big bang would just afect
the public enterprises’ accounts and nothing else.
Te enterprises would continue importing and pro-
ducing in the same fashion but just run large def-
cits that would need to be covered by high and now
explicit subsidies, as the subsidies implicit in the
previous (dual) exchange rate system would come
to the surface. Te basic problem with this second
scenario, however, is that granting such subsidies
automatically would fundamentally undermine the
central government fnances (as the government
would no longer receive the income from the ex-
change rate spread) while taking away the incen-
tives for public enterprises to become more respon-
sive to market signals, cut their costs, and improve
their efciency (business for them would basically
continue as usual).
Option Four (fscally-cushioned big bang) would
obviate the above problems by replacing the inef-
cient import subsidy with a dollar-equivalent lump-
sum subsidy that initially fully neutralizes the fscal,
BOP, and infationary impacts of the exchange rate
unifcation. As in the case of the tourism industry,
the subsidies would be gradually phased out over a
period of years. Tis would immediately enhance
budgetary and public sector transparency. In par-
ticular, loss-making enterprises will come out ful-
ly into the open. Te explicit subsidies should thus
help promote accountability and market respon-
siveness. Te fact that the unifed exchange rate
would apply to all foreign exchange transactions
should help enhance competition, hence market
discipline and responsiveness. Indeed, all enterpris-
es (existing state enterprises as well as potential new
private entrants or emerging public competitors)
would operate from the start under the new rules
of the game.
258
Tis being said, for public enterprises to alter their
behavior it is crucial that the unifcation be accom-
panied, as soon as feasible, by appropriate reforms
of their governance as well as by an in-depth re-
form of the scheme for subsidizing basic goods.
Otherwise, the enterprises could, as in Option one,
continue conducting their business as usual. Tey
could simply wait for the government to extend
the subsidies indefnitely into the future under the
threat of social upheavals induced by across-the-
board subsidy reductions leading to price increas-
es. To prevent such outcome, the public enterpris-
es should be initially required, as a counterpart to
the subsidies they will receive, to set their pricing
decisions so as to limit price increases, particular-
ly on the most basic goods (indeed, the subsidies
should make stable prices consistent with proft-
ability). At the same time, however, to ensure that
efciency gains do materialize, the enterprises’ pro-
duction decisions (i.e., the choice of inputs) should
be nudged towards cost minimization and prof-
it maximization. Indeed, this is where the mix of
the government’s control of public enterprises and
market forces should come handy, one focusing on
258
Te option of staggering the fscally-cushioned big bang unifcation over a period of time on a sector-by-sector basis remains open. Tus, sector
A (say, the tourism industry) could enter at once the single exchange rate regime while sector B (say, the state-owned importing industries or the
exporting sector) could remain for a little while under the old regime. Tis option might give the authorities (or the afected enterprises in any
given sector) more preparation time where absolutely needed. Tis would be superior to Option Tree (economy-wide gradualism) in that, even
when applied on a sector-by-sector basis, the non-distortive nature of lump-sum taxes and subsidies would more efectively stimulate decisions
to invest and raise production and, hence, yield greater efciency gains from the outset. As long as all enterprises in any given sector are brought
it together into the unifcation scheme (instead of phasing in only a few, discretionally selected frms within a sector, while leaving other frms
within the same sector shielded from competition), the resulting distortions should be limited and the market complications manageable.
Cuba’s Economic Change in Comparative Perspective
114
(temporarily) stable prices while the other focuses
on proft maximization.
However, notwithstanding the efciency gains ob-
tained over time by enterprises as they reorganize
their production under the new market prices,
some price increases will become unavoidable as
subsidies to enterprises are gradually phased out. A
comprehensive reform of the public subsidy scheme
will therefore also be needed in due course to limit
the social impact of such increases while limiting
the fscal costs of any remaining subsidies. We ex-
pand below on both of these key issues.
HABI LITATI NG REFORMS AND
SEQUENCI NG ISSUES
As noted, for the fscally-cushioned big bang ap-
proach to work optimally, there is a need for careful
preparation, including the introduction (not nec-
essarily before the unifcation but certainly as soon
as feasible) of a number of crucial habilitating re-
forms. Te frst area that would require habilitating
reforms is the fscal area. As discussed earlier, the
shadow taxes and subsidies implicit in the current
dual exchange rate system will frst need to be re-
placed by transitional lump-sum taxes and subsi-
dies calculated for each enterprise afected by the
exchange rate unifcation. Subsequently, however,
the lump-sum taxes and subsidies will need to be
themselves replaced by permanent, well-designed
taxes and subsidies.
On the tax side, the government may need to re-
visit and adapt the tax system from the perspective
of a new long-term, market-oriented environment.
Tis may include frst of all revising the taxes that
have linkages to the foreign exchange market, such
as FDI or trade (import and export) taxation. But
it may also involve introducing or touching up for
revenue mobilization purposes some domestic tax-
es such as the value added tax.
On the subsidy side, the government may likely need to
introduce a well-focused system of (cash or coupon)
transfers targeted to the most basic goods and lowest
income households. As noted above, unless this is
done, the government would probably be facing an
unsavory choice between a rapid but socially traumat-
ic phasing-out of the subsidies and an indefnite pro-
longation of an unwieldy, inefcient, costly (and hence
ultimately unsustainable) subsidy scheme.
In all cases, a healthy fscal position would facilitate the
transition. A pre-unifcation fscal surplus could allow
the government to accumulate foreign reserves that
could subsequently be used to “fnance” temporary
post-unifcation BOP defcits. A strong post-unifcation
fscal position would greatly ease monetary control.
At the same time, public sector governance reforms
would also be essential to ensure that state enterpris-
es become more responsive to market signals. Enter-
prises should be given market-compatible mandates
(i.e., cost minimization and proft maximization)
and their performance assessed (and their managers
rewarded) accordingly. Based on the newly emerging
market prices, accounting practices should be simul-
taneously revisited to identify unviable state enter-
prises and facilitate their closure or restructuring.
Inter-enterprise claims across balance sheets should
be netted out and restructured as needed.
Tese governance reforms should ideally be ac-
companied (or followed as soon as possible) by
market-oriented reforms. In particular, the entry
of non-state frms should be encouraged to boost
supply, both directly and indirectly (i.e., by exert-
ing competitive pressures on state enterprises). It
would also be desirable for efciency purposes to
disengage state frms from intermediating the busi-
ness activities of private frms and citizens by, for
example, allowing companies in the tourism sector
that have foreign capital participation to select and
hire their workers directly.
259
259
Under the fscally-cushioned unifcation option, the fscal loss that would result from allowing companies in the tourism sector to hire employees
directly would be fully ofset by the fscal gain associated with the lump-sum tax on these companies.
Cuba’s Economic Change in Comparative Perspective
115
To maintain infation under control and allow the
exchange rate to play a more substantial bufering
role, the scheme will require the gradual strength-
ening of the central bank’s monetary instruments and
management capacity. Tis in turn is likely to require
reforms to facilitate the gradual development of the
interbank and exchange rate markets, as well as a
sound and more vibrant fnancial intermediation.
260
A fexible exchange rate regime, if feasible from
the start, would arguably be desirable, as it would
help smooth out the unifcation process. In the
short term, it would help identify the equilibrium
post-unifcation exchange rate and reduce the risks
of emerging exchange rate misalignments. Indeed,
as frms previously transacting at the CUC rate start
to respond to the change in market prices, there-
by lowering the demands for imports and raising
the supply of exports, some appreciation of the ex-
change rate is likely to materialize. Over the longer
term, further appreciation pressures are likely as ef-
fciency gains translate into purchasing power gains
(hence real exchange rate appreciations). A fexible
exchange rate system would thus have the bene-
ft of allowing the real exchange rate to appreciate
through nominal appreciation rather than infation.
At the same time, it would help absorb external
shocks and limit de facto dollarization.
However, a fexible exchange rate regime may not
be feasible because the reforms to establish the mar-
ket and institutional infrastructure necessary to al-
low an independent monetary policy with exchange
rate fexibility will take time to implement, and
waiting for these conditions to be in place might
excessively delay the unifcation. Moreover, main-
taining a fxed exchange rate immediately afer uni-
fcation might help stabilize expectations at a time
of substantial, potentially discomforting changes. It
might thus be preferable to frst unify the exchange
rate system and then move gradually to a more fex-
ible exchange rate system, following a three-phased
agenda of monetary reform:
• Initial phase: a fxed exchange rate with con-
trol of central bank credit expansion and of
excess liquidity in the interbank market
• Intermediate phase: a fexible (but managed) ex-
change rate with monetary-aggregate targeting
• Final phase: a still managed but more fexible
exchange rate with infation targeting
One fnal issue to be considered is currency choice
and unifcation. As noted earlier, this is a concep-
tually and practically diferent issue than the one
that has occupied this paper, namely, the choice and
unifcation of the exchange rate. Te issue of cur-
rency unifcation arises because Cuba currently has,
in addition to two exchange rates, two currencies
(the CUC and the CUP) that act as units of account,
means of exchange, and stores of value.
261
When it comes to the issue of currency choice and
unifcation, there are three main options: (i) for-
mally adopting the dollar as the single currency;
(ii) maintaining a dual currency system; and (iii)
adopting the (new, post-unifcation) Cuban peso
as the single currency. Te pros and cons of these
three options are as follows:
• Full dollarization would be unwise, as it
would increase Cuba’s vulnerability to adverse
terms of trade or other large shocks, especial-
ly by magnifying their recessionary impact.
It would rely on infation or defation as the
main channels for real exchange rate adjust-
ment. Given that shocks to Cuba are not nec-
essarily symmetric to shocks to the United
States (the country that issues of the dollar),
the equilibrium real exchange rate in Cuba
would need to adjust in directions that would
not necessarily coincide with those needed
by the U.S. economy. Hence, under full dol-
larization, Cuba would lose the option to use
its own currency as a policy instrument and
shock absorber.
260
See Vidal and Villanueva.
261
Actually, Cuba has more than two currencies if the dollars or Euros that Cubans hold in cash are taken into account.
Cuba’s Economic Change in Comparative Perspective
116
• A dual currency system, whereby the new
(post-unifcation) peso coexists with the
CUC may have some advantages. In this
case, it would be better if CUC bills disappear
and the CUC continues to exist solely as an
electronic unit of account in which bank de-
posits and loans could be denominated. Te
CUC would retain the one-to-one relation
and convertibility to the U.S. dollar, which
would be in turn backed by a currency board
arrangement. Maintaining the option of
saving and lending in CUCs might help the
economy re-monetize while confdence in
the new peso builds up. However, as long pri-
vate citizens prefer dollars in cash, the shif of
savings towards CUC-denominated deposits
is likely to be limited. Instead, by fragmenting
credit and reducing market depth, the dual
currency can hinder and delay the process of
strengthening monetary management. At the
same time, as long as state enterprises con-
tinue to be the main depositors, there is little
risk of a depositor fight into dollar cash.
• Full peso-ization is therefore arguably the
preferred option. It would imply that, simul-
taneously with the exchange rate unifcation,
all CUC are mandatorily converted into new
pesos.
Cuba’s Economic Change in Comparative Perspective
117
Omar Everleny Pérez Villanueva is professor at the
Center for the Study of the Cuban Economy, Uni-
versity of Havana. Pérez Villanueva earned his doc-
torate at the University of Havana, M.A. at CIDE/
AC (Mexico) and B.A. at the University of Havana.
He has taught or lectured at various universities in
Cuba, the United States, Japan, France, Spain, Bra-
zil, Puerto Rico, Mexico, China and other countries.
He has published more than 70 works on the Cuban
and the international economies. He is co-editor
of Cuban Economy at the Start of the Twenty-First
Century (with Jorge Domínguez and L. Barbe-
ria) and “Cuban Economic and Social Development:
Policy Reforms and Challenges in the 21st Century;
and is editor of Refexiones sobre la economía cuba-
na; Miradas a la economía cubana, volumes I and II;
y Cincuenta años de la economía cubana.
Richard Feinberg is professor of international po-
litical economy at the Graduate School of Interna-
tional Relations and Pacifc Studies, University of
California, San Diego and a nonresident senior fel-
low with the Brookings Institution. Feinberg served
as special assistant to President Clinton and senior
director of the National Security Council’s Ofce of
Inter-American Afairs. He has held positions on
the State Department’s policy planning staf and
worked as an international economist in the U.S.
Treasury Department’s Ofce of International Af-
fairs. He earned his Ph.D. in international econom-
ics from Stanford University and a B.A. from Brown
University.
Carmelo Mesa-Lago is distinguished service pro-
fessor emeritus of Economics and Latin American
Studies at the University of Pittsburgh and has been
a visiting professor or researcher in Argentina, Ger-
many, Mexico, Spain, Uruguay, United Kingdom
and the United States, as well as a lecturer in 39
countries. He is the author of 82 books/pamphlets
and 275 articles/chapters published in seven lan-
guages in 34 countries, on the Cuban economy, so-
cial security and comparative economic systems and
was founder and editor for 18 years of Cuban Stud-
ies. His most recent book is Cuba Under Raul Cas-
tro: Assessing the Reforms (with Jorge Pérez-López,
Lynne Reinner, 2013). He has worked throughout
Latin America and the Caribbean as ECLAC re-
gional advisor, consultant with most international
fnancial organizations, several U.N. branches and
national/foreign foundations; was president of the
Latin American Studies Association; is a member
of the National Academy of Social Insurance and
has received numerous awards including the ILO
International Prize on Decent Work (shared with
Nelson Mandela).
Richard Newfarmer works with the International
Growth Centre as the country director for Rwan-
da, Uganda and South Sudan. He is also a senior
fellow (non-resident) at the World Trade Institute
in Bern, Switzerland and a distinguished research-
er at the North-South Institute (Canada). He con-
sults with international organizations, including
the World Bank, the Organization of Economic Co-
operation and Development and the International
Trade Centre. Previously, he was the World Bank’s
special representative to the United Nations and
World Trade Organization, based in Geneva, Swit-
zerland. Recently, he co-authored “Trade and Em-
ployment in a Fast Changing World” for the OECD
(2012), and co-edited Breaking into New Markets:
Emerging Lessons for Export Diversifcation. Prior
to assuming the post in Geneva, he was economic
advisor in the International Trade Department and
in the Prospects Group of the World Bank, and led
the team that produced Global Economic Prospects
2007: Managing the Next Wave of Globalization. He
was lead economist in the Chief Economist’s Ofce
of East Asia during the Asia crisis (1997-2000), lead
Cuba’s Economic Change in Comparative Perspective
Working Group Member Biographies
Cuba’s Economic Change in Comparative Perspective
118
economist for China, and chief of the Industry and
Energy Division in the China Department. He was
also principal economist for Argentina in the Latin
American region (1988–1992) and has also worked
on Chile, Brazil and other Latin American coun-
tries. Prior to joining the Bank, Mr. Newfarmer was
a senior fellow at the Overseas Development Coun-
cil, and was on the economics faculty at the Univer-
sity of Notre Dame. Mr. Newfarmer holds a Ph.D.
and two M.A.s from the University of Wisconsin,
and a B.A. (Highest Honors) from the University of
California at Santa Cruz.
Guillermo Perry is a professor at the Universidad
de los Andes in Colombia, as well as a research as-
sociate at Fedesarrollo, Colombia and a non-resi-
dent fellow at the Center for Global Development,
Washington D.C. He was formerly chief economist
for Latin America and the Caribbean at the World
Bank from 1996 to 2007. Prior to joining the World
Bank, Perry served his native Colombia in various
government positions, including Minister of Fi-
nance and Public Credit, Minister of Mining and
Energy, and director of the General Directorate
of National Taxes. He was also director of two of
Colombia’s leading economic think-tanks (Fede-
sarrollo and CEDE) and has been professor at Uni-
versidad de los Andes and Universidad Nacional de
Colombia. He has also published numerous articles
and books on macroeconomics, fscal policy, fnan-
cial policy, international fnance, political economy
and energy policy issues. Perry has also published
numerous articles on macroeconomics, fscal pol-
icy, fnancial policy, international fnance, and en-
ergy policy issues. He holds a Ph.D. in Economics
and Operational Research from the Massachusetts
Institute of Technology.
Ted Piccone is a senior fellow with the Project on
International Order and Strategy and Latin Amer-
ica Initiative in the Foreign Policy Program at the
Brookings Institution. Previously, he served as the
acting vice president and director (2013-14) and
deputy director (2008-13) of the Foreign Policy
Program. From 2001-2008, he was the executive di-
rector and co-founder of the Democracy Coalition
Project (DCP), a research and advocacy organiza-
tion working to promote international cooperation
for democracy and human rights around the world.
Mr. Piccone served eight years as a senior foreign
policy advisor in the Clinton Administration cov-
ering Latin America and other issues on the Secre-
tary of State’s policy planning staf, at the National
Security Council and in the Ofce of the Secretary
of Defense. Mr. Piccone also served as counsel for
the United Nations Truth Commission in El Salva-
dor and as press secretary to U.S. Rep. Bob Edgar.
Mr. Piccone has written and published articles on
U.S.-Latin American relations, international orga-
nizations, and human rights and democracy pro-
motion policy. He received a law degree from Co-
lumbia University and a B.A. in history magna cum
laude from the University of Pennsylvania.
Antonio Romero is a Cuban economist with post-
graduate studies in International Relations and De-
velopment from the International Institute of Social
Studies in La Haya, Holland and a PhD in Economics
from the University of Havana. He currently works
as a professor/researcher at the Center for Research
on the International Economy (CIEI) at the Univer-
sity of Havana, and the chair of the International
Trade and Economic Integration Department. Since
November 2012 he has been Chair of the Caribbe-
an Studies Department at the University of Havana.
Since 1984 he has taught various courses at the Uni-
versity of Havana, including “International Econom-
ic Relations,” “International Economics,” “Analysis of
Economic Situations,” and “Economic and Develop-
ment Policies in Latin America and the Caribbean.”
He has spoken at conferences and taught postgrad-
uate classes at universities in Hungary, Argentina,
Mexico, the United Arab Emirates, Chile, Belgium,
Bolivia, Canada, Colombia, the United States, France
and Spain. From January 1992 to April 2002 he was
director of the Center for Research on the Interna-
tional Economy (CIEI) at the University of Havana.
From April 2002 to December 2011 he worked as an
international civil servant in the Permanent Secre-
tariat at the Latin American and Caribbean Eco-
nomic System (SELA).
Cuba’s Economic Change in Comparative Perspective
119
Alberto Trejos joined INCAE in Costa Rica as
a full professor in 1997. Prior to this, he taught at
Northwestern University from 1994 to 1999. He
has had academic relationships with the Universi-
ty of Michigan, University of Miami and Institut de
Anàlisi Econòmica de Barcelona. From 2002-2004
he held the position of Minister of Foreign Trade
for Costa Rica. Trejos has served as a consultant
at think tanks and companies in the United States,
Latin America, Europe and Africa and has been a
board member for several Costa Rican corporations
and a partner at CEFSA (Consejeros Económicos y
Financieros), the largest bureau of macroeconomic
analysis in Costa Rica. He is widely published and
his pieces include “Trade in Intermediate Goods
and Total Factor Productivity” with Pedro Ferreira,
Review of Economic Dynamics 14-3, July 2011 and
“Political and Institutional Obstacles to Reform”
with Jorge Cornick in Growing Pains in Latin Amer-
ica, L. Rojas-Suarez (ed.), Center for Global Devel-
opment, 2009. Trejos holds a Ph.D. in Economics
from the University of Pennsylvania.
Juan Triana Cordoví is graduate professor at the Cen-
ter for the Study of the Cuban Economy (CEEC) at
the University of Havana. His publications include
Miradas a la economía cubana III, (Editorial Camino:
Havana, 2012; 50 años de Economía Cubana, (Edito-
rial Ciencias Sociales, 2011); and “La Universidad, la
economía y el desarrollo,” (Editorial Siglo XXI, March
2010). He has taught undergraduate and graduate
classes on the Cuban economy and universal econom-
ic thought in the Economics Department at the Uni-
versity of Havana. He has spoken at conferences on the
Cuban economy and development problems at more
than ten universities outside Cuba. He speaks at more
than 30 conferences a year on the Cuban economy, as
well as academic, government, nongovernmental and
foreign institutions. His education includes a Doctor-
ate of Economics from the University of Havana, a
Master’s degree in Cuban and Latin American Studies
from the University of Havana, an associate’s degree
in Agricultural Planning and Development Policies
from FAO-PROCAPLAN, United Nations, Buenos
Aires and a Bachelor’s degree in Economics from the
University of Havana.
Ricardo Torres Pérez holds a doctorate of econom-
ics from the University of Havana, where he is an
assistant professor in the Center for the Study of the
Cuban Economy (CEEC). His includes a certifcate
in Econometrics from the University of the Repub-
lic-University of Havana and a Master in Econom-
ics from the University of Havana. He has published
articles in the Harvard International Review and
Latin American Perspectives. His most recent pub-
lications include “Structural Problems and Changes
in Cuba’s Economic Model” in No More Free Lunch:
Refections in Cuba’s Reform Process and Challeng-
es for Transformation, (New York: Springer) and
“Las Transformaciones del Modelo Económico:
Cuba Frente a la Nueva Realidad Contemporánea”
in Cuba: La Ruta Necesaria del Cambio Económico,
(Havana: Ciencias Sociales). He has participated in
events and seminars in various countries including
the United States, the Dominican Republic, Spain,
Norway, Japan and South Africa.
Pavel Vidal Alejandro received his Doctorate in
Economic Sciences in 2008. He is currently a pro-
fessor at the Pontifcia Javeriana Cali University in
Colombia. Previously he worked at the Center for
the Study of the Cuban Economy (CEEC) at the
University of Havana (2006-2012) and as a specialist
at the Central Bank of Cuba in the Monetary Policy
Directorate (1999-2006). He has done several train-
ing stints in various central banks in Latin America.
In 2010 and 2011 he completed a research stint at
the University of Harvard, the Complutense Uni-
versity of Madrid and the Institute of Developing
Economies (Japan External Trade Organization),
and published articles in the Journal of Latin Ameri-
can Studies, the International Journal of Cuban Stud-
ies, the Real Instituto Elcano and Socialism and De-
mocracy. He has published two editions of the book
Elementos de Econometría: Aplicaciones para Cuba.
He has contributed chapters to the following books:
Cuba en Tiempos de Cambio; Miradas a la Economía
Cubana I and II; Refexiones de la Economía Cuba-
na; and Cuban Economic and Social Development:
Policy Reforms and Challenges in the 21st Century.
Foreign Policy at Brookings
1775 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Brookings.edu/foreignpolicy
doc_572972793.pdf
Cubas Economic Change In Comparative Perspective
NOVEMBER 2014
Cuba’s Economic Change in
Comparative Perspective
EDI TED BY:
RI CHARD E. FEI NBERG AND TED PI CCONE
Latin America Initiative
Foreign Policy at BROOKINGS
Cuba’s Economic Change in Comparative Perspective
i
Preface
Since Raúl Castro assumed the presidency in 2008,
Cuba has been engaged in a process of updating
its economic model aimed at modernizing state-
owned enterprises and institutions and opening
up more space for the non-state sector. Te highest
authorities are involved in a government-wide ef-
fort to implement this economic policy agenda. Te
Economic and Social Policy Guidelines (known as
the Lineamientos) passed by the Sixth Congress
of the Communist Party of Cuba in 2011 set forth
steps to put Cuba on a new growth path, including
identifying the need to unify the currency, among
other necessary changes.
Some important progress has already been made.
Te emergence of small-scale business is visible
throughout the island, demonstrating the entrepre-
neurial instincts and talents of the Cuban people.
Most Cubans are now free to travel abroad and use
of mobile telephones and the internet are slowly ex-
panding. To improve its international creditworthi-
ness, Cuba has successfully renegotiated some of its
outstanding bilateral debts. Furthermore, in 2013-
2014, the Cuban government announced a series of
structural reforms which, if implemented, could be
major steps forward. Deep reform of the system of
state enterprises, begun as a pilot project, has been
generalized, promising more autonomy for frms to
retain earnings and make decisions regarding invest-
ments, employment and prices. Te government has
authorized the formation of non-state cooperatives
outside of the agricultural sector. Recognizing the
need for foreign capital and technology, in spring
2014 the government announced with considerable
fanfare a new foreign investment law; it remains to
be seen if it will yield important new projects. Te
difcult tasks of monetary reform and currency re-
unifcation are also on the ofcial agenda.
Looking forward, many challenges remain to shap-
ing comprehensive and coherent economic strate-
gies that encourage sustainable economic growth,
facilitate Cuba’s international economic integration,
and contribute to the efciency and competitive-
ness of Cuba’s economy while simultaneously safe-
guarding the revolution’s gains in social inclusion
and equity. To confront these challenges, it is useful
to look to other international examples of economic
restructuring to identify best practices for inspira-
tion and possible application in the Cuban case.
In support of this efort, scholars at the Brookings
Institution’s Latin American Initiative and econo-
mists at the University of Havana’s Center for the
Study of the Cuban Economy (CEEC) and Center
for Research on the International Economy (CIEI)
embarked on a joint research project to examine
Cuba’s economic reforms from a comparative per-
spective. Te project delved into three specifc areas
of study: economic growth with equity, monetary
policy, and institutional change. Te comparative
perspectives focused mainly on the Latin American
and Caribbean region while also incorporating rel-
evant experiences from other regions like Eastern
Europe and Asia. Te papers on these topics were
presented by the authors at three workshops held
over the course of a year: Washington, DC (May
2013), Havana, Cuba (September 2013) and Chica-
go, Illinois (May 2014). Tey were subsequently re-
vised following discussions at the three workshops
among convened experts, including colleagues
from four international fnancial institutions acting
in their individual capacities. An executive summa-
ry, along with the fnal products and their recom-
mendations, are collected in this edited volume.
Each paper is the sole responsibility of its author(s).
Cuba’s Economic Change in Comparative Perspective
ii
WORKI NG GROUP MEMBERS
Omar Everleny Pérez Villanueva (Center for
the Study of the Cuban Economy – University of
Havana)
Richard Feinberg (University of California, San
Diego and Brookings)
Carmelo Mesa-Lago (University of Pittsburgh)
Richard Newfarmer (International Growth
Centre)
Guillermo Perry (Universidad de los Andes)
Ted Piccone (Brookings)
Antonio F. Romero (Center for Research on the
International Economy – University of Havana)
Alberto Trejos (Instituto Centroamericano de
Administración de Empresas)
Juan Triana Cordoví (Center for the Study of the
Cuban Economy – University of Havana)
Ricardo Torres Pérez (Center for the Study of the
Cuban Economy – University of Havana)
Pavel Vidal Alejandro (Pontifcia Universidad
Javeriana de Cali)
INVITED EXPERTS
Humberto Blanco Rosales (Center for the Study
of the Cuban Economy – University of Havana)
Augusto de la Torre (World Bank)
Raj Desai (Brookings)
Saira Pons Pérez (Center for the Study of the
Cuban Economy – University of Havana)
Andrew Powell (Inter-American Development
Bank)
Germán Ríos (CAF Development Bank of Latin
America)
Rafael Romeu (International Monetary Fund)
Jose Juan Ruíz (Inter-American Development
Bank)
Alejandro Santos (International Monetary Fund)
Harold Trinkunas (Brookings)
Cuba’s Economic Change in Comparative Perspective
iii
Acknowledgements
Te editors are deeply grateful to Ashley Miller for
her dedication, professionalism and skill in manag-
ing all aspects of what is inevitably a complex un-
dertaking. We would also like to pay special thanks
to Caitlyn Davis, Carmen Muñoz and Kevin Tuta-
sig for their assistance with translations, production
and logistics.
Support for this publication was generously provid-
ed by donors to the Foreign Policy program’s Lat-
in America Initiative at Brookings. Te workshop
series was made possible by donors including the
Government of Norway.
Te Brookings Institution is a private non-proft organization. Its
mission is to conduct high quality, independent research and, based
on that research, to provide innovative, practical recommendations for
policymakers and the public. Te Brookings Institution does not take
positions on any policy issues. Te conclusions and recommendations of
any Brookings research are solely those of its author(s), and do not refect
the views of the Institution, its management, its other scholars, or donors.
Cuba’s Economic Change in Comparative Perspective
iv
Table of Contents
Introduction and Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Richard Feinberg
Policies for Economic Growth: Cuba’s New Era. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Juan Triana Cordovi and Ricardo Torres Pérez
Economic Transformations and Institutional Changes in Cuba . . . . . . . . . . . . . . . . . . . . . . . . 29
Antonio F. Romero Gómez
Institutional Changes of Cuba’s Economic-Social Reforms:
State and Market Roles, Progress, Hurdles, Comparisons, Monitoring and Effects . . . . . . .48
Carmelo Mesa-Lago
Economic Growth and Restructuring through Trade and FDI:
Costa Rican Experiences of Interest to Cuba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Alberto Trejos
Monetary Reform in Cuba Leading up to 2016: Between Gradualism
and the “Big Bang”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva
Exchange Rate Uni?cation: The Cuban Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
Augusto de la Torre and Alain Ize
Cuba’s Economic Change in Comparative Perspective
Working Group Member Biographies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117
Cuba’s Economic Change in Comparative Perspective
1
Introduction and Overview
Richard E. Feinberg
T
he Cuban economy has been mired in stag-
nation for over two decades. Living standards
have declined, the revolution’s historic gains in
universal health and education and in social equal-
ity are eroding, the outdated productive apparatus
is sufering from de-capitalization and technolog-
ical obsolescence, and the nation’s balance of pay-
ments is under severe strain. Frustrated by the lack
of promising opportunities, too many of the best
educated youth are exiting the island. In response
to these accumulated challenges, the Cuban gov-
ernment has initiated a process of gradual but in-
creasingly comprehensive economic reforms that
eventually may resemble a form of mixed market
socialism open to the international economy.
Te six papers in this volume explore the roots of the
crisis in the Soviet-style central planning adopted de-
cades earlier, assess the initial reform measures under-
taken since Raúl Castro assumed the presidency in
2008, analyze the many obstacles to be overcome, and
suggest some ways forward. Among the many policy
recommendations, the Cuban government should
recognize the inter-related nature of economic vari-
ables—too ofen isolated reforms introduce further
distortions and fail to produce positive outcomes—and
should make clear its strategic development model.
More transparent goals could improve the coherency of
policymaking and help mitigate public anxieties about
the future.
Readers of the six papers will appreciate that Cu-
ba’s changing model has potential: it can build upon
the gains of the revolution, notably in human capi-
tal formation, better exploit its valuable natural re-
sources in a sustainable manner, and take advantage
of its strong and diverse diplomatic relations. Cuba
may also be able to exploit its geographic location
at the crossroads of the Caribbean—if the United
States fnally relaxes its onerous economic and f-
nancial sanctions.
Te authors welcome the growing list of policy
initiatives that expand space for private initiative
and market signals, even as they underscore that
the emergent private sector labors under many re-
strictions and state ownership and central planning
maintain their dominance. Te frst paper by Cu-
ban economists Juan Triana Cordoví and Ricardo
Torres Pérez focuses on the need to rebalance prior-
ities and to give greater emphasis to efciency and
growth as a sine qua non for sustaining social goals.
A new development model, in their view, should al-
low much more space to market mechanisms and
openness to global commerce and investment, but
a smart state would still perform a great many stra-
tegic functions in the economy.
Economists have increasingly recognized that insti-
tutions play a critical role in economic development.
In their companion contributions, Antonio F. Rome-
ro Gómez and Carmelo Mesa-Lago defne institu-
tions broadly, to encompass not only formal state
agencies, but also public-private relations and regu-
latory regimes as well as societal norms and values.
Understood in this broad sense, getting institutions
Cuba’s Economic Change in Comparative Perspective
2
right is an immense challenge. While their assess-
ments difer in some respects, both Romero and
Mesa-Lago make clear that Cuba has just begun its
long journey of institutional renovation.
Mesa-Lago also ofers comparative commentaries
from the reform experiences of China and Viet-
nam, and of various Latin American nations. In
comparison, Mesa-Lago fnds that Cuba lags be-
hind in many aspects, but could draw useful les-
sons, notably in freeing up agricultural producers,
guaranteeing property rights, and welcoming dias-
pora capital. It should be said, however, that those
Asian nations did not achieve their current levels of
development in a single day and are still engaged in
processes of continual improvements. Cuban social
scientists are carefully studying China and Viet-
nam: where countries exhibit political continuity,
economic gradualism appears a better ft than an
all-embracing and uprooting “big bang.”
Like Cuba, Costa Rica is a relatively small, middle-in-
come economy located in the Caribbean Basin. Cos-
ta Rican economist and former Foreign Trade Min-
ister Alberto Trejos explains his nation’s economic
successes, rooted in human capital development and
bold, decisive engagement in the global economy.
Te Costa Rica case demonstrates that economic
openness and social progress are not exclusive; in-
deed, the former may be a pre-requisite for the latter.
Notwithstanding obvious diferences, the parallels
between the Costa Rican and Cuban cases are strik-
ing and suggest some ways forward for Cuba.
Te fnal two chapters tackle two critical, interre-
lated hurdles: monetary reform and exchange-rate
unifcation. Tese issues pose extraordinarily tough
challenges, from both technical and political points
of view. Augusto de la Torre and Alain Ize, econo-
mists with the World Bank writing in their personal
capacities and drawing on vast international expe-
riences, argue strongly for achieving exchange rate
unifcation in a single blow. A single, competitive
exchange rate would immediately eliminate many
of the distortions plaguing the Cuban economy,
provide positive incentives to exporters, and set the
economy on a more efcient, upward growth path.
But de la Torre and Ize appreciate the dangers ahead,
and suggest measures to accelerate and cushion the
transition. Cuban economists Pavel Vidal and Omar
Everleny Peréz agree that currency unifcation is
necessary, but prescribe a somewhat more gradual
path in line with Cuba’s overall more cautious ap-
proach to reform. Moreover, an intermediate stage
of multiple exchange rates would give enterprises
more time to adjust to new market incentives.
If the crux of the matter is Cuba’s internal econom-
ic management, without a doubt many of the pro-
posed reforms are made much more difcult by the
comprehensive and punitive U.S. economic sanc-
tions. Ironically, the extraordinarily prolonged U.S.
sanctions are making it more difcult for Cuba to
adopt a more market-oriented economic system.
TOWARD A NEW GROWTH MODEL
Te entry by Juan Triana and Ricardo Torres ofers
a clear-eyed evaluation of past errors that have cre-
ated an economy burdened with severe distortions
and high transactions costs. Beref of efcient price
signals, the economy is laden with overly central-
ized, multi-layered bureaucracies unable to respond
promptly to economic opportunities. Tese ver-
tical, silo-ed structures further inhibit horizontal
exchanges across sectors of the economy and prej-
udice local decision making and provincial initia-
tive. Too ofen, the construction of socialism took
precedence over economic development: the social
agenda, however vital, overshadowed efciency
in resource allocation and labor productivity. Te
limited economic reforms of the post-Soviet 1990s,
which did nearly cut in half the number of minis-
tries and state entities, nevertheless fell short, due to
the restrictive regulatory framework and “ideolog-
ical and political prejudices regarding the market
and foreign investment.” Over the last two decades,
growth averaged an anemic 1.8 percent per year,
among the weakest in Latin America, and gross
capital formation (2000-2011) registered a woeful-
ly insufcient 10.3 percent, half of the hemispheric
average. A clear lesson from the Cuban experience:
Cuba’s Economic Change in Comparative Perspective
3
without growth, social gains cannot be maintained.
To be sustainable, progressive politics require eco-
nomic prosperity.
For example, Triana and Torres attribute the se-
vere housing shortage—among the most pressing
social needs—to defciencies in the state banking
system and the absence of capital markets. Te
construction industry sufers from “technological
backwardness, organizational problems, low levels
of quality and systematic failure to meet deadlines,
lack of motivation and scarcity of skilled labor, and
de-capitalization of the national base of production
of building materials, among others.”
Te good news is that the 2011 reform guidelines
(“Lineamientos”) adopted by the Cuban govern-
ment and Communist Party confrm these lessons,
and set forth 313 steps to elevate Cuba onto a new
growth path. Te Lineamientos, however, read like
a bureaucratic compromise, accepting the impor-
tance of market-oriented reforms but reafrming
the hegemony of socialist planning and state-owned
enterprises. As many commentators have noted, the
Lineamientos lack clarity with regard to Cuba’s fu-
ture development model.
Triana and Torres propose a future development
model that prioritizes growth and stresses market
signals, and progressively reduces the state admin-
istrative apparatus in favor of indirect regulation
with clear rules and incentives, compensating for
the “excesses in equality” with elevated standards
of private consumption and access to better quality
public services. An active industrial policy can help
to construct dynamic competitive advantages: bu-
reaucratic red tape has inhibited export initiatives,
leaving Cuba with a low export per capita ratio rela-
tive to other Latin American nations (U.S. sanctions
have also hurt). To complement low levels of nation-
al savings, Cuba must ofer a welcoming hand to for-
eign investment, not only for fnancing but also to
gain access to new technologies and markets and to
insert Cuban frms into regional and global supply
chains. Attracting at the outset a few large multina-
tional frms could serve as a valuable demonstration
on global capital markets. Moreover, the authors
suggest, Cuba should gradually engage with the
international fnancial institutions, including the
Bretton Woods system (the International Monetary
Fund and World Bank), the Inter-American Devel-
opment Bank, and the Andean Development Cor-
poration, and renegotiate its foreign debt such that
future debt payment schedules are sustainable.
Interestingly, Triana and Torres take note of the
emergence of middle-class sectors, and the con-
sequent necessity to design policies that integrate
them constructively into the reform process. At
the same time, Cuba’s educational system needs
updating, to incorporate new technologies and the
shifing demands of the labor market. Labor pol-
icies must also respond to a demographic profle
of low fertility rates and an aging population: the
authors suggest policies to stimulate birth rates and
the circular fows of migrants, such that Cubans
could readily work abroad and at home, and some
diaspora Cubans might return to their native land.
Triana and Torres conclude with a warning: in the
critical formation of new institutions that promote
well-functioning markets, Cuba’s “prior experience
[is] practically irrelevant.” Such market-oriented
institutions must defne and protect basic econom-
ic rights, promote competition, correct for market
failures and promote stability and growth, while as-
suring social cohesion and means of confict resolu-
tion. In assessing the evolution of Cuba’s economic
institutions, the papers by Antonio F. Romero Gó-
mez and Carmelo Mesa-Lago pursue these themes
in depth.
ECONOMIC INSTITUTIONS
Cuban economist Romero ofers an expansive def-
nition of institutions: a series of rules, laws, beliefs,
values, and organizations that together drive indi-
vidual and social behaviors. Among the most vital
tasks of economic institutions is to enable sustainable
growth, but also to determine and, as necessary, cor-
rect the distributions of wealth and income, correct
regional inequalities, and promote social cohesion.
Cuba’s Economic Change in Comparative Perspective
4
By these criteria, revolutionary Cuba had a strong set
of institutions, even as they now appear inadequate.
Romero reviews recent eforts to renew Cuba’s in-
stitutions, outlining a large number of reforms in
various stages of implementation, ofen beginning
with pilot projects, and with mixed results to date.
Te Cuban economist discusses on-going reforms
in the state, cooperative, and private sectors, as well
as the new laws governing foreign investment and
free trade zones, noting that the reform process
is still in its early stages and “much remains to be
done.” Excessive gradualism, he warns, can actu-
ally complicate matters, and “transformations of
various sectors should be done simultaneously in
order for the reforms to be efective.” Government
entities must be better coordinated and economic
and social policies need to be carefully integrated.
Romero adds that it would be an error to anticipate
an immediate improvement in living standards: the
pressing internal and external constraints are sim-
ply too great.
In considering a new institutionalism that would
broaden and regulate the market economy, Rome-
ro adds a number of additional priorities including:
strengthening a legal system that provides guar-
antees to all economic agents, including the new
private sector and cooperatives; designing a com-
petitiveness policy that removes the many existing,
ofen contradictory restrictions; legitimizing the
accumulation of profts, with institutional stimulus
to their productive re-investment; opening the ex-
ternal sector with strong supervisory institutions;
and policies that actively protect natural resources
and cultural patrimony.
THE STATE AND THE MARKET
In reviewing the multiple reforms underway, Car-
melo Mesa-Lago provides additional details, and a
somewhat more impatient assessment of progress
to date. While applauding the general thrust of
reforms, and that they have advanced much further
than previous reform episodes and are highly un-
likely to be reversed, he nevertheless bemoans the
slow progress and states baldly: “the greatest ob-
stacle seems to be the [central planning] model it-
self.” Mesa-Lago asserts: “If Cuba were to follow an
adapted ‘socialist market’ model, as in China and
Vietnam (the private sector, markets and foreign
investment, combined with an indicative plan
and decentralization of decision making) it would
achieve much higher sustained economic growth
under the Party rule” (emphasis is mine). Tat is, it
would be in the political interests of the elites of the
Cuban Communist Party to move faster and fur-
ther, Mesa-Lago suggests, citing comparative prece-
dents. Ten why don’t they? Mesa-Lago asserts that
stubborn opposition from within the government,
from orthodox, hardline factions—fearful of del-
egation and a “snowball” efect—accounts for the
frustrating delays and contradictory steps that have
marked the Cuban reform process to date.
In a detailed evaluation of the distribution in usu-
fruct of idle state lands, Mesa-Lago fnds that the
many restrictions on the use of land and on agricul-
tural markets, including the continued repression
of at-the-farm prices and inefcient state market-
ing of produce, explain the disappointing output
results. If only the restrictions on private property
and agricultural markets were lifed, Mesa-Lago be-
lieves, Cuba could accomplish food self-sufciency
in a few years, saving $2 billion in imports and gen-
erating a surplus for export.
Both Mesa-Lago and Romero applaud the visible
expansion of small-scale private enterprise (legal-
ly employing close to 500,000 persons), and most
recently of non-agricultural cooperatives, notably
in services (cafeterias, personal hygiene), agricul-
tural markets, transportation (taxis), and construc-
tion. Te ofcially stated goal is for two million
Cubans (40 percent of the employed labor force) to
be in the non-state sector by 2016.
1
Both scholars
1
In an earlier publication, I suggest that the percentage of non-state employment could rise even higher, if one adds workers in the un-authorized
informal sector and GESPI—government employees with signifcant private-sector income. See Richard E. Feinberg, Sof Landing for Cuba?
Emerging Entrepreneurs and Middle Classes (Washington, D.C.: Brookings Institution, 2013).
Cuba’s Economic Change in Comparative Perspective
5
lament the constraints on the expansion of these
potential engines of growth, including scarcity of
bank credit and certain anti-growth taxes, and the
arbitrary exclusion of white-collar professions from
private enterprise, which is especially frustrating
for recent university graduates.
Mesa-Lago urges more transparency in evaluating
reforms, to facilitate scholarly analysis and mid-
course corrections. No ofcial data is available, he
enumerates, on poverty incidence, income distribu-
tion, average salary by gender and race, nor on the
number of dwellings sold since the 2012 housing
reform. Te government and Communist Party re-
portedly conduct public opinion surveys but do not
publish them. Mesa-Lago also laments that the an-
ti-corruption campaign has not been accompanied
by transparency and accountability of state agencies
and enterprises.
COMPARATIVE EXPERI ENCES I N ASIA AND
LATI N AMERICA
Mesa-Lago’s paper notes that Cuba has seemingly
chosen not to learn some of the lessons from pre-
vious reforms, notably in China and Vietnam, and
in Latin America: that slow and partial change fails
to generate the sought-afer dynamic growth and
improvements in living standards. Long ago, he as-
serts, China and Vietnam developed their socialist
market models where the state’s role was reduced
to an indicative plan and decision making was de-
centralized. With regard to real estate markets,
Mesa-Lago notes that despite some recent liberal-
ization,
2
the buying and selling of homes in Cuba
remain highly restricted, particularly for foreigners.
In contrast, in China foreign permanent residents
don’t face restrictions and large international fnan-
cial frms have opened realty branches. However,
in comparing Cuba’s extensive social service pro-
grams to various reform eforts in Latin America,
Mesa-Lago advises that “the lesson for Cuba is not
to privatize but to create a new public pension sys-
tem for young workers, with a solid actuarial base,
appropriate reserves and efcient administration,
in order to ensure adequate pension in the long run
and be a source of productive investment.”
A defender of the Cuban reform process could re-
spond that the Asian reforms also began gradually,
were laden with errors and mid-course corrections,
and took decades to attain their current trajectories
(although in China, agricultural reform started with
a bolder approach, allowing more freedom to farm-
ers, and generated faster results). And the starting
points for the structural adjustment reforms that
set many Latin American countries on the road to a
more sustainable growth path were far diferent from
Cuba’s Soviet-imposed centrally planned economy.
When Latin American countries began their adjust-
ment processes in the 1980s, to correct their mac-
roeconomic imbalances and open their economies,
they already possessed essentially market-driven sys-
tems. Te challenges they faced pale in comparison
to the hurdles that Cuba must surpass.
To add to the debates on comparative econom-
ic strategies, the paper by prominent Costa Rican
economist Alberto Trejos explains the dramatical-
ly successful restructuring of his nation’s formerly
rather closed and protected economy, by opting for
an unambiguous openness to international trade
and active promotion of foreign investment. Of par-
ticular relevance to Cuba, Costa Rica’s comparative
advantage has been its well-educated and healthy
workforce, the results of years of public investments
in human capital; by constitutional mandate, edu-
cation expenditures cannot fall below six percent
of GDP and the entire population is covered by an
efcient national health care system. Nor is Costa
Rica an extreme neo-liberal story. Rather the state
remains a strong player through state-owned en-
terprises in numerous strategic sectors, including
energy and other utilities, telecommunications,
and banking. Workers’ rights are sustained through
mandatory pensions, generous severance pay and
other social assistance programs.
2
For more, see Philip Peters, Cuba’s New Real Estate Market (Brookings Institution, February 2014).
Cuba’s Economic Change in Comparative Perspective
6
Costa Rica’s annual infows of foreign direct in-
vestment have been around $2 billion, coinciden-
tally the number that Cuban minister of foreign
trade and investment Rodrigo Malmierca cited as
a goal for Cuba when explaining its new 2014 for-
eign investment law. As Trejos reminds us, FDI not
only injects capital but also transfers knowledge,
best practices and familiarity with global indus-
try to workers and to domestic suppliers. Attract-
ed by Costa Rica’s educated workforce, foreign
investment has diversifed in dynamic clusters in
electronics, medical equipment, life sciences and
business process outsourcin—sectors where Cuba
might also hope to be competitive. Notably, Costa
Rica did not wait passively for foreign investors to
discover its advantages, rather it created strong but
lean and agile investment promotion agencies.
A free trade regime ofers tax and other benefts (as
does the new regime governing Cuba’s Mariel spe-
cial economic development zone) but selection now
focuses on fostering international value-chains,
clusters of related companies, and linkages between
foreign and domestic frms. Drawing on his direct
contact with foreign investors, Trejos comments that
one attraction of the Costa Rican free trade regime is
that the public institutions in charge of it are virtual-
ly corruption free and predictable (e.g., attached to
the letter and spirit of the law) in their decisions. Not
that Costa Rica is without faws: infrastructure is in
poor condition, the educational system has not fully
adjusted to the evolving demands of the labor market,
and the exchange rate has appreciated substantially
in recent years. But Costa Rica has gotten enough
right to ofer its citizens relatively high and rising
living standards. Two indicators of success: indices
of global happiness typically rank Costa Ricans near
the top, and emigration rates are well below those of
other Caribbean basin neighbors.
TOUGH CHOICES: MONETARY REFORMS
AND EXCHANGE RATE REGI MES
Te fnal two papers tackle the extraordinarily
complex—and risk-laden—task of reforming the
inter-related dual currency and exchange-rate sys-
tems. Cuba has two currencies, the convertible peso
(CUC) which is pegged at 1 CUC: 1 US dollar, and
the Cuban peso (CUP) which is fxed at 24 CUP: 1
US dollar, or 1CUC:24CUP. Yet, for frms, the ex-
change rate is 1CUP:1CUC, a massively overvalued
Cuban peso. Recognizing that these monetary sys-
tems introduce huge distortions (segmenting the
economy, sending false price signals, and compli-
cating accounting mechanisms,) the 2011 reform
Lineamientos called for monetary unifcation by
2016. Subsequently, the government announced it
will eliminate the CUC in favor of a single currency,
the Cuban peso, probably in 2015.
As Cuban economists Pavel Vidal and Omar Ev-
erleny note, the government has yet to explain just
how it will implement these reforms, especially
with regard to the dual exchange rate system, and
manage the many inter-related economic variables,
including wage levels and prices. Te anticipat-
ed massive devaluation risks unleashing powerful
infationary pressures through three channels: the
devaluation will increase the costs of imports both
to consumers and frms; producers and retailers
will seek to pass through increases in costs to their
consumers; and fscal policy may incentivize the
government to pump liquidity into frms and fnan-
cial institutions whose balance sheets are adversely
afected by the monetary reform.
Te point regarding frm vulnerability is particularly
delicate. Te distorted monetary system has allowed
inefcient frms to disguise losses. Under monetary
reform, these inefciencies will become manifest, at
which point the government can choose either to
subsidize money-losing operations through com-
pensatory fscal injections or simply allow them
to go bankrupt and dismiss workers. Yet such a
cold-turkey approach could result in social unrest
and, possibly, a generalized collapse of the economy.
Vidal and Everleny also worry about the capacity
of even the more efcient state-run enterprises to
respond quickly to new price incentives. Te gov-
ernment has begun to implement a broad-based
reform of the state enterprise sector, allowing frms
Cuba’s Economic Change in Comparative Perspective
7
more autonomy in decision making, but it remains
to be seen how quickly frms are able to adjust, and
just how much fexibility the economic ministries
and holding companies, accustomed to issuing di-
rectives, are willing to allow subordinate frms.
Another challenge will be managing public percep-
tions. Vidal and Everleny worry that many Cubans
mistakenly attribute low wages in the state sector to
the dual currency system, and anticipate that cur-
rency unifcation will result in a sharp jump in real
wages and purchasing power. In fact, the low wages
are the result of massive featherbedding and low la-
bor productivity, problems that will not be resolved
by monetary reform alone. Vidal and Everleny urge
the government to be more transparent and clear in
defning and explaining its monetary policy strate-
gies going forward.
On the plus side, the Cuban government approach-
es monetary reform with some advantages over
free-market economies: the government still sets
most prices, enabling it in the short run to repress
infationary pressures, and control over the fnancial
sector and foreign exchange reduces the risks of capi-
tal fight and exchange-rate speculation and volatility.
Tactically, Vidal and Everleny suggest a gradualist
approach toward unifying the exchange rate. Al-
ready the government seems to be following such
an approach, introducing the new devalued ofcial
exchange rate sector-by-sector in purchases of some
agricultural products by hotels, of certain inputs
by transportation cooperatives, and in the sugar
agro-industry where, for example, various transac-
tions are recorded in three diferent exchange rates
varying from 4CUP:1USD to 12CUP:1USD. Tis
sector-by-sector approach follows the style of the
overall reform process, where pilot projects precede
generalized reform. It will allow economic agents,
notably state-run frms, to adjust more gradually to
monetary shocks. However, Pavel and Everleny un-
derscore that such a multiple exchange rate system
should be transitory, otherwise it would risk intro-
ducing further distortions as well as opportunities
for corruption.
A more comprehensive and rapid approach to ex-
change rate unifcation is proposed in the paper by
Augusto de la Torre and Alain Ize. Te World Bank
economists argue that accumulated international ex-
perience militates against multiple exchange rates.
Instead, they propose a combination of an imme-
diate unifcation of the exchange rate (whereby all
CUC are mandatorily converted into the new Cuban
pesos at 24:1—they discard the dollarization option)
and a gradual phasing out of the taxes and subsidies
implicit in the current dual exchange rate system.
To achieve the latter, the currently hidden taxes and
subsidies would be made explicit and converted into
lump-sum taxes and subsidies, which would then be
gradually eliminated in line with a pre-announced
timetable. Te authors propose this transitional re-
gime of lump-sum taxes and subsidies to sofen the
huge production and distributional dislocations that
would materialize under a “raw big bang” unifca-
tion option, where an immediate unifcation of the
exchange rate would be accompanied by an instan-
taneous disappearance of the currently hidden taxes
and subsidies. In their proposal, a system of lump-
sum taxes and subsidies would be allocated on an en-
terprise-by-enterprise basis to neutralize or compen-
sate for the initial windfall losses or gains resulting
from exchange rate unifcation.
For this “fscally-cushioned big bang” to produce
the sought-afer efciency gains, while minimizing
short-run pain, de la Torre and Ize propose a series
of urgent “habilitating reforms” including: the gen-
eration of a pre-exchange rate unifcation fscal sur-
plus (Cuba’s fscal position is currently in modest
defcit) to facilitate monetary control; new revenue
mobilization measures such as a value added tax;
deep public sector governance reforms to ensure
that state enterprises become more responsive to
market signals, as Vidal and Everleny also under-
score; and other market-oriented reforms, such as
encouraging non-state frms to grow sufciently
numerous and large as to boost supply and exert
competitive pressures on state enterprises.
While advocates of an immediate currency uni-
fcation, De la Torre and Ize suggest a gradualist
Cuba’s Economic Change in Comparative Perspective
8
approach toward establishing the future exchange
rate system. Tat is, initially Cuba could set a fxed
exchange rate, followed by an intermediate phase
of a fexible but managed rate, until fnally settling
upon a more fexible (but still managed) exchange
rate with infation targeting—the approach followed
by many other Latin American countries today.
