VISITORS TO HAVANA ARE INVARIABLY struck by how run-down the city looks: buildings that haven't seen a coat of paint in 30 years, houses in a state of virtual collapse, cars and buses that appear to be on their last legs. The city's relatively quiet streets add to the impression of a system that does not work: There is less motor traffic and few of the raucous sounds of commerce that so characterize urban areas in the United States. The stores are practically empty of goods. At restaurants lines are long, the menu limited, and the service often abominable. No wonder it is conventional wisdom in this country that Fidel Castro has destroyed the Cuban economy. But appear- ances can deceive. The provision of consumer goods and the delivery of services, so deficient in Cuba, is not the only way of judging the health of an economy. The relative abundance of such goods and services in most every other Latin Ameri- can city hardly implies that the majority there live better. And it reveals even less about the capacity of the economy to provide for its citizens in the long term. Excessive centralization in Cuba has indeed engendered massive inefficiencies and waste.' But Cuba's system of bureaucratic central planning has also achieved many long- term development goals that have eluded much of Latin America. Besides the oft-cited advances in health care and education, in key areas of the economy, such as producing capital goods, generating technology and developing non- traditional exports, Cuba has far outstripped its neighbors. Most market-driven low-income countries have lacked some or all of the ingredients for a sustained "take-off": developed social and productive infrastructure, sophisti- cated financial institutions, political stability, powerful en- trepreneurial groups, successful market integration and so on. The central task of capital accumulation has been too large and risky for private national groups to take on. In such countries the state has been needed to protect infant industry, provide technical, managerial, financial and marketing assistance, offer tax credits or production subsi- dies, coordinate among enterprises, and assist in labor- management relations. Beyond nurturing initial projects, some states have undertaken various forms of economic planning, and have even come to own and manage enter- prises. Although the state is not necessarily "smarter" than the private sector, its perspective and potential command over resources often allow it to take a longer-run view, to invest in projects with large capital requirements and long payback periods, and to undertake complementary projects simultaneously. 2 Albeit in a more pervasive and heavy-handed manner than the Newly Industrialized Countries (NICs) of East Asia, after 1959 the Cuban state fulfilled many of these basic development functions. As in Korea in the late 1940s and Taiwan in the early 1950s, the 1959-1963 land reform in Cuba enabled resources to be channeled toward industriali- zation and rural areas to be integrated progressively into the national market. 3 Massive social infrastructure investments by the Cuban state have not only created a relatively highly educated and healthy labor force, but also a national health industry that has few, if any, rivals in the developing world. The sine qua non of any industrialization process, of course, is capital accumulation--the generation and produc- tive channeling of savings. Following the initial agrarian reforms in South Korea and Taiwan, savings were generated at the expense of small landholders and urban workers, and investment rates rose to levels considerably above those in post-1959 Cuba. Unlike other centrally planned economies, the Cuban revolution's early priority was to fulfill basic needs and develop human capital. No harsh collectivization drive was undertaken, nor was agriculture "colonized" to squeeze the surplus from it, nor was U.S. aid, trade or foreign investment in the picture. Accumulation in Cuba, therefore, proceeded gradually. Nevertheless, the virtual elimination of luxury imports and sumptuous consumption left enough savings to increase investment above the pre-1959 levels. Eventual increases in Soviet aid and the shift away from consumer goods produc- tion later allowed investment to increase steadily. Average annual investment jumped from 400 million pesos in 1953- 1958, to 650 million in 1960-1965, 850 million in 1966- 1970, 1.5 billion in 1971-1975, and 2.6 billion in 1976- 1980.' The investment ratio (gross investment as a share of national income) rose gradually from 20.3% during the period 1962-1965, to 23.2% (1966-1970), 24.3% (1971- 1975), 29.2% (1976-1980) and 28.0% during 1981-1985.% Investment led to economic growth. Between 1959 and 1989 real per capita national income in Cuba grew at an annual rate of 2.7%, compared to 1.2% in the rest of Latin America. Of course, virtual stagnation between 1961 and 1970, and again since 1985, has diminished Cuba's overall performance, but it remains quite creditable, especially compared with the economies of its Latin neighbors. S IMILAR TO THE ASIAN NICS, HAVANA OPTED to seek expanded industrial development, eventually encompassing production of capital goods like harvesters, ir- rigation equipment and computers. This stance spurns the conventional wisdom of the IMF and World Bank that countries should stick to those products in which they have a comparative advantage. Viewed dynamically, specializing in labor-intensive products, based on the low wages preva- lent throughout Latin America, can consign a country to low productivity and low income in the long run. The Cubans realized that an active and innovative state can create com- parative advantage. After initially developing labor-intensive manufacturing, such as textiles and