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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.

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Presentation on theme: "Cuban Economics: How Politics Has Changed the Course of Economic Growth and Stability Created By: Jason Zimmerman Martin Rugeroni Brittany Riley Martha."— Presentation transcript:

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

2 Aim and Outline Aim: To present and analyze how Cuba’s political decisions have affected the course of its economic growth. Aim: To present and analyze how Cuba’s political decisions have affected the course of its economic growth. Pre-revolution Economy Pre-revolution Economy Revolutionary Period Revolutionary Period Evolution of the Embargo Evolution of the Embargo The Fall of the Soviet Union The Fall of the Soviet Union Economic Reform Economic Reform Recent Policy Changes Recent Policy Changes Cuba’s Future Cuba’s Future

3 History Spanish Colony until 1902 Spanish Colony until US companies controlled 80% of Cuba’s nickel exports 1902 US companies controlled 80% of Cuba’s nickel exports Owned most sugar and cigarette companies Owned most sugar and cigarette companies US began a massive public health program US began a massive public health program

4 1902 Cuba Independent 1902 Cuba Independent Platt Amendment, great dependency from the US. Platt Amendment, great dependency from the US. Cuba would not transfer Cuban land to any power other than the United States 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. 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 – Eight-hour day established – Eight-hour day established.

5 1940 Fulgencio Batista elected president 1940 Fulgencio Batista elected president 1940 Modified the Constitution 1940 Modified the Constitution Progressive ideas Progressive ideas Wages and Benefits Wages and Benefits Land Reform Land Reform Education Education Improvements in Media Improvements in Media Social Indicators Social Indicators

6 A third of the population still lived in poverty A third of the population still lived in poverty Distribution of land Distribution of land Relations with the US Relations with the US Urban violence Urban violence Corruption Corruption Fidel Castro attempted to overthrow Batista in 1953 and failed. Fidel Castro attempted to overthrow Batista in 1953 and failed. Why a Revolution?

7 26 th of July Movement, th of July Movement, United States imposed trade restrictions on the Batista administration United States imposed trade restrictions on the Batista administration Batista Fled Jan 1, 1959 Batista Fled Jan 1, 1959 Castro took over Castro took over The Revolution

8 Persecution of opponents Persecution of opponents Labor unions were made illegal Labor unions were made illegal Land and property expropriation and nationalization. Land and property expropriation and nationalization. Cuba also nationalized all United States and other foreign-own land and property 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." 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."

9 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. 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. In response to the acts of the Eisenhower administration, Cuba turned to the Soviet Union for support.

10 Cuban Relations with USSR 1960 – Cuba and Soviet Union sign trade agreement 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 U.S. oil firms in Cuba stop refining oil purchased from USSR –Cuba nationalizes refineries

11 Start of the Embargo President Eisenhower cancels most of Cuban sugar quota President Eisenhower cancels most of Cuban sugar quota Cuba retaliates 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 U.S. imposes export embargo to Cuba except for medicine and food

12 1961 – US-Cuban diplomatic relations are severed; US restricts travel to Cuba 1961 – US-Cuban diplomatic relations are severed; US restricts travel to Cuba Foreign Assistance Act - Total embargo on all trade 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 inter- American system Organization of American States (OAS) - Leninist ideology is incompatible with inter- American system

13 More Restrictions Cuban Missile Crisis Cuban Missile Crisis –U.S. “quarantines” Cuba Kennedy administration prohibits travel to Cuba Kennedy administration prohibits travel to Cuba Financial and commercial transactions with Cuba illegal for U.S. citizens Financial and commercial transactions with Cuba illegal for U.S. citizens

14 Decreasing Restrictions 1975 – OAS lifts collective sanctions 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. U.S. allows foreign subsidies of U.S. companies to sell products in U.S. No longer penalize other nations for trade with Cuba No longer penalize other nations for trade with Cuba

15 Congress repeals provision of Foreign Assistance Act of 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 1978 – U.S. residents allowed to send up to $2000 in remittances a year

16 Resurgence of Embargo Policies 1981 – Reagan inaugurated as president, initiates tighter economic embargo 1981 – Reagan inaugurated as president, initiates tighter economic embargo 1982 – Reestablished travel ban 1982 – Reestablished travel ban Remittances reduced from $2,000 to $1,200 per year Remittances reduced from $2,000 to $1,200 per year

