A revolution to repair: New friends come to the aid of Raúl’s Cuba

Campaign News | Monday, 18 August 2008

By Richard Lapper for the Financial Times

Like the other residents of the José Martí housing estate in Santiago, Cuba’s second city, Rafael Gonzalez has grown used to the taps running dry.

“Sometimes water arrives only two or three times a month,” says the 46-year-old restaurant worker, who often has to rely on what he collects in the two rusting oil drums parked on the balcony of his second-floor flat.

Now, however, change is in the offing. Fixing Santiago’s defective pipelines and aqueduct is one of a number of projects being given priority as Cuba’s Communist government ploughs billions of dollars into roads, electricity and water infrastructure.

José Martí and other Santiago barrios should benefit, for example, from a multi-million dollar restoration plan and Mr Gonzalez and his neighbours are looking forward to the improvement. “They say next year we will have water,” says Rolando, a 52-year-old retired carpenter. “They are ‘revolutionis ing’ things.”

“Revolutionising”, however, turns out to be a slow process. Cuba’s Communists are anxious to avoid the tumultuous transition experienced by the Soviet Union and - like their Chinese allies - are determined to hold on to political power. Nor, with their traditions of austere egalitarianism, do they have much appetite for the kind of market-based liberalisation that has taken place in China and Vietnam.

Even so, President Raúl Castro, who last month completed his second year at the helm of Cuba’s economy, is determined to press on with changes designed to increase economic efficiency and improve living standards.

Under his stewardship - and especially since the permanent retirement in February of his older brother, Fidel - the government has admitted the scale of problems faced by ordinary Cubans and brought a more hard-headed approach to administration and economic management. Buoyed by trade and investment from China, Venezuela, Brazil and other emerging nations, the authorities have had money to make things better.

Indeed, the modest improvements promised in Santiago have already been delivered in some other parts of the country. The lights that went out during the special period of austerity decreed in the early 1990s after the collapse of the Soviet Union, then Cuba’s biggest trading partner, are back on thanks to supplies of Venezuelan oil.

In Havana, the ugly converted articulated lorries known as “Camels” that until recently transported Cubans to work have been replaced by hundreds of modern Chinese buses. If Cubans book early enough they can even find seats on fast and comfortable coaches that now work routes between major cities.

There have been other changes, too. This year Cubans have been allowed to buy hitherto forbidden consumer goods such as computers, DVD players and mobile phones. The ban that until recently prevented Cubans from entering tourist hotels has been lifted and a new terrestrial television station broadcasts US dramas such as The Sopranos and Grey’s Anatomy.

On infrastructure, investment levels that hovered around 10 per cent of gross domestic product for years are up to around 15 per cent, according to Alfredo Jam, head of macro-economic analysis at the economy ministry.

Much of this change reflects a sharp improvement in Cuba’s external circumstances. Driven by demand from China, the price of nickel - Cuba’s most valuable physical export - has surged higher, with revenues last year roughly four times higher than in 2002. Beijing has locked in supplies with a long-term agreement, helping Cuba pay for the buses as well as millions of dollars’ worth of Chinese televisions, rice cookers and refrigerators.

Brazil and Iran have also offered credit lines, allowing Cuba to import more easily. Above all, Cuba’s prospects have been transformed by its alliance with the radical leftwing government of Venezuela.

Cuba buys Venezuelan oil on concessionary terms. About 40 per cent of the bill is converted into a long-term, low-interest loan, while much of the remainder has been paid for by selling the services of some 30,000 doctors, dentists, nurses and fitness instructors to Caracas.

In a series of agreements signed last year, Cuba and Venezuela mapped out long-term co-operation that involves multi-billion dollar Venezuelan investments in Cuba’s refining and petrochemicals industries and encompasses the production of everything from fertiliser to the plastic building materials being deployed in pilot housing projects - the so-called petrocasas (oil houses) - in Santiago and the southern city of Cienfuegos. “The relations we have with Venezuela are about economic integration,” says Mr Jam. “We are looking at developing our two economies in a complementary way.”

There has also been a shift in political style, partly linked to the change at the top. Fidel Castro has an almost obsessive belief in egalitarianism and, faced with difficulties, has often exhorted his people to greater sacrifice and commitment. By contrast, his brother is more prepared to countenance financial rewards for workers and businesses that deliver better results, even if this means accepting a greater degree of inequality.