De la Torre and Ize note that, from a comparative
perspective, the Cuba case is especially challenging
in several respects. Te current spread between the
two exchange rates in Cuba, at 2300 percent, is by far
the largest in post-World War II Latin American his-
tory, increasing the risk of a wage-price infationary
spiral. To counter this risk, the Cuban government
will need to maintain very tight control over mone-
tary expansion. Further complicating the task, Cuba’s
very limited access to international fnance means
that foreign exchange expenditures cannot exceed
income during the transition. Normally, the inter-
national fnancial institutions help marshal valuable
liquidity during major reforms, to fnance a surge in
demand-driven imports, dampen infationary pres-
sures, and facilitate debt service and other interna-
tional payments, but Cuba is not a member of the
Bretton Woods or other regional development agen-
cies. Cuba hesitates to seek membership, perhaps out
of ideological misgivings or fearing a U.S. veto, and
hence must manage its monetary adjustments alone,
relying on its own resources.
SOME ADDITIONAL THOUGHTS
In recent decades, the international community has
learned much about economic development. Te
six papers in this volume, by leading Cuban econo-
mists and international experts with broad experi-
ence in developing countries and drawing on the-
oretical advances as well as success stories from a
wide variety of economic models and geographies,
suggest many relevant conclusions for Cuba. But as
the authors underscore, none of these country cases
is a semi-tropical island in the Caribbean, emerging
from over fve decades of central planning, still fac-
ing economic sanctions from its largest neighbor,
but endowed with a remarkably well educated pop-
ulation, diversifed resource base, and a prosperous,
near-by diaspora. Felicitously, and unlike many
other emerging economies, Cuba does not have to
confront a demographic explosion, nor deep eth-
nic or religious divides. Despite hostility from the
United States, Cuba enjoys good diplomatic rela-
tions throughout the world, and much good will in
Latin America.
Tis volume makes plain that reforming the Cuban
economy will be no easy task. Severe distortions
have accumulated over many decades, institution-
al rigidities are manifest, and the government and
Communist Party appear divided and uncertain on
the best path forward. Success is not guaranteed,
such that continued stagnation remains a possible
outcome; and a botched monetary reform could
catalyze a dangerous infationary spiral. Moreover,
there remains the risk of negative external shocks,
against which the Cuban economy, highly depen-
dent upon imports for food and energy and with low
international reserves, remains highly vulnerable.
3
If author Romero is correct and most Cubans can
anticipate no major improvements in per capita in-
comes in the near term, the government will have
to work hard to build and maintain popular faith in
the reform process. Te long-forgotten Cuban con-
sumer will have to endure a while longer.
Yet, some important progress has already been
made. Te emergence of small-scale business is vis-
ible in Havana and provincial towns throughout the
island, demonstrating the entrepreneurial instincts
and talents of the Cuban people. Prices have been
lifed on a growing percentage of agricultural pro-
duction, improving variety and quality for some
consumers. Government spending is becoming
more efcient as unsustainable social subsidies are
being cut, the pension system has been partially re-
formed, and the educational and health care systems
3
For a discussion of Cuba’s energy vulnerabilities, see Ted Piccone and Harold Trinkunas, Te Cuba-Venezuela Alliance: Te Beginning of the End?
(Washington, D.C.: Brookings Institution, Latin American Initiative Policy Brief, June 2014).
Cuba’s Economic Change in Comparative Perspective
9
are being rationalized. Most Cubans are now free to
travel abroad and return without penalty, and mo-
bile telephones and the internet are becoming more
widespread, if slowly by international standards. To
improve its international creditworthiness, Cuba
has successfully renegotiated some of its outstand-
ing bilateral debts and has worked hard to remain
current in meetings its hard-currency obligations.
From the U.S. side, partial liberalizations of travel
and remittances by the Obama administration have
added some stimulus to the economy, including the
emerging private sector.
In 2013-2014, the Cuban government announced a
series of structural reforms which if implemented
could be major steps forward. Deep reform of the
system of state enterprises, begun as a pilot proj-
ect, has been generalized, promising more autono-
my for frms to retain earnings and make decisions
regarding investments, employment, and prices.
Te government has authorized the formation of
non-state cooperatives outside of the agricultural
sector, in what could be a fascinating experiment in
worker-owned small and medium-sized enterprises
benefting from ofcial encouragement. Recogniz-
ing the need for foreign capital and technology, in
spring 2014 the government announced with con-
siderable fanfare a new foreign investment law; it
remains to be seen if the government approval pro-
cess gets the message and can move with alacrity to
authorize important new projects.
At its most fundamental, economic reform is a polit-
ical process which alters the distribution of income
and opportunities. Te political economy of reform
is especially challenging because potential losers can
be keenly aware of their impending fate whereas
potential winners may not see the future so clearly.
Governments, therefore, must attempt to sequence
reforms such that winners quickly recognize their
good fortunes and join an expanding pro-reform
coalition. In the Cuban case, potential winners in-
clude farmers who beneft from new price incen-
tives, entrepreneurs working in the emerging pri-
vate sector, employees in joint ventures with foreign
investors, and managers in state-owned frms who
gain from decentralization. To the extent feasible,
losers, including employees dismissed from state
ministries, should receive compensations, such as
temporary monetary subsidies and retraining for
emerging labor market opportunities. Te reform
momentum should be strong enough to prevent
early benefciaries from seeking to protect their
gains by freezing forward movement; on the con-
trary, the expanding pro-reform coalition should
perceive the advantages of pressing forward toward
a development model of rising capital accumula-
tion and labor productivity as the only pathway to-
ward sustainable growth and the redemption of the
long-sufering Cuban consumer.
Revolutionary Cuba has proudly prioritized a pro-
gressive distribution of income, which pro-market
reforms can disrupt. Te Cuban polity will decide
its future equity preferences, but certainly it will
want to guarantee equal opportunities across race
and gender, and avoid distortions that drain re-
sources from the poorer provinces. In rebalancing
priorities, policies which seek social equity should
avoid disincentives to savings and investment.
Facing an uncertain future, many Cubans fear a
sudden onslaught of investments from South Flor-
ida and a rush of bulldozers that transform Havana
and the island’s distinct regional centers into a pale
ordinariness. To avert such an apocalypse, the Of-
fce of the Historian has been restoring colonial Old
Havana and other historic sites, to preserve past
glories and to create a major tourist destination,
demonstrating that strong far-sighted planning and
commercial viability can be compatible in the Cu-
ban setting. If the rest of Havana and other towns
are to become sustainable and attractive locations,
then capable institutions that plan and regulate
urban development, that provide smart aesthetic
guidelines for architects and investors, must be in
place before the predictable onrush of foreign cap-
ital. Similarly, only strong institutions, adequately
stafed and fnanced, can safeguard the island’s rich
bio-diversity and marine life. Cuba is too beautiful,
too special, to be abandoned to purely short-term
market-driven solutions.
Cuba’s Economic Change in Comparative Perspective
10
Raúl Castro has pledged to retire in early 2018, by
which time we will have a good sense as to wheth-
er Cuba has begun to build these new institutions,
to engineer a gradual, peaceful transition to a more
productive and sustainable economy. In this “sof
landing” scenario, Cuba would have re-engaged
with the global economy, attracting foreign invest-
ment into diverse sectors—tourism and energy but
also agriculture, bio-technology, entertainment and
sports—with more and more Cubans engaged in
competitive export-oriented businesses. Interna-
tional capital markets—including the internation-
al fnancial institutions and diaspora capital—will
have begun to add much needed investment to bol-
ster growth and productive job creation. At the cur-
rent pace, Cubans may grow increasingly frustrated
and look elsewhere for a brighter future.
As the authors suggest, now is the time for the
Cuban government to accelerate reforms. Among
possible policy priorities, more aggressive reforms
of domestic price mechanisms could quickly bol-
ster agricultural production, alleviating some of the
pressures on the balance of payments. More open
space for the expansion of the domestic private sec-
tor, notably in professional services, could not only
generate more employment and investment but
also build hope for the future: for a Cuban econ-
omy that is more productive and competitive, that
ofers more opportunities for creative innovation
and youthful employment. Productivity-enhancing
reforms within state-owned enterprises, however
challenging, must also be among the critical medi-
um-term goals. But getting to this sof landing will
require many tough decisions and probably some
good luck, as the following essays, steeped in eco-
nomic realism, reveal.
Cuba’s Economic Change in Comparative Perspective
11
Policies for Economic Growth:
Cuba’s New Era
4
Juan Triana Cordovi and Ricardo Torres Pérez
INTRODUCTION
Te changes in the Cuban economic model have given
rise to a notable reaction in academic circles, both in
Cuba and abroad. Te enthusiasm for and skepticism
of the initial moments have been followed by a more
in-depth and measured refection on the strategic is-
sues that will decide the nation’s future. Economic
issues have come to the fore in recent years, includ-
ing the increasingly evident need for a development
program in which the issues of economic growth take
precedence. Tis paper seeks to contribute to this
debate, discussing some aspects that are essential for
framing a strategy that is consistent with the needs of
Cuba and its people, which at the same time is viable
in the contemporary international environment.
Te article is organized into four main parts. First
is the introduction. Te second section addresses
the relationship between growth and development,
seen from the vantage point and particularities of
the Cuban economy today. Te third section ana-
lyzes in detail some factors tied to growth, based
on the theoretical contributions and empirical evi-
dence available. Accordingly, policy actions are sug-
gested to begin to correct the cumulative imbalanc-
es and to put the country on a path to high growth.
Te fnal section summarizes the conclusions.
DEVELOPMENT AND ECONOMIC GROWTH
Te Multidimensional Nature of Development
More than 70 years afer the seminal studies on de-
velopment
5
and afer an almost exclusive emphasis
on economic issues during those initial periods, it
is now understood that development is a multidi-
mensional phenomenon. “Development sustain-
ability” is defned by three dimensions (economic,
social, and environmental) and must be taken into
consideration in the new scenario that Cuba is con-
structing. Previously, especially in the period up
to 1990, the existence of a close link both between
these three dimensions and with the expected pos-
itive results was assumed, however reality proved
otherwise. Since the 1990s, the difculty in striking
an adequate balance among the three dimensions
has become more visible and much more costly
than expected in earlier periods, and therefore they
must be incorporated into the development strate-
gy ex-ante.
Te challenges to fully sustainable development are
signifcant and are infuenced by the cumulative
lag in some areas of development that are decisive
today:
6
the relatively high standard of social services
and conditions that Cuba achieved;
7
Cuba’s status
4
Tis paper has been translated from Spanish to English.
5
Te reference is to pioneers of the studies that constitute the rise of “development economics,” understood as the scientifc sub-discipline that stud-
ies the economics of the less developed countries, i.e. the conditions, characteristics, and policies relating to the economic development of those
countries. Among those authors one can cite Rosenstein-Rodan, Nurkse, Singer, Lewis, Gerschenkron, Myrdal, Hirschman, Scitovsky, Perroux,
Rostow, Myint, and Prebisch.
Cuba’s Economic Change in Comparative Perspective
12
as a small island territory with limited natural re-
sources; and a negative geo-economic situation due
to the blockade by the world’s leading economic
power, which impedes Cuba’s access to the largest
and closest market in the world and limits its par-
ticipation in international fnancial markets and in-
stitutions.
Cuba and Development 50 Years Later: Lessons
Learned?
A set of lessons can be derived from the 30 years of
development experience from 1959 to 1989:
8
i. Development has its own agenda. In the frst
30 years afer 1959, the development agenda
and the agenda of building socialism became
mixed together, yielding, on more than a few
occasions, contradictory results.
ii. Enjoying advantageous external conditions
does not appear to guarantee development
results. Accordingly, a large part of the advan-
tages received due to the special conditions
of insertion
9
did not translate into improved
productive capacities or radical changes to the
characteristics of Cuba’s productive sector.
iii. Social betterment should be an explicit goal of
the development strategy, but its sustainabil-
ity depends on social gains translating into
enhanced productive capacity.
iv. Te market plays an active role in that process;
ignoring it generates inefciencies that tend to
thwart the very purpose of development.
v. Te “local level” has its own characteristics; it
cannot be understood as merely a subcompo-
nent of the “national level.”
vi. Te export sector and the domestic market
should not be considered polar opposites, but
as complementary phenomena that are part of
a single process. Eforts are needed to ensure
that the “dynamic sectors” generate “spillover
efects” to the rest of the national economy.
vii. Isolation from the international trends in the
world economy may generate costs in the long
run that ofset the benefts obtained in the
short term.
viii. Te concentration of external dependency be-
comesa strategic weakness harmful to the pur-
poses of development.
Institutions and Economic Development in Cuba
One of the lessons of recent years is that the quality of
institutions is relevant for attaining development.
10
In-
stitutions are understood to include everything from
policies to state agencies and civil society organiza-
tions, along with the mechanisms for regulating them.
Te state and the market are likely the two most im-
portant factors for development. Development re-
quires not only the correct allocation of resources, a
function that the market is generally able to perform
efciently, but also the attainment of objectives for
which the market does not have a sufciently efec-
tive response, thereby guaranteeing opportunities for
access to services that are strategic for development,
such as education and health. On other occasions the
correct allocation of resources generates dynamics
that promote levels of inequality which in the medi-
um and long term are at odds with the aims of devel-
opment. Tis is not due to market failures, but rather
is the result of market dynamics, justifying and open-
ing the door for the corrective role of the state.
6
Such as: international insertion; productive development; incorporation of I+D+i to production and services; the use of information and commu-
nication technologies; and access to logistic and transport circuits on a global scale, among others.
7
UNDP, Human Development Report 2011– Sustainability and Equity: A Better Future for All, (New York: Palgrave MacMillan, 2011).
8
Juan Triana Cordoví, “De la actualización del funcionamiento al desarrollo económico,” in Miradas a la Economía cubana: el proceso de actual-
ización, eds. Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva, (Havana: Caminos, 2012).
9
Tis refers to the benefts Cuba enjoyed as one of the most backward/underdeveloped members of the Council for Mutual Economic Assistance
(CMEA). Tese include preferential access to these markets; attractive prices for its main export products (sugar, nickel, etc.); low-interest loans
with long amortization periods; renegotiation of debts in arrears; and technical assistance in science, sports, and the arts, among others.
10
Dani Rodrik, “Estrategias de desarrollo para el próximo siglo,” paper presented at “Developing Economies in the 21st Century” at the Institute for
Developing Economies, Japan External Trade Organization, Chiba, Japan, January 26-27, 2000.
Cuba’s Economic Change in Comparative Perspective
13
An important initial stage of the process of institution-
al redesign in Cuba occurred in the mid-1990s when
the State was reorganized and the number of ministries
and state units was cut practically in half, reducing the
number from more than 50 ministries and state units
to less than 30. Tat process also aimed to redefne the
functions of these institutions, especially the minis-
tries, to foster the “separation of state and enterprise
functions.” Tis objective was not attained at the time.
Meanwhile, the opening that had been promoted
from the early 1990s on allowed for market growth,
not only by the impetus created by the “self-em-
ployed”
11
sector and the opening to foreign capital
and foreign commercial enterprises, but also due to
a certain fexibility granted to the state enterprises
that did business in foreign currency.
In this case, several events signifcant for Cuba
came about at the same time. First, Cuba main-
tained a restrictive regulatory framework (even
though, without doubt, as of 1993 macroeconomic
decision-making became more fexible and open,
with positive impacts on growth). Second, the mac-
roeconomic distortions were generated and deep-
ened in the wake of the crisis from 1990 to 1993,
together with sustained ideological and political
prejudices regarding the market and foreign invest-
ment (which were tolerated but not assimilated into
the “normal” operations of the economy). Finally,
the impossibility of accessing the U.S. market has
been all the more critical since 1990. All this con-
solidated a climate not propitious for growth or for
national (state) or foreign investment.
Te Need for a Macroeconomic Environment that
Stimulates Growth and Investment
Increasing investment is crucial for achieving the
results pursued in any development efort. Tis is
a lesson learned. In addition, practically all the ex-
periences observed corroborate the need to ensure
a macroeconomic climate that stimulates growth,
rewards investors (national and foreign), and pro-
motes the spillover of its efects to the rest of the
economy. While the management of cross-cutting
policies is decisive for creating such a climate (fs-
cal, monetary, and exchange policies), these alone
are not totally sufcient.
Recognizing that the reform initiated in the 1990s
generated a legal framework for domestic invest-
ment that to some extent brought it closer to the
paradigm of the West,
12
at the same time peculiari-
ties are identifed in the operation of that same legal
framework that limit its contribution to investment
fnancing. Tese include: the poor performance of
the banking system and the absence of a capital
market; the lack of competitiveness of the banking
institutions resulting from excessive centralization;
and the marked short-term bias of Cuba’s banking
institutions.
13
With respect to domestic investment,
several kinds of limitations associated with the ca-
pacity to efectively promote a massive construction
program have been noted. Tese include: techno-
logical backwardness, organizational problems,
low levels of quality and systematic failure to meet
deadlines, lack of motivation and scarcity of skilled
labor, and de-capitalization of the national base of
production of building materials, among others.
Similarly, the structure of that investment is rele-
vant to development, although each experience is
particular in terms of sources and use. In this case,
while foreign investment was aimed at strategic
country objectives and had a positive impact on
exports and sales,
14
domestic investment did not ef-
fectively accompany foreign investment (Figure 1),
resulting in a missed opportunity to internalize a
major part of the benefts associated with foreign
11
Tis is the sector of small private enterprise in Cuba, which can only operate in activities authorized by the government, mostly simple services
and small artisan production.
12
Lidia Villar López and Víctor Rodríguez García, “El proceso inversionista y la fnanciación de inversiones en Cuba,” Economía y Desarrollo 148,
No. 2 (July-December 2012).
13
Ibid.
14
Omar Everleny Pérez Villanueva and Pavel Vidal Alejandro, “La inversion extranjera directa y la actualización del modelo económico cubano,”
(Havana: Center for the Study of the Cuban Economy (CEEC), 2012).
Cuba’s Economic Change in Comparative Perspective
14
direct investment (FDI) and considerably reducing
the multiplier efect on growth and employment.
It is also crucial to develop a policy to improve and
modernize infrastructure that cuts transaction costs
and contributes to the competitiveness of goods
and services. Despite the gains in infrastructure
development in the 1970s and 1980s, from 1990 a
signifcant quantitative and qualitative defcit has
accumulated. Te technological lag in the railway
system
15
and in coastal transport; decapitalization
in the ports,
16
technologies and systems for storage
and handling of freight; backsliding in the public
transportation system; the technological lag and the
low penetration of cellular telephones and of data
transmission (Internet), along with the high rates
charged for their use, all place Cuba far below com-
petitive standards in the region, and are disincen-
tives to growth and investment (both domestic and
foreign).
“Updating the Economic Model” and
Development: A New Opportunity
In the 1990s, the nature of the economic crisis
17
and
the existence of a more restrictive international en-
vironment, especially due to the reinforcement of
the U.S. blockade, made it such that eforts were
concentrated on managing the crisis to ensure sur-
vival. Nonetheless, at least in discourse, develop-
ment goals remained on the agenda. A heterodox
program that combined fscal cuts, wage anchors,
Infastructure
Goods
Commercial Services
Social and
Government Services
0% 5% 10% 15% 20% 25% 30% 35%
Percentage of total investment
FIGURE 1. INVESTMENT BY SECTOR IN CUBA (ACCUMULATED (1994-2012)
Source ONEI, Anuario Estadistico de Cuba 2012 (Havana: 2013)
15
As part of the policy set forth in the guidelines, today a project is under way to modernize the country’s railways.
16
Tree projects for port modernization are under way: one in Mariel, another in Santiago de Cuba, and the third in Cienfuegos.
17
Most specialists agree that the crisis that began afer 1989 was the result of a combination of internal and external causes. Among the internal
causes, one can cite mainly the exhaustion of the growth model and the limitations on the system for managing the economy. For example, from
1986 to 1989, cumulative GDP growth was null. Among the external factors one fnds the notable deterioration of the international economic
environment since the the mid-1980s, especially in regard to Cuba’s access to international fnancial markets and the collapse of the Soviet Union
in 1991.
Cuba’s Economic Change in Comparative Perspective
15
import adjustment, dollarization of the economy, a
fxed ofcial exchange rate and implicit devaluation
of the Cuban peso in the domestic market as well as
an overvaluing of the ofcial exchange rate, the loss
of the purchasing power of wages, along with the
opening to foreign capital, all made it possible for
the country to survive yet generated distortions that
continue to weigh down eforts to achieve growth.
Economic policy was marked by its focus on “cri-
sis management,” something which remained un-
changeable until the approval of the Economic
and Social Guidelines (Lineamientos Económicos y
Sociales). Macroeconomic distortions, balance of
payments restrictions, a high propensity to import,
alongside a technologically backward productive
sector with high levels of inefciency as well as a
major decline in real wages, are the conditions un-
der which the transformation eforts began in 2007.
Tere are two clearly distinguishable stages: the frst
from 2007 to 2010, in which crisis management
predominated, and the second, as of late 2010 (dis-
cussion of the Guidelines) and especially early 2011
(approval of the Guidelines), when the door was
opened to a more all-encompassing framework.
Te need for an economic development model ap-
peared aferwards and the concept is still unfolding;
hence the importance of examining diferent per-
spectives. Today one can identify points of consen-
sus on a set of issues, some of which are evident if
one looks to international experience, but which are
not so evident looking just at the case of Cuba:
1. Development is a necessary condition for the
sustainability of “Cuban socialism.”
2. Growth is essential for achieving develop-
ment in Cuba.
3. Achieving high rates of fxed investment is
essential for growth.
4. Foreign direct investment is necessary and plays
a central role in eforts to achieve future growth.
5. Production structure policies should supple-
ment the growth efort. In particular, chang-
ing the energy and import matrices, export
orientation and the production of goods with
a higher value-added should be an explicit
goal of those policies.
6. Modernization of the infrastructure, with
special emphasis on information and com-
munication technology (ICT), should ac-
company growth.
7. Research, development, and innovation sys-
tems should be modernized and adapted to
the growth efort.
Te Agents of Development: Te State,
“Self-Employed Persons,” Members of
Cooperatives, and the “Highly Skilled Labor
Force”—Is it Possible to Have a Middle-Income
Sector Committed to Development in Cuba?
Te role of each of these actors in the future devel-
opment of Cuba is not fully defned. While progress
has been made on the central idea that their dy-
namics should be aligned with the common devel-
opment goals, past experience shows that the role
of these diferent agents has swung back and forth.
Accepting that at present this pendulum-like per-
formance is a thing of the past and that what is at
stake is developing, it seems logical that the State
should take the lead in the process and align itself
with all the other actors. At the same time, this is
a process riddled with difculties and uncertainties
that will require a carefully-designed legal frame-
work.
Yet what is truly novel in that development process
is the role of the (still incipient) middle-income sec-
tor. At present the positive role of the middle class
in the development processes is recognized in dif-
ferent countries and regions.
18
Te case of Cuba is
more complex because the specifc socio-economic
18
Francisco H. G. Ferreira, Julian Messina and Jamele Rigolini, La movilidad económica y el crecimiento de la clase media en America Latina, (Wash-
ington, DC: World Bank, 2012).
Cuba’s Economic Change in Comparative Perspective
16
and political characteristics require thinking about
a “middle-income sector” diferently than other
Latin American countries, not only in terms of its
origins, but also in light of the roles it must play in
the process of economic modernization.
Te role of social classes in the Cuban Revolution
undoubtedly continues to be a polemic issue.
19
More than 40 years afer social segments that could
be described as middle class practically disappeared
from the national reality, this process of updat-
ing (which today makes Cuban social actors “less
equal”),
20
creates opportunities for a “relatively new
social diferentiation” compatible with the aims of
growth and development. It is a question of know-
ing how viable the creation, consolidation, and ex-
pansion of a middle-income sector of sorts are in
the new Cuban socioeconomic structure, and how
that sector is distinguished from Cuba’s “principal
actors.” If it is viable, then it is necessary to design
policies that permit the integration of that new so-
cial sector into the new agenda of changes.
From the Path of the Unknown to a Vision of the
Country: What Does Prosperity Mean in Cuba?
What are the Challenges to Sustainability?
If development is always a process with a high level
of uncertainty, in the particular case of Cuba this
process fts within another process, also highly
complex, which consists of maintaining/consoli-
dating Cuban socialism, a goal which the political
leadership described from the outset, in one way or
another, as a “road to the unknown.”
Moving towards development generally involves an
ex ante understanding of the country one wishes to
have. In this respect, the political leadership itself
has formed a skeletal understanding of the desired
paradigm which constructs a vision of the country
as “a prosperous and sustainable socialist soci-
ety”
21
that is “less egalitarian but more just”.
22
Tis
is the most recent conceptualization of that desired
future, which lays out the contours but does not de-
fne the details. Hence de-codifying the details of
the components of that vision is an essential exer-
cise in the country’s future planning.
What specifcally will defne Cuban socialism in
terms of the economy? An interpretation of recent
events suggests that state ownership and manage-
ment of key sectors and leading enterprises, along
with the expansion of the private, cooperative, and
foreign capital sectors, have resulted in mixed man-
agement of the economy (a type of planning dif-
ferent from the current one, with the addition of
the active incorporation of the market) with direct
and decisive state support for health and education.
Tese elements appear to constitute the central core
of that future socialism, an inalienable element of
which is preserving independence.
What does a prosperous country mean in the case
of Cuba? Te relative ambiguity of the concept (be-
cause it entails a major subjective component asso-
ciated with people’s perceptions) requires that one
look to specifc indicators to clarify the answer.
One such proxy could be the Human Development
Index and some of its components,
23
whose evolution
over time is observed in the following fgure (Figure
2). Several readings could be done of this indicator
for Cuba, but all of them confrm the need to supple-
ment it with other indicators, especially if one com-
pares it to the country’s evolving economic and social
trends. Te frst comparison highlights the contrast
between the improvement of this indicator and the
relative stagnation of the rate of growth of per capita
19
Carlos Rafael Rodríguez, “Cuba en el tránsito al socialism: 1959-1963” in Letra con flo, vol. 2, Carlos Rafael Rodríguez (Havana: Ciencias Sociales,
1983).
20
Raúl Castro Ruz, “La mayor satisfacción es la tranquilidad y serena confanza que sentimos al ir entregando a las nuevas generaciones la respons-
abilidad de continuar construyendo el socialismo,” Granma, February 25, 2013.
21
Raúl Castro Ruz, “Valoramos que la actualización del modelo económico marcha con paso seguro y se empieza a adentrar en cuestiones de mayor
alcance,” Granma, December 14, 2012.
22
Castro, Granma, February 24, 2013.
23
But it should be understood that it is merely an initial approximation and is not reduced to this Index.
Cuba’s Economic Change in Comparative Perspective
17
GDP in these same years and the deterioration of the
real wage experienced in that same period.
24
A sec-
ond element that calls into question the results of this
index is that even in the 1990s, when GDP sharply
declined, the HDI not only did not deteriorate, but
improved. Te HDI improved even though there was
a general deterioration of indicators of economic ef-
fciency and quality of life, such as diminished access
to food and the quality of food, as well as a decline
in transportation and electricity generation, and an
increase in hidden unemployment.
Te level of access to jobs that require skilled labor,
improve productivity, and are adequately remuner-
ated, as well as the level of access to modern ser-
vices, could be included within the concept of pros-
perity along with the degree of equity in income
distribution. In contrast to the rest of Latin Amer-
ica, Cuba has attained high standards of equality—
although it is increasingly clear there is a setback
in this area, partly as a result of the development
process, but also due to the peculiar way in which
Cuba is moving toward a new economic model. Te
path to development, in this case, should compen-
sate the excesses in equality with improved stan-
dards of private consumption, especially associated
with the increase in consumption in absolute terms
and access to better quality public services.
In the case of sustainability
25
(a characteristic or
state according to which the needs of the current
population can be met without compromising the
capacity of future generations or populations in
other regions from meeting their needs), being a
small island territory no doubt imposes a signif-
cant challenge.
26
Nonetheless, other indicators of sustainability sug-
gest the major challenge Cuba faces on its path to
development. Cuba’s demographic dynamic—the
availability and use of water and arable land, for
example—contributes another perspective, which
in one way or another points toward the better use
of existing resources and an improvement in Cuba’s
24
José Antonio Alonso and Pavel Vidal, “Reglas, incentivos e instituciones,” in ¿Quo Vadis, Cuba? La incierta senda de las reformas, edited by José
Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013) pp. 256-297.
25
Te fgures used are from Human Development Report 2011 – Sustainability and Equity, p.164.
26
Mindful of said study by the United Nations, Cuba’s environmental footprint is 1.9 (UNDP, 2011), much less than other countries with similar
levels of per capita income, yet the consumption of fossil fuels as a percentage of the total is practically 90 percent and urban pollution is also rel-
atively high. In others, such as per capita greenhouse gas emissions, forest cover and its variation, the indicators are relatively favorable. Another
angle of analysis is to refer these indicators not to population but to the country’s productive capacity.
0.8
0.78
0.76
0.74
0.72
0.7
0.68
0.66
0.64
0.62
1990 2000 2005 2008 2009 2010 2011 2012 2007 2006
FIGURE 2. HUMAN DEVELOPMENT INDEX, CUBA (1990-2012)
Source: UNDP “International Human Development Indicators,” 2013. http://hdr.undp.org (accessed March 31, 2013).
Cuba’s Economic Change in Comparative Perspective
18
technological and organizational levels. In the me-
dium and long-term, however, they point to the im-
perious need to achieve signifcant “technological
leaps forward” that make it possible to create bet-
ter conditions for attaining that sustainability. No
doubt a policy that stimulates growth and makes
it possible to achieve these goals of prosperity and
sustainability is decisive in Cuba’s immediate future.
Te Need to Grow to be able to Develop: Te Cuban
Experience Post-Crisis.
Te economic growth of any country is not an aim in
itself, but constitutes an essential vehicle for attain-
ing other important societal objectives. High growth
may help create more productive jobs and reduce
poverty. It also helps to obtain the resources neces-
sary for health services, education, science, sports,
and culture, among other key benefts and services.
Analyzing the determinants of economic growth is
one of the most dynamic core areas of economic sci-
ence. Te breakdown of growth based on its immedi-
ate determinants (capital and labor), and the result-
ing residual—Total Factor Productivity (TFP) has
a long history and has been the subject of intense
theoretical and empirical debates.
With the profound economic crisis of the early
1990s, the predominant focus in managing the econ-
omy was on the short-term, to address urgent situ-
ations in an exceptional period. Nonetheless, this
need has shed light on the importance of addressing
the country’s prospective development by granting
greater space to strategic matters. While Cuba be-
gan the recovery in 1994, the average growth rate of
Cuba’s gross domestic product (GDP) in the last 20
years has been approximately 1.8 percent annually,
making it one of the lowest-performing countries
in Latin America. If one takes into account only
the years afer 1993, the average rises to 3.2 per-
cent.
27
Tis is still less than average for the region
in the same period and is perhaps the most meager
performance in the area. Certainly, a series of neg-
ative factors converge in Cuba that do not afect the
rest of the countries in the region, but one cannot
discard the possibility of this record being unsat-
isfactory even discounting the country’s particular
conditions
28
(Figure 3).
27
Calculations based on Economic Commission for Latin America and the Caribbean (ECLAC) CepalStat, consulted in February 2013, http://web-
sie.cl/sisgen/ConsultaIntegrada.asp.
28
In 2014, GDP growth was planned at 2.2 percent. At the end of the frst half of the year, it has only managed to grow 0.6 percent and was expected
to close at 1.4 percent, confrming the tendency of continued poor economic performance.
FIGURE 3. RATE OF GROWTH OF REAL GDP, CUBA (1990-2014)
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
P
e
r
c
e
n
t
a
g
e
s
Source: Author’s calculations based on ONEI (several years).
Cuba’s Economic Change in Comparative Perspective
19
In recent decades international experience has
shown that growing at high rates is necessary for
attaining development.
29
Yet that experience also
tells us that along with the magnitude of growth,
the quality of that growth is decisive.
30
Or similar-
ly, if those high growth rates are attained based on
deepening and consolidating a disadvantageous
situation in international trade, or on extensively
exploiting a country’s natural advantages, or if that
growth does not achieve signifcant changes in the
structure of the economy and does not reach into
those very sectors helping to increase their techno-
logical complexity, then the development impact
will be signifcantly reduced, in part because the
impacts on labor productivity and income distribu-
tion will not be long-lasting.
Cuba has experienced sustained growth since 1994,
of course at rates signifcantly lower in the last 20
years (approximately 3 percent, depending on the
reference year taken).
31
While there has been a no-
table structural change in the composition of exports
from goods to services, this growth is also the prod-
uct of a combination of the emergence of new sectors
and the decline of others that had a long tradition and
had traded in great volumes, such as sugar. Similarly,
if one looks at the structure of output, non-commer-
cial services (generally with lower productivity) con-
tinue to account for a decisive proportion of output
and greater share of employment.
Table 1 confrms the essential diferences in the
style of growth and the means of addressing the cri-
sis which began to take shape in the 1980s. Te frst,
basically extensive, typifed by relatively low restric-
tions on access to resources and fnancing, where
the “opening” also meant implementing the System
for Direction and Planning of the Economy, had
positive efects, shown by the fact that the contri-
bution of TFP is greater than that of capital. In the
second and third period, TFP refected the inertia
in the style of the adjustment employed to manage
the crisis in the frst stages, with a preference for
substantial cutbacks over major economic policy
changes. Te last of the periods, 1994-2003, shows
how regulatory changes had a positive impact on
29
Yenier Mendoza, “¿Ha sido importante el capital humano en el crecimiento económico de Cuba?” (Havana: Facultad de Economía, 2007).
30
Yaima Doimeadios, El crecimiento económico en Cuba: Un analisis desde la productividad de los factores, (Havana: Facultad de Economía, 2007).
31
Juan Carlos Palacios “Determinantes y restricciones del crecimiento económico en Cuba”, Revista de la CEPAL No. 110, (August 2013).
32
Commission of Growth and Development, Postcrisis World in Developing Countries, (Washington, D.C.: World Bank, 2010).
33
ECLAC, Cambio Estructural para la Igualdad: Una visión integrada del desarrollo, Trigésimo cuarto período de sesiones de la CEPAL, San Salvador,
August 27-31, (Santiago: United Nations, 2012).
34
Always calculated at constant prices. Tere are several papers in which the rate ranges from less than 2 percent annual average, if one takes 1990 as
a point of departure, to just over 3 percent if one takes 1993-94 as the starting point.
TABLE 1. ESTIMATIONS OF THE CONTRIBUTION OF ECONOMIC GROWTH FACTORS IN CUBA
Period ?PIB ?K ?L ?PTF
1976-1985 6 3,42 1,49 1,09
Mendoza (2003)
29
1986-1993 -4,75 1,76 0,91 -6,11
1994-2000 3,81 -1,03 0,08 4,75
1975-1985 6,45 1,7 2,56 2,19
Doimeadiós (2007)
30
1986- 1989 0,52 1,99 1,25 -2,71
1990- 1993 -10,03 -0,57 0,41 -9,87
1994- 2003 3,33 -1,52 0,27 4,58
1986-1993 -4,70 3,08 0,67 -8,45
Palacios (2010)
31
1994-2003 4,42 0,81 -0,22 3,83
2004-2008 6,28 1,21 1,96 3,11
Source: Prepared on the basis of works consulted.
Cuba’s Economic Change in Comparative Perspective
20
the recovery, even though they did not reach the
necessary depth and breadth. Te permanence of
institutional arrangements particular to the devel-
opment style of the 1980s prevented the adjustment
and structural changes that began in 1994 from
having a greater impact.
35
Additionally, the de-
creasing support shows the labor force in the frst
two models suggests that investment in education
requires other supplements (incentives, physical
capital, infrastructure, and information and ICT) to
fully utilize the human capital formed.
ANALYSIS OF THE STRUCTURAL FACTORS
OF ECONOMIC GROWTH
While economic theory and empirical evidence are
not conclusive as to the essential causes of sustained
economic growth, a tacit consensus has formed
around a group of elements that appear to deter-
mine countries’ performance, albeit in diferent
proportions depending on the specifc context and
particular priorities derived from diverse cultures.
Te analysis incorporates some of these essential
factors, grouping them along two main axes: supply
and demand. Within supply, the aspects related to
the simple accumulation of factors and their quality
are addressed. Te second group includes those el-
ements associated with demand, with a special em-
phasis on external markets.
In the fnal analysis, the interaction between them
and the policies decided upon by governments leads
to a certain path, subject to the restrictions and op-
portunities imposed by the international sphere.
Tis sphere has become ever more important in re-
cent decades, and requires special attention on the
part of small countries whose very open economies
are dependent on the external fows of goods, capi-
tal and knowledge.
Dynamics of the Population/Workforce: Te Case
of a Middle-Income Economy with an Advanced
Demographic Transition
Te labor force is one of the fundamental factors of
production. Cuba’s demographic profle suggests a
near future contraction of the labor force, increas-
ing the non-working age population and pressure
on public fnances. Te aging of the population
36
and the increase in the dependency index (from 54.7
at present to 67.7 in 2025) are distinct aspects of this
process. Tis trend could constitute a threat to sus-
tained long-term growth, bearing in mind that due
to Cuba’s stage of development, it still depends on a
greater availability of factors to sustain a path of high
growth. Growth in such circumstances would be al-
most unprecedented for a developing state, since the
experiences of high growth in the last 50 years oc-
curred in countries with a growing and mostly young
labor force during most of that process. Cuba will
face a diametrically opposed situation.
In this regard, although one recognizes the long pe-
riod over which these demographic processes have
unfolded, and the fact that a change in the current
trend would only begin to be perceived within a
few decades, one could put a number of measures
in place to cushion the current explosive path. Tis
would allow more time to formulate other policies
and begin to reap the benefts of the more immedi-
ate measures.
Tis process began, in fact, in 2008, with the re-
form of the Law on Social Security. Te changes
were geared toward increasing the maximum age of
retirement, from 60 to 65 years for men; and from
55 to 60 years for women. Tis made it possible to
delay, for a time, the moment when the rate of new
entrants to the job market would be lower than the
35
Tere are other more recent papers that obtain a breakdown of Cuban economic growth, with slight changes in the periods and methodologies
employed, including, among others, Yordanka Cribeiro, Contribución de la fuerza de trabajo califcada al crecimiento económico en Cuba, (Havana:
Facultad de Econmía, 2011). Nonetheless, the fundamental conclusions do not vary signifcantly.
36
In 2011, 18.1 percent of the population was over 60 years old; that proportion will increase to 26.1 percent in 2025.
Cuba’s Economic Change in Comparative Perspective
21
rate of those who are retiring. Tere was also an in-
crease in the number of years necessary for bene-
fting from a pension in the general regime. Tese
changes may help alleviate the negative impact of
the country’s demographic shif on the availability
of public resources for covering expenditures for a
growing over-60 population.
A comprehensive program is needed to stimulate
the birth rate, as low fertility is one of the direct
causes of the current trend. In this respect, one
could work to establish a program to provide assis-
tance to couples who have more than one child. In
subsequent stages one could extend this plan to in-
corporate some type of facility to acquire or expand
the housing of families with two or more children,
increase the spaces available in day care centers (cír-
culos infantiles), or cover part of the expenses asso-
ciated with child care by private certifed day care
centers, as well as a certain amount of food. Tese
programs, which have been tried with relative suc-
cess in very diferent contexts, such as the Scandi-
navian countries, are highly dependent on an im-
provement in the fscal position of the state.Tus,
they should be implemented once a stable fow of
resources has been secured such that macroeco-
nomic equilibrium is not compromised.
In addition, immigration regulations should con-
tinue to be adapted in order to consolidate, in the
medium term, a process of circular emigration that
attenuates the drain of qualifed personnel to other
countries. One could think about extending addi-
tional guarantees for migrants of working age. Te
idea would be to guarantee, in the best of conditions,
a strengthening of the ties with the country of origin.
Tis efort runs up against a high degree of endog-
eneity, and this characteristic should be a sufcient
argument for accelerating the transformations that
take place in the economic model, especially those
that have a direct impact on the capacity of persons
to use their multiple talents to create individual and
collective wealth and well-being, not only in the non-
state sector, but also the public enterprises in which
most Cuban workers are employed. Improving the
living conditions of vast segments of the population,
albeit to a relative degree, could help contain the fow
of migrants. For the time being, as a result of the
changes in the migration regulations and uncertainty
about the country’s prospects, the negative balance of
migration in 2012 (46,662 persons) was the highest
since 1994, the year of the “crisis of the rafers.” Tis
refects the complexity of the problem and the fore-
seeable negative impacts of this brain drain in the
medium term.
Moreover, it may be necessary to develop closer
relations with the Cuban emigrant community to
facilitate greater exchange with Cuba, while at the
same time extending these contacts beyond afec-
tive ties, family visits, or remittances, and toward
the intellectual-productive realm so as to create
conditions for some to consider a partial return to
their country of origin based on identifying con-
crete interests in the work and business worlds.
Te Quality of the Workforce
Most experts recognize that Cuba is well-endowed
with human capital, the direct result of a very active
education policy that includes higher education. In
2010 Cubans had approximately 10.57 average years
of schooling,
37
the highest of any country in Latin
America and the Caribbean, and one of the highest
in the developing world (trailing only South Korea
and Taiwan). On the education component of the
HDI, Cuba has great educational achievement (87.6
percent of the highest possible score), once again
the best in Latin America and most of the under-
developed world (except former socialist countries
and others in East Asia).
Research capabilities have also been created in sev-
eral areas, with particular distinction in agricultural
sciences, medicine, and biotechnology for applica-
tions related to human health. Nonetheless, in the
last two decades, due to a multitude of factors close-
ly related to the economic crisis of the early 1990s,
37
Robert J. Barrow and Jong Wha Lee, “Educational Attainment for Total Population, 1950-2010,” v. 1.0, 2010.
Cuba’s Economic Change in Comparative Perspective
22
the quality of the education system has gradually
deteriorated while other essential complements
for the development of human capital such as the
quantity and quality of the means of production,
and expanding capabilities for basic and applied
research, among others, have also experienced set-
backs. Added to this is the weakness of the produc-
tive system, whereby a sufcient number of jobs
are not created to efciently absorb highly-skilled
workers.
Added to this is a structure of skills in the profession-
al and technical personnel that has not been updated
fast enough to fully assimilate the major technolog-
ical advances of the last two decades. Tese short-
comings are especially noteworthy in information
and communications technologies (ICT) and foreign
languages (Table 2). In addition, education and train-
ing in engineering and the natural and exact sciences
were substantially cut back with the crisis. Finally,
the major efort to extend the reach of higher educa-
tion did not translate into a signifcant improvement
in the quality of the graduates.
Tere are baseline conditions that depend on a
greater endowment of resources, from more in-
vestment in updating the equipment available for
training professional and technical personnel, to
greater deployment of ICTs, which would help in-
crease access to knowledge generated elsewhere. In
addition, exposure to international trends should
be furthered through education-abroad programs,
including graduate-level education. In this area one
could also make progress through coordinated ac-
tions in relation to foreign investment strategy. Such
requirements have been applied by other countries
to expand the spillover efects of such fows.
On another topic, increased technical training for
teachers and professors is also subject to an im-
provement in economic performance that would
make it possible to increase salaries. At the same
time, gradually eliminating the monetary duality
would foster a better scenario for evaluating the im-
pact of these movements on price stability.
Physical Capital Accumulation
Current levels of investment do not guarantee the
replenishment of physical capital or its expansion
at the required rates. In the presence of very low
domestic savings, one must substantially increase
access to external savings, especially through FDI.
Tis not only guarantees fnancing, but also new
knowledge, technologies, markets, and insertion
in global and/or regional value chains, and diver-
sifes risk. One could put together a comprehensive
strategy along these lines that includes at least these
three axes.
First there is the need to increase the volume of re-
sources and to improve efciency in the use of do-
mestic savings. Tis requires a proper framework
that stimulates productive investment by national
actors, public or not, which matches their treatment
to that granted to foreign companies.
Tis requires the progressive updating and mod-
ernization of the national fnancial system so as to
facilitate the use of new instruments and the deploy-
ment of a specialized banking system such as de-
velopment banks, agricultural banks, microfnance
institutions, and venture capital. Here the human
resource training component is crucial, along with
introducing new information and communications
TABLE 2. SELECT INDICATORS OF ICT INFRASTRUCTURE
Cuba Latin America
Fixed telephone lines (/100 pop.) 10.6 18.5
Mobile telephone lines (/100 pop.) 11.7 106.7
Internet Users (/100 pop.) 23.2 39.4
Broadband Internet subscriptions (/100 pop.) 0.04 7.5
Source: By the author based on ONEI, Anuario Estadístico de Cuba (several years) and World Development Indicators (2013).
Cuba’s Economic Change in Comparative Perspective
23
technologies. One can look to successful experienc-
es in this area in Latin America, both of govern-
ments and of numerous fnancial institutions and
regional integration bodies. One must note that as
growth rates improve and global productivity in-
creases, one should generate larger volumes of do-
mestic savings, which would amplify the scope and
impact of such transformations.
A notable reserve of investment resources (and oth-
er resources, including labor) lies in progressively
reducing the administrative apparatus of the Cuban
State and Government. Such an initiative would
free up a huge sum of resources for other productive
purposes, while at the same time is consistent with
an economic mechanism in which indirect regula-
tion and the use of modern systems for planning
and managing economic activity will have greater
weight. It would be a substantial supplement to ef-
forts to increase the contribution of national sourc-
es to the fnancing of productive investment.
Nonetheless, it is understood that due to both the
conditions at the starting point and the present stage
of Cuba’s development, external fows of fnancing
will be key for many years, representing all together a
larger contribution than could be achieved from na-
tional sources. One must bear in mind that the aver-
age invested in the last two decades is only 10 percent
of GDP, far less than the rates of 25-30 percent that
have been observed for many years in high-growth
economies. For that reason, a series of actions should
be proposed to improve access to international fnan-
cial markets that includes a gradual approach to the
most important fnancial institutions (the Bretton
Woods system), but also to other regional fnancial
institutions, such as the Andean Development Cor-
poration (CAF), the Inter-American Development
Bank (IDB), and the Bank of the South. Tere are
numerous political and technical obstacles, but the
magnitude of the benefts suggests integrating these
eforts within the transformations under way.
At the same time, there should be continued eforts
to renegotiate the largest tranches of Cuba’s exter-
nal debt on sustainable bases. To date, favorable
results have been reached with Japan and Russia,
both members of the Paris Club; but steps in this
direction should be accelerated. One important
channel for supporting the aforementioned strat-
egy has to do with negotiating preferential associ-
ation agreements with partners with great weight
in the world such as the European Union and the
Union of South American Nations (UNASUR).
Both blocs have some favorable conditions for suc-
cessfully concluding those processes. One notable
characteristic of the above-mentioned actions is the
“avalanche” efect, whereby the extent to which tan-
gible gains are attained in an area, more propitious
conditions would be created for success in all other
respects. Tis extends to the country’s credit scores,
which impose a huge additional cost derived from
the high country risk and by the fact that only one
of the three major credit rating agencies includes
Cuba in its analyses.
38
In order to capture larger-scale fows of foreign capital,
a new comprehensive strategy for attracting FDI needs
to be designed. Such an initiative is both essential and
promising in current conditions. Along these lines,
one must make progress in grasping the many contri-
butions that can be expected from such a movement
if it is conceived of as part of a vision of development
looking to the future that takes into account the con-
ditions and rules of the contemporary world. Here one
can include the usual capital, technology, and market
along with values of a new generation such as the cre-
ation of high-skilled jobs, insertion into global and/or
regional value chains, risk-sharing, etc. In view of its
expected impact, one should design a special policy
for attracting large foreign businesses that can have a
signifcant “demonstration” efect for other partners.
Existing niches could also be tapped to attract more
funds to small- and medium-scale projects with a lo-
cal and regional impact.
38
Moody´s. In April 2014, this agency downgraded Cuba’s sovereign debt to Caa2, citing, among other things, the high exposure of Cuba’s balance
of payments to reduced ties with Venezuela.
Cuba’s Economic Change in Comparative Perspective
24
At present, the Law on Foreign Investment is un-
der review and it is anticipated that there will be a
specifc regime for the Special Development Zones
(Zonas Especiales de Desarrollo, or ZEDs), among
which the Port of Mariel is a pioneer. In both cases
one of the bases of current tax revenues should be
consistent with international practice and progress
in the immediate regional environment. Otherwise
it would be very difcult to ensure the success and
sustainability of such policies. Te same reason-
ing, if applied to special projects such as the ZEDs,
could be extended to certain economic sectors for
the purpose of fostering the best possible condi-
tions for their subsequent advance.
Structure of Accumulation and Complementarity
among Productive Factors
Te previous considerations are relevant only to the
extent that it is understood that one essential principle
for the policy recommendations that stem from this
approach is that—more important than the specifc
aspects—consolidating a successful and sustainable
strategy for accumulating factors lies in the degree of
complementarity that must be found at each point in
time. Given that planners’ information needs are very
high, a steady advance depends on progressive decen-
tralization and changes in the rules of the game at the
microeconomic level, including the strong promotion
of innovation and external competition.
Progressively reducing the distortions present in
the fundamental prices of the economy plays a role
here. Correcting the disequilibria associated with
the dual monetary circulation and the multiplic-
ity of exchange rates is a necessity that cannot be
put of. Tis should be supplemented successively
by mechanisms that make it possible to transmit
changes in international prices to the domestic
economy so as to guide the internal allocation of
resources. Tis is especially relevant taking into ac-
count the size of the Cuban economy and its high
dependence on foreign trade.
Te other main component of these macroeconomic
changes is situated at the level of the meso-economy.
It would be especially important to design an indus-
trial policy that would boost the competitiveness of
those activities that have a special impact on accu-
mulation and on Cuba’s external insertion. In this
regard, not only is the quantitative and qualitative
increase in the availability of productive factors im-
portant, but in addition, a regulatory framework
with adequate rewards and penalties is needed for
establishing clear rules that make it possible for
the economic actors to correctly channel their de-
cisions related to the combination of available fac-
tors. Accordingly, a sufciently fexible and mod-
ern framework is needed so that enterprises of any
size and type of ownership can increasingly make
fexible decisions about their levels of production,
prices, type of ofering, choice of suppliers and tar-
get markets, and establish various partnerships,
including with foreign companies. Moreover, prog-
ress is needed on the institutional framework that
supports progressive fulfllment of the fundamental
markets of the economy, such as the fnancial mar-
ket, the labor market, and the capital goods market.
Access to International Markets
One of the secular characteristics of the Cuban econ-
omy has to do with its high external dependence and
the prejudicial nature of that relationship over histo-
ry. Cuba’s most profound economic crises have had
to do with disturbances whose origins are in the ex-
ternal sector. In this context, one notes the country’s
scant export dynamism, the maintenance of a profle
of low levels of diversifcation, specialization tied to
products that are hardly dynamic in the internation-
al market, and dependency on a large commercial
power at diferent stages. In the Latin American
region, Cuba has one of the least commercially-in-
tense economies, especially if one bears in mind its
size and level of development. Tis condition has not
changed substantially in the last 25 years, even if one
takes into account the efect of the sales of services
(Table 3). Tis performance is inconsistent with a
history of high growth for open economies.
Te Cuban central government should accord high
priority to attaining greater trade integration based
Cuba’s Economic Change in Comparative Perspective
25
on negotiating mechanisms for preferential access
with diferent partners. In Latin America, Cuba is
one of the countries with the fewest preferential
trade agreements, which puts its producers at a
clear disadvantage vis-à-vis their competitors in the
rest of the world. Preferential agreements need to
be negotiated with more countries, extending to in-
vestments, protection for intellectual property, and
technical barriers to trade given the strong relation-
ship between fows of productive capital and trade
in the modern world. Certainly the U.S. blockade
is a major obstacle in this regard, with profound
bilateral and multilateral implications. In trade,
the United States accounts for almost one-fourth
of world imports, but it is an even more important
buyer for the countries of Latin America, which
means that the cost to Cuba is much higher than
what one can predict based on a static analysis. To
this is added a signifcant qualitative dimension: it
is not just one more trading partner, but a world
leader in the supply of advanced technologies and a
major source of investment fows.
Another sphere in which substantial changes are in
order is the regulatory framework for exporters. For
example, even though Cuba has negotiated some
trade agreements with Latin American countries, at
present most of the items subject to preference re-
main inactive on the Cuban side. One of the most
common complaints from Cuban exporters is the
large number of regulations that apply to export
operations and all the red tape one must wade
through. A relatively small sum of resources could
go a long way toward simplifying these procedures.
One very important aspect is related to modifying
the nature of the intermediation between producers
and commercial operators in the external markets.
At present, it is still administrative in nature, caus-
ing great inertia and infexibility, further distanc-
ing the producers from the trends in international
markets. Here one could further strengthen a group
of key institutions such as chambers of commerce,
both general and those that represent specifc sec-
tors, while at the same time strengthening an ex-
port promotion agency with a clear mandate. Tese
organizations could fll the needed space, advising
Cuban companies to expedite the process of com-
ing out successfully in the external market. To this,
other more specialized ones could be added based
on the type of product or geographic area.
Te Domestic Market
Ofen forgotten or undervalued, the role of the
domestic market takes on new importance today
as a factor for promoting growth. In this case,
it is important to understand that the change in
the scenario of the current Cuban economy and
future trends promote an expanded role for new
economic actors (small and medium enterprises,
TABLE 3. EXPORT POTENTIAL OF SELECT COUNTRIES OF LATIN AMERICA
Countries Total exports/GDP
Exports of
goods /GDP
Per capita total
exports
Per capita
exports of goods
1990 2012 1990 2012 1990 2012 1990 2012
Bolivia 20 45 17 41 147 1149 125 1067
Chile 31 34 25 29 775 5205 635 4482
Costa Rica 27 38 19 25 639 3542 441 2381
Cuba 21 22 19 9 562 1474 512 567
Dominican Republic 20 25 8 15 255 1416 102 876
Ecuador 29 36 24 34 318 1708 265 1591
Guatemala 23 25 18 20 176 832 136 670
Uruguay 23 27 18 20 694 3870 544 2928
Source: Authors’ estimates based on United Nations Conference on Trade and Development UNCTADStat (consulted February 2013).
