Does the Economy Work?

...True, the appearance of scarcity in Cuba contrasts starkly with the appearance of abundance in the rest of Latin America...

...Two keys to Cuba's eventual success in capital goods were the early emphasis on general and technical education, and research and development institutes...

...Between 1959 and 1989 real per capita national income in Cuba grew at an annual rate of 2.7%, compared to 1.2% in the rest of Latin America...

...embargo compelled Cuba to design and produce needed spare parts...

...Increased agricultural productivity stimulated the food processing industry, and freed up labor for the industrial workforce (cane-lifting was 100% mechanized, cane-cutting 70% mechanized...

...Charges that official Cuban growth statistics are unreliable are based on a misunderstanding of Cuba's system of national income accounting and a faulty application of economic method...

...aid, trade or foreign investment in the picture...

...The sine qua non of any industrialization process, of course, is capital accumulation--the generation and productive channeling of savings...

...Eventual increases in Soviet aid and the shift away from consumer goods production later allowed investment to increase steadily...

...We obtained results very similar to the official rates...

...Unlike other centrally planned economies, the Cuban revolution's early priority was to fulfill basic needs and develop human capital...

...Such goods included air conditioning andrefrigeration equipment, batteries, semi-conductors, pistons, cables, valves, tires, platform trucks and railroad cars...

...Figures here and elsewhere unless otherwise cited are from the Anuario Estadistico de Cuba, various years...

...2 Albeit in a more pervasive and heavy-handed manner than the Newly Industrialized Countries (NICs) of East Asia, after 1959 the Cuban state fulfilled many of these basic development functions...

...Average annual investment jumped from 400 million pesos in 19531958, to 650 million in 1960-1965, 850 million in 19661970, 1.5 billion in 1971-1975, and 2.6 billion in 19761980.' The investment ratio (gross investment as a share of national income) rose gradually from 20.3% during the period 1962-1965, to 23.2% (1966-1970), 24.3% (19711975), 29.2% (1976-1980) and 28.0% during 1981-1985.% Investment led to economic growth...

...Excessive centralization in Cuba has indeed engendered massive inefficiencies and waste.' But Cuba's system of bureaucratic central planning has also achieved many longterm development goals that have eluded much of Latin America...

...If political conditions permit, significant steps toward economic reform will be made at the Communist Party congress in early 1991...

...Most market-driven low-income countries have lacked some or all of the ingredients for a sustained "take-off": developed social and productive infrastructure, sophisticated financial institutions, political stability, powerful entrepreneurial groups, successful market integration and so on...

...See A. Zimbalist and C. Brundenius, The Cuban Economy: Measurement and Analysis of Socialist Performance,, Baltimore: Johns Hopkins University Press, 1989...

...Finally, the state's control over the generation and use of investment funds and foreign exchange enabled Cuba to prevent the capital flight and importation of luxury consumer goods that have been so damaging to other Latin American economies...

...Packaging facilities are generally poor, transportation networks and auxiliary equipment (e.g., refrigeration) are woefully insufficient and expensive, and marketing ties are absent or minimal...

...No wonder it is conventional wisdom in this country that Fidel Castro has destroyed the Cuban economy...

...There were greater shortages and some contraction of economic activity, but the ensuing social costs were distributed evenly and lower income groups actually received wage increases and larger consumption subsidies...

...3 Massive social infrastructure investments by the Cuban state have not only created a relatively highly educated and healthy labor force, but also a national health industry that has few, if any, rivals in the developing world...

...The central task of capital accumulation has been too large and risky for private national groups to take on...

...The introduction of state-of-the-art techniques with home-grown innovations in medicine and biotechnology, world leadership in technology for the sugar industry, new production methods in electronics, and the growth of many non-traditional exports-all are linked to the development of the capital goods sector...

...See A. Zimbalisted., Cuban Political Economy: Controversies in Cubanology, Boulder: Westview Press, 1988...

...A major attraction of capital goods is the potential learning experience they offer: Producing machinery is producing the means of production and, hence, technology...

...In contrast, Cuba's package reduced demand only in particular foreign exchange-sensitive sectors (fuel, electricity, television programming, transportation, sugar), and succeeded in maintaining high levels of economic activity and near full employment...

...ANOTHER POTENTIAL ADVANTAGE OF CENtralized control over resources was highlighted by the debt crisis of the 1980s...

...eds...

...The economy's own growth and increasing complexity, as well as changes in the world system, will compel it to become more agile and decentralized in the 1990s...

...But appearances can deceive...

...market...

...origin...

...For these reasons, the governments of the East Asian NICs use fewer direct levers of control today, and most of the planned economies have moved decisively away from their centralized systems of state control...

...Viewed dynamically, specializing in labor-intensive products, based on the low wages prevalent throughout Latin America, can consign a country to low productivity and low income in the long run...

