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    OPINION
    FEBRUARY 2006

    Cuba’s : Mistaken Blame

    BY PHILIP PETERS

    Philip Peters is vice president and director of the Cuba Program at the
    Lexington Institute. This column is based on a research paper released
    in February 2006.

    Cuba’s inequality is not mainly the result of deviant behavior; it is
    caused in larger measure by Cubans’ lawful earnings in an economy
    separated by the government’s own economic policies. The number of
    licensed entrepreneurs and foreign investors are falling.

    The American press reported a CIA assessment that Fidel Castro has
    Parkinson’s disease, and the Cuban president responded last November 17
    with a four-hour speech that showed stamina and a sense that this
    comandante en jefe, at age 79 and in power 47 years, still keeps a long
    list of things to do.

    Speaking in the of Havana’s formal lecture hall, Castro
    himself broached the topic of post-Castro Cuba. He challenged his
    audience to consider whether and how the revolution would survive as it
    confronts domestic problems now and an American policy that seeks to
    undermine socialism quickly once he departs. Among those domestic
    problems are two chronic ones – pilferage of state resources and income
    inequality – that he discussed with clear knowledge of what is going on
    in Cubans’ daily lives. It is less clear, especially in the case of
    bridging income gaps, that his solutions match the dimension of the problem.

    2005 was a turning point; a year when the term used to describe the
    economic crisis of the 1990’s – the “special period in time of peace” –
    fell into disuse. Many factors played a part: revived , high
    nickel prices, an offshore oil discovery with hopes of more to come, new
    pledges of foreign investment, trade credits from , and a broad
    relationship with that includes the export of services, trade
    credits, and cut-rate oil supplies. Cuba seems to be escaping its
    decade-long cash flow crisis, and international is being
    restructured to end a punishing dependence on short-term, high-interest
    credit. Even the CIA sees progress, estimating that Cuba’s economy grew
    by 5.2 percent last year.

    Despite these improvements, the summer of 2005 was marked by extended
    power blackouts that affected Cubans across the island who lost their
    power, their running water, the food in their refrigerators, and their
    tempers often for days at a time. The blackouts, caused by failed parts
    at a Soviet-era power plant, served as a reminder of a large investment
    and maintenance backlog.

    And in spite of statistics that show low unemployment, the economy is
    not generating the broad-based growth needed to create new jobs for
    Cuban youth and to provide a strong wage for many valued workers already
    in the labor force.

    +++ Cuba’s licensed entrepreneurs have seen their ranks shrink from a
    peak of 209,000 in 1996 to about 150,000 at the end of 2004. There is a
    new bias toward large-scale investments, and more than 100 joint
    ventures have closed their doors, dropping the total to fewer than 300. +++

    The economic improvements were enough to change Cuba’s economic policy.
    2005 saw a retrenchment of some of the reforms of the 1990’s, confirming
    that the market-based policies employed to rescue socialism will not be
    the basis for a permanent course correction.

    Cuba’s licensed entrepreneurs have seen their ranks shrink from a peak
    of 209,000 in 1996 to about 150,000 at the end of 2004, and the number
    may be declining further. The state does not oppose their activity in
    principle, but greater competition from state enterprises and tightened
    regulations have put the squeeze on the self-employed.

    Policy toward foreign investment has also changed; there is a new bias
    toward large-scale investments, and more than 100 joint ventures have
    closed their doors, dropping the total to fewer than 300. If Chinese and
    other investors deliver on recent pledges, however, investment volumes
    will rise considerably.

    Late last year there was a warning and some enforcement action against
    transporters and wholesalers accused of profiteering at farmers markets.
    The message was delivered and the markets, which sell producers’ surplus
    at free-market prices, now seem to be functioning normally.

    It is against that backdrop that Castro delivered his address. While his
    prescriptions were mainly economic, he set them in a political context
    that extends beyond his time in office.