Cuba’s Economic Change in Comparative Perspective
26
cooperatives, and private actors). Te role of these
new actors in creating capacities for accumulation,
the process of completing the productive chains,
and the introduction of process and product inno-
vations should radically change the structure and
dynamics of Cuba’s domestic market. One of the
essential challenges has to do with achieving the
full integration of these new actors to productive
activity, including access to knowledge and new
technologies.
Other countries’ experiences show that horizon-
tal relations are essential in a modern economy.
Along with traditional commercial relations, one
also notes an increase in agreements related to in-
vestments, joint project management, integrating
research and development units, strategic partner-
ships for accessing new markets, and many more.
Tis type of behavior is associated with a more fex-
ible type of organization that responds to the chang-
es more nimbly and that is capable of constructing
and sustaining competitive advantages, intelligently
combining their capacities with those of other insti-
tutions that operate in their milieu.
Te Cuban economic model has worked with a
wide variety of barriers that limit the development
of horizontal relationships among institutions,
parceling up a domestic market that is already
small. Tis creates additional difculties for the
social division of labor and specialization, which
are fundamental forces for increasing productivity
and, therefore, for improving incomes and eco-
nomic and social development. Among the most
visible barriers, one can cite the highly vertical and
centralized structure of the economic system, the
placement of the entities by provinces, the type of
currency with which current transactions are con-
ducted, the form of ownership, and ministerial af-
fliation, among others.
Given that the economic system works on the basis
of a vertical and centralist model, most decisions
are made at the higher-level structures for coordi-
nation. Tis means that the duration of the whole
process is drawn out, as proposals have to be dis-
cussed and approved at the various levels, to later
be implemented in the companies. In addition,
given that in general these actions involve the ex-
ecution of resources, and that such expenditures
should be included in the annual plan of the entity
and corresponding ministry, approval is even more
complex because it depends on the real availability
of resources in keeping with the external fnancial
balance sheet. Tis presupposes certain very strong
disincentives for managers when it comes to seri-
ously thinking of undertaking an action in this re-
gard.
In other cases, the possibility of associating or es-
tablishing some type of exchange is prohibited or
limited administratively. Tis is the case of service
companies assigned to a specifc territory (province
or municipality) or those that address their respec-
tive ministerial structures. As a rule, they cannot
engage in transactions with entities other than
those approved for purchasing their inputs, selling
their production, contracting a specifc service, etc.
Te same holds for diferent types of ownership, al-
though this has improved formally in the last year.
All these barriers are much more severe if the coun-
terpart is a foreign company.
An examination of the overlap of these limitations
reveals an evident contradiction. On one hand the
entities are constantly called on to improve their
performance, while on the other hand those same
enterprises cannot respond with agility to the op-
portunities they identify. In the contemporary
economy this capacity depends crucially on being
able to establish a dense network of ties with their
counterparts in a wide array of areas, but depriving
them of that ability translates into a substantial re-
duction in their possibilities of success. Tis takes
on a larger dimension for those that are closely tied
into external markets.
Moreover, the current monetary arrangement is
based on the circulation of two currencies and mul-
tiple exchange rates. It has resulted in the establish-
ment of numerous distinct markets that operate
simultaneously. Some difer in the mechanism of
Cuba’s Economic Change in Comparative Perspective
27
price formation (regulated, fxed, freely formed),
others use diferent monetary signs (CUP, CUC,
USD), and there are both formal and informal mar-
kets. In many cases one observes an overlap of sup-
ply, in terms of trading in goods and services that
are very similar or even substitutes at very diferent
prices. Tis process ends up feeding an informal
market that operates on the basis of the arbitrage
of those price diferences. In addition, the growing
importance of the non-state sector of the economy,
which is not administratively subject to the rules of
the Annual Economic Plan, has most intensely re-
vealed that the development of markets for factors
of production is lagging considerably with respect
to consumer goods. In addition, the restrictions in
which Cuban monetary policy has operated in the
last 20 years have resulted in monetary mechanisms
in which price stability has depended excessively on
containing real salaries, which keeps the actual con-
sumption of families at very depressed levels. Tis
conspires against the necessary increase in aggre-
gate demand, so as to make it possible to accommo-
date a larger and more specialized supply.
Tese distortions result in the process of allocation
of productive resources taking place without clear
signals of the relative scarcity of the various inputs,
factors of production, and structure of demand.
Tis inevitably leads to a very inefcient distribu-
tion, precisely the least desirable outcome in a con-
text of scarcity. On top of that, the dynamic efect
of this mechanism could be the most dangerous
aspect. For example, the diferences in remunera-
tion among certain occupations may be inducing a
shif in the skilled labor force to positions that do
not necessarily require a high professional level.
Tis may represent a gain in the short run for the
individual, but it may be a waste of resources from
society’s point of view. Unfortunately, once a cer-
tain amount of time has gone by in such conditions
it is very costly to reverse the situation, since the
non-use of certain skills and know-how may result
in a partial disqualifcation. Similar processes may
be occurring in other markets, while the enormous
current distortions are maintained.
CONCLUSIONS
Cuba is a special case of the paradoxes of develop-
ment. Cuba is a pioneer in explicitly introducing
social policies into a development strategy, with un-
questionable accomplishments in terms of standard
of living and social mobility indicators. Yet going
back to the years prior to 1990, it is also notable for
its limited capacity to tap into that unquestionable
advantage, especially in the last two decades, given
its scant fexibility when it comes to accommodat-
ing to a changing and ofen hostile external envi-
ronment. A signifcantly less prodigious scenario
and 20 years of attrition managing a crisis that be-
gan in the 1990s, have led to a re-thinking of the
future in the medium to long term and to an efort
to fnd a model of sustainable development that en-
sures prosperity and gains for the nation in specifc
areas.
Te paradoxes, however, are unquestionable. On one
hand, Cuba is a country with limited resources that
has not succeeded in coming up with a macroeco-
nomic and institutional design that allows it to ex-
ploit those scarce resources intensely and efectively.
On the other hand, it enjoys a relative abundance of
highly skilled labor for which the economic mod-
el is not able to generate adequate, productive, and
sufciently well-remunerated employment. Tere is
also increasing recognition of the insufciencies of
the state sector along with hesitations and sustained
restrictions on greater expansion of a non-state sec-
tor that has already proven it can be functional to
the purposes of Cuban socialism. Characteristics in-
clude: unquestionable evidence of the insufciency
of its own resources for undertaking development
and signifcant technological lags along with de-
lays that are hard to understand in the opening to
foreign capital; time restrictions, both political and
economic, in the face of procedures that at times are
excessively drawn out for making and implement-
ing economic decisions, with an opportunity cost
that has yet to be calculated (but is no doubt high);
a strong aspiration to decentralize decisions in the
face of a profound centralizing culture that perme-
ates the very process of “decentralizing”; the need
Cuba’s Economic Change in Comparative Perspective
28
for “institutional innovations” that accompany the
“updating of the model” in the face of the survival
of institutions that were born and developed in the
past that have not been able to change their modus
operandi in any essential respect and that generate
high transaction costs.
Tat is why the policies for stimulating growth
must not be considered in isolation from the con-
text in which they are implemented. Just in the
last two years there has been a much more explicit
intent to integrate that vision of growth and devel-
opment in Cuba as part of the strategy for “mod-
ernizing Cuban socialism.” Nonetheless, there is
still a long way to go not only in terms of design,
but also when it comes to applying the approved
policies and learning from those experiences. One
must also acknowledge that as the process advanc-
es it will be more complex, as the Cuban economy
and society will become more diverse. It will then
be much more necessary to truly fne-tune and co-
ordinate those policies to be able to minimize the
costs of that process.
Technical difculties are also encountered in the
initiative to move toward policies with an emphasis
on economic growth. First, the skills and knowl-
edge that Cuba’s decision-makers manage to in-
corporate will be key. Tis is due essentially to the
fact that for 50 years they have trained in a context
and with mechanisms that are part of the problem
today, and a consensus appears to be emerging in
the direction that some of the coming tasks have
to do with making substantial changes to the eco-
nomic model. Even though certain terms are not
used, it seems clear that Cuba is moving toward a
model more like a market economy
39
, yet the fnal
objective does not appear to be to transition into a
typical capitalist country. Tis has a value that goes
beyond the sphere of political economy, given that
the reconfguration under way implies that the tools
and policies to be fostered (for example, economic
growth), would be increasingly similar to those em-
ployed by most countries. Hence the importance of
drawing on the lessons learned from the experienc-
es of other nations.
Te microeconomic level is another area that may
be a source of bottlenecks in implementing these
policies since there have been no frms or con-
sumers in Cuba for many decades in the standard
meaning of these terms. As a result, the institu-
tions that support the sound working of markets
40
(in which these economic actors increasingly have
to make their decisions) are very weak and do not
have the skills or know-how in the public adminis-
tration to construct them, again due to the previous
experience being practically irrelevant. Tis line of
reasoning indicates that the scenario that Cuban
decision-makers will face in the future will be no
less difcult with regards to the mix of policies and
instruments for directing an increasingly complex
and decentralized economy. Tis would be the case
even if economic indicators were to improve sig-
nifcantly.
39
Tis can be observed in a number of spheres, such as: the growing weight of the non-state sector (private and cooperative); greater decentraliza-
tion in decision-making for all economic actors as a whole (consumers, state enterprises, private enterprises, cooperatives); greater functionality of
the price system in the allocation of productive resources; and the growing role of direct taxes (applied to the net earnings of a productive activity)
in fnancing the State, among others.
40
Including, among others, the defnition and promotion of basic economic rights, the promotion and defense of competition, correction of market
failures, promotion of stability and growth, and social cohesion and efective dispute resolution. For more details on this issue see Alonso and
Vidal.
Cuba’s Economic Change in Comparative Perspective
29
Economic Transformations and
Institutional Changes in Cuba
41
Antonio F. Romero Gómez
INTRODUCTION
In recent years (2011-2014) a process of major
changes has been set in motion in Cuba that afects
core aspects of the previously existing economic
model. Te economic transformation—structural
in nature, also including reforms in management
mechanisms, and in economic and administra-
tive organization—entails changes in the political
sphere and equally key institutional challenges.
Te relationship between economic change and
institutional change is a two-way process: institu-
tional change is necessary for enforcing economic
reform, and economic reform, in itself, changing
the rules of behavior of economic and social actors,
implies an institutional change. At present, Cuba
is going through an economic transformation of
greater reach than the country had experienced in
earlier periods. Given the irreversible nature most
analysts attribute to these changes, they must be
accompanied by a profound institutional change,
understanding this as a change in the rules, norms,
and values that had prevailed in Cuba until recent
years.
In light of the aforementioned, it is useful to study
the institutional changes that accompany—and
also those that should accompany—the process of
economic and social transformation currently un-
der way in Cuba.
Obviously, the Cuban case is characterized by a set
of elements—both objective and subjective—that
explain certain points of resistance to the process
of change, and which make it such that this process
has been based on the implementation of gradual
yet continuous modifcations
42
that are leading the
system towards an economic, social, and institu-
tional environment unknown to most Cubans born
afer the triumph of the revolution.
Te fundamental purpose of this paper is to study
the economic and institutional changes that have
occurred in Cuba in recent years. To do so, the
analysis is organized in four sections. Te frst high-
lights some recent conceptual notes regarding the
discussion about institutions and economic change.
Te second section addresses considerations con-
cerning the starting point of the economic and in-
stitutional changes in an efort to contextualize the
Cuban reality up to the end of the last decade. Te
third section undertakes an analytical summary of
the economic and institutional changes that have
taken place in Cuba in the most recent period. Te
fourth section describes some of the most import-
ant institutional changes facing Cuban society to-
day, highlighting what remains to be done. Finally,
41
Tis paper has been translated from Spanish to English.
42
In efect, not a year has gone by in Cuba since 2008 in which some regulation typical of the past has not been modifed.
Cuba’s Economic Change in Comparative Perspective
30
the main ideas contained in this essay are summa-
rized in the conclusion.
GENERAL CONTEXT OF THE DISCUSSION
ON INSTITUTIONS AND ECONOMIC CHANGE
Institutions defne the framework of incentives and
penalties, of values, norms, and beliefs that shape
and regulate social interactions. In so doing, institu-
tions not only reduce their own risk and transaction
costs, but also spur on collective action, resolving
certain problems of coordination that arise among
institutions that make decisions independently in a
framework of generalized interdependence.
43
In the recent period the most modern theories re-
garding economic growth and development em-
phasize the relevance of institutional quality in the
processes of modernization and growth of econo-
mies.
44
With respect to both the discussion of the
relationship between institutions and economic
development, and the adaptability to change or the
socially acceptable distribution of the benefts of
collective action, there is a strong focus on the idea
of institutional quality and its main determinants.
In estimates by Alonso and Garcimartín,
45
institu-
tional quality is the most solid and robust factor
explaining countries’ development, no matter the
indicator used to measure it. Many analysts tried
to identify the variables that explain institutional
quality, having recourse to historical or geographic
factors in each country. In an earlier article Alon-
so and Garcimartín adopted a more analytical ap-
proach, trying frst to identify the criteria that defne
a “quality” institution.
46
Tey suggest the following
criteria for gauging institutional quality: (i) the ca-
pacity of an institution to promote equilibria that
exhaust the possibilities aforded by the technolog-
ical frontier; (ii) the capacity of the institution to
draw up credible inter-temporal contracts; (iii) the
capacity to reduce the uncertainty associated with
human interaction; and, (iv) the capacity of the in-
stitution to anticipate changes in the social reality.
Change theory has evolved to greater complexity in
explaining the economic dynamic, incorporating
new factors and new economic conditions, moving
from the realm of the tangible (physical capital) in
identifying the factors that promote growth to an-
other realm in which less tangible factors play an
important role, such as externalities, knowledge,
technology, and human capital.
47
Sustained economic growth implies macroeconom-
ic stability, for which there must be a stable, credible,
and predictable legal and regulatory framework in
the country. In addition, public fnance, with its two
components of revenues and expenditures, needs to
be efcient, fexible, fair, and efcient. Clearly, both
the regulatory activities of the state and those as-
sociated with its redistributive functions depend
on the scale of and capacity for managing the pub-
lic treasury. Finally, to ensure sustained economic
growth, it is essential to have adequate institutions
for promoting macroeconomic stability through
monetary, fscal, and exchange policy instruments.
Also among the determinants of sustained econom-
ic growth are considerations associated with the
distribution of income and assets, which requires
that the state correct that distribution, to that end
drawing on the possibilities aforded by its regula-
tory activity and the policy for revenues and pub-
lic spending. Tis task, intrinsic to every modern
state, is essential given that the market strengthens
43
José Antonio Alonso and Pavel Vidal, “Reglas, incentivos e instituciones,” in ¿Quo vadis, Cuba? La incierta senda de las reformas, ed. José Antonio
Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 256-279.
44
Nonetheless, we are far from having a unifed and consensus-based theoretical framework for analyzing institutions and their change processes.
45
José Antonio Alonso and Carlos Garcimartín, “Factores determinantes de la calidad institucional. Un estudio empírico”, Revista de Economía
Aplicada, Vo. XIX, No. 55, (2011) pp. 5-31.
46
José Antonio Alonso and Carlos Garcimartín, “La calidad de las instituciones: una panorámica internacional,” Cuadernos de Información
Económica, no. 202, (February 2008).
47
José Antonio Alonso and Juan Triana Cordoví, “Nuevas bases para el crecimiento,” in ¿Quo vadis, Cuba? La incierta senda de las reformas, ed. José
Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 25-64.
Cuba’s Economic Change in Comparative Perspective
31
dynamics of accumulation conducive to increasing-
ly polarized income distribution.
48
Finally, promoting social cohesion—an indispens-
able component of any development strategy and
any sustainable pattern of growth—requires the
existence of solid and credible institutions to rep-
resent and channel the interests of the most diverse
social groups. Given that the market does not guar-
antee adequate distribution of economic activity
throughout the national territory, promoting social
cohesion also requires setting in motion regional
and institution policies to correct exclusionary ter-
ritorial dynamics.
HISTORICAL CONTEXT AND STARTI NG
POI NT OF THE CURRENT ECONOMIC AND
INSTITUTIONAL CHANGES I N CUBA
From the triumph of the Revolution until 1976, a
period referred to as one of provisional institution-
al arrangements (de provisionalidad institucional),
the Revolutionary Government centralized and
concentrated executive and legislative functions in
Cuba. It did not distinguish between state functions
and governmental functions. Te laws issued by it
were constitutional in nature and aimed to address
all areas of social life from this single organ of pub-
lic power.
49
Te permanent hostility of the U.S. administrations
—through political pressures, the imposition of dip-
lomatic isolation, espionage, economic sanctions,
direct aggression in various forms including orga-
nizing plans to assassinate President Fidel Castro,
and military harassment—helped to install a siege
mentality in Cuba’s institutional culture. In this
context, the political leadership of the country un-
derstood that the concentrated control of resources
and forces, the armed mobilization of the popula-
tion, and discipline in citizen conduct were the best
resources for gathering forces that would deter the
intent of direct aggression and would make it pos-
sible to address the challenges raised by the indirect
aggression.
50
Concurrently, the revolutionary state
grew in size, infuence, and degree of programming
of social life, on the legitimate grounds of national
defense.
In economic terms the model included—and still
does, albeit with signifcant modifcations—attrib-
uting decisive weight to state ownership over prac-
tically all the means of production, and according
priority to large state enterprises as the fundamen-
tal form of economic organization. Te direction of
the economy has been based on planning with very
high doses of centralization and, consequently, the
role of monetary-mercantile relations in economic
operations has been marginalized.
To the aforementioned one must add the efects
stemming from the profound process of income
and opportunity redistribution through social jus-
tice policies via state action, with the consequent
social ascent experienced by broad sectors of the
Cuban population during this period. Tis rein-
forced the perception that it was necessary to en-
shrine the state as the only instrument capable of
carrying out the great revolutionary transformation
and ensuring national independence.
51
Te socialist Constitution promulgated on Febru-
ary 24, 1976 institutionalized the new state. It had
three fundamental objectives: (i) to regularize the
decision-making process, (ii) to decentralize state
power, and (iii) to enshrine the catalogue of citizen
rights. Tese objectives were to be attained through
the dynamic of centralization-decentralization
48
Te public institutions should set in motion corrective mechanisms that prevent the consolidation of exclusionary processes and strengthen equal
opportunity among economic actors.
49
See Santiago Díaz de Sarralde and Julio César Guanche , “Descentralización y desconexión del poder estatal,” in ¿Quo vadis, Cuba? La incierta
senda de las reformas, ed. José Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 226-255.
50
Ibid.
51
Ibid.
Cuba’s Economic Change in Comparative Perspective
32
established in the text of the Constitution. None-
theless, the institutional system would preserve
strong features of state concentration and, at the
same time, determined that in the dynamic of cen-
tralization-decentralization, the central level of the
State would be favored.
Since 1992, when the Constitution was amended to
bring it into line with the post-Cold War scenar-
io, the state structure has been notably reduced:
there was a cutback in public sector employment,
state organs were downsized, certain state functions
were redefned, an efort was made to decentralize
power downward (to the provincial and munici-
pal governments), and laterally (to the ministries),
there was an increase in the autonomy of the parts
(ministries and other states institutions) and dif-
ferent levels (national, provinces and municipality
levels), and measures were adopted for their oper-
ations that granted more space—albeit limited—to
the market forces, with prices established by supply
and demand.
52
Tese changes became much more
evident as of 2011, with the gradual implementa-
tion of several policy measures incorporated in the
Economic and Social Policy Guidelines, which were
approved at the Sixth Congress of the Communist
Party of the Cuba and aferwards reafrmed by the
National Assembly of People’s Power, a process that
will be addressed in the next section.
53
In any event, the Cuban State continues to exhibit, at
the beginning of the second decade of the 21
st
cen-
tury, a notable degree of centralization that was ex-
pressed both territorially, with respect to the scope
of authority of provinces and municipalities, and
functionally, on concentrating the decision-making
processes of a good part of the economic agents,
mainly of the state enterprises, which are at the core
of the national productive structure. Te current
economic and institutional reform is called upon
to reduce those degrees of centralization, allow-
ing for greater autonomy for the state enterprises
and the new non-state productive actors that have
been consolidating, as well as for the geographical
entities. Certain advances can be noted along these
lines. Obviously, this process is not easy, since it af-
fects one of the key axes for articulating power and
defning spaces for citizen participation.
ECONOMIC MODI FICATIONS AND
INSTITUTIONAL CHANGES: IMPLEMENTI NG
THE ECONOMIC AND SOCIAL POLICY
GUI DELI NES I N CUBA
Any assessment of Cuba’s economic performance
afer the triumph of the Revolution in 1959 would
have to recognize periods in which there were gains
and positive results, but also structural rigidities
and bottlenecks that ultimately have held back the
development of the productive forces in Cuba.
From 1959 to 1989 Cuba’s total output grew at an
average annual rate of 4.3 percent, which deter-
mined per capita growth of 2.8 percent, for which
signifcant investments were made, and average an-
nual gains in labor productivity came to 2 percent.
54
More signifcant is that those results were record-
ed at the same time as a progressive redistribution
of income was brought about stemming from the
profound transformations in the social structure
based on the radical revolutionary process begun
in January 1959, and in the midst of the iron-fsted
economic sanctions—commercial and fnancial—
imposed by the government of the United States on
Cuba as of early 1962.
Te changes in the international scene in the late
1980s, and in particular the disappearance of the
socialist system from the world economy, undercut
52
Indeed, the State, since the early 1990s – with the economic adjustment and reform measures begun in 1993 – renounced part of its monopoly
over the economy, employment, and control of the population’s incomes.
53
Cuban Communist Party, VI Congress of the Cuban Communist Party, Lineamientos de la política ecónomica y social del partido y la Revolución,
April 18, 2011.
54
José L. Rodríguez, “La economía cubana,” in Estado, nuevo orden económico y democracia en América Latina, (Caracas: Editorial Nueva Sociedad,
1992), pp. 217-223.
Cuba’s Economic Change in Comparative Perspective
33
the bases that sustained Cuba’s foreign economic
relations and set in motion an acute critical dynam-
ic in the Cuban economy starting in 1990. Tose
transformations required re-articulating the coun-
try’s external economic relations. Tat re-articula-
tion of Cuba’s foreign engagement, begun in 1993,
resulted in some changes in the forms of economic
management as well as perceivable—though not
radical—changes in the structure of ownership and
employment. For some observers, the emergence
of new actors who shook up the “traditional social
values” of the Revolution was a “necessary evil” that
should be corrected once past the critical stage and/
or once the external conditions for the country’s de-
velopment changed.
With the ushering in of the new century, and with
a gradually expanding economic relationship with
the Bolivarian Republic of Venezuela—later in the
context of the Bolivarian Alliance for the Peoples of
Our America (ALBA)—as well as consolidated re-
lations with the People’s Republic of China, the pro-
cess of changes in economic policy and economic
management (weakened since the late 1990s) came
to a halt and there was a certain turning back of
the process of economic decentralization that had
been experienced earlier. Yet the new modalities
of foreign engagement, with major revenues for
Cuba from the export of professional services and
favorable conditions for fnancing fuel imports, did
not prevent the re-emergence of a period of clear
economic stagnation, with serious macroeconom-
ic disequilibria and severe fnancial limitations,
since the middle of the last decade. Te structural
obstacles that impeded Cuba’s economic and social
development were felt once again, as has happened
repeatedly. Tose obstacles include: (i) lack of ade-
quate internal linkages in the productive structure,
(ii) lack of any change in the profle of productive
specialization (of goods), (iii) signifcant depen-
dence on intermediate and capital goods from
abroad to complete the cycle of major production,
(iv) technological obsolescence in several areas of
production, and, (v) very low economic efciency
and return on capital, which do not correspond to
the levels of education and training of the Cuban
workforce.
In large measure the insufciencies of the country’s
economic structure and dynamic could perhaps be
explained by the general characteristics of the Cu-
ban enterprise system. In a study of the systems for
managing the economy since 1959 and their impact
on the productive trajectory of the enterprises,
55
two essential elements stand out. First, the develop-
ment strategies promoted in this period were char-
acterized by the absence of a systemic approach,
impeding the attainment of key long-term objec-
tives; it was not possible to implement a coherent
set of strategies, policies, and instruments aimed at
generating a favorable context for innovation. And
second, the regulation and control mechanisms
were characterized by their centralization and verti-
cality, leaving little space for enterprises, and result-
ing in the predominance of large state enterprises
and a practically ceremonial role for cooperatives,
relegating individual entrepreneurship to a margin-
al role.
56
On taking stock of the above-noted structural prob-
lems the highest-level authorities in Cuba proposed
the need for a major process of structural changes in
the management of the economy and in economic
policy, under the rubric of “updating the economic
model,” which was approved at the Sixth Congress
of the Communist Party of Cuba.
57
As part of that
program, many changes have been introduced in
the economy and regulatory system.
Among the recent modifcations, several have as
their purpose the restructuring of the national econ-
omy in terms of employment, ownership structure,
55
Ileana Díaz Fernández, “La productividad en la empresa estatal cubana,” in Economía Cubana, ensayos para una reestructuración necesaria, eds.
Omar Pérez Villanueva and Ricardo Torres Pérez, (Havana: Centro de la Economía Cubana (CEEC), 2013), pp. 193-220.
56
See Isabel Álvarez and Ricardo Torres, “Tecnología, innovación y desarrollo,” in ¿Quo vadis, Cuba? La incierta senda de las reformas, ed. José
Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 102-147.
57
Cuban Communist Party.
Cuba’s Economic Change in Comparative Perspective
34
and scale of production. Tis restructuring opens
up more spaces and promotes a scenario in which
market considerations are becoming incorporated
into the design of economic regulation policies.
58
At the same time—and as a result of the dynam-
ics described above—non-state forms of ownership
and management are beginning to be consolidated,
including the proliferation of new enterprises that
can be classifed as micro, small, and medium en-
terprises (MSMEs).
In large part the changes have been promoted
through a procedure that is beginning to become
the norm in Cuba: First an experiment is carried
out; then the results are verifed; the proposal is ad-
justed; and it is then adopted generally through the
design and approval of the new legal framework.
59
It is in the area of economic relations where most
of the changes have taken place in Cuba from 2011
to 2014. Accordingly, a growing sector of self-em-
ployed workers has emerged, this time with “cuen-
tapropistas” (persons engaged in self-employment)
who can hire other workers. A major transforma-
tion has also taken place in the agricultural sector,
which is becoming stronger and developing coop-
erative and non-state economic entities (including
not only agro-food mini-industries). New impetus
has been given to the process of “perfeccionamien-
to empresarial” (entrepreneurial enhancement) in
several production and state services institutions,
which on occasion inspires new methods of orga-
nizing and managing productive entities. Finally,
commercial, technical, and personal services in-
stitutions that had been structured as state-owned
provincial and municipal enterprises are becoming
cooperatives of various sorts.
60
Te process of de-statization of agricultural is es-
pecially important. One should bear in mind that
the State disburses some US$2 billion annually to
import food, about half of which could be saved
since such food items could be produced nationally.
Tis was explained by Marino Murillo Jorge, Vice
President of the Council of Ministers and Chief of
the Commission on Implementation and Develop-
ment of the Guidelines.
61
For that reason, accord-
ing to him, from the Sixth Congress of the Cuban
Communist Party until mid-September 2013, 14
principal policies inherent to the agriculture sector
had been approved, with varying degrees of imple-
mentation.
62
Among these, special mention could
be made of the following structural and institution-
al changes:
i. As of 2008 idle lands began to be turned over
to individual and cooperative agricultural
producers for usufruct for 10 and 25 years, re-
spectively, with the possibility of renewing the
contract at the end of the period. In 2012 new
rules were approved that make the process
more fexible: (a) increasing the ceiling on the
maximum area per producer from 40 to 67
hectares; (b) facilities for obtaining inputs; (c)
the possibility of building housing and infra-
structure on the lands, among others.
ii. In addition, a radical transformation began
in the operation of the Basic Units of Agri-
cultural Production (UBPC: Unidades Bási-
cas de Producción Agropecuaria), the type of
agricultural productive entity which since the
mid-1990s had the largest agriculrtural land-
holdings.
iii. Since mid-2011 there has been a legal change
associated with the agricultural sector and the
substitution of imports aimed at developing
tourism. Approval was given for agricultural
cooperatives to sell directly to hotels. Now,
58
In any event, the decision is that the plan will continue to play a central role in giving direction to the economy. In this respect, Guideline No. 1
states: “Te socialist planning system will continue to be the principal means to direct the national economy….”
59
See Alonso and Vidal.
60
In addition, authorization has been given for public sector institutions of the economy to enter into contracts with private entities; a cooperative
sector is emerging that is not limited to agriculture; and major reforms are under way in the system for agro-food distribution and in agricultural
markets, among other changes.
61
Te critical assessment of the authorities themselves with respect to the agricultural sector includes the fact that of the economically active popu-
lation in Cuba, 20 percent are tied to the Ministry of Agriculture, yet it contributes only 3 percent of national GDP.
62
“Agropecuarios por la seguridad alimentaria y el avance de la economía,” Granma, September 16, 2013, p. 8.
Cuba’s Economic Change in Comparative Perspective
35
the regulations have been updated, expanding
their options. Resolutions from the minis-
tries of agriculture, tourism, and fnance and
prices, published in the Extraordinary Of-
cial Gazette No. 24 on September 9, 2013, set
forth guidance for the transformation of the
agricultural output collection and marketing
system through more expeditious mecha-
nisms that simplify the linkages between pri-
mary production and the end consumer. Tus
small farmers—owners and usufructuaries of
the land—have the option to sell their output
directly to tourism entities, something they
could previously only do through the Credit
and Service Cooperatives (CCS: Cooperativas
de Créditos y Servicios). Also, new products
were added to the list of approved products.
In addition, according to determinations
by the Central Bank of Cuba (BCC: Banco
Central de Cuba), they may open current ac-
counts in Cuban pesos (CUP) in the country’s
commercial banks to guarantee the direct ties
between tourism entities and small agricul-
tural producers.
63
iv. Also tied to agriculture, through the publica-
tion of Extraordinary Ofcial Gazette No. 35
a regulation came into force that allows for
experimental development of new formulas
for commercializing agricultural output in
the provinces of La Habana, Mayabeque, and
Artemisa. Tis decision is aimed at studying,
on a sub-national scale, other approaches
to commercializing agricultural output that
make it possible to modify, expand, improve,
and then extend these provinces’ experienc-
es to the remaining provinces. Tis address-
es the need to transform commercialization
to eliminate the mechanisms that currently
make it cumbersome, so as to make it more
dynamic, efcient, and fexible. Te idea is
also to organize and improve the commer-
cial network for agricultural goods—both
wholesale and retail—making it more acces-
sible for producers and consumers, and also
more competitive in relation to all forms of
production. Te fundamental principles be-
hind these provisions include giving life to
more fexible management mechanisms that
contribute to reducing losses in the process of
commercialization and simplifying the links
between agricultural producers and the fnal
consumer, including the possibility of pro-
ducers going to market on their own.
64
v. Similarly, the Extraordinary Ofcial Gazette
published Resolution No. 673 of 2013 from
the Ministry of Agriculture, which approves
the updating of the social purposes of the Ba-
sic Units of Agricultural Production (UBPC),
the Agricultural Production Cooperatives
(CPA: Cooperativas de Producción Agro-
pecuaria), and the Credit and Service Coop-
eratives (CCS). Tat social purpose includes
the activities of production, services delivery,
and commercialization. Tus, in addition to
producing and selling their products, the co-
operatives may buy from other forms of pro-
duction and small agricultural producers—
owners and/or usufructuaries—to sell them
elsewhere.
65
Te economic changes incorporate various dimen-
sions and afect a variety of sectors. For example,
Extraordinary Ofcial Gazette No. 4 of February
21, 2013, published updated rules by which natural
persons who seek bank loans may ofer new forms
of collateral to the branches. In addition to cash,
potential borrowers can present other goods in sup-
port of their application, which now include jewels,
precious objects, and motor vehicles, among others.
Tis measure supplements Decree-Law 289, in force
since 2011, which updated Cuba’s credit policy and
expanded those who could potentially access such
loans to include small farmers who show that they
have legal land tenure, self-employed workers and
63
“Nuevas opciones en la comercialización directa de productos agropecuarios,” Granma, September 9, 2013, p. 2.
64
“Ajustar la comercialización a la realidad de cada día,” Granma, November 6, 2013, p. 4.
65
Ibid, p. 5.
Cuba’s Economic Change in Comparative Perspective
36
those engaged in other forms of non-state econom-
ic activity, and persons who intend to hire labor or
purchase building materials.
66
In this respect, one
should recall that Instruction No. 7/2011 of the
Ministry of Economy and Planning (MEP: Minis-
terio de Economía y Planifcación) indicated that
contractual relationships between legal persons and
self-employed workers or other forms of non-state
economic management would operate like any oth-
er, and their payment would be in keeping with the
spending limits established in the plan or budget
approved for each entity. With the publication of
the new rules, the payment among these actors was
updated.
67
As has been indicated, the process of economic re-
form in Cuba includes moving some of the small
and medium state enterprises in services and small-
scale industry to non-state forms of management,
especially cooperatives. In early 2013, vice presi-
dent Marino Murillo Jorge proposed to the Coun-
cil of Ministers the approval of the frst group of
124 non-agricultural cooperatives, which included
various activities: 99 for agricultural markets, fve
for passenger-transport services, six for auxilia-
ry transport services, two for recycling waste, and
12 for construction-related activities. Of this frst
group of cooperatives, 112 are from the state sec-
tor, and 12 are from the non-state sector, the latter
formed mainly by self-employed workers.
68
Since the rise of the frst non-agricultural coopera-
tives in Cuba in July 2013, 498 have been approved
by the Council of Ministers; of these, 249 have been
constituted. Some 68 percent of these cooperatives
have been created by governments at the provincial
level.
69
In the opinion of the governmental author-
ities, the results of these new forms of non-state
economic activity have been satisfactory. In this re-
spect, they fnd that the cooperative members are
content, and are well-remunerated for their eforts;
the quality of the services has improved; there is a
more stable presence—with greater variety and se-
lection—of goods in the markets. One also notes
a sustainable improvement in the appearance of
the establishments that have been leased. Follow-
ing government approval of the second group of
non-agricultural cooperatives, a bidding process
on state-owned restaurants that were closed years
ago has begun, in which several cooperatives have
participated so far. Nonetheless, there are problems
that limit the potential of these new forms of eco-
nomic activity, including: (a) the lack of a wholesale
market where one can purchase goods, parts, and
spare parts for the production or services provided
by them; (b) limits on the availability of transpor-
tation equipment; (c) excessive hiring of labor; (d)
defcient fnancial control; and, (e) refusal of some
state enterprises to sell supplies and inputs to these
cooperatives.
70
In examining the impact that the changes have
been having, one should consider that where-
as in September 2010 Cuba had a total of 157,371
self-employed workers, by June 2014 this fgure
had reached 467,000,
71
particularly in restaurants
and cafeterias, taxi services, retail, and rentals of
houses and apartments. Tis last activity accounts
for 15 percent of the supply of lodging available for
international tourism. At the same time, as part of
the changes, public-sector employment continues
to fall, while non-state employment has climbed
steadily since 2011.
72
66
“El Banco actualiza sus garantías. Nuevas normas del Banco Central y los Ministerios de Finanzas y Economía actualizan las garantías bancarias y
los pagos entre personas naturales y jurídicas,” Granma, February 23, 2013, p. 3.
67
Ibid.
68
“Comienzan a funcionar cooperativas en diversos sectores de la economía,” Granma, July 1, 2013, p. 3.
69
“Recuperar ritmos de avance que aseguren el desarrollo socialista sobre bases sostenibles e irreversible,” Granma, July 7, 2014, p. 4.
70
“Cooperativas no agropecuarias habaneras exhiben satisfactorios resultados,” Granma, November 20, 2013, p. 3; and “Recuperar ritmos…”
71
Information from Vice President Marino Murillo Jorge, when addressing the third session of the National Assembly of People’s Power, corre-
sponding to the 8
th
Legislature, Havana. “Recuperar ritmos…”.
72
Omar E. Pérez Villanueva, “Análisis de la evolución reciente de la economía cubana,” in Miradas a la Economía cubana. Entre la efciencia económi-
ca y la equidad social, eds. Omar E. Pérez Villanueva and Ricardo Torres Pérez, (Havana: Editorial Caminos, 2013), p. 24.
Cuba’s Economic Change in Comparative Perspective
37
By way of contrast with the liberalization that has
been unfolding in the private and cooperative sec-
tors, the allocation and control of resources in the
state enterprise sector had continued to rely on
centralized planning. Nonetheless, in the last two
years major changes have taken place or have been
announced for the enterprise sector that point to an
accelerated—and very complex—transformation as
of the second half of 2014. Accordingly, in a meet-
ing of the Council of Ministers of April 3, 2013, it
was emphasized that the transformations in the
Cuban enterprise system were vital for achieving
better economic development in Cuba. “Only by
transforming the enterprise system, which is where
the wealth is produced, will we attain sustainable
economic development,” said Vice President Mari-
no Murillo Jorge. Among the regulations recently
approved for modifying the institutional environ-
ment in which Cuba’s state enterprises operate are:
• In a session of the Council of Ministers held
in April 2013, the Minister of Finance and
Prices announced that as of 2014 the state
enterprises—in line with Guideline No. 19 —
will be able to decide what to do with up to 50
percent of afer-tax profts, once the commit-
ments to the State have been carried out. So
the enterprises may earmark those additional
resources to increasing their working capital,
investments, research, and training, and also
pay their workers based on the results ob-
tained.
73
• With a view to pursuing the same objective,
a total of 11 High-level Organizations for En-
terprise Management (OSDE: Organizaciones
Superiores de Dirección Empresarial) have be-
gun to operate since 2013; these constitute a
type of corporate entity that groups togeth-
er the state enterprises in each sector. With
respect to the OSDEs, the second leading
ofcial in charge of the Permanent Commis-
sion for Implementation and Development of
the Guidelines told the Cuban legislature that
most of the enterprises in the Cuban public
sector should be grouped in 26 to 30 OSDEs.
To that end, work is under way to prepare the
documents that will govern that relationship
based mainly on the principles of orienta-
tion, coordination, and control.
74
Nonethe-
less, part of this structural reorganization of
the enterprises has resulted in many of them
becoming “basic enterprise units” (UEB: uni-
dades empresariales de base), a sort of process
of absorption which does not contribute at all
to efciency or productivity, insofar as those
new entities lose degrees of autonomy. In ad-
dition, according to several analysts the very
creation of the OSDEs constitutes de facto a
step backwards away from decentralization,
there are serious contradictions between that
structure and its governing documents, and
with the general logic of the reform and up-
dating of the model, and therefore they could
have adverse economic results, both individu-
ally (i.e. for each enterprise) and socially.
75
• Trough Resolution No. 134 of 2013 of the
Ministry of Economy and Planning, pub-
lished May 20 in Extraordinary Ofcial Ga-
zette No. 14, the corporate purposes of the
economic entities have been made more fex-
ible. Tis includes giving the enterprises more
independence, which will make it possible to
increase their levels of production and ef-
ciency. Te idea is to leave behind the rigid-
ity with which the corporate purposes of the
enterprises were determined, which result-
ed in a failure to tap many capacities in the
Cuban economy. Now it will be possible for
the economic activities set forth in each enti-
ty’s corporate purpose to be provided to any
73
“Raúl: avanzamos a buen ritmo a pesar de los obstáculos. Sesionó reunión del Consejo de Ministros,” Granma, April 4, 2013, p. 3.
74
Information from Leonardo Andollo Valdés, second chief of the Standing Commission for the Implementation of the Guidelines to the National
Assembly of People’s Power. “Resumen de debates en Sesión de la Asamblea Nacional,” Granma, July 8, 2013, p. 7.
75
See, among others, Juan Triana Cordoví, Competencia y desarrollo: una mirada desde la economía cubana, (Havana: Center for the Study of the
cuban Economy (CEEC), University of Havana, 2014); and Ileana Díaz Fernández, Los cambios en la empresa estatal cubana en el contexto de la
actualización del modelo, (Havana: Center for the Study of the cuban Economy (CEEC), University of Havana, 2014).
Cuba’s Economic Change in Comparative Perspective
38
legal or natural person. With this new rule,
the management of each enterprise will de-
cide on secondary activities to be carried out
that are derived from the principal activity
defned in the corporate purpose. According-
ly, each enterprise will be able to determine
what to do with the materials that remain as a
by-product of the productive process, engage
in other transactions such as renting out lo-
cales and warehouses, parking, sales at one’s
own disposal, etc.
76
• Another decision aimed at strengthening the
management of the state enterprises was to
begin to apply a new concept of “charge en-
trusted to the state” (“encargo estatal”) on an
experimental basis. Tis experiment—which
involves various enterprise structures served
by the ministries of Industry, Construction,
and Energy and Mines—will also contrib-
ute to the gradual expansion of the whole-
sale market. Tis consists of authorizing
the directors general of these enterprises to
engage in wholesale to legal Cuban persons
of certain surplus output and authorized
services (taking into account market de-
mand), once contracts have been fulflled.
Te enterprises may approve the wholesale
prices as per the correlation between supply
and demand, and these prices will be ap-
plied in Cuban pesos (CUP) or convertible
pesos (CUC), or both; discounts may be of-
fered based on quality, conditions of deliv-
ery and commercialization, large volumes
sales, or other commercial considerations.
Te start-up of this experience will make it
possible for the enterprises to increase their
sales volumes and profts, thereby help-
ing to increase fnancial resources for their
recapitalization, and boost workers’ incomes.
To accomplish all that, resolutions Nos. 641
and 471 of the Ministry of Economy and
Planning and the Ministry of Finance and
Prices, respectively, were approved. Tis ex-
periment constituted a step towards what
gradually began to be implemented in the en-
terprise system as of January 2014.
77
• Associated with the transformations aimed at
benefting the state enterprises and their envi-
ronment, Decree-Law No. 315—published in
Extraordinary Ofcial Gazette No. 37, of No-
vember 15, 2013—sets forth a new regulation
for treating and managing inventory, in par-
ticular slow-moving and idle inventory. Tis
new legal provision opens the way to solving
the problem of the accumulation of idle or
slow-moving inventories that have a negative
impact on the national economy, although
according to Alfonso Regalado—Chief of
the Group for Other Sectoral Policies of the
Standing Commission for the Implementa-
tion and Development of the Guidelines—
this may be remedied once and for all when
the restructuring of wholesale commerce
is completed. Te new provisions establish
the means for liquidating those inventories,
and to that end the Ministry of Finance and
Prices also issued Resolution No. 386, which
authorizes the adoption of prices determined
by supply and demand as between the parties
for the wholesale commercialization of such
merchandise; they also establish the fnancial
procedure to which entities should apply to
receive the economic efect derived from the
mobilization of inventories. It also creates
mechanisms that encourage reducing them
or that penalize those who increase them.
78
• In addition, it should be noted that in 2013,
Resolution No. 242 was published in Extraor-
dinary Ofcial Gazette No. 17; it contains the
indications for the wholesale commercializa-
tion of food products, other consumer and in-
termediate goods, and services. Tis provision
specifes that wholesale commercialization can
76
“Flexibilización de los objetos sociales. Desplegando potencialidades,” Granma, May 21, 2013, p. 3.
77
“Continúa el fortalecimiento de la empresa estatal socialista, Granma, November 22, 2013, p. 2.
78
“Inventarios ociosos. Y sin embargo, se mueven…,” Granma, November 15, 2013, p. 16.
Cuba’s Economic Change in Comparative Perspective
39
be done by authorized legal and natural per-
sons. In that regard, it will be aimed at those
entities engaged in retail sales to the popu-
lation; social consumption and the priority
programs; non-state forms of management
and associated productive agricultural enti-
ties; and supporting the needs of the entities
of the national economy. According to Vice
President Marino Murillo Jorge, this restruc-
turing of wholesale circulation will guarantee
greater efects for the country.
79
• Some export enterprises have also begun to
beneft from the changes taking place insofar
as they are gaining autonomy in the manage-
ment of their budgets through the implemen-
tation of what are called Closed Arrangements
for Financing in Foreign Exchange (Esquemas
Cerrados de Financiamiento en Divisas).
Te changes adopted in recent months that notably
modify the general framework for the functioning of
state enterprises has led to the de facto extinction of
Decree-laws No. 252 and No. 281, which regulated
the process of enterprise enhancement (perfecciona-
miento empresarial) for the exceptional prerogatives
they gave the enterprises undergoing the “enhance-
ment” process (those “en perfeccionamiento”) have
become generally applicable with the adoption of the
new regulations. In any event, new Ministry of Labor
and Social Security (MTSS) regulations on salaries
and their being tied to job performance, and of the
Ministry of Finance and Prices (MFP) on the fnan-
cial relations among enterprises in the new condi-
tions, are being discussed, drawn up, and reviewed.
80
Te changes under way have also been refected in
the dynamic of the fscal accounts. In 2008 total ex-
penditures in the state budget came to 78 percent of
GDP; since then the government has been applying
a policy of fscal adjustment. By 2013 expenditures
were budgeted that totaled 68 percent of GDP, i.e.
a reduction of 10 percentage points in relation to
GDP. Tis has also been associated with a reduction
of the fscal defcit from 6.9 percent of GDP in 2008
to 1.7 percent in 2013.
81
As part of this efort a review has been undertak-
en of subsidies and expenditures associated with
social policy. Te entire ministerial and enterprise
management system has been reorganized, the goal
being to signifcantly reduce payroll: there are plans
for more than one million workers to stop working
for the State by 2016, and to relocate in the emerg-
ing private and cooperative sector. Te fscal ad-
justment has contributed to the gradual exit from
a default crisis which in 2008 and 2009 prejudiced
outside investors, suppliers, and creditors.
Notable changes have also taken place in fscal rev-
enues. In 2013 a new tax law came into force that
seeks to promote local development, agriculture,
the formation of cooperatives, and environmen-
tal protection all through the use of tax incentives.
Te new law adds tax exemptions for self-employed
workers and microentrepreneurs in the frst three
years of the start-up of their businesses. Te chang-
es in the country’s budget policies and laws indicate
progress, moving towards fscal decentralization
while at the same time greater autonomy will be
granted to the local governments. Experiments are
being conducted along these lines in the new prov-
inces of Mayabeque and Artemisa to learn lessons
that could be applied more widely.
In addition, policy instruments were adjusted in
2013 to maintain control over the printing of mon-
ey, and modifcations were approved in the struc-
ture of fnancing the state defcit, all in the frame-
work of a taking a new look at how to improve the
use of macroeconomic policy tools in Cuba. Espe-
cially important, no doubt, is the proposal for a Law
79
“Comercialización mayorista. Hacia una forma de abastecimiento más coherente,” Granma, June 5, 2013, p. 3.
80
Information ofered by Ms. Grisel Tristá, staf member of the Commission for Implementation and Development of the Guidelines, 24
th
Annual
Scientifc Sessions of the INIE, Teatro del MEP, Havana, November 28, 2013.
81
Author’s calculations based on information ofered by the Minister of Finance and Prices when speaking at the third session of the National As-
sembly of People’s Power, corresponding to the 8
th
Legislature, Havana. “Recuperar ritmos…”
Cuba’s Economic Change in Comparative Perspective
40
on Financing of the State,
82
which will be submitted
to the National Assembly for approval in late 2014.
In the current process of economic transformations
that Cuba has embarked upon, with the co-ex-
istence of various forms of property, the role of
planning must necessarily be subject to profound
reconsideration; likewise the separation of enter-
prise functions from state functions must also be
reconsidered. As such, 80 percent of the precepts
and organizing principles of the entrepreneurial
experiments that were approved in the directives
of the national economic plan for 2014 were adopt-
ed. A signifcant change was also made to the in-
dicators used at the enterprise level to evaluate the
performance of these state entities
83
so as to aford
the enterprises greater autonomy and at the same
time to enable their managers to defne on their
own which indices should be used to assess their
work in accordance with their priorities. Finally,
the directives for the 2014 national economic plan
support implementing the guideline that proposes
the extinction, merger, restructuring, or transfor-
mation of those enterprises which for at least two
consecutive years show negative economic and f-
nancial results into other non-state forms,
84
which
will require signifcant legal and regulatory changes
insofar as it will require adopting legal provisions
for regulating bankruptcies of enterprises in Cuba.
Te Cuban enterprise system—and within it, the
state enterprise system—is going to have to become
associated with foreign capital in order to obtain f-
nancial resources, overcome the technological lag,
and fnd entry into international markets; this is
the only way it will be able to overcome its com-
petitive limitations. Te economic reform under
way requires reaching consensus on a new policy
of openness to the outside world that goes beyond
the limits in place since the 1990s. Major steps
were recently taken in this direction by approving
a whole set of provisions to regulate the businesses
to be established in the so-called Special Develop-
ment Zones, and with the adoption in late March
2014 by the National Assembly of a new policy
and a new Foreign Investment Law. Tese statu-
tory provisions imply changes in the institution-
al framework of the external sector of the Cuban
economy. Te provisions that will govern the con-
solidation of the Mariel Special Development Zone
(ZEDM: Zona Especial de Desarrollo del Mariel),
along with the modern infrastructure that zone will
have, provide special benefts to the investments
made in it. Among other aspects, it is noted in the
approved provisions that the process of approving
business operations will be more expeditious and
all the administrative procedures will be entrusted
to a “single window” that will be part of the Ofce
of the ZEDM. According to the corresponding de-
cree-law, this entity will have only 45 to 90 days to
approve or deny investors’ proposals. In addition,
and according to the Minister of Foreign Trade and
Foreign Investment of Cuba, the Council of Minis-
ters will only intervene in the process of approval
of investments in the ZEDM in exceptional cases,
such as exploration and exploitation of natural re-
sources, when the concession holder or user pro-
vides public services, or when an attempt is made
to create a frm that is 100 percent foreign. In ad-
dition, a legal determination was reached as to the
prioritized sectors and activities in this frst stage
of the ZEDM: (i) biotechnology and pharmaceuti-
cal industries, (ii) renewable energy, (iii) agro-food
industry with the potential for import substitution,
and (iv) the bottling and package industry.
85
Te recently-approved legal framework of the policy
for attracting foreign investment is made up of: (a)
the Law on Foreign Investment, which establishes
the guarantees, the sectors receiving foreign invest-
ment, the modalities, the authorization regime, and
the provisions regarding environmental protection
82
Information from Ms. Juana Lidia Delgado, of the Commission for Implementation and Development of the Guidelines, at the 24
th
Annual Scien-
tifc Sessions of the INIE, Havana, November 28, 2013.
83
Just six directive indicators, similar to the number of the so-called “limit indicators” (“indicadores límites”). Te rest of the indicators will be
defned autonomously by each particular enterprise.
84
Information from Ms. Grisel Tristá, staf member of the Commission on the Implementation and Development of the Guidelines, 24
th
Annual
Scientifc Sessions of the INIE, Teatro del MEP, Havana, November 28, 2013.
Cuba’s Economic Change in Comparative Perspective
41
and the use of natural resources, dispute settlement,
and special regimes (banking, exports and imports,
labor, taxation, and reserves and insurance); (b) the
Regulation issued as a Decree, and which includes
the procedures for the presentation, negotiation,
monitoring and control of businesses, establishing
the composition and functions of the Commission
for the Evaluation of Businesses with Foreign Invest-
ment; (c) two Decisions (Acuerdos) of the Council of
Ministers, the frst of which is the publication of the
approved policy and the other by which the power
to authorize some international economic associ-
ation contracts is delegated to the ministers of the
Ministry of Foreign Trade and Foreign Investment
(MINCEX) and Ministry of Tourism (MINTUR);
(d) two Resolutions of the MINCEX that regulate
the operation of the Commission for the Evaluation
of Businesses with Foreign Investment and estab-
lish the methodological bases for the submission
of the technical-economic feasibility studies of the
projects; (e) the Resolution of the Ministry of Labor
and Social Security (MTSS) that regulates the labor
regime for foreign investment; and (f) two Resolu-
tions of the Central Bank of Cuba, one regulating
the opening of bank accounts for the cash deposit
of capital contributions of foreign investors, and the
other regulating the transfer abroad of foreign natu-
ral persons’ assets.
Te new Law that was approved features some sig-
nifcant diferences with respect to its predecessor,
Law No. 77 of 1995. Tese include:
1. In relation to the modalities of foreign in-
vestment established in Law 77 (mixed
enterprises, enterprises with 100 percent for-
eign capital, and international economic asso-
ciation contracts), the scope of the association
contracts was expanded to incorporate admin-
istration of production and services, hotel man-
agement, and professional services.
2. Te regime for approving business opera-
tions was modifed based on their character-
istics,: (a) the Council of State will approve
business operations related to the exploitation
of non-renewable natural resources, except for
at-risk contracts (los contratos a riesgo), the
operation of public services or publicly-owned
assets and construction of public works; (b)
the Council of Ministers will approve enter-
prises with 100 percent foreign capital, busi-
ness operations in which property rights or
other rights over state property are transferred;
business operations associated with at-risk
non-renewable resources when a foreign pub-
lic enterprise is involved or when it is aimed at
developing renewable sources of energy, and
investments in the enterprises systems of the
public health, education, and the armed forc-
es; and, (c) the Council of Ministers may dele-
gate the power to approve and authorize other
business operations with the participation of
foreign capital to heads of agencies of the Cen-
tral Administration of the State.
3. Preferences regarding foreign trade are to be
granted to the purchase of national goods in
competitive conditions.
4. A chapter is introduced that regulates the ac-
tions for controlling the modalities of foreign
investment, and environmental protection is
expanded to incorporate aspects related to
technology and innovation.
5. More details of the dispute settlement regime
are spelled out, particularly regarding the role
of national courts.
6. Te procedure for evaluating and approving
businesses is amended to expedite it.
7. Provisions are made for the treatment of for-
eign investment once a single currency ad-
opted.
8. It is established that foreign investment is
covered by the 2012 tax statute (Ley Tributar-
ia No. 113 of 2012) with the adjustment indi-
cated in the special tax regime provided for
in the Law for mixed enterprises and national
85
“Zona Especial de Desarrollo del Mariel consolidará relaciones comerciales y económicas,” Granma, November 6, 2013, p. 2.
