Does Cuba Have an Industrial Future?
Archibald Ritter,
Carleton University, Ottawa Canada
ASCE 2014
OUTLINE
I. Characteristics of the Deindustrialization
Process
II. Causal Factors
III. Consequences
IV. The “Lineamientos”
V. Sectorial Potentials
VI. Basic Policy Requirements
VII.Conclusion
Central Issues:
• Since 1989, a disastrous de-industrialization with
no significant recovery;
• Complex and multi-dimensional causes;
• Result? Cuba pushed to small Caribbean island
economic status;
• Can this situation be reversed?
– Will the Lineamientos be useful?
• Are there potential industrial sectors for
resuscitation?
• What are the necessary policy changes?
Significance of Manufacturing Industry in
the Cuban Economy:
Manufacturing Industry
1989
2012
Manufacturing Value Added
24.4%
15.4%
19.4%
12.4%
as Percentage of GDP
Labor Force in Manufacturing
as Percentage of Total
Index of Manufacturing Output in 100.0
Physical Terms
1989 = 100.0
54.3
Source: ONE, Anuario Estadistico de Cuba, 2012 and CEPAL, La Economia de
Cuba, Santiago Chile, 2000
1. De-Industrialization
Figure 1. Index of Industrial Output (excluding Sugar) 1989 - 2012
(1989 = 100.0)
120
100
80
60
40
20
0
1989
1998
2000
2002
2005
2006
2008
Source: ONE, Anuario Estadistico de Cuba, 2004, Table 11.1 and AEC 2012
Note: Data for 1990-1997 are not available
2010
2012
Source: NU CEPAL, 2000 Cuadro A.86; ONE, 2012 Table 11.3
II. Causal factors
A Conjuncture of Circumstances - a perfect storm
1. Termination of the special relationship with USSR;
 The end of subsidization;
 USSR Break-up and E. European recession reduced Cuba’s
export earnings
Result? Economic melt-down: deep recession;
Collapse of investment and savings
Cannibalization of existing equipment
Severe in-capacitaion of manufacturing sector.
2. Soviet technological inheritance: antiquated and
uncompetitive
3. Before 1989, inadequate maintenance;
After 1989, maintenance and re-investment
collapsed. (Note: “derrumbes”)
“Cannibalization” of industrial plant.
4. Since 1989, low levels of investment.
10.5% of GDP in 2008
vis-à-vis 20.6% for Latin America,
(UN ECLA, 2011, Table A-4.)
5. Dual monetary and exchange rate system
penalizes traditional and potential new
exporters
[receive one old (Moneda Nacional) peso for each
US $ from exports
6. Blockage of small and medium enterprise
despite some liberalization in 1992-1993
- prevented entrepreneurial trial and error and the
emergence of new manufacturing activities.
7.
China has helped to de-industrialize
Cuba
China’s advantages in its manufacturing:
– Low-cost and industrious labor force;
– Past and current emphases on human development and
higher education;
– A relatively new industrial capital stock;
– Massive economies of scale;
– Massive “agglomeration economies”;
– Grossly undervalued exchange rate, co-existing with
Cuba’s grossly overvalued exchange rate.
• Result: Cuba is flooded with cheap Chinese products
that have replaced consumer products, many of which
Cuba once produced – in the 1950s as well as the 1980s
Causes of Sugar Sector Collapse:
1. A foreign exchange “cash cow” milked to death;
2. Insufficient maintenance and by insufficient reinvestment preventing productivity
improvement.
3. The monetary and exchange rate regimes under
which it labored have also damaged it badly..
4. Fidel’s decision to close half the industrial
capacity of the sector
Result:
 Sugar agro-industry has shrunk by +/- 85%
 Cluster of industrial activities servicing sugar
have collapsed.
III. CONSEQUENCES OF THE COLLAPSE
OF MANUFACTURING
1. Employment (including sugar) declined from
685,500 in 1989 to 530,800 in 2009
a reduction of 32.6%. (ONE AEC, 2011 Table 7.3)
2. Second, labor productivity in manufacturing
has fallen, still a reduction of +/- 35% from in
2011 compared to 1989.
