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Cuba's Reinsertion
into the World Economy

by Pedro Monreal

Dr. Monreal is a researcher of Havana University's Center of International Economy Research (CIEI). In this article, he explores the current challenges faced by Cuba's economy, which seeks upgrading in the context of a crippling U.S. embargo.

Introduction

The process of Cuba's reinsertion into the world economy during the nineties has been officially conceived by the Communist Party as part of a larger effort to "introduce the necessary transformations in order to sustain the continuity and further development of the Revolution and the preservation of its socialist essence, in conditions of efficiency and adaptation to the realities imposed by the international context" (Granma, November 7, 1997).

Almost ten years have passed since the beginning of the process and therefore we can now engage in an assessment of its results, including its shortcomings and limitations. In this paper we will address first the strategies and observable results of reinsertion during the nineties and then present a summarized outline of the main problems faced by the process.

Reinsertion is not and will not be a panacea. Nonetheless, reinsertion is certainly an option to be seriously considered by a country like Cuba since the national consensus seems to reject autarchy (that is, a closed-doors policy). The fundamental perspective to bear in mind is that in pursuing reinsertion there is a trade-off because improving the relative position of the country within the world economy and increasing national income as its result also means becoming incorporated into a system where exploitation, dependency and marginalization are standard features.

Thus, reinsertion should be considered as a kind of 'second best option' for Cuba's economy (lacking a better alternative at the moment). Specific policies should be adopted to pursue the optimum, not the maximum degree of insertion. Excessive fascination with the process would be naïve, illusory and dangerous, and reinsertion must be not conceived as a fatalistic or undifferentiated alternative. Options could be made available.

Cuba's policies of reinsertion during the nineties

Events in Eastern Europe and the former Soviet Union during the late eighties and early nineties forced Cuba to a rapid and vast restructuring of its international economic relations. Much has been written and said about the tremendous negative impact of those events on the Cuban economy. There is even a current of opinion that argues that those events were the cause of the crisis. However, the trade shock associated to those events should be rather considered as the most immediate (but not the only) cause for the crisis of the Cuban economy. A study of the growing tensions in the model of extensive growth in operation during the seventies and the eighties provides more substantial insights on the roots of the crisis.

The trade shocks of 1990-1991 had repercussions both for economic development and for the restructuring of Cuba's international economic relations. So far during the nineties, Cuba has drastically changed its trade, technology and investment partners, modified its institutions of foreign trade, opened the door to foreign investment, developed international tourism at a breathtaking pace, and changed--albeit not in such a dramatic way-- the product composition of its exports.

That process amounted to a reinsertion of Cuba into the international economy, or to be more precise, into the capitalist world. This change in policy came in sharp contrast to the previous period of 'de-linking' from the capitalist world-system, particularly during the eighties.

During the seventies and eighties Cuba was a very 'open' economy but that openness was basically related to the interaction with countries of the former Council for Mutual Economic Assistance (Comecon), and particularly with the former Soviet Union. In 1989 the share of Cuba's total trade with socialist economies was 80%. Relations with the capitalist world were very modest and obviously were not perceived as either 'fair' or 'advantageous' in comparison with Comecon patterns of trade and credit with Cuba, which had built-in mechanisms for transfer of profits (i.e. preferential prices, 'soft' loans, and arrangements for the 're-exportation' of oil in hard currency).

After the abrupt collapse of socialism in Europe, the challenge for Cuba in the nineties was perceived as finding ways of 're-linking' to the world economy. The relative 'step back' in the openness of the country during the early nineties was an historical accident, not a deliberate decision. Even in the worst moment of the crisis the Cuban economy sustained a high degree of openness.

The process of reinsertion has been vigorously obstructed by recent U.S. policy. The economic embargo imposed on Cuba since the early sixties was not only tightened in the nineties regarding new restrictions for U.S businesses but also has been expanded to incorporate extra-territorial clauses that have affected Cuba's relations with the rest of the world.

