Marko Lukic GLOA 710: Cuba Trade February 10, 2014

Economic Transformation And Social Inequality: Investigating links between Reforms And Socioeconomic Disparities In Cuba

Abstract
This paper depicts the growing concerns of socioeconomic inequality in Cuba and the effects that various economic measures have had on this issue. Certain reforms have had limited success but mostly have not been able to deal with the issues of poverty in its entirety, while some reforms have even exacerbated social disparities and created social, as well racial rifts in society. The research compiled within this paper focuses on Cubas historic market-oriented transformations as an inevitable process of coping with changes in the global economy.

Introduction
Cubas economy experienced major turmoil following the dissolution of communism in the Former Soviet Union and Eastern Europe. Due to the collapse of !
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foreign relations and its economic dependence with the USSR, Cubas government has applied numerous economic reforms throughout the last two decades in an attempt to revive its economy. These reforms have had some, yet very limited success for the citizens and standards of living of the general population. Many Cubans believe that socioeconomic equality was one of the most important accomplishments of the socialist revolution (Mesa-Lago, 26). Prior to the revolution, social inequality and income disparity were rampant issues in Cuban society (Reeve, BBC documentary). As a result, after the revolution, Fidel Castros administration began pouring money into social welfare programs that generated a reliable safety-net system for the entire population. Free healthcare and education were among some of the safetynet programs provided by the state. However, Cuba became unfortunately too reliant on Soviet subsidies. Therefore, when the USSR fell apart so did its dependence structure, and as a result, economic crisis followed. In order to adapt to the changing global economy, Castros regime has had to loosen its grip on the market and allow for private investment and self-employment. These market-oriented reforms have been deliberately slow and brief and have had little positive effects on socioeconomic disparity since the 1990s. Cubas relentless gradualism towards market-oriented reforms can represent two things: the governments goal to maintain the ethos of Cuban society, or its unwillingness to completely loosen its grip on society. The focus of this research paper is to determine how effective institutional reforms towards the market have been throughout the last two and half decades. The next section will therefore provide a brief historical background leading up to the economic

crisis of the early 1990s. The subsequent section will discuss the negative impact that the fall of communism in the USSR had on Cuba, followed by a section allocated strictly about reforms. The last section, before concluding the entire research paper, will focus on linking growing inequality to gradual economic reformation.

Background
In the 1950s, Cuba had a vibrant economy with large capital outflows to foreign investors. However, the country was riddled by extreme inequality and poverty. Throughout the fifties, Cuba was run by an American-supported dictator whose regime was infamous for decadence, corruption, and greed (Reeve, BBC documentary). The Cuban revolution began in July of 1953 in an attempt to overthrow the oppressive regime of President Fulgencio Batista. The armed revolt, led by Fidel Castro, successfully ousted Batista from power on the first of January 1959, which sparked a new beginning for Cuba. Batistas dictatorship was replaced by state socialism with Fidel Castro as the Prime Minister. His premiership lasted until 1976 and continued his reign as President until stricken by illness in 2008, which eventually forced Fidel to hand over control to his brother Ral (Reeve, BBC documentary). In 1959, Fidel implemented significant transformations to the economy by nationalizing private industry and other private assets. Some of these changes included the vast nationalization of the agricultural sector, mainly foreign-owned sugar plantations. Cuba extensively expanded the full capacity of the state, nationalizing previously foreign-owned enterprises, including US-owned assets such as petroleum and

telecommunications. As a result, the US imposed economic sanctions in the form of a long-lasting trade embargo that has stifled economic growth (Thompson, 2). Cuba became the first communist state in the Americas and was welcomed into the arms of the Eastern Bloc at the height of the Cold War. The government quickly became supported and bankrolled by its Soviet allies and began to build what Fidel Castro called a workers utopia. Many Cubans are thus justifiably proud of the revolutions progress and devotion towards social equality. Free pensions, free healthcare, free education, and free funerals were among some of the aspects of socialism that were introduced. Child malnutrition was virtually eliminated; literacy rates vastly increased, and life expectancy grew as well (Reeve, BBC documentary). Nevertheless, once Communist Russia collapsed and Soviet support dissipated, Cuba has struggled to compete economically on a global scale, especially with the US embargo still in place. As a result, socioeconomic inequality has increased, creating many challenges for the government to deal with growing inescapable poverty.