food-processing, the Cuban state explic- itly promoted domestic production of capital goods for local industry. Such goods included air conditioning andrefrigera- tion equipment, batteries, semi-conductors, pistons, cables, valves, tires, platform trucks and railroad cars. Approxi- mately one-quarter of investment spending on capital goods in the 1980s was on machinery and equipment produced in Cuba, a level no other Third World economy the size of Cuba's has attained. A major attraction of capital goods is the potential learn- ing experience they offer: Producing machinery is producing the means of production and, hence, technology. Not only can locally generated technology be adapted to local condi- tions, but, in the words of Henry Bruton, it opens the prospect of developing "a more or less continuous flow of new technological knowledge."' In a sense, Cuba's choice to develop the capital goods sector was forced upon it. In 1959, between 80% and 90% of Cuba's industrial machinery and equipment stock was of U.S. origin. The U.S. embargo compelled Cuba to design and produce needed spare parts. Trade with the Soviet bloc helped a bit in this regard, but lower levels of technological development and the use of the metric system in the socialist trading bloc placed a heavy burden on Cuba to make its own adaptations. The degree of industrialization achieved will improve Cuba's capacity to confront what is likely to be another phase of innovation enforced by growing isolation in the 1990s. Two keys to Cuba's eventual success in capital goods were the early emphasis on general and technical education, and research and development institutes. By 1980, on a per capital basis, Cuba was actually graduating from universities 40% more students than Czechoslovakia and 31% more than East Germany. In the early 1980s, Cuba had over 20 R&D institutes related to capital goods with over 2,000 special- ists.' Cuba's access to scientific training in the USSR and Soviet generosity in sharing technology and engineers have been vital to this process. Cuba's technological capacity has begun to yield increas- ingly obvious benefits. The introduction of state-of-the-art techniques with home-grown innovations in medicine and biotechnology, world leadership in technology for the sugar industry, new production methods in electronics, and the growth of many non-traditional exports-all are linked to the development of the capital goods sector. Since 1980, Cuba has shown a strong performance in non-traditional exports-like shellfish, citrus fruits, medi- cine, iron and steel products and non-electrical machinery -particularly in comparison to the rest of Latin America. 7 Except for Cuba, the nations of the Caribbean Basin benefit from favorable tariff treatment and geographically easy access to the U.S. market. They receive additional fillips from foreign investment and the diversion of resources toward production for export. Yet the Caribbean's non- traditional export performance has been uneven at best, and certainly far below Cuba's. The recent history of non-traditional exports in Central America and the Caribbean is primarily tainted not by inadequate will or inaccurate prices, but by insufficient institutional support to confront the many obstacles of export promotion. Identifying and producing viable new exports requires finance, technical assistance, market knowledge, and time. (Gestation periods for new products often run from one to four years.) Local producers usually can not count on having any of these. Packaging facilities are generally poor, transportation networks and auxiliary equipment (e.g., refrigeration) are woefully insufficient and expensive, and marketing ties are absent or minimal. Frequently, U.S.AID offers Caribbean Basin nations support for one or two steps of the process and for a limited time period. Local entrepreneurs invest their capital in new projects that are promising at first but then become encumbered at later stages and ultimately fail. This failure not only wastes human and financial capital, it dis- courages others from trying. The Cuban state, whatever its inefficiencies, has commit- ted sufficient resources to new export projects and has bargained effectively with foreign trading companies for market access and fair prices. The governments in South Korea, Taiwan and Japan provided similar support to their projects, particularly during the early periods of new export promotion. It is also common to the Cuban and East Asian experiences that export promotion and import substitution--of such goods as rice, clothing, radios, televisions and medicines-have been pursued jointly as part of an overall development strategy. ANOTHER POTENTIAL ADVANTAGE OF CEN- tralized control over resources was highlighted by the debt crisis of the 1980s. During the first half of the decade, Cuba was largely insulated from the effects of the crisis by its favorable terms of trade (and debt relief) with the Soviet Union. But the terms of trade deteriorated, petroleum prices and the dollar dropped, poor weather decimated the harvest, Western debt accumulated, and by 1985 Cuba was facing the same foreign exchange crunch as the rest of Latin America. Like other countries in the region, Cuba introduced an austerity package. The social and economic impact of the Cuban package, however, was dramatically different. A central goal of market economy austerity programs is to curb aggregate demand and, thereby, lower imports and conserve foreign exchange. This brings on deeper recession, more unemployment, lower wages, and acutely aggravated social conditions. In contrast, Cuba's package reduced demand only in particular foreign exchange-sensitive sectors (fuel, electricity, television programming, transportation, sugar), and succeeded in maintaining high levels of