Cuba’s Economic Change in Comparative Perspective
42
and foreign investors that are party to inter-
national economic association contracts.
No doubt the elements associated with the tax bene-
fts and guarantees given to investors in the new law
are key mechanisms to attract foreign investment.
Finally, some decisions have also been made that have
required adopting legal provisions to implement the
timetable agreed upon by the Council of Ministers
with a view to unifying the currency. Afer carrying
out activities to train the personnel and various in-
stitutions associated with this complex process, the
government issued price and accounting regulations
for the state enterprises, and the Council of Ministers
approved those tied to planning, the state budget, the
banking system, and statistics that will guide the cur-
rency unifcation process; moreover, the provisions
in force that have been issued in the dual currency
scenario and that need to be modifed this year have
already been identifed.
86
Cleary, it can be said that despite existing contra-
dictions, signifcant changes are taking place in the
economic-productive, social, and institutional fab-
ric of Cuba. Among these, a network of small and
medium enterprises is beginning to emerge in the
non-state sector of the economy
87
(although these
new forms of property and management have not
been labeled as such); in addition, a restructur-
ing process is under way in the state sector, with a
greater role being accorded to market relationships
in Cuba’s economic and social dynamic.
Nonetheless, in the process of consolidating the
new Cuban economic model, which is in its frst
stages,
88
much remains to be done to implement a
set of policy measures and statutory provisions to
ensure that the economic and social transformation
is integral and consistent, as it must be.
FUTURE DI LEMMAS AND CHALLENGES
TO THE ECONOMIC AND INSTITUTIONAL
CHANGES I N CUBA
Te formal institutional framework in Cuba sure-
ly maintains part of the institutional and norma-
tive structures that were particular to the preceding
model, albeit with corrections. But it is true that the
government has taken important steps to address the
most evident institutional and political shortcom-
ings. Indeed, changes in the Constitution are antic-
ipated to bring it in line with the new characteristics
of the system towards which the country is moving.
Analyzed in short- and long-term perspective, the
new development conditions of the Cuban econo-
my—as a result of the changes that are being im-
plemented—make it necessary to devise an integral
strategy for supporting the enterprise sector in gen-
eral, and also specifc policies and provisions for the
development and consolidation of a dynamic sector
of small and medium enterprises (SMEs). In this
context, the institutional changes—a result of the
changes that have been articulated—must answer
to the needs of the country’s network of enterpris-
es and contribute to progress and social wellbeing.
In other words, the process of economic transfor-
mation under way demands greater institutional
changes so as to expand and regulate the activity of
the market. Tough there may be various proposals
in this regard, the Cuban authorities could consider
the following to be priorities in future institutional
changes:
1. Strengthening the institutional framework
to promote a regime of legal certainty for all
economic actors who play a part in the na-
tional economy, for which it is necessary to
design, discuss, and approve a Law on En-
terprises. Tat law and its complementary
86
Information ofered by Vice President Marino Murillo Jorge in the third session of the 8
th
Legislature of the National Assembly of People’s Power,
July 5, 2014.
87
In any event, one should reiterate that one of the main limitations—about which no changes have taken place to date—is the exclusion from activ-
ities allowed for private work of those services with the greatest value added, associated with professional activities.
88
Vice President Marino Murillo Jorge indicated at the last session of the Cuban legislature of 2013 that the most complex transformations associat-
ed with the implementation of the Guidelines will be carried out in 2014 and 2015. Granma, December 20, 2013.
Cuba’s Economic Change in Comparative Perspective
43
legal regulations should take note of the
great dispersion and heterogeneity of the
existing network of enterprises and those
that are emerging as part of the process of
changes, most of them marked by a very
low level of technological development,
limitations in access to information and
communication technologies (ICTs), little
progress in terms of participation and, in
general, low productivity. At the same time,
progress should be made approving the
provisions necessary for consolidating en-
tities that provide services to the enterprise
sector (such as legal, consulting, auditing,
accounting, market research, and product
and process design). Clearly, the Law on
Enterprises should be consistent with pub-
lic policies that support the formation of
enterprise clusters that more fully tap the
linkages among industries and economic
sectors so as to support the aggregate ef-
ciency of the system.
2. Under current conditions it seems sensible
to assume that the prospects for the country’s
development will be associated directly with
greater and better integration in internation-
al markets, thus it is urgent to put in place
policies that support this process and facili-
tate adequate management of the associated
costs.
89
Tis requires reform of the institu-
tional framework that regulates Cuba’s for-
eign trade with a view to conferring greater
fexibility to ofset the level of concentration
and centralization that still characterizes the
country’s foreign trade operations, and allow-
ing non-state entities access to the export and
import markets. Tis could help introduce a
gradual diversifcation of the matrix of Cuba’s
entry into foreign trade.
3. In a country such as Cuba, establishing a
competition policy as well as determining
its regulations and scope of application is es-
sential given the economic transformation
under way. Te appearance of new forms
of ownership and new economic actors; the
modifcation in the mechanisms of state
regulation and control of the economy; the
changes in planning and economic man-
agement; the new attributes that are begin-
ning to be assigned to state enterprises; the
presence of various actors in foreign trade
operations; and the decentralization of the
processes for determining prices (wholesale
and retail) are economic changes that have
propelled the appearance of markets and
spaces for competition in Cuba.
90
It is important to understand that objective
conditions for competition exist in Cuba, yet
the Cuban context includes major distor-
tions that could be overcome by designing a
public policy and, consequently, legal provi-
sions to promote and regulate competition.
According to research studies, while there
is no statutory or regulatory framework for
competition in Cuba, several statutes are in
force that contain provisions related to it.
91
Nonetheless, the category “competition”
does not appear in the programmatic docu-
ment for the current transformations in the
economic and social model. In this respect,
Triana asks whether the market is possible
without competition, and notes that “wheth-
er or not it is ofcially acknowledged, com-
petition exists, it’s just that its repudiation
(or its non-recognition) could minimize
and even eliminate its positive efects on the
dynamics of the economy and aspirations
for development.”
92
89
Ricardo Torres Pérez, Ricardo “Algunas contradicciones del desarrollo económico cubano contemporáneo,” in Miradas a la Economía cubana.
Entre la efciencia económica y la equidad social, eds. Omar E. Pérez and Ricardo Torres, (Havana: Editorial Caminos, 2013), p. 38.
90
Competition in Cuba expressed in the growing diversity of entities that engage in the same activity has led to the appearance of a clear economic
diferentiation expressed in terms of prices, quality, guarantees, and post-sale services, all of which constitute typical indicators of competitive
relationships.
91
Johana Odriozola Guitart, “Derecho de la Competencia Strictu Sensu. Una aproximación a la realidad cubana,” (Doctoral thesis, School of Law,
Universidad de La Habana, 2003).
92
Triana Cordoví.
Cuba’s Economic Change in Comparative Perspective
44
Te process of designing and implement-
ing a policy and rules for regulating com-
petition in Cuba should consider, among
other aspects, the following:
(i) At present there are many restric-
tions on competition in Cuba, most
of which have to do with legal provi-
sions and administrative decisions of
governmental entities, which indeed
in some cases contradict established
policies.
(ii) Some of the distortions observed to-
day in the operation of the Cuban
economy—and which stand in the way
of an adequate environment for com-
petition to generate favorable stimuli
for the network of economic actors –
include the direct assignment of pur-
chasers or suppliers, limitations on the
rights to acquire goods or services, or
the discretional exclusion of econom-
ic actors.
93
Other restrictive practices
include the limitation of trades in the
new non-state sector of the economy,
the exclusion of professionals from
self-employment, barriers to entry,
and collusion and corruption asso-
ciated with excessive controls. Tese
barriers limit the positive impact of the
so-called “emerging sector” on the na-
tional economy, in terms of production
and services and in terms of generating
employment, and artifcially reduce the
possibility of elevating the technologi-
cal complexity of goods and services,
enabling some to obtain undeserved
revenues.
94
(iii) Granting diferentiated conditions of
competition to economic actors is of-
ten a common practice for “stimulat-
ing” certain sectors (for example, it is
ofen the case with industrial policies)
and while one should not discount its
possible positive efect in the short
term, one mustn’t forget that such mea-
sures should be temporary.
(iv) Designing a competition policy does
not mean defending competition to
the end, but establishing the spaces in
which it should unfold and ensuring
that it operate adequately, promoting
innovation, economic efciency, and
productivity.
4. Another area of public policy to be developed
by the State in these new conditions has to do
with policy towards the regions, and conse-
quently the adoption of the set of provisions
that guarantees the rights of the territories in
the context of a process of administrative de-
centralization. Tose provisions should help
achieve a more homogenous distribution of
productive capacities throughout the nation-
al territory. Moving forward with the adjust-
ments, the economic transformations, and
their inevitable modifcations opens up new
theoretical and practical concerns regarding
the inequalities as among diferent regions
or territories in Cuba, which for now do not
appear to be coming to a halt.
95
Nonetheless,
one should bear in mind that this phenom-
enon is directly related to the design of the
structure and mechanisms of public deci-
sion-making. Tis is a highly complex issue,
given that it involves decisions that afect the
system of organization and representation of
democratic sovereignty.
96
Te reasons why
the transfer of budget powers to the sub-cen-
tral governments could give impetus to
93
Tese constitute characteristics which, according to Triana Cordoví (2014), are almost always the result of highly centralized styles of “planning”
such as those that have been used in Cuba.
94
Triana Cordovi, “Competencia y desarrollo”.
95
Luisa Íñiguez Rojas, “Desigualdades territoriales y ajustes económicos en Cuba” in Miradas a la Economía cubana. Entre la efciencia económica y
la equidad social, eds. Omar E. Pérez and Ricardo Torres, (Havana: Editorial Caminos, 2013), p. 115.
96
See Díaz de Sarralde and Guanche.
Cuba’s Economic Change in Comparative Perspective
45
economic activity run a wide gamut.
97
Obvi-
ously, in order for the benefts of fscal decen-
tralization to be felt, the institutions by which
inter-governmental relations are channeled
must be adequately designed.
5. Tere are also very important areas for sus-
tainable economic development in which in-
ternational experience shows that the action
of the state is key. Innovation, which is a fun-
damental part of research and has the charac-
teristics typical of a “public good”; the protec-
tion of environmental resources, goods, and
services caring for and protecting cultural
heritage: all are strategic areas that cannot be
marginalized among state priorities and for
which the design and development of com-
plex yet efcient institutions is needed.
Many economic, social, institutional, and political
reforms remain to be implemented for Cuba to be
able to make the most of its potential for progress, at
the same time as it preserves the gains made during
the revolutionary period. Obviously, the process
will require great imagination and a consolidated
decision to change so as to seek specifc respons-
es to a very peculiar economic and social reality, in
which there is, therefore, no room for any automat-
ic transplants of foreign experiences.
Te greatest challenges facing the general dynam-
ic of economic and social changes in Cuba (which
makes the required institutional change all the
more complex) include:
1. While a consensus has been reached that
the logic that governed the Cuban economy
over the last 40 years has run its course, and
therefore structural and institutional changes
cannot be put of,
98
the future scenario for the
country is not clearly defned. In any event,
the ultimate goal—which according to many
theoretical analyses on social change is a key
factor for reducing uncertainty—has nev-
er been totally clear for the common citizen
or for the leadership in those countries that
have undertaken a change as profound as that
which Cuba now faces, insofar as the very
implementation of specifc or sectoral trans-
formations involves changes in the vision for
the future.
2. Tere is a clear will on the part of the Cuban
leadership to reform, though there are obvi-
ous points of resistance in various economic
and social sectors.
99
Terefore one must un-
derstand the continuing yet paused sequence
of changes decided upon by the highest-lev-
el Cuban authorities. In the case of Cuba,
this excessive gradualism could also imply a
more complex undertaking. In many cases,
the changes in one specifc aspect or sector
require, to make them operative, changes in
other complementary spheres; that is, simul-
taneous transformations are needed in sev-
eral areas if the reforms are to be efective.
Given the interconnection among a wide di-
versity of areas to be included in the changes,
it is practically indispensable for the reforms
to be undertaken simultaneously in an efort
to create the conditions for the new forms of
economic organization to operate efciently.
3. According to some analysts, excessive-
ly gradual changes result in their benefts
barely afecting living conditions. Terefore
they run the risk of creating increased re-
sistance to the reform. Nonetheless, mind-
ful of the magnitude of the challenges Cuba
faces and the adverse internal and exter-
nal conditions, it is practically impossible
to expect an immediate improvement in
the economic performance of the nation.
97
In any event, fscal decentralization does not always imply more efcient delivery of services. In some cases the university supply at the national
level has advantages that should be considered.
98
It was clearly formulated by President Raúl Castro, when he indicated that the country was walking along the edge of a precipice.
99
Tere are several factors, in the Cuban case, that explain resistance to change, which are also tied to the starting point of the current transforma-
tions, summarized in the second section of this paper.
Cuba’s Economic Change in Comparative Perspective
46
Tat would be a false reference when judg-
ing the advance in the process of economic
transformations.
100
Nonetheless, one must
recognize that the changes implemented have
begun to systematically address the contra-
dictions in the country’s economic and social
reproduction, so they constitute an opportu-
nity to build a more prosperous country.
4. Te Economic and Social Policy Guidelines,
which set forth the guidelines for change,
are themselves not a long-term economic
and social development program. Tere has
been discussion and review of the proposals
for conceptualizing the economic model that
will be built, as well as the long-term devel-
opment program (to 2030), but theoretical
and practically consistency is needed among
these three platforms: the guidelines, the pre-
liminary vision of the model to be construct-
ed, and the long-term development program.
Possible inconsistencies among these pro-
grammatic platforms could lead to the re-
form in Cuba facing contradictions whose
resolution would prove costly.
5. Te right to accumulate earnings in the
emerging non-state sector is another matter
for which a new approach should be imposed,
making a break with the accumulated weight
of prejudices in this regard. At present, there
are severe limitations governed by a logic that
is not adapted to the current moment of the
Cuban economy and its medium- and long-
term development challenges. Te possibility
of reinvesting these surpluses—and institu-
tional stimuli to help make it happen—would
complete the cycle of appropriating the re-
sults of innovation, understanding that it is
likely that those who have generated those
resources have identifed and successfully ex-
ploited present opportunities in the new na-
tional economic context.
In sum, Cuba is in the midst of a process of pro-
found institutional change that accompanies and
at the same time is functional to the economic and
social transformations that have been required as
part of implementing the Economic and Social Pol-
icy Guidelines. Given the specifcities of the Cuban
case and the particular economic and social system
that make up the starting point, institutional change
requires a permanent exercise of institutional inno-
vation, experimentation, and adaptation. Analyzing
and comparing other international experiences will
be useful, but inevitably the options chosen must
always be adapted to a social reality that is very
peculiar. No doubt institutional change entails not
only approving a new legal framework, but progres-
sively changing social actors’ perceptions and judg-
ments regarding the new rules. Approving new laws
and regulations occurs at a given moment in time,
whereas changing perceptions requires more time,
in part because they are directly associated with
perceptions rooted in individuals’ behavior.
SUMMARY AND CONCLUSIONS
Te process of economic changes in which Cuba is
immersed, and the institutional changes that have
taken place, are beginning to remove some of the
regulatory and incentives obstacles that have ob-
structed the progress of Cuba’s economy and insti-
tutions to date.
Going forward with the process of reforms will nec-
essarily involve an exercise in institutional innova-
tion. To encourage that process, Cuba has some as-
sets that should be considered. Te main one is the
high educational level of the population. Cuba has a
notable advantage from the outset, despite the nega-
tive impacts the education sector has absorbed since
the crisis of the 1990s. One of the main criticisms
made of the current economic system in Cuba is its
incapacity to harness the huge investments made in
human capital for innovation and economic growth.
100
Torres Pérez, p. 39.
Cuba’s Economic Change in Comparative Perspective
47
Reducing the state apparatus, clearly delimiting
enterprise functions from state functions, and cre-
ating a network of heterogeneous enterprises, all
recognized as economic actors who should make
decisions without being tied to anything beyond
observing the basic economic regulations estab-
lished by the Government—by means of clear and
transparent rules and norms—will no doubt pro-
mote a better institutional environment that will
facilitate economic growth by improving the con-
ditions for microeconomic operations. Te ratio-
nalization and modernization of the government
institutions and the creation of spaces for decentral-
ization that strengthen “inclusion” in the efort to
achieve growth are unquestionable, and that should
be accorded priority in the agenda of transforma-
tions. Re-launching the non-state sector and the
consequent modifcation of the tax system creates
prospects for a signifcant change in the nature of
the relationship between the State and the citizenry;
yet this will take time and in any event will depend
on the scale actually achieved by the private and co-
operative sectors.
Te discussion around the social equity challenges
in the current process of economic and institution-
al changes is also crucial. Tis presupposes not only
valuing the possible medium and long-term efects
of the measures implemented, but also analyzing
their consequences for diferent social groups and re-
gions. One important—indeed essential—challenge
is to maintain the articulation and interconnec-
tion of social policy with economic policy, which is
grounded in an integral conception of development
in Cuba, which had promoted economic growth
alongside a more equitable distribution of wealth,
universal access to basic social services, and atten-
tion to existing social problems. While in previous
decades social development was accorded greater
priority than economic development, the guide-
lines and changes implemented also introduce el-
ements of economic efciency and sustainability in
social policy. Accordingly, the challenge in this case
is to keep these spheres interconnected.
101
Yet economic and administrative decentralization,
the emergence of a non-state sector that is begin-
ning to occupy important spaces in terms of gen-
erating income and employment, and the growing
signifcance of market signals in the process of di-
recting and managing the economy should ft with-
in constructs of popular sovereignty, a process that
is still incipient. In this respect, the editorial in the
newspaper Granma marking July 26, 2013, recog-
nized: “What we need is a people as cultured as it
is educated that is the subject and not the object of
the transformations, a people with broad democrat-
ic participation by all the ways and means and that
accelerates the efective operation of the institutions
as the only guarantee for the continuity of the Rev-
olution.”
102
101
María del Carmen Zabala Arguelles, “Retos de la equidad social en el actual proceso de cambios económicos” in Miradas a la Economía cubana.
Entre la efciencia económica y la equidad social, eds. Omar E. Pérez Villanueva and Ricardo Torres Pérez, (Havana: Editorial Caminos, 2013), p.
171.
102
“Asalto al cuartel del futuro,” Granma, July 26, 2013, p. 2.
Cuba’s Economic Change in Comparative Perspective
48
Institutional Changes of Cuba’s
Economic-Social Reforms:
State and Market Roles, Progress, Hurdles, Comparisons,
Monitoring and Effects
103
Carmelo Mesa-Lago
INTRODUCTION
Tis chapter studies Cuba’s ongoing process of in-
stitutional change, focusing on
fve central struc-
tural reforms: updating the economic model; dis-
tribution in usufruct of idle state land; dismissal
of unneeded state employees and expansion of the
non-state sector; modifying wage policies; reducing
gratuities (including rationing) and social services;
and selling/buying houses.
104
As other chapters in
this volume discuss themes of monetary policy, dual
currency and exchange rates, foreign direct invest-
ment, and banking, they will not be addressed here.
Te chapter is divided in three sections: I) institu-
tional changes analyzed on fve factors in each of
the reforms: state and market roles (including state
regulations and ownership), progress achieved,
persistent hurdles, and comparisons with reforms
in China, Vietnam and Latin America; II) monitor-
ing of the reforms and evaluation of macroeconom-
ic efects; and III) conclusions and ways forward.
INSTITUTIONAL CHANGES, PROGRESS,
HURDLES AND COMPARISONS
Updating the Economic Model
State and market roles. Te VI Party Congress
agreements of 2011 do not substantially transform
the current economic model, but seek to “update” it
in a gradual manner, preserving the predominance
of the central plan and state ownership of property
over the market and non-state ownership of prop-
erty. Te agreements avoided the terms “reform”
and “private” (though the latter was accepted in
2014), lacked specifcs on the role of planning and
the market and their interactions, had many gaps
and were vague in key aspects of the model. Ma-
rino Murillo, chief of the Permanent Commission
to implement the agreements, reiterated this pre-
dominance in 2013 and stated: “Tere will be not a
transformation of property but modernization of its
management,” including expansion of the non-state
sector and the recognition of the market. He and
Raúl Castro declared that they will neither restore
capitalism nor implement shock therapy.
105
How-
ever, government rhetoric may have been a euphe-
mism to disguise actual practice.
Progress. Te analysis in the following sections
shows that the reforms have generally been posi-
tive and market-oriented; the agreements give the
market a greater role than it has had since 1961
when central planning began. In 2013, Murillo an-
nounced a more complex and profound stage of
the reform that would tackle more difcult issues
in 2014, transforming and deregulating the larg-
est state enterprises: mining (nickel, oil), steel and
103
Te author alone is responsible for this essay but gratefully acknowledges comments or materials from Richard Feinberg, Marc Frank, Armando
Nova, Omar Everleny Pérez Villanueva, Pavel Vidal and Mao Xianglin.
104
For a comprehensive analysis of Cuba’s economic-social reforms and their efects see Carmelo Mesa-Lago and Jorge Pérez-López, Cuba under
Raúl Castro: Assessing the Reforms (Boulder-London: Lynne Rienner, 2013).
105
Raúl Castro, “Discurso en la Clausura del Segundo Período de la Asamblea Nacional del Poder Popular,” Granma, December 23, 2013; Marino
Murillo, Informe a la Asamblea Nacional, Granma, July 8, 2013; Marino Murillo, report in Granma, July 5, 2013.
Cuba’s Economic Change in Comparative Perspective
49
textiles. As Omar Everleny Pérez Villanueva has
noted, everything must come from the overly rigid
and centralized plan; instead of a facilitator, it is an
obstacle and discourages enterprise performance;
the government centrally assigns resources to en-
terprises that are not allowed to use their own re-
sources to solve their own problems; and produc-
tion levels are not decided by enterprises since most
are dependent on domestic output or imports.
106
However, these obstacles are gradually being elimi-
nated. Instead of shifing all profts to the state and
the latter deciding the budget allocation to enter-
prises, large enterprises may retain 50 percent of
their profts net of taxes for reinvestment and wage
raises, giving managers more decision-making
power and creating incentives to increase efciency
and production. State enterprises will be allowed to
sell idle inventories at a price agreed to with buyers.
Enterprises with losses for two years or more will
have to turn a proft or be downsized, merged with
others or shut down.
107
Enterprises could use funds
assigned for the purchase of imports to instead
purchase goods produced locally, without previous
state approval.
108
Hurdles. According to Raúl, updating the model
has “a long and complex road ahead.”
109
Several lo-
cal and foreign economists believe it is a mistake
to preserve a model dominated by central planning,
which history has proven (in the USSR, Eastern
Europe, China and Vietnam, as well as in Cuba) to
be inefcient and which has caused the economic
problems the nation faces.
110
Some reforms planned
for 2014—including deregulation and self-fnanc-
ing of key state enterprises, closing those with loss-
es, and using part of their profts for investment and
wage funds—were tried in Cuba in the 1970s and
1980s, but were later abandoned. In mid-2013, two
years afer the agreements were approved, Murillo
informed the National Assembly that a team had
just been appointed “to study and understand the
updating of the economic model;”
111
at the end of
2013 he reported that “the frst version of the pro-
posal for the conceptualization of the model had
been elaborated”.
112
Out of the 313 agreements ap-
proved in 2011, only 46 (15 percent) had been im-
plemented by the end of 2013. Tis indicates the
slow progress achieved toward a concrete model,
enforcing the agreements, flling their gaps and
clarifying vague points. Another barrier to success
is the leaders’ commitment to “avoid[ing] the con-
centration of wealth,” which generates disincentives
and ignores the large income inequalities already
in existence. Murillo pushed to eliminate all obsta-
cles involved in updating the model, and yet, the
greatest obstacle seems to be the model itself that
interferes with the reforms and their success. Final-
ly the reforms have created some winners, but have
also raised concerns among the general population
about the future.
Comparisons. Cuba and North Korea are the two
socialist economies with the largest role of a planned
economy and state property and the smallest role of
the market and private property. Conversely, China
and Vietnam developed a “socialist market” mod-
el where the private sector, markets and foreign
investment, combined with an indicative plan and
decentralization of decision making, have spurred
the highest economic growth rates in the world.
Twarting the party bureaucracy and resistance
to deeper economic changes, a recent China Party
meeting agreed to push forward new reforms which
mandate that, in the relation between the govern-
ment and the market, the latter should play a de-
cisive role in fnancing and allocation of resources,
106
Omar Everleny Pérez Villanueva, “Cuba, continuidad y cambio: El impacto de la implementación de las reformas” (La Habana, CEEC, unpub-
lished paper, September 2013).
107
Decreto No. 323, Deregulation of state enterprises, March 4, 2013.
108
Marino Murillo, reported in Juventud Rebelde, June 3, 2013; Marino Murillo, Informe a la Asamblea Nacional, Granma, July 8, 2013; report in
Granma, July 5, 2013.
109
Raúl Castro, “Intervención en la Primera Sesión Ordinaria de la VIII Legislatura de la Asamblea Nacional,” Granma, July 7, 2013.
110
José Antonio Alonso and Pavel Vidal Alejandro, “Reglas, Incentivos e Instituciones,” in ¿Quo vadis, Cuba? La incierta senda de las reformas, eds.
José Antonio Alonso and Pavel Vidal, (Madrid: Catarata, 2013), pp. 256-279.
111
Murillo, Informe a la Asemblea Nacional, 2013.
112
Granma, December 21, 2013.
Cuba’s Economic Change in Comparative Perspective
50
that competition be strengthened and restrictions
on land ownership be overhauled.
113
In Vietnam,
both the state and the non-state sectors generate
40 percent of GDP, while the latter has the highest
investment share: 38.5 percent versus 37.2 percent
from the state and 24.3 percent from foreign invest-
ment.
114
Structural reforms in Latin America have
mainly consisted of shock therapy and privatiza-
tion; Cuba rejects this approach and takes a gradu-
alist, slow tack that preserves the predominance of
the state role. In the region, Cuba also leads in the
size of the state sector, far ahead of some countries
that have strengthened the role of government, like
Argentina, Bolivia, Brazil, Nicaragua and Venezue-
la; in these countries as in the rest of the region, the
market still plays the predominant role.
Distribution in Usufruct of State Idle Land
State and market roles. Te only agricultural land
owners are farmers who received small plots from
the state at the start of the revolution, whose num-
bers have been steadily declining.
115
Two laws in
2008 and 2012, the second more fexible than the
frst, regulated the usufruct distribution of idle state
land in small plots to individuals, cooperatives and
state farms/entities.
116
Te state keeps ownership of
the land whereas the usufruct farmer (usufructu-
ary) has the right to cultivate the plot and appro-
priate its fruits.
117
Although the state owns the land,
tightly regulates contracts and mandates the selling
of part of the crop (acopio), the practice of usufruct
is still a step closer to the market. Moreover, if more
liberalized, the use of usufruct could signifcantly
increase agricultural output and reduce costly food
imports. According to Nova,
118
essential issues to
be solved in agriculture are: real land ownership
(rights to decide what to grow, to decide to whom
to sell the produce and to set the price); recognition
of the market’s key role; elimination of monopolies
and diversifcation of marketing with autonomous
marketing cooperatives; and free labor hiring.
Progress. Te usufruct law of 2012 made several
improvements over the 2008 law, which was quite
restrictive and didn’t produce results. Te plot size
rose from 13.4 to 67.1 hectares (165 acres), provided
the usufruct is linked to a cooperative or state farm.
Te contract length remains unchanged for persons
(10 years)
119
but it increases for cooperatives and
state entities (20 to 25 years). Despite the advantage
of the latter two forms, 98 percent of usufruct land
has gone to individuals. Te usufructuary is allowed
to build homes (more than one if relatives work the
land) and barns on the plot, as well as to plant or-
chards, all of which had previously been banned. If
the contract is not renewed, the state must evaluate
the investment made and reimburse the usufructu-
ary. In case of usufructuary death or incapacity, rel-
atives working the plot can inherit the usufruct and
the investment. Te tax reform granted the usufruc-
tuary a two-year exemption on personal income
tax, land value and hiring labor; said exemption
may be extended if the usufructuary cleans the land
of marabú (a thorny bush difcult to eradicate). Tax
on inactive usufruct land was also suspended one
year.
120
Since 2011, the state has ofered microcredit
to those holding land in usufruct and allows them
113
Chris Buckley, “China to ease long-time policy of 1-child limit,” New York Times, November 16, 2013.
114
Armando Nova González, El modelo agrícola y los lineamientos de la política económica y social en Cuba (Havana: Editorial Ciencias Sociales,
2013).
115
In 1959 there were some 200,000 private farmers but their number dwindled to 23,000 in 2012 (Ofcina Nacional de Estadística e Información
(ONEI), Anuario Estadístico de Cuba 2012, (Havana, 2013).
116
Decreto-Ley regulation of usufruct, No. 259, July 10, 2008; and decretos-leyes Nos. 300 and 304, October 22, 2012.
117
For a comparative analysis of the right of ownership in Cuban structural reforms, see Carmelo Mesa-Lago “Los cambios en la propiedad en las
reformas económicas estructurales de Cuba,” Espacio Laical, No. 223, February 2013 and José Manuel Palli, “Superfcie and Usufruct Rights in
Cuba: Are Tey Really Insurable Rights?’ Cuba in Transition, No. 23 (Miami: ASCE), 2013. Te best study on Cuban entrepreneurship is Richard
E. Feinberg, Sof Landing in Cuba: Emerging Entrepreneurs and Middle Classes, (Washington D.C.: Brookings Institution, 2013).
118
Armando Nova González, “La propiedad en la economía cubana: Recientes cambios en las formas de propiedad y su impacto en el sector agrícola
cubano,” in Cuba: Hacia una estrategia de desarrollo para los inicios del siglo XXI, eds. Mauricio Miranda and Omar Everleny Pérez Villanueva,
(Cali: Editorial Javeriano-SSRC, 2012), pp. 127-164.
119
In contrast, Decreto-Ley 273 (2010) grants the land-surface right to foreign investors in luxury golf courses for up to 99 years.
120
Ley 113, Tax reform, Gaceta Ofcial, November 21, 2012; also Resoluciones Nos. 41-42 and 353, 2013.
Cuba’s Economic Change in Comparative Perspective
51
to open bank accounts. All agricultural produc-
ers, including usufructuaries, are permitted to sell
more to the market (47 percent in 2012) and since
2013 directly to tourist entities without co-ops in-
termediation.
121
Decreto 318/2013 reformed acopio,
ended the state marketing monopoly in three prov-
inces, allowed competition and market-price sales
of chicken, pork, vegetables, eggs and non-citrus
fruits. Te frst wholesale market to sell agricultural
supplies was created in the Isle of Pines in 2014.
122
At the end of 2012, 1.5 million hectares of idle state
land had been distributed to 174,271 individual usu-
fructuaries and 2,700 legal entities.
123
Te Ofcina Na-
cional de Estadísticas e Información (ONEI) reports
300,810 total usufructuaries in mid-2012, of which
157,948 were under the usufruct law of 2008 (the
2012 law entered in force in December) and 142,862
were authorized during the crisis of the 1990s and are
now under the 2012 law.
124
Table 4 shows the changes
in thousand hectares in agricultural, cultivated and
uncultivated land by type of tenant (state, UBPC/
CPA cooperatives, and CCS/private sector).
125
In De-
cember 2007 (before the frst law was enacted) there
were 6.6 million total hectares of total uncultivated
agricultural land, and by June 2012, it was reduced
by 62 percent to 1.4 million hectares. Te state share
was cut by 1.1 million hectares and that of UBPC/
CPA by another million, whereas land cultivated by
CCS/private grew by 1.2 million.
126
Usufructuaries
neither own land as private farmers nor are they nec-
essarily CCS members, but they ought to be in the
CCS/private sector group because they were only re-
ceiving state land. Te table suggests that the increase
in total CCS/private agricultural land by 1.04 million
hectares in 2007-2012 was probably due to state land
distributed in usufruct, a fgure that is 30 percent
lower than the cited 1.5 million hectares. Te state
and UBPC/CPA shares of total agricultural land fell
whereas the CSS/private sector share rose from 18
percent to 35 percent of agricultural land and from
26 percent to 40 percent of cultivated land (Table 4).
Hurdles. Despite its increased fexibility, the 2012
law is still restrictive and creates uncertainty. Te
usufructuary’s 10-year contract will be terminated
or not renewed if he fails to fulfll his obligations,
such as “using the land in a rational manner” (a spec-
ifcation lef to government interpretation—9,000
contracts were cancelled for this reason), compul-
sory sale to the state of about 70 percent of the crop
at state-fxed prices (acopio, modifed in 2013), hir-
ing more workers than allowed, selling the plot in-
vestment or investing without state permit, and for
public need or social interest. Despite a legal cap
of 108 days, plot measurement can take up to two
months due to faws in public records and thou-
sands of applications are delayed by lack of quali-
fed personnel and negligence. To obtain inputs and
services and market their produce, the usufructuary
must be linked to a state farm or cooperative, pref-
erably either UBPC or CPA, the two with the least
autonomy.
127
It is incongruous that the usufruct was
introduced to increase agricultural output, but forc-
es linkage to UBPC and state farms, recognized as
inefcient production forms.
128
More rational would
be to authorize voluntary cooperatives of usufruc-
tuaries. Regardless of the noted progress, in 2012,
usufruct shares in total agricultural and cultivated
land were 17 percent and 13 percent respectively,
and still 21 percent of the land was uncultivated (81
percent under state/UBPC/CPA). Marabú covers 50
percent of all the land in usufruct; it must be cleared
to start production, but state credit cannot be used
121
Murillo, Informe a la Asemblea Nacional, 2013; Marc Frank, “Cuba reports Little progress fve years into agricultural reform,” Reuters July 30,
2014, http://uk.reuters.com/article/2013/07/30/uk-cuba-reform-agriculture-idUKBRE96T0VK20130730.
122
Marc Frank, “Cuba experiments with wholesale market for farmers,” Reuters, June 1, 2014, http://uk.reuters.com/article/2014/06/01/cuba-re-
form-agriculture-idUKL1N0OG11I20140601.
123
“Con el corazón puesto en la tierra,” Juventud Rebelde, November 10, 2012.
124
Ofcina Nacional de Estadística e Información (ONEI), Anuario Estadístico de Cuba 2012, (Havana, 2013). Available at www.one.cu.
125
UBPC: basic units of cooperative production; CPA: agricultural production cooperatives; CCS: credit and service cooperatives.
126
Out of uncultivated land, the total idle part was 1,232,800 hectares in 2007 and had been cut only by 21 percent to 975,500 in mid-2012. In 2007
the idle land was 51 percent state, 44 percent UBPC/CPA and only 5 percent in CCS/private (ONEI, Anuario Estadístico de Cuba 2012).
127
A law of 2012 restructures UBPC and gives them more autonomy; another of 2013 permits cooperatives ties with CCS.
128
CCS coops and private farms produce 57 percent of all output with only 24 percent of the cultivated land (Nova).
Cuba’s Economic Change in Comparative Perspective
52
for that purpose. Hence, tax exemptions are not
granted. Usufructuaries can only hire relatives or
seasonal workers either self-employed or in cooper-
atives, and the investment size is limited to one per-
cent of the plot size. Ofcially, these disincentives are
ofcially justifed as preventing wealth concentra-
tion. Around 77 percent of usufructuaries lack ex-
perience in agriculture;
129
the government may ofer
training but it does not release public information
detailing how many have been trained. Te state sets
the acopio price below the market price, which is a
production disincentive. State microcredit is
grossly insufcient, as are markets that sell inputs to
farmers at high prices. Rules to request usufruct, sign
and extend the contract, and approve or modify in-
vestment (even building a house) are cumbersome.
130
Decreto 318/2013 bans sales of beef, milk and milk
byproducts, cofee, cocoa and honey; it also keeps rice,
beans, corn, potatoes, sweet potatoes, taro, onions,
garlic, oranges and grapefruit under acopio in 2013
and 2014, hence keeping these the most important ag-
ricucultural products out of the free market.
TABLE 4. DISTRIBUTION OF AGRICULTURAL, CULTIVATED AND UNCULTIVATED LAND IN THOUSAND HECTARES
AND PERCENTAGES, BY TENANT SECTOR IN CUBA: 2007 AND 2012
Years and categories Total State
Non state
UBPC/CPA CSS/Private
Area (1,000 hectares)
2007 (December)
Agricultural land 6,620 2,371 3,034 1,214
Cultivated 2,988 694 1,495 799
Uncultivated 3,631 1,677 1,539 415
2012 (June)
Agricultural land 6,405 2,007 2,139 2,260
Cultivated 5,040 1,413 1,634 1,994
Uncultivated 1,365 594 505 266
Change 2007/2012
Agricultural land -214 -364 -895 1,045
Cultivated 2,052 719 139 1,194
Uncultivated -2,266 -1,083 -1,033 -149
Distribution (percent)
2007
Agricultural land 100.0 35.8 45.9 18.3
Cultivated 100.0 23.2 50.0 26.7
Uncultivated 100.0 46.3 42.4 11.4
2012
Agricultural land 100.0 31.3 33.4 35.3
Cultivated 100.0 28.0 32.4 39.6
Uncultivated 100.0 43.5 37.0 19.5
Source: Author’s calculations based on ONEI, Anuario Estadístico de Cuba 2011 (Havana, 2012) and Anuario Estadístico de Cuba 2012 (Havana
2013).
129
“Con el corazón puesto en la tierra”.
130
Usufruct regulations take six pages of the Ofcial Gazette (Decreto-Ley 304) versus four pages of the basic Decreto-Ley 300.
Cuba’s Economic Change in Comparative Perspective
53
Comparisons. Cuba’s agricultural usufruct re-
form is much more modest than their counterparts
in China and Vietnam, which have a much larger
market role and fewer state regulations. In all three
countries the state retains land ownership, but in the
two Asian cases virtually all agriculture is managed
privately or by autonomous cooperatives; contracts
are for 50 years or indefnite periods time (instead
of Cuba’s 10 years renewable under tight conditions
and the risk of cancellation); there is freedom to
hire workers, and investment fully belongs to own-
ers; farmers freely decide what to sow, to whom to
sell the produce and set the price based on supply
and demand. Tere is neither acopio nor are pric-
es set by the state below the market price in China
or Vietnam, although in late 2013 acopio began to
be curtailed in Cuba. Te Sino-Vietnamese reform
features resemble what Nova noted was needed in
Cuba and their results have been impressive: coun-
tries that historically sufered from hunger are now
food self-sufcient and export a surplus. Vietnam is
the second largest world exporter of rice and sup-
plies 250,000 tons to Cuba annually, half of its con-
sumption needs.
131
Despite these notable diferences,
within the historical context of Cuban socialism, the
usufruct is a step toward the market, albeit modest
and quite restricted. In contrast, in Latin America,
the usufruct is normally granted by a private farm
owner, the free market and private land ownership
dominate, state farms are rare, and cooperatives,
where they exist, are typically autonomous.
Dismissals of State Employees and Expansion of
the Non-State Sector
State and market roles. Ofcial estimates of un-
needed state employees range from 1.3 to 1.8 mil-
lion or between 26 percent and 36 percent of the
employed labor force in 2011. Cuba’s very low open
unemployment rate (1.6 percent in 2008—virtually
full employment and the lowest in the world) was
achieved through “hidden” unemployment—un-
derutilization of labor or unneeded state jobs—
which reduced labor productivity and wages.
132
Te
huge fscal cost of this policy forced the government
in 2010 to recognize the problem and the need to
dismiss the labor surplus. But that, in turn, re-
quired the expansion of “non-state” jobs including
self-employment, non-agricultural-production and
services cooperatives (hereafer “new cooperatives”
or “new co-ops”) and usufruct. Tese market-ori-
ented policies aim to cut fscal costs and improve
productivity and wages. Self-employment had been
authorized before but not at the current magnitude
and speed; the self-employed own their micro-busi-
nesses but in the new co-ops (as in usufruct), the
state keeps the property and leases it to co-op mem-
bers who manage the business and keep the profts.
Progress. From 2006 to 2013, approved self-em-
ployed activities expanded at a rate of 28 percent,
from 157 to 201 authorized categories of jobs, in-
cluding the addition of some skilled jobs. By the
end of 2013 there were 2,000 small restaurants (pal-
adares) and 7,500 rented rooms.
133
New cooperatives
began in 2011 with barbers, hairstylists and man-
icurists. 222 new co-op activities were approved in
2012, and 71 more in 2014, including construction,
transportation, garbage collection, produce mar-
kets, bird and shrimp breeding, light manufactures
and food services.
134
Some 77 co-ops were created
to market agricultural products in Havana City with
the same functions as supply and demand markets.
135
In 2013, 2,401 state-premises were leased to 5,479
co-op members. In March 2014, 224 co-ops were op-
erating and 228 more had been authorized.
136
Tere
are 2,150 barber and hairdresser co-ops with 5,500
members.
137
Te goal of this policy is for 40 percent
131
ONEI, Anuario Estadístico de Cuba 2011 (Havana, 2012).
132
Carmelo Mesa-Lago, “El desempleo en Cuba: de oculto a visible,” Espacio Laical, 4, 2010.
133
Resoluciones, New regulations on self-employed, Nos. 353 and 41, September 26, 2013; El País, June 1, 2014.
134
Nuevo Herald, April 29, 2013.
135
Granma, July 1, 2013; Granma, July 6, 2013.
136
Marino Murillo, “Nuevo grupo de cooperativas no agropecuarias,” Granma, March 3, 2014.
137
Vivian Bustamante, “Comercio Interior: vender y vender bien,” Bohemia, August 6, 2013, http://www.bohemia.cu/2013/08/06/nacionales/comer-
cio-exterior.html.
Cuba’s Economic Change in Comparative Perspective
54
of the employed labor force to be in the non-state
sector by 2016. Efects of new co-ops cannot be eval-
uated due to their recent creation.
138
Co-op members pay monthly rent to the state, pur-
chase inputs, and freely set prices (the latter also
being true for the self-employed). Spurred by the
proft motive, members improve the locale, ofer
better services, earn fve to six times their previous
state salary and raise fscal income. Co-ops and the
self-employed are permitted to buy from, sell and
lease to the government and tourist facilities includ-
ing joint venture hotels, hire employees (not limit-
ed to family members), open bank accounts, receive
micro-credit, and import household appliances. In
2013, some taxes were temporarily suspended or
made more fexible. As a result, 20 state restaurants
were transferred to co-op operation, and a whole-
sale enterprise began in the Isle of Pines to sell food,
intermediate and consumer goods (computers, fur-
niture, technical tools), and rent storage, frigorifc
and transport equipment. Tese products/services
are sold to the state, cooperative and private sectors
(including farmers and the self-employed) to stim-
ulate their inception and development.
139
In June
2013 the wholesale market was regulated through
contracts, competition, and free market prices set
by supply and demand.
140
As a result, a co-op in Ha-
vana, Mayabeque and Artemisa now manages the
frst wholesale market leased by the state, based on
supply and demand, breaking the state monopo-
ly.
141
State enterprises can lease wholesale and sup-
ply markets of produce to the new co-ops, trucks
to all producers, retail markets to co-ops and the
self-employed (that sell at market prices), and con-
tract produce with all co-ops that directly contract
with consumers.
142
Hurdles. Permitted activities for the self-employed
are quite specifc and mainly non-skilled (clowns,
mimics, carters, bathroom caretakers), though few
are skilled (realtors, translators, insurance agents),
and university graduates cannot work on their own.
Tus, an architect can be a taxi driver but not prac-
tice his or her trained profession privately. Such
constraints waste Cuba’s huge investment in educa-
tion and obstruct the dismissal of state professional
employees as well the expansion of the non-state
sector. New co-ops must go through four bureau-
cratic stages to get approved and the fnal decision
is lef to the Council of Ministers. Te government
usually decides to transfer an activity to a co-op and
workers can join it or be laid of, but the degree to
which co-ops will be fully independent from state
intervention remains unclear. Independence of the
new co-ops vis-à-vis the state is questioned. Work-
ers can be hired with a cap of 10 percent of total la-
bor hours being worked by the co-op members and
only for 90 days.
143
Inspectors burden the self-em-
ployed and ofen ask for bribes. Norms strictly reg-
ulate all activity, even renting public bathrooms for
self-employed caretakers.
144
Co-ops must obtain a
license and pay high monthly fees and taxes, in-
cluding taxes on sales, services, hired labor, social
security and personal income—the progressive rate
is 50 percent above $2,000. Over fve employees,
the tax on labor applies a rate over the base salary
that climbs from 50 to 200 percent according to the
number of employees. Hence, the tax system pe-
nalizes the self-employed workers who create more
jobs and it conspires against the state goal of laying
of its unneeded workers—the tax rate is justifed to
avoid concentration of wealth.
145
Tax levies are high
and deductible expenses low, thus inducing under-
reporting.
146
In addition to disincentives caused by
138
Castro, “Discurso en la Clausura,” 2013.
139
Ministry of Interior Trade (MINCIN) Resolution MINCIN No. 52, February 14, 2013.
140
Nuevo Herald, June 5, 2013.
141
Marc Frank, “Cuba steps back from its wholesale produce monopoly,” Reuters June 20, 2013, http://www.reuters.com/article/2013/06/20/cuba-re-
form-agriculture-idUSL2N0EW1K420130620.
142
Decreto No. 318, Marking of agricultural products, October 20, 2013.
143
Marc Frank, “Cuban state begins to move out of the restaurant business,” Reuters, August 26, 2013, http://www.reuters.com/article/2013/08/26/
us-cuba-reform-cooperatives-idUSBRE97P0R620130826. Archibald Ritter, “Te Movement towards Non-Agricultural Cooperatives in Cuba,”
Miami: ASCE Meetings, August 2013, http://www.ascecuba.org/publications/proceedings/volume23/pdfs/ritter.pdf.
144
Resolución 512, Ministry of Economics and Planning on bathroom rentals has six pages in the Gaceta Ofcial, October 31, 2013.
145
Ley 113, 2012.
146
Alonso and Vidal, 2013.
Cuba’s Economic Change in Comparative Perspective
55
taxation, micro-credit granted and inputs sold are
grossly insufcient,
147
state retail sales have a prof-
it of 200 percent, imports are not allowed, and ex-
ports have dwindled.
148
Wholesale markets in the
experimental stage give priority to the state over the
non-state sector. Prices are rising and Murillo has
said they will not stabilize until output increases.
149
Self-employment uncertainty (successively allowed,
reduced and reauthorized) has been reinforced by
recent actions: the closure of tiny business set in Ha-
vana building porches; the imposition of high taxes
on sales of imported clothing and the later banning
of those sales afecting 20,000 self-employed that
might go underground; and the closure of home-
based cinemas (including 3-D that state theaters do
not show) and video-game arcades.
150
Decree-Law
315/2014 permits the confscation of businesses
and fnes violators. In many cases, bureaucrats fear
competition: a state-restaurant manager ofering
bad food and service is threatened by a nearby ex-
cellent private restaurant.
At the start of 2014, 596,500 state employees had
been dismissed, amounting to 10 percent of the la-
bor force and tantamount to 60 percent of the of-
cial target of one million layofs at the end of 2011
and 33 percent of the goal of 1.8 million dismissals in
2014-2015. However, the creation of non-state jobs
has been insufcient to absorb those who have been
fred. Te open unemployment rate grew from 1.6
percent in 2008 to 3.5 percent in 2012. Although the
latter was the lowest in Latin America, it has been ar-
tifcially reduced because of exclusion of workers not
actively seeking employment.
151
Poor statistics are
an obstacle to evaluating the expansion of the non-
state sector. Table 5 shows the available ofcial data
in 2005-2013 on the employed labor force by state
and non-state employment (the latter disaggregated
by co-ops, self-employed and other private work-
ers), but excludes private farmers, usufructuaries
and land renters. Additionally, the categories are not
consistent through time. Until 2011 co-op members
were limited to the agricultural sector and showed a
declining trend, but they rose in 2012 because new
co-op members (barbers, hairstylists and manicur-
ists) were added; “other private workers” also fell
until 2010, but have increased since 2011 as workers
hired by self-employed were clustered with the latter.
Self-employment also declined from 3.6 percent to
2.9 percent in 2005-2010 and then rose to 9 percent
in 2013. Te state-sector share grew from 80.2 per-
cent to 83.8 percent but fell to 75.2 percent in 2012;
conversely the non-state share fell from 19.8 percent
to 16.2 percent but jumped to 24.8 percent in 2012
due to the increase in all three components. If ofcial
data for 2012
152
on all usufructuaries (300,810), land
renters and private farmers (125,812) were added to
the estimated non-state sector (1,219,000), the sum
would be 1.6 million, or 34 percent of the employed
labor force. However, if this sum were put together
with 75.2 percent of the state sector, the total would
be 109 percent.
153
In December 2013 there were 444,109 registered
self-employed workers (18 percent of which were
hired workers), a net of 291,509 afer subtracting the
152,600 self-employed previously approved prior to
the expansion of the number of authorized occupa-
tions. Te 2012 goal was 695,300 and only 42 percent
of that was met by the end of 2013. Te 2015 goal is
147
In 2012, 133,291 loans were granted to individuals, averaging $250; 90 percent was for purchase of building materials, leaving 10 percent for
self-employed, coops and usufructuaries (Granma, December 21, 2012). In 2011-2013, 218,400 loans were granted, averaging $141 and only 0.2
percent to self-employed (Juventud Rebelde, December 19, 2013; Juventud Rebelde, December 27, 2013).
148
Havana Times, May 9, 2014.
149
Bohemia, August 29, 2013.
150
Granma, September 26, 2013; Marc Frank, “Cuba shutters private theaters, threatens other businesses,” Reuters, November 2, 2103, http://www.
reuters.com/article/2013/11/02/cuba-reform-idUSL1N0IN08Q20131102.
151
Economic Commission for Latin America and the Caribbean (ECLAC), Preliminary Balance of the Economies of Latin America and the Caribbean
2013 (Santiago, December 2013); “Un magnífco congreso obrero,” Juventud Rebelde, February 23, 2014; Marc Frank, “Cuba continues to trim
state payroll,” Reuters, February 24, 2014.
152
ONEI, Anuario Estadístico de Cuba 2012; Raúl Castro, “Discurso en las Conclusiones del XX Congreso de la CTC,” Juventud Rebelde, February
24, 2014.
153
Feinberg, adding estimates of unregistered and part-time self-employed, reaches 2 million workers, 41 percent of the employed labor force and
116 percent of the labor force.
Cuba’s Economic Change in Comparative Perspective
56
1.8 million, thus demanding a six-fold increase of the
2013 net amount in just two years. Out of the total
self-employed, 68 percent did not have a prior work
record, but were probably illegal workers that became
legalized; 18 percent kept state jobs while earning ex-
tra money on the side, and 14 percent were pension-
ers. Only 16 percent had been fred from state jobs in
2012. Te primary work activities were food, trans-
portation, house leasing, public vendors and home-
good sellers; 61 percent was not specifed.
154
Comparisons. Te Sino-Vietnamese reforms have
advanced much more than Cuba’s in this area, as
employment in the private sector goes beyond
self-employment and new co-ops, engaging wage
workers, and professionals can work on their own
or in the private sector. In China, 75 percent of the
employed labor force is in private enterprises and
self-employment; they contribute between 50 per-
cent and 60 percent of the GDP and half of total
taxes; cooperatives are autonomous and usually
own their business.
155
In the most developed Lat-
in American countries, formal salaried work in the
private sector predominates, but self-employment
still accounts for 18 percent to 24 percent of the la-
bor force. In less developed countries, self-employ-
ment rises to between 40 percent and 58 percent of
the labor force (the highest of which is in Bolivia
and Peru), and is an important source of income
and wealth, without the tough restrictions imposed
in Cuba.
156
Latin American co-ops normally joint-
ly own their businesses, are more autonomous and
submit to fewer regulations than in Cuba as well.
Wage Policy, Reduction of Gratuities and Social
Services, and the End of Rationing
State and market roles. Wages are centrally fxed
and quite depressed in real terms, and severe re-
strictions provoke labor-efort disincentives. Te
TABLE 5. EMPLOYED LABOR FORCE BY TYPE OF EMPLOYER IN CUBA: 2005-2013 (IN THOUSANDS AND PER-
CENTAGE OF THE EMPLOYED LABOR FORCE)
Years
(Dec)
Employed
Labor Force
(000)
State Sector
Non-State Sector
a
Cooperatives
b
Self-employed
c
Other Private
d
Total
e
(000)
(per-
cent) (000)
(per-
cent) (000)
(per-
cent) (000)
(per-
cent) (000)
(per-
cent)
2005 4,723 3,786 80.2 271 5.7 169 3.6 496 10.5 936 19.8
2006 4,755 3,889 81.8 257 5.4 153 3.2 456 9.6 866 18.9
2007 4,868 4,036 82.9 242 5.0 138 2.8 453 9.3 834 17.1
2008 4,948 4,112 83.1 234 4.7 142 2.9 460 9.3 836 16.9
2009 5,072 4,249 83.8 232 4.6 144 2.8 448 8.8 823 16.2
2010 4,984 4,178 83.8 217 4.4 147 2.9 442 8.9 806 16.2
2011 5,010 3,873 77.3 209 4.2 392 7.8 537 10.7 1,137 22.7
2012 4,902 3,684 75.2 213 4.3 405 8.3 600 12.2 1,219 24.8
2013 4,919 444 9.0
a
Excludes usufructuaries, private farmers and land renters (see text).
b
From 2005 to 2010, members of agricultural cooperatives; since 2011, likely
also includes non-agricultural-production and services cooperatives.
c
Since 2011, data includes also their hired wage earners.
d
From 2005 to 2010,
includes wage earners in mixed enterprises and hired by self-employed and private farmers; since 2011 those hired by self-employed are reported in
the self-employed column.
e
Sum of cooperatives, self-employed and other private activities.
