Transcript Slide 1

Cuban Economics:
How Politics Has Changed the Course of Economic
Growth and Stability
Created By:
Jason Zimmerman
Martin Rugeroni
Brittany Riley
Martha Kramer
Spring 2010
Econ 4311
Aim and Outline

Aim: To present and analyze how Cuba’s political
decisions have affected the course of its economic
growth.

Pre-revolution Economy
Revolutionary Period
Evolution of the Embargo
The Fall of the Soviet Union
Economic Reform
Recent Policy Changes
Cuba’s Future
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History
Spanish Colony until 1902
 1902 US companies
controlled 80% of Cuba’s
nickel exports
 Owned most sugar and
cigarette companies
 US began a massive public
health program

1902 Cuba Independent
 Platt Amendment , great dependency from
the US.
 Cuba would not transfer Cuban land to any
power other than the United States
 The right to US intervention in Cuban affairs
and military occupation when the US
authorities considered that the life, properties
and rights of US citizens were in danger.
 1933 – Eight-hour day established.

1940 Fulgencio Batista elected president
 1940 Modified the Constitution
 Progressive ideas
 Wages and Benefits
 Land Reform
 Education
 Improvements in Media
 Social Indicators

Why a Revolution?
A third of the population still lived in
poverty
 Distribution of land
 Relations with the US
 Urban violence
 Corruption
 Fidel Castro attempted to overthrow
Batista in 1953 and failed.

The Revolution

26th of July Movement, 1956.

United States imposed trade
restrictions on the Batista
administration

Batista Fled Jan 1, 1959

Castro took over
Persecution of opponents
 Labor unions were made illegal
 Land and property expropriation and
nationalization.
 Cuba also nationalized all United States and
other foreign-own land and property
 Castro went to the United States to explain
his revolution. He said, "I know what the
world thinks of us, we are Communists, and
of course I have said very clearly that we are
not Communists; very clearly."


The United States, in turn, responded by
freezing all Cuban assets in the United
States, severing diplomatic ties, and
tightening the embargo on Cuba, which is
still in place after 50 years.

In response to the acts of the Eisenhower
administration, Cuba turned to the Soviet
Union for support.
Cuban Relations with USSR

1960 – Cuba and Soviet Union sign trade
agreement
– Soviet Union buys sugar
– Cuba buys crude oil

U.S. oil firms in Cuba stop refining oil
purchased from USSR
– Cuba nationalizes refineries
Start of the Embargo

President Eisenhower cancels most of
Cuban sugar quota

Cuba retaliates
– expropriates all U.S. property
– Discriminates against imports of U.S. goods

U.S. imposes export embargo to Cuba
except for medicine and food

1961 – US-Cuban diplomatic relations are
severed; US restricts travel to Cuba

Foreign Assistance Act - Total embargo on
all trade
– Amendment included barring aid to countries
assisting Cuban government

Organization of American States (OAS) Leninist ideology is incompatible with interAmerican system
More Restrictions

1962 - Cuban Missile Crisis
– U.S. “quarantines” Cuba

Kennedy administration prohibits travel to
Cuba
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Financial and commercial transactions with
Cuba illegal for U.S. citizens
Decreasing Restrictions

1975 – OAS lifts collective sanctions
– Each nation decides relations with Cuba

U.S. allows foreign subsidies of U.S.
companies to sell products in U.S.

No longer penalize other nations for trade
with Cuba
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1977 - Congress repeals provision of Foreign
Assistance Act of 1961
– No longer refuses aid to countries trading with
Cuba

1978 – U.S. residents allowed to send up to
$2000 in remittances a year
Resurgence of Embargo Policies

