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Cuba Samples Globalization

Author: Bruce Stokes
January 18, 2003
National Journal

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HAVANA-The thin light from a lone fluorescent street lamp barely sketches the crumbling facades of what was, a hundred years ago, one of central Havana's fashionable neighborhoods. At one courtyard entrance, a sign announces Paladar La Guarida, one of a small number of family-run restaurants that have sprung up in the city since 1995, when the government first legalized such enterprises to enable people to supplement their collapsing incomes.

The intrepid diner climbs a cracked, stained marble staircase into the mansion's once-elegant ballroom. The expanse is now festooned with sheets and underwear-the hanging laundry of multiple families who occupy what was once a single-family dwelling.

Up another flight, behind an unpretentious door, lies La Guarida. Its two rooms, crammed with tables, are garishly decorated with antiques, modern art, and photographs of Hollywood stars who have dined here. Restaurants like this one are supposed to seat no more than 12 diners. On this evening, however, nearly twice that number are feasting on an imaginative array of delicious appetizers and elegantly presented fish, chicken, and pork, along with an impressive wine list and a chocolate tart to die for.

Such a meal bears no comparison with the normal diet of most Cubans, who live abstemiously on a state ration of rice and eggs, and an occasional serving of pork or chicken. The La Guarida bill, $30 per person, is three times the average monthly salary in Cuba, and diners must pay it in scarce U.S. dollars. Clearly, this restaurant caters to international tourists, now Cuba's largest source of foreign exchange, and to the small but growing number of Cubans who drive taxis, work in tourist hotels, or labor for foreign joint ventures and have access to greenbacks.

La Guarida's setting is a depressing reminder of Cuba's long-lost affluence. Yet its culinary and business success is a tantalizing hint of what Cuba might become if it had a market economy. And the restaurant's very existence symbolizes Cuba's emerging two-track society, in which a few people have successfully entered the broader global economy while a far larger number remain isolated and fall further behind their countrymen, in a nation that has believed in, fought for, and largely achieved a rough egalitarianism.

Cuba is rapidly being globalized. But its leaders are struggling to define the nation's niche in that world marketplace. "Globalization is a fact," observed Ricardo Alarcon, the president of Cuba's National Assembly. "You can't be against the movement of history."

Like leaders everywhere, Alarcon and others in Havana hope to maximize the benefits and minimize the costs of that globalization. Cuba's prospects, however, are clouded by its sclerotic planned economy and its authoritarian Communist political system, neither of which has the flexibility demanded by the global marketplace. Moreover, people on Cuba's streets are wary of swimming in the broader capitalist sea without the benefit of their life vest-the economic safety net that socialism has long afforded them. Their personal initiative is also questionable after 44 years of dependence on the state for their livelihoods. And many people still fervently adhere to the strict egalitarian values of the revolution.

Cuba's most important global competitive advantage-its proximity to the U.S. market-is constrained by the U.S. trade and investment embargo imposed in the 1960s in a futile effort to topple the Communist regime of Fidel Castro. Moreover, the island's geographical blessing is also a curse. The sun and sea tempt the new Cuba to become a typical Caribbean economy, sustaining itself through tourism rather than more-productive activities-manufacturing, services, and specialty agriculture. Finally, time is working against Cuba, in two ways. Its well-educated workforce is not renewing itself-the population is not increasing. And the uncertainty about what may follow Castro's inevitable passing-he is 76-has created a wait-and-see attitude about needed reforms, a dawdling that is incompatible with the rapid pace of globalization.

All in all, current efforts to sculpt a Cuban face onto globalization will be a struggle.

Clawing Back

In the late 1980s, Cuba looked like a fairly successful developing nation, with the best health care and education in Latin America and a per capita income comparable to that of Costa Rica. But the prosperity was a false one, dependent on Soviet subsidies that accounted for a quarter of the Cuban economy. When the Soviet Union collapsed, abruptly ending the socialist dole, Cuba plunged into a deep crisis. Food shortages became commonplace, and cars and buses disappeared from the streets for lack of fuel.