Source: Absolute fgures from ONEI, Anuario Estadístico de Cuba 2010 (Havana 2011), Anuario Estadístico de Cuba 2011, Anuario Estadístico de
Cuba 2012, and Panorama Económico y Social de Cuba, 2013 (Havana 2014); self-employment in 2013 from AP, January 15, 2014; the author has
estimated state, other private and non-state fgures from ONEI fgures, and calculated all percentages.
154
“Aumenta el trabajo por cuenta propia,” Juventud Rebelde, August 17, 2013.
155
Mao Xianglin, Interview with the author on China reforms. Beijing, November 8, 2013.
156
ECLAC, Social Panorama of Latin America and the Caribbean 2011 (Santiago, June 2012).
Cuba’s Economic Change in Comparative Perspective
57
state provides “gratuities” and generous social
services: universal free access to health care and
education; large subsidies to the cost of social se-
curity pensions (prior to the 2008 pension reform,
workers did not pay contributions and could retire
at 55 for women and 60 for men, among the low-
est ages in the region); rationed goods at subsidized
prices; cheap meals in work-center cafeterias; and
home ownership for most of the population. Start-
ing in 2003, under the “Battle of Ideas” launched by
Fidel, 3,000 municipal university campuses were
created, signifcantly increasing the percentage
of people in higher education. While enrollment
jumped 40 times in the humanities and fve times
in physical education, it fell 39 percent in natural
sciences and math, both essential to development.
A social workers training program was also estab-
lished, but those graduates were used inefciently.
Social services costs peaked in 2007-2008 taking 55
percent of the budget and 37 percent of GDP; 88
percent of the cost of rationed goods was subsidized
at the cost of 25 billion CUP ($1 billion USD) in
2013.
157
Even during the grave crisis of the 1990s,
gratuities and social services were not trimmed.
Despite high costs, the quality of such services de-
clined: the real average pension fell by half in 1989-
2011; due to an acute shortage of teachers (prompt-
ed by very low wages), “emerging teachers” were
trained in only a few months, worsening the level
of incoming students at universities; health-care in-
frastructure, equipment and services deteriorated.
Additionally, Cuba has the second most aged pop-
ulation in the hemisphere and rapid aging raises
pension and health-care costs substantially.
158
Such
economic and fscal largesse is unsustainable in the
medium and long term.
159
Raúl Castro acknowl-
edged these problems, stating that social services
must be subordinated to fscal resources and eco-
nomic capacity, and launched a program to reduce
social services, eliminate gratuities and rationing.
Tese reforms are oriented towards the market but
rule out any supplementary or partial privatization
of social services.
Progress. Salary reform in 2008 strived to raise
wages and incentives by authorizing multiple jobs
and payment for results, eliminating the salary cap
and legalizing enterprise stimulus bonuses in CUC
or hard-currency. Other social reforms seek to re-
duce budget expenses by shutting down inefcient,
costly programs such as schools in the countryside,
thousands of municipal university campuses and the
social-workers program; setting entry quotas and
tightening entrance exams to universities, and sharp-
ly cutting enrollment in humanities and physical
education while enlarging enrollment in natural sci-
ences and math. Te number of hospitals and clinics
was cut by 32 percent in 2007-2012 and health pro-
fessionals by 16 percent;
160
the expansion of herbal
medicine and acupuncture attempts to compensate
for cuts in health-care curative services. Te pen-
sion reform increased retirement ages by fve years
for both genders and established contributions made
by workers, but tied to a raise in their wages. Since
1995, Cuban economists have warned that universal
rationing benefts the high income group that does
not need this subsidy and have hence recommend-
ed eliminating rationing and establishing social as-
sistance targeted to the needy. Accepting this idea,
in 2006-2013, Raúl Castro gradually removed cer-
tain goods from rationing and began selling them at
market price, several times higher than the rationed
price. Tese goods included beef, tubers, lard, chick-
peas, cocoa, cigarettes, toothpaste, detergent, soap
and liquid gas. He also cut the quota for beans and
eggs by half, and reduced the sugar quota by 20 per-
cent. Utility tarifs and prices in foreign-currency
shops (TRD) were also elevated.
Hurdles. Table 6 exhibits the results of multiple so-
cial reforms. No data are available on the efects of
the 2008 salary reform, which possibly helped to
157
Rosa Tania Valdes, “Cuban food ration system marks 50 years amid controversy,” Reuters July 12, 2013, http://uk.reuters.com/article/2013/07/12/
us-cuba-reform-ration-idUSBRE96B0NP20130712.
158
In 2010, the population age 60+ (17.8 percent) exceeded that age 0-14 (17.3 percent); the former grew to 18.7 percent in 2013 (ONEI, Panorama
Económico y Social de Cuba, 2013 (Havana, April, 2014).
159
Carmelo Mesa-Lago, Social Protection Systems in Latin America and the Caribbean: Cuba (Santiago de Chile: ECLAC, 2013).
160
ONEI, Anuario Estadístico de Cuba 2011 (Havana, 2012).
Cuba’s Economic Change in Comparative Perspective
58
increase the average real wage by two percentage
points by 2011, though this was still 73 percent low-
er than the 1989 level. Expenditures in state-budget-
ed social services shrank from a peak of 55 percent
of the total state budget related to current expens-
es in 2007 to 48 percent in 2012. In terms of GDP,
these expenditures declined from 37 percent to 27.3
percent between 2008 and 2013. Te most afected
sectors were social assistance, housing, health care
(despite population aging which increases health
costs) and education. Social assistance was slashed
by 76 percent while benefciaries as a percentage
of the population were reduced by 72 percent.
Housing expenditures combined with communal
services were cut from 2.9 percent to 1.3 percent;
housing alone was 0.3 percent of GDP in 2012.
161
Te pension reform reduced the sate-funded fnan-
cial defcit (annual revenue minus expenditures)
from 41.5 percent to 39 percent of expenditures in
2009-2010, but it increased again to 48 percent in
2013, the highest on record. Relative to GDP, the
defcit rose slightly to 3.1 percent. In the long run,
the actuarial defcit (projected revenue to pay future
obligations) will intensify due to population aging
and the high life expectancy at retirement age. De-
spite some nominal increases, the average real pen-
sion in 2012 was one half of its 1989 level.
Some social reforms have harmful social conse-
quences. Cuts in health services afect the popula-
tion, e. g., reductions in personnel, especially family
doctors (reduced to one third of former numbers
due to their export to Venezuela and other coun-
tries)
162
closure of some hospitals and clinics, and
cuts in diagnostic tests and specialist consultations.
Workers’ cafeterias with subsidized prices have been
shut down and replaced by a voucher system that
is insufcient to buy lunch. Ending rationing is the
toughest social reform. Although quotas are meager
and only cover food needs for seven to ten days a
month, the system is still vital for low income groups
that do not receive foreign remittances. Hence, its
TABLE 6. RESULTS OF STRUCTURAL SOCIAL REFORMS IN CUBA: 2006-2013
Indicators 2006 2007 2008 2009 2010 2011 2012 2013
a
Real average wage (1989=100) 23.9 24.5 25.0 26.0 27.1 27.1 27.1 27.1
Real average pension (1989=100) 39.3 39.3 48.2 50.0 50.0 50.0 50.0
Social current expenditures
b
percent of state budget 53.4 55.4 53.1 54.0 53.1 53.6 48.2 51.1
percent of GDP 28.9 33.2 36.6 36.3 33.9 32.6 29.6 27.3
Education (percent of GDP) 10.0 12.1 14.1 13.1 12.9 12.8 12.0 10.8
Health care (percent of GDP) 7.1 9.9 10.3 11.3 9.7 10.1 8.0
Social security pensions (percent GDP) 6.7 6.4 7.1 7.6 7.6 7.4 7.3 7.2
State ?nanced de?cit
c
(percent) 37.4 35.3 40.5 41.5 39.1 41.0 43.1 48.1
percent of GDP 2.5 2.2 2.9 3.2 3.0 3.0 3.1 3.1
Housing &communal services
d
(percent GDP) 2.8 2.8 2.9 2.8 2.7 1.9 1.8 1.3
Social assistance (percent of GDP) 2.2 2.0 2.1 1.5 1.1 0.5 0.4
Bene?ciaries (percent total population) 5.3 5.3 5.2 3.8 2.1 1.6 1.5
a
Preliminary data.
b
Peak denoted in dark font.
c
[(current revenue - current expenditures)/current expenditures] x 100.
d
In 2012, housing received only 14.4 percent of the combined total, and communal services 95.6 percent.
Sources: Real wages and pensions from Mesa-Lago and Pérez López, 2013; rest author’s calculations and updating based on ONEI Anuario Estadísti-
co de Cuba 2012 (Havana, 2013) and Panorama Económico y Social de Cuba, 2013 (Havana, April 2014).
161
ONEI, Panorama Económico y Social de Cuba, 2012 (Havana, April 2013).
162
ONEI Anuario Estadístico de Cuba 2012 (Havana, 2013).
Cuba’s Economic Change in Comparative Perspective
59
elimination faces wide opposition. Te vulnerable
population has expanded due to substantial price
raises in goods and public services (TRD charge a
240 percent markup), dismissals that doubled the
open unemployment rate, and reduced access to
family doctors. About 480,000 citizens age 60 and
over are in need but only 15,825 slots are available in
nurseries/asylums.
163
Raúl promised that no afict-
ed needy would not be lef unprotected, but social
assistance has been severely curtailed. Although tar-
geting is appropriate to detect benefciaries not real-
ly in need, the VI Party Congress agreements ended
assistance to benefciaries with relatives who can
help them, failing to address the generalized level of
need and the expanding vulnerable population.
Comparisons. Te Sino-Vietnamese reforms dis-
rupted the pension and health systems because they
were tied to big state enterprises now largely decen-
tralized, as well as rural communes now disbanded.
In China, formal and informal co-payments were
typical in education but now it is free. New systems
are emerging: urban areas have medical care funds
fnanced by the state, employers and workers, and
users have a 15 percent co-payment; in rural areas,
co-ops provide health care and the copayment is 30
percent; the new pension system is still in an early
stage.
164
Tese reforms in social-service fnancing
are more radical than Cuba’s.
Afer a signifcant increase in social spending in
Latin America, a leveling of or decline, includ-
ing in Cuba, began in 2010-2011. Despite this, the
share of GDP used for social spending in Cuba is
still twice the regional average.
165
In several Latin
American countries, structural reforms privatized
part of social services, ofen with adverse results.
In health care, competing private for-proft corpo-
rations (HMOs) were created and expected to im-
prove care and reduce costs, but in practice HMOs
charged high premiums and co-payments, exclud-
ed pre-existing conditions, and imposed higher fees
to women in their child bearing years and the el-
derly. In Chile, a pioneer in social reform, services
in the public health sector deteriorated and later
required signifcant investment, but as they im-
proved, the population enrolled in HMOs declined
from 25 percent to 16 percent whereas the public
sector expanded. Te Cuban pension reform was
modest, limited to altering some parameters rather
than fostering structural change.
Half of Latin America fully or partially privatized
social security pensions from 1981-2011, increas-
ing the capital accumulated in private funds and
improving managerial efciency of individual
accounts. However, reforms failed to expand la-
bor-force coverage, in most cases competition did
not work, administrative charges were very high,
and transition costs have been much greater and
lasted longer than initially projected. Re-reforms
in three countries between 2008 and 2010 have in-
creased the state role in such pensions. Two closed
the private system and moved all the insured and
their funds to the public system. Chile kept the pri-
vate system but improved it with higher pensions,
enhanced social solidarity and gender equity, and
strengthened competition. Aside from a few excep-
tions, public pension systems face growing fnancial
and actuarial defcit, as well as inefciencies, and
pay low pensions.
166
Selling and Purchasing Dwellings
State and market roles. Te urban reform of 1960
confscated most housing, forbade its sale and rent-
al, decreed that homeowners could only keep one
home, virtually banned private construction, abol-
ished mortgages and granted tenants the right to
pay monthly rent to the state for 20 years to become
homeowners. A positive outcome was that 95 per-
cent of the population now owns their own homes,
163
“Los retos de enevejecer,” Juventud Rebelde, November 14, 2014.
164
Xianglin.
165
ECLAC, Social Panorama of Latin America and the Caribbean 2012 (Santiago, March 2013).
166
Carmelo Mesa-Lago, Reassembling Social Security: A Survey of Pension and Health Care Reforms in Latin America (Baltimore: John Hopkins
University Press, 2012); Carmelo Mesa-Lago, “Re-reforms of Privatized Systems,” Zeitschrif für ausländisches und internationales Arbeits- und
Sozialrecht (Munich, 26: 3), 189-316.
Cuba’s Economic Change in Comparative Perspective
60
but there were adverse efects as well. Te rate of
state housing construction was much lower than
population growth, and many homes are in severe
disrepair due to lack of maintenance (resulting from
absence of construction materials, state restrictions
on building, and the inefciency of the government
agency for repairs) and hurricanes that in the last
ten years damaged one million dwellings, equating
to 28 percent of the stock of 3.88 million units.
167
Te ofcial housing defcit is 600,000 units, but the
true amount is closer to one million by the author’s
estimate. Te National Institute of Housing reports
1.17 million homes (30 percent of the stock) to be in
mediocre or poor condition.
168
In Centro Habana,
49 percent dwellings are in bad shape and 9 percent
are in critical situation; 230 edifces collapse daily,
and 24,311 residents live in temporary shelters.
169
To ameliorate these problems, building of private
homes (termed “self-efort”) was permitted as were
housing swaps (permutas) of homes of supposedly
similar value. However, in practice permutas trig-
gered bureaucracy and corruption. Te housing re-
form
170
is an important move towards the market.
Progress. Te 2011 reform authorizes the sale and
purchase of homes for Cuban citizens and foreign
permanent residents at a price freely fxed by seller
and buyer, ownership of a second home for recre-
ation in the countryside or the beach, the right to
inherit a home and for emigrants to pass it to rel-
atives (or sell it before leaving the island). In addi-
tion, the reform permits sales of building materials
at market price, grants subsidies for those in need
with homes damaged by hurricanes to buy such ma-
terials, concedes some tax exemptions, and expands
state microcredit (90 percent of which is to build/
repair homes). Tose eligible for the subsidy in-
clude home owners, tenants in a multifamily dwell-
ing, and renters of state buildings. Two Supreme
Court rulings in 2013 implicitly acknowledged a
previous illicit transaction and authorized its pay-
ment in dollars, suggesting that the government
wants to legalize prior transactions and improve
market security.
171
In 2013, the market-set collater-
al guarantee was reintroduced on jewels, precious
metals, agricultural equipment, cattle and crops, as
well as mortgages on recreation houses and empty
lots but not on principal homes.
172
Housing capital,
which had been frozen for 50 years, can now be sold
to change residence, invest in microbusiness, buy a
cheaper dwelling and use the remaining funds to
improve life, or get a small capital to settle abroad.
Dwellings transferred between November 2011 and
March 2012 totaled 14,310, of which 80 percent
were donations (probably legalization of prior ille-
gal sales) and 20 percent were sales. In November
2012, 45,000 accumulated transactions were report-
ed (without disaggregating those sold and donated)
and 80,000 more in 2013 alone for a total of 125,000,
or 3 percent of the stock.
173
And yet, it is reported
that 100,000 homes were informally sold, similar to
the number of formal transactions. A 2013 survey
gave an average house sale price of $31,498 (a for-
tune in Cuba), ranging from $21,464 in Villa Clara
to $59,191 in Playa Havana, but $500,000 in Mira-
mar and $2 million for a penthouse in Havana.
174
Subsidies for poor families to repair their homes
damaged by hurricanes were 566 million CUP from
January 2012 to March 2013, granted to 33,431
benefciaries, an average of 16,960 CUP ($700)
per person/household. Te maximum subsidy to
build a dwelling of 25 square meters is 85,000 CUP
167
ONEI, Informe Final del Censo de Población y Viviendas 2012 (Havana, 2013).
168
Daniel Benítez, “Cuba’s Housing Situation,” Havana Times, July 9, 2013.
169
Marcelo Martín Herrera, Documentary “Elena,” exhibited in ICAIC, Havana, April 2013.
170
Decreto-Ley No. 288, Housing reform, November 22, 2011.
171
Circular 265, April 2013; Cubaencuentro, September 10, 2013.
172
Cuban Central Bank, Instrucción 1, 2013.
173
“Aumenta la compraventa de viviendas en Cuba,” EFE, December 3, 2013.
174
John Arlidge, “Cuba, home of the oddest property market,” Financial Times, June 21, 2013; Peter Orsi, “Despite hurdles, Cuba real estate market
buzzing,” AP, April 30, 2013; Benítez 2013; Emilio Morales and Joseph Scarpaci, “Mercado inmobiliario en Cuba: Una apertura a medias,” Miami,
Te Havana Consulting Group, May 2013.
Cuba’s Economic Change in Comparative Perspective
61
($2,500), a substantial sum in Cuba, and 5,000 or
10,000 CUP ($208 and $417) for repairs depending
on the work needed.
175
Afer peaking at 111,400 in 2006, the number of
dwellings built dwindled to 25,600 in 2013, while the
rate of units built per 1,000 inhabitants fell from 9.9
to 2.3 (Table 7). Despite positive steps taken, houses
constructed by the population declined from 70 per-
cent of total construction to 29 percent from 2006
to 2012 whereas those built by the state rose from
27 percent to 70 percent. Preliminary data for 2013,
however, show a reversal to 48 percent and 52 per-
cent respectively, an indication that reforms might be
having better results on this front.
Hurdles. Te major impediment to the sale of
homes is that supply is higher than demand due to
Cubans’ low purchasing power. Te average annual
wage is 5,580 CUP ($232) and a very cheap house
costs $5,000 so it would take 21 years of wages. Cu-
bans also lack basic knowledge on how to evaluate
their property and set a market price: no appraisers
exist, and, due to the bad state of most dwellings,
the buyer must invest about 50 percent over the ask-
ing price to repair the house, a fact that few know.
Mortgages on primary residences are still banned
and lending banks for housing don’t exist.
176
To sell
a home it must be recorded in the municipal prop-
erty registry and the transaction must be conducted
by a notary public (notario). Te registry was virtu-
ally abandoned and out of date because few cared to
record their home or update its status; an attempt
to create a national cadaster in the 1960s was aban-
doned. Only 17 percent of home owners have reg-
istered or updated their property status.
177
Tere
are additional hurdles to home sales including the
insufcient amount of public notaries; until late
2013, realtors were banned, although they worked
illegally and now charge a 5 percent commission;
architects cannot work as self-employed, obstruct-
ing dwelling construction and repair. Advertising is
limited to signs at homes, places where buyers and
sellers meet, and a few web sites with low popula-
tion access. Te Cuban TV also began announcing
sales in 2013, a step in the right direction.
178
Previ-
ously a 4 percent sales tax on the selling price was
levied, but that requirement was suspended in 2013.
As noted, state budget allocation for housing com-
prises the second lowest amount of public spend-
ing and has been decreasing. Te 2013 state plan
for the sale of housing construction materials was
2.3 billion CUP or $96 million,
179
but actual sales
reported in the frst quarter were 539 million CUP
175
Acuerdo Consejo de Ministros No. 7,387, Regulation of housing subsidies, May 6, 2013; Granma, May 6, 2013.
176
Morales and Scarpaci; Jef Franks, “Cubans on the move as new real estate market grows,” Reuters, March 20, 2013, http://uk.reuters.com/arti-
cle/2013/03/20/uk-cuba-housing-idUKBRE92J05A20130320.
177
Based on ONEI, Informe Final del Censo de Población y Viviendas 2012 (Havana, 2013).
178
Arlidge; Granma, July 11, 2013. Te website EspacioCuba has 2,500 listings and 30-40 daily customers (Orsi). According to Morales and Scarpaci,
100,000 homes were listed in mid-2013.
179
Murillo, Informe a la Asamblea Nacional, 2013; Franks.
TABLE 7. HOUSING CONSTRUCTION TOTAL AND BY BUILDER IN CUBA: 2006-2013
Indicators 2006 2007 2008 2009 2010 2011 2012 2013
Dwellings built
Thousand units 111.4 52.6 44.8 35.1 33.9 32.5 32.1 25.6
Units per 1,000 inhabitants 9.9 4.6 4.0 3.1 3.0 2.8 2.8 2.3
Dwellings built by (percent of total)
a
Population 69.9 52.0 52.8 40.4 33.7 27.5 28.9 47.7
State 26.7 42.6 41.8 55.4 64.0 70.6 69.6 52.3
a
Dwellings built by cooperatives made the diference to 100 percent.
Source: ONEI Anuario Estadístico de Cuba 2011 (Havana, 2012); Anuario Estadístico de Cuba 2012 (Havana, 2013); and Panorama Económico y
Social de Cuba, 2013 (Havana, April 2014).
Cuba’s Economic Change in Comparative Perspective
62
($22 million) below the plan, because of insufcient
equipment, low quality products, high prices and
slow stock mobilization due to price rigidity.
180
Legal procedures and regulations on building homes,
selling houses and receiving subsidies are all cumber-
some as well. A building application requires eight
visits to four state agencies, which takes at least 132
days.
181
Nationals cannot own more than two homes
and non-resident foreigners are forbidden to buy
houses; it is unclear if foreigners can own apartments
built by Cuban companies in authorized luxury re-
sorts.
182
Municipal authorities decide who qualifes
to build and also set priorities for subsidies, inspec-
tors evaluate the applicant construction plan, materi-
als needed and transportation costs, and the munic-
ipality makes the fnal decision. Detailed rules also
defne what goods can be bought with the subsidy at
TRD.
183
Corruption, fraud and law infractions exist:
to cut taxes the sale price is given as a fraction of the
real one; donations hide new purchases; subsidies
and construction materials are provided to persons
that are neither needy nor have dwellings damaged
by hurricanes; ofcials are bribed to approve illegal
deals; foreigners buy homes and place their titles in
the name of a Cuban relative or friend.
184
Comparisons. China’s ownership rights are much
more liberal than Cuba’s. Te property law of 2007
allows national and foreign investors to own homes
under construction on state-owned land and, once
completed, grants the right to sell, lease and mortgage
such rights for 70 years for residences (automatically
renewable) or 40-50 years for industrial and com-
mercial businesses. China does not have a unifed
national housing system; in Beijing a resident family
can buy two homes and a child 18 years old or older
can buy another two, and there is no limitation on
commercial use. Tere are no restrictions on foreign
permanent residents and large international com-
panies (Blackstone, Morgan Stanley, and Goldman
Sachs) have realty branches in China. Such property
rights have led the real estate industry to make huge
profts from a frenzy of eager buyers (many foreign-
ers) that keep real estate prices bubbling.
185
Te home
ownership rate in Cuba is the highest in Latin Amer-
ica, but no other country has so many restrictions
and regulations on ownership, investment, buying/
selling, building and repairing of homes imposed on
its nationals and particularly on foreigners. Mexican
trusts (fdeicomisos) allow foreigners, through a do-
mestic bank, to hold real estate titles for 100 years,
generating huge investment with little risk.
186
Mort-
gages exist throughout the region and most countries
have housing lending banks that facilitate credit and
construction. On a positive note, Cuban subsidies to
the needy for home construction/repair are generous
by regional standards.
REFORM MONITORI NG AND EVALUATION
OF MACRO RESULTS
Reform Monitoring
Te VI Party Congress neither provided a timeta-
ble to implement the agreements of 2011, nor set
priorities or a sequence of actions. Te Permanent
Commission reporting to the Council of State is in
charge of coordinating, monitoring and overseeing
implementation of the agreements. Chief of the
Commission Murillo said that it has the authori-
ty to make changes to the agreements or propose
new ones, and that it was developing a plan through
2015 that would be strictly fulflled.
187
Twice a year,
Murillo reports to the National Assembly on the
agreements’ progress. Te PCC First National Con-
180
Buenítez; Bustamante.
181
Granma, July 8, 2013.
182
Palli.
183
Acuerdo No. 7,387, 2013; Granma, May 6, 2013.
184
Tere is a two-tier market: Cubans mostly buy small, cheap houses whereas foreigners with Cuban connections acquire the most expensive prop-
erties (Franks). Diario de Cuba, March 20, 2013; Murillo, Informe a la Asamblea Nacional, 2013; Granma, October 4, 2013.
185
Palli; Xianglin.
186
Palli.
187
Gerardo Arreola, La Jornada, March 28, 2012.
Cuba’s Economic Change in Comparative Perspective
63
ference in 2012 stipulated that the Party is respon-
sible for fostering and overseeing compliance of the
agreements, especially updating the model, and to
ensure that they do not become a “dead letter”.
188
Te Central Committee meets twice annually to
review progress and prepare a report on the agree-
ments’ implementation. Te leadership of the Party
and of the government should closely oversee the
process and, when appropriate, make adjustments
to correct negative trends. Te General Comptroller
Ofce also exercises control over the reforms afect-
ing the non-state sector; Director Gladys Bejarano
reported a new stage in the implementation process
in which statistical information would be a tool of
management and monitoring, facilitating informed
criticism, and the fght against corruption.
189
Te
National Ofce of Tax Administration (ONAT)
controls taxes in the non-state sector. Te mass me-
dia must also provide regular, reliable information
on the progress achieved and hurdles faced to keep
the population informed regarding the reforms and
any alterations that are made.
Te creation of oversight entities and mechanisms
to monitor the agreements’ implementation is an
important step as well, but several agencies are in-
volved in the process without clear coordination
and data exchanges. Reports are brief and broad
with scant fgures; in some cases, years pass without
reporting a policy outcome or updating key data.
Additionally, the National Assembly does not allow
for frank debates on the progress of the economic
reforms, and is not provided with sufcient data for
informed discourse. Evaluating the efects of the re-
forms demands a robust statistical base. Te Perma-
nent Commission may gather such data, but it has
not publicly released it despite Raúl’s call to do away
with secrecy and to keep the people informed. ONEI
lacks statistics on usufruct; the number of usufruc-
tuaries began to be published in 2013, but fgures are
still needed on cultivated land, production, yields,
sales and prices, disaggregated by producers (state
farms, cooperatives, private farms and usufruct).
Meager data is available on credits given to farmers,
their purpose, and repayment performance, and also
on inputs sold to them. No data has been published
on the impact of the 2008 salary reforms, poverty
incidence, income distribution, average salary by
gender and race, and number of dwellings sold or
donated since the end of 2012. Te party and the
government conduct public opinion surveys, but
don’t publish them (although a few scholars con-
duct and publish limited surveys). So far no surveys
have been released about the people’s views on the
reforms and desired changes. In 2013, Minister of
Finance and Prices Lina Pedraza reported a signif-
icant quantity of unpaid personal income tax and
under-declaration of income due to weakness in the
state tax collection system. ONAT has an obsolete
information system (e.g., deceased self-employed
are still enrolled, payment delays on fle for those
who actually paid on time) that must be updated in
2014 and must make short-run changes to adjust to
the new stage of the reforms.
190
Moreover, the fght
against corruption, one of Raúl’s key targets, has not
been accompanied by transparency and account-
ability of state enterprises and agencies.
191
Macroeconomic Results
In most cases it is not possible to attribute macro-
economic performance to the reforms because of
other factors that could not be isolated; but as Table
8 illustrates, macroeconomic indicators have not
improved since the implementation of the reforms.
GDP. Growth rates declined from 2007 to2009
due to domestic problems and the global crisis.
Although a partial recovery process began to take
place, growth slowed to 2.7 percent in 2013 (below
a 3.6 percent goal), the sixth lowest rate in Latin
America; the ofcially projected growth for 2014 is
1.4 percent below the goal of 2.2 percent.
192
Growth
188
Granma, January 29, 2012.
189
Granma, July 5, 2013.
190
Granma, July 6, 2013.
191
Antonio Romero, “Transformaciones económicas y cambios institucionales en Cuba: Una aproximación crítica,” (Washington, D.C.: Brookings
Institution, August 2014).
192
“Reunión del Consejo de Ministros: Tomando el pulso a la economía cubana,” Granma, June 23, 2014.
Cuba’s Economic Change in Comparative Perspective
64
averaged 2.5 percent in 2009-2013 whereas 5 to 6
percent is needed to spur adequate development.
Minister Yzquierdo blamed the poor growth on
Hurricane Sandy, non-fulfllment of hard-cur-
rency revenue, planning faws, bad investments,
insufcient credit and low labor productivity.
193
Raúl recognized that “still GDP performance is not
noted in the average Cuban family economy.”
194
Gross fxed capital formation fell from 10.8 percent
to 7.7 percent in 2008-2011, vis-à-vis 25.6 percent
in 1989, with a regional average of 22.7 percent, ver-
sus 50 percent in China and Vietnam.
195
In both in-
dicators, performance has been well below planned
targets.
Agriculture: Nova argues that the agricultural sec-
tor is decisive and strategic because of its spillover
has multiplying efects in other sectors of the na-
tional economy.
196
If this sector does not have the
expected results, as has happened in recent years,
the multiplying efect is negative. Agricultural out-
put decreased 5 percent in 2010 and grew 0.5 per-
cent in 2012 (a quarter of the goal of 2.2 percent);
as a percentage of GDP it was stagnant from 2007
to 2013 (Table 8). Te output index shows that by
2010, two years afer the frst usufruct law, output
in all crops except cereals was substantially below
2005, although by 2013 also beans and some fruits
had exceeded that level. ONEI preliminary reports
TABLE 8. REFORMS AND MACROECONOMIC PERFORMANCE IN CUBA: 2006-2013
Indicators 2006 2007 2008 2009 2010 2011 2012 2013
a
GDP constant prices (percent) 12.1 7.3 4.1 1.4 2.4 2.8 3.0 2.7
Capital formation
b
(percent
GDP)
10.4 9.7 10.8 5.4 8.6 7.7
Agricultural output (percent) -7.5 19.6 0.6 3.3 -5.1 5.0 0.5
Ibid (percent GDP) 3.2 3.7 3.6 3.7 3.5 3.5 3.7 3.6
Crops output (2005=100)
Tubers and plantains 85.5 92.0 83.5 86.8 87.4 88.5 90.7 86.9
Vegetables 83.4 81.2 76.1 79.5 66.8 68.8 65.9 75.1
Cereals
c
101.3 110.7 104.3 118.9 106.7 126.0 137.2 150.4
Beans 66.4 91.5 91.5 104.2 75.7 125.2 119.6 122.2
Citrus fruits 67.2 84.5 70.6 75.6 62.2 47.7 36.7 30.0
Other fruits 91.1 95.7 90.1 91.3 93.0 99.7 117.8 112.9
Cacao 102.5 66.7 53.2 67.1 82.6 73.0 98.0
Tobacco 114.2 98.5 82.6 96.9 78.8 76.5 75.0
External trade (billion pesos)
Import of goods 9.5 10.1 14.2 8.9 10.6 14.0 13.9 14.8
Export of goods 2.9 3.7 3.7 2.9 4.5 5.8 5.9 5.7
Agricultural
d
(percent of total) 0.5 0.4 0.4 0.5 0.3 0.4 0.4
Balance of goods -6.6 -6.4 -10.5 -6.0 -6.1 -8.0 -8.0 -9.1
a
Preliminary data.
b
Gross fxed capital formation.
c
Rice and corn.
d
“Agricultural/cattle products by groups.”
Sources: ONEI Panorama Económico y Social de Cuba, 2012 (Havana, April 2013); ONEI Anuario Estadístico de Cuba 2012 (Havana, 2013); ONEI
Panorama Económico y Social de Cuba, 2013 (Havana, April 2014); and author’s calculations including crops output index.
193
Adel Yzquierdo, Informe a la Asamblea Nacional,” Juventud Rebelde, December 19, 2013.
194
Castro, “Intervención en…”
195
ECLAC, Preliminary Balance of the Economies of Latin America and the Caribbean 2012 (Santiago, December 2012); Pérez Villanueva.
196
Nova.
Cuba’s Economic Change in Comparative Perspective
65
show that in 2013, non-sugar agricultural output
grew 2.6 percent but there were signifcant de-
clines vis-à-vis 2012: citrus 18 percent, tubers and
plantains 4 percent (plantains 26 percent and pota-
toes 18 percent) and non-citrus fruits 4 percent.
197
In 2012, milk and eggs fell 17 percent. Converse-
ly, vegetables grew 14 percent, cereals 9.7 percent
and beans 2 percent.
198
With very few exceptions,
all output indicators are well below 1989 levels.
199
Cuba’s General Auditor attributes the lack of results
in usufruct to the failure to change the mentality of
state entities and their leaders.
200
Te usufruct efect on agricultural output is difcult
to measure because it is not disaggregated within the
CCS/private sector (where it must belong) but usu-
fructuaries were the only to receive idle state land.
Also, the more fexible 2012 usufruct law entered in
force in December and its full potential cannot be
assessed until fnal data are available for 2013. Te
CCS/private sector share in total cultivated land by
crop expanded in 2011-2012 and in the latter year
ranged from 89 percent to 97 percent, except for cit-
rus and beans where the state had a majority. Te
sector share in total agricultural output also rose and
oscillated between 85 percent and 97 percent with
the same two exceptions noted. Finally, sector yields
in most crops were higher than those of the state.
Total agricultural output virtually stagnated in 2012,
but while state production declined in nine out of
ten products, CSS/private sector output rose in six
out of ten, which could be interpreted as a usufruct
outcome.
201
And yet, data for 2013 contradict such
interpretation: CSS/private sector output contracted
in six areas and rose in four whereas the opposite
was true of the state sector.
202
One explanation for
this oddity is that private and usufruct farmers are
diverting output from state acopio to the market, but
this should have been the case in 2011-2012 also.
Exports/imports: Te balance of trade in goods
ended in a defcit for the entire period (2006-2013),
reaching a record of $10.5 billion in 2008,
203
which
led to debt insolvency. Afer proper policies were
enacted, the defcit shrank but rose again to $9.1
billion in 2013, the second highest in history. Due
to poor domestic performance, the share of agri-
culture and livestock in total exports was minimal
and fell from 0.5 percent to 0.4 percent; food im-
ports account for 70 percent of consumption and
rose from $1.5 billion to $2 billion in 2011-2013.
204
Cuba’s heavy trade-economic dependence on Ven-
ezuela is risky because of the latter’s economic-po-
litical problems, coupled with the lack of tangible
macroeconomic results.
Comparisons. In the initial six to seven years of the
Vietnam reform, more aggressive reforms led to it
having higher GDP growth rates, investment, agri-
cultural output and exports than Cuba, despite be-
ing under a similar US embargo.
205
People in China
and Vietnam are satisfed with the reforms because
they resulted in improvement in living standards
but in Cuba the lack of economic results and some
adverse social efects have not generated such pos-
itive feelings.
CONCLUSIONS AND WAYS FORWARD
Institutional reforms are advancing in Cuba and are
positive overall. Tey include the establishment of
microcredit, bank accounts and wholesale markets
for the non-state sector, the sale of homes which was
previously banned, and inheritance rights of usu-
197
ONEI, Panorama Económico y Social de Cuba, 2012; ONEI Anuario Estadístico de Cuba 2012.
198
ONEI, Panorama Económico y Social de Cuba, 2013.
199
Mesa-Lago and Pérez-López.
200
Gladys Bejarano, “Octava Comprobación Nacional de Control Interno,” Granma, March 3, 2014.
201
Based on ONEI Anuario Estadístico de Cuba 2012.
202
ONEI Sector Agropecuario Indicadores Seleccionados, enero-diciembre 2013 (Havana, February 2014).
203
ONEI yearbooks refer to “pesos” not specifying if they are CUP or CUC; ECLAC gives same data in US dollars.
204
Granma, December 15, 2012; Raúl Castro, “Intervención en la Primera Sesión Ordinaria de la VIII Legislatura de la Asamblea Nacional,” Granma
July 7, 2013; ONEI Anuario Estadístico de Cuba 2012.
205
Pavel Vidal, “Reforma y crecimiento económico: Comparación entre Cuba y Vietnam,” Chicago, unpublished paper, LASA Congress, May 2014.
Cuba’s Economic Change in Comparative Perspective
66
fructuaries and home owners. Tese are the most
important reforms under the revolution. Further-
more, many of them either lack a precedent—mass
dismissal of unneeded state employees, elimination
of or reductions in gratuities and social services,
home sales, and commercial relations between the
state and non-state sectors—or they have advanced
much more than previous reforms, like self-employ-
ment. Te reforms are oriented towards the market.
For example, prices are set by supply and demand
in home sales and self-employed/co-op services; the
self-employed own their tiny businesses; new co-
ops are managed by their members who enjoy the
profts; and the number of economic agents has ex-
panded, as has the competition between them. Te
reforms try to increase efciency and production,
but while they have not improved legitimacy, levels
of uncertainty have grown.
206
Key structural chang-
es and components of the new model are still miss-
ing: integral price reform, elimination of monetary
duality, a realistic exchange rate, and bank system
restructuring. Te reforms are being implemented
slowly (albeit with more dynamism in the last two
years), and they have not produced tangible results.
Te reforms still fall far behind the Sino-Vietnam-
ese reforms, and Raúl has less than four years lef to
complete them. Cuba’s reforms run counter to the
shock therapy typical of Latin America, where the
market and private property predominate even in
countries that in recent years have reinforced the
state role. It is highly unlikely that the reform pro-
cess be reversed, as has happened before, because
of the magnitude of the socio-economic troubles
accumulated over 55 years of centralized state so-
cialism and the lack of feasible alternatives. Sum-
marized below are the most important conclusions
and some suggestions for moving forward.
Updating the model. Te Cuban economic mod-
el is not being transformed but updated gradually,
preserving the supremacy of the central plan and
state property over the market and non-state prop-
erty (though with the latter expanded). Most Cuban
academic economists seek a more balanced mix of
planned economy and state-owned property with
an open market and non-state-owned property. Up-
dating the model will be a long and complex pro-
cess which has been unsuccessful in other former
socialist countries, as it has in Cuba. Several key
components of Cuba’s changes in 2014in the larg-
est state enterprises were attempted before and then
abandoned. It took 33 months to organize a team to
study and conceptualize the frst version of the new
model. Te greatest obstacle to the reforms seems to
be the model itself. If Cuba were to follow an adapt-
ed “socialist market” or mixed economy model, as
in China and Vietnam (which have a private sector,
open markets and foreign investment, combined
with an indicative plan and decentralization of de-
cision making) it would achieve much higher sus-
tained economic growth under the Party rule.
Usufruct. Te Sino-Vietnamese experience shows
that agricultural reform is pivotal. Cuba’s agricul-
tural reform is mainly executed through usufruct
and has required a second law, more lax than the
previous law but still restrictive. At the end of 2012
there were 174,271 usufructuaries but 142,862 had
been working the land for 20 years without a sig-
nifcant role in increasing agricultural output. Of-
fcially, usufructuaries received 1.5 million hectares
of agricultural land, but it is possible they only re-
ceived one million. Te average plot size was either
six or nine hectares, much lower than the 13 or 67
hectares respectively allowed in the two usufruct
laws of 2008 and 2012. Either 33 percent or 54 per-
cent of usufruct land was not yet producing at the
end of 2012, probably the result of the hurdles an-
alyzed. New usufructuaries have been working for
fve years but agricultural output declined in 2010,
stagnated in 2012 and possibly rose slightly in 2013.
Cuba could accomplish food self-sufciency in a
few years, save $2 billion in imports and generate a
surplus for export, if it shifed to indefnite usufruct
contracts with the right to decide what to plow, to
whom to sell produce and to fx all prices. Acopio
should be eliminated completely.
206
Alonso and Vidal.
Cuba’s Economic Change in Comparative Perspective
67
Dismissals and expansion of the non-state sector.
Statistics for 2012-2014 that include accurate disag-
gregated data by type of employment are needed.
Te dismissals plan is far behind the goal, yet open
unemployment still rose to 3.5 percent in 2012, even
excluding those not seeking jobs. Since 2010, the
state sector has declined whereas the non-state sec-
tor has expanded. Despite the increase in self-em-
ployment, members of new co-ops and their hired
manpower, total net job creation has not grown
enough to absorb the state-employment surplus. To
dismiss unneeded state employees, save substantial
resources and raise state wages, more fexibility is
crucial to expanding the non-state sector. To ac-
complish this, the state must permit self-employ-
ment in skilled, high-value-added jobs for univer-
sity graduates, authorize medium-sized enterprises
and co-operative ownership of businesses, allow
true co-op independence, reduce excessive taxes on
non-state workers, halt government measures that
create uncertainty, and expand microcredit and
wholesale markets.
Social reforms. Social expenses were cut 7 per-
centage points relative to both the state budget and
GDP. Most cuts are rational and efcient but ris-
ing unemployment, fewer goods sold by rationing,
ending gratuities and escalating prices have caused
adverse social efects and expanded the vulnerable
population while social assistance expenditures
were slashed by 76 percent. Te pension reform
neither reduced the fnancial defcit funded by the
state nor improved actuarial equilibrium. And yet,
universal free access to education and health care
continues, and pension coverage of the labor force
is one of the highest in Latin America.
Cuba has rejected the structural social reforms in
the region that privatized pensions and health care,
and also avoided the Sino-Vietnamese disruption
of those systems. But access and quality of social
services have deteriorated and, despite salary re-
form and nominal increases, the real average wage
is 27 percent of its 1989 level and the real average
pension 50 percent of its 1989 level. A social safe-
ty net to protect the needy and vulnerable should
be fnanced with tax-reform revenue. Allocation
of health funds could improve targeting the most
essential needs (water and sewage infrastructure,
as well as geriatric hospitals and asylums, instead
of reducing the already quite low infant mortality).
Education expenses could also be reduced, elimi-
nating costly programs such as foreign student fel-
lowships. Te Latin American lesson for Cuba is not
to privatize pensions but to close the current system
and create a new funded public pension system for
young workers (with supplementary individual
accounts), with a solid actuarial base, appropriate
reserves and efcient administration in order to en-
sure adequate pensions in the long run and provide
resources for productive investment.
Housing. Tis is considered the most serious social
problem even though 95 percent of the population
owns their own home, the highest home owner-
ship rate in Latin America. Despite steps to stim-
ulate home building, the rate of new homes built
fell by 77 percent from 2006 to 2013 and from 70
percent to 29 percent of those built by individu-
als although an upbeat reversal occurred in 2013.
Te sale and purchase of dwellings at market prices
liberates housing capital that has been frozen for
half a century. Tere were 125,000 home transac-
tions between 2011 and 2013, which accounts for
3 percent of the housing stock. Tese were mainly
donations but another 100,000 homes were sold re-
portedly informally. Tese meager results are due
to a number of complicating factors: supply far
outstrips demand given low purchasing power; for-
eign investment is precluded (although it happens
anyway); owners lack knowledge of the market; ex-
cessive regulations; the property registry has been
outdated for half a century and only has 17 percent
of owners registered; no mortgages are permitted
on main residence and there is a lack of housing
fnancing banks; architects are banned from work-
ing privately; there is an insufcient number of
public notaries and realtors were only authorized
in 2013; and Cuba has experienced a slowdown in
construction-materials sales. To get better results,
foreigners—including émigré Cubans—should be
permitted to buy houses or help their relatives do
Cuba’s Economic Change in Comparative Perspective
68
so, mortgages should be allowed on main residenc-
es, credit should expanded with the help of foreign
countries and NGOs, architects should permitted
to work privately, the non-state sector should play a
key role in the construction industry, and a housing
lending bank should established as in many Latin
American countries
Monitoring. Several state agencies and mecha-
nisms have been created to monitor the reforms,
the most important being the Permanent Com-
mission, but appropriate coordination and sharing
of data among them is needed. Despite periodic
Commission reports, there is no statistical series
on the reform efects, which are essential for prop-
er assessment and adjustments, transparency, and
accountability. More public debate at the National
Assembly on the reform results is necessary, as well
as critical evaluations by the news media.
Macro efects. Te macroeconomic efects of the
reforms are difcult to evaluate due to a lack of sta-
tistics and the inability to isolate other factors that
may have an impact on performance, but agricul-
tural output fell or was stagnant in three of the last
four years. Efects on GDP are even more arduous
to assess, but growth rates in 2011-2013 were among
the lowest in the region and the reforms have not
helped to increase them. Agricultural exports are a
tiny fraction of the total and the reforms have not
reduced costly food imports due to negative/stag-
nant agriculture output.
Why are the reforms so slow and cramped with ob-
stacles, taxes and disincentives that conspire against
their success? According to Raúl, the reforms are
complex and difcult, take time to achieve results
and must not be hurried so as to avoid costly errors.
Alonso and Vidal argue that the slow path may be a
way to face the resistance of potential losers like the
bureaucrats.
207
Critical opponents claim that there
is no real intent to reform and that all the reform ef-
forts to date have been a ploy to win time. It is plau-
sible that a confict exists within Cuban leadership;
the most advanced members push for the reforms
but the hard-liners—fearful of delegation and loss
of economic power and a “snowball” efect—attach
controls, regulations and taxes which they justify by
arguing that they avoid wealth concentration. Such
confict leads to compromises that breed an inefec-
tive hybrid model, unable so far to bear the results
required to improve living standards and get the
population support and legitimacy. Raúl has been
in power for more than seven years and his reforms
have not yielded tangible results. He has promised
to retire in February 2018 when his second fve-year
term expires and he will be 86. Tus, less than four
years are lef for him to complete the key institu-
tional changes the nation urgently needs.
208
207
Alonso and Vidal.
208
Cuban economist Ricardo Torres has stated: “We don’t have the luxury to spend six more years dealing with relevant issues in which we must
advance much faster” (“Las perspectivas dependen de nuestra habilidad,” Trabajadores, September 18, 2013).
Cuba’s Economic Change in Comparative Perspective
69
D
evelopment is the result of many policies and
national characteristics regarding economic
and extra-economic issues. No country in Lat-
in America is developed or even close to it, a stark
reminder that the job is hard and largely pending.
But the region is very heterogeneous, not only in
terms of income—where there is a 15 to 1 diference
between the richest and poorest nation—but also in
terms of relative strengths and achievements. Sev-
eral Latin American countries display, along with
salient policy failures, some successes worthy of
study and, perhaps, emulation.
Te purpose of this paper is to discuss one of those
examples of progress—namely, the international-
ization of the Costa Rican economy afer economic
reform beginning in the mid-1980s—and the extent
to which it represents a useful reference when dis-
cussing policies aimed at the growth prospects of
another nation in the region: Cuba.
209
Over the last 30 years, Costa Rica has implement-
ed, in a fairly consistent manner, signifcant reform
in its trade, foreign investment and other related
policy areas. Tis yielded some valuable results in
terms of the volume and composition of its exports,
the sectorial composition of its economy, and the
volume and nature of the foreign direct investment
(FDI) it attracts. Overall, the nation has made some
progress over the years; for example, it ranks sec-
ond in Latin America in terms of cumulative output
growth (PPP) in the three decades afer 1980, and
frst in the proportional fall of its extreme pover-
ty rates.
210
Costa Rican progress can be largely at-
tributed to this trade and investment performance.
INTRODUCTION: CUBA AND COSTA RICA
Some of the strengths on which Costa Rica built this
successful trade policy strategy are similar to the
most salient advantages of the Cuban economy, in
Economic Growth and Restructuring
through Trade and FDI:
Costa Rican Experiences of Interest to Cuba
Alberto Trejos
209
For comprehensive—albeit old— surveys of the academic literature on the efect of trade liberalization on income and growth, the classic
reference is Sebastian Edwards, “Openness, Trade Liberalization and Growth in Developing Countries” in Journal of Economic Literature 31
(September 1993), pp. 1358-1393 and “Openness, Productivity and Growth: What do we really know?” in Journal of Economic Literature 108
(March 1998), pp. 383-398. For some more recent references, see the introduction of Pedro Ferreira and Alberto Trejos, “On the Output Efects of
Barriers to Trade” in International Economic Review 47, No. 4 (November 2006) pp. 1319-1340 and “Trade in Intermediate Goods and Total Fac-
tor Productivity” in Review of Economic Dynamics (2012). For an excellent and modern summary of the more applied literature, see Juan Blyde,
Carlo Pietrobelli and Christian Volpe, Políticas de Internacionalización para el Desarrollo Productivo, Mimeo, (Inter-American Development
Bank, 2013). In the context of this project, and specifcally directed at the Cuban case, see Richard Feinberg, Te New Cuban Economy: What
Roles for Foreign Investment? (Washington, D.C.: Brookings Institution, 2012).
210
According to the World Development Indicators, the fraction of the Costa Rican population living under the extreme poverty line ($1.25 per per-
son per day) fell from 9.2 percent in the early 1990s to 2.2 percent in the mid-2000s. Te fall regarding the alternative poverty line ($2 per person
per day) fell from 18.8 percent to 6.4 percent. Proportionally, no Latin country achieved a larger fall in the former, and only Chile in the latter.
Cuba’s Economic Change in Comparative Perspective
70
particular the relative abundance of human capital.
As such, it is worth considering the applicability of
Costa Rica’s policy experience to Cuba. Costa Rica’s
poor showing in other areas, such as infrastructure,
only enhances the interest in this case.
211
Costa Rica and Cuba make an interesting compara-
tive case for other reasons, besides the fact that both
have made investments in education and health-
care—which far exceed expectations given their
(similar) levels of income and development:
• Both nations place a high value on the role
of the state in promoting more equity in in-
come distribution.
212
• While Costa Rica has moved away from its
past leanings toward central planning, the
country has not shared the privatization
impetus of the rest of the region and still
holds a very large fraction of its economy
in the form of state-owned enterprises.
213
In other words, some long-held aspects of
the Costa Rican economy, as compared to
other Latin American examples, would be
more familiar to the contemporary Cuban
analyst.
• Minerals and fossil energy resources play a
small role in Cuba’s resource endowment,
as in Costa Rica but unlike most of the re-
gion. Tis implies that both countries must
confront their growth challenges while fac-
ing deteriorating terms of trade; both growth
and signifcant change in the industrial com-
position of output and exports are necessary
in order to move toward their development
objectives. Human capital is at the forefront
of the strategy. Employment must improve in
quantity and quality, along with the creation
of economic conditions that reduce incen-
tives to emigrate. Tese are parallel challeng-
es on which Costa Rica has done well, largely
due to its export performance and ability to
attract the right kind of FDI.
Before the mid-1980s, a closed Costa Rican econo-
my exported barely $1 billion annually in goods and
services. Tese exports were largely concentrated on
three undiferentiated and unprocessed agricultural
commodities (cofee, bananas and sugar), and sales
from the import-substitution manufacturing base to
a captive regional common market. Since then, afer
signifcant trade liberalization and further promo-
tion policies, the volume of exports has multiplied by
18. More to the point, exports have also diversifed so
that those original commodities represent less than
8 percent of the total, no other product represents
a similar concentration, and 3000 diferent lines of
211
Most analysts agree on several policy areas where improvement has been slow and irregular. Reform worked toward macroeconomic stabiliza-
tion, a reduction of the role of the state in the economy and, especially, internationalization. In other areas, policy has been erratic and govern-
ment has lost efectiveness. Te problems—fnancial and administrative—in its capability to execute infrastructure projects in transportation and
energy, the inability to cope with some safety and security issues, the perception of corruption in government ofcials by the general population,
recent concerns about the long-term fnancial sustainability of the current pension schemes and healthcare institutions and the slow pace with
which the formal educational system has adapted to new challenges, needs and opportunities, are all examples of policy areas where Costa Rica
has not been a success.
212
For instance, according to UNDP data, in 2009 Costa Rican household income derived from the market displayed a far from enviable 0.452 Gini
coefcient, and a 31.2 to 1 ratio between the top and bottom deciles. However, through social services, transfers and other policies, the corre-
sponding numbers afer the intervention of government transform into net household incomes with a far better 0.324 Gini and a 6.9 ratio. Other
UNDP data show that, despite the high disparity in pre-government market incomes, the heads of household that can be described as “Upper and
middle class, owners, experts, professionals and management” has grown from 28.5 percent of the labor force in 1987, to 32.3 percent in 1998,
to 40.9 percent in 2008, clearly a positive trend. Some other social indicators, on the other hand, have not improved in the same period. Besides
direct redistributive policies through the transfer system, the Costa Rican state mostly seeks equity through the provision of universal healthcare
and education, the funding for the housing of the poor, a social security (solidary pensions), and the protection of worker´s rights. Health eforts
are singularly important, as the country has—for instance—the second highest life expectancy in the hemisphere (second afer, precisely, Cuba).
According to the last census, the proportion of households in “precario” (irregular property rights over their dwelling) has fallen to 0.8 percent,
the number in “tugurio” (dwellings of unacceptable quality or characteristics that do not satisfy the legal requirements) to 0.5 percent, and adding
those in “cuarterías” (rented rooms), it reaches 0.7 percent. Before the eforts of the housing funding system, these numbers were in double digits.
213
In Costa Rica, the government still has a legal monopoly on fuel and fuel distribution, electricity distribution, water, alcohol production and a few
other activities. In other activities, the legal monopoly has been broken, but the government still keeps dominant companies with overwhelming
market share in telecoms, power generation and insurance, and over 50 percent market share in banking.
Cuba’s Economic Change in Comparative Perspective
71
goods and services are exported.
214
Further, with di-
versifcation has come sophistication; the prevalence
of diferentiated products and services
215
—mostly
those in which the availability of human capital, sci-
entifc and technical abilities can be utilized—and the
capacity to meet quality standards are the key com-
petitive characteristics. As Umaña et.al have docu-
mented, nearly all manufacturing exports by the late
1980s consisted of product lines typically prevalent
in either very poor or very closed economies. Since
then, the country has shifed the composition of pro-
duction—with exports as a driver—towards the kind
of product lines that one would associate with devel-
oped nations. An updated version of their analysis is
presented in Figure 4.