17 Minimal Effects of the Embargo By the late 1980s: 99% of Cuba’s oil came from the Soviet Union 99% of Cuba’s oil came from the Soviet Union Received oil at prices far below market value Received oil at prices far below market value Cuba had reduced oil-consumption Cuba had reduced oil-consumption Re-exported surplus petroleum was 2nd largest export (after sugar) Re-exported surplus petroleum was 2nd largest export (after sugar) Vessels from the Socialist bloc transported 85% of Cuban trade Vessels from the Socialist bloc transported 85% of Cuban trade 85% of Cuban trade was with Council of Mutual Economic Assistance (COMECON) 85% of Cuban trade was with Council of Mutual Economic Assistance (COMECON) –Transactions mostly in nonconvertible currency

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20 A Time of Transition Late 1980s: Cuban-Soviet relations weakened as Soviet leadership moved away from Marxism Late 1980s: Cuban-Soviet relations weakened as Soviet leadership moved away from Marxism Late 1989: Cuba announced the Program Alimentario Late 1989: Cuba announced the Program Alimentario –Goal: improved self-sufficiency –Method: large investments in agricultural sector

21 A Special Period in a Time of Peace August 1990 Cuba announced the Período Especial August 1990 Cuba announced the Período Especial Originally created for a time of war Originally created for a time of war Established a framework to implement austerity measures Established a framework to implement austerity measures

22 “Special Period” New rationing schedules New rationing schedules 200 goods added to the ration list 200 goods added to the ration list 50% cut in energy consumption required 50% cut in energy consumption required Reduced work hours at factories Reduced work hours at factories Large cuts in public transportation Large cuts in public transportation Encouraged use of animals for transportation/plowing in agriculture Encouraged use of animals for transportation/plowing in agriculture

23 The Fall of the Soviet Union Late 1991: Gorbachev withdrew almost 3,000 troops from Cuba Late 1991: Gorbachev withdrew almost 3,000 troops from Cuba –Symbolic significance: end of Cuban-Soviet ties Christmas 1991: Soviet Union officially dissolved Christmas 1991: Soviet Union officially dissolved

24 Problems for Cuba Weakened Cuban military Weakened Cuban military Major issue: loss of trade partners Major issue: loss of trade partners External forces of the early 1990s: External forces of the early 1990s: –Decrease in sugar prices –Increase in oil prices –Vulnerable to U.S. actions

25 Changes in U.S. Policy April 1992: Bush banned ships trading with Cuba from stopping at U.S. ports 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 September 1992: Bush instituted a limit on the humanitarian aid that U.S. citizens could send to Cuba October 1992: Torricelli Bill October 1992: Torricelli Bill November 1992: stronger restrictions on baggage for people traveling to Cuba November 1992: stronger restrictions on baggage for people traveling to Cuba

26 Torricelli Bill: Cuba Democracy Act Banned subsidiaries of U.S. companies in other countries from investing in or trading with Cuba 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) Ban included food and medical supplies (in 1992 this was 90% of Cuban trade with U.S. subsidiaries)

27 Torricelli Bill cont’d: Authorized U.S. president to “punish” countries that provided aid to Cuba 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 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

28 : A Cuban Crisis Shortages Shortages –Food –Oil –Medical Supplies Drop in GDP per capita Drop in GDP per capita Large budget deficits Large budget deficits

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30 Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the Cuban Economy (2002): 510. Print.

31 Consumer Goods Commercial relations with the former Soviet Union decreased more than 90% from 1989 to 1993 ($8.7 billion to $750 million) 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 Shipments of consumer goods, grains and other foods declined

32 Consumer Goods cont’d Supplies of clothing and soap became sparse Supplies of clothing and soap became sparse Rationing quotas supplied only enough food for 2 weeks of each month Rationing quotas supplied only enough food for 2 weeks of each month –Increase in black market activity

33 Health Over 300 medicines eliminated from pharmacies Over 300 medicines eliminated from pharmacies About 800,000 Cubans with asthma went without necessary medication 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 1993: over 50,000 Cubans suffered from an epidemic of optic neuropathy as a result of a vitamin B deficiency

34 Health cont’d Evidence of delayed marriages and a large drop in fertility rates Evidence of delayed marriages and a large drop in fertility rates Surge of abortions: between 1988 and 1990, 9 abortions for every 10 births Surge of abortions: between 1988 and 1990, 9 abortions for every 10 births

