The economy of Cuba under Castro

By Professor Tim Congdon

Old habits die hard. On April 29, Itar-Tass, the state-owned Russian news agency, issued a press release. Following talks between Russian foreign minister Sergei Lavrov and his Cuban counterpart, Bruno Rodriguez, Russia is keen to invest in Cuba. The two countries want to resolve tensions arising from a legacy of debt that has long plagued relations between them. In the 30 years before its break-up, the Soviet Union supplied Cuba with oil at beneath the world market price, and did not always demand full and immediate payment. Cuba sent the bulk of its sugar production to the Comecon countries in return, but the value of the sugar exported was much less than that of the oil imported. Over the years Cuba incurred a debt of about $35 billion.

Russia’s rulers, lonely in European diplomatic circles after their annexation of Crimea, have decided they need friends in the world. Cuba is being embraced as if the Cold War had never ended. So the recent talks have resulted in Russia writing off 90 per cent of the $35 billion owed by Cuba. This may sound drastic, but all is not lost. The two governments, no doubt with assorted cronies and hangers-on, can work together to profit from the remaining $3.5 billion. The Itar-Tass press release quotes Lavrov as saying that the $3.5 billion will be transformed into “investments” and, in his words, “we’re interested in making these investments productive to the maximum.” 

In the geopolitical struggles between capitalism and Communism in the 20th century, Cuba had an importance out of all proportion to its size. When Fidel Castro overthrew the Batista dictatorship in 1959, many outsiders expected his government to be quickly replaced by one more friendly to American interests. But Cuba adopted a communist model devised by Che Guevara, the theoretician of the revolution, and received such massive help from the Soviet Union that the new regime became entrenched. Castro, 32 when he took control of Cuba, is now in his late eighties and not expected to live much longer. But the regime is still there. 

Most people thought the rivalry between capitalism and Communism was over when Fukuyama announced “The End of History” in the summer 1989 issue of theNational Interest. The Fukuyama article was beautifully timed just before the fall of the Berlin Wall. Given that Communism is generally believed to have collapsed in Europe 25 years ago, the Lavrov-Rodriguez pact must have caused a few chuckles in Western intelligence agencies. At any rate, the apparent new rapprochement between Russia and Cuba is a good moment to assess the long-run economic performance of one of the world’s two remaining Communist nations. (The other is North Korea.) 

On a visit towards the end of last year, I expected to be unimpressed by Cuban living standards and economic infrastructure. Even so, the extent of the poverty, backwardness and decay came as a shock, and this article will argue that Cuba must have lower incomes per head now than 55 years ago, at the time of the Castro takeover. At the end I will offer brief remarks on Thomas Piketty’s Capital in the Twenty-First Century, a book that some see as wagging a finger at Fukuyama and “The End of History”, and re-igniting the Left-Right ideological debate.

Cuba’s relations with Russia were less friendly 20 years ago than they seem to be today. The disintegration of the Soviet Union abruptly halted the imports of cheap Russian oil and disrupted trade relations within the former Communist bloc. The withdrawal of Soviet aid was blamed for a decline of over a third in Cuban GDP. For a few years conditions were so bad as to be labelled the “Special Period”, with food shortages leading to significant falls in people’s calorie intake. (There are reports, perhaps unreliable, that people ate domestic pets and animals from Havana Zoo.) The once iconic sugar industry was also seen as a major culprit for the disaster. It had been the backbone of the economy in the first half of the 20th century, when the small island of Cuba was the world’s biggest sugar exporter. But state ownership undermined incentives, and by the Nineties the industry was inefficient and high-cost by international standards. Its production, and hence Cuban export revenues, collapsed once the protected Comecon market disappeared. 

What was to be done? Tourism received official blessing (from Fidel’s brother, Raúl, no less) and was to be promoted as the new growth industry. Prohibitions on private enterprise were relaxed, and families were to be allowed to have foreign guests in casas particulares (small guest houses) and to run paladares(restaurants for tourists). The number of foreign visitors has indeed grown since the mid-Nineties. Everyone agrees that the economic situation has improved since the Special Period. Nevertheless, Cuban tourism is crippled — like so much of the economy — by government inefficiency of one sort or another. (On my visit, a long wait for luggage at Havana airport was infuriating. If airports cannot handle large numbers of people, large numbers of people cannot have holidays in Cuba.) 