216
Some of the previous results would not have been
possible if the country had not managed to attract
signifcant FDI. Multinational corporations provide
capital that enhances domestic labor productivity
without using funds from the domestic savings pool
and import new technology to the country, improv-
ing current productivity and transferring knowledge,
best practices and familiarity with global industry to
workers or domestic suppliers. More importantly,
FDI provides a diferent kind of “market access” as
it is ofen the case that a country possesses the labor
and other resources that enable it to competitively
produce a particular good or service, but lacks orga-
nizational capability of an entrepreneur or compa-
ny. Costa Rica’s infows of FDI have grown rapidly,
reaching a record level of $2.3 billion in 2012. Even
if it no longer has the highest per-capita levels of
jobs, income, exports or implied change in output
composition and productivity, Costa Rica arguably
has the most successful FDI receipts in the region,
since almost all of this investment is in advanced
manufacturing and services (which carry smaller
price tags than, say, infrastructure projects or min-
ing investments, yet have larger transformative po-
tential).
217
Our thesis is that some aspects of trade and invest-
ment experience in Costa Rica, particularly in terms
of policies and strategies, are applicable to Cuba. To
that end, the rest of this paper proceeds as follows.
Te next section describes the key strategic policies
that allowed the above-mentioned performance in
exports and FDI in Costa Rica, along with the rea-
sons why some of those choices could be relevant
214
Despite the prominence of electronic and computing equipment (about $2 billion) and medical equipment (about $1.2 billion), these categories
are in fact composites of a variety of diferentiated goods and companies and their weight relative to total exports is far below the historical levels
of concentration. For instance, back in 1982 the four traditional commodities represented 61.4 percent of the exports of goods, with cofee alone
amounting to 27.2 percent.
215
Service exports are an increasing share of total Costa Rican exports, now approaching a quarter of the total gross exported value (and, since ser-
vice activities tend to be very vertically integrated, they represent an even higher share of exported value added). Te originally successful service
export industry since the late-1980s was, of course, tourism; Costa Rica now receives nearly $2 billion in net tourism revenues and well over 1
million tourists. Tis is, of course, very important in a country of 4.5 million people and approaching $45 billion GDP. Costa Rican tourism is
very well positioned in a high-value niche (ecological and adventure travel), with enviable levels of service, duration of stays, repetition of stays,
expenditures per day and other similar industry indicators. More recently, there has been a fast growth in business process operations: IT and
sofware development, outsourcing, call centers and, professional and management services of increasing complexity and value. Afer 2010, these
services have made a net contribution to the balance of payments exceeding that of tourism; unfortunately, there are no statistics about gross
exported value, employment levels, remuneration, or the like.
216
Umaña et.al group manufacturing products in fve categories, depending on whether the most important competitive driver in the industry is
the availability of 1) cheap unqualifed labor, 2) a key natural resources to process, 3) a captive market or specifc capital good, 4) the capability to
diferentiate and add quality or 5) the availability of scientifc and technical personnel. Manufacturing exports in the last two categories—which
one could associate with the manufacturing supply of a developed country—grew from nearly zero before reform, to 25 percent by 1994 (when
total manufacture exports reached $1.6 billion) and an impressive 53 percent by 2011 (when the total reached $8 billion). Meanwhile, the frst
two categories—the more typical manufacturing supply of a poor economy—are now below 32 percent. Similar changes have occurred in service
exports, where tourism and call centers are giving way to much more complex business processes. Sanjaya Lall, John Weiss and Jinkang Zhang,
“Te ‘Sophistication’ of Exports: A New Measure of Product Characteristics,” Working paper 123, QEH Working Paper Series (Oxford University,
2009) create a measurement technique for what they call “sophistication of output”, apply it cross-country, and come to similar results in the case
of Costa Rica. To the extent that the sectorial makeup of the economy relates to development—say, because the reward structure of antiquated
industries or their degree of positive externalities falls short of new activities with more sophisticated technologies and better resource require-
ments—this is the kind of change we would like to see in most of Latin America, and in particular in Cuba.
217
FDI comes in many forms: green-feld, when the investing company is creating an operation from scratch; acquisitions, when it is acquiring
a running enterprise; real estate, obviously when it is purchasing domestic land and its resources, perhaps to develop them or infrastructure
concessions, when it is forming a domestic company that builds or operates an asset for the state, etc. In terms of value, mining acquisitions and
infrastructure concessions ofen carry the larger price tags.
Cuba’s Economic Change in Comparative Perspective
72
and applicable to Cuba. Section 3 discusses some
errors that Costa Rica may have committed along
the way and that may be avoided in the Cuban case,
while Section 4 delves on the key diferences be-
tween the Costa Rican strategic starting point in the
mid-1980s, and the Cuban situation today. Finally,
Section 5 concludes, pondering what is reasonable
to expect and what cannot be achieved from a strat-
egy like this, especially in the absence of comple-
mentary action in other areas of economic policy.
THE COSTA RICAN TRADE AND
I NVESTMENT STRATEGY
A large number of policy choices, social decisions
and intangibles underlie the Costa Rican perfor-
mance in exports and FDI attraction. Here, we
attempt to organize them around the following cat-
egories.
Education and Human Capital
Te key competitive advantage for Costa Rican ex-
ports and, more saliently, for Costa Rica’s FDI in-
fows, is the remarkable productivity of the Costa
Rican labor force and, in particular, its compara-
tively high levels of training and education. For over
a century, Costa Rica has spent signifcantly in pub-
lic education, training, and healthcare. Enrollment
rates are high: by constitutional mandate, education
expenditure cannot fall below 6 percent percent of
GDP and scores on internationally comparable tests
(like PISA) are slightly better than those of other
developing countries of similar income. Traditional
FIGURE 4. COMPOSITION OF MANUFACTURING EXPORTS, SORTED BY THE KEY COMPETITIVE DRIVER OF
THE INDUSTRY
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1994 2011
Science and human capital
Natural resources
Differentiated products Scale or capital
Cheap labor
Source: PROCOMER
Cuba’s Economic Change in Comparative Perspective
73
academic education is complemented by technical
education (in high schools) and a job training sys-
tem, which tends to be in tune with the specifc in-
dustry needs. Life expectancy is very high, with the
entire population covered by an efcient national
health care system.
Costa Rica was already relatively well endowed
in human capital before economic reform, but its
economy demanded little of that resource. Man-
ufacturing and services catered to a closed and
underdeveloped domestic market, and very sim-
ple unprocessed agricultural products for export
require little training and technical sophistication
in their production and management. Te state
bureaucracy was a very large part of demand for
human capital. Tis means that, as reform has pro-
gressed, the entry of qualifed labor into the export
segment of the economy has been facilitated not
only by the fow of entrants to the job market, but
also by a stock of older qualifed workers already in
the system who shif from jobs where their abilities
are underutilized.
Costa Rican blue collar workers, in general, have a
strong and well-earned reputation for productivity;
they seem to possess strong “sof-skills” that enable
them to operate well in demanding markets or as
part of global corporations. Tese skills include the
ability to work in teams, learn from abstract content
(as opposed to only direct experience), adapt and
learn as they progress, communicate efectively, and
remain disciplined and rebelliously creative.
218
Consequentially, a more open Costa Rican econ-
omy has proven a competitive export location for
products, services and niches in the market that
demand high technical standards and specialized
knowledge. In a Hecksher-Ohlin sense, its com-
parative advantage lies in products that use human
capital intensively. Furthermore, the nature of the
labor market has been changed by the emergence
and entry of national and international companies
that produce those products for export. Because
human capital abundance is hard to fake or substi-
tute, the position in the market of those companies
and products is strong.
Openness to Trade
A country that is closed for imports is closed for
exports. Tis is a well-argued fact in basic economic
theory. When an economy is closed to imports, the
resulting artifcial proftability of the protected sec-
tors aimed at the domestic market diverts resources
that otherwise would have been allocated to export
activities. Furthermore, domestic prices of tradable
intermediate inputs will be higher if the market is
protected, raising costs and creating an anti-export
bias that drains the competitiveness of the fnal, ex-
portable product.
In Costa Rica, unilateral trade liberalization came
quickly during the 1980s. Early in the decade, as
in the previous two or three decades, tarifs aver-
aged over 100 percent, including prohibitive rates
for most products. By the mid-1980s tarif rates be-
gan to steadily fall, with the average at 85 percent,
reaching 6 percent in 2002 and only 2 percent to-
day. Tis means that for the overwhelming major-
ity of products, producers for the domestic market
face international competition. Tis has created a
competitive pressure that helps raise productivity,
allowing consumers to buy and producers to source
their inputs at lower prices. It has also allowed, in
most industries, a base on which to build export
growth.
Market Access
Costa Rica belongs to the Central American Com-
mon Market (CACM), an integration efort which
has been fairly successful in generating trade. Es-
tablished in the late 1950s, CACM was initially
218
See Ronald Arce, Ricardo Matarrita, Alejandro Roblero and Alberto Trejos, Desarrollo del talento humano para competir en la atracción de
inversión extranjera directa, Mimeo, (INCAE and CINDE, 2012) for a description of the surveys and measurements available to assess the Costa
Rican historical strength in human capital, as well as the current challenges being faced by its educational system, which are detailed in the next
chapter.
Cuba’s Economic Change in Comparative Perspective
74
intended to be a mechanism to enlarge the domes-
tic market and, thus, properly implemented an im-
port substitution strategy. As import substitution
came to an end and these economies opened to
global trade, the regional market lost importance.
Recently, however, the market has grown quite dra-
matically, representing as much as in $11 billion of
intraregional trade in 2012. Now its driver is not the
common external barrier, but rather the geographic
proximity and the complementarity of these econ-
omies— so it makes sense for companies to see the
region, rather than a single country, as the “domes-
tic market.” Te integration efort is quite mature—
there is a common external tarif on most products;
free intra-regional trade on all but one good (sug-
ar); customs legislation, regulation, registries, san-
itary and phyto-sanitary protection; coordinated
technical norms; and regionally-negotiated block
trade agreements with several large parties.
Preferential market access is enjoyed not only for
exports to the neighbors, but also for markets rep-
resenting over 90 percent of non-oil trade. In par-
ticular, Costa Rica has negotiated free trade agree-
ments, on its own and as part of CACM, with its
three largest trading partners (the United States,
the European Union and China), other developed
nations (Canada, Singapore), other immediate
neighbors (CARICOM, Mexico, Panama) and oth-
er countries in the hemisphere (Peru, Colombia
and Chile). Terefore, Costa Rican products enter
those markets paying lower tarifs and confronting
fewer non-tarif barriers than their more relevant
competitors, like Asian manufactured products
or South American tropical agriculture. Further-
more, these agreements provide a binding legal
basis for trade and investment. Since Costa Rica is
the “small” partner in most of these relationships,
it tends to do better when there is a binding legal
basis, rather than informal interaction.
Exchange Rate and Currency-Related Policies
Management of the exchange rate is perhaps the
most important macroeconomic measure afecting
export growth. On the one hand, the exchange rate
level determines the proftability of exports, since
a local company would mostly face costs in the
domestic currency and obtain revenues that are
linked to foreign currency, so the relative value of
costs to revenues—that is, the proft rate—would be
proportional to the exchange rate.
On the other hand, the volatility of the exchange
rate is also important. It adds signifcant risks to
production for export since it introduces a variable
wedge between the units in which costs are mea-
sured in the present and the units in which reve-
nues are measured in the future. Export activity
typically carries some additional risks as compared
to normal domestic production, including inter-
national logistics, international marketing, perfor-
mance of foreign economies, etc. As such, it is clear
that adding risk to the proposition of exports does
very serious damage to growth prospects.
Some countries have chosen to intervene in the
currency market in order to undervalue the local
money, hence pushing their exports growth strat-
egy. Perhaps the clearest example of this is China.
Although it is not the most desirable of options for
other objectives, like reducing infation or keeping
the value of domestic incomes, it is a tempting op-
tion to push export competitiveness with such a
simple instrument.
Other countries in Latin America do not necessarily
push down the value of their currency, but rather try
to compensate market forces. Tis is the case of ex-
porters of raw materials who are enjoying unusually
good terms of trade, but whose non-commodity ex-
ports are afected by the “Dutch disease.” Tis is also
true of countries, such as Costa Rica, facing signif-
icant infux of capital due to the current distortions
in global interest rates and fnancial markets.
Costa Rica aggressively managed its exchange rate
between 1985 and 2006 by keeping the real ex-
change rate nearly constant with the purpose of
increasing the competitiveness of its exports. Te
actual policy was to make very small daily adjust-
ments to the nominal fxed exchange rate, which
Cuba’s Economic Change in Comparative Perspective
75
were pre-announced and calibrated to equal the
diference between domestic and international in-
fation rates.
Te original purpose of the policy was to simply
to take the real exchange rate variance out of the
equation, but as time progressed and productivity
growth (especially in the export sectors) exceeded
that experienced by trading partners the exchange
rate level was arguably distorted towards under-
valuation, further pushing exports. Te conse-
quences of this are studied in the next chapter.
Incentives
Back in the mid-1980s, when Costa Rica’s push
towards export promotion started, one of the key
instruments for export promotion was a subsi-
dy known as a Certifcado de Ahorro Tributario
(CAT). Tis certifcate was an asset tradable in the
fnancial market which could be used (by the re-
cipient or the purchaser) as a credit at tax-payment
time. Exporters would be issued a CAT worth 15
percent of the gross value whenever they shipped
a new product (meaning anything but the original
four traditional agricultural exports) to a new mar-
ket (meaning not Central America).
Blunt as this instrument was—in the sense that
some recipients of the incentive probably were al-
ready proftable without it, others were in the busi-
ness only to get the incentive, and still others easily
found ways to corrupt the system—it did compen-
sate the initial entrepreneurs (at the time, mostly lo-
cal) who entered export businesses in new lines for
the frst time. Entry was risky and involved a lot of
previously unmeasured costs (fguring out the true
nature of the international market, organizing in-
ternational logistics, assuming new risks, etc.) that
were not present when producing for the domestic
market.
In other sectors—in particular, in tourism—similar
incentives and subsidies were applied, at least in the
early stages of the growth process. With a better de-
sign, they not only targeted entry into the activity,
but also linked to performance indicators and the
qualitative evolution of the industry.
It is hard to argue that the CAT was not efective in
inducing some eventual exporters into the market—
just like it is easy to imagine, at least in theory, a bet-
ter system of incentives. Today, something like this
would be legally untenable before the WTO and po-
litically impossible to justify. CATs lasted for nearly
a decade, until the late-1990s, when it became clear
that they were unnecessary, unforgivably expensive
and a large source of corruption. Nevertheless, in
other places where there has been little room for en-
trepreneurship and the initial risks associated with
entry into export activities would be large, some-
thing like this incentive may play a role.
Free Trade Zone Regime
Another intervention, considered by some a subsi-
dy, is the existence of a free trade zone (FTZ) re-
gime. In the case of Costa Rica, this is less related
with government-run locations and serves more as
an alternative legal/fscal regime in which compa-
nies can choose to participate.
219
A company may enter this regime whether it is
physically located in a privately-owned, industrial
park designed for this purpose or in a stand-alone
location. To qualify for the regime, the company
must meet certain conditions and subject itself to
strong controls and measurements.
In the frst version of the regime (the law that existed
until 2007) the main requirement for an FTZ compa-
ny was a performance requirement: that it would ex-
port a certain percentage of its output. In exchange,
the main concession was the exemption from cer-
tain taxes (including taxes on profts) for a period
typically lasting 15 years, renewable under some ex-
treme conditions. Instead, companies paid a much
lower “canon” for the space and services occupied.
219
In many countries, especially in Africa, FTZs consist of government-owned industrial parks, ofen near ports or in disadvantaged areas, ofering
special conditions to any company operating from them.
Cuba’s Economic Change in Comparative Perspective
76
Companies were also allowed to bring in imported
inputs and capital goods free of tarifs through an
expedited process signifcantly simpler than the or-
dinary import-export process.
220
In the current ver-
sion of the law (passed through congress in 2007)
the tax exemption is no longer total—although FTZ
companies still pay signifcantly less than regular
companies—and its magnitude depends on features
like a company’s expenditure on training Costa Ri-
can workers, investment in research and develop-
ment, local reinvestment, growth, etc. Furthermore,
under the new law qualifcation for the regime is
harder for companies located in San Jose’s Great
Metropolitan Area and looser for those established
in regions of lower human development. Te key
condition is no longer a performance requirement,
which was illegal through a WTO ruling that in-
terprets a fscal incentive designed that way as an
export subsidy. Rather, conditionality is linked to
the industry and other operating characteristics of
the company. Emphasis is now placed on fostering
international value-chains, clusters of related com-
panies and linkages between domestic and foreign
companies. In particular, the tax exemption to a di-
rect exporter is extended proportionally to its do-
mestic suppliers of key inputs. Nationality is not a
condition to participate in the regime.
Manufacturing exports from FTZs in Costa Rica
have a gross value roughly 2.5 times that of non-
FTZ manufactures, while non-tourism exports of
services are roughly half in FTZs and half not. Te
dynamic clusters in electronics, medical equipment,
life sciences and business process outsourcing are
taking place mostly within the regime.
Some analysts have argued that this type of regime
is just a subsidy scheme by another name and that
by competing with each other diferent locations
are just engaged in a “race to the bottom” that only
benefts multinational corporations. While some of
that may be so, the fact of the matter is that compa-
nies in certain key industries do face very attractive
fscal conditions in other places and a country that
does not compete along this dimension may have a
tough time growing in those industries.
221
Further-
more, it is interesting to note that companies whose
fscal beneft expires choose to remain in the FTZ
regime although the legal controls and limitations
are stricter, meaning that the other aspects of the
regime (in particular, the expedited import-export
processes and the geographical proximity of similar
companies) hold value.
222
Fostering Institutions
Costa Rica has three key institutions with the man-
date of promoting development through the suc-
cessful internationalization of the economy.
First, it has a specialized Ministry of Foreign Trade
which is not part of an Economy or a Foreign Rela-
tions Ministry, as in other Latin American countries:
Ministerio de Comercio Exterior (COMEX). CO-
MEX is small but agile and historically has not been
subjected by law to all the civil-service restrictions
that afict the rest of the state (for instance, it attracts
better professionals, pays more, and can hire and fre
at will). Despite its size and limited mandate, it is a
politically infuential institution, especially due to the
public attention to the negotiations of international
220
If an FTZ company chooses to sell part of its output in the domestic market, it does pay income tax on that portion of its profts and pay tarifs on
that portion of its inputs.
221
An interesting example of an alternative is the case of Mexico, Chile and Ireland, which no longer ofer a diferentiated fscal regime for this type
of industries. In order to do so they signifcantly reduced the tax rates for all companies. In Costa Rica, ordinary companies pay 30 percent proft
tax and, if foreign, an additional 15 percent on the repatriation of the dividends. Cutting these rates for the economy as a whole would perhaps be
unafordable for fscal reasons and expecting that local and foreign companies that pay zero elsewhere would stay here facing 40.5 percent total
tax rates would simply be naive.
222
Te author has also heard from some executives in these companies that a reason to stay in the regime is that the public institutions in charge of
it are virtually corruption free and predictable (e.g, attached to the letter and spirit of the law) in their decisions, while being outside the regime
makes one subject to problems of transparency and rule of law coming from the rest of government.
Cuba’s Economic Change in Comparative Perspective
77
trade agreements. In addition to the negotiation,
implementation and oversight of those instruments
and of trade policy in general, COMEX is charged
with promoting a competitive business climate for
export promotion.
Second, and organizationally linked to COMEX, is
Costa Rica’s Trade Promotion agency (PROCOM-
ER). PROCOMER, funded by fees from adminis-
tering the export-import process and the canon
paid by FTZ companies, is in charge of fostering
the quantitative and qualitative growth of exports
through very varied activities. PROCOMER is ex-
ceptionally fexible within the usually rigid rules for
the Costa Rican state (the law describes it as an in-
stitution of “maximum deconcentration”). Among
its programs are training initiatives like the Crean-
do Exportadores program, which teaches interna-
tional marketing and logistics to the management
of established domestic frms; market intelligence
about specifc products and places; advisory ser-
vices for small exporting companies; events for po-
tential buyers to see samples of Costa Rican prod-
ucts and even promotion of the “image” of Costa
Rican output. It also runs a program (Costa Rica
Provee) to promote linkages between large multina-
tionals operating in the country and local small and
medium enterprises that could be their providers. It
has small ofces in a few key capitals.
Tird is the Costa Rican Investment Promotion
Agency (CINDE), an NGO founded with USAID
support in the 1980s to help train and encourage
small agricultural exporters of new products. As the
years passed—and especially as Costa Rica ceased
to be a natural target for foreign aid—the institu-
tion evolved into a small, local private organization
funded through an endowment and the sale of ser-
vices, whose main purpose is to promote hi-tech
greenfeld FDI. It does this by acting as an informa-
tional bridge and informal competitiveness expert
to potential investors by channeling their concerns
and problems afer establishment and advising or
lobbying the government and congress on problems
that the country encounters in the competition for
FDI. Much smaller than other institutions of its
kind, CINDE is almost always cited among the best
investment promotion agencies in the world and is
quite distinct from the others as it is not a part of
government or funded by the Treasury.
While economic theorists are ofen fond of assum-
ing that, if proftable opportunities exist, entrepre-
neurs will fnd them, the Costa Rican experience is
that if a country is small enough it will take a while
for foreign companies to fnd it and if it is poor
enough the same will happen with the local entre-
preneur. In the absence of institutions that solve the
immediate problems, channel information in both
directions and reduce the riskiness and entry costs,
it is likely that multinationals would pass up places
like Costa Rica and go to “safer” (by which we mean
larger, or better known, or easier to argue from the
distance of corporate headquarters) locations and
small local companies would more ofen stick to the
comfortable domestic market.
Tis institutional arrangement also has the beneft
of avoiding certain conficts of interest regarding
FDI and the FTZ regime, since PROCOMER, the
organization in charge of overseeing and collect-
ing fees and canons from the companies, is sepa-
rate from both the institution promoting their en-
try (CINDE) and the institution authorizing their
participation in the FTZ regime (COMEX). Te
arrangement has also created an environment that
is very welcoming to the potential FDI, by provid-
ing a predictable set of rules, plenty of information
that facilitates decisions and reduces risks, a media-
tor than can help investor and regulator understand
each other and, in general, a “voice on its side” that
speaks its language and sees its points.
Costa Rica already provides a fairly welcoming le-
gal regime for FDI. By Constitutional mandate, any
frm operating legally in the country is endowed
with certain common rights, which are not subject
to the nationality of the company or its owners.
Te country has also signed a number of FTAs and
over 40 bilateral investment treaties which grant in-
vestors an extra layer of guarantee over both those
rights, and the right to arbitration (typically at the
Cuba’s Economic Change in Comparative Perspective
78
UN or the World Bank’s arbitration units) in case
of violation. Added to the simplicity of the paper-
work and the role of the supporting institutions,
greenfeld, productive FDI aimed at exports fnds a
very welcoming and trustworthy environment and
access the excellent human resources that make up
Costa Rica.
223
Industrial Policy (or Lack Tereof)
Traditionally in Latin America, policy was inclined
to distort across diferent industries, with the state
making very strong interventions by determining
which industries to enter as an entrepreneur and
which industries to promote the entry of the private
sector through taxation, subsidies and other “blunt”
policy mechanisms. Tis type of industrial policy
seemed to be based on a view that certain sectors
and activities were desirable and part of a devel-
opment process, even if their growth did not come
from becoming better at producing in those sectors.
It was also based on the notion that government has
enough information and probity to make these pol-
icy decisions wisely and transparently.
Afer the 1980s crisis, many policymakers in the
hemisphere became of the view that this type of dis-
tortions caused by sector-specifc policies was very
damaging; neutrality across industries was a better
choice. Unless there was clear evidence of external-
ities, public goods or other well-justifed market
failures that the policy was compensating for, hor-
izontal policy (i.e., common across industries) was
thought to be better.
We are now seeing the intellectual pendulum swing-
ing back on this issue, as a number of scholars have
raised the point that the success of some Asian
countries seems to emerge largely from well selected
“vertical” industrial policies, according to both data
and to narrative. Furthermore, the argument goes,
proftability across diferent sectors is not the sole
determinant regarding the desirable composition
of the economy, as clearly there are some activities
that can be more strongly associated with develop-
ment and others with poverty.
Do Costa Rican export promotion and FDI attrac-
tion policies focus on fostering “picking winners” in
specifc industries? Perhaps the best way of describ-
ing the existing policy is that government does not
pick winners, but rather follows them. Tat is, the
Costa Rican state does not apply any blunt policy
instruments (like credit restrictions diferentiated
taxes subsidies etc.) that select across sectors. How-
ever, the fostering institutions have plenty of sof in-
struments (like selecting in which activities to train
labor, or to conduct research, or contact companies
etc.) which strongly target specifc industries, based
on the market evidence of existing entrants in those
industries or in “similar” activities.
Take, for instance, the growth of the emerging
sector that produces medical devices and, more
broadly, inputs to the global hospital industry. It
would be false to claim that policy considers this
type of activity as equivalent to others—say, sew-
ing cotton garments. Medical devices are the kind
of product in which we would like to grow, as it re-
quires high-technology, uses well qualifed workers,
provides space to diferentiate products according
to quality, and possesses other characteristics that
make this industry more likely to emerge in a de-
veloped country than in a poor one.
It would be naïve for the fostering institutions to
ignore the fact that we have already managed to ac-
quire some companies in that activity. Once some
223
One must add the caveat that the above is true for export-oriented greenfeld FDI, but not for other forms of FDI. For instance, Costa Rica
is closed to mining investment (the law specifes that due to environmental concerns, there is a moratorium on most mining endeavors) and
the facilitating institutions don’t see as their role to help investment aimed at the domestic market, real estate investment, or the acquisition of
ongoing operations. Furthermore, the laws granting rights to minority stockholders are weak and the restrictions on large acquisitions, especially
of companies registered in the stock exchange, are arcane. Finally, companies who do business with the government (build infrastructure, BOT
public facilities, or provide services to the general public charged to the Treasury) fnd a nightmare of controls and, worse still, harshly inquisitive
attitudes by Congress, press and the Comptroller General. But, all this aside, for private, aimed-at-export, greenfeld FDI, the legal and institu-
tional regime in Costa Rica is as attractive as any in the world.
Cuba’s Economic Change in Comparative Perspective
79
participants in that industry are present, it becomes
easier to convince others to enter. Furthermore,
once some key companies in those industries four-
ish, there is more value in attracting the providers
of their key inputs to the country as part of intelli-
gent “cluster” policy.
Does this mean that the country should ofer stron-
ger instruments like diferentiated tax rates or pub-
lic services, government subsidies, or something
else to promote that industry at the expense of
others? Te answer seems to be no, as government
is still in general inefcient and corruptible when
making this type of decision.
Regarding some policy areas, government is simply
“doomed to choose,” paraphrasing Ricardo Haus-
mann. It is impossible, for instance, to create infra-
structure and other public goods without making
choices about design and location) that are not neu-
tral across industries. Te same goes for specialized
training and college education.
What about farming? What policies afect the land
usage in diferent crops, for example? In agricul-
ture, the key policy instrument has been the remov-
al of tarifs and other barriers to imports. Trough
its efect on relative prices, trade liberalization
has induced a shif in land use, from some of the
crops the domestic market consumes, to others for
which the land is better suited. As tarifs in agri-
culture have fallen over the last 20 years, 120,000
hectares (or a quarter of the available arable land)
shifed from certain grains, like yellow corn, to
exportable products where comparative advantages
are present. Tis change along the extensive margin
explains almost all the productivity growth in Costa
Rican agriculture in that period, the fastest in the
hemisphere.
224
In a way, opening the economy and
fostering exports has been the agricultural industri-
al policy in this period.
225
As another example of Costa Rica dabbling in pro-
ductive development policy, the changes in the new
FTZ laws are aimed at promoting linkages between
domestic and foreign frms, participation of do-
mestic companies in international value chains and
healthy dynamics in productive clusters like elec-
tronics, advanced manufacturing, medical devices
or BPOs. In those, more than choosing a particular
sector to promote, the policy aims to get the market
dynamics right.
Competitiveness
Costa Rica’s competitiveness performance—under-
stood as the quality and availability of traits and insti-
tutions that are outside the control of specifc frms,
yet afect total factor productivity—is quite varied.
Look, for instance, at the results in the Global Com-
petitiveness Index compiled by the World Economic
Forum. Costa Rica’s rank in what the index considers
to be simple, basic tasks is dismal, especially in all
categories related to infrastructure.
226
Meanwhile its
performance in the indicators of those more com-
plex things that one would associate with develop-
ment—especially all that relates to human capital
and technological readiness—is very high.
224
In the meantime, according to FAO data and TradeStat, Costa Rica has become the sixth largest agriculture exporter per capita and second largest
per area in the world outside of intra-European trade. Output per worker in agriculture has grown from 40 percent to 75 percent of output per
worker outside agriculture, with the corresponding convergence between rural and urban human development and poverty indicators.
225
Tis is not ideal. One would have hoped to combine the cleansing and productivity-enhancing efects of trade liberalization along the extensive
margin, with a more active government policy along the intensive margin to deal with the many externalities, public goods, social and other mar-
ket distortions that are common in agriculture. Sadly, these types of eforts by the Costa Rican state regarding agriculture were sacrifced during
the fscally-lean decades of the 1980s and 1990s. Tis implied that the social cost of this efcient shif in land use was higher than necessary:
many farms ended up changing owners in order to change crops. For further analysis of these matters, see Alberto Trejos, “Trade, the Efcient
Use of Land, and Agricultural Productivity: the Case of Costa Rica and Lessons for Africa” in Perspectives In Agriculture: Strengthening Africa’s
Performance, Discussion paper 2010/06, (Brenthurst Foundation, 2010).
226
Te fact that many of the components of the index are measured on the basis to opinion polls rather than hard data, on the other hand, leads
to exaggeration. Costa Rica, for instance, ranks in “seaports” below some landlocked African countries and below Nicaragua, a neighbor whose
frms actually utilize Costa Rican ports instead of their own. On matters that evolve very slowly—again, like infrastructure—the index tends to
oscillate very wildly, and to be very correlated to the short-term popularity of the government. Nevertheless, the data do paint a broad picture.
Cuba’s Economic Change in Comparative Perspective
80
Part of the issue is the philosophy with which many
Costa Rican productive services are organized.
Take, for instance, infrastructure. Te network is
organized in a very bottom-up way, with noticeable
underinvestment in the key arteries (large ports,
airport, and the main highways) but a very rich
network of capillaries. For example, while the ex-
pressway linking the two main cities with the air-
port has half the lanes that it should, and boasts a
perennial trafc jam, almost every little town has a
paved road entry, power, clean water and telecoms,
plus schooling and healthcare infrastructure. Te
former failure is very visible and clearly document-
ed, but perhaps the latter success is more important,
especially for the competitiveness of sectors like ag-
riculture and tourism and the participation of the
rural population in the dynamic labor market of the
new sectors.
Like infrastructure, the paperwork and bureau-
cratic cost of regulation is also extremely burden-
some. Construction permits ofen take months to
be granted, regulatory decisions are ofen guided
by form rather than content, private operators are
ofen lef in a legal limbo. Several eforts of trade of
paperwork facilitation and simplifcation have been
performed over the years, but have in general failed
because the bulk of the regulatory burden seems to
be court-mandated. Further, the current political
mood of the country leads to more regulation, not
less. To some extent—but only some—export com-
panies and especially FDI are somewhat isolated
from this problem by the nature of the FTZ regime.
Yet, while Costa Rica’s institutional and legal en-
vironment would seem like heaven for companies
that utilize private resources to export,—thus relat-
ed to government only in its regulatory role—those
frms that need to interact with government as a key
supplier or costumer may instead fnd themselves
in a hell of unclear rules, corruption, slow bureau-
cracy and erratic decisions.
Costa Rica has invested consciously in its brand
name, making sure that the label “Made in Costa
Rica” adds rather than subtracts value. In a 1996
study, researchers at the INCAE business school
measured that being located in Costa Rica allowed
tourism companies to charge prices with a 15 per-
cent premium, and campaigns like “No Artifcial
Ingredients” have positioned the environmental
merits of the country very well in the mindset of
potential travelers. Rather than wasting large bud-
gets in very expensive mass advertising, CINDE
and PROCOMER focus their message to industry
events and one-to-one public relations where the
returns are maximized.
A fnal topic that may be worthy of mention, in
which Costa Rica performs comparatively well in
the Global Competitiveness Index, is the area of
labor relations. Tis is an area that varies very sig-
nifcantly across countries and strongly determines
productivity, the fexibility of the productive sector
and the well-being of the general population.
Workers’ rights are very important and need to
be protected if the fruits of growth are to be well
shared, but the way in which workers represent
their interests and the means by which their rights
are implemented may be in some places an addi-
tional institutional strength –building consensus,
facilitating information fows, creating healthy in-
centives to performance—while in other places it
becomes a source of cost and volatility, impair in-
tra-industry mobility and creative destruction, pro-
long unemployment and foster a misallocation of
resources that would afect labor productivity.
Costa Rica demonstrates a very interesting case
with regard to this issue. Costa Rican labor is very
strongly protected by laws ranging all the way back
to the 1940s. Tese include mandatory coverage by a
national healthcare insurance scheme, a universal—
now fully-funded—mandatory pension scheme,
generous severance pay, workers compensation,
maternity and disability and a myriad of other so-
cial schemes. Tese rights are granted by law to all
workers, are not specifc to certain labor employer
relationship and can be demanded by the worker
through the state, which allocates resources to the
oversight and compliance of labor laws.
Cuba’s Economic Change in Comparative Perspective
81
Tis means that workers are adequately protect-
ed, in a manner predictable by law, and companies
know exactly what are they getting into, through an
institutional arrangement that is signifcantly less
confrontational and wasteful than collective bar-
gaining. Union membership in the private sector
is, therefore, remarkably low, with most employers
and employees preferring instead to organize along
“Solidarismo”, a very peculiar labor arrangement.
Solidarism organizes labor through associations
that operate independently at a frm rather than in-
dustry level, usually with a close direct connection
between the employee, the union ofcer and the
employer. Tey are funded by contributions from
the employer, who provides a monthly deposit to
the union in the worker’s name for what would be
the worker’s severance, to be utilized in a savings-
and-loans type arrangement for the workers. Te
worker keeps the money regardless of whether
the termination of the labor contract is of a sever-
ance-induced nature or not.
Many solidarity unions branch their activities in
other directions; for example, some frms outsource
to their solidarity associations certain services and
inputs, or engage them into proft-sharing mech-
anism. In that way, the employer fnds a route to
improve the well-being, morale and productivity
of the worker, while the worker benefts and fnds
his interests aligned with those of the company.
An overwhelming majority of Costa Rican private
sector employees choose to participate in solidar-
ity unions, rather than the more traditional and
aggressive unions.
227
Tis allows for a situation in
which labor and player relationships are almost
entirely devoid of aggressiveness and friction. Em-
ployer-employee relationships are, as a result, very
non-adversarial.
MISTAKES AND LESSONS ALONG THE WAY
We have said that Costa Rica’s wealth of human
capital, the ofspring of many decades of invest-
ment in health and education, is the country’s main
competitive advantage. But there are some growing
weaknesses in the educational system which put in
danger not only the sustainability of the success ex-
perienced so far, but also the capability to extend
services to the entire labor force and the rest of the
economy.
228
In the last few years, education planning has fo-
cused on raising the budget allocated to the task
and raising enrollment rates at all levels, especial-
ly the fraction of the corresponding age group that
completes high school. Tese matters are, of course,
important, but not the only dimension along which
the system can improve.
First, consider the mix between technical and vo-
cational education, on the one hand, and tradition-
al humanities education on the other. Despite the
fact that students demonstrate signifcantly higher
interest in the former (with very low dropout rates),
it only involves 7.5 percent of available high school
seats, and falling.
229
Meanwhile, the traditional
route is still designed—as half a century ago—as
a preparation for university, seemingly useless for
students who know they will not follow that path.
Both employers and students believe education
ends with the “third cycle” (that is, end of ninth
grade), with the rest of high school being valued
only as a university requirement, with no apparent
intrinsic value.
Another mix problem happens in public universi-
ty, where the fraction of the seats assigned to en-
gineering, basic sciences, computing and health
227
Some analysts question whether this is really a choice, as employers are ofen as keen to encourage solidarism as they are to discourage the forma-
tion of unions. But clearly, in my experience, workers seem to value the opportunity of solidarism strongly and sincerely, while the radicalism of
traditional unions—which prevail among public sector workers—and their inclination to engage more in political matters than in labor represen-
tation, weakens their appeal.
228
Te ideas and data in this section largely come from Arce, et al.
229
As a reference point, technical and vocational high school reach 75 percent of the students in Finland, 66 percent in Germany, and over 50
percent in most other European countries, despite the fact that those countries have much higher enrollment rates in higher education than Costa
Rica.
Cuba’s Economic Change in Comparative Perspective
82
professions falls well short of student and job mar-
ket demand. A high fraction of applicants to those
felds are being pushed against their will away from
opportunity and into social sciences and education.
Tirty consecutive years of excess applicants in
some felds and excess places in some others has not
led the system to reallocate resources. Tis problem
is made more difcult because the university curric-
ula are very rigid, forcing students to become spe-
cialists in a feld, with little fexibility to mix train-
ing in that feld with other abilities, or to graduate
as a generalist familiar with several felds. Today’s
production processes, especially in the provision of
exportable services like BPOs, demand and reward
workers that have mixed abilities in several areas,
while specialists are already quite available. Sof
skills among Costa Rican university graduates are
worsening, while similar skills measured on blue
collar workers are exemplary.
Te process of tarif reduction, key for the export
success, also could have been fne-tuned. Costa Rica
managed to open to trade very aggressively through-
out the 1980s through unilateral tarif phase-out, and
then at the slower pace of barrier reduction associ-
ated with international trade negotiations afer the
1990s. In general, doing this was politically difcult,
but the results have been very satisfactory. Still, three
weaknesses deserve attention.
First, the phase-out process was unbalanced across
goods, with tarifs coming down very quickly for
most sectors, with exception to a few products
(mostly crops), whose growers had the necessary
political clout and were able to maintain untouched
protection. Te discrepancies and price distortions
this generated were great, and the political vested
interests proportional.
230
Second, some of those phase-outs were very quick,
without any parallel support ofered to the afected
producers. Many farms needed to change ownership
in order to change crop output. In those cases, the
transitional cost could have been much lower had a
diferent combination of policies been implemented.
Tird, the industries of import, distribution and
retail of certain goods are very concentrated in oli-
gopolies or monopolies, and in those cases the re-
ductions in import barriers do not refect automati-
cally and fully in domestic relative prices, impairing
the benefts from trade. Costa Rican antitrust leg-
islation is somewhat modern, but the institutions
in charge are weak and, more to the point, mostly
focus their attention to other industries.
Te choice of reducing to almost zero the short-
term volatility of the real exchange rate was wise, as
it created a much safer environment for entrepre-
neurs to experiment with entry in export markets
and for local and foreign companies to add predict-
ability to their proftability.
Te mechanism chosen, on the other hand, im-
plied that the average level of said real exchange
rate remained roughly constant for nearly 30 years.
Because productivity grew faster than in trading
partners, by the end of the period the Central Bank
required such large transactions in the currency
market to implement the policy that it largely lost
command over its overall monetary policy. Tis
also implied that, once the system was reformed to
allow better monetary control and the reduction
of infation, the massive appreciation that came as
a result was a very large obstacle for future export
growth performance.
231
230
Perhaps the worst case is rice, a crop with a few large and very competitive industrialized producers who do not need protection to be proftable,
along with a number of very small growers in land without proper irrigation, for whom the best support would be to help them transit to another
product better suited to their location. Although the policy has been to maintain high protection and a vast system of subsidies in the name of the
latter, these instruments are designed in a way that implies the benefts are mostly received by the former. Interesting descriptions of the situation
appear in Umaña (2009) and Jorge Cornick, La organización del sector público para PDPs exitosas, Mimeo, (Banco Interamericano de Desarrollo,
2011).
231
As the currency started to foat, other phenomena have conspired to the appreciation of the colón, including the signifcant infow of short-term
fnancial capital caused by the distortions in the international markets afer the great recession. At the moment of this writing (mid-2013) the
colón has appreciated in real terms nearly 40 percent relative to four years ago, thus bringing along a signifcant deceleration and difculty in
further export growth.
Cuba’s Economic Change in Comparative Perspective
83
Te design of the CATs, the export subsidy de-
scribed in the previous chapter, lef much room for
improvement. Te design choice was to make the
subsidy proportional to an easy-to-calculate vari-
able—in this case, the gross value of export—so
that there would be little room for subjectivity in
the calculation. Despite this rationale, the CAT sys-
tem was very easy to manipulate (by, say, falsifying
invoices) or even corrupt. For example, a company
was found to be simply exporting ice, at a loss, to it-
self. Additionally, while many entrepreneurs clearly
needed a push to take this leap into the unknown,
giving everybody a push of the same size was prob-
ably suboptimal. Calibrating the parameters of the
support to more specifcs of the transaction prob-
ably would have been better, especially if the pay-
ment had not been in a cash-equivalent but rather
into the assigning of resources to reduce some real
inefciencies and real costs that the exporter had to
face. Finally, it was clear that the subsidy lived for
far too long and should have at best been a transito-
ry policy very early in the reform process.
We described also in the last chapter the system of
FTZs and the way it was reformed in 2009. While
controversial, we hold that such a system is necessary
to remain competitive in certain sectors for which
the terms of tax treatment are simply too hetero-
geneous across countries. In Delgado and Trejos
232
calculations of direct and indirect contributions to
taxation by one specifc large frm in the FTZ sys-
tem reach the conclusion that indirect contribution
(the extra payment that workers, service providers
and owner of resources make to the state because
their income is more valuable than it would have
been selling to somebody else) is larger than tax ex-
emption. So, in net terms the system is probably not
even a drain—at least not a large one—on the tax
revenues. Nevertheless, the design, negotiation and
lobbying of the 2009 reforms demonstrated sever-
al lessons that would have been useful earlier on.
First, giving a complete tax exemption was probably
unnecessary, since there are positive yet small rates
that can be applied and yield some revenues, if de-
signed in a way that they net out from tax credits ap-
plicable in their home country. Second, once one has
a positive tax, even if the rate is low, one can provide
incentives as credits against that tax for companies
to do things that government fnds desirable or that
the market under-provides, like training or R&D.
Tird, the incentive did not diferentiate between the
conditions to enter an FTZ in the developed heart
of the country, versus its very poor periphery. Tis
similarity in the rules implied that government could
not push companies to establish themselves in areas
of lower development. Further, as the country made
progress, companies in very backward sectors would
leave the Metropolitan Area. However, but of real-
locating to a poorer part of Costa Rica, they would
move to another country altogether. Fourth, and f-
nally, the FTZ system should have contained or oth-
erwise extended not only direct exporters but also
their local suppliers from the beginning. At the very
least, the rules should have been designed to avoid
creating a negative distortion that led companies to
try to source abroad, because sourcing locally was
administratively onerous.
Finally, we address issues related to export compet-
itiveness. A lesson from every successful exporting
country is that rather than hoping to be ideal in
every possible aspect of productivity and the busi-
ness climate, the target should be to fnd a winning
combination of attractive traits or advantages. One
can argue that, in the case of Costa Rica, the macro-
economic environment, human capital and quality
of the labor force, clarity of the rule of law, favorable
fscal regime, assisting institutions and very wel-
coming labor relations constitute such a winning
combination. Nevertheless, some of the current sa-
lient weaknesses do hurt and carry a serious cost.
Te poor condition of the country’s infrastruc-
ture is perhaps the largest competitive weakness in
232
Félix Delgado and Alberto Trejos, El Impacto macroeconómico de la presencia de INTEL en Costa Rica, (Consejeros Económicos y Financieros,
2006).
Cuba’s Economic Change in Comparative Perspective
84
Costa Rica. For reasons that are not pertinent
here,
233
the government simply lost its ability to le-
gally perform any infrastructure project of signif-
icant size, afer the decade-long hiatus in such in-
vestments that took place as a consequence of the
fnancial crisis of the early 1980s. We are getting to
the point where the costs caused by bad logistical
infrastructure, and the complexities and delays as-
sociated with dealing with government and regula-
tion in general, are too onerous to compensate for
other positive traits, valuable as they may be.
Another aspect of general competitiveness that
causes concern is energy. As of the late 1990s, Cos-
ta Rica became one of the few nations in the world
that required no fossil fuels for electric power gen-
eration, due to decades-long investments by the
public utility, ICE, in renewable energy capability.
Not only was this a very signifcant environmen-
tal achievement, but also provided a guarantee
of high-quality energy whose price did not need
to vary along with the oil price. Over the last few
years, however, construction of generation capaci-
ty has fallen behind, and today 9 percent of energy
is generate through hydrocarbons. If no large new
plants come in line till then, this percentage could
reach 50 percent by 2021. Tis problem is due to the
combination of the same limitations to public in-
vestment mentioned above, a set of barriers erected
by the state and congress against private investment
for these purposes (driven by ideological reason-
ing) and poor decisions regarding pricing and ex-
change conditions.
CONCLUSIONS: ON THE APPLICABI LITY
OF THIS STRATEGY TO CUBA
Te remaining question is the applicability of the
Costa Rican story to the Cuban reality. Te simi-
larities between the potential competitive strengths
of the two countries lead us to believe that some of
the experiences that are described in the previous
chapters could be of some value and use for Cuban
policy makers. Other similarities and opportunities
need to be ascertained, including a more detailed,
quantitative comparison between the human-cap-
ital endowment of the two countries, in order to
assess the value of the efort and to guess where the
low-hanging fruits could be.
Some concerns and pending questions arise right
away, however. One of them is the role of the Cuban
entrepreneur. While prominent, FDI is not the lead
character of the Costa Rican story, the domestic ex-
porting company is. One can easily imagine that
Cuba could aim, with limited adjustments within its
current economic structure, to attract similarly im-
pressive multinational corporations as Costa Rica. But
the applicability of this story to Cuban growth largely
depends on the capability for the Cuban entrepreneur
to do its part or the Cuban state enterprise to take its
place. It is not our objective or place to recommend an
appropriate economic design for Cuba. One is com-
pelled, however, to identify points where the Costa Ri-
ca-Cuba analogy gets most tightly challenged.
Another difculty in applying some of this story in
the case of Cuba comes from timeframe. Te global
economy is very diferent now from what it was in
the early 1980s. One example is the willingness, be-
fore the current wave of FTAs, which rich countries
had then to grant unilateral preferential market
access to poorer partners. Another example is the
infexibility of current multilateral rules regarding
the design of new FTZs or, in general, other exports
subsidy schemes, for mid-income countries.
Finally, the current global macroeconomic cli-
mate—let alone the peculiarities of Cuban macro-
economic management—pose some limitations on
matters like real exchange rate policy, currency con-
vertibility, etc.
Despite these difculties we contend that there are
components of the Costa Rica story that are appli-
cable and interesting for Cuba, yielding purpose to
the broader project to which these pages belong.
233
See instead Jorge Cornick and Alberto Trejos, “Political and Institutional Obstacles to Reform”, in Growing Pains in Latin America, ed. Lilliana
Rojas-Suarez (Washington, D.C.: Center for Global Development, 2009), pp. 153 – 191.
Cuba’s Economic Change in Comparative Perspective
85
INTRODUCTION
Te general objectives of the Cuban economic re-
form were set forth, in broad strokes, in the docu-
ment “Guidelines for Economic and Social Policy”
(“Lineamientos de la Política Económica y Social”),
approved in 2011 during the Sixth Congress of the
Communist Party of Cuba (PCC). Two objectives
stand out in the chapter on monetary and fnancial
policy: First, expanding microfnance, an objective
for which legislation is already in force and which is
gradually moving forward; and second, mention is
made of the dual currency, a matter on which spe-
cifc actions have yet to be decided, and on which
there is great uncertainty. Tese two appear to be
the most important elements of change in mone-
tary and fnancial policy as part of the ongoing re-
form of the Cuban economy, and 2016 has been put
forth as the deadline for attaining the objectives.
235
As of December 20, 2011, three commercial state
banks began to ofer bank loans and fnancial ser-
vices to self-employed persons and microentrepre-
neurs, and expanded banking facilities for private
agricultural workers. Te new legislation has already
ofered positive, yet discrete, results.
As of late 2013, new expectations have been raised
regarding the dual currency since the ofcial note
published in the newspaper Granma announced
that soon a group of actions would be taken in the
enterprise sector, and then in the social sector, with
the aim to move the economy toward a single cur-
rency—the Cuban peso.
236
From 2011 to 2013 the
government had organized some monetary-ex-
change experiments in certain enterprises and se-
lect sectors, which ofer hints as to the type of mon-
etary reform that is considered most likely.
Whatever strategy is ultimately decided on, the
main measure that the Central Bank must take to
eradicate the distorting parallel circulation of two
national currencies—the Cuban peso (CUP) and
the convertible peso (CUC)—is the devaluation of
the ofcial exchange rate of the Cuban peso, a mat-
ter that has been put of for more than 20 years.
It is in this context that this article examines the mon-
etary experiments already in place and what they tell
us about future monetary reform, so as to then ana-
lyze the costs and benefts, as well as economic policy
responses, associated with the eventual devaluation
of the ofcial exchange rate.
Monetary Reform in Cuba Leading up
to 2016:
Between Gradualism and the “Big Bang”
234
Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva
234
Tis essay is the result of the project carried out by the Universidad de La Habana and the Brookings Institution, which made possible the debate
about these monetary-fnancial issues and others at the workshop held in Havana in September 2013, and thereby included the impressions and
suggestions of Augusto de la Torre, Richard Feinberg, Antonio Romero, Carmelo Mesa-Lago, Guillermo Perry, Saira Pons, Ricardo Torres, José
Juan Ruiz, Alberto Trejos, and Juan Triana, among others. It has been translated from Spanish to English.
235
For a lengthy description of the current reform in Cuba one can see the texts by Carmelo Mesa-Lago, Cuba en la Era de Raúl Castro: Reformas
Econónomico-Sociales y sus Efectos (Madrid: Editorial Colibrí, 2012) and Omar Everleny Pérez, “La economía cubana en el 2012: La actualización de
su modelo económico,” in Miradas a la Economía Cubana, eds. Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva (Havana: Caminos, 2012).
236
See the newspaper Granma, October 22, 2013.
Cuba’s Economic Change in Comparative Perspective
86
One of the key aspects to be decided is the pace of
monetary reform. Te analyses and conclusions of
this article show a group of arguments that would
justify guaranteeing, in all areas possible, a gradual
transition as the best strategy for Cuba’s monetary
reform. Nonetheless, given the major gap between
the two exchange rates, at certain moments abrupt
devaluations (“big bang” style) will be required to
meet the goal of having a single currency in 2016.
Te analyses set forth in this text do have not em-
pirical backing, as they have to do with actions that
have yet to start; moreover, they do not have prece-
dents in the Cuban economy. Te assessments that
are presented take into consideration the mecha-
nisms of monetary and fnancial transmission rec-
ognized by theory and international experiences,
and in that context an efort is made to select those
that will have the greatest chance of fnding expres-
sion in the Cuban economy given the characteris-
tics and particularities of its monetary policy and of
Cuba’s banking and fnancial system. It is also cru-
cial to be able to understand the origins of the dis-
tortions present today, which go back to the crisis
of the 1990s and to the economic policy responses
adopted at that time. Terefore, the value-added of
the conclusions presented rely on this evaluation of
the origin and context of the monetary and fnan-
cial problems that the Cuban government is now
proposing to resolve.
For reasons of length it is not possible to address at
the same time the issue of microfnance and dual
currency. Tis paper focuses on the second issue.
THE BANKI NG SYSTEM AND REFORM
In the 1990s the Cuban fnancial system was sub-
ject to a profound transformation. A two-tier bank-
ing system was created that replaced the previous
scheme of a single bank that performed at the same
time central banking functions and commercial
banking functions, as was typical in socialist sys-
tems. In 1997 the Central Bank of Cuba was estab-
lished as the lead organization for banking super-
vision, the payments system, and monetary and
exchange policy.
To some extent the banking system was able to ac-
commodate the reform pushed in those years afer
the disappearance of the socialist bloc. Tis process
also included opening up tourism, foreign invest-
ment, and remittances, restructuring the state en-
terprise system, and partially freeing up spaces for
the small-scale private sector, among other changes
approved at that time by President Fidel Castro.
237
New commercial banks and non-banking fnancial
institutions appeared in the fnancial system. All are
state-owned, but they have the power to make de-
cisions on loans within certain general parameters
defned by the Central Bank. Te door was opened
to international fnancial institutions, which legally
were established as ofces representing the parent
companies. Some of them have been engaging in
credit operations and fnancial services, yet their
operations are subject to the many pressures and
limitations that stem from the sanctions imposed
by the United States government on Cuba.
At present, the Cuban fnancial system is made up
of eight state commercial banks, one mixed bank
with Cuban and Venezuelan state capital (Banco In-
dustrial de Venezuela-Cuba), nine non-bank state
fnancial institutions, and 15 ofces of foreign f-
nancial institutions. Te fnancial system achieved
certain progress in the modernization, computeri-
zation, and development of new services and instru-
ments for capturing savings and allocating credit.
238
Te Central Bank has continued to set interest rates on
demand deposits and fxed-term deposits in the state
banks, while it has defned narrow ranges for interest
rates on loans. A certain degree of competition was
237
A lengthy description of the Cuban reform of the 1990s can be found at ECLAC, La Economía Cubana: Reformas Estructurales y Desempeño en
los Noventa, (Mexico City, D.F.: Fondo de Cultura Económica, 1997).
238
For more details on the changes the Cuban fnancial system has experienced, see Carlos Pérez, “Metodología para la Planifcación y Gestión de la
Política Monetaria en el Segmento Población de la Economía Cubana,” (Doctoral thesis, Universidad de la Habana, 2012).
Cuba’s Economic Change in Comparative Perspective
87
established among the diferent fnancial institu-
tions, albeit within a very limited framework. Te
interbank market never took of, beyond interbank
deposits and specifc credit operations among the
fnancial institutions.
