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    CHANGE IN CUBA?

    CHANGE IN CUBA?
    12-08-2011.
    Paul Meo
    Former official of the World Bank with a very extensive experience in
    developing countries and a long term member of ASCE

    (www.miscelaneasdecuba.net).- The early August meeting of the
    Association for the Study of the Cuban Economy (ASCE), held in Miami ,
    was different from some of the more recent ones. First, there were few,
    if any, papers presented on the "Transition" in Cuba .

    Partly because the Castro brothers rival Adenauer in longevity, partly
    because there is nothing novel left to say, and partly because the
    proposed governmental changes are more interesting, the academics,
    retired Bretton Woods institutional staff, consultants, bureaucrats, and
    others who make up the membership decided the Transition was not a
    priority. Secondly, there were far more defectors, at least recent
    ones, than before. It was jarring for me to encounter a Cuban who had
    been head of an agricultural brigade in the People's Republic of Yemen
    while I had been there on a World Bank mission.

    Some Cubans sent their papers via the internet, and there was even
    one–who presented an apolitical paper–who had been given an exit visa
    to attend the conference. There seemed to be far better information
    available on what was happening in Cuba , although the modelers and
    other theoreticians continued to successfully ignore reality when
    necessary.

    Last November, the authorities issued some 270 "Lineamientos"
    (guidelines) to be considered by the VI Party Congress. The Congress
    met in April, after almost a dozen years of hiatus, and spent a whole
    day reviewing and approving the guidelines. In the event, with changes
    and additions, about 300 "agreements" were published, and these will
    serve for the restructuring of the Cuban economy over the next few years.

    Many of the agreements were hortatory–demanding better discipline, more
    unity, better efficiency, etc.–and others were mildly
    inconsistent–expanding the private sector (the word "private" is still
    verboten in Cuba; it is called the "non-state sector") while increasing
    taxes on it massively–so the more sensible presenters (and I)
    concentrated on the few that might make a difference.

    For years; indeed, shortly after the departure of Fidel from the scene,
    the ASCE consensus has been that Raul Et. Cia. would produce very little
    change in the Cuban economy. This has been true since 2005; very little
    has indeed changed. Things may (I say "may" with reason) change in the
    future, but not really because of the VI Congress agreements.

    There are some important decisions among the trivial.

    First, the decision to downsize the public sector workforce by 500,000
    has been validated by the Congress. While the timeline of March 2011,
    has not been met (only about 250,000 have been shed), the new timeline
    of end-2011 has been agreed to by the Congress. Indeed, further
    downsizing was also agreed, with a total of 1.8 million to be shed by
    end 2014. While all sorts of barriers can be foreseen–military
    objections (the military now run the majority of public enterprises),
    slow generation of non-state jobs, bureaucratic obstacles–the Cuban
    regime has decided that government employment will not be the answer.

    Secondly, while the famous 178 "own account" non-state activities were
    expanded to almost 200, and even within their context expanded (e.g.,
    "paladares" (private restaurants) can now have places for up to 50, from
    12), and non-family members can be employed in some activities
    (particularly private agricultural ones), there was no permission
    granted for establishing small, private businesses. Hence, most private
    sector expansion must be in small service activities (small restaurants,
    barber shops–which the state has now turned over the barbers,
    entertainment activities, beauty shops, taxis, etc.) and not in even
    relatively (say, 50 employees) small businesses. Even the
    professions–law, accounting, etc.–remain verboten for the private
    sector. It is hard to see how this can generate sufficient employment
    for over one third of the public work force to be downsized by 2014!

    Thirdly, the Congress agreed to allow private ownership of housing; this
    to begin by the end of this year. This will obviously have a major
    effect, since mortgages, inheritance expectations, and construction will
    be massively affected if (IF!) the housing decision is liberally
    interpreted. Stay tuned for this one.

    Finally, the Congress validated and encouraged an acceleration of
    "usufruct" standing for farmers, whereby they can decide what, when, and
    how to produce on land they are granted tenure for. But there was no
    decision to grant title to the farmers, and the need to accelerate the
    turnover stems from the desultory process used so far. (One speaker
    asked how you translate "usufruct" into plainer English; I suggested
    "sharecropper" since the resemblance to that is amazingly close).

    Pari passu with these output changes, there are others that will greatly
    affect Cubans. The Tea Party has hit Havana ; government expenditures
    are being greatly curtailed. The ration book has been greatly
    condensed; many cheap products are now only available on the "market" or
    black market. Many state firms had canteens to feed the workers; most
    are being closed. Pensions will not be nominally increased; they have
    been declining in real terms for years. The education budget has been
    cut, and the need for foreign exchange has led to many doctors being
    sent abroad. While Raul promised recently to expand medical education
    and focus more on domestic medical services, they are now so abysmal
    that hospital patients are dying of neglect and even malnutrition.

    But not all the Tea Party program has arrived; taxes have been
    increased. Many Cubans pay one third of their income in taxes, and "own
    account" workers pay far more. (The minimum salary–which is relatively
    close to the average– is now about US$17-18 a month!)

