Cuban Economics: How Politics Has Changed the Course of Economic Growth and Stability

1. Cuban Economics: How Politics Has Changed the Course of Economic Growth and Stability Created By: Jason Zimmerman Martin Rugeroni Brittany Riley Martha Kramer Spring 2010 Econ 4311

2. Aim and Outline • Aim: To present and analyze how Cuba’s political decisions have affected the course of its economic growth. • Pre-revolution Economy • Revolutionary Period • Evolution of the Embargo • The Fall of the Soviet Union • Economic Reform • Recent Policy Changes • Cuba’s Future

3. History • Spanish Colony until 1902 • 1902 US companies controlled 80% of Cuba’s nickel exports • Owned most sugar and cigarette companies • US began a massive public health program

4. 1902 Cuba Independent • Platt Amendment , great dependency from the US. • Cuba would not transfer Cuban land to any power other than the United States • The right to US intervention in Cuban affairs and military occupation when the US authorities considered that the life, properties and rights of US citizens were in danger. • 1933 – Eight-hour day established.

5. 1940 Fulgencio Batista elected president • 1940 Modified the Constitution • Progressive ideas • Wages and Benefits • Land Reform • Education • Improvements in Media • Social Indicators

6. Why a Revolution? • A third of the population still lived in poverty • Distribution of land • Relations with the US • Urban violence • Corruption • Fidel Castro attempted to overthrow Batista in 1953 and failed.

7. The Revolution • 26th of July Movement, 1956. • United States imposed trade restrictions on the Batista administration • Batista Fled Jan 1, 1959 • Castro took over

8. Persecution of opponents • Labor unions were made illegal • Land and property expropriation and nationalization. • Cuba also nationalized all United States and other foreign-own land and property • Castro went to the United States to explain his revolution. He said, "I know what the world thinks of us, we are Communists, and of course I have said very clearly that we are not Communists; very clearly."

9. The United States, in turn, responded by freezing all Cuban assets in the United States, severing diplomatic ties, and tightening the embargo on Cuba, which is still in place after 50 years. • In response to the acts of the Eisenhower administration, Cuba turned to the Soviet Union for support.

10. Cuban Relations with USSR • 1960 – Cuba and Soviet Union sign trade agreement • Soviet Union buys sugar • Cuba buys crude oil • U.S. oil firms in Cuba stop refining oil purchased from USSR • Cuba nationalizes refineries

11. Start of the Embargo • President Eisenhower cancels most of Cuban sugar quota • Cuba retaliates • expropriates all U.S. property • Discriminates against imports of U.S. goods • U.S. imposes export embargo to Cuba except for medicine and food

12. 1961 – US-Cuban diplomatic relations are severed; US restricts travel to Cuba • Foreign Assistance Act - Total embargo on all trade • Amendment included barring aid to countries assisting Cuban government • Organization of American States (OAS) -Leninist ideology is incompatible with inter-American system

13. More Restrictions • 1962 - Cuban Missile Crisis • U.S. “quarantines” Cuba • Kennedy administration prohibits travel to Cuba • Financial and commercial transactions with Cuba illegal for U.S. citizens

14. Decreasing Restrictions • 1975 – OAS lifts collective sanctions • Each nation decides relations with Cuba • U.S. allows foreign subsidies of U.S. companies to sell products in U.S. • No longer penalize other nations for trade with Cuba

15. 1977 - Congress repeals provision of Foreign Assistance Act of 1961 • No longer refuses aid to countries trading with Cuba • 1978 – U.S. residents allowed to send up to $2000 in remittances a year

16. Resurgence of Embargo Policies • 1981 – Reagan inaugurated as president, initiates tighter economic embargo • 1982 – Reestablished travel ban • Remittances reduced from $2,000 to $1,200 per year

17. Minimal Effects of the Embargo By the late 1980s: • 99% of Cuba’s oil came from the Soviet Union • Received oil at prices far below market value • Cuba had reduced oil-consumption • Re-exported surplus petroleum was 2nd largest export (after sugar) • Vessels from the Socialist bloc transported 85% of Cuban trade • 85% of Cuban trade was with Council of Mutual Economic Assistance (COMECON) • Transactions mostly in nonconvertible currency

20. A Time of Transition • Late 1980s: Cuban-Soviet relations weakened as Soviet leadership moved away from Marxism • Late 1989: Cuba announced the Program Alimentario • Goal: improved self-sufficiency • Method: large investments in agricultural sector

21. A Special Period in a Time of Peace • August 1990 Cuba announced the Período Especial • Originally created for a time of war • Established a framework to implement austerity measures

22. “Special Period” • New rationing schedules • 200 goods added to the ration list • 50% cut in energy consumption required • Reduced work hours at factories • Large cuts in public transportation • Encouraged use of animals for transportation/plowing in agriculture

23. The Fall of the Soviet Union • Late 1991: Gorbachev withdrew almost 3,000 troops from Cuba • Symbolic significance: end of Cuban-Soviet ties • Christmas 1991: Soviet Union officially dissolved

24. Problems for Cuba • Weakened Cuban military • Major issue: loss of trade partners • External forces of the early 1990s: • Decrease in sugar prices • Increase in oil prices • Vulnerable to U.S. actions

