"The obstacle is political control if reform moves forward fast. We economists counter that if Cuba doesn't reform fast the authorities will definitely lose control."

‹ An unidentified economist in Cuba, quoted by Gillian Gunn in "Balancing Economic Efficiency, Social Concerns and Political Control," La Sociedad Económica, Bulletin 42, 1994, p. 12.

The Cuban economy is currently undergoing a continuing and severe contraction under the weight of its excesses and contradictions that is progressively weakening the anachronistic socialist system and also increasing social despair, unrest, and polit ical repression. There is alienation and impoverishment. This tragic situation is forcing a reluctant and arrogant communist party government to make necessary but insufficient policy changes and reforms, in the vain hope of forestalling a transformatio n to a new government committed to respect for basic human and economic rights, representative democracy and a market-based economy.

The communist authorities attribute Cuba's chronic and structural economic difficulties to the U.S. embargo rather than to the socialist system and their resistance to make major reforms. Not wanting to relinquish their exclusive control of governme nt nor to abandon a failed system, they tinker at the edges to forestall inevitable change, while trying to sell an image of a "reformist" government that is implementing "market-friendly" reforms. They are not considering people's feelings nor their per sonal dignity. They appear to be following the Chinese and Vietnamese models without adopting their main related market inspire reforms. The policies adopted and partial reforms have not solved the deep and long depression, high unemployment and inflati on, lack of proper institutions and low foreign investment. Cuba will emerge from the socialist period with a far weaker economy that it had in the late 1950's, both in absolute and relative terms.

While there is considerable debate about the degree to which the situation can continue to deteriorate in a country with Cuba's characteristics, escalating human and labor rights violations and deepening critical shortages of food and medicines are o f particular concern to those who see it leading inexorably to a plundering of national assets or selling and/or leasing natural resources at liquidation prices to foreigners and causing permanent damage to the population, which could stall future economi c rehabilitation and development. This, in turn, is likely to generate a new massive emigration of Cubans to the U.S. following a change in government, as happened in the case of Albania or, in any event, that the further the situation is allowed to wors en, the greater the likelihood of a violent ending to the present precarious regime. It is our firm conviction that while the extreme socialist nature of the system is maintained, the crippled economy will continue to deteriorate and disintegrate because of the system's inherent inability to provide for the people.

Ultimately it will be up to the Cuban people themselves to find a way out of this quagmire. This paper is based on the conviction that the systemic economic reforms required to reverse the declining standard of living of the Cuban people are inev itable and either entail or will induce fundamental and irreversible political change. Cuba has started to move slowly, but surely, and seems poised for sweeping changes that could finally unleash its economic potential. The force of economic necess ity is now driving stabilization and structural reform. The long-delayed own account work, "free" agricultural and industrial/artisan markets could give the momentum to push through a broad agenda of even more aggressive free-market reforms and impose th e right direction in the Cuban economic confusion. The genie of entrepreneurship and individual initiative is being liberated after many months of international pressures and out of sheer necessity and cannot be put back in the bottle. The valve will ev entually blow as in the case of the Chinese and Vietnamese models.

We begin this paper with a summary presentation in Section II of the protracted decay and critical socio-economic conditions that Cuba faces as a consequence of the failure of the revolution's economic system and misrule, that should be addressed by the government. The Cuban economy is characterized by severe and deep-rooted macroeconomic imbalance, structural distortions and overexpanded social services. Starved of foreign funds, Cuba is in an even worse position than could have been imagined five years ago. Section III includes a presentation of the economic measures and reforms adopted by the Cuban authorities in 1990-1994 ‹indeed a period of regress‹ and an analysis of their inadequacies and shortcomings, especially of those oriented towards stimulating a supply response that are paramount to face the crisis. Section IV presents an overall appraisal of the package of measures and reforms adopted to date and concludes with some final observations and prognosis.

II. The Unsustainable Critical Economic Course

"Cuba's economy showed signs of improvement last year but it is too early to talk of overall recovery...... 1994 ended with some positive signs, including increased foreign investment, a trend toward more balanced internal finances , and growth in tourism and domestic crude oil production."

‹ Carlos Lage as quoted by the Miami Herald, January 26, 1995, p. A21.