"Sobrevivir y avanzar"

Seen in retrospect, Cuba's insertion into the world economy shows that a shifting pattern of re-linking took place in Cuba during the nineties. Two different, although mutually inclusive, policy goals were present since the beginning of the process: 'survival' (sobrevivir o resistir) and 'moving forward' (avanzar). The first goal could be reached by 'securing a place under the sun' in the global system, even if a very modest one. The second goal requires 'upgrading' within the system, which in strictly economic terms means following a progressive trajectory of absorption of new knowledge and technology, and consequently, the achievement of higher levels of income.

The first phase began in 1990-1991 and the emphasis was on 'survival'. In fact, 'survival' was a more general policy goal not limited to international reinsertion. Here we will refer to it basically from the perspective of the insertion into world economy. The great concern at the beginning of the crisis was simply to avoid being 'left outside' the system. It is useful to recall that in 1991 it was not clear at all what could be the demand for Cuban products in world markets. Finding markets for Cuban exports and new suppliers had to be done in a very short period of time with inadequate institutions and little knowledge. Securing a minimum level of imports, supported by exports, was a must in order to avoid a downward spiral in the economy. Fostering some kind of 'upgrading' was then a more limited and sector oriented goal (i.e. the development of pharmaceutical exports). Priority was given to import substitution, the emergence of new exports and new means of access to external financing.

Reinsertion was not seen as 'integration' by official policy, in the sense that it was taken for granted that the control of the Cuban economy would continue to be 'endogenous.' The notion prevailed that the 'exogenous' trade shock was basically responsible for the problems. The economic downturn was supposed not to be fundamentally related to deficiencies in the economic system but it was mainly understood as being the consequence of a foreign trade shock. It was then the task of the foreign trade sector of the economy to achieve a new point of equilibrium at the level of the external accounts in order to resume economic growth. Therefore, it was presumed that most of the adjustment could be confined to the external sector of the economy. From that perspective, a successful re-linking was supposed to do the trick of solving most of the economy's problems.

A choice was made to build a dual system where a 'modern' external sector would provide the dynamism and the potential for insertion into the world economy. This 'modern' external sector basically comprised the 'new exports', particularly tourism and pharmaceuticals. It was assumed that there was potential for rapid export growth in those areas and therefore it would allow to secure both a minimum level of foreign trade ('survival') and a potential for 'upgrading'. In that first phase, however, the focus was on 'survival'.

The other component of the dual system that would facilitate insertion was to be found in the 'traditional' economy. There was not much hope in the future of 'traditional' exports (sugar, minerals, and tobacco) but they were needed to keep a minimum level for exports. In addition, import substitution was deemed possible within the traditional sector, particularly in the area of food production.

There is no easy explanation for the apparent neglect of 'traditional' exports at that time (in terms of resource allocation). Nonetheless, a perception prevailed that those exports required huge quantities of resources in order to sustain their current levels and those resources were simply not available at the time. The numbers didn't even add up. Traditional exports would not be able, under the most favorable scenarios, to reach sufficient levels to pay for the imports that were considered necessary for a 'normal' operation of the economy. The alternative utilization of available resources in fostering new exports generated by other sectors (i.e. pharmaceuticals) has been, however, a more controversial issue.

The limits of upgrading

There has been a rapid transition in Cuba from 'de-linking' to reinsertion into the world economy and both the breadth of the links and the 'upgrading' factor should be taken as important criteria to evaluate that insertion. From the perspective of the breadth of the links, Cuba is now a relatively more closed economy than a few years ago. This does not reflect, however, a successful structural transformation but the inability of the country to make a smooth transition from its previous pattern of foreign economic relations. In other words, the degree of openness of the Cuban economy within the CMEA arrangements and its resulting economic structure could not be sustained in the current global economy.

The relative reduction of Cuba's economic openness in the nineties reflects failure in terms of overall structural adjustment. The real story behind the 1991 trade shock was the fact that most Cuban tradable output was simply not competitive in world markets. The degree of openness of the Cuban economy was supported until the early nineties not by its competitiveness but by preferential prices and external financing available on the basis of political arrangements. The drastic elimination of the sources of those external funds and favorable market conditions exposed the fragility of the economic structure erected upon them. By 1990 Cuba simply did not have an output structure that could be successfully transformed into competitive exports in a short period of time.