Anyhow tourist receipts have not increased enough to offset the slump in sugar, and Cuba suffers from a chronic shortage of foreign exchange. The obvious answer, the answer that virtually all sensible economists would now recommend, is for Cuba to devalue its currency and to try to encourage new export activities. But Cuba is Cuba. It has its distinctive brands of revolutionary socialism and the Castro family is not interested in advice from the International Monetary Fund, the World Bank, the Inter-American Development Bank or other gringo capitalist organisations. 

Instead of devaluing the currency and starting again, Cuba has imposed exchange controls on its citizens and limited their ability to acquire foreign exchange. Modern Cuba therefore has two currencies, its own national peso (earned and spent by the locals) and a so-called “convertible peso”. When tourists come to Cuba, they switch their hard currencies (euros, sterling and so on) into convertible pesos, which enables them to pay for hotels, taxis, meals in paladares and so on. 

The social effects of this arrangement are poisonous. The revolution sought its justification in the achievement of greater equality. Market forces and the price mechanism were abolished, and replaced by planning and ration coupons, but everyone was to have the same value of coupons and hence the same share of consumption. Even if the average level of consumption was lower than before, the defenders of the revolution argued that it was worthwhile, because everyone would feel the warmth of “socialist emulation” and “fraternal competition”. But the dual-currency device mocks this notion. Blatant financial apartheid divides society into two. A small proportion of Cuban residents (senior members of the ruling Communist Party, holiday tour operators and their staff, expatriates working on contracts) have access to convertible pesos; the rest do not.

The dual-currency system entrenches division and inequality, and separates a privileged few from everyone else. Perhaps worst of all, Cuban citizens touched by international tourism cannot help but notice that foreigners have hard currencies and spend convertible pesos freely. By contrast, hardly any Cubans can acquire hard currency (unless they are senior in the party or work in hotels, or have income from casas particulares or paladares), and they certainly cannot spend it outside Cuba. Financial apartheid prevails on the island between Communist Party members and the apolitical majority, and internationally between the Cuban people and the rest of humanity. 

The existence of the two currencies also complicates any appraisal of Cuba’s economic record, particularly of its standing in international league tables of growth or incomes per head. In the Sixties such left-wing worthies as the prominent Cambridge economist Joan Robinson, wrote with enthusiasm about Cuba’s socialist transformation. No one can any longer be that silly. But there is ample scope for debate about exactly how bad its performance has been. The consensus is that the last 20 years have seen modest but meaningful progress, and that incomes and consumption per head are higher than they were 50 years ago. The counter-argument to be made here is that Cuba must be poorer now than in the late Fifties. 

Cuba’s isolationism and idiosyncrasy bedevil analysis. Critically, what is the correct exchange rate to use when converting the value of Cuban output in national pesos into something that has international meaning? By official decree, the national Cuban peso (CUP) can be exchanged into the convertible peso (CUC) at a fixed rate of 25 to one, while one CUC is supposed to have the same value as one US dollar. According to the Havana Times of August 6, 2013, the average monthly income is 466 CUP. On this basis Cubans typically earn less than $25 a month and under $300 a year. Now Cubans are poor by the standards of other countries, with foreign travel unthinkable for the great majority of the population. But the degree of poverty is overstated by the $25-a-month figure. Sure, Cuba is a grubby, run-down, tired sort of place. All the same, it is plain to any observer that living standards are appreciably higher than implied by expressing local values at the CUC exchange rate. Because a high proportion of consumption is financed by coupon entitlements to subsidised goods and services, and so lies outside the market sector altogether, methods of comparison that use current prices and exchange rates are misleading. 