1981 – Reagan inaugurated as president,
initiates tighter economic embargo

1982 – Reestablished travel ban

Remittances reduced from $2,000 to $1,200
per year
Minimal Effects of the Embargo
By the late 1980s:
 99% of Cuba’s oil came from the Soviet Union
 Received oil at prices far below market value
 Cuba had reduced oil-consumption
 Re-exported surplus petroleum was 2nd largest
export (after sugar)
 Vessels from the Socialist bloc transported 85%
of Cuban trade
 85% of Cuban trade was with Council of Mutual
Economic Assistance (COMECON)
– Transactions mostly in nonconvertible currency
Year
19
90
19
89
19
88
19
87
19
86
19
85
19
84
19
83
19
82
19
81
19
80
19
79
19
78
19
77
19
76
19
75
19
74
19
73
19
72
19
71
19
70
Real GDP per capita
Real GDP Per Capita
8000
7000
6000
5000
4000
Brazil
C hile
M exic o
C uba
3000
2000
1000
0
Year
19
90
19
89
19
88
19
87
19
86
19
85
19
84
19
83
19
82
19
81
19
80
19
79
19
78
19
77
19
76
19
75
19
74
19
73
19
72
19
71
19
70
Openness
Openness
50
45
40
35
30
25
20
Brazil
C hile
M exic o
C uba
15
10
5
0
A Time of Transition

Late 1980s: Cuban-Soviet relations
weakened as Soviet leadership moved away
from Marxism

Late 1989: Cuba announced the Program
Alimentario
– Goal: improved self-sufficiency
– Method: large investments in agricultural sector
A Special Period in a Time of Peace

August 1990 Cuba announced the Período
Especial
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Originally created for a time of war
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Established a framework to implement
austerity measures
“Special Period”
New rationing schedules
 200 goods added to the ration list
 50% cut in energy consumption required
 Reduced work hours at factories
 Large cuts in public transportation
 Encouraged use of animals for
transportation/plowing in agriculture

The Fall of the Soviet Union

Late 1991: Gorbachev withdrew almost
3,000 troops from Cuba
– Symbolic significance: end of Cuban-Soviet ties

Christmas 1991: Soviet Union officially
dissolved
Problems for Cuba

Weakened Cuban military

Major issue: loss of trade partners

External forces of the early 1990s:
– Decrease in sugar prices
– Increase in oil prices
– Vulnerable to U.S. actions
Changes in U.S. Policy
April 1992: Bush banned ships trading
with Cuba from stopping at U.S. ports
 September 1992: Bush instituted a limit
on the humanitarian aid that U.S.
citizens could send to Cuba
 October 1992: Torricelli Bill
 November 1992: stronger restrictions on
baggage for people traveling to Cuba

Torricelli Bill: Cuba Democracy Act

Banned subsidiaries of U.S. companies in
other countries from investing in or trading
with Cuba

Ban included food and medical supplies (in
1992 this was 90% of Cuban trade with U.S.
subsidiaries)
Torricelli Bill cont’d:

Authorized U.S. president to “punish”
countries that provided aid to Cuba
– Withhold economic assistance
– Withhold debt relief
– Terms of free trade agreements
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Strengthened the ban from 1992: ships
trading with Cuba could not use U.S. ports
for 6 months
– Cuba only capable of carrying 20% of its total
trade
1990-1993: A Cuban Crisis
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Shortages
– Food
– Oil
– Medical Supplies

Drop in GDP per capita

Large budget deficits
Cuban GDP 1970-2007
160000000
140000000
120000000
80000000
60000000
40000000
20000000
Year
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
0
19
70
GDP
100000000
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the
Cuban Economy (2002): 510. Print.
Consumer Goods
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Commercial relations with the former
Soviet Union decreased more than 90%
from 1989 to 1993 ($8.7 billion to $750
million)
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Shipments of consumer goods, grains
and other foods declined
Consumer Goods cont’d
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Supplies of clothing and soap became
sparse

Rationing quotas supplied only enough
food for 2 weeks of each month
– Increase in black market activity
Health

Over 300 medicines eliminated from
pharmacies
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About 800,000 Cubans with asthma went
without necessary medication

1993: over 50,000 Cubans suffered from an
epidemic of optic neuropathy as a result of a
vitamin B deficiency
Health cont’d
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Evidence of delayed marriages and a
large drop in fertility rates

Surge of abortions: between 1988 and
1990, 9 abortions for every 10 births
Energy