25. Changes in U.S. Policy • April 1992: Bush banned ships trading with Cuba from stopping at U.S. ports • September 1992: Bush instituted a limit on the humanitarian aid that U.S. citizens could send to Cuba • October 1992: Torricelli Bill • November 1992: stronger restrictions on baggage for people traveling to Cuba

26. Torricelli Bill: Cuba Democracy Act • Banned subsidiaries of U.S. companies in other countries from investing in or trading with Cuba • Ban included food and medical supplies (in 1992 this was 90% of Cuban trade with U.S. subsidiaries)

27. Torricelli Bill cont’d: • Authorized U.S. president to “punish” countries that provided aid to Cuba • Withhold economic assistance • Withhold debt relief • Terms of free trade agreements • Strengthened the ban from 1992: ships trading with Cuba could not use U.S. ports for 6 months • Cuba only capable of carrying 20% of its total trade

28. 1990-1993: A Cuban Crisis • Shortages • Food • Oil • Medical Supplies • Drop in GDP per capita • Large budget deficits

30. Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the Cuban Economy (2002): 510. Print.

31. Consumer Goods • Commercial relations with the former Soviet Union decreased more than 90% from 1989 to 1993 ($8.7 billion to $750 million) • Shipments of consumer goods, grains and other foods declined

32. Consumer Goods cont’d • Supplies of clothing and soap became sparse • Rationing quotas supplied only enough food for 2 weeks of each month • Increase in black market activity

33. Health • Over 300 medicines eliminated from pharmacies • About 800,000 Cubans with asthma went without necessary medication • 1993: over 50,000 Cubans suffered from an epidemic of optic neuropathy as a result of a vitamin B deficiency

34. Health cont’d • Evidence of delayed marriages and a large drop in fertility rates • Surge of abortions: between 1988 and 1990, 9 abortions for every 10 births

35. Energy • Oil supply from the (former) Soviet Union decreased almost 90% from 1989 to 1992 • Shortages led cuts in public transportation • Frequent power outages

36. Energy cont’d • Daily blackouts imposed • Closing of many industrial plants and factories • Estimated 50% of industrial plants suspended operations due to shortages of fuel and replacement parts

37. Agriculture • Imports of fertilizer decreased 80% and animal feed by 70% • Sugar crop declined from 8.1 million tons in 1991 to 4.2 million tons in 1993 • 1993 shortage of chicken feed resulted in a halt in egg production • Animals had to be used to replace tractors and other farm equipment

38. Other Problems • Shipments of raw materials and spare parts for industry ceased • March 1993: a winter storm caused more than $1 billion of damage and left over 150,000 people homeless • Paper shortage: lack of print media • Factory closings and transportation cuts left almost 20% of the population displaced

39. One Success: Tourism • In 1990 tourism brought in $243 million • Only sector that grew steadily • Revenues quadrupled in first half of the 1990s • 1993 brought in more revenue than sugar • If not for embargo, would U.S. tourism change the Cuban economy?

40. Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the Cuban Economy (2002): 513. Print.

41. Reform and Recovery • Summer 1993: Cuban government began policy reforms to stabilize the economy • Legalized the use of foreign currency • Stop the growing black market for foreign currency • Stimulate remittances to citizens by relatives abroad • September 1993: authorized self-employment • Many restrictions • Only open to specific occupations • Had to pay fees and taxes

42. September 1993: broke up large state-owned farms into cooperatives • Owners could choose management, have own bank accounts and sell the product • Gave incentives for increased production • May 1994: adopted a policy for reduced expenditures and increased revenues • Increased prices of cigarettes, alcohol, gasoline, public transportation, etc • Eliminated subsidies • Charged for previously free items- school lunches, admission to sporting events, etc

43. Price S Equilibrium Ration Price D Quantity • September 1994: created markets where agricultural producers, once a quota was reached, could sell excess output at market prices (determined by supply and demand) Once producer reaches quota: -Sell at a higher price -Consumers not limited to ration stamp amounts *Hybrid economy: transition from state-controlled/socialism to free market capitalism

44. September 1995: changed foreign investment law • Allowed 100% foreign ownership • Simplified the process for foreign investment • May 1997: reformed the banking system • Creation of Banco Central de Cuba as an independent institution

46. Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the Cuban Economy (2002): 509. Print.

47. Success • Negative growth ended and GDP grew 0.7% in 1994 • 1993-2000 the average annual GDP growth was 3.8% • In 1993 the budget deficit was 33.5% of GDP, in 1996 it was 2% of GDP

48. Success cont’d • Exports increased 47.4% from 1993 to 2000 • Imports increased 144.4% over the same period • By the end of the 1990s, growth was steady • In 2000, GDP was still 15.4% below the level of 1989

49. Remaining Problem: Embargo • 1996: Congress passed the Helms-Burton Act • 1998: report by the U.S. Defense Intelligence Agency stated, “Cuba does not pose a significant military threat to the U.S. or to other countries in the region."

50. New Decade • 2000 - U.S. lifts ban on exports of certain agricultural goods • Cash only sales • Cuba refused to buy goods for 1 year • Ban on imports from Cuba continues