    The speech was full of digressions: about the recent inter-American
    summit in Argentina, about Hugo Chavez’s musings about Mars, about the
    revolution’s achievements, about President Bush’s early-to-bed routine,
    about American actions in Iraq, about Castro’s own eyesight. Between
    these detours he introduced, bit by bit, the issue of the revolution’s
    survival.

    First he touched on the demise of the Soviet Union, a “very bitter”
    experience in “a state that should have worked out its problems and
    never should have destroyed itself.” He then asked, “Is it that
    revolutions are called upon to bring themselves down, or is it that men
    can make revolutions fall?”

    +++ Castro believes the no longer expects to bring his
    government down through economic sanctions and other measures, but
    rather his death. +++

    Soon he touched on U.S. strategy toward Cuba; a plan, he argued, that no
    longer expects to bring his government down through economic sanctions
    and other measures. Rather, he said, “They are waiting for a natural and
    absolutely logical phenomenon, which is the death of someone. In this
    case they have given me the considerable honor of thinking of me.they
    say they have to wait until I die, then that is the moment.”

    Later he applied his questions to the Cuban context: “Can a
    revolutionary process be irreversible, or not? When those who were among
    the first, the veterans, are disappearing and making room for new
    generations of leaders, what is to be done and how should it be done?”
    Castro argued that the Cuban people are well prepared and educated and
    “would never permit this country to become again a colony of theirs.”
    The danger is internal, he continued: “This revolution can destroy
    itself, we can destroy it, and the fault would be ours.”

    How could this come about?

    Castro did not directly link energy security to political survival, but
    he is in the midst of an energy conservation campaign, and he discussed
    the issue at great length in this speech. The audience was left with no
    doubt that mass installation of high-efficiency light bulbs would
    continue, and that subsidized electricity rates are a thing of the past.

    Castro spoke frankly about the income inequality that emerged during the
    1990’s, and he disparaged the “new rich” who may earn “twenty times,
    thirty times more” than a doctor, professor, or engineer who earns a
    simple salary from the state. He also discussed in detail the ways in
    which some Cubans earn extra income illegally – the unlicensed taxi
    driver who “drives his old car, buying and stealing gasoline all the way
    from Havana to Guantanamo.charging 1,000 p
    esos, 1,200 pesos to one of
    those young students who has to travel when the transportation situation
    is very difficult.”

    Describing the theft of resources from the state, he asked rhetorically,
    “How many kinds of theft are there in this country?” He cited the case
    of a construction brigade that systematically stole and sold
    construction materials. And he spoke of large-scale theft of gasoline
    that was exposed when the government posted young “social workers” to
    monitor sales and receipts at gas stations across the country. In
    Havana, Castro recounted, gas station revenues suddenly doubled. In
    Pinar del Rio, “It was soon discovered that what was being stolen was
    equal to what was being sold.”

    But there was a gap in the explanation of income inequality. There is no
    doubt that thieves and black marketeers – not to mention the
    “cheapskates” and “egotists” that Castro described in his speech – can
    and do enrich themselves. However, Cuba’s inequality is not mainly the
    result of deviant behavior; it is caused in larger measure by Cubans’
    lawful earnings in an economy bifurcated by the government’s own
    economic policies.

    Cubans who work for a joint venture with a foreign investor, or earn
    tips in the tourism industry, or work as licensed entrepreneurs, or sell
    private farm produce on the open market, or receive support from
    relatives abroad, easily earn three or more times the average salary
    paid to state workers. Cuban policies adopted between 1992 and 1994 make
    these high incomes possible.

    At the very same time, life became more expensive. Cuban consumers found
    that many goods needed to meet basic needs – soap, toothpaste,
    housewares, appliances, many kinds of clothing – were available only in
    hard currency stores, and not at discounted prices. Cubans with low
    incomes and no access to hard currency are left scraping each month to
    make these purchases. Cuba’s vast black market is surely more a result
    of this inequality than its cause.