The island nation has been clawing its way out of that hole ever since. It welcomed foreign investment-mostly European and Canadian. It revived its long-dormant tourist industry, expanded nickel mining for the world market, and began pumping more of its own oil. And it diversified its external commercial relations, replacing the Soviet bloc, which accounted for four-fifths of Cuba's trade in 1989, with Venezuela-the major source now of its oil-and Europe and Canada.

Then, beginning 18 months ago, a fresh series of blows struck the economy. The falloff in tourism after the September 11 terrorist attacks severely curtailed access to foreign exchange. The global economic slowdown and the resulting fall in world nickel and sugar prices crimped Cuba's export earnings. And a rise in oil prices swelled the nation's import bill. Damage from three severe hurricanes only made matters worse.

It is little wonder, then, that Cuba's economic growth slowed from 6.2 percent in 1999 to 3 percent in 2001; economists expect to see even slower growth when final figures are available for 2002.

"The slowdown is the result of economic reforms that were insufficient, and interrupted, to cope with the problems," said Carmelo Mesa-Lago, a professor emeritus of economics at the University of Pittsburgh who follows the Cuban economy closely.

Because these reforms have been inadequate, the economy has only partially transformed itself. Tourism is now the island's principal industry. Nickel exports have accelerated: They once generated a tenth of foreign earnings; they now produce a third. Sugar production, however, is half of what it was in 1989, and sugar has fallen from nearly three-quarters of all exports by value in 1989 to barely a quarter today.

The island's industrial base still lags behind. Manufactured imports-many of them brought in to satisfy the needs of the tourist trade-have nearly doubled as a portion of all imports. Merchandise trade is seriously out of balance, with imports nearly triple exports. At the end of 2001, the country had a $10.9 billion external debt-not high by developing-country standards. Cuba, however, pays above-average interest rates on its debt, because the U.S. embargo and Cuba's uncertain political future make lenders skittish.

Most ominously for the Castro regime, real wages in 1999 were still only three-fifths of what they were in 1989. Average income is only the equivalent of $10 per month; almost all Cubans, wherever they work, are paid by the state in Cuban pesos. For three-quarters of wage earners, their state-supplied earnings are insufficient to cover daily expenditures. Three in five households survive only because of the dollar incomes they get from pay supplements provided by state enterprises or by foreign joint ventures; from tips they pick up in the tourist trade; from private entrepreneurial activity; and from remittances by Cuban-Americans to their relatives on the island (these remittances in 1999 averaged $73 per person).

The result has been a loss of equality-the erosion of one of the principal benefits of the Cuban revolution. The gap between the highest and lowest incomes in Havana, Mesa-Lago says, has grown markedly over the past seven years. The effect is evident every time Cubans head to a market for food. A worker solely dependent on her state peso income, for example, would have to work 15 days to earn enough-about 194 pesos-to buy a modest supply of pork chops, rice, black beans, soap, and toothpaste, according to a survey done by Philip Peters, the vice president of the Lexington Institute in Arlington, Va. The driver of a private taxi in Havana, on the other hand, could pay for the same purchase after working only 1.5 days. Remittances from Cuban-Americans might be expected to help rebalance this inequality, but instead they add to it, and in a distinctly race-weighted way. Of those receiving cash from relatives abroad, 98 percent are white, because most of those who fled to Florida in the wake of the revolution were white. Thus, Cuba's mulatto and black majority has less access to desperately needed dollars.

Largely because of this difficulty in earning a living wage, Cubans have the smallest families in Latin America. Raising a family is too hard, even in a socialist state where many of life's needs are ostensibly provided.

The Challenge Ahead

Cubans in the street are quick to blame most of these problems on the U.S. embargo. But the country's leaders privately harbor no illusions about a quick end to the U.S. boycott. So they are focusing their attention on a broader, more difficult task-reforming the domestic economy and carving a niche for Cuba in the global market.