The 'upgrading' issue is more complex. At first glance, judging by foreign trade statistics, there seems to be no upgrading at all. Measured by its diversification, the exports structure is still heavily biased towards primary products, semi-processed goods and labor-intensive manufactures. In 1996, almost 90% of Cuban exports consisted of sugar, seafood, minerals, and tobacco products. In fact, there was some step back in terms of export diversification compared with the late eighties. Nonetheless, a broader perspective of exports reveals a dramatic change during the nineties. In 1995 tourism replaced sugar as the main export. For the first time in more than two centuries sugar was displaced as the most important export of the country. Cuba has became in a very short span of time one of the most important tourist destinations in the Caribbean, an achievement particularly significant because the Cuban tourism industry has no access to the U.S. market as a consequence of the embargo.

Tourism and remittances constitute the core of Cuba's current 'modern' economy and if their induced 'exports within the borders' are incorporated into the analysis it is then clear that 'upgrading' has been a more extended process than the one suggested by foreign trade statistics and balance of payment figures. The point to bear in mind, however, is that part of the process ('exports within the borders') has been a very peculiar type of 'upgrading' conducted in semi-protected markets at sub-optimal levels (from a world market perspective).

On the surface, competitiveness in resource based activities appears as the easiest path towards reinsertion, which could explain both government priorities and, certainly, foreign capital preferences. Most current Cuban exports reflect the adoption of that path regardless of whether they are 'traditional' (i.e. sugar) or 'modern' (i.e. tourism). One of the paradoxes of contemporary Cuba is precisely that the current trade structure reflects a marked disparity between the skill-and technology- intensive share of exports and the educational attainment of the labor force. This suggests that Cuba has not been able to benefit from one of its key comparative advantages: the existence of a large, well educated and skilled labor force, particularly in the industrial sector.

The U.S. embargo: an obstacle to upgrading?

The U.S. economic embargo and the open hostility of Washington towards foreign investment in Cuba complicates the analysis of Cuba's economic alternatives. There is no doubt that if U.S.- Cuba relations were to change, the terms of foreign investment would be very different. Under those circumstances it would be conceivable to foresee reinsertion and foreign investment in areas of the Cuban economy currently not taken into account.

Having said that, the explanation for the dismal performance of vast areas of the Cuban economy in terms of its 'direct' reinsertion and their lack of attractiveness for foreign capital should go deeper for the reasons we'll now lay out. The two main components of the 'modern' economy (tourism and remittances) are paradoxically among the areas more sensitive to U.S. policies and, in fact, tourism has been one of the major recipients of foreign investment. Therefore, there might be factors other than U.S. policies that account for the difficulties of reinsertion and foreign investment faced by most segments of the 'traditional' economy.

Any serious analysis oriented towards the search of solutions for that problem should consider the permanence of U.S. hostility as an invariable factor in the foreseeable future. Practical considerations strongly suggest that reinsertion should be pursued notwithstanding the U.S. embargo although this is not to say that different scenarios could not be imagined for analytical purposes and alternative plans. Therefore, there is no point in limiting the exploration of the causes of the current difficulties to the US embargo, no matter how important this could be as a limiting factor. The roots of the problems of 'upgrading' go well beyond the embargo.

Dilemmas posed by the quest for growth

Rapid economic growth in Cuba is not only a matter of accelerating the process of recovery and minimizing the duration of long term stagnation. It is above all, a necessary condition for the vast structural transformation that the Cuban economy requires. If autarchy is discarded as a realistic option, then the long term viability of Cuba's international insertion will depend on the possibility that a relatively large share of the country's total output would have to find its way into the world market. Such a move would need high rates of growth since this is the only way to secure the vast amount of resources needed for a structural transformation.

The Cuban State evidently has no means of its own to successfully implement the required economic transformations. Therefore, private funds are necessary to achieve high rates of growth. This is not to say that economic reform should focus on downsizing the state sector, but rather that a mixed economy is needed. Economic reform should include many actions, including the revitalization of state owned enterprises, which could play an important role in the economy. The possibility of an efficient state productive sector should not be discarded off hand. Nonetheless, private capital will be needed as a source of funds, technological learning and efficiency.

