Two generations lost to Communism

50 years of Communism have left Cuba poorer than ever

Fidel Castro's revolution has left Cubans destitute
Tim Congdon
On 11 June 2014 17:24

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 percent 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 the National 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 inpaladares 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.

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