Cuba--is the "special period" really over?

Abstract

Since 1989, Cuba has struggled to recover from the loss of Soviet trade and subsidies. The Cuban government dubbed the period between 1990 and 1994 "A Special Period in Peacetime" in recognition of the 35% decline in GDP. Instead of restructuring its economy, the Cuban government used a bandaid approach that permitted self-employment, raised prices, legalized the dollar, and decreased government subsidies of state enterprises. Although growth resumed in 1994, the Cuban economy never fully recovered to pre-1989 levels of GDP. This paper discusses the investment, trade, and production problems that continue to plague the Cuban economy. (JEL O10, F14, F20)

Introduction

 
     True revolutionaries never surrender, never sell out, never betray. 
     That is for cowards, traitors and opportunities. None of us want 
     that trash that [capitalists] are offering us. We prefer any 
     sacrifice, any fate to that of capitalism. [Castro, 1992, Havana 
     Radio Address, quoted in Mesa-Lago, 2000] 

The Cuban president, Fidel Castro, named the period between 1990 and 1994 the "Special Period" in Cuban history. The "Special Period" refers to the economic malaise experienced by Cuba subsequent to the collapse of the Soviet Union. Without the economic support of the Soviet Union, the Cuban economy faced a sharp decline in GDP. During this period, Cubans faced a period of hunger and privation. Within a few years of the Soviet collapse, the Cuban economy began to grow again with the help of new trading and business partners: Europe and Latin America. Despite their help, Cuba never fully recovered from the "Special Period" and may actually be sinking back into a serious economic decline.

Conditions in Cuba took a turn for the worse in Spring 2003 when Castro arrested and imprisoned approximately 75 economists and journalists and executed three hijackers after a 20-min trial. Based on these and other human rights violations, Europeans and much of the world condemned Castro's regime and withdrew vital economic support. Castro's economy was already stumbling badly from weather and structural problems that had devastated the sugar crop.

Cuba never fully recovered from the Special Period and may face another serious economic decline. This paper will discuss the Special Period; current economic conditions; and problems related to foreign investment, U.S. trade relations, exports and production, and lack of support for entrepreneurs. This analysis is followed by recommendations that require long-term structural changes in the Cuban economy.

The Special Period

The fall of the Soviet Union in 1989 devastated Cuba's already weak economy. (1) Cuba's economic survival depended on Soviet development aid and trade subsidies (in which sugar and nickel were exchanged for oil at favorable terms of trade). Trade with the Soviet Union and CMEA block peaked in 1987 with 87% of Cuba's trade and had declined to a still formidable 79% by 1989. Between 1986 and 1990, Cuba received Soviet loans amounting to US$11.6 billion and an additional US$10 billion in non-repayable price subsidies. Cuba's debt with the Soviets and CMEA in 1990 was between US$10 billion and 30 billion. Cuba's total external debt in 1990 amounted to US$37.6 billion, which was the highest per capita debt in the hemisphere [Mesa-Lago, 2000].

Castro named the early 1990s the "Special Period in Peacetime" (Periodo Especial en Tiempo de Paz). And a special period it was. Between 1989 and 1993, GDP declined 34.8%, consumption fell 30%, gross investment fell 80%, exports fell 78.9%, and imports fell 75.6% [Brundenius, 2002; Perez-Lopez, 2002]. The ensuing food shortage decreased caloric intake by 38% from 2,908 calories per day per person in 1989 to 1,863 in 1994 [Rosenblum, 2002].

During the early 1990s, Cuba faced several major economic problems: (1) a fuel shortage that caused shutdowns, electricity blackouts, and transportation shortages; (2) production declines in agriculture, mining, and manufacturing; and (3) severe fiscal and monetary problems. Between 1989 and 1993, the budget deficit grew from 7.3% of GDP to 33.5% of GDP. In addition, cash balances and checkable deposits increased from 21.6% of GDP to 73.2% of GDP. Cubans were unable to spend their money on non-existent goods and services. The unofficial peso-dollar exchange rate rose after 1990 to peak in 1994 at 130 pesos for US$1. The black market in dollars and goods was seriously undermining any attempts to control money supply and inflation [Mesa-Lago, 2000; Perez-Lopez, 2002; Brundenius, 2002; Leogrande and Thomas, 2002]. Castro knew something had to change, but was afraid that market reforms would undermine Cuba's social system and eventually threaten the government's political control.

As a result, Cuba decided on a "bandaid" approach that would address the short-term crisis without making the structural changes that would have insured long-term economic health. So, in 1993 the Cuban government passed several reform measures. To stem the black market in dollars and encourage remittances from family members in the U.S., the U.S. dollar was legalized. The state established "dollar stores" referred to as TRDs (Tiendas de Recuperacion de Divisas). The items sold in dollar stores are often imports or domestic goods not available in peso stores. The government then charges very high prices in an attempt to obtain hard currency. In addition to recognizing the dollar, a new convertible peso was created with an exchange rate pegged at 1 peso = $1. This created a triple currency market fraught with inconsistencies and problems [Orro, 2002]. The government also authorized self-employment in 117 occupations with a rule prohibiting the self-employed from hiring non-family members. To boost agricultural production, the government transformed large state farms into cooperatives called Basic Units of Cooperative Production (UBPC). Finally, the government sought to eliminate the budget deficit. To achieve this, the government decreased expenditures and no longer subsidized SOEs with losses. At the same time, the government increased revenue by increasing the prices of cigarettes, alcohol, gasoline, electricity, public transportation, and mail. The government also began charging for sporting events, school lunches, and some medicines. These policies reduced the budget deficit to 7.4% of GDP in 1994. In addition, by attracting some foreign capital, these policies halted the economic decline in 1994 [Mesa-Lago, 2000; Perez-Lopez, 2002; Brundenius, 2002].

Other reforms followed. In 1994 the government increased taxes on a wide array of goods and services and reauthorized farmers' markets that had been criminalized in 1986. In 1995, 100% foreign ownership of investments was permitted and in 1997 the Cuban Central Bank was created [Mesa-Lago, 2000; Perez-Lopez, 2002; Brundenius, 2002].

The economy turned around in 1994 with 0.7% GDP growth. Between 1993 and 2000, GDP grew by 29.7% and GDP per capita grew by 26.1%. This amounts to an average annual GDP growth rate …