Oil supply from the (former) Soviet
Union decreased almost 90% from 1989
to 1992

Shortages led cuts in public
transportation

Frequent power outages
Energy cont’d

Daily blackouts imposed

Closing of many industrial plants and
factories

Estimated 50% of industrial plants
suspended operations due to shortages
of fuel and replacement parts
Agriculture
Imports of fertilizer decreased 80% and
animal feed by 70%
 Sugar crop declined from 8.1 million tons
in 1991 to 4.2 million tons in 1993
 1993 shortage of chicken feed resulted in
a halt in egg production
 Animals had to be used to replace
tractors and other farm equipment

Other Problems
Shipments of raw materials and spare parts
for industry ceased
 March 1993: a winter storm caused more
than $1 billion of damage and left over
150,000 people homeless
 Paper shortage: lack of print media
 Factory closings and transportation cuts
left almost 20% of the population displaced

One Success: Tourism
In 1990 tourism brought in $243 million
 Only sector that grew steadily
 Revenues quadrupled in first half of the
1990s
 1993 brought in more revenue than sugar
 If not for embargo, would U.S. tourism
change the Cuban economy?

QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the
Cuban Economy (2002): 513. Print.
Reform and Recovery
Summer 1993: Cuban government began
policy reforms to stabilize the economy
 Legalized the use of foreign currency

– Stop the growing black market for foreign
currency
– Stimulate remittances to citizens by relatives
abroad

September 1993: authorized self-employment
– Many restrictions
– Only open to specific occupations
– Had to pay fees and taxes

September 1993: broke up large stateowned farms into cooperatives
– Owners could choose management, have own
bank accounts and sell the product
– Gave incentives for increased production

May 1994: adopted a policy for reduced
expenditures and increased revenues
– Increased prices of cigarettes, alcohol, gasoline,
public transportation, etc
– Eliminated subsidies
– Charged for previously free items- school
lunches, admission to sporting events, etc

September 1994: created markets where
agricultural producers, once a quota was
reached, could sell excess output at market
prices (determined by supply and demand)
Price
Once producer reaches quota:
-Sell at a higher price
-Consumers not limited to
ration stamp amounts
S
Equilibrium
Ration Price
D
Quantity
*Hybrid economy: transition
from state-controlled/socialism
to free market capitalism

September 1995: changed foreign
investment law
– Allowed 100% foreign ownership
– Simplified the process for foreign
investment

May 1997: reformed the banking system
– Creation of Banco Central de Cuba as an
independent institution
Year
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
GDP per capita
Real Per Capita GDP in Cuba
25000
20000
15000
10000
Brazil
C hile
M exic o
C uba
P eru
N ic aragua
5000
0
Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the
Cuban Economy (2002): 509. Print.
Success
 Negative growth ended and GDP grew
0.7% in 1994
 1993-2000 the average annual GDP
growth was 3.8%
 In 1993 the budget deficit was 33.5% of
GDP, in 1996 it was 2% of GDP
Success cont’d

Exports increased 47.4% from 1993 to 2000

Imports increased 144.4% over the same
period

By the end of the 1990s, growth was steady

In 2000, GDP was still 15.4% below the level
of 1989
Remaining Problem: Embargo

1996: Congress passed the Helms-Burton
Act

1998: report by the U.S. Defense
Intelligence Agency stated, “Cuba does
not pose a significant military threat to
the U.S. or to other countries in the
region."
New Decade

2000 - U.S. lifts ban on exports of certain
agricultural goods
– Cash only sales
– Cuba refused to buy goods for 1 year

Ban on imports from Cuba continues
Hurricane Michelle

2001 – Caused $1.8 billion in damages

U.S. offered direct aid to the people

Castro refuses aid

One time agreement to buy food and
medicine from U.S.
– 1st time Cuba agreed to import food from U.S.
U.S. Strengthened Restrictions
Passed in 2004
 Family visits limited to once every three
years instead of once per year
 Maintain $1,200 transfer limit per year
 Remittances and gifts only allowed to
immediate family
 Castro responds – ban on transactions in
U.S. dollars

Transition Period

U.S. Commission for Assistance to a Free
Cuba - recommends $80 million in aid when
transitional government in place

2006 - Raul Castro takes temporary power
– “disposed to normalize relations” with the U.S.