...Nevertheless, the virtual elimination of luxury imports and sumptuous consumption left enough savings to increase investment above the pre-1959 levels...

...Brundenius and I have reestimated Cuban growth using different methodologies and correcting for possible biases in Cuban pricing...

...To be sure, the desirability of active state intervention in economic affairs diminishes as an economy develops...

...If these rates were taken as a share of gross national product, they would probably range from the mid-teens to the low-twenties...

...2. This is not to imply that an active state role is sufficient for promoting development, as African nations have shown over the past twenty years...

...By 1980, on a per capital basis, Cuba was actually graduating from universities 40% more students than Czechoslovakia and 31% more than East Germany...

...6. Henry Bruton, "Import Substitution," paper presented at the Northeast Development Consortium Conference, Harvard University, April 29-30, 1988...

...After initially developing labor-intensive manufacturing, such as textiles and food-processing, the Cuban state explicitly promoted domestic production of capital goods for local industry...

...No harsh collectivization drive was undertaken, nor was agriculture "colonized" to squeeze the surplus from it, nor was U.S...

...This failure not only wastes human and financial capital, it discourages others from trying...

...Cuba's technological capacity has begun to yield increasingly obvious benefits...

...Though the inefficiencies so striking to visitors are real and pervasive, the Cuban economy has succeeded in accomplishing many important development tasks...

...Of course, virtual stagnation between 1961 and 1970, and again since 1985, has diminished Cuba's overall performance, but it remains quite creditable, especially compared with the economies of its Latin neighbors...

...The recent history of non-traditional exports in Central America and the Caribbean is primarily tainted not by inadequate will or inaccurate prices, but by insufficient institutional support to confront the many obstacles of export promotion...

...A central goal of market economy austerity programs is to curb aggregate demand and, thereby, lower imports and conserve foreign exchange...

...But the contrast between the underlying health of Cuba's semideveloped economy and its neighbors' underdevelopment is every bit as great...

...That is, they are appreciably below the investment rates of over 30% that have been attained in Japan, Taiwan and South Korea...

...At restaurants lines are long, the menu limited, and the service often abominable...

...Approximately one-quarter of investment spending on capital goods in the 1980s was on machinery and equipment produced in Cuba, a level no other Third World economy the size of Cuba's has attained...

...They receive additional fillips from foreign investment and the diversion of resources toward production for export...

...whether the government elite is well educated, and whether it maintains cooperative relations with other well educated groups...

...The increased supply of skilled labor and the evolution of infrastructure and support institutions allow for decision-making to be more effectively decentralized...

...whether a military imperative exists...

...Accumulation in Cuba, therefore, proceeded gradually...

...Like other countries in the region, Cuba introduced an austerity package...

...Not only can locally generated technology be adapted to local conditions, but, in the words of Henry Bruton, it opens the prospect of developing "a more or less continuous flow of new technological knowledge...

...8. For comparative data and additional discussion, see Eva Paus, StruggleAgainstDependence: Non-traditional Export Promotion in Central America and the Caribbean (Boulder: Westview Press, 1988...

...7 Except for Cuba, the nations of the Caribbean Basin benefit from favorable tariff treatment and geographically easy access to the U.S...

...The Cuban state, whatever its inefficiencies, has committed sufficient resources to new export projects and has bargained effectively with foreign trading companies for market access and fair prices...

...Following the initial agrarian reforms in South Korea and Taiwan, savings were generated at the expense of small landholders and urban workers, and investment rates rose to levels considerably above those in post-1959 Cuba...

...Trade with the Soviet bloc helped a bit in this regard, but lower levels of technological development and the use of the metric system in the socialist trading bloc placed a heavy burden on Cuba to make its own adaptations...

...Yet the Caribbean's nontraditional export performance has been uneven at best, and certainly far below Cuba's...

...Whether or not the state can fulfill its role in a particular country depends on an intricate matrix of historical forces, for example: whether a traditional, landed class retains significant sway over government decision-making...

...7. Miguel Figueras, Produccirn de Maquinarias, p. 45...

...Besides the oft-cited advances in health care and education, in key areas of the economy, such as producing capital goods, generating technology and developing nontraditional exports, Cuba has far outstripped its neighbors...

...Moreover, greater size and complexity place insurmountable hurdles in the way of centralized information gathering and processing, and modem technology demands greater flexibility...

...During the first half of the decade, Cuba was largely insulated from the effects of the crisis by its favorable terms of trade (and debt relief) with the Soviet Union...

...The governments in South Korea, Taiwan and Japan provided similar support to their projects, particularly during the early periods of new export promotion...

...Cuban economists and planners are well aware of this and have already resumed efforts at administrative decentralization...

...In a sense, Cuba's choice to develop the capital goods sector was forced upon it...

