Cuba’s Economy and the Impact of American Engagement

Testimony Before the International Trade Commission

Mr. Chairman, members of the Commission:

I appreciate this opportunity to testify and would like to focus on sectors of the Cuban economy that have changed significantly in the past decade, and how economic relations with the United States would affect these sectors and U.S. interests.

I’ll summarize my statement as follows.

First, there is a private sector in Cuba. It consists mainly of incentive-based agriculture, joint ventures with foreign corporations, and microenterprise. Notwithstanding its limitations, this sector provides considerable benefits to the Cuban people and favors the interests of U.S. foreign policy. American engagement would expand it, adding to the benefits this sector brings to Cuban workers and their families, and increasing American influence in Cuba.

Survival in a post-Soviet world

Today, nearly a decade after the loss of aid, trade, and investment from the Soviet bloc, Cuba is no economic paradise. Many goods are scarce, peso salaries provide weak purchasing power, not all Cubans have an adequate diet, and infrastructure is in need of renewal across the board. However, growth has been restored (over 6 percent in 1999 and 2000 to date, according to official figures), and the peso has been stable at about 20 to the dollar since 1996. In Havana, one sees traffic jams and scores of construction and restoration projects in progress. Perhaps the most unique feature of Cuba’s economy is its duality; two economies operate side by side, one in pesos, one in dollars.

These are not ideal conditions, but they represent a recovery from an economic crisis that many observers believed was not survivable.

The recovery owes to many factors: austerity, family remittances, and a series of policy changes that are generating new sources of income and employment for hundreds of thousands of average Cubans.

Some policy changes are adaptations of the current system. State enterprises are not being privatized, but their subsidies are being phased out and they are being forced to meet financial targets. Ministries and state enterprises have downsized; the Ministry of Economy and Planning alone reduced its personnel by two thirds. The Revolutionary Armed Forces have also been downsized to such a degree that, according to a 1998 Pentagon assessment, Cuba’s military capability is now “residual” and “defensive.”

There is a private sector in Cuba

Other changes implemented in 1993 and 1994 represent more significant policy shifts that are introducing elements of capitalism to Cuba’s socialist economy.

Foreign investment in Cuba is relatively small – estimates range from $2 billion to $3 billion since 1993 – and because of Cuba’s legal and regulatory environment and other factors, in most areas Cuba is not a strong competitor for inward investment in the Caribbean basin.

But after a three-decade drought, the impact of relatively small amounts of capitalist investment is significant. A tourism industry with hotels, resorts, restaurants, retail shops, and ancillary services has been built virtually from scratch. Nearly two million tourists are visiting Cuba this year, about 40 times the amount of the late 1980s. Foreign investment has boosted mineral and energy production. It has also improved telecommunications by modernizing infrastructure and providing better customer service.

These investments take the form of joint ventures with state entities, so they do not represent a devolution of decisionmaking to a private sector. But they do have an impact on their Cuban workers and managers. They receive training from the foreign partner, whether in international business practices, customer service in hotels, or mining methods and safety. They also receive better pay than Cubans who work for the state, because in addition to their standard peso salary, many receive pay supplements, either in dollars or in kind. This is in spite of a steep labor tax that is paid by the joint ventures through the employment agencies that are technically the employers of the joint venture workers.

Here are examples drawn from my interviews with workers across Cuba. A shift manager at a nickel plant in eastern Cuba operated by a Canadian-Cuban joint venture earns 460 pesos monthly plus a bonus paid in dollars that averages $70 per month. (This compares to the average Cuban salary of 223 pesos per month.) A hotel cleaning woman at Varadero earns a 267-peso salary plus a $4 supplement, plus $10 that represents her share of pooled tips that are distributed to all workers. Nearby, the “Superclubs” resort pays a $40 monthly supplement. At the phone company ETECSA, a profit-sharing fund adds $10 monthly to an operator’s 200-peso salary, doubling her earnings.

Agricultural reform is also having an impact. It has three principal aspects.