35 Energy Oil supply from the (former) Soviet Union decreased almost 90% from 1989 to 1992 Oil supply from the (former) Soviet Union decreased almost 90% from 1989 to 1992 Shortages led cuts in public transportation Shortages led cuts in public transportation Frequent power outages Frequent power outages

36 Energy cont’d Daily blackouts imposed Daily blackouts imposed Closing of many industrial plants and factories Closing of many industrial plants and factories Estimated 50% of industrial plants suspended operations due to shortages of fuel and replacement parts Estimated 50% of industrial plants suspended operations due to shortages of fuel and replacement parts

37 Agriculture Imports of fertilizer decreased 80% and animal feed by 70% 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 Sugar crop declined from 8.1 million tons in 1991 to 4.2 million tons in shortage of chicken feed resulted in a halt in egg production 1993 shortage of chicken feed resulted in a halt in egg production Animals had to be used to replace tractors and other farm equipment Animals had to be used to replace tractors and other farm equipment

38 Other Problems Shipments of raw materials and spare parts for industry ceased 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 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 Paper shortage: lack of print media Factory closings and transportation cuts left almost 20% of the population displaced Factory closings and transportation cuts left almost 20% of the population displaced

39 One Success: Tourism In 1990 tourism brought in $243 million In 1990 tourism brought in $243 million Only sector that grew steadily Only sector that grew steadily Revenues quadrupled in first half of the 1990s Revenues quadrupled in first half of the 1990s 1993 brought in more revenue than sugar 1993 brought in more revenue than sugar If not for embargo, would U.S. tourism change the Cuban economy? If not for embargo, would U.S. tourism change the Cuban economy?

40 Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the Cuban Economy (2002): 513. Print.

41 Reform and Recovery Summer 1993: Cuban government began policy reforms to stabilize the economy Summer 1993: Cuban government began policy reforms to stabilize the economy Legalized the use of foreign currency 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 September 1993: authorized self-employment –Many restrictions –Only open to specific occupations –Had to pay fees and taxes

42 September 1993: broke up large state- owned farms into cooperatives September 1993: broke up large state- owned 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 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

43 September 1994: created markets where agricultural producers, once a quota was reached, could sell excess output at market prices (determined by supply and demand) 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 Quantity S D Equilibrium Ration Price Once producer reaches quota: -Sell at a higher price -Consumers not limited to ration stamp amounts *Hybrid economy: transition from state-controlled/socialism to free market capitalism

44 September 1995: changed foreign investment law September 1995: changed foreign investment law –Allowed 100% foreign ownership –Simplified the process for foreign investment May 1997: reformed the banking system May 1997: reformed the banking system –Creation of Banco Central de Cuba as an independent institution

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46 Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the Cuban Economy (2002): 509. Print.

47 Success Negative growth ended and GDP grew 0.7% in 1994 Negative growth ended and GDP grew 0.7% in the average annual GDP growth was 3.8% 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 In 1993 the budget deficit was 33.5% of GDP, in 1996 it was 2% of GDP

48 Success cont’d Exports increased 47.4% from 1993 to 2000 Exports increased 47.4% from 1993 to 2000 Imports increased 144.4% over the same period Imports increased 144.4% over the same period By the end of the 1990s, growth was steady By the end of the 1990s, growth was steady In 2000, GDP was still 15.4% below the level of 1989 In 2000, GDP was still 15.4% below the level of 1989

49 Remaining Problem: Embargo 1996: Congress passed the Helms-Burton Act 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." 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."

50 New Decade U.S. lifts ban on exports of certain agricultural goods 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 Ban on imports from Cuba continues

51 Hurricane Michelle 2001 – Caused $1.8 billion in damages 2001 – Caused $1.8 billion in damages U.S. offered direct aid to the people U.S. offered direct aid to the people Castro refuses aid Castro refuses aid One time agreement to buy food and medicine from U.S. One time agreement to buy food and medicine from U.S. –1 st time Cuba agreed to import food from U.S.