    +++ Government actions make the income gap harder to breach: prices
    remain high in state retail establishments, certain telephone charges
    increased last year, and electricity rates are going up now. Actions yet
    to come could widen the gap further. +++

    The Cuban government has attempted to close this income gap in recent
    years, for example by increasing salaries for health and
    workers, and last year by increasing minimum salaries and pension
    payments across the board. The government has also taken steps to
    redistribute income. Through a new exchange rate that devalues the
    dollar against the Cuban convertible peso (the sole currency for
    domestic hard-currency commerce), it is drawing a new stream of revenue
    from Cubans who have dollar income from family remittances and other
    sources.

    However, other government actions make the income gap harder to breach:
    prices remain high in state retail establishments, certain telephone
    charges increased last year, and electricity rates are going up now.
    Actions yet to come could widen the gap further. Referring to the ration
    book that tracks each household’s monthly supply of highly subsidized
    food, Castro said without elaboration, “We are creating the conditions
    for the libreta to disappear.” He talked of a drive to eliminate
    subsidies in and transportation and other services while
    maintaining free health care and education. Castro hinted at pay
    increases to come – but depending on the magnitude and sequencing of all
    these measures, they could make purchasing power go up, or down.

    When Soviet bloc support for Cuba’s economy came to an end, Cuba’s first
    task was to survive a horrific economic crisis. Survival was
    accomplished, and Cuba went on to accomplish its “re-insertion” into the
    international economy through new sources of hard currency income and
    new economic alliances.

    Now comes the third major task of Cuba’s post-Soviet economy: ending
    gross income inequality and raising standards of living in an economy
    unbalanced by more than a decade of deep change.

    For Cubans in their twenties, this means providing good jobs at good
    wages. For older generations, it means restoring the purchasing power
    they had before 1991 when salaries covered basic needs and more. For the
    Cuban economy as a whole, the rationalization of pay structures is
    vitally important: it can eliminate incentives for petty , it
    can end the flight of educated and talented Cubans from their fields of
    expertise to tourism, where earnings are higher.

    +++ There will be continued efforts to expand economic relations with
    countries such as Venezuela and China, and to expand exports of medical
    services. +++

    Castro’s speech does not provide a clear road map as to how these goals
    will be achieved. He did indicate a continued recentralization of
    economic decisionmaking – a reversal of a management reform taken a
    decade ago. There will be continued efforts to expand economic relations
    with countries such as Venezuela and China, and to expand exports of
    medical services. Social workers will be deployed beyond gas stations to
    root out theft in bakeries, cafeterias, pharmacies, and other
    installations. Energy conservation will continue to be a high priority;
    ministries will reduce their fleets of vehicles and lose control of some
    of their fuel supplies. Gas-guzzlers in the private sector – including
    some private taxis and the 1950’s American cars with replacement engines
    under their hoods – may also receive, in Castro’s phrase, “a Christian
    burial.” Private restaurants may disappear altogether, he said, having
    long been subsidized by low electricity rates.

    The effort to promote equity will proceed, in other words, on the
    strength of Cuba’s new financial position, and by betting on the central
    government’s ability to plan and execute a growth strategy. There is no
    sign of a perceived need for the entrepreneurship and decentralized,
    competitive decisionmaking that have generated broad-based growth from
    below in economies, including socialist economies, around the world.
    Market-based growth is not part of Cuba’s equation today – to the
    contrary, it is viewed as an error that could threaten socialism itself.

    “There were those who believed that with capitalist methods they were
    going to construct socialism,” Castro said. “It is one of the great
    historical errors.” The speech does not define how or whether Cuba will
    act to rectify those “errors,” leaving a question mark by many current
    economic policies. What is clear is that corruption, theft of state
    resources, and the excessive use of “capitalist methods” have all been
    placed in the ideological context of threats to the revolution’s
    survival, and their treatment can now be viewed as matters of national
    security. If there is a decision to retrench further in economic policy,
    the ideological path has been cleared.

    http://www.latinbusinesschronicle.com/reports/opinion/0206/peters.htm

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