Economic Crisis
The most notable cause of Cubas economic meltdown was the major decline in foreign trade. The country experienced a 75% drop in foreign exchange receipts between 1990-1993 (Ritter). According to Archibald Ritter, a former economist and current research professor at Carleton University, this decline was a direct result of the abrupt discontinuation of Soviet subsidies in the 1990s (Ritter, 4). Throughout the 1970s and 1980s, Cubas economy became extremely reliant on financial assistance from the USSR, their largest trading partner at the time. Ritter refers

to this type Soviet economic aid to export markets as a system of hidden subsidization. This was a covert system of subsidization in the form of manipulating prices on merchandise imports and exports. For example, the USSR was paying above-market prices on Cuban commodities such as sugar and nickel, while at the same time selling petroleum to the regime for substantially lesser than the prevailing market price (Ritter, 4). Ritter claims that these hidden subsidies were often obscured from the general public. The Cuban government denies that these subsidies were a form of aid, and instead labeled them as a system of special arrangements for the fair-exchange of commodities (Ritter, 4). When observed from a perspective of modern economics, the Soviet dependence structure was perhaps far too unsustainable in terms of achieving any sort of long-term growth. The volatility and eventual deterioration of such a system of artificially propelled growth has therefore made Cuba susceptible to future economic crises. Cuba accumulated a bilateral debt of $23.5 billion USD to the USSR by 1990. This debt includes trade deficits and capital account credits accrued over two decades. Unfortunately, Russia is not the only state that Cuba still owes a large sum of money to. Additional bilateral debts from other countries, mainly in Eastern Europe, still loom over Castros administration. This has increased debt service burden, curtailing any hopes of future foreign lending (Ritter, 4). The sudden withdrawal of Soviet subsidies has disrupted purchasing power of Cuban exports. Due to large decreases in export purchasing power, Cuba has had to limit imports in vital sectors that would otherwise help drive long-term economic growth. The

reduction of imports has constrained the inflows of intermediate goods, raw materials, foodstuffs, machinery and replacements parts, and energy inputs (Ritter, 5). This led to an overall contraction of the Cuban economy, which has vastly contributed to the increase of poverty and inequality throughout the entire country. In addition to the breakdown of the USSRs dependence structure, Cubas lack of diversity in its export sector also played a role in the economic crisis. Since 1959 the export market was structured and highly reliant on a few primary commodities, such as sugar, nickel, and tobacco. After Soviet aid dissipated, the few thriving sectors that relied so much on their subsidies deteriorated shortly afterwards (Ritter, 5). Merchandise exports became almost completely stagnant in the 1990s. The volume of Cuban exports was nearly sliced in half from 1989 to 2000, while purchasing power of those exports decreased by almost three quarters of what it was a decade before (Ritter, 7). The Cuban governments inability to increase production in its most important sectors reflects the volatility of State Socialism within a theoretical framework of modern economics. However, despite massive reductions in exports, imports, GDP, real wages, and consumption, Cuba avoided becoming a failed-state and was able to avoid the sort of widespread poverty and starvation that much of the developing world had endured during this time period. According to Dr. Alberto Gabriele, mass starvation was avoided due to the lack of class differentiation, the strength of the Cuban state and the effectiveness of its selected rationing mechanisms (Gabriele, 650). Castros reaction to the fall of the Soviet Union and its calamitous effects were to preserve the basic tenets of state socialism and to minimize the social cost paid by the population (Gabriele, 651).

Fidels attempt towards preserving the old state socialist model within an increasingly integrated global system has proven quite difficult. The fall of communism during the late eighties and early nineties had left a negative mark on the Cuban economy due to the collapse of the USSRs vast dependence structure. Due to the economic crisis that ensued, the Cuban government has had virtually no other choice but to make some sort of adjustments to the economy.

Institutional Reforms
Following the economic crisis in the early 1990s, Cubas government implemented various institutional and policy reforms in order to promote productivity, diversify the export sector, cut trade deficits, and achieve future sustainable economic growth. Since then the state has slightly loosened its grip in certain sectors and implemented levels of market-oriented reforms, while sometimes withdrawing some of those changes. The first wave of economic reforms came in 1993 and lasted only for three years until Fidel Castro decided to conclude them in order to restrengthen the power of the state. The institutional reforms implemented between 1993-96 included: legalization of US currency, liberalization of remittances, legalization of self-employment in certain low-tech sectors, reestablishment of agricultural markets, liberalization of foreign investment law, conversion of state farms into quasi-cooperatives, establishment of four export processing zones (EPZs), revitalization of small-holder farming, reorganization of