First, Cuba redistributed about two-thirds of state lands to cooperatives and individual farmers.

Second, farms and cooperatives, regardless of size, type of organization, or ownership, now have material incentives to increase production. They are now permitted to sell their surplus on the open market once they have delivered their contracted quota to the state.

Third, farmers markets were opened in October 1994 to bring this surplus to consumers in a new, legal channel of food supply that complements the state’s distribution system.

This quasi-private surplus production is the source of supply for the 304 farmers markets that operate throughout Cuba, 49 in Havana alone. At these markets, prices are high for Cubans earning pesos only (a pound of pork costs five percent of a doctor’s monthly salary, about fifteen percent of a worker’s pension), but they bustle with customers, and they are competitive.

Small business has made a start in Cuba. Among Cuba’s reforms, this one represents the most significant grant of autonomy to individuals. Simply put, it was illegal five years ago for a Cuban citizen to quit a job and set up shop as a carpenter, food vendor, locksmith, restauranteur, or mechanic. Today, these and other activities are legal, and about 160,000 Cubans, 4 percent of the workforce, are working as licensed entrepreneurs.

This is not a small business economy of the kind that you or I would set up if we were writing the rules. Most are one-person businesses, prohibited from hiring employees. Restaurants are limited to twelve seats. For most, there is no wholesale supply market. Cuban officials say that future policy changes may address these issues, but it is not clear when such changes might take place.

Many entrepreneurs chafe at the limitations imposed on their business activity. They do not like paying income taxes, which were re-instituted in Cuba after being abolished for 36 years. They dislike regulations and inspectors, and some tell stories of arbitrary decisions by inspectors enforcing regulations.

Still, they take advantage of the opportunity before them, and many succeed. Based on a survey I conducted in 1998, their average earnings are 3½ times the average Cuban salary. They value their autonomy; “Here, I am the boss,” they say, like entrepreneurs everywhere. They are re-learning the arts of entrepreneurship and service, giving new vitality to cities and towns that were devoid of commerce just 7 years ago. And they have created a powerful and visible example, showing that an economic reform of this type can succeed.

Cuba’s new economy – what it means to Cubans

Cuba has not abandoned socialism. However, the reforms outlined above have created what I call Cuba’s “new economy” – a sector of farmers, market vendors, entrepreneurs, and joint ventures that is the dynamic part of Cuba’s economy, and that functions according to market concepts, not state planning. The workers in this new economy have these characteristics in common:

• They are in jobs that did not exist a decade ago.
• They are working in market settings where considerations such as accountability, productivity, cost control, and customer service are important.
• Their income is tied to their output.
• They are all earning far more than the average worker in the state sector.

The public welfare impact of this sector is best illustrated by the food it puts on the table. As a measure, take a simple market basket of one pound each of pork chops, rice, and black beans; two pounds of tomatoes; three limes; and one head of garlic. Whereas it would take a Cuban day care worker nearly 6 days to earn enough to buy that basket and a Cuban with the nation’s average salary 4 days, it would take the average entrepreneur 1.2 days; a nickel worker at a joint venture, 1.1 days; and a farmers market vendor, 6 hours. (See data in Appendix I.)

The likely impact of American engagement

The commission is attempting to determine the impact of economic sanctions on the Cuban economy. Because the embargo’s impact is negative and one can’t measure the number of visits, contacts, and transactions it blocks, one can only speculate in measuring its impact. However, several predictions can be made with a high degree of confidence.

When sanctions end, the main immediate impact will be political and symbolic.

The end of a 40-year U.S. policy aimed at weakening the Cuban economy and isolating Cuba would be an important political signal in Cuba and in the hemisphere. It would respond to the calls of independent Cubans who oppose economic sanctions as inhumane and ineffective (see Appendix II).

An opening of economic relations will be neither a panacea for the Cuban economy nor a bonanza for American business.

