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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 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 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 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 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 Real GDP per capita Real GDP Per Capita 8000 7000 6000 5000 4000 Brazil Chile Mexico Cuba 3000 2000 1000 0 Year 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 Openness Openness 50 45 40 35 30 25 20 Brazil Chile Mexico Cuba 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 Originally created for a time of war 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 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 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 06 20 04 20 02 20 00 20 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 19 70 0 19 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 Commercial relations with the former Soviet Union decreased more than 90% from 1989 to 1993 ($8.7 billion to $750 million) Shipments of consumer goods, grains and other foods declined Consumer Goods cont’d 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 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 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 Chile Mexico Cuba Peru Nicaragua 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 "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 http://weblogs.sunsentinel.com/news/politics/dcblog/Cuba%20fla g.jpg