the state enterprise system and ministries, and some additional banking reforms (Ritter, 7). The 1993-96 reforms put a temporary halt on Cubas economic meltdown. Other policy reforms also focused on balancing the fiscal debt, reducing money creation and inflation, cutting subsidies, changing tax structure, and reducing military expenses. After 1994, Cuba experienced improvements in foreign exchange earnings, output levels, petroleum extraction, energy availability, food production and availability, tax revenues and fiscal balance, monetary indicators. (Ritter, 7). However, the positive results generated from these various institutional changes led Castro to slow down and eventually put an end to economic reforms by 1996. Castro believed that further reforms were unnecessary and moreover, were destabilizing his regime. Since then reforms have been very marginal, while some have even been reversed. Socioeconomic disparities have increased, income levels have remained low, and lack of access to upward mobility remain prominent issues in Cuban society. According to Mesa-Lago, so-called zigzagging market-oriented reformsresulted in significant increases in income inequality and socioeconomic disparities, which have reversed many of the previous accomplishments (Mesa-Lago, 3). Continuing constraints on foreign exchange, petroleum, producer inputs, and consumer products have hindered future economic success (Ritter, 7). These are all potential resources that could help drive Cubas economy and ensure sustainable growth and development. Despite gradual levels of market liberalization, there are still significant economic problems that the government has not handled effectively. According to Ritter, some of

these noted maladies include: the dual monetary and exchange rate system; failure to expand and diversify exports; inability to revive previously flourishing sectors; inefficient policy-making for microenterprise sector; reduction in real value of budgetary revenues devoted to education, health, and public services, causing drops in real income levels for those employed in these services; and the perpetual decline of living standards since 1985. (Ritter, 7) In 2010, Ral Castros administration acknowledged inefficiencies in the economic model. The government recognized: low economic growth, insufficient investment, stagnant income levels and rising prices of goods and services, the lack of positive correlation between productivity and salaries, excessive economic centralization and state restriction, low level of housing construction, and trade deficits as the main economic concerns (Prez, 24). Dr. Omar Prez, an Economics Professor and Researcher at the University of Havana, however, is optimistic towards Ral Castros attitude towards future change. Prez claims that, since Ral Castro has been in power, the perception and importance placed on reforms, as well as on the future role of the non-state sector has tremendously changed. In 2010 the government proposed a list of modifications designed to increase productivity, promote entrepreneurship, create a more efficient tax system, and stabilize public finances. For the first time in a long time, there was a focus on increasing non-state employment (Prez, 24). Within the last four years, the government has made promises towards increasing the recognition of different categories of work or trade, and putting unused farmland into productive use (Prez, 24). Restrictions on selling homes and vehicles were lifted,

businesses were granted greater autonomy, and some additional limits on business licensing have been replaced by a more incentivized structure of conducting business and trade. The maximum level of customer occupancy allowed for private restaurants slightly increased from 12 to 20 seats. In order to increase food productivity and self-sufficiency, and eliminate rationing, individuals can lease state facilities, including those in the food industry (Prez, 26). The state is supposedly in the process of moving 1.8 million state workers off of state payrolls and into the private sector by 2015, which would put two in five workers in the private sector (Peters, A Viewers Guide to Cubas Economic Reform, 8). Prez believes that these gradual advancements will promote opportunities for self-employment and allow for creation of microenterprise. Business licensing for microenterprises has increased by 50% since the start of economic reforms, exceeding 113,000 licenses in October of 2010 (Prez, 26). Since economic reforms were first introduced, 400,000 Cubans have registered to become entrepreneurs under the new market-socialist system. In 2012, the government acknowledged 181 private jobs, including taxicab drivers, construction workers, and shopkeepers as no longer being state-owned. The government has also allowed occupations such as mule drivers, palm tree trimmers, well-diggers, button-coverers, and dandies to become privately licensed through the state (Reeve, BBC Documentary). It seems as though the government is solely concerned with privatizing jobs with limited incomes. Other economists believe that this list of 181 licensed lobs is a further limit to growth, preventing would-be entrepreneurs from choosing the activities that appeal to them and in which they believe they can succeed (Peters, Cubas

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Entrepreneurs: Foundation of a New Private Sector, 17). Some suggest a complete removal of the list by allowing complete entrepreneurial ventures in any sector, except for a few that the state may reserve for itself (Peters, Cubas Entrepreneurs: Foundation of a New Private Sector, 19).

