Saturday, May 2, 2009

Cuba & the U.S. (7 of 11): The Cuban Economy

If you prefer, you can read the whole Cuba report as a PDF by clicking here.

Summary:  The Cuban economy cannot operate without substantial foreign subsidies, and it is deeply in debt.

The Cuban economy is socialist, and in accordance with the Constitution, it is directed and planned by the state (Art. 9a). The state owns the means of production and operates under the principle “from each according to his capacity, to each according to his work” (Art. 14). Except for a few small farms, private ownership is banned. Workers are allowed to join one and only one union, whose primary duty is to ensure that the state’s production quotas are met. The expropriation of private property is authorized “for reasons of public benefit or social interest and with due compensation,” but the compensation takes into account “the economic and social needs of the person whose property has been expropriated” (Art. 25): no wealthy capitalists need apply. Today the Cuban government says that 76% of the labor force works for the government, although the U.S. State Department estimates the total at more like 93%.

In the early 1990s, the Soviet Union collapsed and stopped subsidizing its satellites and allies. Cuba lost a significant portion of its revenue (an estimated $4 to $6 billion annually), and entered what the Castro brothers called the “Special Period.” From 1989 to 1993 the country’s GDP dropped by an estimated 35%. Raul Castro is sometimes credited with proposing to revive the moribund economy by action on the Chinese model: lifting some restrictions on business, trade, and tourism while maintaining strict political control.

Then, in 2000, Venezuela’s Hugo Chavez—an admirer of Cuba’s socialist programs—signed an agreement by which Venezuela sent some 100,000 barrels of heavily subsidized oil to Cuba daily, in exchange for assorted goods and services. By 2001, the economic reforms of the “Special Period” were being revoked.

In 1986, Cuba defaulted on most of its international debt. It has not resumed payments, and therefore is ineligible for loans from institutions such as the World Bank. When the Republic of Cuba needs to borrow to purchase food, it must do it at short-term rates of up to 22%.

Cuba suffers dire shortages of basic goods. Raul Castro spent a substantial portion of his “21st Century Socialism” speech (7/26/2007) discussing in mundane, boring detail how milk could be more efficiently distributed. The Cuban government made headlines a few years back when it bought rice cookers to distribute to housewives. Buried in the text of the story was the fact that the rice cookers were distributed because of their low energy consumption. Demand for electricity was overloading Cuba’s Soviet-era electrical system to the point where blackouts were common, even in Havana.

When there are shortages, Cuban leaders are wont to demand more sacrifices and order more controls as the economy worsens. In Raul’s “21st Century Socialism” speech, he called for “organized work, control and dedication, day after day; systematic rigor, order and discipline, from the national level down to the thousands of places where something is produced or a service is offered.”

As always, the inefficient state-controlled economy has spawned an “informal” economy where buyers and sellers exchange scarce goods at mutually agreeable prices. It has been estimated that 40% of Cuban economic activity is on the black market.

The Index of Economic Freedom (compiled by the Wall Street Journal and the Heritage Foundation) rates economic freedom based on such factors as tax rates, tariffs, property rights and government size. This year it ranked Cuba 177th out of 179 countries in economic freedom—trailed only by Zimbabwe and North Korea.

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