Foreign capital has played an important role in recent transformations of the Cuban economy. By policy design, the role of foreign capital has been relatively limited until now. Even under the eventual presence of more liberal foreign investment regulations, it would continue to be a limited process due to other factors that could only be overcome by economic reform. Private domestic capital has a very limited presence in Cuba (basically confined to agricultural production) although the co-operative sector is relatively large. Under current policies, the non-state sector can only play a limited role in investment and economic growth. The so-called self-employment sector derives from an informal economy, and in practice plays no important role in economic strategy, other than providing a survival mechanism for part of the population.

The issue to be considered is that high growth will require the mobilization and effective utilization of existing resources in the country, something that under current policies would be difficult to achieve, particularly given the almost exclusive emphasis on the state sector. The role of a domestic private sector could make the entire difference between a path of low economic growth and a high growth trajectory.

Productive demand for the already existing skilled Cuban labor force would be determined by investment and technological change, two factors apparently well beyond the possibilities of the Cuban government. The current situation of structural mismatch between the quality of the work force and available job placements reveals the critical impasse that exists in this area.

Current trends in foreign investment are not particularly favorable for the solution of the problem. First, because given its volume and patterns it has been not a critical factor in job creation, and perhaps more important because while a number of highly skilled jobs have been preserved or created by foreign investment (i.e. mining, oil exploration, telecommunications, several industries, and certain categories of services) the bulk of foreign investment seems to be directed toward resource based activities and tourist services, where most jobs are not conducive to high productivity or substantial technological learning processes. Thus, the problem lies not so much on foreign investment policies but on the more general issue of insertion into the global economy.

It is true that in the case of Cuba the U.S. embargo plays a highly negative role. It is important to bear in mind, however, that key sectors in Cuban economy already receive foreign investment from other countries. The problem is not so much to establish the presence of foreign capital but to expand and upgrade it.

The global economy has had a visible 'pull effect' on policy making in Cuba. Important sectors of the Cuban economy are already market oriented and have found 'a place under the sun' in the global economic system as well as potential for 'upgrading' within the system. Decentralized and market oriented notions are now part of the mainstream equation of economic management in Cuba, no matter what its ideological codification could be. This is not so much the deliberate result of ideological conversion as the consequence of global restructuring.

Reality clashed with the idealized models of reinsertion into the world economy during the early nineties. A trial and error process revealed important lessons in terms of the differences in efficiency (or the lack of it) among alternative options for economic policy and institutional change. The trajectory of the transformation adopted in order to facilitate insertion increasingly included two important aspects for the broader issue of 'transition': changes in property and markets. It would be speculative to assume that this is a linear and totally predictable process. The notion that insertion dictates 'transition' is mechanicist and could be farfetched. 'Transition' toward a 'market economy' could be a possible but not necessary outcome. Politics and ideology are important questions to consider. But it would be naïve to assume that global restructuring and practical experience do not count in policy making.

Ultimately, options in the area of reinsertion are partially determined by the limits of the process. Most of those limits are not "natural" limits, and can be modified by social action. Hence, economic policy is a key factor, and within it political considerations are paramount. A choice could be made to continue the mild approach to reinsertion that Cuba has been undertaking. However, stronger forms of reinsertion could be also considered. None of those alternatives would be free of social and political problems. It is not reasonable to presume ex ante that a mild approach to reinsertion is more acceptable because it is gentler in terms of its social costs. Social exclusion due to the market stratification originated by dollarization (which has been a central mechanism in reinsertion) has been partially compensated by social programs but the fact is that even a bland model of reinsertion could be conducive to outrageous forms of social exclusion. Compensatory mechanisms are not currently part of the approach to reinsertion. These have an independent logic --rooted in the social commitments of the political system-- and could be applied within stronger forms of reinsertion.

ISLA has edited this article from a much longer piece (complete with footnotes and concrete examples), which is available from us upon request. A version of this text was read at the 1998 LASA Congress in Chicago.

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