Growing Inequality
Despite periods of moderate liberalization and minor strides towards privatization, Cubas economy has struggled and inequality has begun to increase. Cuba has experienced widening socioeconomic disparities since the collapse of the USSR and since the implementation of economic reforms. In the time period between 1993 and 2001 social inequality had increased in terms of income and wealth, taxes, social services, regional and racial disparities, satisfaction of basic needs, and poverty (MesaLago, 3). The country experienced an estimated 45.2% decrease in average real wages between 1989 and 1998, from 131 to 73 pesos in that time period. According to CADECA (the official government exchange house of Cuba), that decrease represented a reduction of $17 USD in average real wages. Salaries in the state sector drastically declined while incomes in the small but growing private sector substantially increased during this same time period (Mesa-Lago, 6).
Income of artists and musicians who have international fame, private farmers, owners of small restaurants (Paladaras), private taxi drivers, self-employed workers, employees in tourist facilities, speculators in the black market and similar activities have rose dramatically (Mesa-Lago, 6-7).

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Extreme salary/income disparity increased from 829/1 in 1995 to 12,500/1 in 2002 (Mesa-Lago, 3). Based on a Mesa-Lagos very broad collection of statistics, documents, surveys, scholarly articles, and interviews, income and socioeconomic inequalities have risen and continue to rise since the fall of the USSR. The legalization of the reception, possession, and circulation of remittances has only exacerbated the already growing divergences in social class. Foreign currencies (mainly USD) in the form of remittances are received by only 50-65% of the entire population. This is an estimated average of $103 USD annually per capita, which is close to the average state employee income in pesos (according to 2002 CADECA exchange rates of 21 pesos to $1). According to various interviews with citizens, immigrants and visitors, most recipients live in Havana and are white. The interviews consistently revealed:
that the farther one is from the capital city, the less the remittances received; this seems to be true even in Santiago, the second largest city, which is in the most eastern part of the country (Mesa-Lago, 10).

Furthermore, according to the 1990 US census, 83.5% of Cubans living in the US were white and the rest were of Afro-Cuban decent (16.5%). Various estimates of the percentage of Afro-Cubans living in Cuba exist, thus it is very difficult to get an accurate demographic. However, walking through the streets of Havana, it is easy to assess that the population is at least evenly split down the middle, in terms of whites and blacks. Estimates of the black population in Cuba range from 34% to 62% (MRG, refworld.org).

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By taking the lowest possible population of blacks in Cuba, and assuming that remittances were evenly distributed regardless of race, $668 million USD (out of $720 million USD) were received by whites ($81 USD per capita) and only $120 million USD by blacks ($31 USD per capita). If the percentage of the black population is anything higher than 34%, which it most likely is, then disparity between the two per capita numbers is even higher (Mesa-Lago, 10). Open-market reforms and tourism-led growth have helped aggravate this socioeconomic unevenness that has existed throughout history since Cuban colonialism. According MRG (Minority Rights Group International), an international human rights NGO headquartered in London, reforms have failed to provide equally beneficial opportunity for black Cubans. The recent surge in tourism has exclusively benefited wealthy Cubans who own property and vehicles, while most other Cubans, mostly blacks, are not directly involved in the formal tourism sector. This means they are often prevented from entering hotels or going to certain beaches and tend to be restricted to working on the fringes of the tourist industry providing sex services and other forms of itinerant hustling (MRG, refworld.org). No sufficient data on wealth distribution is available for Cuba, however, many indicators display unequal income distribution, opportunities, and access to upward social mobility. According to a Cuban economist:
The structure of the banking accounts show an expansion of the wide gap among various groups of savers, which in turn is a reflection of differences in income distributionThis implies inequalities in opportunities, which five years ago did not depend on income differences but on just economic and social opportunities to individuals, such as education (Mesa-Lago, 11).