economic activ- ity and near full employment. There were greater shortages and some contraction of economic activity, but the ensuing social costs were distrib- uted evenly and lower income groups actually received wage increases and larger consumption subsidies. Finally, the state's control over the generation and use of investment funds and foreign exchange enabled Cuba to prevent the capital flight and importation of luxury consumer goods that have been so damaging to other Latin American economies. To be sure, the desirability of active state intervention in economic affairs diminishes as an economy develops. The increased supply of skilled labor and the evolution of infra- structure and support institutions allow for decision-making to be more effectively decentralized. Moreover, greater size and complexity place insurmountable hurdles in the way of centralized information gathering and processing, and mod- em technology demands greater flexibility. For these rea- sons, the governments of the East Asian NICs use fewer direct levers of control today, and most of the planned economies have moved decisively away from their central- ized systems of state control. Cuba also followed a market-type decentralization strat- egy from 1976 to 1986, but, for a variety of reasons, in April 1986 entered a phase of reevaluation and relative de-empha- sis on material incentives. The economy's own growth and increasing complexity, as well as changes in the world system, will compel it to become more agile and decentral- ized in the 1990s. Cuban economists and planners are well aware of this and have already resumed efforts at administra- tive decentralization. If political conditions permit, signifi- cant steps toward economic reform will be made at the Communist Party congress in early 1991. And an eventual return to experimentation with aspects of a market-oriented decentralization seems inevitable. Though the inefficiencies so striking to visitors are real and pervasive, the Cuban economy has succeeded in accom- plishing many important development tasks. True, the ap- pearance of scarcity in Cuba contrasts starkly with the appearance of abundance in the rest of Latin America. But the contrast between the underlying health of Cuba's semi- developed economy and its neighbors' underdevelopment is every bit as great. Most of its successes, as ses, as well as many of its problems, can be attributed to the state-dominated system so maligned by the United States. Does the Economy Work? 1. For a succinct discussion of the problems of central planning, see, Deborah Milenkovitch and A. Zimbalist, "The Economics of Socialism," in J. Eatwell et. al. (eds.) The New Palgrave:A Diction- ary of Economic Thought and Doctrine (London: The Macmillan Press Ltd., 1987). 2. This is not to imply that an active state role is sufficient for promoting development, as African nations have shown over the past twenty years. Naturally, the state's role differs with the circum- stances and, generally, tends to diminish as the economy develops and becomes more complex. Whether or not the state can fulfill its role in a particular country depends on an intricate matrix of histori- cal forces, for example: whether a traditional, landed class retains significant sway over government decision-making; whether a mili- tary imperative exists; whether the government elite is well edu- cated, and whether it maintains cooperative relations with other well educated groups. 3. Land reform created a demand for industrial products used in agriculture, such as machinery and other inputs, as well as other industrial goods. Increased agricultural productivity stimulated the food processing industry, and freed up labor for the industrial work- force (cane-lifting was 100% mechanized, cane-cutting 70% mecha- nized). 4. Miguel Figueras, Produccidn de Maquinarias y Equipos en Cuba (Havana: Editorial Cientifico-Ticnica, 1985), p. 50. 5. National income, or net material product, in Cuba's MPS national income accounts roughly equals net national product in the SNA or Western system minus "unproductive" services. Figures here and elsewhere unless otherwise cited are from the Anuario Estadistico de Cuba, various years. It would be preferable to take gross investment as a share of gross material product, but a consistent series of gross material product is not available. If these rates were taken as a share of gross national product, they would probably range from the mid-teens to the low-twenties. That is, they are appreciably below the investment rates of over 30% that have been attained in Japan, Taiwan and South Korea. Due to different accounting meth- odologies, however, it is not clear whether the official investment series between Cuba and the Asian NICs are commensurable. Charges that official Cuban growth statistics are unreliable are based on a misunderstanding of Cuba's system of national income accounting and a faulty application of economic method. (See A. Zimbalisted., Cuban Political Economy: Controversies in Cubanol- ogy, Boulder: Westview Press, 1988.) Brundenius and I have reesti- mated Cuban growth using different methodologies and correcting for possible biases in Cuban pricing. We obtained results very similar to the official rates. (See A. Zimbalist and C. Brundenius, The Cuban Economy: Measurement and Analysis of Socialist Perform- ance,, Baltimore: Johns Hopkins University Press, 1989.) 6. Henry Bruton, "Import Substitution," paper presented at the Northeast Development Consortium Conference, Harvard Univer- sity, April 29-30, 1988. 7. Miguel Figueras, Produccirn de Maquinarias, p. 45. 8. For comparative data and additional discussion, see Eva Paus, StruggleAgainstDependence: Non-traditional Export Promotion in Central America and the Caribbean (Boulder: Westview Press, 1988).