"What brought down Communism in Russia? An anti-Communist party? A coup d'etat by the army? Invasion by a foreign force? No. Communism was brought down by Communists who could no longer separate their people with an Iron Curtain from images of other parts of the world that were moving forward as they stagnated under repression. The truth could no longer be hidden."

‹ Shimon Peres, Washington Times, June 11, 1994, p. D1.

A.Historical Perspectives and Overview

The current economic crisis in Cuba is not just the consequence of recent events. Cuban economic trends since 1986 are a story of slowdown and eventual depression determined by blunder, mismanagement, stupidity and irresponsibility by authorities wh ose obligation to government was betrayed by their embrace of misconceived theories and ineptly-applied policies. The authorities precipitated and deepened a recession and failed at critical times to make the necessary corrections that would have ensured the country's rehabilitation as it struggled to survive a harsh external shock and the ensuing economic crisis. They were doing the wrong things and they were doing them badly. The results of these policies were temporarily concealed by Cuba's access t o substantial external transfers. Then they ran out of transfers.

In the 1975-1985 period, one of great turbulence in the world economy, Cuba was relatively isolated from two major oil price shocks, the decline in prices of raw materials and from the debt crisis that rocked the developing world. In spite of its in efficient economic system and artificial specialization in sugar built up over many years following a process of statization, some modest growth and progress in the social sectors took place as a result of massive economic assistance from the Soviet bloc, expanding foreign debt with Western countries and some liberalization measures implemented in the late 1970's and early 1980's. During this period, under the System of Economic Management and Planning (SDPE) sponsored by then-planning minister Hu mberto Pérez, there were positive and steady gains toward market mechanisms, material incentives, cost analysis, training of economists and managers, efficiency in capital allocation, and labor productivity. The government poured resources not onl y into social sectors, but also into a large bureaucracy, oversized armed forces, and inefficient state-owned enterprises paying for them with loans from Western creditors and by printing money. The USSR's assistance and foreign loans afflicted Cuba with the "Dutch disease." It rationalized an extreme socialist system with near absolute centralization in the exercise of power and elimination of market forces.

Although the partial and piecemeal market improvements did not receive enough opportunity to work, they were considered threatening by the top hierarchy and were thus brought to an end in 1986 with the "Rectification Process," when Cuba became the on ly communist regime that consistently backed off from market mechanisms and material incentives for work, while a wave of economic reforms was sifting through the socialist bloc. It was the triumph of dogma over elementary good sense. The general commit ment to extreme socialism became deeper in Cuba; in no other country was it so fully adopted as a guiding principle. Older, less educated, less sophisticated and more ideological technocrats and managers replaced Pérez's reformists. This left Cub a incapable of repaying even interest on its loans and it defaulted on its obligations to members of the Paris Club.

The status-quo-ante was essentially reestablished and this initiated the economic crisis that persists to this day. Five of the most important and popular institutions abolished were: (1) the Free Farmers' Markets (MLC) and the government parallel markets; (2) the handicraft markets; (3) the bonuses to motivate workers for increases in productivity and quality and reductions in cost; (4) private enterprise in a wide range of trades and services; and (5) private selling, rental and construction of housing. There was also a further integration of small private farms into state controlled cooperatives and several measures to increase control of labor and wages. Growing corruption and cynicism within the communist party and the state administration accompanied these reversals. The recent economic decline and current crisis is t he legacy of this shift back to a Stalinist command system and of over-reliance on bad economic policies and economic subsidies from the former Soviet Union.

Nonetheless, as had occurred during the Revolutionary Offensive in 1968 and contrary to official xpectations, the vitality and resilience of Cuban initiative and entrepreneurship was still alive in Cuba and thus economic disruption and chaos resulted . It was folly to believe that Cuban society could abandon the liberalization reforms and reenter a closed system that would behave according to false ethical and moral assumptions. Inefficiency and mismanagement increased steadily, contributing to the ensuing grave economic decline and dislocation. Since then, entrepreneurship has contained large doses of conspiracy and corruption.

The situation deteriorated abruptly as of 1989 with the cut-off of Soviet preferential trade and external transfers in the form of price subsidies, financing of the trade deficit, and development and military aid (see Table 1). The landing has been very hard.