Te reform of the fnancial system, like all the oth-
er transformations of the 1990s, came to a halt in
the 2000s; several proposals for change were lef
pending, some of which are trying to resume today
under the presidency of Raúl Castro. For example,
the development of the interbank market and the
fnancing of the fscal defcit by means of issuing
public debt are two aspects mentioned in the cur-
rent reform, even though there is not much clarity
as to the steps that will be taken to advance such
aims. In this new stage it appears that the more in-
depth changes to the banking system will be associ-
ated with the expansion of microfnance.
Cuba’s fnancial institutions have been giving loans
mainly to the state enterprise sector, and only in a
very controlled way in the sector of households and
private agricultural producers. Te fnancial restric-
tions on the private sector had to do not only with
credit, but also the impossibility of using bank pay-
ment instruments and current accounts.
Te new legal framework in which self-employed
persons, microenterprises, and private agricultur-
al workers could operate fnancially was published
in the Ofcial Gazette 40 of November 2011.
239
Te current fnancial measures of the Cuban gov-
ernment allow one to classify the new policy as an
opening to micro-lending and microfnance. Te
volume of expected loan amounts (a few hundred
dollars), the recipients of such loans (individuals,
small agricultural producers, and microenterpris-
es), as well as the characteristics of the guarantees
allowed (not backed by mortgages) situate the new
fnancial operations in the feld of microcredit. Te
opening also extends to microfnance, given that
microentrepreneurs will receive fnancial services
in addition to loans, specifcally managing current
accounts and the use of bank payment instruments.
As of July 2013, a total of 271,152 loans had been
made for more than 1.5 billion pesos (62.5 million
dollars at the exchange rate for the population). Te
banking authorities themselves consider the fgure
of loans applied for by the private sector to be dis-
crete. Given Cuban banks’ scant prior experience
with microcredit, the technological difculties, and
the limited alliances with local actors, among oth-
er limiting factors, the fgure of loans made so far
should be considered positive and as an indicator of
the potential that could be deployed if appropriate
measures continue to be adopted. No eforts should
be spared in this regard, given that the growth of the
private sector requires such fnancial support for its
take-of and sustainability.
MONETARY AND FI NANCIAL EQUI LI BRIA
Figure 5 shows infation since 1990 measured by the
consumer price index (CPI) in Cuban pesos. One
notes that in the period from 1991 to 1993, infa-
tion climbed to two- and three-digit fgures, yet as
of 1994 the economic authorities succeeded in con-
trolling price increases.
240
Te main determinant of
infation in the 1990s was the increase in the fscal
defcit, which rose to more than 30 percent of GDP.
Te government increased fscal spending to support
the public enterprises that became unproftable as a
result of the crisis, and thereby was able to contain
unemployment, which reached only 8 percent. At
the same time, social spending in nominal terms
was held steady (education, health, social assistance,
and subsidies for the food basket), and thousands
of families were kept from falling into extreme pov-
erty. Te fscal defcit was monetized and provoked
an excessive increase in the money supply at a time
when, moreover, demand for money for transactions
diminished due to the 35 percent contraction of
239
Ministry of Justice, Gaceta Ofcial de la República de Cuba No. 40 (Havana, November 2011).
240
Te measurement of the Cuban CPI has accumulated some defciencies such as not including the markets in convertible pesos and not changing
the basis for weighting goods and services since 1999; the result of which it is likely that ofcial infation is underestimating actual infation by
several percentage points.
Cuba’s Economic Change in Comparative Perspective
88
GDP. Te result was increased infation and the loss
of more than 80 percent of the value of state wages,
which were frozen in nominal terms but in real terms
absorbed the cost of the crisis. In this way, the cost of
the crisis was distributed among state employees; it
was the alternative to massive unemployment and to
extreme poverty for thousands of families.
Later, fscal adjustment measures and the gradu-
al recovery of economic growth made it possible
to control infation. While the Central Bank has
helped keep infation below 10 percent, it does not
have an infation objective explicitly defned, nor
has it developed a monetary policy scheme that
would enable it to propose one.
Monetary policy does not yet use conventional
monetary policy instruments. Planning and cen-
tralization have been the main instruments used
to regulate aggregate demand in the economy. It
does not appear that monetary policy is designed
to transition from the current moment to the use of
conventional indirect instruments such as open
market operations, reserve requirements, and the
discount rate. In a context of controlled interest
rates, low competition, and the absence of an inter-
bank market, the transmission mechanisms through
the banking system—in order to indirectly infu-
ence credit levels, the money supply, and ultimately
demand and prices—have turned out to be inopera-
tive for monetary policy. In addition, the possibility
of using open market operations has been vetoed
by the non-existence of a market in internal public
debt. Nor are there Central Bank bonds or any oth-
er instrument that can be used to collateralize any
type of operation for expanding or contracting the
monetary base through the discount window.
Price stability during the decade has some visible fun-
damental determinants: First, the government’s direct
control over part of the prices (more than 40 percent of
the CPI in Cuban pesos); second, having maintained
on average a low fscal defcit (approximately 3 percent
of GDP); and third, control over the exchange rates of
the Cuban peso and the convertible peso.
Low infation is a major advantage of the current
Cuban reform in relation to the 1990s, when a
FIGURE 5. INFLATION IN CUBAN PESOS (1990-2011)
90 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 11
91.5
76
18.3
7.3 5.7
1.6
1.1
Source: Created using data from the Central Bank of Cuba (2008) and the National Ofce of Statistics and Information (ONEI) Anuario Estadístico
de Cuba (several years), www.one.cu.
Cuba’s Economic Change in Comparative Perspective
89
group of fscal and monetary stabilization measures
had to be proposed. Monetary policy can therefore
focus on other objectives, such as eliminating the
dual currency and promoting the convergence of
exchange rates.
Nonetheless, the currency reform to be implement-
ed may well pose challenges to maintaining mone-
tary and fscal stability. Te strategies set in motion
to eliminate the dual currency, to devalue, and to
achieve convergence of exchange rates will require
compensatory fscal measures (at least transitory
ones) for the enterprises and families afected; all of
that could squeeze fscal accounts on the spending
side, and ultimately usher in infation. In addition,
the necessary devaluation of the exchange rates will
be passed on to consumer prices. In other words,
both the fscal defcit and infation will receive pres-
sures through monetary reform, which will have to
be navigated by the economic authorities.
Moving on to other aspects of monetary policy,
while the Central Bank has been able to keep infa-
tion under control, it has not been able to avoid the
occurrence of other types of monetary imbalances.
Since 2008 the Cuban economy began to sufer a
crisis that was, all at once, a debt crisis, a banking
crisis, and an exchange crisis. Te external shocks
and the fnancial centralization measures decided
upon in prior years were the fundamental causes.
Te mistakes in the monetary policy design that ac-
companied the convertible peso afer the de-dollar-
ization in 2003 and 2004, including the lack of rules
or transparency in relation to the issue of the CUC,
TABLE 9. CAUSES OF THE CUBAN FINANCIAL CRISIS IN 2008
1. Balance of payments crisis since 2008 triggered by three external shocks: worsening terms of trade, a ne-
farious hurricane season that required additional food imports (as well as supplies for repairs to housing and
infrastructure), and the international crisis with its transmission channels to external ?nancing and Cuban
exports. These shocks acted on a balance of payments that was already suffering from fragilities after the
slowdown in the export of medical services to Venezuela.
2. The elimination, since 2003, of the currency board (caja de conversion) that controlled the issue of convert-
ible pesos (CUC), without setting any monetary rule to replace it. Previously, for each convertible peso in cir-
culation there was a dollar on reserve at the Central Bank, but when this system was ended, and not replaced
by another monetary rule, the Central Bank had unrestricted freedom to print convertible pesos. Although the
data is not public, the facts show that up to 2009 a sum of convertible pesos was issued far greater than the
reserves in foreign currency required to support its convertibility.
3. The recentralization of ?nancial resources since 2005. In 2005, the Single Account of the State (Cuenta Única
del Estado) was established, where businesses are required to deposit their pro?ts, pay taxes, and make
other payments in foreign exchange and convertible pesos. Centralization may be considered another factor
promoting the banking crisis to the extent that it provoked a concentration of the ?nancial risk in a single
economic agent, in this case, the central government. It was not the ?rst time the government has confront-
ed a crisis in its ?nances; the difference is that previously it did not have such strong repercussions on the
balance sheets of the banks, as liquidity was more diversi?ed among the current accounts of the different
state enterprises.
4. Another factor that aggravated the ?nancial crisis is the ?xed exchange rate policy. A timely and gradual
devaluation of the exchange rate of the convertible peso would have helped re-establish equilibrium in the
balance of payments. It would have generated incentives in favor of import substitution, increased exports,
and made tourism prices more competitive. From 2005 to March 2011 the exchange rate was kept ?xed
at 0.92 CUC for 1USD. Only in March 2011 was it devalued 8 percent to return to the parity of 1CUC:1USD.
Source: Pavel Vidal and Mario González-Corzo, “Cuba’s Banking Crisis: Macroeconomic Antecedents, Principal Causes, and Recent Policy Re-
sponses,” in International Journal of Cuban Studies 2, No. 3/4 (December 2010), pp. 201-213.
Cuba’s Economic Change in Comparative Perspective
90
also contributed to the Cuban fnancial crisis. Table
9 summarizes the main causes of the 2008 Cuban
fnancial crisis.
Te stabilization of the Cuban banking and fnan-
cial system could not count on the help of an in-
ternational lender of last resort, given that Cuba is
not a member of the main international fnancial
institutions.
241
Venezuela’s own economic problems
have rendered impossible an exercise of this type on
behalf of its main economic ally or from the newly
established Bank of the South, of the Bolivarian Al-
liance for the Peoples of Our America (ALBA).
Te only option for the government is to implement
a pro-cyclical adjustment policy to resolve the sol-
vency problems behind the liquidity crisis and to
be able to generate fnancial surpluses so as to pay
of the debts little by little. Te government of Raúl
Castro has implemented an adjustment of imports,
investments, and fscal outlays; controlling spend-
ing has been almost an obsession for the new gov-
ernment. As a result, it was able to reduce the cur-
rent accounts defcit of the balance of payment, the
fscal defcit returned to values close to 3 percent of
GDP, and the banking crisis was solved.
In addition, the government has been able to make
a series of agreements with its international credi-
tors to reduce the external indebtedness. It secured
an agreement to postpone payments of the debt
service with China until afer 2015, Japan forgave
80 percent of the debt pending since the 1980s (ap-
proximately US$ 1.4 billion), Mexico also forgave
70 percent of a debt valued at US$ 487 million,
while there is also an debt agreement with Russia
with the defunct Soviet Union.
ORIGI N AND CURRENT STATUS OF THE
DUAL CURRENCY
Te dual currency began with partial dollarization
in the 1990s, associated with the economic crisis,
the disequilibria, infation, and depreciation of the
exchange rate in the informal market. In response to
the resulting lack of confdence in the Cuban peso,
the U.S. dollar began to replace it in informal mar-
kets as the means of payment and unit of account.
In 1993 dollarization was ofcially recognized and
extended to the business sector, both national and
foreign, which was beginning to grow as part of the
policy of attracting foreign direct investment. Ever
since, both the Cuban peso and the U.S. dollar cir-
culated in tandem, with institutional recognition.
Afer the recovery of fscal and monetary stability
for several years, in 2003 and 2004 the government
set in motion a group of actions that shifed to the
convertible Cuban peso, or CUC, the functions
played by the U.S. dollar. Tis has led to the current
situation in which the economy is no longer dollar-
ized, but the parallel circulation of two currencies is
maintained, now between the Cuban peso and the
convertible peso, both issued by the Central Bank
of Cuba.
Te convertible peso was frst printed in 1994 but its
circulation as a means of payment in retail markets
was very limited. It was created with an exchange
rate pegged to the U.S. dollar (1CUC:1USD) and a
currency board that backed it until 2003. Nowadays
the convertible peso maintains parity with the dol-
lar, but there is no rule to regulate its issue.
In the 1990s, along with the dual currency, another
factor was introduced that was much more distort-
ing: the duplicity of exchange rates. Te exchange
rate for the Cuban peso sufered an enormous
depreciation with respect to the dollar in the in-
formal market during the 1990-1993 period, when
it climbed from 7CUP:1USD to 100CUP:1USD,
which was a main determinant of infation in those
years. In response to a set of adjustment measures,
mainly fscal measures, the exchange rate appreciat-
ed from 1994 onward. Since then, the exchange rate
has held stable (see Figure 6).
241
See Richard Feinberg, Reaching Out: Cuba’s New Economy and the International Response (Washington, D.C.: Brookings Institution, 2011) for an
analysis of Cuba’s possibility of becoming a member of the IMF and other international fnancial institutions.
Cuba’s Economic Change in Comparative Perspective
91
As we indicated, the depreciation of the Cuban
peso began in the 1990s in the informal market.
In 1995 this parallel exchange rate was assumed
by the recently-established state network of cur-
rency exchanges that engages in operations with
the population and with the tourists (Cadeca: Ca-
sas de Cambio S.A.). Nonetheless, the new value of
the Cuban peso never extended to the accounting
and exchange operations of the enterprise sector.
Te public enterprises and organizations contin-
ued operating with the exchange rate of the 1980s:
1CUP:1USD. Even today the population and tour-
ists change at 24CUP:1USD at the currency ex-
changes, but the ofcial exchange rate that is used
to record national accounts and the fnances of the
state enterprises and public organizations continues
to be 1CUP:1USD. It is prohibited for the enterpris-
es to turn to the currency exchanges and arbitrate
with the diferences in exchange rates, which is dif-
fcult anyway as the currency exchanges only en-
gage in operations involving small amounts of cash.
Foreign and mixed capital frms also use the ex-
change rate of 1CUP:1USD to record their expendi-
tures in Cuban pesos, which are basically limited to
payment of wages to national personnel.
Table 10 summarizes the exchange rates of the Cu-
ban peso and the convertible peso for the exchange
operations of the population and tourists at the cur-
rency exchanges (Cadeca) and for the fnances and
accounting of the public enterprises and organiza-
tions.
TABLE 10. EXCHANGE RATES (2013)
Population
and tourists
(Cadeca)
Public
enterprises
and
organizations
(Of?cial)
Cuban peso/
convertible peso
24.0 1.0
Convertible
peso/U.S. dollar
b
1.0
a
1.0
Cuban peso/U.S.
dollar
b
24.0
a
1.0
a
A 10 percent tax is applied to the exchange of dollars in cash.
b
Te exchange rate with respect to the Euro and other foreign curren-
cies varies daily depending on the value of the dollar in the interna-
tional market.
Source: Authors’ calculations based on ofcial data from the Central
Bank of Cuba (several years).
FIGURE 6. EXCHANGE RATE OF THE CUBAN PESO TO THE U.S. DOLLAR (1990-2012)
90 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 11
7
20
100
45
21.2
26.0
22.2
24
Source: Created based on ofcial data from the Central Bank of Cuba (several years).
Cuba’s Economic Change in Comparative Perspective
92
Te excessively overvalued exchange rate of
1CUP:1USD has enormous costs for the enterprise
sector, distorts economic measurement, and ac-
cordingly has a negative impact on the efciency of
economic decisions and resource allocation. Te ex-
cessive value of the Cuban peso hides subsidies and
keeps a series of enterprises artifcially proftable
and another group deceptively unproftable; in other
words, it distorts the enterprises’ balance sheets and
fscal accounts. In particular, it has a negative impact
on the export sector and all national producers with
the potential to compete with imports.
Te overvaluation of the exchange rate of the Cu-
ban peso has also impeded its free convertibility
for the enterprise system.
242
Te enterprise sector
is divided into two based on the predominant type
of currency, which operates as a disincentive to for-
eign investment, provokes absurd segmentations,
and reduces linkages, weakening the economy in
the extreme.
243
By understanding the origins of the duality of cur-
rencies and its interrelationships with the dual ex-
change rates, one is able to appreciate that the main
measure the Central Bank should take to eliminate
the dual currency is devaluing the Cuban peso in
the enterprise sector, a matter that has been post-
poned for more than 20 years. Partial dollarization
and the monetary and exchange duality was the
monetary policy strategy of the 1990s that was use-
ful for avoiding devaluation of the exchange rate in
the enterprise circuits. Tat strategy was extended
in time, leading to the accumulation of enormous
distortions throughout the network of enterprises.
MONETARY ILLUSIONS
As we already noted, the Guidelines approved at
the Sixth Congress of the Cuban Communist Party
ratifed the elimination of the dual currency as one
of the economic policy objectives, yet details of
the plan of action were not ofered. Te Guidelines
do not say much about the dual currency, just this
paragraph:
244
Progress will be made toward the establish-
ment of a single currency on the basis of labor
productivity and efective distribution and
redistribution mechanisms. Te complexity
of this goal will require rigorous preparation
and implementation, both objectively and
subjectively.
Te paragraph confrms that eliminating the dual
currency will be a gradual process. Tere is talk of
preparation on the subjective level, since for the
population at large the dual currency tends to be
associated with the low purchasing power of wages
and inequalities, which is not so. A few comments
are in order on this aspect.
Te low wages in Cuban pesos and the possibility
of being able to have greater private income in con-
vertible pesos or foreign exchange has created the
impression that the dual currency causes inequali-
ties, when in reality it is the low productivity of the
state sector that conditions the low wages and, ac-
cordingly, fosters inequalities.
Te strategy for distributing the cost of the adjust-
ment in the 1990s among state workers, in combi-
nation with the opening of the economy to tourism,
remittances, foreign investment, self-employment,
and other private sources of income for the family,
has revealed a huge income gap between families
dependent on wages, pensions, assistance, and state
subsidies, and those families that have been able to
gain access to other private sources of income. Te
inability of the state enterprise sector to recover
242
If the convertibility of the Cuban peso at the exchange rate 1CUP:1USD were opened up today, international reserves would not cover the
demand for dollars. Tat is why the state enterprises that operate in Cuban pesos receive the foreign exchange for imports through the centralized
allocation in the annual economic plan.
243
Pavel Vidal, “Monetary Duality in Cuba; Stages and Future Perspectives,” in Cuban Economic and Social Development: Policy Reforms and Chal-
lenges in the 21st Century, ed. Jorge I. Domínguez, et al, (Cambridge: Harvard University, 2012).
244
Communist Party of Cuba, Lineamientos de la Política Económica y Social del Partido y la Revolución, Sixth Congress (Havana, April 2011).
Cuba’s Economic Change in Comparative Perspective
93
productivity and wages more than 20 years afer
the disappearance of the Soviet Union has made in-
equality a structural (and not monetary) problem.
Te dual currency has actually helped to conceal the
real structural causes of low state wages and difer-
ences in income, which are associated with the low
productivity and inefciency of the state enterprise
sector. It is interesting to note that a system that has
promoted equality by statizing the economy is to-
day creating inequalities due to the inefciency of
its state enterprise system.
A monetary illusion has been created among the
population that by eradicating the dual currency
family incomes will automatically rise and inequal-
ities will vanish; yet people do not understand that
the fundamental costs of the dual currency are in
the enterprises, therefore, that is where the immedi-
ate benefciaries will be found, and it is through this
means that the benefts will reach families. Some
generations of Cubans still hold the economy of the
1980s in Cuban pesos as the ideal, and the expecta-
tion of returning to that status once all prices and
incomes return to that currency. Tey forget, how-
ever, that that status depended on Soviet subsidies,
and that today a harsh adjustment is required along
with a revision of the model that makes it possible
to boost productivity as the only way to increase
wages and reduce their disadvantage with respect
to other sources of income.
POI NTS OF CONSENSUS AND UNKNOWNS
WITH RESPECT TO MONETARY REFORM
Based on partial information that has been pro-
vided and the characteristics that defne the Cuban
monetary and exchange scenario, one can consider
the following options as the most likely to be fol-
lowed by the Central Bank in an eventual program
for doing away with the dual currency. Perhaps they
are the points on which there is greatest consensus
among the economic authorities, which were con-
frmed in one way or another in the ofcial note
published in the newspaper Granma on November
22, 2013:
• Te Cuban peso is the currency that will
remain as the only monetary sign; the con-
vertible peso should disappear over time. Te
government’s preference for the Cuban peso
is based on several factors: (i) it’s the histor-
ic currency; (ii) most family savings are in
Cuban pesos; the population maintains con-
fdence in this currency, which is bolstered
by public expectations that it will become
the only currency in circulation; (iii) wages
are denominated in Cuban pesos, paying the
equivalent in CUC would further cast light
on the low level of real wages in the state sec-
tor; this does not have an efective economic
impact, yet it does have a political and psy-
chological impact on people; (iv) the national
accounts, state budget, and decisive sectors
such as agriculture record their operations in
Cuban pesos.
• Te main measure that the Central Bank will
adopt to eliminate the dual currency is deval-
uation of the exchange rate of the Cuban peso
in relation to the U.S. dollar in the enterprise
sector (the 1CUP:1USD exchange rate will in-
crease), so as to bring it closer to the exchange
rate for the population (24CUP:1USD).
• It is expected that the 1CUC:1USD exchange
rate will remain constant in the coming years.
Although there could also be a simultaneous
devaluation of the CUC in relation to the
dollar, this does not appear to be the path se-
lected according to ofcial statements and the
exchange actions taken on an experimental
basis until then.
• Te exchange rate of the Cuban peso in the
currency exchanges would remain constant
or, if possible, it would be revalued (the
24CUP:1USD would decline, and with it the
24CUP:1CUC exchange rate).
• Te elimination of the dual currency will be
a gradual process. While 2016 is the deadline
for meeting the objectives of the Guidelines
and the monetary reform begins in 2014, one
would be considering a three-year period for
Cuba’s Economic Change in Comparative Perspective
94
doing away with the dual currency. Perhaps
by then the peso will not have been fully rees-
tablished as the only currency, but one would
expect that by then all the enterprises will be
operating with the same exchange rate as that
which applies to the population, and that all
prices would be recorded in Cuban pesos.
Te CUC could survive a few more years as
a reserve currency and for opening savings
accounts. Even though the preference is for
a gradual transition, the major gap between
the exchange rates of the Cuban peso in the
enterprise sector and for the population
(2,300 percent) would require, at some point,
a faster pace in the devaluations. Te exper-
iments that have been implemented, in fact,
assume a devaluation of the Cuban peso in
the enterprise sector that is quite signifcant,
as the rate of 10CUP:1USD represents a 900
percent devaluation in relation to the ofcial
exchange rate of 1CUP:1USD.
While there has always been a preference for gradu-
al monetary reform, confrmed several times by the
Cuban authorities, and which moreover is consis-
tent with the pace at which the rest of the reform is
being carried out, there has been a debate between
two possible ways to implement it. In other words,
there appears to be two alternative strategies for
gradually devaluing the ofcial exchange rate of the
Cuban peso:
(i) Comprehensive reform: It would consist of
implementing gradual devaluations of the ex-
change rate of the Cuban peso for all enter-
prises.
(ii) Reform by sectors: Gradual incorporation of
some sectors to a particular exchange system
with a devaluated ofcial exchange rate.
In summary, “gradual” can refer to either time or
sectors, or a combination of the two. Some ofcial
statements and certain experiments already imple-
mented point to a monetary reform that above all
would follow the second strategy. Let’s take a look
at these experiments.
As of December 1, 2011, the use of a special ex-
change rate of 7CUP:1USD was begun for direct
transactions (without intermediaries) between
hotels and restaurants, on the one hand, and ag-
ricultural cooperatives on the other. Te decision
benefts the hotels and restaurants, which can now
acquire national products with their income in
CUC (or dollars) at lower prices due to the devalua-
tion of the peso from 1CUP:1USD to 7CUP:1USD.
It also benefts the agricultural cooperatives, which
can gain direct access to a national market to which
they did not have access due to the dual currency.
Although ofcially that decision is not recognized
as a devaluation, the decision de facto creates a
new special rate of exchange for those transactions.
Later, in 2013, by Resolution 9 of the Ministry of
Finance and Prices, the special exchange rate in-
creased to 10CUP:1USD.
Another clue to future monetary changes comes
from the experiment that began in 2013 with a
group of state enterprises. Tis experiment is aimed
at endowing them with greater powers in their eco-
nomic and fnancial management, and greater au-
tonomy in relation to control by the ministries. On
the monetary level, it has been announced that all
these enterprises’ transactions will be carried out in
Cuban pesos; they will operate with a diferent ex-
change rate, and will be able to buy and sell foreign
exchange at the Central Bank without exchange
controls. Tere is no precise information on the ex-
change rate that will be used, but it appears that it
will be situated at 10CUP:1USD or 5CUP:1USD.
Moreover, in some media the story has circu-
lated that from the second half of 2013 the sugar
agroindustry began to use multiple exchange rates
for its accounting and transactions diferent from
the ofcial rate of 1CUP:1USD. As of this writ-
ing, it is known that three diferent exchange rates
are used, 12CUP:1USD for recording export rev-
enues, 7CUP:1USD for recording imports, and
4CUP:1USD for oil imports from Venezuela. Tis
would suggest a transition to a much more elabo-
rate/extensive multiple exchange rate regime as an
alternative to the overvalued ofcial exchange rate
of 1CUP:1USD.
Cuba’s Economic Change in Comparative Perspective
95
Te last available sign that provides information
about the future strategy of monetary policy is to
be found in the recently created transportation ser-
vice cooperatives, which will be able to purchase
imported and domestic inputs such as fuel, tires,
parts, space parts, and others, not at the ofcial ex-
change rate of 1CUP:1USD but at an exchange rate
of 10CUP:1USD.
245
In summary, the new exchange rates for the en-
terprise sector will probably be situated around
10CUP:1USD, and given that the convertible peso
maintains parity with the U.S. dollar, it means that
10CUP:1CUC, which represents a 900 percent de-
valuation of the Cuban peso in relation to the U.S.
dollar and the convertible peso. Evidently, the solu-
tion to the dual currency will also follow the style of
the rest of the reform, in which frst experiments are
organized, and then a general program is adopted
based on the experiences.
Te convergence of the exchange rates would be
more transparent and direct with a comprehensive
reform; it would avoid passing through arrange-
ments with more multiple exchange rates, which is
complicated to manage and control. Te disadvan-
tage is that it may entail great costs to the sectors
least prepared for a new exchange rate scenario.
Te pressure from these less prepared sectors for
the devaluation could delay the adjustment of the
exchange rate.
Te second strategy makes it feasible to accelerate
the evaluation in those sectors that are best pre-
pared to assume and respond to a new exchange
rate, but has the disadvantage that it may complicate
even further the exchange rate scenario and one
may lose control over the possibilities of arbitrage
among the diferent exchange rates. Te multiple
exchange rates in the enterprise sector would allow
space for arbitrage, and would render accounting
and exchange operations difcult and extremely
complicated, which would be a breeding ground for
bureaucracy and corruption.
Te economic literature is abundant in showing
the inefciencies such an exchange policy option
would entail for the allocation of resources and the
deformations it can cause in measurements of in-
ternational competitiveness, which means, when it
comes to establishing exchange rate subsidies and
taxes, discretionally promoting quasi-fscal policy
approaches and a lack of transparency in State ex-
penditures and revenues.
Te period of multiple exchange rates is a thing of
the past internationally as an efective option for
exchange policy regimes, due to their proven inef-
fciency and due to the high costs they entail. Te
most recent experiences in the region, in both Vene-
zuela and Argentina, provide new evidence of those
costs. Tis is why one would hope that devaluations
by sector in Cuba represent just a transitory mecha-
nism for garnering experiences and accelerating the
devaluation, but that the fnal intent should be to
generalize the devaluation to the entire enterprise
system, and to obtain a defnitive convergence with
the exchange rate for the population.
Te experiment with several exchange rates for the
sugar agroindustry, in particular, should not be gener-
alized to other sectors. Te trend toward convergence,
putting in place general rules, and looking to inter-
national best practices should prevail over the trends
that today still indicate that Cuba is continuing to con-
struct a “handmade economy,” far from international
standards, and in which discretion prevails.
Let us now examine the unknowns that remain un-
answered in the ofcial statements and in the exper-
iments under way, and with respect to which it is not
possible to infer the future trajectory with any rea-
sonable certainty. Next, a few of these elements of the
strategy for eliminating the dual currency are related
that the Central Bank has yet to defne publicly:
• Pace of the devaluations and how long the
sector-based diferences will remain. It re-
mains to be known how and when the
245
Te newspaper Juventud Rebelde, October 13, 2013.
Cuba’s Economic Change in Comparative Perspective
96
experiments will be extended to the rest of
the enterprise sector and how the devaluation
of the ofcial exchange rate will continue to
the point of convergence with the exchange
rate for the population.
• Te way the impact of the devaluations on
prices will be managed, whether price con-
trols will be maintained and whether the
pass-through will be directed administrative-
ly, or whether an autonomous adjustment in
wholesale and retail prices will be allowed.
Tat will defne to what point the nominal
devaluation will represent a real devaluation
of the exchange rate.
• Response of fscal policy to the impact of the
devaluation on the enterprises, families, and
consequently the structure and balance sheet
of the State budget.
• Te decisions that will be made in relation to
the enterprises that remain unproftable afer
the devaluation and the forms of support that
will be given to the state enterprises with the
potential to take advantage of the new ex-
change rate.
• General timetable for the measures and role
in each stage of the state enterprise sector, the
non-state enterprise sector, and families.
• Te extent and manner in which foreign
investment and mixed capital investment
would be included in the circuit in Cuban pe-
sos. Two important points here are whether
they need to move their balance sheets to Cu-
ban pesos, and the changes that could occur
in the wages that foreign and mixed capital
enterprises pay to the state employer institu-
tions.
• Role of the market in determining the equi-
librium single exchange rate. Possibility of
creating a foreign exchange market for enter-
prises, banks, and other organizations.
• Degree of convertibility of the Cuban peso.
Exchange regime that will accompany the
Cuban peso. Whether or not an exchange
control will be established for the purchase of
foreign exchange with Cuban pesos.
• Monetary policy that will sustain the Cuban
peso afer eliminating the duality of currency
and rates of exchange.
Te defnition of these points will mark the true
depth of the monetary reform and the scope it will
have on the functionality of the real sector of the
economy. One of the disadvantages of a gradual re-
form compared to a “big bang” strategy is the un-
certainty it casts on future monetary changes. Tis
has repercussions in the form of investment proj-
ects coming to a standstill, higher transaction costs,
and the loss of credibility of monetary policy. Te
only way for the economic authorities to mitigate
this uncertainty is by announcing the sequence in
which the monetary reform will be carried out from
now until 2016.
COSTS AND BENEFITS OF THE DEVALUATION
OF THE OFFICIAL EXCHANGE RATE AND
ECONOMIC POLICY RESPONSES
Given that the devaluation of the ofcial exchange
rate of the Cuban peso is the main action that the
Central Bank has to decide to take in order to over-
come the dual currency, it is worthwhile analyzing
the consequences of a measure of this nature, as
well as the economic policy options for taking them
on. It is actually very difcult to anticipate, much
less to measure, the various efects that the ofcial
devaluation will have on the Cuban economy, since
prices have not changed for decades in the enter-
prise sector. Combining economic theory with the
particular characteristics of the Cuban economy,
next we related some of the impacts that appear to
be more foreseeable:
Efect on Balance Sheets
Te devaluation of the Cuban peso will result in
changes in almost all the proportions, relative pric-
es, and fnancial results of the enterprises, banks,
Cuba’s Economic Change in Comparative Perspective
97
and other institutions. Te balance between assets
and liabilities of the enterprises will change, as they
will be multiplied by a diferent exchange rate. Te
losers will be the fnancial balance sheets that show
a mismatch of exchange rates, that is, whose debts
in convertible pesos and foreign currencies are
greater than their assets in those same currencies.
And those institutions whose situation is the oppo-
site in their balance sheets from that just described,
will be favored by the measure.
Te devaluation will create traumas in the fnan-
cial situation of the enterprises, but it is aimed at
promoting more transparent accounting balances
that more accurately refect the economic realities.
Tis is probably one of the most difcult balances to
strike through economic policy. On the one hand,
one must get the devaluation to have an impact (it
should be a real devaluation, not just a nominal
one), that changes the fnancial situation of the en-
terprises and that leads to a better allocation of re-
sources. Te “maladjustment” that comes from the
measure is its main contribution, since one starts
from an initial situation in which the overvaluation
of the Cuban peso deforms the fnancial indicators
of the enterprises and distorts the correct price sig-
nals for efcient decision-making. Yet on the other
hand, this shock cannot be unmanageable for the
enterprises, so as to provoke a collapse of economic
activity. Gradually introducing the devaluation may
indeed help strike a satisfactory balance between
the two efects.
Infation
Costs in convertible pesos and foreign exchange,
expressed in Cuban pesos, will increase when
multiplied by a higher exchange rate. Enterpris-
es can pass this increase in cost to the fnal prices
of the goods and services they sell. Many of those
goods and services represent costs for other com-
panies. High transfer is expected in an economy in
which two currencies circulate and there is a high
dependency on imports.
246
Tus, through infation,
there would be consequences for almost all organi-
zations and markets.
Te economic authorities should avoid an infation-
ary spiral, with a view to conserving monetary sta-
bility and with the objective of having the nominal
devaluation of the exchange rate becoming a deval-
uation of the real exchange rate. Te ministries of
Economy and Planning and of Finance and Prices
have control over most prices in the enterprise sys-
tem, so the transfer of the costs to the fnal prices
will be a matter for economic policy decision-mak-
ing. To keep infation from reaching consumers,
the price subsidy for the retail markets should be
increased, a decision that will put pressure on the
fscal accounts balance.
It is worth reiterating that it appears that actions
need to be defned to cushion (albeit not eliminate)
the efects of the devaluation. Economic policy
should guide and regulate the maladjustment” the
economy will experience when the real exchange
rate is changed, but in reality the efects should not
be avoided, but managed, so as to avoid creating in-
fationary spirals or unmanageable shocks for the
enterprises, or shocks that would have excessively
high social costs.
Banks
Te banks Banco Popular de Ahorro (BPA), Ban-
co de Crédito y Comercio (BANDEC), and Banco
Metropolitano (BM), which are the ones that take
in deposits and make loans in Cuban pesos and in
CUC, will sufer the direct balance sheet efect. Yet
actually all the banks, including the remaining ones
that operate only in CUC and foreign exchange,
could be impacted by the sequelae/afermath of the
devaluation given the various fnancial interrela-
tionships among the enterprises, and between them
and the banks.
246
Eduardo Hernández, “La Elección Cambiaria: Propuesta para Cuba,” (Doctoral thesis, Universidad de la Habana, 2011).
Cuba’s Economic Change in Comparative Perspective
98
A worsening of the fnancial situation of certain en-
terprises due to the balance sheet efect in a situa-
tion of an exchange rate mismatch, would reduce
their ability to pay their debts and, as a result, would
hurt their creditors. Te banks should therefore take
the necessary measures and prepare their portfoli-
os, simulating said scenario. Stress tests need to be
used to determine the vulnerabilities of the banking
system to devaluation and to prepare it to make the
appropriate decisions.
Tradable Goods and Services Sector
Evidently, devaluation has a number of impacts and
costs for the business sector, but it will also generate
benefts. Exporters will see increased proftability and
competitiveness. All the domestic output in the trad-
ables sector will see a relative improvement in its com-
petitiveness vis-à-vis imported goods and services.
For these benefts to materialize the state enterprises
must have greater autonomy. Terefore the sectoral
experiment being designed should not only help
transform the enterprises’ exchange system, but also
their management mechanisms, so as to move to
greater autonomy. Te state enterprises, which will
be most impacted by the devaluation, need some
room for maneuver to respond to the new environ-
ment and to react so as to tap into the opportunities
that generate changes in relative prices.
One of the weakest points to ensure the benefts of
devaluation surpass its costs is the fact that the real-
ization of benefts depends on the responsiveness of
state enterprises, yet there is always doubt as to their
fexibility to respond to a new set of incentives, par-
ticularly in a centrally planned economy and where
the bureaucracy has become too strong. Accordingly,
the structure of the Cuban economy, supported by
great state enterprises that answer to a central plan,
makes for additional challenges to the devaluation.
Financial Account of the Balance of Payments
One should not expect the devaluation of the of-
cial exchange rate to provoke an outfow of capital
in the balance of payments, as could be the case in
a market economy with an opening in the fnancial
account. As just indicated, the enterprise struc-
ture of the Cuban economy is based on state frms,
whose fnancial operations are controlled through
the annual central plan that is approved and moni-
tored by the Ministry of Economy and Planning. As
part of the reform, steps are beginning to be taken
to make the centralized planning mechanisms more
fexible, but not to the point that the government
loses control of the enterprises’ international fnan-
cial fows.
Foreign and mixed capital enterprises, for their part,
operate mainly in dollars or in convertible pesos, so
they would not have the opportunity to engage in
speculative operations in Cuban pesos, which are
also restricted by the lack of convertibility of the
Cuban peso for the enterprises.
Families’ fnancial assets and their currency portfo-
lio decisions would not have to be directly impacted
by the devaluation of the ofcial exchange rate. In
the family sector there would be speculative fnan-
cial movements based on changes that may occur
in the exchange rate in the currency exchanges (to-
day set at 24CUP:1USD) and related to the expecta-
tions that they create as to the consequences of the
monetary reform for the value of their savings. Te
authorities have experience on how to handle these
events; for example, the Central Bank has in its re-
cent history the de-dollarization of 2003 and 2004.
In summary, the controls on capital movements and
exchange control will annul any chance of a massive
outfow or infow of capital to the Cuban economy and
overreaction of the exchange rate as a result of mone-
tary reform, beyond specifc speculative episodes that
could occur in families’ fnancial decisions.
Domestic Economic Integration
Te benefts of the monetary reform would not
be limited to the changes in relative prices and to
greater transparency in accounting balance sheets;
rather, the correction of the exchange rate will make
Cuba’s Economic Change in Comparative Perspective
99
it possible to open up convertibility of the Cuban
peso for enterprises, which would have a very pos-
itive efect on the strengthening of the domestic
market. Once the enterprise sector that has reve-
nues in Cuban pesos can freely buy convertible pe-
sos and foreign exchange with that currency, it will
be more integrated to the rest of the domestic econ-
omy and with international trade; in addition it will
begin to be more attractive for foreign investment.
By opening up to convertibility of the Cuban peso
in the enterprise sector, the economy will be more
integrated and interrelated, segmentations would
be eliminated, and linkages among the organiza-
tions would appear.
Performing all transactions in a single currency and
with an exchange rate that is not overvalued will
enormously reduce transactions costs, will entail
gains in efciency, competitiveness, and business in-
tegration, and will strengthen the domestic market.
Tese benefts, which will be perceived at the end
of the monetary reform, are what should lead the
monetary authorities to persist and expedite in all
possible respects the convergence of the exchange
rates. Te short-term complications must not lead
one to lose sight that the economy as a whole stands
to gain (national enterprises, government, foreign
investors, and families) once all transactions can be
done in a single currency.
Foreign Firms
Te devaluation of the Cuban peso would not appear
to have major consequences in the short term for for-
eign investors, given that today they operate in con-
vertible pesos and foreign exchange, and their ties
with the economy in Cuban pesos are limited due to
the lack of convertibility of that currency. Obviously,
foreign investors should monitor the consequences
of the devaluation on the state enterprise system as
a whole, monetary-fnancial stability, and the fscal
balance, given that these are macroeconomic factors
in which they are indirectly implicated.
Te efect on wage costs is uncertain, since foreign
companies do not hire or pay their employees’ wages
directly, but rather do so through a state enterprise
employer, which today receives the wages in dollars
and then pays the state workers in Cuban pesos.
Monetary unifcation, in the medium term, would
render that mechanism pointless, yet one would
still need to know under what new rules the inter-
national hiring of Cuban workers would operate. To
learn more about the consequences for wages one
must await further information about the future
monetary strategy.
In the medium term, foreign and mixed capital en-
terprises could gain space when the Cuban peso is
fully convertible and operates as the only means of
payment nationally. Te domestic market would
be more attractive for foreign investment, for their
opportunities—today limited to exports and the
sectors that operate in convertible pesos – would
be expanded. When the currencies are unifed, the
whole economy will potentially be of interest to
the international investor. When all the enterprises
work with the same means of payment, the foreign
and mixed capital enterprises could become more
integrated with the national enterprises and thereby
reduce their costs while at the same time having a
greater multiplier efect over the domestic economy.
One would have to know in the future whether
frms with international capital would be required
to put all their accounting and fnancial balance
sheets in Cuban pesos. In that case, the exchange
risks for the foreign investor would be associated
not with the convertible peso, but with the Cuban
peso and the monetary policy and exchange regime
that will support it.
Families
It is most likely that the elimination of the dual cur-
rency would not have direct and immediate efects
on the population. Te population already sufered
the direct efect of the devaluation of the exchange
rate in the 1990s; the agricultural markets and all
private business have been working since the 1990s
with the exchange rate of 24CUP:1USD. Obvious-
ly, multiplying the prices of the markets that today
Cuba’s Economic Change in Comparative Perspective
100
operate in convertible pesos by 24 , to take them
to Cuban pesos, has almost no implications for the
population.
In the event that the transfer from convertible pe-
sos to Cuban pesos in retail prices is done at an
exchange rate below 24, then there could be a fa-
vorable wealth efect. Nonetheless, one should not
have much hope in a possible revaluation of the
exchange rate of the Cuban peso in Cadeca in the
short term; international experiences indicate that
in situations of multiple exchange rates convergence
also tends to the highest (most devalued) exchange
rate, which is usually closer to equilibrium.
In the medium term there would be an apprecia-
tion of the exchange rate at the currency exchanges
once the devaluation of the exchange rate and cur-
rency unifcation efectively promote exports, larg-
er infows of foreign investment, and a fall in the
demand for imports.
Returning to the possible short-term impacts, it
should be noted that while one should not expect
direct impact on the population, there would be in-
direct mechanisms of transmission, given that the
ofcial devaluation of the Cuban peso impacts en-
terprises that pay wages and intervene in the chain
of value that infuences the prices of consumer
goods and services. Terefore, one must learn how
the authorities will manage those potential impacts
on wages and consumer prices, that is, how they
will manage the infationary implications of the
devaluation; whether, for example, they will allow
the enterprises favored by the devaluation to be
able to pay their workers higher wages, or allow the
increase in production costs in Cuban pesos to be
charged in the prices to the end consumers.
Fiscal Policy
Te devaluation of the Cuban peso will efectively
give rise to costs and benefts, the diference is that
most of the costs of the devaluation are certain and
immediate while the benefts appear as opportunities
and will take time to completely materialize. Tat is
why it is essential that economic policy accompany
monetary reform, in particular fscal policy. A group
of compensatory measures should be designed for
those enterprises that are impacted by the immediate
costs of the devaluation yet have the potential to ben-
eft from the new exchange opportunities.
Economic policy should adjust its instruments to
bufer this temporary gap between the costs and
benefts of the devaluation: subsidies, taxes, credit
policy, and the allocation of resources through the
economic plan should defne measures to support
exporters and all the enterprises that have the poten-
tial to take advantage of the devaluation. Tat would
mean tension in the fscal balance on the expendi-
ture side that should be ofset by a renewed tax poli-
cy. One option is to capture a percentage of the pos-
itive balance sheet efects in state enterprises. Fiscal
policy, in this frst stage of the monetary reform, is
even more important than monetary policy.
247
Unfortunately, the country will have to take on this
complex process of monetary unifcation without
the help of the international fnancial institutions,
with very limited international reserves, and in a
moment of low economic growth. Nonetheless, one
cannot continue waiting for the “ideal moment” to
undertake it; the structural reforms need the mon-
etary reform.
Monetary Policy
In the frst phase of the reform, monetary policy
could continue to be implemented as it has been to
date, supported by direct instruments of monetary
control and in coordination with fscal policy, which
depend on the mechanism of monetization of the
fscal defcit. Nonetheless, by 2016 one would expect
that the minimal conditions will have been created
to begin to implement a monetary policy that more
efectively sustains the credibility and stability of the
single currency. To that end one must continue the
247
Te design of fscal policy required for these circumstances is beyond the intended scope of this article.
Cuba’s Economic Change in Comparative Perspective
101
transformations of the banking system that were lef
pending since the 1990s, while completely eradi-
cating the practice of fnancing the defcit by mon-
etization. Tere is a need to develop the inter-bank
market, the primary and second market for public
debt, to make interest rates fexible and subsequently
freed up, and to use conventional indirect monetary
policy instruments such as open-market operations,
reserve requirements, and the discount rate.
Lessons should be drawn from the mistakes made
in monetary policy associated with the convertible
peso and the de-dollarization of the economy, and
that were determinants of the Cuban fnancial crisis
in 2008. Monetary policy for the Cuban peso as of
2016 has to consider transparency and the explicit
defnition of objectives and rules as an essential part
of its instruments and ultimate objectives. Perhaps
by 2016 all the changes that monetary policy needs
will not be completed, but as much as progress as
possible should be made in those areas considered
most essential to the credibility and guarantee of
stability of the Cuban peso.
CONCLUSIONS: BETWEEN GRADUALISM
AND THE “BIG BANG”
Monetary and fnancial policy have two main ob-
jectives through 2016: the expansion of microf-
nance and the resolution of the dual currency. For
the frst objective a legal framework is already in
place and some results can be reported afer more
than two years of implementation. For the second
objective, there is less information about the strate-
gy to be followed; available signs point to a gradual
reform by sectors.
Carrying out the monetary reform by sectors will
make it possible to gain experience and promote
more pronounced devaluations for some enterpris-
es, but it will be complicated to control arbitrage,
corruption, and the other costs associated with mul-
tiple exchange rates. Multiple exchange rates should
constitute only a frst step in monetary reform; by
2016 there should be defnitive convergence of the
value of the Cuban peso for the entire economy.
Te structure of the Cuban economy, based on
large state enterprises, justifes a gradual devalua-
tion of the exchange rate and not the application of
a “big bang” approach. Te domestic private sector
(self-employed persons, microentrepreneurs, and
private agricultural producers) have already been
working since the 1990s with a devalued exchange
rate. Nor will there be direct efects of the devalua-
tion of the ofcial exchange rate on foreign invest-
ment. Terefore, the gains from devaluation will
have to be guaranteed by the response of the state
enterprise sector, which needs more time to react
due to the greater bureaucracy, rigidity, and subor-
dination to the ministries. In order for the response
to be efective, more room for maneuverability? is
required for its management, making the central
planning mechanisms more fexible and aligning
the workers’ and managers’ incentives with the im-
pacts of devaluation in their enterprises; that is, the
efects of the devaluation should not remain on the
balance sheets of the state enterprises, but rather
should reach the wages they pay.
Gradual change will not only facilitate the response
of the state enterprises, but also the response of eco-
nomic policy. One cannot anticipate all the impacts
of devaluation, given that this is a price that has not
changed for decades in the Cuban economy. One
cannot start from the assumption that the economic
actors and the government will know how to man-
age the exchange-rate shock. While it is necessary
frst to defne the sequence of monetary transfor-
mations and the general rules under which it will be
possible to respond and cushion the exchange-rate
shock, corrections will have to be made along the
way to fscal policy, and credit policy for exporters,
among others. In addition, a time is needed to ad-
just accounting dynamics, IT systems, contracts,
bureaucratic mechanisms, among other operation-
al aspects that have to be accommodated, for they
are designed to operate with an exchange rate that
has not changed in decades. Terefore, introducing
the changes gradually will also give the economic
authorities time to react.
Cuba’s Economic Change in Comparative Perspective
102
Te 2016 deadline implies that, even though there
is a preference for gradual introduction of the re-
form, there will have to be pronounced devalua-
tions of the exchange rate to attain converge of the
ofcial rate 1CUP:1USD and the exchange rate for
the population, 24CUP:1USD. Indeed, the experi-
ments that began in 2013 consider an exchange rate
for some enterprises around 10CUP:1USD, which
means a 900 percent devaluation of the ofcial
exchange rate, which could be classifed as a “big
bang,” albeit reduced to some companies and on an
experimental basis.
A question that will have to be defned going for-
ward is the monetary and exchange regime of the
Cuban peso as of 2016. It seems sensible to think
that initially such a regime should prioritize con-
vertibility and credibility, which could be guar-
anteed with a fxed exchange-rate system, or with
some monetary rule. Second, the exchange-rate
regime should include fexibility as the top priority
and move progressively to arrangements that make
viable a larger foat in the value of the currency and
monetary policy independence.
One of the disadvantages of a gradual reform in re-
lation to a “big bang” strategy is the uncertainty it
casts over future monetary changes. Te econom-
ic authorities have as a factor in their favor control
over capital fows; that certainly reduces the specu-
lative options and overreaction of the exchange rate
associated with expectations on future monetary
and exchange actions. Nonetheless, monetary un-
certainty may paralyze investment projects of the
emerging non-state sector, or of foreign business
interests, and complicate management in state en-
terprises. Te only alternative the economic author-
ities have to mitigate this disadvantage is to more
clearly explain the monetary reform up to 2016.
Cuba’s Economic Change in Comparative Perspective
103
INTRODUCTION
Since 2011, the Cuban authorities have placed ex-
change rate unifcation as one of their top policy
priorities. Indeed the current dual exchange rate
system—whereby a one-to-one exchange rate for
the “convertible peso” coexists with a twenty four-
to-one exchange rate for the “Cuban peso” (both
against the US dollar)—introduces severe and per-
vasive distortions with costly consequences for re-
source allocation and the growth potential of the
Cuban economy. At the same time, the unusually
large (by international comparison) spread between
the two exchange rates exacerbates the transition
costs and thus constitutes one of the main reasons
delaying their unifcation.
249
Tis paper reviews from an international perspec-
tive the challenges faced by Cuba in unifying its ex-
change rate system and compares various options to
meet this objective. It argues in favor of an immedi-
ate unifcation cushioned by a system of lump-sum
taxes and subsidies to be phased out during a prean-
nounced transition period. By allowing for relative
price changes to operate in full from the start, the
immediate unifcation would maximize efciency
gains. At the same time, by cushioning the Cuban
economy from potentially large transitional pains—
including fscal revenue losses, productive dislo-
cations, infationary outbursts and distributional
efects—the lump-sum taxes and subsidies would
ease the transition, thereby boosting policy credi-
bility. Tese lump-sum taxes and subsidies would
be set on an enterprise-by-enterprise basis so as to
fully neutralize, initially, the windfall losses or gains
that individual enterprises would otherwise make
upon the unifcation of the exchange rate.
By replacing at the outset the taxes and subsidies
implicit in the current exchange rate spread with
Exchange Rate Uni?cation:
The Cuban Case
248
Augusto de la Torre and Alain Ize
248
Te authors work for the World Bank as, respectively, Regional Chief Economist ([email protected]), and Senior Consultant (aize@
worldbank.org). Te paper beneftted from comments by Aquiles Almansi, Tito Cordella, Eduardo Fernandez-Arias, Daniel Lederman, Sergio
Schmukler, and other participants at an internal World Bank workshop (August 2013), and comments by Richard Feinberg, Andrea Gallina,
Guillermo Perry, José Juan Ruiz, Alejandro Santos, Alberto Trejos, Juan Triana, Pavel Vidal, and other participants at a University of Havana
workshop held in Havana (September 2013). Magali Pinat provided excellent research assistance. Te views in this paper are entirely those of the
authors and do not necessarily represent the views of the World Bank, its executive directors, or the countries they represent.
249
For information on the economic situation in Cuba and the circumstances underpinning the exchange rate system, see Roberto Orro, “Te
Cuban Dual Monetary System and Challenges Ahead,” in La Economia Cubana: Reformas Estructurales y Desempeño en los Noventa, eds. David
Ibarra and Jorge Máttar (ECLAC, 2000); Gabriel Di Bella and Andy Wolfe. “A Primer on Currency Unifcation and Exchange Rate Policy in Cuba:
Lessons from Exchange Rate Unifcation in Transition Economies” Cuba in Transition 18 (2008): 50-62; Silvia Dreher, “Monetary Policy in Cuba,”
Cuba in Transition 19 (2009): 286-291; Pavel Vidal, “Monetary Duality in Cuba: Stages and Future Perspectives,” in Cuban Economic and Social
Development: Policy Reforms and Challenges in the 21
st
Century, eds. Jorge I. Domínguez, Omar Everleny Pérez Villanueva, Mayra Espina Prieto
and Lorena Barberia, (Cambridge: David Rockefeller Center for Latin American Studies, Harvard University, 2012); Pavel Vidal, “Monetary and
Exchange Rate Reform in Cuba: Lessons from Vietnam,” Institute of Development Economies, Japan External Trade Organization, 2012; Pavel
Vidal and Omar Everleny Pérez Villanueva, La Reforma Monetaria en Cuba hasta el 2016 : Entre Gradualidad y “Big Bang” (Washington, D.C. :
Te Brookings Institution, 2013); and Richard Feinberg, Sof Landing in Cuba: Emerging Entrepreneurs and Middle Classes, (Washington, DC: Te
Brookings Institution, 2013).
Cuba’s Economic Change in Comparative Perspective
104
explicit taxes and subsidies of equivalent magnitude,
the traumatic efects the unifcation would have on
impact would be eliminated. Tereafer, however,
both the enterprises and the government will have to
adjust, albeit gradually, because the lump-sum tax-
es and subsidies would be phased out according to a
preannounced timetable. But such adjustment process
would be facilitated by efciency gains, given that—at
the margin—the incentives faced by existing enter-
prises to invest and produce would be completely in-
dependent of the lump-sum taxes or subsidies which,
by defnition, would be set as an absolute amount that
does not vary with productive efort (or lack thereof).
In efect, the incentives faced by existing enterprises
would be at par with those faced by the new enterpris-
es. However, to facilitate a positive supply response
(i.e., to ensure that the change in relative prices asso-
ciated with the exchange rate unifcation leads to an
early materialization of efciency gains) and to fur-
ther ease transition pains as lump-sum subsidies are
phased out, important habilitating reforms will be
needed, particularly as regard the governance of state-
owned enterprises and a retargeting of subsidies.