"Our challenge is to have a new strategy of economic development," said Julio Carranza Valdes, a Cuban economist working for UNESCO in Havana. "We need deeper economic reforms in order to get more dynamism in the labor force, and we need to use our economic capacity in more and different economic activities to create a more efficient economy."

Valdes believes that inserting Cuba into the global economy will expose domestic producers to greater foreign competition, which will accelerate internal change-restructuring-and maximize its benefits.

Foreign investment is critical to the success of this restructuring. Help, however, has been slow in coming. From 1990 through 2001, $5 billion in foreign investment was announced for Cuba, but only $2.5 billion was disbursed. Foreign firms that are dragging their feet complain about excessive overhead, in the form of banking, customs, and utility charges. They're also unhappy with unilateral changes the Cuban government makes (in its favor) in joint-venture agreements. Perhaps their biggest complaint is the requirement that they pay workers' salaries in dollars to the state, which then pays the Cuban workers in pesos at the "official" rate and not the better market-exchange rate. Most of these obstacles are within the power of the government to remove.

To date, much of the investment has gone to the building of hotels and resorts to create a tourist industry. Superficially, the effort has been a tremendous success. The number of foreigners visiting Cuba-despite a U.S. ban on most tourism by Americans-has grown more than fivefold, from 340,000 in 1990 to 1.77 million in 2001. Tourism revenues have risen from 550 million pesos in 1992 to 1.8 billion pesos in 2001. Directly and indirectly, tourism supports 300,000 Cuban jobs.

"Tourism is a positive activity," said Mesa-Lago. "It's a strength. The problem is that Cuba has not established an interconnection between its domestic economy and its tourist economy, so tourism has no multiplier effect on the local economy." He notes that importing goods to meet tourists' needs (everything from Coca-Cola to shower curtains) eats up a third of the foreign exchange Cuba earns from tourism. This is a tremendous improvement from 1992, when Cuba retained only about a fifth of its net tourist revenue. But, Mesa-Lago argues, Cuba needs to undertake further economic reforms-such as market incentives to get local farmers to grow what tourists eat-if it is to maximize the country's earnings from tourism.

Tourism poses other problems, too. It has distorted the local labor market. Thousands of teachers, engineers, and doctors have quit their state jobs because they can earn more money as taxi drivers and waiters-and be paid mostly in precious dollars. Tourism, meanwhile, creates many dead-end jobs, offering low wages (albeit with opportunities for tips), with little necessity or opportunity for gaining new skills, and little room for advancement over time.

The quality of many hotels and resorts for the tourist trade is also suspect. All too often, said Mario Coyula, one of Cuba's leading architectural historians, "these are cheap investors looking for cheap projects, and cheap [Cuban] officials looking for cheap money. It results in cheap projects. Such foreign investment can be more destructive [to Cuba's historic buildings] than erosion or deterioration," Coyula said.

Said Valdes: "We will always have the beach and the sun. At the same time, we should have tourism with a Cuban mark-eco-tourism, cultural tourism," activities that generate premium returns, create higher-value jobs, and attract quality investments.

The Workforce Dilemma

In its efforts to catch a ride on the globalization wave, Cuba has both a unique opportunity and a formidable challenge because of its well-educated workforce.

Cuba has the highest literacy rate in Latin America, with 81 percent of its secondary-school-age children in school (Brazil has only 66 percent), and with the average child getting 11 years of education (in Nicaragua, it's nine). Cuba, as a result, is well positioned to provide more than raw materials and tourist services for the world economy. "We need more economic activity that can build on these talents," Valdes said.

Cuban officials have ambitious dreams of becoming, for example, a center of biotechnology and pharmaceutical production, taking the same step that has helped the Puerto Rican economy. But that goal is far from being realized. In 2000, pharmaceuticals accounted for less than 2 percent of Cuban exports.