In 1990 the Castro government enacted an austerity plan called "Special Period in Time of Peace," with people being moved to rural areas, as happened in Cambodia, to produce agricultural products for self-sufficiency. The main emphasis was on reduci ng non-essential consumption, egalitarian distribution and transfers to the unemployed. This resulted in a costly and highly disorderly adjustment ("shock without therapy") with a deep, long and inevitable depression characterized by a drastic decline in real incomes, unemployment and acceleration of inflation in the black market. More recently it adopted some changes in policies without undertaking sufficient macroeconomic adjustment measures, institution-building and liberalizing systemic reforms. Th e nature and specific design of its response has been ill-advised and plagued with inconsistencies, because the essential features of the socialist system have been retained. At times, especially from 1990 until August 1993 and in the first half of 1995, there has even been a paralysis in economic policy or at least a marked procrastination. The political wishes have overwhelmed the process of economic analysis, judgment and contingency planning. The government has stumbled tactically and strategically , and has lost macroeconomic control.

There is a downward economic spiral. Production is plummeting and unemployment is mushrooming. Labor productivity has nose-dived as employment has been artificially protected while production declined. Consequently, standards of living are falling substantially. This decline is the result of an abrupt encounter of an inherently inefficient system and overexpanded social services, military and administrative expenditures combined with no massive external aid. It is also the legacy of drastic allo cative and structural errors and failures, together with the absence of a required adjustment in the context of a very competitive and dynamic post-Cold War economic environment (e.g., NAFTA and WTO), where even Japanese, German and U.S. enterprises have aggressively reduced their own work forces and streamlined production. In this environment it becomes more difficult for governments to subsidize exports by state-owned enterprises.

Table 1. Cuba: Main Economic Phases , 1975-1994

Period	Main Characteristics
1975 1985:	Progress under "socialism with limited markets:" In spite of a very inefficient system, some progress was sustained by massive assistance from the Soviet bloc and indebtedness with Western countries, together with liberaliz ation measures adopted in the late seventies and early eighties.
1986 1989:	Retrenchment or stagnation under the return to recalcitrant and dysfunctional Stalinist socialism: The very inefficient system became strikingly evident and began to show signs of near-exhaustion as real foreign trade imbal ances mounted due to the counter-reform, or the repeal of the liberalization reforms of the previous period. An excessive debt burden with Western countries caught Cuba in the debt trap. This period set the stage for economic catastrophe.
1990-July 1993:	Deepening crisis under socialism: Steep decline in output due to the cut-off of massive Soviet bloc assistance. Slow reaction and reluctance on the part of the authorities to adopt m ajor stabilization policies, systemic reforms, and enterprise restructuring to arrest a sharp slide in living standards. The consequences of protracted microeconomic distortions and macroeconomic mismanagement were further exposed.
July 1993 1994:	Continued deepening crisis and beginning of the disintegration of the socialist system under a late attempt at "socialism with limited markets:" Continued decline has brought the crippled economy to the verge of collapse du e to ill-advised adjustment and destabilizing policies, insufficient systemic reforms and the strengthening of the U.S. embargo. Trends have been unleashed that are gradually testing the resiliency of existing institutions and values. There are ominous signs of increasing impoverishment and regressive income distribution.

The socialist regime was successful in developing widespread coverage in education, health and social security based on the extraordinary external assistance by the socialist bloc. However, the economic foundation of this widespread social coverage is, indeed, weak as the economy's deterioration has shown since 1989, and especially since 1991 (see Table 2). The authorities have erred to such a degree that Cuba is in the throes of a long-term systemic structural crisis and on the brink of economic d isintegration. The recalcitrant socialist system developed in Cuba is not viable.

According to two IMF officials who visited Havana in late 1993, the decline in the Cuban economy in 1989-1993 was much worse than the deterioration suffered by any socialist Eastern European country in the transformation to a market economy. By Dece mber 1994, the economic problems that have been building in the country since 1986 and that accelerated since August 1991 reached near-catastrophic proportions.