Cuba’s economy is fundamentally shaped by socialist policies. Foreign trade alone will not produce the change that increased space for private initiative, de-centralization of decisionmaking, or a thorough overhaul of state enterprises would bring.

The degree of opportunity for U.S. business depends on the conditions and policies in place when sanctions are lifted. Regardless of those circumstances, however, the short-to-medium term opportunities in a market of 11 million people will be interesting for selected companies but modest for the overall U.S. economy.

In agricultural trade, it is not likely that U.S. suppliers would immediately displace all other exporters who have developed relationships with Cuban customers. Countries that subsidize agricultural sales are likely to maintain their market share, while sectors such as rice, where Cuba buys from Asian sources on commercial credit terms, would likely shift to U.S. suppliers. Investment opportunities would be limited by Cuba’s selective approach to forming joint ventures, and potential American partners would be in competition with businesses that have established ties to Cuba and a record of doing business.

Predictions that Cuba has no money to buy imports are wrong.

In the U.S. political debate it is often claimed that Cuba is incapable of importing for financial or other reasons. This is wrong. In spite of its economic difficulties, Cuba clearly has sources of foreign exchange with which to buy imports. Official data indicate exports of approximately $4 billion in 1999.

With world sugar prices depressed, Cuba’s recent sugar harvests have yielded relatively low earnings – but tourism, nickel, tobacco, and other export products have begun to replace this traditional source of export earnings. Ironically, Cuban-Americans provide large flows of foreign exchange through remittances and telephone revenues, which provide, by very conservative estimates, $50 million per month.

Some trade would benefit public welfare in Cuba.

Lower-cost food and simplified purchases of U.S. medicines and medical equipment would be likely to make food and medical care more accessible and affordable for the average Cuban.

Even a limited U.S. opening would spur significant growth in Cuba’s new economy.

It is possible that trade with the United States could alone produce efficiencies that would result in benefits to Cuban workers and their families. However, it is clear that American direct investment and an end to the travel ban would produce concrete benefits of this type.

If American companies were permitted to form joint ventures in Cuba, they would expand a sector that generates high-income employment for Cuban workers and helps Cuba’s economy make a transition toward markets and capitalism.

The end of the travel ban would further increase Cuban citizens’ purchasing power, as spending by U.S. visitors – through tips and purchases in private restaurants, art markets, taxis, and other small enterprises – would increase aggregate demand for the services offered throughout Cuba’s new economy.

This would occur through simple multiplier effects. The hotel maid who earns dollar tips may pay a seamstress who has a home business. A miner may spend his dollar pay supplement in a farmers market, increasing the market vendor’s income and spurring increased demand for private farmers’ production. An artist who sells paintings to tourists can afford to pay assistants and vendors, and has disposable income to spend in farmers markets and on the services of neighborhood entrepreneurs. These impacts, which already result from family remittances, would take place even in the absence of liberalization in Cuban economic policy.

In sum, economic engagement would more effectively and more immediately serve the interests that current U.S. policy aims to serve through a regime of severe economic sanctions.

Engagement could spur further reform.

Many observers in and out of Cuba argue that reduced tensions with the United States would create a political climate in Havana that is more conducive to further economic reform. The past decade’s experience indicates that internal factors, not the posture of foreign countries, determine how and when Cuban reforms are implemented or stalled. It is also conceivable that, for reasons of history, size, and geography, an end to the U.S. embargo would have an impact far larger than that of other countries. This kind of influence is conceivable, but its likelihood is impossible to gauge, and ultimately it is a question that Cubans will have to answer.

Appendix I

Free-market food: what it costs…

Market basket prices at selected markets

• December 1996, Havana 50.5 pesos
• March 1998, Havana 46.00
• October 1998, Havana 49.50
• February 1999, Havana 44.25
• February 1999, Santiago 35.50
• March 2000, Havana 39.25
• March 2000, Santa Clara 33.60
• August 2000, Havana 43.40

Basket consists of one pound each of pork chops, rice, and black beans; two pounds of tomatoes; three limes; and one head of garlic.