Since the Cuban Revolution in 1959, this tension has been a constant in the political debate. But under Raúl, the balance has tilted away from idealism. As one European diplomat puts it: “Think of Cuba as if it were an old Ilyushin aircraft that Fidel Castro wants to fly to the moon. Raúl shares that ambition but he knows that unless the plane lands and essential repairs are carried out it will crash.”

At the centre of the new president’s practical concerns - voiced repeatedly in recent speeches - is low productivity in agriculture, construction and manufacturing. Cuba already has an internationally competitive state-run tourism sector, built during the 1990s by adapting management techniques learnt from western multinationals. A viable biotechnology sector, which exports about $300m (€204m, £161m) a year, is another product of this effort.

Over the past couple of years, Cuba has pursued the idea of selling medical services beyond Venezuela. Caracas still dominates but Cuban officials estimate that, of annual revenues of some $5bn, about a third comes from countries such as China and Algeria, where Cuba has built and staffed hospitals specialising in eye surgery.

However, the efficiency of domestically oriented sectors has lagged behind. This imbalance is reflected in Cuba’s complicated exchange rate system and is responsible for a series of distortions in the economy. Whereas hotels and restaurants charge tourists in convertible pesos whose value is tied to the dollar, the domestic economy functions on much less valuable pesos. Cuba’s average wage of about 430 pesos a month is nominally worth only about 17 convertible pesos, for example.

The problem is that this system distorts incentives, sucking labour out of farming and the building trades, and even creating shortages of teachers. Hundreds of thousands of Cubans work in the illegal black economy, much of it linked to tourism, where a casual tip can equal a day’s wages.

Remittances mainly sent by Cuban-Americans in the US further complicate matters, undermining work incentives. Manuel Orozco, a remittances specialist at the Inter-American Dialogue think-tank in Washington, estimates that 25 per cent of Cuban families receive regular dollar payments from their families in the US, with total flows amounting to nearly $1bn a year.

The government has talked about extending the management techniques used in tourism, while the administration of agriculture and construction is being decentralised in order to bring bureaucrats closer to day-to-day decisions. More radically, Mr Castro seems prepared to break with long-established commitments to income equality and increase the country’s low wage differentials in order to lift productivity. In one recent speech he claimed that equality meant equality of rights and opportunities, not of income.

At one level, that means being prepared to allow workers to earn bigger bonuses. At another it might involve modifying universal entitlement to social welfare. Much of this discussion is just beginning but it could, for example, involve the replacement of the hugely expensive rationing system - in which all Cubans receive the same monthly entitlement of basic foods - with a more targeted approach, similar perhaps to the conditional income transfer programmes successfully developed in Brazil and Mexico, in which welfare is made dependent on attendance at schools and clinics.

But there is much opposition to overcome. “I favour ending the ration but this is very controversial. There is very fierce debate about these things,” explains one leading government adviser. In addition, the government is explicitly opposed to what it calls “shock therapy” - sudden policy changes of the sort implemented by several Latin American countries in the 1980s and 1990s.

Moreover, the authorities are still cautious about dealings with the private sector, limiting access to capital, technology and management know-how. Cuba has allowed foreign direct investment since the 1990s, developing an institutional framework that allows it to enter into joint ventures with private companies. But in recent years Venezuelan state companies have been the only sizeable investors.

Although the government wants to make more consumer goods available, reform in this area has been timid in the extreme. Mobile phones may be legal but Cubans face some of the highest costs in the world: ETECSA, the state-owned company, charges calls at the equivalent of a US dollar a minute.

There are signs too that the pace of change will slow further as Cuba adjusts to high food and energy prices. Mr Jam says that investment plans in areas such as housing and road repair are already being pared back.

The chances are, then, that life will improve but only at a snail’s pace. Supported by the emerging market powers, the country will steer clear of the kind of crisis it faced in the 1990s, but popular expectations of more rapid change will be thwarted.

It is perhaps not surprising that there have been signs recently that the government has been preparing to dig in, reinforcing its disposition to defend Cuba’s authoritarian brand of socialism and fight what Communist party ideologues call the “battle of ideas”.

For all his fresh thinking, there is an occasional hint of steel about the new Cuban president. As he told one recent meeting of party officials: “When the difficulties are great, the greater the need for order and discipline.”