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Income inequality can be analyzed through the indirect measure of the decline of savings. In 1994, 54% of the population had 6.3 billion pesos saved in bank accounts, however in 2000 these numbers dropped to 37% of the population with 5.2 billion pesos (Mesa-Lago, 11). The creation of the dual monetary system in the 1990s has also helped deepen social inequality. Higher quality goods and services, especially those being imported from abroad, are exclusively available to Cubans who have the hard currency and who can afford them. The majority of the population only has a limited option of goods and services to choose from because most salaries are still paid in National Pesos (CUPs), while the small percentage of Cubas wealthy class has access to Convertible Pesos (CUCs) and can afford a better standard of living (Frank, reuters.com). With an average monthly wage of less than $20, accompanied by a steady increase in the cost of living, inequality and poverty have become pervasive issues. State salaries for professionals, such as doctors and teachers, are very low and get paid in CUPs. On the other hand, those who work in tourism, receive remittances, run small businesses, or do government work abroad, have better access to CUCs and can thus afford a higher standard of living relative to the rest of the population (Frank, reuters.com). Philip Peters claims the dual currency economy produces egotism, the cult of capitalist fetishes, and the mentality of the small property owner (Peters, Cubas Entrepreneurs: Foundation of a New Private Sector, 6). According to Dr. Myra Espina, a Law Professor at the University of Havana, the Gini index of income inequality has increased from 0.24 in 1986 to 0.38 in 2000. Many

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local experts believe that the index has risen even further since 2000, however no additional figures since then are available (Frank, reuters.com).

Concluding Thoughts
The Cuban government has taken many steps to address the economic crisis, however, social inequality has continued to grow in a country that once prided itself on its egalitarian society. Institutional changes, restructuring tax systems, and reshaping the way in which Cubans can earn income have generated additional challenges for the government to cope with poverty.
In a process that one analyst has called relentless gradualism, Cubas government is relying on private sector solutions, loosened restrictions on the Cuban people, painful cuts in guaranteed employment and social benefits, and aspirations for wealth-creating industries that offer goods and services for export in a competitive global marketplace. Their goal is simple but unprecedented: to preserve the communitarian ethos of Cubas society and maintain its commitments to education and public health, while building a competitive economy that can honor these obligations in a sustainable way over time (CDA, democracyintheamericas.org).

In the early nineties, reforms succeeded in attracting some foreign investment and propping its tourism and mining industries. However, they were unable to cope with the issues of food scarcity and the failing sugar industry (Ocampo, 25). The reforms also initially generated a dynamic response from self-employment, but reforms in this area partially overturned towards the end of the decade. Since then the governments approach towards market reforms have been very gradual. The success of reforms is measured in terms of generation of growth, access to upward mobility and economic freedom. So far the reforms have not been able to keep up with the demanding

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changes in the economy, but has at least been able to maintain provisions in various sectors such as health and education, which are very important to the Cuban population. Nevertheless, Cuba still has a long and arduous path of development ahead of them and only time can tell if the state will be able to cope with the various challenges that arise during economic transition.

Work Cited:
Mesa-Lago, Carmelo. "Growing Economic and Social Disparities in Cuba: Impact and Recommendations for Change." Cuba Transition Project (CTP): Institute for Cuban and Cuban-American Studies. (2002): pg. 2-39. Print. Reeve, Simon, dir. This World: Cuba. BBC, 2012. Documentary film. Thompson, Frank. "Case Study: The Economy of Cuba."University of Michigan . (1999): pg. 1-4. Print. Ritter, Archibald. "The Cuban Economy in the Twenty-first Century." University of Pittsburgh Press. Chapter 1. (2001): pg. 3-24. Print. Gabriele, Alberto. "Cuba: From State Socialism to a New Form of Market Socialism?." Comparative Economic Studies. Palgrave Journals. (2011): pg. 64773. Print. Prez, Omar. "Will the proposed economic reforms in Cuba succeed?: Yes." Hard Talk Forum. (2011): pg. 24-27. Print. Peters, Philip. "A Viewers Guide to Cubas Economic Reform." Lexington Institute. (May, 2012): pg. 2-34. Print. Peters, Philip. Cubas Entrepreneurs: Foundation of a New Private Sector. Lexington Institute. (July, 2012): pg. 3-22. Print.

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"World Directory of Minorities and Indigenous Peoples - Cuba : Afro-Cubans." refworld. Minority Rights Group International (MRG), n.d. Web. <http://www.refworld.org/cgi-bin/texis/vtx/rwmain?docid=49749d342c>. Frank, Marc. "Cuba grapples with growing inequality."reuters.com. Reuters: US, 10 Apr 2008. Web. <http://www.reuters.com/article/2008/04/10/us-cuba-reforminequality-idUSN1033501920080410>. Ocampo, Jos. "Will the proposed economic reforms in Cuba succeed?: No." Hard Talk Forum. (2011): pg. 24-27. Print.

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