A Brief Economic History of the Socialist Period in

Cuba

Economic Goals of the Revolution

• achieve rapid economic growth

• reduce dependency on sugar through– rapid industrialization– diversification of agriculture

• reduce economic dependency on the U.S.

• achieve full employment

• redistribute income more equally– increase standard of living of peasantry and

unskilled urban workers

The First Three Decades of Revolution

• five stages– liquidation of capitalism (1959-1960)– attempt to adopt central planning (1961-1963)– co-existence of two models (1964-1966)

• a Maoist attempt to skip socialism and go straight to communism advocated by Che Guevara

• central planning with market mechanisms (Libermanism)

– Mao-Guevara model with Fidelista features (1966-1970)

– return to central planning in 1971

• Note that the first four stages occur during the first decade, more or less

• Period of extreme disruption and reversals of course

• Struggle between idealism and pragmatism

Liquidation of Capitalism (1959-1960)

• no real ideology– motivated initially as need to take from enemies

of the revolution

• successive waves of collectivization– foundations of markets destroyed– professional and managerial class forced out

• shift of trade from U.S. to Soviet Union and China– U.S. trade embargo

• growth maintained through spending of foreign reserves, massive public works, and popular revolutionary fervor

• economic dependence on U.S. reduced

• greater equality of income– mainly due to rich leaving

• unemployment remains a problem

• remain dependent on sugar

Attempt to Introduce Central Planning (1961-1963)

• markets destroyed and pipeline to Soviet Union established

• collectivization continues– medium and large farms collectivized– only small, peasant farming remains private– acopio imposed on private farmers

• required delivery of portion of harvest at low, state-set prices

– effectively a tax

• adopts old Soviet-style central planning with priority on heavy industry– inappropriate for an agricultural, one-crop,

developing country

• planning infrastructure lacking– poorly developed vertical channels of

communication and control– inability to generate accurate statistics on

outputs, inputs, etc.– leadership kept making investment decisions

without consulting the planners– investment irrational and highly inefficient in

long run

• agricultural output rots due to breakdown in distribution channels

• irrational price setting discouraged private farmers from producing needed crops

• growth in 1961 continues due to exceptionally good sugar crop harvested before full impact of collectivization and administrative reform

• over next two years output falls– agricultural output in 1963 23% below 1958

level

• Cuba’s debt to Soviet Union skyrockets as exports decline– 80% of trade deficit held by Soviet Union– replaces economic dependence on U.S. with

economic dependence on Soviet Union

• open unemployment replaced by under-employment

• jobs and wages guaranteed in state sector– worker productivity on state farms half that of

private farmers

• attempt to use urban surplus labor as “voluntary” unpaid labor in countryside– highly unproductive and costly

• supply of consumer and agricultural goods falls– rationing begins– black market appears

• distribution of income probably becomes flatter– elimination of medium and large farms– taxation of small (but still above average

income) farmers through the acopio– emigration of half of MDs and most professors

• on other hand, high, black market prices favors rich and locks out poor

• deterioration of economy and exodus of professionals causes deterioration in social services– education

– health care

• housing stock declines

Co-Existence of Two Models (1964-1966)

• gives up on industrialization and returns to sugar as engine of development

• debate between Mao-Guevarists and Libermanists

• Che Guevara influenced by China’s Great Leap Forward– proposed elimination of material incentives– elimination of money

– full collectivization– fully centralized planning– consciousness-raising through education,

mobilization, unpaid voluntary labor, moral incentives, and expansion of free social services

– an attempt to by-pass socialism and leap right to communism

– revolutionary victory of “subjective conditions” (idealism, moral consciousness, willingness to work for the good of society) over “objective conditions” (economic realities such as material incentive effects, supply and demand, scarcity)

• Libermanists were a moderate, pragmatic group influenced by writing of Russian economist E. G. Liberman– Libermanism influenced attempts in E. Europe

and Soviet Union to find market-based mechanisms to reform their sluggish economies

– emphasizes material incentives and enterprise self-financing

• “objective conditions” over “subjective conditions”

– wages tied to work quotas• full wage only if work quota met

• Mao-Guevara model applied in two-thirds of state sector, including industry

• Liberman model applied in agriculture and exports– watered down by state-budget grants to cover

losses

• no increase in collectivization

• although both sides advocated a central plan, there were no central plans– sectoral plans proliferated

• system of work quotas and wage scales developed

• growth resumed mainly due to– increased world prices for sugar

• resulted in increase in trade with non-socialist countries

– a fair sugar harvest– better incentives introduced by Liberman-style

reforms in agriculture

• setback for diversification goal– justified on grounds of comparative advantage

• surplus urban workers relocated to countryside through– compulsory military service– “voluntary” labor– restrictions on labor mobility– selective incentives

• income distribution becomes less flat as production and overtime bonuses instituted and as private farm incomes rise

• radical collectivization– state buys up private farms or increases acopio– family plots of state farm workers taken– remainder of non-ag private sector passes to

state control• 56,000 small businesses such as street food vendors,

restaurants, bars, repair shops, handicraft shops,

Adoption and Radicalization of Mao-Guevarist Model

(1966-1970)

• no annual plans– ad hoc allocation decisions made by political

leadership– use of monetary calculation and market

mechanisms totally abolished in agriculture– accounting techniques downplayed

• capital accumulation emphasized– consumption stagnates– capital productivity falls sharply as investment

decisions irrational

• labor productivity falls – reduction in material incentives– gigantic labor mobilizations

