cuba in Raul Castro’s era: Economic-Social Reforms and their effects

1. cuba in Raul Castro’s era: Economic-Social Reforms and their effects Carmelo Mesa-Lago Miami Dade College, co-sponsored by CRI-FIU, ASCE and NACAE February 12, 2013

2. SUMMARY 1. Causes of Raul Castro’s economic-social reforms 2. Three types of reforms 3. Main “structural” reforms and their effects 4. Conclusions and Prospects

3. I. CAUSES OF RAUL CASTRO’S REFORMS • Slowdown of economic growth since 2008; Cuba the 2nd lowest in L.A. in 2011 • Capital formation fell from 25% to 8% in 1989-2011 • Industrial production in 2011 was 45% of 1989 level • Sugar output shrank from 8 to 1.3 million tons in 1989-2011 • Agricultural production in 2011 below 1989 and 2007 • Oil, gas & nickel many times above 1989 level but stagnant since 2006-08 • Tourism rising but hotel occupancy fell from 64% to 53% • Deficit in trade balance (merchandise) reached $11 billion in 2008 • $13 billion in Venezuelan trade-economic aid, twice the USSR level • Real wages decreased 72% in 1989-2011 • Deterioration of social services, but costs 53% of budget and 33% of GDP • More than 1.3 million unneeded state workers • Housing deficit more than 1 million units

4. II. RAUL CASTRO REFORMS, 2006-2012 • A) Raul’s call for “structural reforms” and national debate, 2007-08 • B) Three types of reforms • 1. Administrative Changes • Reorganization of state entities, 2007- • Perfeccionamientoempresarial, 2006-07 • Campaign against labor indiscipline and corruption, 2006- • Openness to criticism, 2007 • 2. Non-Structural Reforms • Access to hotels and restaurants, 2008 • Payment of debts, increase in acopio prices, input sales, 2007- • Private transportation, 2008 • Nominal salary increases, 2007-09 • Pension reform, 2008

5. 3. Structural Reforms • Updating of economic model, 2011- Very difficult • End of rationing, Pending • Elimination of monetary duality, Pending • Distribution of state land in usufruct, 2008 and 2012 • State-workers dismissals and creation of private jobs, 2010- • Reduction of gratuities, social services and welfare, 2008- • Sales of homes and automobiles, 2011 • Migration law, 2012 • Tax reform law, 2012 • Laws on agricultural and non-agricultural and service coops, 2012

6. III. MAIN STRUCTURAL REFORMS AND THEIR EFFECTS:1. USUFRUCT • 1.5 million hectares distributed to 174,000 persons by 2012 • 58% of total idle state land • agricultural output fell 5% in 2010, but rose in 2011 (need to separate usufruct) • state cultivated land and production contracted, the opposite on non-state land • Improvements in 2012 over 2008 • Parcel size: rose from 40 to 67 hectares • Contract (same): 10 years individuals (state/coops expanded 20 to 25 years) •  Investments: can build homes, stable for animals, storage; woods, fruit trees • If contract rescinded, state assess value and reimburses • family workers may inherit usufruct land and investments • microcredit with limitations, opening of bank accounts

7. Obstacles: • Despite improvements, agricultural output in 2011 below 1989 and 2007 levels • contract is terminated if obligations are not met or for state needs • must be tied to state farm or coop to get inputs, services and commercialization • marabú covers 50% of land, must be cleaned, state credit cannot be used for that • out of the distributed land 33% to 54% not in production • state-fixed acopio price below market price • restrictions to hire non-family workers • size of investment limited to 0.67% of parcel • 77% of usufruct recipients lack experience in agriculture • state micro-loans grossly insufficient • complex regulations to request land, sign/extend contract, approve investment

8. 2. State Dismissals, Self-employment and Cooperatives • Reform: 1.3 million unneeded state workers to be fired (28% labor force) • Targets: 500,000 dismissals in March and 1 million in December 2011 • Actual: 365,000 dismissed in 2011-12, 36% of the 1-million target of 2011 • Reason: creation of non-state jobs grossly insufficient to allow dismissals • Improvements: • Self-employed 400,000 in 2012 but net 253,00 and only 18% was unemployed • more occupations (181), non-family employees w/o limit, more chairs in paladares • allowed to sell/rent to state entities, microcredit, suspended some taxes • Service cooperatives: barbers/hair dressers, 222 activities approved in 2012