Figure 2 Labor Productivity in Manufacturing
(excluding Sugar) , 1989-2011; (1989= 100)
120
100
80
60
40
Employment Index
20
Physical Output Index
Labor Productivity Index
0
1990
1995
2000
20005
2010
Source: ONE, Anuario Estadistico, 2004, 2012 and Naciones Unidas CEPAL, La Economia Cubana,
Mexico D.F.: Fondo de Cultura Economica, 2000, Cuadro A.49 and A.90
3. Importation of manufactures previously
produced in Cuba has risen.
Shoes, clothing, textiles, plumbing supplies, electrical materials,
household gadgetry and furnishings
Available only for “Convertible Pesos” rather than the
Moneda Nacional that people actually earn.
Tiendas por la Recaudacion de Divisas system (TRDs or former
dollar stores) resembles Walmart, Costco, Target, etc. in that
they make their mammoth purchases from China for all their
stores in the country
The World according to Walmart’s
Procurement Volumes:
The Model for Cuba’s TRD Oligopolies?
4. Cuba has lost the foundation for
diversified manufacturing for the future.
 the “clusters” of economic activities that once
surrounded the sugar sector specifically and
agriculture generally producing inputs and
processing outputs.
 E.g. production of machinery and equipment is at
0.4% of the 1989 level; metal fabrication is at
32.8%.
5. The potential for the emergence of
manufacturing for export has been
damaged or in some cases destroyed.
II. THE “LINEAMIENTOS” ON THE MANUFACTURING
SECTOR.
“Lineamientos de la Política Económica y Social del
Partido y la Revolución,”
– included 25 guidelines on Industry
1. “prioritize” exports (Guideline No. 215)
2. “prioritize” maintenance (220),
3. assure inputs for the self-employment &
cooperative sectors (217),
4. emphasizing technical training (132 and 138)
5. the rationalization and restructuring of industrial
capacity, (219).
II. THE “LINEAMIENTOS”, continued
6. Sectorial Emphases:









Nickel (224),
OK
Natural medicines (222)
OK
Pharmaceuticals (221),
OK
Rubber tires (231),
?? OK?
Fertilizers (230),
???
IT and electronics for export (226), ? Limited; ??
Construction materials (233) OK
Metallurgy
????
Machinery and equipment
????
Some of these seem reasonable and may have
important roles to play in future manufacturing.
II. THE “LINEAMIENTOS”, continued
7. Exchange rate and monetary unification and
rationalization: vital for manufacturing revival;
Action coming.
8. Small enterprise liberalization and co-operative
promotion : in process;
• An important step
• Continuing limits on size and professional
activities: impede the evolution and
diversification into higher tech manufacturing
and related services.
“Lineamientos” proposals, if and when implemented,
could support a turn-around for manufacturing.
So far, however, reforms have been systematic and
cautious but also limited and slow.
IV. SECTORAL POTENTIALS
What might be the successful manufacturing sub-sectors in
future?
 “Picking the winners”: difficult; maybe impossible
 Best approach: establish a reasonable policy and institutional
framework and let the winners emerge over time.
o liberalize micro- small and medium enterprise further,
o a fair taxation system for Cuban-owned private sector
enterprises,
o unifying the monetary and exchange rate systems,
o establishing a secure property rights system and theimpartial
rule of law in the economy
o Some areas are in the process of implementation
 However, if Cuba establishes an “enabling environment” for
manufacturing, what might be the main opportunities?
A.1 Traditional Agro-Industries: Sugar
Sugar agro-industrial sector
• Major potential for food and bio-fuels;
• Requires reconstruction from the ground up;
• Requires foreign – that is Brazilian – technology,
management and entrepreneurship;
• Dramatic institutional change is necessary to
replace the old dysfunctional state enterprise
model
A.2 Traditional Agro-Industries: Tobacco
Cigars: a thriving agricultural and manufacturing base for future
expansion.
– Market prospects: mixed but modestly positive on balance.
– Downside: health concerns; aging baby boomers; the end of
the cigar fad == reduced consumption in high income
countries;
– Upside: a status symbol for middle class of the BRICS and
other emerging countries
– Normalization of relations with the US will also increase
demand.
Conclusion? Continue to promote this sector.
Suggestion: Broaden export market with high quality machinemade cigars at affordable prices. (Cuba has priced itself out of the
middle class cigar market.)
A.2 Traditional Agro-Industries: Rum and
Alcoholic Beverages
Rum and alcoholic beverages:
Strong foundation;
Good prospects:
– In BRICS and middle income countries now;
– In US market after normalization
Continue promotion.