...The New Palgrave:A Dictionary of Economic Thought and Doctrine (London: The Macmillan Press Ltd., 1987...

...S IMILAR TO THE ASIAN NICS, HAVANA OPTED to seek expanded industrial development, eventually encompassing production of capital goods like harvesters, irrigation equipment and computers...

...This brings on deeper recession, more unemployment, lower wages, and acutely aggravated social conditions...

...Does the Economy Work...

...VISITORS TO HAVANA ARE INVARIABLY struck by how run-down the city looks: buildings that haven't seen a coat of paint in 30 years, houses in a state of virtual collapse, cars and buses that appear to be on their last legs...

...And an eventual return to experimentation with aspects of a market-oriented decentralization seems inevitable...

...Cuba also followed a market-type decentralization strategy from 1976 to 1986, but, for a variety of reasons, in April 1986 entered a phase of reevaluation and relative de-emphasis on material incentives...

...Identifying and producing viable new exports requires finance, technical assistance, market knowledge, and time...

...4. Miguel Figueras, Produccidn de Maquinarias y Equipos en Cuba (Havana: Editorial Cientifico-Ticnica, 1985), p. 50...

...But the terms of trade deteriorated, petroleum prices and the dollar dropped, poor weather decimated the harvest, Western debt accumulated, and by 1985 Cuba was facing the same foreign exchange crunch as the rest of Latin America...

...Local entrepreneurs invest their capital in new projects that are promising at first but then become encumbered at later stages and ultimately fail...

...The stores are practically empty of goods...

...The relative abundance of such goods and services in most every other Latin American city hardly implies that the majority there live better...

...1. For a succinct discussion of the problems of central planning, see, Deborah Milenkovitch and A. Zimbalist, "The Economics of Socialism," in J. Eatwell et...

...5. National income, or net material product, in Cuba's MPS national income accounts roughly equals net national product in the SNA or Western system minus "unproductive" services...

...In 1959, between 80% and 90% of Cuba's industrial machinery and equipment stock was of U.S...

...Frequently, U.S.AID offers Caribbean Basin nations support for one or two steps of the process and for a limited time period...

...Most of its successes, as ses, as well as many of its problems, can be attributed to the state-dominated system so maligned by the United States...

...And it reveals even less about the capacity of the economy to provide for its citizens in the long term...

...The city's relatively quiet streets add to the impression of a system that does not work: There is less motor traffic and few of the raucous sounds of commerce that so characterize urban areas in the United States...

...Beyond nurturing initial projects, some states have undertaken various forms of economic planning, and have even come to own and manage enterprises...

...In the early 1980s, Cuba had over 20 R&D institutes related to capital goods with over 2,000 specialists.' Cuba's access to scientific training in the USSR and Soviet generosity in sharing technology and engineers have been vital to this process...

...It is also common to the Cuban and East Asian experiences that export promotion and import substitution--of such goods as rice, clothing, radios, televisions and medicines-have been pursued jointly as part of an overall development strategy...

...The social and economic impact of the Cuban package, however, was dramatically different...

...The U.S...

...Local producers usually can not count on having any of these...

...Due to different accounting methodologies, however, it is not clear whether the official investment series between Cuba and the Asian NICs are commensurable...

...It would be preferable to take gross investment as a share of gross material product, but a consistent series of gross material product is not available...

...The degree of industrialization achieved will improve Cuba's capacity to confront what is likely to be another phase of innovation enforced by growing isolation in the 1990s...

...Since 1980, Cuba has shown a strong performance in non-traditional exports-like shellfish, citrus fruits, medicine, iron and steel products and non-electrical machinery -particularly in comparison to the rest of Latin America...

...3. Land reform created a demand for industrial products used in agriculture, such as machinery and other inputs, as well as other industrial goods...

...The Cubans realized that an active and innovative state can create comparative advantage...

...The provision of consumer goods and the delivery of services, so deficient in Cuba, is not the only way of judging the health of an economy...

...Gestation periods for new products often run from one to four years...

...In such countries the state has been needed to protect infant industry, provide technical, managerial, financial and marketing assistance, offer tax credits or production subsidies, coordinate among enterprises, and assist in labormanagement relations...

...This stance spurns the conventional wisdom of the IMF and World Bank that countries should stick to those products in which they have a comparative advantage...

...Although the state is not necessarily "smarter" than the private sector, its perspective and potential command over resources often allow it to take a longer-run view, to invest in projects with large capital requirements and long payback periods, and to undertake complementary projects simultaneously...

...As in Korea in the late 1940s and Taiwan in the early 1950s, the 1959-1963 land reform in Cuba enabled resources to be channeled toward industrialization and rural areas to be integrated progressively into the national market...

...Naturally, the state's role differs with the circumstances and, generally, tends to diminish as the economy develops and becomes more complex...