…and who can afford it.

Work time required to pay for a market basket for Cubans in selected occupations

• Retiree with pension 7.2 days
• Day care worker 5.8 days
• Cuban earning average national salary 4 days
• Teacher 2.7 days
• Deputy director, state enterprise 1.9 days
• Emergency room doctor 1.9 days
• Average entrepreneur 1.2 days
• Nickel worker in joint venture 1.1 days
• Cigar factory custodian 7 hours
• Farmers market meat vendor 6 hours
• Private taxi in Havana 3.5 hours

Calculations based on March 2000 prices in Havana farmers markets and salary levels recorded by author during the past two years. Average national salary (223 pesos in 1999) published in official Cuban data; average entrepreneur earnings based on author’s survey of 152 entrepreneurs in 1998; all other salaries are based on interviews with individuals; they do not represent occupational averages. Cigar factory custodian’s earnings include salary and performance-based bonus. Market basket prices recorded by author. Havana prices are averages of prices at several markets.

Appendix II

Cuban commentary on U.S. economic sanctions

“Total embargoes which affect essential products for the people, including the food and medicines which are essential for the population, are ethically unacceptable, generally violate the principles of international law, and are always contrary to the precepts of the Gospel.

“The political use of an embargo to show disagreement or disapproval of a government directly affects the people who suffer the consequences in hunger and illness. If what is intended by this approach is to destabilize the government by using hunger and want to pressure civic society to revolt, then the strategy is also cruel.”

Statement of Cuba’s Catholic Bishops
October 2, 1992

“…America should lift its embargo on sales of food and medicine to Cuba, a prohibition that violates international law and hurts the people, not the regime. Denying medicine to innocent citizens is an odd way of demonstrating support for human rights.

“[Cubans] must begin reforms that offer hope to all. But less rigidity on the part of the United States would do a lot to help that change begin.”

Elizardo Sanchez, director of the Cuban Commission for Human Rights and National Reconciliation, in a New York Times op-ed column, April 22, 1997. Sanchez is pre-eminent among Cuban dissidents and has spent nine years in jail.

“The U.S. economic embargo against Cuba, in all its expressions, goes against the will and the needs of Cubans, and for that reason it should end. So if it is a question of solidarity, that solidarity can not lead to measures that increase the difficulties of the population. Solidarity implies looking to the people of Cuba and taking steps that contribute to overcoming the tensions between the two countries…

“We request that you take a first step, above all for justice and also in good faith toward the people of Cuba by lifting, unconditionally, the embargo against Cuba in food and medicines.”

Oswaldo Payá, leader of the Christian Liberation Movement, in the Movement’s “Message to the Government and Congress of the United States of America,” November 23, 1996

“The United States erected… a complex policy of unilateral pressure with new and controversial instruments that has demonstrated, through the years, its inability to attain its objectives…. [The embargo has] allowed the Cuban government to present itself as the only defender of the interests of a threatened nation.”

Statement of the Democratic Socialist Current dissident group, reported by the Associated Press, April 13, 1994

“Leaders of various dissident groups in this region declared themselves in favor of the sale of medicines and food from the United States to Cuba.

“Santiago Torres González, executive of the José Martí National Human Rights Commission; Margarito Broche Espinosa, President of the Balseros Peace, Democracy, and Freedom Association of Caibarién; and Rolando Cabello Carba, delegate in Camajuaní of the Democratic Solidarity Party, issued this statement for the organizations they represent.

“The dissidents consider that the lifting of these restrictions by the United States of America would benefit the Cuban people, who are tired of the [Cuban] government justification that the trade embargo is to blame for [Cuba’s] political and economic crisis.”

“Dissidents support trade with United States,” report of Juan Carlos Recio Martínez, independent journalist, datelined January 12, 2000, Villa Clara

PHILIP PETERS, a State Department official during the Reagan and Bush administrations, is vice president of the Lexington Institute in Arlington, Va.