B. Food and Food Processing
Major domestic and export potential
Weak foundation:
Agriculture generally weak;
Citrus cultivation: fallen out of the picture;
Tropical fruit production is nowhere;
Processing activities: totally underdeveloped.
Major potentials:
Tropical fruit juices for Northern Hemisphere markets;
Off-season vegetables for Northern Hemisphere;
A strong US market after normalization
Requirement:
Successful agricultural revival;
An enabling policy environment;
C. Pharmaceuticals.
Major success since 1989:
• Significant exports (546 million pesos in 2011) to a
range of countries.
• Success could continue.
Downside risks.
• New drugs must continuously be developed: generic
versions can be produced freely anywhere (read India
and China) when patent protection runs out.
i.e. Cuba’s producers, like big pharmaceutical companies, face
future death unless they innovate successfully.
• Some markets are ideological “sweet-heart” deals , e.g.
Venezuela.
At risk when the Cuba-Venezuela “special
relationship” runs its course.
D. Light Manufactures
Significant producer in 1950s and 1960-1989
– e.g. leather and rubber footwear, textiles, clothing, cotton and
rayon textiles, clothing and consumer products of leather,
wood, paper, metal, rubber and plastic for household use,
rubber tires, soap, paint….
(IBRD, Report on Cuba 1950, p.130.)
1989-2012: 70% to 90% Reductions in different cases
– Paralleled by its corresponding collapse in Canada and the
United States, with the resultant job-loss and urban decay in
the rust-belt.
Difficult to reclaim these areas,
– due to economies of large scale production and agglomerative
economies in Asian countries, most notably China.
D. Light Manufactures, continued
Possible niche-type markets, e.g. ;
– Some lines of specialty women’s clothing, leather footwear,
Spanish-colonial style furniture.
– Surprising crafts-level innovation in a myriad of areas for hardcurrency tourist markets.
Policy Pre-requisites:
– Further liberalization of enterprise to middle-size
firms
– Successful monetary unification and convertibility
E. Chemical and Petrochemical
Products.
Slim Prospects, unless major quantities of off-shore oil
are developed.
Some production and exports from the refinery complex
in Cienfuegos.
But competition from established producers in the region
such as the (US, Mexico, Trinidad and Venezuela) limits the
possibilities.
Revival of Fertilizer “mixing PPK”? Perhaps but inputs are
all imported (potash, phosphates and nitrogen)
F. Heavy Industry
Heavy industry
(iron and steel complex, metal smelting & fabrication, wire,
sheet, rebar, beam and tube making ……….)
Nickel Extraction, Concentration and Smelting for export:
Competitive and viable
Other Activities Unlikely to emerge due to
–
–
–
–
lack relevant raw materials at this time,
energy situation at this time
absence of significant metal using industries
Small domestic market vis-à-vis efficient scales of
production,
– absence of relevant skills etc.
Situation could change if low-cost energy from off-shore
petroleum were to be developed.
H. Machinery and Equipment
Pre- and post- 1959:
– successful production of agricultural equipment e.g. cane
carts and wagons (for rail) , sugar mill tanks, vats, hoppers etc.
1970s and 1980s:
– some agricultural equipment such as heavy cane harvesters
2014:
– Cuba has lost the market for the production of machinery and
equipment for the agricultural sector.
– Brazil seems likely to capture much of this market.
– Some niche products may emerge
Automotive assembly (Chinese in Mariel): economic lunacy;
Some auto parts: batteries, rubber tires, are a slim possibility
Complex machinery and equipment? Forget it.
Some straight-forward custom-built one-off sheet-iron type
products, can be viable.
I. Electric and Electronic Equipment
Assembly of some electric or electronic products
– occurs now in a minor way and could perhaps be
expanded.
But domestic value added would be limited.
– virtually all of the components would have to be
imported.
Competition from abroad, notably from China will
be difficult to overcome due to its huge advantages
noted earlier.
J. The Mariel Export Processing Zone
The Mariel EPZ creates new possibilities.
• China, Brazil, Russia and others may establish
assembly, light fabrication or bulk-breaking
activities.
• “Give-away” tax treatment provided to
foreign investors is a major incentive
– “Zero” tax rate on profits for 8 years;
– full expatriation of profits;
– a rate of 15% after 10 years.