The difficulty is to judge how much uplift should be given to the $25-a-month figure to arrive at a number that makes sense in international statistics. The Central Intelligence Agency ought to be an authority, given the prominence of Cuba in American foreign policy and the trade embargo that the US has maintained for more than five decades. In its World Factbook the CIA somehow reaches an annual income number of over $10,000 a head in terms of so-called “purchasing power parity”, which implies that living standards are similar to Brazil’s. (Lack of space prohibits a detailed technical discussion of the difference between GDP “at current prices and current exchange rates”, and GDP “at purchasing power parity”, or PPP. In short, economists agree that international comparisons of GDP need to make allowance for non-traded services, which have a large weight in the typical consumption basket. The relative prices of such services and traded goods vary enormously between countries, and so also do estimates of GDP in PPP terms relative to those in current prices and exchange rates. Both approaches have their uses.)

But the CIA’s number goes too far in the opposite direction and is plainly wrong. Clear evidence that Cuba is poorer than Brazil comes from a recent programme agreed by the governments of the two nations. For all its other problems, Cuba has made proud boasts that it has outstanding public medicine and large numbers of excellent doctors. By contrast, in Brazil the left-wing government of President Dilma Rousseff has been criticised for poor health standards and under-staffed medical services. 

So they have done a deal. Brazil pays dollars to Cuba, Cuba sends 5,000 of its doctors to Brazil, and the Rousseff government announces a scheme of Mais Médicos (“more doctors”) to beef up state medicine. All of which might seem excellent for everyone concerned, except Brazil’s National Doctors Federation (Fenam) has protested that the Cubans are slave labour. The Brazilian government is paying Cuba about $4,000 a month for each doctor, but only a tenth of that is handed over to the doctors themselves. The president of Fenam has said publicly that the scheme amounted to “the biggest labour fraud we have ever seen”. Since the Cuban medics are sent to remote and dangerous regions that their Brazilian counterparts avoid at all costs, there can be little doubt that their true pay levels are much less than those of the Brazilians. As medicine is a favoured profession in Cuba, it must also be the case that Cubans in general are much less well-off than Brazilians in PPP terms. 

Both the $300-a-year incomes suggested by mechanical conversion at current exchange rates and the CIA’s $10,000-a-year PPP number must be rejected. The correct figure in PPP terms is probably somewhere between $2,500 and $5,000 a head, which is a quarter to a half of the Latin American average. As Cuba was the wealthiest country in tropical Latin America in the Fifties, the verdict is inescapable. The Communist take-over was and remains an economic disaster. Two generations have been cheated of material improvements that they would have enjoyed if they had not lived in a nation that became a shuttlecock in the Cold War. Indeed, several rather banal items of evidence suggest that Cuba has gone backwards. 

Two favourite themes of Cuba’s tourist postcards are the classic American automobiles of the Fifties that are still driven on the roads, and the best examples of colonial architecture. The popularity of both these themes speaks volumes about the pattern of economic development. Let us take first the high number of American cars from the pre-revolution period relative to cars of a later vintage. Obviously, the age of a nation’s car population reflects the timing of purchases and owners’ willingness to repair rather than replace. In the Fifties so many Cubans had the dollars to buy foreign cars that they were one of the most widely-held consumer durables in private ownership, which fits with the reputation Cuba then had of being particularly affluent compared with other Latin American countries. In fact, privately-owned cars were so common that the Castro regime did not dare to expropriate and redistribute them. They continued to belong to individuals and families, even as businesses and land were being confiscated by the state. 

Many of them were lovingly maintained and repaired, and with their 50 or 60-year-old engines they remain in service today. Wall-to-wall gas-guzzling limousines may nowadays be despised by the environmentally-correct citizens of New York, Chicago and Los Angeles, but they are one of Havana’s top tourist attractions. A delicious irony is that what was good for General Motors in the Fifties is also good for Communist Cuba and its tourist industry in the 21st century.

Unhappily, by the Eighties virtually no Cubans had dollars to buy foreign cars. The proof is straightforward, that hardly any cars from that period are visible on the roads. Certainly in the Special Period purchases of foreign cars must have stopped altogether. An obvious first deduction is that the ability of the Cuban people to buy cars was radically less by the Nineties than it had been 30 years before. True enough, some more modern cars are to be seen in Havana, although they are rare in the countryside. (For the first time in over 20 years I saw a Dagenham-made Ford Zephyr, clapped-out but going, on a rural road near the pretty tourist town of Trinidad.) 