9. Obstacles: • Self-employed • Too specific/unskilled occupations (professions not allowed) • too much regulation (inspection) • excessive taxes-fees (tax rate on hired workers increases with their number) • insufficient credit and inputs • lack of wholesale markets • opposition of bureaucracy • uncertainly in view of previous history • Cooperatives • 4-instances for cooperative approval, final decision by Council of Ministries • restrictions in hiring workers • others obstacles similar to self-employed

10. 3. Reduction of gratuities, Social Services and welfare • Salary • Gradual raises require increases in production and productivity • legalized payments in hard currency/CUC in mixed enterprises • elimination of wage top • multiples jobs allowed • payment by results • but no data on results by 2012 • Gratuities • Elimination of workers cafeterias at subsidized prices • food items taken out of “libreta” (elimination of rationing pending) • increases in tariffs of public utilities and prices of goods

11. Social services • Cost is now subordinated to output increase and available fiscal resources • budget reductions in 2009-2011 except in pensions • costs cut one point in state budget and GDP, still very high • Education • End of secondary rural schools, workers-peasants, social work, emergent teachers, most municipal universities • university entry quotas and stricter exams • drastic enrollment cuts in humanities, physical education; increases in natural sciences & math • Pensions • Reform raised 5 years in retirement age andworkers’ contributions • incorporation of self-employed and coop members • reform won’t reduce deficit in the long run (state subsidy rose in 2011) • accelerated aging of population will increase pension and health care costs

12. Health care • Budget reduction in 2010-11 • cut in personnel, hospitals, family-doctors, high-tech diagnosis and tests • increment in use of herbal medicine and acupuncture • Housing • Selling of construction materials at market price • abolition of subsidy for construction materials to population • credit to poor and low-income to buy materials at lower prices • Social assistance: • Shift from subsidies to goods to assistance to those in need • assistance eliminated to beneficiaries with relatives that can help them • drastic cut in social assistance expenditures and beneficiaries • many reforms will further erode social welfare and increase poverty

13. Drastic Cuts in Social Assistance, 2006 and 2011

14. 4. SaLeS of homes and automobiles HOMES Improvements • Free selling construction materials for home building/repair • Law 2011 allows selling/buying homes to Cuban and foreign permanent residents at a price set by sellers/buyers • allows second home in beach/countryside: incentive for Cubans abroad to invest • right to inherit home for relatives of Cubans that emigrate • 90% of state micro-credit to build/repair homes • some tax exemptions • millions of frozen homes for 52 years can be sold and generate capital Obstacles/disadvantages • Only 3,000 homes sold by mid-2012 (11,000 donated) • property must be registered/updated in real-estate registry (only 6% has done so) • registry out-of-date, insufficient public notaries and access to Internet for sales

15. AUTOMOBILES • Improvements • Law 2011 allows selling/buying some cars to Cuban and foreign residents: • pre-1959 US cars • Soviet-made cars prior to 1990 • second-hand cars imported with state permit • new cars in CUC or foreign currency via commercial agencies or import • Cuban emigrants may transfer their cars to relatives through state • Obstacles • More cars sold than homes, still only 12,000 by mid-2012 • buyer must show that money has been obtained legally, for new cars • also that money comes from a state job (exceptions) • state permit required to buy new cars

16. IV. CONCLUSIONS AND PROSPECTS • Administrative and non-structural reforms are less complex and important, and usually have positive results • Most key structural reformsare more complex and important but have not been successful up to now, due to obstacles and disincentives: • Usufruct: agricultural output fell in 2010 but rose in non-state sector in 2011, 2012 law brought improvements, still obstacles and complex procedures • Dismissals of state employees and creation of private jobs: goals not met due too many limitations, excessive taxes and state control • Salary: nominal raises but still 72% below 1989 • Elimination of gratuities, goods taken out of rationing, cuts in social services and in social assistance could further increase poverty • Sales of homes and cars: important but home sales not substantial yet due to obstacles; sales of cars higher

17. Raul Castro’s reforms are positive and well-oriented, but: • Partial, slow, bit by bit, imbedded with obstacles and excessive regulations and tax burdens that generate disincentives and impede progress • Insufficient to solve the socio-economic problems accumulated in 50 years of centralized socialism • The analysis indicates that there is a conflict in the leadership that results in ineffective compromises • Reform acceleration in last six month may be due to lack of results, failure to find oil and Chavez’ grave illness