Urban farms attempt to engineer an organic future

Beyond the neat lines of lettuce at the Alamar organic market garden and across the road leading to Havana, some new land has caught the eye of Miguel Salcines. As the 58-year-old farmer explains how he wants to start growing fruit and grazing sheep there, he seems every inch the ambitious rural entrepreneur.

But this market garden on the outskirts of the capital is a co-operative and Mr Salcines, its administrator, is also a government supporter and an official who wants to make the Communist system work better.

In fact, the success of the business that he and his 168 fellow workers have built up makes it something of a model for President Raúl Castro as he tries to get Cuba to produce more of its own food and reduce dependence on increasingly expensive imports. Cuba’s food import bill is expected to rise to $2.55bn (€1.74bn, £1.37bn) in 2008 from $1.47bn in 2007.

Since establishing the co-op in 1997, Mr Salcines has seen it grow 100-fold. Sales of vegetables, herbs and ornamental plants have increased from 50,000 pesos to 5m pesos a year and productivity has risen sharply. Mr Salcines claims he is producing more than 180 tonnes of lettuce, tomatoes, cauliflowers and other vegetables a hectare, more than double that achieved on most Cuban farms. “We can get to 200 tonnes,” he says.

Much is sold to the local population from market stalls but the co-op also counts Havana’s top hotels among its clients, providing them with mint for mojito rum cocktails.

While Cuban state farmers and co-operatives can sometimes struggle to attract workers unimpressed by hard work and low wages, Mr Salcines finds labour easy to find. More than 60 new workers have joined in the past year, attracted by proximity to their homes and a payment system that recognises effort and commercial success.

Each fortnight the co-op hands out 50 per cent of its profits in the form of a bonus, with the amount depending on seniority and length of service. The average wage of 1,000 pesos per month is twice the Cuban norm. Among the recruits are highly skilled engineers and agronomists. “We have 17 university professionals and most of our employees are graduates,” says Mr Salcines.

That technical expertise has helped the co-op develop the organic farming methods on which Cuba became dependent after losing access to Soviet oil, pesticides and fertilisers in the early 1990s. With Cuba keen to reduce dependence on hydrocarbons, there is heavy official support for organic methods. Alfredo Turro, 53, who also used to be an irrigation engineer, now spends his days rearing earthworms and creating humus. “Vegetables consume such a lot of nutrients. Unless we farm organically we can’t use the soil so intensively.”

The government is encouraging such experiments in “urban agriculture”. Indeed, this year Mr Castro announced an ambitious decentralisation of the sector, breaking up more than 100 co-operatives in order to bring production closer to towns and cities and reduce distribution costs. In addition, the top-heavy agriculture ministry has set up 169 municipally-based offices.

Alcides López, the deputy agriculture minister, told the FT that “the [new] local offices are very close to the producers. They know where and when it rains. They’ll know producers need a product or a resource so can act more quickly”. 

Idle land is to be offered to private farmers and co-operatives on extended leases, with more credit made available. Farmers, rather than bureaucrats, will be able to decide whether to reinvest.

Whether all this will be the answer to Cuba’s agricultural difficulties is another matter, however. That is partly because of the scale of the needs. In 2006, for example, Cuba imported 66 per cent of products that provide protein and more than half of its basic grains, a greater dependence than at any time since the 1959 revolution, according to the Centre for Study of the Cuban Economy, a pro-government think-tank based in Havana.

Ideology could also limit success. Cuba’s government remains reluctant to extend market mechanisms. Although the Alamar and other “urban farms” sell directly to the community through local markets, bigger producers - such as the state farms and rural co-ops - sell 80 per cent of their output at set prices to state-run warehouses that have traditionally been inefficient.

Although Cuba has signed a deal that will bring Brazilian technology to a pilot soya project, the country seems some way away from signing joint ventures with big private international agri-business concerns. Yet that might be the only way to revive the fortunes of the moribund and capital-intensive cattle rearing and dairy farming sector.

Many Cubans privately fear that bureaucracy will block success. Mr López is adamant that will not be so. “We are not magicians. We are in a rush but we are not desperate,” he says. “The changes will be introduced gradually, without improvisation and without despair.”

Slideshow: Richard Lapper on Raúl Castro’s cuba

Copyright The Financial Times Limited 2008

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