• chaos– shortages and bottlenecks appear due to lack of

planning– imported capital left to rust on docks– nearly finished factories left closed because of

missing components– harvests lost due to lack of coordination– maintenance neglected causing shutdown of

factories and electric plants

• economic growth turns negative

• trade deficits increase

• dependence on Soviet Union increases

• yet irritated Soviets by claiming to be ahead in transition to communism and refusing to adopt the Soviet planning model

• Soviet Union retaliates in 1968 by reducing oil shipments

• full employment reached but up to half of workday wasted– labor absenteeism increases reaching 20%

• reduction of wage differentials and bonuses flattens income distribution

Assessment of First Decade

• very slow growth– especially for a developing country– causes of slow growth

• destruction of market mechanisms w/o adequate substitute

• numerous changes in economic organization

• great leap backward of Mao-Guevarist period

• exodus of technical, professional, and managerial talent

• low sugar output and world prices

• consumptionist policy in first half followed by poor investment decisions in second half

• embargo by U.S. and O.A.S.

• heavy burden of national defense and subversion abroad

• highly inefficient allocation of resources– low labor and capital productivity

• more equal distribution of income, at least in money terms– the rich depart– state eliminates interest and rental income and

profit– state sets wages– nominal unemployment eliminated and wages

guaranteed

• exchanges economic dependency on U.S. for dependency on Soviet Union

• fails to diversify economy– continues dependence on sugar– fails to industrialize

Return to Central Planning in 1971

• leadership recognizes failure of Mao-Guevarist model– Cuban society not ready for the ascendancy of

subjective over objective conditions– foundations of socialism must be built first– Soviet Union recognized as much further along

on road to communism so theirs is the model to follow

• Soviet model is based on a highly institutionalized model of central planning with recognition of importance of material incentives to motivate desirable behavior

• Cubans referred to this stage as “institutionalization of socialism”

• in agriculture, farms organized into collectives and state farms

• acopio system continued for private farmers but at higher prices– private farmers encouraged to sell surplus in

free peasant markets

• planning structure built, including functioning vertical channels of information and control

• Cuba incorporated into COMECON in 1972

• by 1976, full Soviet system constructed– first five-year plan guiding annual plans– sectoral plans components of annual plan

• supported by experts trained in planning techniques

• enterprises managed by experts trained in enterprise management

• replacement of the political cadres with experts

• considerable decentralization– 300 enterprises broken up into 3,000

• enterprises on self-financing basis– legal entity with own bank account and ability

to borrow working capital– expected to earn profit with planned prices set

to cover input costs

• reintroduction of Soviet system of work quotas and wage scales– wage differentials set to reflect skills, labor

market needs, etc.

• reintroduction of bonus system

• increased supply of consumer goods

Economic Performance in the 1970s• impressive growth spurt in first half

– more efficient economic organization– better individual incentives– better allocation of capital– steady output of trained personnel

• managers

• engineers

• skilled workers

– booming sugar prices– mechanization in sugar industry– postponement of debt to Soviet Union and new credits– relaxation of U.S. embargo

• growth slows considerably in second half– sugar output rises but prices fall– industrial output levels off

• income distribution less equal– Mao-Guevarist emphasis on equality seen as

idealistic mistake– new stress on efficiency releases surplus labor– reintroduction of material incentives– increased use of prices– curtailment of some free social services

The 1980s• decent growth in first half

• due almost totally to huge increase in labor and capital and continued Soviet subsidies– dramatic rise in female labor force participation– baby boom from early ‘60s– labor productivity stagnant– capital productivity falling

• negative growth in second half– extensive means of development exhausted– huge increases in trade and budget deficits– exports stagnate and no new products developed

• these problems become obvious to leadership by the mid-80s

• leadership begins in 1984 to question the applicability of the Soviet model in Cuba

• “process of rectification of errors and negative tendencies”– counter-economic reform

• return to social mobilization

• elimination of farmers’ markets and artisans’ markets that had been created in early ‘80s

• yet another reversal by the Cuban leadership– makes reform in the ‘90s more difficult

• it wasn’t working real well for the Soviet Union at that time– though it had worked well enough in the past in

the Soviet Union to accomplish a lot of socialist goals

• Soviet model works best in large, closed, resource rich country– Cuba is a small, open economy unable to ignore

economic realities like comparative advantage

Why Did the Soviet Model Not Work for Cuba?

• whatever the economic system, Cuba needed to develop out of its position as a supplier of basic commodities– terms of trade inevitably turn against such

economies• in 1959 a 60 horse-power tractor could be imported

with the proceeds of 24 tons of sugar

• in 1982 it took 115 tons

• in 1960 a ton of coffee bought 37.3 tons of fertilizer

• in 1982 a ton of coffee bought only 15.8 tons

• Cuba’s relationship in COMECON locked it into a position of being the supplier of basic commodities, mostly sugar

Crisis: The Fourth Decade

• central planning abandoned in most of East Europe in 1989 and shortly after in Soviet Union

• COMECON disintegrates

• loss of both subsidies and trading partners

• between 1989 and 1993 Cuba’s economy contracts by a third– rest of Latin America is growing rapidly

• decline arrested in 1994, but no significant recovery since