The Cuban economy is currently in a protracted depression with substantial and ever expanding imbalances: large excess demand at current prices, high unemployment and an increasing balance of payments constraint. Cuba is an undeveloping country, moving back into the Nineteenth instead of into the Twenty-first Century because it a ppears to have difficulty in coming to terms with democracy, market economics and intellectual questioning. This is the harsh reality under which any successor or transition government will need to launch a stabilization program and initiate comprehensiv e systemic reforms toward a market economy in order to un-block the production capabilities of the people of Cuba.

B.The Deepening Internal Imbalance (Depression, pervasive shortages and imminent prospects of hyperinflation)

GSP per capita dropped more than 50 percent from 1989 to 1994, the deepest and most widespread depression in Cuba's history (see Table 2). The economy is expected to shrink a further 5 percent in 1995. This spiraling decline makes the depression of the 1930's look like a minor incident. Open unemployment and disguised unemployment or under-employment have reached record double-digit highs and are expanding. Carlos Solchaga, an advisor to the government, estimated that 1 to 1.5 million workers out of a total of 5 million are out of work.

People are aware of their economic backwardness and that their steadily declining standard of living is rapidly moving toward that of a subsistence economy. Effective real wages have

declined as monetary wages have remained the same while goods obtained through meager official ration allocations have declined substantially and those obtained in the black market have increased. Also, there has been a marked increase in prices on the b lack market and at "dollar stores."

Real salaries are so low that they do not motivate people to greater work effort. The government tries to mobilize people and even school children to work "voluntarily," but real gross productivity is very low and net productivity is very likely neg ative. This reflects the incompetence and contradictions of a dogmatic system that does not use its most abundant factor of production ‹a relatively well-educated labor force‹ or uses it inappropriately due to improper material incentives.
Table 2. Cuba: Selected Economic Indicators, 1971-1993

Indicator	1971- 75	1976 80	1981- 85	1986	1987	1988	1989	1990	1991	1992	1993
% Annual change GSP	7.5	3.4	7.2	1.2	-3.9	2.2	0.1	-3.1	-25	-14	-10
% Annual change GSP per capita	5.6	2.5	6.4	0.1	-4.8	1.1	-1	-4	-25.8	-14.8	-11
Exports, FOB (CU$million)	2004	4.463	5.98	5322	5402	5518	5400	4410	3585	2300	2100
Imports, CIF (CU$million)	1990	3870	6311	7596	7584	7579	8100	6415	3690	2500	1700
Sugar prod. (million metric tons)	5674	7074	7819	7467	7232	8119	7579	8430	7620	7000	4200
Budget deficit as percentage of GSP	...	...	...	2	5	10	11	16	...	...	34
External debt in conv. currency (CU$million)	...	...	...	4985	5657	6606	...	...	6800	7600	7800

Sources: For 1971 to 1989: ECLAC, Economic Survey of Latin America, various issues; and ECLAC, Statistical Yearbook for Latin America, various issues. 1990-1993: The Economist Intelligence Unit, 1994 Report, and authors' estimates based on news reports, o fficial statements and articles published in Cuban journal.
An aging Fidel Castro blames external factors ‹the U.S. embargo ("criminal blockade"), the deteriorating terms of trade and natural disasters (hurricanes, rains and droughts)‹ to evade responsibility for the misery that is the result of internal factors: (1) an inherently inefficient, economically unstable and corrupt system that penalizes and blocks individual initiative and effort, increases risk, lacks proper incentives and institutions, and is thus plagued with poor organization and very low productivity; (2) overwhelming dependence on the former Soviet Union for economic assistance and trade; (3) excessive and artificial specialization in sugar; (4) overexpanded social services; and (5) very weak adjustment policies. Terms of trade have improved since mid-1994.

The overall public sector deficit skyrocketed due to the erosion of external transfers, artificially low prices for the goods and services of state enterprises (69 percent showed deficits in 1993), and salary increases for the armed forces. Waste, f raud, over-staffing and mismanagement dogged Cuban state enterprises and social services for many years. Public sector employment and expenditures in administration, military and internal security activities are unjustifiably high. Budget data available show persistent and escalating deficits, rising from about 2 percent of revenues in 1986 to 11 percent in 1989, 16 percent in 1990 and an estimated 34 percent in 1993. A wasteful and substantial amount of spending continues to be channeled toward defens e and internal security (more than 14 percent of GSP in 1993) which is an enormous drain on the economy. The social safety net expenditures increased from 17 percent of GSP in 1989 to 26 percent in 1992.