2008 – Raul officially takes power
2008 Disaster Relief

2 Hurricanes hit Cuba within 10 days
– Destroyed about 30% of crops
– About $9.7 billion in damages

U.S. offered $100,000 in direct aid after
Hurricane Gustav
– Cuba refused

Offered $5 million in direct aid after
Hurricane Ike
– Cuba initially refused
Loosening Restrictions
2009 – ban on Cuban-American travel to
Cuba lifted
 U.S. removes limit on remittances
 Travel restrictions still in place for nonCuban-Americans
 U.S. citizens cannot send money or gifts to
government officials

Present

Trade embargo remains
– U.S. allowed to export certain agricultural
goods
– No Cuban imports allowed

U.S. largest supplier of food to Cuba
– 2008 – exported about $710 million
– $2.9 billion total as of May 2009
 Obama: policy changes
Future of the Economy

Privatization
– Decrease government role
– Redevelopment of activities that disappeared
due to political and ideological reasons
– Commercial sector is key
 Large portion of employment
 Offers investment opportunities
– Private journalism

Trade liberalization
– Open up economy
– Licensing programs should be quick and
inexpensive
– Encourage privatization and investment

Social safety net
– Free health care, education, ration cards
– Currently financed by government’s ability to
set prices/market
– Important to maintain security during
transition
– Seen as basic right by many Cubans
Conclusion
What is coming in Cuba’s future?
 Is the U.S. embargo still justified?
 Was it ever?
 Is the Obama administration reasonable in
waiting for Cuba to take the next steps?
 Video

Sources
PWT 6.3
Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for
International Comparisons of Production, Income and Prices at the University of Pennsylvania,
August 2009.
Deere, Carmen. "Cuba's Struggle for Self-sufficiency - Aftermath of the Collapse of Cuba's
Special
Economic Relations with Eastern Europe." CBS MoneyWatch Monthly
Review (1991). CBS MoneyWatch. Web. 2 May 2010.
<http://http://findarticles.com/p/articles/mi_m1132/is_n3_v43/ai_11063036/>
.
Griswold, Daniel. "Four Decades of Failure: The U.S. Embargo against Cuba." (2005).
CATO Institute. Web. Apr. 2010.
<http://www.cato.org/pub_display.php?pub_id=10921>.
Pérez Jr., Louis A. "Socialist Cuba." Cuba: Between Reform & Revolution. Oxford UP,
1995. 381-87. Cuba's Special Period. J.A. Sierra. Web. 2 May 2010.
<http://www.historyofcuba.com/history/havana/lperez2.htm>.
Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association
for the Study of the Cuban Economy (2002): 507-21. Print.
More Sources
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"BBC NEWS | Americas | Bush Approves New Squeeze on Cuba." *BBC NEWS | News
Front Page*. 7 May 2004. Web. 25 Apr. 2010. <
http://news.bbc.co.uk/2/hi/americas/3690697.stm>.
"BBC NEWS | Americas | Timeline: US-Cuba Relations." *BBC NEWS | News Front
Page*. 31 Dec. 2008. Web. 25 Apr. 2010. <
http://news.bbc.co.uk/2/hi/americas/3182150.stm>.
Hanson, Stephanie. "U.S.-Cuba Relations." *Council on Foreign Relations*. 11 Jan.
2010. Web. 25 Apr. 2010. <
http://www.cfr.org/publication/11113/uscuba_relations.html>.
Maybarduk, Gary H. "Measures Not Taken: Issues For Today And Tomorrow." Web.
25 Apr. 2010. <http://lanic.utexas.edu/la/ca/cuba/asce/cuba9/maybar2.pdf>.
Sanguinetty, Jorge A. "Macroeconomic Policy Issues For A Free-Market Cuba." Web.
25 Apr. 2010. < http://lanic.utexas.edu/la/ca/cuba/asce/cuba9/sanguin.pdf>.
Photo Sources
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http://weblogs.sunsentinel.com/news/politics/dcblog/Cuba%20fla
g.jpg