According to the Economist last January, the Cuban government announced that special permits would no longer be required if people wanted to buy the latest imported cars. This was dressed up, in the best Potemkin style, as a deregulation measure. But there was a catch, that the cars would be available only from state-owned suppliers and at fantastic prices. A standard Peugeot saloon car sold in Europe for $30,000 costs about $250,000 in Cuba, which is ludicrous in a nation ostensibly with an average annual income of $300. A second fair deduction is that the ability of the Cuban people to buy cars must be less — drastically less — in the 2010s than in the 1950s. 

The enthusiasm for colonial buildings also says much about the island’s economic trends. Havana and the principal towns do have modern structures. Blocks of flats were built in the Sixties, Seventies and Eighties, before the economic situation became too dire, and over the whole island they must provide accommodation to hundreds of thousands of people. However, Cuba’s population has been depleted by the emigration of more than a million people, as well as by 20,000 state executions. Several towns therefore have smaller populations now than 50 years ago. 

As a result, when blocks of flats are located in the outer suburbs of the main conurbations, they are often empty and vulnerable to the elements, and they are deteriorating. Brutalist in design and cheap to construct, they are hideous and tacky in decay. The buildings that are worth preserving are much older ones, usually in the town centres, that date from the colonial period. It is these, not the products of contemporary Communist architecture, that can be happily represented on postcards. 

In Havana whole sections of the city are in an appalling state of dilapidation. Guidebooks still refer to the Malecón, a famous oceanfront esplanade, as a tourist must-see. From a distance the buildings look big and grand, but the salt from the Atlantic necessitates constant repainting and maintenance if they are to stay presentable on closer inspection. Most of them were stolen from their original owners over 40 years ago and the Cuban state has not looked after them subsequently. Only a fraction of the structures are new, and the decay of the old is proceeding at such a rate that a high proportion of them are uninhabitable and unoccupied. Again, the conclusion must be antes mejor (“better before”). The Cuban construction sector produces less today than in the Batista period, while the quality of housing stock, and indeed of the built infrastructure as a whole, must have gone down compared with the Fifties.

The collapse of the once world-leading sugar industry, the need to send doctors to middle-income countries to boost foreign exchange receipts, the iconic status of 60-year-old cars as tourist attractions, the crumbling of buildings on streets that were once national showcases, the evident inability to maintain these buildings for the future, the writing-off of nearly all the external debt: it must be the case that Cuba is less productive and poorer, probably much poorer, than 55 years ago. Socialism was supposed to give Cubans prosperity, unity, fairness and freedom, but instead it has led to impoverishment, apartheid, division and oppression.

Yes, old habits die hard. For much of the 20th century French intellectuals quoted great chunks of Marx in difficult but allegedly epochal works, and bewailed the contradictions of capitalism. Indeed, London had entire bookshops devoted to literature of this sort, even if they depended, like Cuba, on Soviet subsidies to pay the bills. So what is one to make of a book, a bestseller in fact, that once more quotes Marx and bewails the contradictions of capitalism, as if the plainest lessons of the 20th century had never been? And, yet more extraordinary, what is one to think of the book’s title, Capital in the Twenty-First Century, which is presumably meant to persuade the reader that it is forward-looking and even avant-garde? 

Thomas Piketty claims that the market economy based on private property is subject to “a powerful destabilising force”, with consequences for “the long-term dynamics of wealth distribution” that are “potentially terrifying”. (He means that, when their investments yield a decent rate of return, rich people get richer. Surprise, surprise.) 

Perhaps he should write another book on the long-term dynamics of wealth distribution in a planned economy based on state ownership, and so try to determine whether Communism is also vulnerable to “contradictions”. In one respect writing that book would be much easier than the preparation of the 655-page tome from Harvard University Press that has just appeared under his name. Data and evidence from only two countries — Cuba and North Korea — would need to be examined, since the Soviet Union and Comecon disqualified themselves 20 years ago. And, like the people who have had to live in these unfortunate places for a few decades, he might find such data and evidence “potentially terrifying” too.


This article was published in Standpoint in June 2014

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