• Limited Value Added for Cuba due to light
taxation and importation of inputs.
VI. Basic Policy Requirements
1. Required: “enabling environment” for micro,
small and medium enterprise:
– A reasonable and fair tax regimen;
• End discrimination against domestic Cuban
enterprise (see chart)
– An enabling environment for private and
cooperative sectors
– Establishment of unified and realistic monetary
and exchange rate systems
– Property law and company law,
Comparison of the Tax Regimes for Small Enterprise and Foreign Mixed
Enterprise after the 2014 Foreign Investment Law
Small Enterprise
Foreign Investors
Nominal Tax Rates
Personal Income Tax Rate:
15% up to 50% of income
above CuP $2,000 per year
Profits Tax: 15% of Net Corporate
Income (50% for resources);
Effective Tax Base
Net Income after deduction of
all production and investment
costs from Gross Revenues
Social Security Payments
60 to 90% of Gross
Revenues (Maximum of
10% to 40 % allowable
depending on activity)
May exceed 100% of Net
Income
None
Deductible only within the
10% to 40% limits
Deductible only within the
10% to 40% limits
Exemption for first five;
Six or more taxed
Yes
Lump-Sum Taxation
Input Importation Rights
Profit Expatriation
Up-front Cuota Fija
Direct Imports Prohibited
No
None
Freedom to Import Directly
Yes
Effective Tax Rates
Tax Holiday
Deductibility of Investment
Costs from Gross Revenues
Deductibility of Input Costs
from Gross Revenues
Employee Hiring Tax
15% of Net Income
Eight Years Tax Exemption
Fully deductible from Gross
Revenues
Fully deductible from Gross
Revenues
Complete Tax Exemption
Yes
2. Release Creativity, Energy and Intelligence of
Cuban Citizens:
Liberalize micro-, small and medium enterprise,
•
•
•
•
•
•
Permit expansion to 20 or 50 employees for in all areas;
Opening for professional enterprises;
Open up all areas for enterprise– not only the “201”
Open and automatic licensing for all;
Implementation of wholesale markets for inputs,
Open access to foreign exchange and imported inputs
under reasonable terms,
• Micro-credit and credit facilities,
• Full legalization of “intermediaries”
• Permission for advertising.
But avoid “Walmart-ization” of Cuban
economy
A strong possibility if existing state sector concentration
(e.g. CIMEX) were to be simply privatized;
“Walmart-ization”
•
•
•
Would reduce potential for diversified manufacturing
in Cuba;
Would help continue the conversion of the Cuban
economy into a branch of the Chinese economy;
Would lead to immense concentration of income for
Cuban owners, or profit expatriation for foreign
owners
3. Monetary and Exchange Rate System:
Unification and market determination;
Meaning: Convertibility and Devaluation
Result:
• Imported manufactures rise in price, decline in
volume;
• Potential manufactured exports decline in
price, rise in volume and value;
• New manufacturing possibilities emerge
VII. CONCLUSION
So, does Cuba have an industrial future?
General Comparative Disadvantages:
• Manufacturing base has collapsed significantly;
• Obsolete run-down manufacturing capital stock;
• Low investment levels impede up-dating capital stock;
• Decayed and mis-fitted skills;
• Decayed infrastructure;
• Small domestic market size: agglomerative and scale
economies are minimal;
• At present, US embargo blocks potential exports
VII. CONCLUSION, continued
Does Cuba have an industrial future?
General Comparative Advantages:
• Energetic, creative, entrepreneurial and educated
population;
• Some strong sectors: traditional and pharmaceutical
• Some resource potential: mainly in agriculture plus
nickel
• In future: a symbiotic and complementary relationship
with Cuban-American community;
• In future: a locational advantage re US market;
VII. CONCLUSION, continued
Does Cuba have an industrial future?
Answer: Yes, to some degree.
If policy reforms are significant and expeditious regarding
• Further enterprise liberalization and taxation
• Monetary system and exchange rate
Broader-based industrial revival for Cuba is possible but
will be most difficult.
Good Luck and Best Wishes.
Thank You Very Much
Does Cuba Have an Industrial
Future
Archibald R. M. Ritter,
Economics and International Affairs,
Carleton University,
Ottawa Canada
ASCE 2014, Miami