Te rest of the paper is organized as follows. Sec-
tion 2 briefy reviews the international experience
on exchange rate unifcation, based on the academ-
ic literature, some statistics about the evolution of
exchange rate regimes across the world, and a com-
parison of current Cuban spreads and macroeco-
nomic conditions with those prevailing at the onset
of unifcation in other Latin American countries
that underwent similar experiences in the not too
distant past. Section 3 focuses on what is special
about Cuba and what this implies for policy. Sec-
tion 4 compares and contrasts the pros and cons of
four policy options. Sections 5 and 6 provide rough
sketches of how the proposed fscally-cushioned big
bang option would work for two specifc sectors of
the Cuban economy, specifcally the foreign-man-
aged tourism industry and the state-owned import-
ers and local producers, respectively. Section 7 con-
cludes by discussing key habilitating reforms (fscal,
monetary and public sector governance) and some
sequencing issues. It also briefy addresses the relat-
ed yet distinct issue of currency unifcation.
SOME LESSONS FROM INTERNATIONAL
EXPERI ENCE
Understanding well what caused the original dislo-
cation that led to a multiple exchange rate regime
is the inescapable starting point for defning a suc-
cessful policy agenda towards exchange rate unif-
cation. Typically, multiple rate systems emerge afer
a large shock hits the economy that exerts substan-
tial pressure on the foreign exchange market and
calls for a major depreciation of the equilibrium
real exchange rate. Te shock can be a supply shock,
such as the deterioration in the terms of trade that
severely weakens the external trade account or an
increase in world interest rates that sharply raises
the servicing costs of the country’s external debt. Or
it can be a demand shock, such as a surge in local
demand for foreign assets (capital fight) triggered
by fnancial repression and/or unsustainable mac-
ro policies. In the frst case, the required exchange
rate depreciation refects the deterioration in the
country’s purchasing power; in the second case, it
refects the relative price change needed for reduc-
ing the country’s demand for tradable goods so as
to allow its citizens to transfer their assets abroad.
To avoid a politically explosive fall in real wages
and a rise in infation due to an increase in the cost
of imported inputs, governments may introduce
a dual exchange rate regime. Te more depreciat-
ed “free rate” (the market determined rate) is used
for capital account transactions and “non-basic”
imports, while the “ofcial rate” is used for “basic”
imports and “must-surrender” export proceeds. In
theory, this can help limit infation, protect socially
sensitive economic activities, channel resources to
developmental priorities, and redistribute income
progressively (including by avoiding rewarding the
owners of foreign currency-denominated assets
through devaluation-induced valuation gains).
In practice, however, dual exchange rates typical-
ly cause large efciency losses. Te exchange rate
spread acts as a tax on exports (through surrender-
ing requirements) and a subsidy on “basic” imports,
which are detrimental to the country’s exporting and
Cuba’s Economic Change in Comparative Perspective
105
import-substituting productive activities, thereby
hindering economic growth and job creation. Dif-
ferentiating between “basic” and “non-basic” im-
ports can give rise to similarly severe resource mis-
allocations and opacities. In all cases, the exchange
rate spread causes growing wedges between private
and social interests that translate into enforcement
nightmares and multifaceted, socially destructive
rent seeking activities. Te costs of such distortions
accumulate and worsen over time, particularly in
the case of a supply shock that calls for a perma-
nent real exchange rate adjustment. As dual rates
persist and become fossilized throughout the econ-
omy, they end up causing increasingly pernicious
and ingrained segmentations between the winning
sectors (that found access to preferential exchange
rates) and the losing sectors (that did not).
250
Ex-
change rate unifcation should therefore originate
both static efciency gains (i.e., a better allocation of
existing resources, so that more income and output
can be generated with the same labor, land, and cap-
ital that are already available today) and dynamic
efciency gains (i.e., the income expansion arising
from the process of accumulation and better use of
resources over time).
Refecting the growing awareness of such efcien-
cy costs, but also improved macro-monetary policy
frameworks, the share of countries with multiple
exchange rate regimes across the world has steadily
declined over the last forty years, albeit with a slight
resurgence in the last 5 years (see Figure 7). In Lat-
in America, this resurgence included some churn-
ing between the return of parallel rates in coun-
tries that had successfully unifed their exchange
rates (Venezuela and Argentina) and the successful
250
Pierre-Richard Agenor, “Parallel Currency Markets in Developing Countries: Teory, Evidence, and Policy Implications,” Essays in International
Finance No. 188 (Princeton University, 1992) provides a good summary review of the literature on parallel exchange rates, including causes, wel-
fare impacts and policy implications. Jacob A. Frenkel and Assaf Razin (“Te Limited Viability of Dual Exchange Rate Regimes,” NBER WP No.
1902, (1986)) analyze the restrictive conditions under which a dual exchange rate system that separates capital from current account transactions
can be sustained indefnitely.
FIGURE 7. WORLD SHARE OF MULTIPLE VS. SINGLE EXCHANGE RATE REGIMES, 1973-2011
1
9
7
3
1
9
7
5
1
9
7
7
1
9
7
9
1
9
8
1
1
9
8
3
1
9
8
5
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
100
90
80
70
60
50
40
30
20
10
0
A
s
a
s
h
a
r
e
o
f
t
o
t
a
l
n
u
m
b
e
r
o
f
c
o
u
n
t
r
i
e
s
Multiple Unified
In Latin America:
- Argentina
- Cuba
- Venezuela
Sources: Kenneth S. Rogof, Aasim M. Husain, Ashoka Mody, Robin Brooks, and Nienke Oomes, “Evolution and Performance of Exchange Rate Re-
gimes,” IMF Working Paper WP/03/243 (International Monetary Fund, 2003) and International Monetary Fund (IMF), Annual Report on Exchange
Rate Arrangements and Exchange Restrictions (AREAER), Washington, D.C., various years.
Cuba’s Economic Change in Comparative Perspective
106
recent unifcation of the exchange rate in countries
with formerly dual exchange rate regimes (such as
the Dominican Republic; see Figure 8). Arguably,
however, multiple exchange rates appear to be for
the most part a species on the verge of extinction.
Conversely, the persistence of multiple exchange
rate regimes in the few remaining countries that still
have them is likely to refect in part the challenges
and costs associated with exchange rate unifcation.
Tese costs depend on the roots of the original split.
In countries where the originating shock was a de-
mand shock resulting from fnancial repression or
poor macro-monetary management, a reversal to-
wards sounder macro-fnancial policies may be all it
takes to discourage capital fight and, hence, absorb
the pressures that led the parallel rate to deviate from
the ofcial rate in the frst place. Instead, in countries
where the shock came from the supply side and where
the factors behind the shock still endure (for example
a permanent worsening in the terms of trade), unif-
cation is likely to have more substantial costs. Tis
is because in these cases unifcation is likely to take
place at the most depreciated (parallel) rate, rather
than at the most appreciated (ofcial) rate. Tus, ab-
sent ofsetting mechanisms, a large depreciation of
the ofcial rate can have substantial infationary and
redistributive implications.
Te post-unifcation equilibrium exchange rate
is typically expected to lie somewhere within the
two exchange rates in efect before the unifcation.
Te reasoning behind this expectation is straight-
forward. A depreciation of the more appreciated
(ofcial) exchange rate should reduce the demand
for basic imports—thereby freeing some foreign ex-
change—or promote exports—thereby allowing ad-
ditional foreign exchange to come in. As this addi-
tional supply of foreign exchange fnds its way into
the market, it should allow the more depreciated
(parallel) rate to strengthen. Tus, as one continues
depreciating the ofcial exchange rate, the two rates
should gradually move towards each other, eventu-
ally converging somewhere inside the initial spread.
FIGURE 8: CHURNING BETWEEN MULTIPLE VS. UNIFIED EXCHANGE RATE REGIMES, 1999-2011
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1999 2011
such as Cuba
such as Argentina
and Venezuela
such as
Dominican Republic
multiple multiple (unitary in 1999) unitary (multiple in 1999) unitary
Notes: Countries with multiple exchange rates in 2011 but with a unifed rate in 1999 are Angola, Argentina, Eritrea, Georgia, Guinea, Kyrgyz
Republic, Malawi, Maldives, Mongolia, Nigeria, Sao Tome and Principe, Sudan, Ukraine, Uzbekistan, and Venezuela. Countries with a unifed rate
in 2011 but with multiple rates in 1999 are Afghanistan, Belarus, Botswana, Cambodia, Dominican Republic, Egypt, Iran, Lao, Libya, Russia, and
Turkmenistan. Source: IMF AREAER online database.
Cuba’s Economic Change in Comparative Perspective
107
In practice, however, because the demand for basic
imports is generally fairly inelastic and the response
of exports to a more competitive exchange rate
tends to take time to materialize (e.g., it is short-
run inelastic), the depreciation of the ofcial rate
is unlikely to free much foreign exchange, at least
in the short run. If so, unless there is a sufcient-
ly deep, forward-looking foreign exchange market
that anticipates future foreign exchange infows, the
two rates will tend to meet close to the bottom of
the range, i.e., close to the parallel market rate.
251
Moreover, the above reasoning assumes that there
is no change in the demand for foreign exchange
coming from the capital account. But this will not
be the case if expectations of post-unifcation in-
fation (more on this below) induce a shif towards
the dollar (e.g., if there is a private portfolio shif to-
ward the dollar), or if the central bank starts accu-
mulating foreign reserves afer the unifcation (e.g.,
if there is a public portfolio shif toward the dollar).
In both cases, the post-unifcation single exchange
rate could well depreciate (overshoot) beyond the
pre-unifcation parallel rate.
252
Unless ofset through fscal adjustments (more on
this below) a one-time post-unifcation infation
can generally be expected from the pass-through of
the ofcial exchange rate depreciation to infation
(e.g., cost-based infation).
253
Moreover, the rise in
TABLE 11: POST-UNIFICATION INFLATION IN SELECTED LATIN AMERICAN COUNTRIES
Country
Beginning of
Uni?cataion
Process
Pre-
Uni?cation
Premium Phasing
Point-to-Point Annual In?ation
3 months
before
uni?cation
begins
...3
months
after
...12
months
after
...24
months
after
Venezuela Mar. 1989 202 percent Fast 36 per-
cent
103
percent
81 per-
cent
36 per-
cent
Argentina Feb. 1989 53 percent Gradual 372
percent
460
percent
8163
percent
232
percent*
Peru June 1989 166 percent Gradual 3414
percent
5704
percent
1968
percent
207
percent*
Ecuador Sept. 1992 27+ percent Gradual 50 per-
cent
64 per-
cent
46 per-
cent
27 per-
cent
Dominican Republic Oct. 2003 10+ percent Fast 26 per-
cent
40 per-
cent
52 per-
cent
0 percent
Cuba ? 2300 percent ? 4 percent ? ? ?
Notes: Premium is defned as the average spread between the parallel and ofcial rates as a percent of the ofcial rate in the last quarter before unif-
cation. Phasing is defned by the duration of the coexistence of ofcial and parallel rates afer unifcation—“fast” is less than 3 months. * 28 months
afer, to capture the efects of the formal introduction of Convertibility in April 1991 (Argentina) and the fnal currency unifcation in August 1991
(Peru). Sources: Te Economist Intelligence Unit; International Currency Analysis, Inc., World Currency Yearbook (formerly Pick’s Currency Year-
book), (Brooklyn, N.Y.: various issues); AREAER (several publications); Pick’s currency yearbook (several publications); Miguel Kiguel and Stephen
A. O’Connell. “Parallel exchange rates in developing countries,” Te World Bank Research Observer 10, no. 1 (1995): 21-52; Nancy P. Marion, “Dual
exchange rates in Europe and Latin America.” Te World Bank Economic Review 8, no. 2 (1994): 213-245; Ethan Ilzetzki, Carmen M. Reinhart, and
Kenneth S. Rogof, “Exchange Rate Arrangements in the 21
st
Century: Which Anchor Will Hold?” (2008), Steven Kamin, “Argentina’s Experience
with Parallel Exchange Markets, 1981-1990,” Board of Governors of the Federal Reserve System International Finance Discussion Papers, no. 407,
1991; International Financial Statistics (IFS) database.
251
Tis is what Agenor fnds in the experience of exchange rate unifcations in a number of African countries during the 80s. He concludes that “the
post-unifcation exchange rate is typically close to the pre-reform parallel rate, casting doubts on the argument that the equilibrium exchange rate
is an average of the ofcial and parallel rates”.
252
See Saúl Lizondo, “Unifcation of Dual Exchange Markets,” Journal of International Economics 22 (1987): 57-77and Pierre-Richard Agenor and
Robert P. Flood, “Unifcation of Foreign Exchange Markets,” IMF WP/92/32, 1992.
253
However, such supply side pressures may be relatively subdued in countries where domestic prices already refected for the most part the parallel
rate (rather than the ofcial rate).
Cuba’s Economic Change in Comparative Perspective
108
the price level may turn into a permanent rise in the
rate of price increases when the initial supply shock
leads to wage-price spirals that are accommodated
by a weak (or not credible) monetary policy (e.g.,
expectations-based infation); or when the unif-
cation gives rise to lasting fscal imbalances (e.g.,
demand-based infation) resulting from the loss of
quasi-fscal income generated by the dual exchange
rate regime (in particular, an abrupt reduction in
the implicit taxation of exports).
Table 11 provides a bird-eye view of post-unifcation
infationary experiences in Latin American coun-
tries that have unifed their exchange rate in the not
too distant past. Te table shows that post-unifca-
tion infation tended to be higher in countries with
high pre-unifcation infation (Argentina, Peru)
or in countries with high pre-unifcation spreads
(Venezuela, Peru). By contrast, for countries with
relatively low pre-unifcation infation and spreads
(Ecuador, Dominican Republic), post-unifcation
infation was relatively subdued. For Cuba this is
both good news and bad news. While pre-unifca-
tion infation is low, the spread is way above any-
thing observed in other countries of the region.
THE CASE OF CUBA
Te Cuban dual exchange rate system overlaps with
a dual currency system. Te latter consists of the
Convertible Peso (CUC)—a fully convertible cur-
rency that exchanges at one to one against the dol-
lar—and the Cuban Peso (CUP)—that exchanges at
24 to one dollar.
254
Hence, the dual currency entails
dual exchange rates. For simplicity, we will use in
what follows “CUC” to refer to the more appreci-
ated CUP rate (1 per 1 USD) and “CUP” to refer to
the more depreciated CUP rate (24 per 1 USD).
Te two systems responded to the same initial shock
although they are sustained by diferent motives.
Te dual exchange rate system goes back to the ear-
ly sixties when a separate exchange rate was used
for trade with the socialist countries, particularly
the former Soviet Union. Te market segmentation
was abruptly exacerbated during the 1990-1993 pe-
riod when the political changes in the former Soviet
Union led to a redefnition of commercial relations
with Cuba that resulted in a huge worsening in Cu-
ba’s terms of trade. Te CUC was subsequently cre-
ated (in 1994) to limit dollarization—by providing
an alternative to the US dollar as a unit of account
and a store of value—in the environment of rapid-
ly rising and highly volatile infation that followed
the adverse terms of trade shock. Tis overlap and
common origin has led many observers to see the
dual exchange rate and the dual currency systems as
“joined at the hip.” But they are clearly driven by dif-
ferent motives and pursue diferent objectives. Ex-
change rate unifcation can thus be conceptually and
practically de-linked from the currency unifcation.
What makes the case of Cuba special when com-
pared to other cases of dual exchange rate regimes
in Latin America? At least four features stand out.
First, because the origin of the Cuban dual exchange
rate system is primarily real (linked to a terms of
trade shock) rather than fnancial (linked to capital
fight), it basically amounts to a quasi-fscal scheme.
It taxes exports and some other types of foreign
exchange incoming fows while subsidizing basic
imports. Tis is both good news and bad news. It
is good news because it mitigates concerns about
speculative fnancial turbulence during unifcation.
Such concerns are further limited by the fact that
much of the population’s savings are already held
in the form of cash dollars (hence do not generate
a pent-up demand for dollars) while most bank de-
posits (whether in CUPs or CUCs) belong to public
enterprises (hence are unlikely to trigger specula-
tive shifs into dollars). However it is also bad news
because, unless fscally neutralized, the exchange
254
Actually, the CUP exchanges at 24 CUP per dollar households and at 1 CUP per dollar for the state enterprises and institutions. Persons can
exchange dollars or CUCs for CUPs (at 24 to 1), as well as CUPs for CUCs (at 25 to 1), in the exchange bureaus (Cadecas). State enterprises and
institutions conduct exchange transactions with the Central Bank and are prohibited from using the Cadecas to arbitrage between the exchange
rates. Tere are no indications at this time, however, of a signifcant spread between the 24 per 1 USD rate at the Cadecas and the rate in informal
transactions on the street. For details see Vidal “Monetary Duality in Cuba…”.
Cuba’s Economic Change in Comparative Perspective
109
rate unifcation will unavoidably have large re-dis-
tributional implications, making the former sellers
of CUCs better of and the former purchasers (and
their clients) worse of. While such re-distributions
can be ofset through bold yet temporary fscal
means, the sustainability of the unifcation in the
medium-term will require comprehensive fscal re-
forms (more on this below).
Second, the spread between the two exchange rates
in Cuba, at 2,300 percent, is by far the largest in post-
World War II Latin American history. Tis implies
that there is a signifcant risk that the pass through ef-
fects of the depreciation of the CUC rate may unleash
a wage-price spiral. To avoid it, a premium will need
to be placed on maintaining a very tight control over
monetary expansion during and afer the unifcation.
Tird, the Cuban the government can exert control
over the actions of public enterprises arguably more
than in other countries. Tis may complicate some
things and facilitate others. Te materialization of
efciency gains would require a sufciently elastic
supply response (in the form of decisions to increase
investment and production) to the changes in relative
prices. But this supply elasticity depends on the quality
of relative price signals and on the responsiveness of
decentralized economic actors to such signals (and to
other market incentives), both of which are likely to be
weak or sluggish in the large state sector of the econo-
my. On the plus side of the ledger, however, the control
of public enterprises by the government can also help
limit price increases on the most basic goods during
the transition (more on this below).
Fourth, Cuba has limited access to international f-
nance. Tis is an important further complication.
Indeed, concessional fnance, if available, could fa-
cilitate unifcation by allowing expenditure to ex-
ceed income during the transition.
EXCHANGE RATE UNI FICATION OPTIONS
In view of the constraints mentioned above, the key
challenge for Cuba is to balance the short-term real-
location pains of the exchange rate unifcation with
its medium and long-term efciency gains. Over time,
by boosting the size of the cake, efciency gains should
provide plenty of room to ofset the initial reallocation
pain. Tus, in the end, unifcation should be a win-
win for all. Indeed, the achievement of such efciency
gains is the raison d’être of unifcation. Te problem
is that the size of the cake is likely to be largely given
in the short-term, as the increase in the capital stock
(including in foreign direct investment—FDI) and re-
allocation of resources that are required for efciency
gains will likely take time to materialize. Tus, unless
cushioned in some way, the raw initial impacts of uni-
fcation (fscal revenue losses, productive dislocations,
infation outbursts, and regressive distributional ef-
fects) could be quite painful.
A successful transition strategy should thus pursue
two objectives. First, to limit the short-term pains
until efciency gains materialize and come to the
rescue. Second, to boost the pace at which such ef-
ciency gains materialize. Te extent to which these
two objectives are fulflled should therefore provide
the basic measuring rod with which to compare and
rank available unifcation options. We distinguish
four typological options.
Option One may be labeled raw big bang. It con-
sists in unifying the exchange rates on day one. To
limit initial income efects (hence balance of pay-
ments and foreign exchange market pressures),
the CUP rate would remain unaltered—that is, the
rates would be unifed the rate of 24 (new) pesos
per dollar. Te elimination of the CUC exchange
rate would thus imply that all exchange transac-
tions would thereafer take place at the single new
rate. Te main advantages of this option are its sim-
plicity and initial credibility. It can be implement-
ed with the stroke of a pen. Moreover, by doing the
whole adjustment up-front and not leaving any-
thing hanging, it would signal at once the authori-
ties’ full commitment to unifcation. On the minus
side, however, it does not address at all the objec-
tive of mitigating the pain while efciency gains
materialize. Te one time devaluation of the CUC
rate would have large up-front fscal, redistributive,
reallocation, and infationary costs. Te economic
Cuba’s Economic Change in Comparative Perspective
110
and political consequences could thus be so trau-
matic as to render the whole experiment unviable.
Option Two can be labeled sector-by-sector gradual-
ism. It would consist in gradually depreciating the
CUC rate towards the CUP rate on a sector-by-sec-
tor basis, that is, in diferent degrees and at difer-
ent speeds for diferent sectors. On the plus side, by
spreading the pain by sectors (hence over time), this
option would be less traumatic than Option One. In
addition, it could give the authorities some scope
for experimentation, hence better control over the
entire unifcation process. On the negative side of
the ledger, however, this option would also spread
the gains over time. By delaying the relative price
changes across sectors (hence the supply response)
it would limit the scope for efciency gains. Tus,
Option Two would meet the objective of mitigating
the pain better than Option One, but at the cost of
falling behind as regard the objective of front-load-
ing and maximizing the gains. In addition, the more
Option Two seeks to give the authorities a margin
of control (i.e., unannounced, discretionary adjust-
ments), the more policy uncertainty it would create,
especially because there may be a tendency to post-
pone dealing with the most distorted sectors. At the
extreme, Option Two might even raise doubts as to
whether the unifcation reform will ever be com-
pleted. Such uncertainties would likely promote a
wait-and-see attitude, thereby further delaying the
supply response. Last (but not least), the even great-
er multiplicity of exchange rates during the transi-
tion could further segment markets and distort
price signals, impeding in particular the efcient
resource allocation across sectors.
Option Tree may be labeled economy-wide grad-
ualism. It would consist in preannouncing a path
of gradual convergence of the CUC rate toward
the CUP rate, which would apply uniformly to all
sectors, actors, and activities in the economy. By
spreading the pain over time, Option Tree would
be less traumatic than Option One. Because of its
economy-wide application, it would be “cleaner”
than Option Two, thereby avoiding the additional
cross-sector distortions of this latter option during
the transition. On the minus side, however, Option
Tree sufers from similar, albeit less intense, draw-
backs as Option Two. It is quite comparable to Op-
tion Two in terms of mitigating the initial pain. And
while it would do much better than Option Two in
terms of front-loading efciency gains, the materi-
alization of these gains would likely be insufcient
to ofset the transitional pain. Te pain would be
of lower intensity but would last over a more pro-
longed period. Moreover, Option Tree carries a
risk of policy uncertainty leading to self-fulflling
failure. As in Option Two, by spreading the ad-
justment over time, investors under Option Tree
would also be induced to pursue a wait-and-see at-
titude, just in case the unifcation’s pain would lead
to a policy interruption. By postponing efciency
gains, the lack of supply response could further
raise transition costs. In turn, by eventually induc-
ing the authorities to abandon the preannounced
adjustment path, this could end up validating the
initial skepticism and turn it into a self-fulflling
prophecy.
Option Four may be labeled fscally-cushioned big
bang. As in the case of Option One, the two exchange
rates would be unifed on day one at the (new) rate
of 24 pesos per dollar. However, to mitigate the ini-
tial pain, the shadow taxes and subsidies implicit
in the dual exchange rate would be replaced by ex-
plicit, revenue neutral, non-distortionary lump-sum
taxes and subsidies. Te latter would apply to each
enterprise that is currently conducting any transac-
tions at the CUC rate.
255
Take the example of an en-
terprise that sold X dollars at the CUC rate during a
full calendar year prior to the unifcation (hence re-
ceived in exchange X pesos). Afer unifcation, the
enterprise would now receive 24*X pesos at the uni-
fed exchange rate. Hence, on year one afer the uni-
fcation, the enterprise should be subject to a lump-
sum tax of 23*X pesos, leaving it with the same X
255
Te amount of, say, the annual subsidy or tax implicit in the exchange rate spread that is received or paid, respectively, by each individual enter-
prise is known because the central bank keeps records on the amounts of CUCs sold to or purchased from each enterprise.
Cuba’s Economic Change in Comparative Perspective
111
pesos afer the unifcation as before. Te lump-sum
tax would then be gradually phased out over a pe-
riod of n years. For example, the tax might decline
to 15*X pesos on year 2, 7*X pesos in year 3, and
might be altogether eliminated in year 4. Similarly,
an enterprise which beneftted from purchases of Y
dollars at the CUC exchange rate during a full cal-
endar year prior to unifcation would beneft from
a lump-sum subsidy equal to 23*Y pesos during a
full calendar year afer unifcation. As in the case of
the lump-sum taxes, the lump-sum subsidies would
then be gradually phased out.
Option Four would maximize efciency gains be-
cause it would allow from the start all economic ac-
tors (both old and new) to operate under a new set
of relative prices, hence market-oriented incentives.
Indeed, provided that appropriate safeguards are put
in place (more on this below), the enterprises’ deci-
sions on investment and production would be totally
unafected by the lump sum taxes and subsidies. In
efect, the virtue of lump-sum subsidies or taxes is
that their absolute magnitude does no change with
the intensity of production and efciency-enhancing
efort (or lack of efort) of the enterprise in question.
Yet, unlike Option One, Option Four would be far
more efective in shielding the economy from the
transition pains, frst by neutralizing them through
lump-sum taxes and subsidies and then by ofsetting
(much if not all of) their impact through efciency
gains. Tus, this option would much better address
the pain/gain balance.
256
It does require, however, an
adequate and non-trivial preparation, including ma-
jor concomitant changes in economic policy, as dis-
cussed in Section 7. Before doing so, however, in the
next two sections we illustrate the basic features of
Option Four (fscally-cushioned big bang) by sketch-
ing how it would be implemented in the case two key
sectors of the Cuban economy: the foreign-managed
tourism industry and the sector of importing state
enterprises.
THE FOREIGN-MANAGED TOURISM
INDUSTRY
Te current system for foreign-owned tourism ser-
vices entails very large efciency losses. Because for-
eign hotel operators must pay for labor in dollars at
the CUC exchange rate but the employee receives
her payment in CUP, the CUC-CUP spread implies
a heavy tax on local labor. Out of every dollar paid
by the hotel operator, the worker receives only 1/24
dollars (about 4 cents), with the state retaining the
remaining 23/24 dollars (about 96 cents) as a tax.
257
While this arguably allows the Cuban government
to capture and redistribute much of the rents from
the tourism industry, the tax distorts the allocation
of productive resources in a major way and the high
labor costs faced by the hotel operator severely dis-
courages job creation, undermines the quality of
hotel services, hinders new FDI, reduces tourism in-
fows, and promotes stealth employment (direct but
not legal sale of labor services) in the tourism sector.
A raw big bang unifcation (Option One) would be
traumatic on impact because of its major re-distri-
butional efects. As long as average wages remain
where they are today (which is likely to be the case if
hidden unemployment remains prevalent in Cuba)
and hotel prices do not decline (which is likely to
be the case as long as competitive pressures do not
build up), foreign operators would efectively ben-
eft from rents conducive to large windfall profts.
Conversely, fscal revenues would collapse, thereby
undermining the government’s ability to compen-
sate the losers and generating (via a widening fscal
defcit) demand-side upward pressures on prices.
Foreign operators would have more dollars to re-
patriate and this would weaken the balance of pay-
ments (BOP) to the extent that such repatriation is
not compensated by new FDI infows, which would
take time to materialize.
256
Unifying at the CUP rate (24 pesos per 1 USD), rather than any other rate, is critical to fully neutralize the initial income efect of the unifcation,
since the lump-sum taxes and subsidies would be computed that rate.
257
Labor payments are made not directly to the worker but to a state-managed employment agency.
Cuba’s Economic Change in Comparative Perspective
112
Instead, the windfall gains and losses that would
occur under a raw big bang could be initially fully
neutralized under a fscally-cushioned big bang (Op-
tion Four) through a dollar-equivalent lump-sum
tax paid by each hotel operator in accordance with
the average value of foreign exchange transactions
at the CUC rate it conducted over the previous
year(s). Once set for the frst year, the lump-sum
tax would be gradually phased out over a predeter-
mined period according to a preannounced phase-
down schedule. Because each operator would have
to pay the tax no matter what and the amount to
be paid would be independent of what the opera-
tor does (or does not do) in Cuba, the tax would be
non-distortionary (i.e., it would have no impact on
the operator’s investment or production decisions).
For the system to work, however, the operator
should not have the option to default on its tax ob-
ligations, for example by selling out its Cuban ven-
ture and exiting the country. Te simplest way to
prevent such default is via internationally binding
contracts, so that operators would have to honor
their commitments whether they leave Cuba or not.
As long as competitive pressures remain moder-
ate, the exchange rate unifcation, by lowering la-
bor costs, should boost the marginal proftability
of both existing investments (i.e., expanded hotel
occupation) and new investments (i.e., expanded
capacity). Tus, existing enterprises should expand
capacity and improve quality of service so as to se-
cure and expand their market share in anticipation
of greater competition. On impact (with the cur-
rent stock of FDI), employment and service quality
should rise, thereby raising tourism infows. As a
result, BOP and fscal pressures should ease. Over
time, the new rules of the game should boost new
FDI and promote local investment, further bene-
ftting the BOP and fscal accounts. Tis would in
turn allow for a smooth phasing down of the lump-
sum taxes. Over the longer term, labor productivity
should steadily increase, allowing for real wages to
rise and the real exchange rate to appreciate, much
as has happened in other economies in transition.
While the existing hotel operators would not incur
any competitive disadvantage (at the margin both
new and old would compete under the same plain
level feld), they could object to the deal by arguing
that the lump-sum taxes will erode their average
proftability looking forward. Tey could fear that as
new entrants come in and/or existing operators start
competing more aggressively against each other, ho-
tel prices would fall, thereby eroding their average
(afer lump-sum tax) proft margins. Yet, there are at
least three strong counter-arguments to this line of
reasoning. First, because the existing hotel operators
can take full advantage of their installed capacity and
knowledge of the local market, they should be the
main benefciaries of the initial boost in proftability
and can position themselves to take the best advan-
tage of any new business opportunity that becomes
available as a result of unifcation. Second, even if
proft margins become compressed due to increased
competition, volume increases should ofset much, if
not all, of the decline in proft margins. Tird, even in
the worst-case scenario of a transient decline in the
average proftability of existing Cuban hotels (due to
the payment of lump-sum taxes in a more compet-
itive environment), because the current owners (or
managers) of these hotels are mostly large interna-
tional chains, they should be able to absorb this de-
cline without much impact on their bottom line.
STATE-OWNED IMPORTI NG INDUSTRI ES
Consider now the case of the state-owned import-
ing industries. Again, the current system entails
huge efciency losses. Using the CUC rate for ba-
sic imports and the CUP rate for wages amounts
to subsidizing basic imports while penalizing the
consumption of non-basic imports. While this may
contribute to evening out welfare across Cubans,
the implicit subsidization weakens the central gov-
ernment’s fnances, penalizes the employment-gen-
erating production of importables and promotes
instead the importation of basic fnished goods or
of the inputs needed to produce them locally, there-
by pressuring the BOP. Exchange rate unifcation
should thus result over time in a much improved
allocation of resources as enterprises take full ad-
vantage of the low local labor costs and other com-
parative advantages.
Cuba’s Economic Change in Comparative Perspective
113
However, as in the case of the tourism industry, a
raw big bang unifcation could be quite traumatic on
impact. Tis would be the case if the state enterpris-
es responded to the unifcation as private enterpris-
es would, i.e., by seeking to cut their losses. Tey
would raise prices, thereby triggering supply-side
infation, and cut down on employment in the face
of declining demand, thereby exerting contraction-
ary pressures on the economy. While this would
improve the BOP and (depending on public fnance
responses) the central government fnances as well,
it would raise unemployment and erode the pur-
chasing power of low-paid workers.
Alternatively (and perhaps more realistically), the
initial impact under a raw big bang would just afect
the public enterprises’ accounts and nothing else.
Te enterprises would continue importing and pro-
ducing in the same fashion but just run large def-
cits that would need to be covered by high and now
explicit subsidies, as the subsidies implicit in the
previous (dual) exchange rate system would come
to the surface. Te basic problem with this second
scenario, however, is that granting such subsidies
automatically would fundamentally undermine the
central government fnances (as the government
would no longer receive the income from the ex-
change rate spread) while taking away the incen-
tives for public enterprises to become more respon-
sive to market signals, cut their costs, and improve
their efciency (business for them would basically
continue as usual).
Option Four (fscally-cushioned big bang) would
obviate the above problems by replacing the inef-
cient import subsidy with a dollar-equivalent lump-
sum subsidy that initially fully neutralizes the fscal,
BOP, and infationary impacts of the exchange rate
unifcation. As in the case of the tourism industry,
the subsidies would be gradually phased out over a
period of years. Tis would immediately enhance
budgetary and public sector transparency. In par-
ticular, loss-making enterprises will come out ful-
ly into the open. Te explicit subsidies should thus
help promote accountability and market respon-
siveness. Te fact that the unifed exchange rate
would apply to all foreign exchange transactions
should help enhance competition, hence market
discipline and responsiveness. Indeed, all enterpris-
es (existing state enterprises as well as potential new
private entrants or emerging public competitors)
would operate from the start under the new rules
of the game.
258
Tis being said, for public enterprises to alter their
behavior it is crucial that the unifcation be accom-
panied, as soon as feasible, by appropriate reforms
of their governance as well as by an in-depth re-
form of the scheme for subsidizing basic goods.
Otherwise, the enterprises could, as in Option one,
continue conducting their business as usual. Tey
could simply wait for the government to extend
the subsidies indefnitely into the future under the
threat of social upheavals induced by across-the-
board subsidy reductions leading to price increas-
es. To prevent such outcome, the public enterpris-
es should be initially required, as a counterpart to
the subsidies they will receive, to set their pricing
decisions so as to limit price increases, particular-
ly on the most basic goods (indeed, the subsidies
should make stable prices consistent with proft-
ability). At the same time, however, to ensure that
efciency gains do materialize, the enterprises’ pro-
duction decisions (i.e., the choice of inputs) should
be nudged towards cost minimization and prof-
it maximization. Indeed, this is where the mix of
the government’s control of public enterprises and
market forces should come handy, one focusing on
258
Te option of staggering the fscally-cushioned big bang unifcation over a period of time on a sector-by-sector basis remains open. Tus, sector
A (say, the tourism industry) could enter at once the single exchange rate regime while sector B (say, the state-owned importing industries or the
exporting sector) could remain for a little while under the old regime. Tis option might give the authorities (or the afected enterprises in any
given sector) more preparation time where absolutely needed. Tis would be superior to Option Tree (economy-wide gradualism) in that, even
when applied on a sector-by-sector basis, the non-distortive nature of lump-sum taxes and subsidies would more efectively stimulate decisions
to invest and raise production and, hence, yield greater efciency gains from the outset. As long as all enterprises in any given sector are brought
it together into the unifcation scheme (instead of phasing in only a few, discretionally selected frms within a sector, while leaving other frms
within the same sector shielded from competition), the resulting distortions should be limited and the market complications manageable.
Cuba’s Economic Change in Comparative Perspective
114
(temporarily) stable prices while the other focuses
on proft maximization.
However, notwithstanding the efciency gains ob-
tained over time by enterprises as they reorganize
their production under the new market prices,
some price increases will become unavoidable as
subsidies to enterprises are gradually phased out. A
comprehensive reform of the public subsidy scheme
will therefore also be needed in due course to limit
the social impact of such increases while limiting
the fscal costs of any remaining subsidies. We ex-
pand below on both of these key issues.
HABI LITATI NG REFORMS AND
SEQUENCI NG ISSUES
As noted, for the fscally-cushioned big bang ap-
proach to work optimally, there is a need for careful
preparation, including the introduction (not nec-
essarily before the unifcation but certainly as soon
as feasible) of a number of crucial habilitating re-
forms. Te frst area that would require habilitating
reforms is the fscal area. As discussed earlier, the
shadow taxes and subsidies implicit in the current
dual exchange rate system will frst need to be re-
placed by transitional lump-sum taxes and subsi-
dies calculated for each enterprise afected by the
exchange rate unifcation. Subsequently, however,
the lump-sum taxes and subsidies will need to be
themselves replaced by permanent, well-designed
taxes and subsidies.
On the tax side, the government may need to re-
visit and adapt the tax system from the perspective
of a new long-term, market-oriented environment.
Tis may include frst of all revising the taxes that
have linkages to the foreign exchange market, such
as FDI or trade (import and export) taxation. But
it may also involve introducing or touching up for
revenue mobilization purposes some domestic tax-
es such as the value added tax.
On the subsidy side, the government may likely need to
introduce a well-focused system of (cash or coupon)
transfers targeted to the most basic goods and lowest
income households. As noted above, unless this is
done, the government would probably be facing an
unsavory choice between a rapid but socially traumat-
ic phasing-out of the subsidies and an indefnite pro-
longation of an unwieldy, inefcient, costly (and hence
ultimately unsustainable) subsidy scheme.
In all cases, a healthy fscal position would facilitate the
transition. A pre-unifcation fscal surplus could allow
the government to accumulate foreign reserves that
could subsequently be used to “fnance” temporary
post-unifcation BOP defcits. A strong post-unifcation
fscal position would greatly ease monetary control.
At the same time, public sector governance reforms
would also be essential to ensure that state enterpris-
es become more responsive to market signals. Enter-
prises should be given market-compatible mandates
(i.e., cost minimization and proft maximization)
and their performance assessed (and their managers
rewarded) accordingly. Based on the newly emerging
market prices, accounting practices should be simul-
taneously revisited to identify unviable state enter-
prises and facilitate their closure or restructuring.
Inter-enterprise claims across balance sheets should
be netted out and restructured as needed.
Tese governance reforms should ideally be ac-
companied (or followed as soon as possible) by
market-oriented reforms. In particular, the entry
of non-state frms should be encouraged to boost
supply, both directly and indirectly (i.e., by exert-
ing competitive pressures on state enterprises). It
would also be desirable for efciency purposes to
disengage state frms from intermediating the busi-
ness activities of private frms and citizens by, for
example, allowing companies in the tourism sector
that have foreign capital participation to select and
hire their workers directly.
259
259
Under the fscally-cushioned unifcation option, the fscal loss that would result from allowing companies in the tourism sector to hire employees
directly would be fully ofset by the fscal gain associated with the lump-sum tax on these companies.
Cuba’s Economic Change in Comparative Perspective
115
To maintain infation under control and allow the
exchange rate to play a more substantial bufering
role, the scheme will require the gradual strength-
ening of the central bank’s monetary instruments and
management capacity. Tis in turn is likely to require
reforms to facilitate the gradual development of the
interbank and exchange rate markets, as well as a
sound and more vibrant fnancial intermediation.
260
A fexible exchange rate regime, if feasible from
the start, would arguably be desirable, as it would
help smooth out the unifcation process. In the
short term, it would help identify the equilibrium
post-unifcation exchange rate and reduce the risks
of emerging exchange rate misalignments. Indeed,
as frms previously transacting at the CUC rate start
to respond to the change in market prices, there-
by lowering the demands for imports and raising
the supply of exports, some appreciation of the ex-
change rate is likely to materialize. Over the longer
term, further appreciation pressures are likely as ef-
fciency gains translate into purchasing power gains
(hence real exchange rate appreciations). A fexible
exchange rate system would thus have the bene-
ft of allowing the real exchange rate to appreciate
through nominal appreciation rather than infation.
At the same time, it would help absorb external
shocks and limit de facto dollarization.
However, a fexible exchange rate regime may not
be feasible because the reforms to establish the mar-
ket and institutional infrastructure necessary to al-
low an independent monetary policy with exchange
rate fexibility will take time to implement, and
waiting for these conditions to be in place might
excessively delay the unifcation. Moreover, main-
taining a fxed exchange rate immediately afer uni-
fcation might help stabilize expectations at a time
of substantial, potentially discomforting changes. It
might thus be preferable to frst unify the exchange
rate system and then move gradually to a more fex-
ible exchange rate system, following a three-phased
agenda of monetary reform:
• Initial phase: a fxed exchange rate with con-
trol of central bank credit expansion and of
excess liquidity in the interbank market
• Intermediate phase: a fexible (but managed) ex-
change rate with monetary-aggregate targeting
• Final phase: a still managed but more fexible
exchange rate with infation targeting
One fnal issue to be considered is currency choice
and unifcation. As noted earlier, this is a concep-
tually and practically diferent issue than the one
that has occupied this paper, namely, the choice and
unifcation of the exchange rate. Te issue of cur-
rency unifcation arises because Cuba currently has,
in addition to two exchange rates, two currencies
(the CUC and the CUP) that act as units of account,
means of exchange, and stores of value.
261
When it comes to the issue of currency choice and
unifcation, there are three main options: (i) for-
mally adopting the dollar as the single currency;
(ii) maintaining a dual currency system; and (iii)
adopting the (new, post-unifcation) Cuban peso
as the single currency. Te pros and cons of these
three options are as follows:
• Full dollarization would be unwise, as it
would increase Cuba’s vulnerability to adverse
terms of trade or other large shocks, especial-
ly by magnifying their recessionary impact.
It would rely on infation or defation as the
main channels for real exchange rate adjust-
ment. Given that shocks to Cuba are not nec-
essarily symmetric to shocks to the United
States (the country that issues of the dollar),
the equilibrium real exchange rate in Cuba
would need to adjust in directions that would
not necessarily coincide with those needed
by the U.S. economy. Hence, under full dol-
larization, Cuba would lose the option to use
its own currency as a policy instrument and
shock absorber.
260
See Vidal and Villanueva.
261
Actually, Cuba has more than two currencies if the dollars or Euros that Cubans hold in cash are taken into account.
Cuba’s Economic Change in Comparative Perspective
116
• A dual currency system, whereby the new
(post-unifcation) peso coexists with the
CUC may have some advantages. In this
case, it would be better if CUC bills disappear
and the CUC continues to exist solely as an
electronic unit of account in which bank de-
posits and loans could be denominated. Te
CUC would retain the one-to-one relation
and convertibility to the U.S. dollar, which
would be in turn backed by a currency board
arrangement. Maintaining the option of
saving and lending in CUCs might help the
economy re-monetize while confdence in
the new peso builds up. However, as long pri-
vate citizens prefer dollars in cash, the shif of
savings towards CUC-denominated deposits
is likely to be limited. Instead, by fragmenting
credit and reducing market depth, the dual
currency can hinder and delay the process of
strengthening monetary management. At the
same time, as long as state enterprises con-
tinue to be the main depositors, there is little
risk of a depositor fight into dollar cash.
• Full peso-ization is therefore arguably the
preferred option. It would imply that, simul-
taneously with the exchange rate unifcation,
all CUC are mandatorily converted into new
pesos.
Cuba’s Economic Change in Comparative Perspective
117
Omar Everleny Pérez Villanueva is professor at the
Center for the Study of the Cuban Economy, Uni-
versity of Havana. Pérez Villanueva earned his doc-
torate at the University of Havana, M.A. at CIDE/
AC (Mexico) and B.A. at the University of Havana.
He has taught or lectured at various universities in
Cuba, the United States, Japan, France, Spain, Bra-
zil, Puerto Rico, Mexico, China and other countries.
He has published more than 70 works on the Cuban
and the international economies. He is co-editor
of Cuban Economy at the Start of the Twenty-First
Century (with Jorge Domínguez and L. Barbe-
ria) and “Cuban Economic and Social Development:
Policy Reforms and Challenges in the 21st Century;
and is editor of Refexiones sobre la economía cuba-
na; Miradas a la economía cubana, volumes I and II;
y Cincuenta años de la economía cubana.
Richard Feinberg is professor of international po-
litical economy at the Graduate School of Interna-
tional Relations and Pacifc Studies, University of
California, San Diego and a nonresident senior fel-
low with the Brookings Institution. Feinberg served
as special assistant to President Clinton and senior
director of the National Security Council’s Ofce of
Inter-American Afairs. He has held positions on
the State Department’s policy planning staf and
worked as an international economist in the U.S.
Treasury Department’s Ofce of International Af-
fairs. He earned his Ph.D. in international econom-
ics from Stanford University and a B.A. from Brown
University.
Carmelo Mesa-Lago is distinguished service pro-
fessor emeritus of Economics and Latin American
Studies at the University of Pittsburgh and has been
a visiting professor or researcher in Argentina, Ger-
many, Mexico, Spain, Uruguay, United Kingdom
and the United States, as well as a lecturer in 39
countries. He is the author of 82 books/pamphlets
and 275 articles/chapters published in seven lan-
guages in 34 countries, on the Cuban economy, so-
cial security and comparative economic systems and
was founder and editor for 18 years of Cuban Stud-
ies. His most recent book is Cuba Under Raul Cas-
tro: Assessing the Reforms (with Jorge Pérez-López,
Lynne Reinner, 2013). He has worked throughout
Latin America and the Caribbean as ECLAC re-
gional advisor, consultant with most international
fnancial organizations, several U.N. branches and
national/foreign foundations; was president of the
Latin American Studies Association; is a member
of the National Academy of Social Insurance and
has received numerous awards including the ILO
International Prize on Decent Work (shared with
Nelson Mandela).
Richard Newfarmer works with the International
Growth Centre as the country director for Rwan-
da, Uganda and South Sudan. He is also a senior
fellow (non-resident) at the World Trade Institute
in Bern, Switzerland and a distinguished research-
er at the North-South Institute (Canada). He con-
sults with international organizations, including
the World Bank, the Organization of Economic Co-
operation and Development and the International
Trade Centre. Previously, he was the World Bank’s
special representative to the United Nations and
World Trade Organization, based in Geneva, Swit-
zerland. Recently, he co-authored “Trade and Em-
ployment in a Fast Changing World” for the OECD
(2012), and co-edited Breaking into New Markets:
Emerging Lessons for Export Diversifcation. Prior
to assuming the post in Geneva, he was economic
advisor in the International Trade Department and
in the Prospects Group of the World Bank, and led
the team that produced Global Economic Prospects
2007: Managing the Next Wave of Globalization. He
was lead economist in the Chief Economist’s Ofce
of East Asia during the Asia crisis (1997-2000), lead
Cuba’s Economic Change in Comparative Perspective
Working Group Member Biographies
Cuba’s Economic Change in Comparative Perspective
118
economist for China, and chief of the Industry and
Energy Division in the China Department. He was
also principal economist for Argentina in the Latin
American region (1988–1992) and has also worked
on Chile, Brazil and other Latin American coun-
tries. Prior to joining the Bank, Mr. Newfarmer was
a senior fellow at the Overseas Development Coun-
cil, and was on the economics faculty at the Univer-
sity of Notre Dame. Mr. Newfarmer holds a Ph.D.
and two M.A.s from the University of Wisconsin,
and a B.A. (Highest Honors) from the University of
California at Santa Cruz.
Guillermo Perry is a professor at the Universidad
de los Andes in Colombia, as well as a research as-
sociate at Fedesarrollo, Colombia and a non-resi-
dent fellow at the Center for Global Development,
Washington D.C. He was formerly chief economist
for Latin America and the Caribbean at the World
Bank from 1996 to 2007. Prior to joining the World
Bank, Perry served his native Colombia in various
government positions, including Minister of Fi-
nance and Public Credit, Minister of Mining and
Energy, and director of the General Directorate
of National Taxes. He was also director of two of
Colombia’s leading economic think-tanks (Fede-
sarrollo and CEDE) and has been professor at Uni-
versidad de los Andes and Universidad Nacional de
Colombia. He has also published numerous articles
and books on macroeconomics, fscal policy, fnan-
cial policy, international fnance, political economy
and energy policy issues. Perry has also published
numerous articles on macroeconomics, fscal pol-
icy, fnancial policy, international fnance, and en-
ergy policy issues. He holds a Ph.D. in Economics
and Operational Research from the Massachusetts
Institute of Technology.
Ted Piccone is a senior fellow with the Project on
International Order and Strategy and Latin Amer-
ica Initiative in the Foreign Policy Program at the
Brookings Institution. Previously, he served as the
acting vice president and director (2013-14) and
deputy director (2008-13) of the Foreign Policy
Program. From 2001-2008, he was the executive di-
rector and co-founder of the Democracy Coalition
Project (DCP), a research and advocacy organiza-
tion working to promote international cooperation
for democracy and human rights around the world.
Mr. Piccone served eight years as a senior foreign
policy advisor in the Clinton Administration cov-
ering Latin America and other issues on the Secre-
tary of State’s policy planning staf, at the National
Security Council and in the Ofce of the Secretary
of Defense. Mr. Piccone also served as counsel for
the United Nations Truth Commission in El Salva-
dor and as press secretary to U.S. Rep. Bob Edgar.
Mr. Piccone has written and published articles on
U.S.-Latin American relations, international orga-
nizations, and human rights and democracy pro-
motion policy. He received a law degree from Co-
lumbia University and a B.A. in history magna cum
laude from the University of Pennsylvania.
Antonio Romero is a Cuban economist with post-
graduate studies in International Relations and De-
velopment from the International Institute of Social
Studies in La Haya, Holland and a PhD in Economics
from the University of Havana. He currently works
as a professor/researcher at the Center for Research
on the International Economy (CIEI) at the Univer-
sity of Havana, and the chair of the International
Trade and Economic Integration Department. Since
November 2012 he has been Chair of the Caribbe-
an Studies Department at the University of Havana.
Since 1984 he has taught various courses at the Uni-
versity of Havana, including “International Econom-
ic Relations,” “International Economics,” “Analysis of
Economic Situations,” and “Economic and Develop-
ment Policies in Latin America and the Caribbean.”
He has spoken at conferences and taught postgrad-
uate classes at universities in Hungary, Argentina,
Mexico, the United Arab Emirates, Chile, Belgium,
Bolivia, Canada, Colombia, the United States, France
and Spain. From January 1992 to April 2002 he was
director of the Center for Research on the Interna-
tional Economy (CIEI) at the University of Havana.
From April 2002 to December 2011 he worked as an
international civil servant in the Permanent Secre-
tariat at the Latin American and Caribbean Eco-
nomic System (SELA).
Cuba’s Economic Change in Comparative Perspective
119
Alberto Trejos joined INCAE in Costa Rica as
a full professor in 1997. Prior to this, he taught at
Northwestern University from 1994 to 1999. He
has had academic relationships with the Universi-
ty of Michigan, University of Miami and Institut de
Anàlisi Econòmica de Barcelona. From 2002-2004
he held the position of Minister of Foreign Trade
for Costa Rica. Trejos has served as a consultant
at think tanks and companies in the United States,
Latin America, Europe and Africa and has been a
board member for several Costa Rican corporations
and a partner at CEFSA (Consejeros Económicos y
Financieros), the largest bureau of macroeconomic
analysis in Costa Rica. He is widely published and
his pieces include “Trade in Intermediate Goods
and Total Factor Productivity” with Pedro Ferreira,
Review of Economic Dynamics 14-3, July 2011 and
“Political and Institutional Obstacles to Reform”
with Jorge Cornick in Growing Pains in Latin Amer-
ica, L. Rojas-Suarez (ed.), Center for Global Devel-
opment, 2009. Trejos holds a Ph.D. in Economics
from the University of Pennsylvania.
Juan Triana Cordoví is graduate professor at the Cen-
ter for the Study of the Cuban Economy (CEEC) at
the University of Havana. His publications include
Miradas a la economía cubana III, (Editorial Camino:
Havana, 2012; 50 años de Economía Cubana, (Edito-
rial Ciencias Sociales, 2011); and “La Universidad, la
economía y el desarrollo,” (Editorial Siglo XXI, March
2010). He has taught undergraduate and graduate
classes on the Cuban economy and universal econom-
ic thought in the Economics Department at the Uni-
versity of Havana. He has spoken at conferences on the
Cuban economy and development problems at more
than ten universities outside Cuba. He speaks at more
than 30 conferences a year on the Cuban economy, as
well as academic, government, nongovernmental and
foreign institutions. His education includes a Doctor-
ate of Economics from the University of Havana, a
Master’s degree in Cuban and Latin American Studies
from the University of Havana, an associate’s degree
in Agricultural Planning and Development Policies
from FAO-PROCAPLAN, United Nations, Buenos
Aires and a Bachelor’s degree in Economics from the
University of Havana.
Ricardo Torres Pérez holds a doctorate of econom-
ics from the University of Havana, where he is an
assistant professor in the Center for the Study of the
Cuban Economy (CEEC). His includes a certifcate
in Econometrics from the University of the Repub-
lic-University of Havana and a Master in Econom-
ics from the University of Havana. He has published
articles in the Harvard International Review and
Latin American Perspectives. His most recent pub-
lications include “Structural Problems and Changes
in Cuba’s Economic Model” in No More Free Lunch:
Refections in Cuba’s Reform Process and Challeng-
es for Transformation, (New York: Springer) and
“Las Transformaciones del Modelo Económico:
Cuba Frente a la Nueva Realidad Contemporánea”
in Cuba: La Ruta Necesaria del Cambio Económico,
(Havana: Ciencias Sociales). He has participated in
events and seminars in various countries including
the United States, the Dominican Republic, Spain,
Norway, Japan and South Africa.
Pavel Vidal Alejandro received his Doctorate in
Economic Sciences in 2008. He is currently a pro-
fessor at the Pontifcia Javeriana Cali University in
Colombia. Previously he worked at the Center for
the Study of the Cuban Economy (CEEC) at the
University of Havana (2006-2012) and as a specialist
at the Central Bank of Cuba in the Monetary Policy
Directorate (1999-2006). He has done several train-
ing stints in various central banks in Latin America.
In 2010 and 2011 he completed a research stint at
the University of Harvard, the Complutense Uni-
versity of Madrid and the Institute of Developing
Economies (Japan External Trade Organization),
and published articles in the Journal of Latin Ameri-
can Studies, the International Journal of Cuban Stud-
ies, the Real Instituto Elcano and Socialism and De-
mocracy. He has published two editions of the book
Elementos de Econometría: Aplicaciones para Cuba.
He has contributed chapters to the following books:
Cuba en Tiempos de Cambio; Miradas a la Economía
Cubana I and II; Refexiones de la Economía Cuba-
na; and Cuban Economic and Social Development:
Policy Reforms and Challenges in the 21st Century.
Foreign Policy at Brookings
1775 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Brookings.edu/foreignpolicy
doc_572972793.pdf