And demographic trends could destroy the dream. Today, the number of Cuban university graduates is a third of what it was in the early 1990s. Young Cubans are forgoing college for jobs driving taxis and waiting on tables, occupations that promise better income than the professions. "The economic crisis has had a serious impact on people with high qualifications," Valdes said. "It is necessary to create other opportunities for these people." If Cuba fails to stem this young people's boycott of its higher-education system, it risks losing its competitive advantage in the global economy before ever having a chance to use it.

For the long run, the Cuban people's demographic protest-couples are having, on average, less than two children and thus are not even replacing themselves-suggests a broader need to give people hope for the future.

Paying the Cost

Cuba clearly has much to gain from globalization. But the people, and the ruling Communist Party, also have much to lose.

Hundreds of thousands of jobs are on the chopping block because of recent cutbacks in sugar production. Such dislocations are never easy, particularly in a socialist society in which joblessness is rare. When layoffs are necessary, said Alarcon, "I believe in the right of a worker to not be removed from his position without a discussion." Such a "discussion" in Cuba is a lengthy deliberative process that is at odds with rapid-paced, market-based decisions. Laid-off sugar workers will ostensibly be retrained. But after retraining, they'll need new jobs.

Cubans believe they can have globalization with a Cuban face. "You need foreign investment," Valdes said. "And you must assume negative consequences. But you should control the damage with rules and regulations. We see an important role for the market, but with the continued hegemony of social interests."

Spoken like a true Western European Social Democrat. To date, however, the Cuban government's efforts to balance its social and economic goals have been ham-handed. In the mid-1990s, when a relaxation of controls on private enterprise led to a rise in inequality, Havana clamped down by raising licensing fees on the self-employed and by imposing new taxes on the paladar (private) restaurants and on the rooms homeowners rented out to tourists. Consequently, self-employment fell from 208,500 in 1995 to 153,800 in 2001. It was an unfortunate reaction to the consequences of market reforms.

Finally, economic reform and globalization cannot easily be divorced from political reform. "If we open the economy, we will need an open political system," said Valdes. But he worries about a subsequent reconcentration of political power in the hands of the wealthy. "We will need clear rules, in order to have fair political competition," he said. Good luck!

The Future

Looking ahead, the U.S. embargo on trade and investment will undoubtedly keep on constraining Cuba's globalization. And Cuban leaders understand that a Republican-controlled Congress is unlikely to lift the boycott.

Trying to put the best face on the situation, Alarcon said: "I am not advocating the maintenance of the embargo, but [to improve U.S.-Cuban economic ties] you probably don't have to change the laws. It's how you administer them." He argued that any positive signal from Washington, by hinting at the eventual dropping of the embargo, would help accelerate foreign investment in Cuba and would cut Cuba's borrowing costs abroad.

Beyond that, Mesa-Lago points to Costa Rica as Cuba's possible model for globalization. That small Central American nation has transformed itself from an exporter of bananas and coffee to an exporter of manufactured products, thanks to its well-educated workforce. And it has developed a flourishing eco-tourism business.

Neither a U.S. relaxation of the embargo nor the further development of a globalized Cuban economy is likely, however, without deeper Cuban economic reforms. In December, a small group of Cuban dissidents in Havana-calling themselves the All United Movement-issued a manifesto proposing 36 reforms. Their proposals included a rise in salaries and pensions, freedom for all to work for foreigners with partial payment in dollars, more freedom to set up small businesses, and the right to form free trade unions. The dissidents argued that these changes could be implemented without any amendment to the Cuban Constitution. Nevertheless, the changes they seek would challenge the underlying principles of the Cuban economy and the role of the state and the party. Not surprisingly, their proposals have been met with stony official silence.

Such resistance to reform, however, inhibits the broader pursuit of Cuba's efforts to adapt to globalization. And it ignores Cuba's continuing dire economic condition.

"The Cuban economy cannot stand much more," lamented one Cuban. "We will have to change." The question is whether that reform will be planned and deliberate, or-as in the early 1990s-reactive.