Up to 1993, there was a sizable monetary overhang ‹approximately 80 percent of GSP‹ which was the legacy of monetized high and fiscal deficits. Incomes did not decline as rapidly as production, and official prices showed only minor increas es. The excess monetary assets, limited real wealth and dwarfed productive capacity threatened the Cuban economy with hyper-inflationary pressures. There was triple-digit inflation in the black market in 1992 and 1993. This led to excess demand with in creasing shortages and spiraling black market prices in spite of widespread price controls and severe rationing of most goods and services. The black market boomed since 1989 in spite of increasing government restrictions. According to estimates by econ omists at Cuban quangos (government-sponsored or "quasi" non-governmental organizations ‹NGOs) black market transactions on consumer goods increased from 2 billion pesos in 1990 to 14 billion pesos in 1992, two-thirds of total transactions. T he almost-frozen price level is much too low relative to the stock of money; the excessive monetary stock is approximately 15 times the monthly wage bill and was expanding as a result of financing the fiscal deficits through monetary emission.

Therefore, Cuba had a mix of "repressed inflation" in official markets and soaring prices in the black market as recently as October 1994, when the "free" agricultural and artisan/industrial markets were reestablished. The symptoms of "repressed inf lation" become more acute every day; although inflation is still restricted in official markets, there has been a dramatic burst of inflation in the black market after the legalization of "dollarization" and the lifting of the ban on Cubans shopping in do llar stores, following which prices were doubled. Rationing is extended to virtually all consumer goods and current quotas are barely at a subsistence level. Ration allocations are slim to satisfy minimum consumer needs and are often not honored. Peopl e spend a significant amount of time in shopping queues, searching and bartering for food and other basic necessities, as well as feeling generally "hassled" and frustrated at not being able to obtain the most basic goods and services. Too much money is chasing too few goods. The poor and those without family abroad suffer the most because they cannot supplement the meager rations in the free markets, the black market or dollar stores. There are low levels of economic incentives to workers. A sort of societal depression has set in, with the people unable to envisage a better future in Cuba. Consequently, there is a deterioration of labor discipline, motivation and morale, and increasing cynicism, resentment, pessimism, tension, and even occasional bu t increasing demonstrations of social unrest.

Investment has been reduced drastically and there has been a significant deterioration of the capital stock. There is a clear inability to raise capital formation above a replacement level that would help reverse the economic decline. Unfinished in vestment projects were three times the new investment in 1991. Scarce resources needed for investment were used for constructing a network of tunnels and military fortifications in urban areas for unspecified purposes. There is excess productive capacit y, except in agriculture and tourism. Factories are forced to close or work only a few days or hours per week due to lack of raw materials and supplies, progressive deterioration of the industrial base, as well as major transportation problems for worker s. The transportation and communications infrastructure is in shambles and continues to deteriorate. The equipment is outdated. Impoverishment and environmental degradation are spreading. There is a huge and widening housing shortage. There is a lack of domestic financial assets in which people can save. The educational system is highly ideological, with an emphasis on marxist-leninist theory, designed to inculcate the commitment to failed egalitarian and communitarian ideals.

On the positive side, Cuba has a solid and broad skilled human capital base. Literacy rates, schooling and the proportion of university-trained professionals are among the highest in Latin America. However, most of the new university-trained profes sionals and skilled technicians do not have the opportunity to apply their skills and are becoming technologically obsolete due to the contraction of the economy. The excessive supply is wasteful because the openings are limited and the declining returns kill the incentives for the people to continue investing in human capital. There is a lack of books, pencils, etc. in schools. Medical supplies and medicines are in short supply. Nutritional, housing and basic hygiene and sanitary conditions have been declining rapidly and have reached very low standards as living conditions continue to deteriorate. Infectious diseases that were once thought to have been eradicated, such as tuberculosis and malaria, are returning. Malnutrition is now a problem. In 1993, UNICEF reported that half of all Cuban infants showed symptoms of anemia in the first year of life. This tragic social deterioration is threatening what many consider the main areas of accomplishment of the communist party regime ‹education, h ealth care, basic sanitation, and social security.

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