    The Congress was also an obvious attempt by Raul to institutionalize
    what has been so far a family-run dictatorship. Party procedures have
    been restored, empty positions filled, and new faces abound (Raul
    recently replaced all of the provincial governors with younger
    stalwarts). By keeping 70 percent of the public sector management
    within the military, Raul probably also expects he can force
    implementation of his changes more quickly; he publicly stated he wants
    to move from chaos to socialism. (Where has he been the past 52 years?)

    Now, on the face of it, these changes are both partial and
    disappointing. While Cuban data continue to show a relatively buoyant
    economy, independent estimates indicate per capita income is still below
    that of 1989, the fiscal position is abysmal, and the external situation
    even worse. Cuba 's recent sugar harvest, for example, was the worst in
    a century. Tourism, the chief export earner, has been relatively
    stagnant for three years, as has Venezuela 's financial support. In
    spite of the agricultural reform–begun two years ago–food production
    remains stagnant. Cuban debt arrears continue to grow, and the country
    is "off cover" for all but the Chinese, Brazilians, and Venezuelans.
    The only growth item comes from Obama's decision to allow unlimited
    remittances and visits by Cuban Americans.

    The economy confronts three major structural problems: the state
    enterprises are mostly dysfunctional; Cuba has extremely low, overall
    productivity; and gross investment–after years of being negative on a
    net basis–is still barely above depreciation levels. No sane person
    expects "taking in each other's laundry" will reverse these, let alone
    generate enough productive jobs to absorb the over third of the public
    workforce being fired over the next three years.

    But. But I believe change (or "informal" reforms) may accelerate.
    First, one has to realize that Cuba is no longer a "hard state" when it
    comes to economics. Corruption is rampant; so rampant that virtually
    every head of a foreign-linked sector—Cubana airlines, tourism, tobacco,
    rum–has been convicted of corruption. Even Pedro Alvarez, once the
    all-important head of ALIMPORT who used to negotiate deals with US farm
    groups and state Governors, has been tried and convicted. (Like most
    Cuban officials, on release from prison he headed for the US ; he now
    resides in Tampa .)

    To understand how irrelevant the VI Congress is, simply click on
    www.revolico.com and note the many homes "for trading." While you can
    barter homes for homes, it is illegal to include cash or other payments
    in the deal. This is done openly with no (yet) punishment. Given the
    tax burden on "own account" workers, few register or pay taxes; or
    rather they pay only nominal sums to the block warden of the "Committee
    for the Defense of the Revolution." Tips are now illegal in resorts
    patronized by foreigners. This is treated as a joke. Prostitution
    abounds; crime is rampant; education, health, and other vaunted public
    services are often provided only after bribes.

    Pandora's box is now open. Recent foreign observers quickly note that
    there is less obedience of even the most sacred laws; folks openly
    disparage the government; and there seems to be greater economic freedom
    than ever. Understandably, while–as noted above–the formal statements
    still genuflect to Marxism, there is far less rhetoric about the glories
    of socialism as the social safety net is reduced, public workers are
    fired, and 52 years of that persuasion have ended in economic disaster.
    Fidel is now history. Alive, occasionally writing columns on world
    events, and trotted out to embrace Chavez (and visiting US Senators), he
    is otherwise ignored on policy issues. All those linked to him and of
    less loyalty to Raul are now gone.

    A cynic would remind us (and one did) of the reforms of 190-85, and of
    1993-95, when the economy confronted disaster. As soon as the
    challenges were ameliorated, the "reforms" (far more timid than those
    now underway) were reversed. But there now seems no savior in sight.
    Whatever happens to Chavez or Venezuela , it is obvious that Venezuelan
    subsidies will not increase. The state enterprises remain among the
    least productive in the world. The authorities have recently increased
    taxes on tourism. The declining infrastructure and desultory service
    mean that Cuban tourism sites are now fairly uncompetitive with other
    Caribbean spots, let alone the now cheaper Florida options. In spite of
    the agricultural reforms, including the closure of two-thirds of the
    (inefficient) sugar mills, agricultural production continues to fall.

    Thus, I–for one–believe the move towards a market economy is now
    irreversible. The corruption combined with the desperation of Cubans
    will quickly expand the private activities from legal to illegal
    micro-enterprises (already occurring) and then to small and medium-sized
    firms. One example; a recent traveler to Cuba noted that one private
    restaurant had valet parking, a singer, and other ancillary attractions.
    All are still illegal. Timid house ownerships regulations, when they
    come at the end of the year, will likely lead to a total freeing of the
    housing markets. Banks may now lend directly to people; while they have
    yet to do so, I expect this to accelerate once the bankers receive the
    appropriate incentives–bribes.