52 U.S. Strengthened Restrictions Passed in 2004 Passed in 2004 Family visits limited to once every three years instead of once per year Family visits limited to once every three years instead of once per year Maintain $1,200 transfer limit per year Maintain $1,200 transfer limit per year Remittances and gifts only allowed to immediate family Remittances and gifts only allowed to immediate family Castro responds – ban on transactions in U.S. dollars Castro responds – ban on transactions in U.S. dollars

53 Transition Period U.S. Commission for Assistance to a Free Cuba - recommends $80 million in aid when transitional government in place U.S. Commission for Assistance to a Free Cuba - recommends $80 million in aid when transitional government in place Raul Castro takes temporary power Raul Castro takes temporary power –“disposed to normalize relations” with the U.S – Raul officially takes power 2008 – Raul officially takes power

54 2008 Disaster Relief 2 Hurricanes hit Cuba within 10 days 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 U.S. offered $100,000 in direct aid after Hurricane Gustav –Cuba refused Offered $5 million in direct aid after Hurricane Ike Offered $5 million in direct aid after Hurricane Ike –Cuba initially refused

55 Loosening Restrictions 2009 – ban on Cuban-American travel to Cuba lifted 2009 – ban on Cuban-American travel to Cuba lifted U.S. removes limit on remittances U.S. removes limit on remittances Travel restrictions still in place for non- Cuban-Americans Travel restrictions still in place for non- Cuban-Americans U.S. citizens cannot send money or gifts to government officials U.S. citizens cannot send money or gifts to government officials

56 Present Trade embargo remains Trade embargo remains –U.S. allowed to export certain agricultural goods –No Cuban imports allowed U.S. largest supplier of food to Cuba U.S. largest supplier of food to Cuba –2008 – exported about $710 million –$2.9 billion total as of May 2009 Obama: policy changes Obama: policy changes policy changes policy changes

57 Future of the Economy Privatization 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

58 Trade liberalization Trade liberalization –Open up economy –Licensing programs should be quick and inexpensive –Encourage privatization and investment Social safety net 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

59 Conclusion What is coming in Cuba’s future? What is coming in Cuba’s future? Is the U.S. embargo still justified? Is the U.S. embargo still justified? Was it ever? Was it ever? Is the Obama administration reasonable in waiting for Cuba to take the next steps? Is the Obama administration reasonable in waiting for Cuba to take the next steps? Video Video Video

60 Sources PWT 6.3 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 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 Griswold, Daniel. "Four Decades of Failure: The U.S. Embargo against Cuba." (2005). CATO Institute. Web. Apr Pérez Jr., Louis A. "Socialist Cuba." Cuba: Between Reform & Revolution. Oxford UP, Cuba's Special Period. J.A. Sierra. Web. 2 May Pérez-López, Jorge F. "The Cuban Economy in an Unending Special Period." Association for the Study of the Cuban Economy (2002): Print.

61 More Sources "BBC NEWS | Americas | Bush Approves New Squeeze on Cuba." *BBC NEWS | News Front Page*. 7 May Web. 25 Apr "BBC NEWS | Americas | Bush Approves New Squeeze on Cuba." *BBC NEWS | News Front Page*. 7 May Web. 25 Apr "BBC NEWS | Americas | Timeline: US-Cuba Relations." *BBC NEWS | News Front Page*. 31 Dec Web. 25 Apr "BBC NEWS | Americas | Timeline: US-Cuba Relations." *BBC NEWS | News Front Page*. 31 Dec Web. 25 Apr Hanson, Stephanie. "U.S.-Cuba Relations." *Council on Foreign Relations*. 11 Jan Web. 25 Apr Hanson, Stephanie. "U.S.-Cuba Relations." *Council on Foreign Relations*. 11 Jan Web. 25 Apr Maybarduk, Gary H. "Measures Not Taken: Issues For Today And Tomorrow." Web. 25 Apr Maybarduk, Gary H. "Measures Not Taken: Issues For Today And Tomorrow." Web. 25 Apr Sanguinetty, Jorge A. "Macroeconomic Policy Issues For A Free-Market Cuba." Web. 25 Apr Sanguinetty, Jorge A. "Macroeconomic Policy Issues For A Free-Market Cuba." Web. 25 Apr http://lanic.utexas.edu/la/ca/cuba/asce/cuba9/sanguin.pdf >http://lanic.utexas.edu/la/ca/cuba/asce/cuba9/sanguin.pdf >

62 Photo Sources sentinel.com/news/politics/dcblog/Cuba%20fla g.jpg


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