    Then there is the recent and massive increase in immigrant remittances
    and travel by US citizens to Cuba . I did not write "Cuban-Americans"
    because it is clear the Obama Administration will let anyone travel to
    Cuba . In the last year of the Bush Administration there were 1500
    citations sent to Americans for illegal travel to Cuba . Since Obama
    took office there have been 19. One of the student papers presented
    included anecdotes from a recent tourist trip to the island. Foolishly,
    I commented to some Cuban-Americans that the student must have been
    Canadian since she was not of Cuban origin and her trip was–as
    noted–pure tourism. I was immediately deluged with example after
    example of travel by ordinary Americans as simple tourists; the travel
    agencies which package the tours are often forgetting to include the
    "research" or other legal reason for the trips. Canada has replaced
    Spain and Italy as the most important tourist provider as Cuba
    increasingly deters "immersion" tourism (ie, city-tourism, where
    linguistically capable Italian and Spanish tourists can mingle with
    ordinary Cubans) and concentrates on resort tourism. And the US is fast
    becoming one of the top five tourist providers.

    Since the US already ranks fourth in Cuban merchandise trade and
    provides two thirds of the remittance flows, you can quickly understand
    how the "blockade" is working. And these flows have led to some
    interesting results. Micro-credit is now available to Cubans; a system
    has arisen by which a family member in the US guarantees the credit and
    the Cuban then receives the loan. Remittances were the source of over
    half the "own account" activities surveyed last year. And illegal
    housing purchases are often made by proxies of Cuban Americans buying
    retirement homes. Farmers expanding their new "usufruct" activities
    often can do so only because of immigrant remittances.

    While all this will lead to steadily deeper and more helpful "reforms"
    (actually, the expansion of the informal economy, with legality
    hopefully following after a lapse), there seems little reason to expect
    a major or significant shift quickly. Chavez' health, the continued
    role of state enterprises, the uncompetitive nature of the overall
    economy, remain.

    Cuba is very likely to find significant deposits of oil. A Norwegian
    fifth-generation drilling vessel costing $750 million was launched in
    Singapore recently and hired to drill north of Havana by Repsol and
    other European (and Chinese) firms. It cost $450,000/day and will
    likely make five to seven attempts. You don't spend that kind of money
    unless you are reasonably certain something will turn up. But even the
    most optimistic estimate of Cuba's possible reserves indicates Cuba
    might become self-sufficient (it consumes under 150,000 bbl/day) in the
    longer term; and if oil is found next year it will be five years before
    it becomes available. The Venezuelans and Chinese are building two
    150,000 bbl/day refineries: one on the south coast near Cienfuegos
    (actually, this is being renovated and expanded), another on the north
    coast for processing Chinese crude from South America . These, however,
    are projects that will both take a few more years to complete and offer
    few jobs and little foreign exchange (refining is the least profitable
    of petroleum activities; and off-shore ones are notoriously parsimonious
    to their hosts). Cuba now has agreements with over 90 countries to
    provide medical professionals. From Pakistan to South Africa , from
    Qatar to Bolivia , Cuban doctors and nurses labor at Cuban salaries
    (about $20/month) while the host governments pay 10 times or more to the
    Cuban government. (This, of course, violates a series of ILO
    agreements, but as usual the "international community" ignores it.)
    Most–probably 30,000 out of 50,000–are in Venezuela and likely
    ensuring Cuba receives free oil (in fact, Venezuela should charge
    $27/bbl, but since Cuba never pays it is free). Given the effect
    exporting doctors and nurses has had on the domestic health scene, Raul
    has announced he will be expanding Cuba 's doctor-training capacity to
    100,000/yr. (This compares to about 2/3 that in the US , and is
    probably as credible as the 10 million to sugar harvest attempted years
    ago!) Nevertheless, this income will likely grow in the future,
    although it will depend on finding new markets for the doctors/nurses…

    Finally, the usual cautionary note. While I am quite convinced the move
    towards economic markets is virtually irresistible, if chaotic and
    "illegal" in most cases, I have no crystal ball on its effect on Cuba 's
    political scene. Raul continues to beaver away, institutionalizing the
    dictatorship in the hope it will last when he and Fidel are entombed.
    The military remains strongly in control of both the economy and the
    government, if complemented by some younger civilians in provincial
    posts. And Cuba 's police remain as effective as ever–using access to
    education, other social services, rationed food, etc.–in controlling
    most dissent before it becomes public. The Arab Spring has not hit
    Havana . But the desperation of Cubans, the increasing policy conflict
    between downsizing public work forces and limiting the growth of
    alternative, private work alternatives, and the likely departure of
    Chavez, Fidel and Raul from the scene could lead to a revolution. An
    ex-Diplomat privately noted that the political scene seemed far more
    fragile today than it was when the USSR withdrew its support. We'll
    simply have to wait and see what happens…. Paul Meo

    *************

    One question: Was concrete information presented in the conference
    showing that indeed 250,000 workers have been dismissed from the public
    sector? The last I have heard is that they have punted and extended the
    deadline for reducing the public sector payrolls a few years down the road.

    The "punting" was over the 500,000 downsizing target, which was
    supposed to be achieved by end-March 2011. The even more massive
    target–1.8 million–is supposed to be achieved by end-2014. One
    presenter noted that by the VI Congress (April 2011) the authorities had
    indicated only 200,000 to 250,000 had been downsized, so the timeline
    for the half-million was extended to end-2011

    http://www.miscelaneasdecuba.net/web/article.asp?artID=33266

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