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Growth, human capital, and technological change in a centrally planned economy: Evidence from Cuba

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Growth, human capital, and technological change in a centrally planned economy: Evidence from Cuba

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GROWTH, HUMAN CAPITAL, AND TECHNOLOGICAL CHANGE IN A
CENTRALLY PLANNED ECONOMY: EVIDENCE FROM CUBA
by
Manuel Enrique Madrid-Aris
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
MASTER OF ARTS
(Economics)
May 1998
Copyright 1997 Manuel Enrique Madrid-Aris
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UMI Number: 1391090
Copyright 1998 by
Madrid-Aris, Manuel Enrique
All rights reserved.
UMI Microform 1391090
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U N IV E R SIT Y O F S O U T H E R N C A L IFO R N IA
THE GRADUATE SCHOOL.
UNIVERSITY PARK
L O S ANGELES. CALIFORNIA > 0 0 0 7
This thesis, •written by
under the direction of hJL£ Thesis Committee,
and approved by all its members, has been pre
sented to and accepted by the Dean of The
Graduate School, in partial fulfillment of the
requirements for the degree of
M % 5 T l ? n . C P /f e / ~ S C f t o w n,c 'D & jtfP G L n & u iZ L
I T . I lf< l i
/
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Dedication
This research is dedicated to the Cuban people.
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Acknowledgments
I would to express my appreciation to my Committee Chair, Jeffrey Nugent for his
helpful comments during the development of this research. I am also grateful to the other
members of my committee, Professors Caroline Betts and Robert Kalaba.
I would also like to acknowledge Carmen Gonzales and Alfredo Prieto for helping
me in Cuba to find the way to collect the data used in this research. I would like to thank
the Centro de Investigaciones de la Economia Cubana (CIEM) and Centro de Estudios de
la Economia Cubana (CEEC) of Havana, for providing information for this research.
Special thanks are extended to the personnel of the Buro de Investigaciones Sociales y
Economicas S. A. of Havana, for providing data used in this research.
Additionally my appreciation goes to the participants of the Seventh Annual
Meeting of the Association for the Study of the Cuban Economy (ASCE) on August 7-9,
1997 in Miami for their valuable comments. Thanks are also due to Jorge Perez-Lopez for
organizing the meeting, and for inviting me.
Economic support for the development of this research was provided by M&M
Ingenieria Ltda.- CHILE.
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TABLE OF CONTENTS
Dedication ii
Acknowledgments iii
List of Tables vi
List of Acronyms vii
Abstract viii
1. INTRODUCTION AND RESEARCH OBJECTIVES
1 .1 Introduction 1
1.2 Research Objectives 3
1.3 Research Overview 4
2. A BRIEF OVERVIEW OF THE CUBAN ECONOMY
2.1 Macroeconomic Indicators 6
2.2 International Trade 8
2.3 Human Capital 11
2.4 Labor Force 12
2.5 Social Indicators 13
3. UNDESTANDING CUBAN GROWTH, HUMAN CAPITAL AND
TECHNOLOGICAL CHANGE
3.1 Literature Review 15
3.2 Conceptual Points about Growth Accounting 17
3 .3 Production Function for Estimating Rate of Technical Progress or TFP 20
3 .4 Estimating Stock of Capital 21
3.5 Total Factor Productivity Growth for the Cuban Economy 23
3 .6 Sectoral Analysis of Total Factor Productivity Growth 25
3.6.1 Total Factor Productivity Growth for the Agricultural Sector 25
3.6.2 Total Factor Productivity Growth for the Industrial Sector 27
3.7 Summary and Factors Contributioning to Economic Growth 29
3.8 Theoretical Explanations of Cuban Technological Change 31
3 .8.1 Technological Change Embodiment in Capital 31
3.8.2 Economies of Scale 32
4. ECONOMETRIC AND COMPARATIVE ANALYSIS OF CUBAN TFP
4.1 Econometric Estimation of Total Factor Productivity Growth 35
4.1.1 TFP without Human Capital Adjustment (Hicks Neutral Function) 36
4.1.2 TFP with Human Capital Adjustment by Educational Quality 37
4.2 Comparison of Cuba’s Technological Change with Other World Regions 40
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5. IMPLICATIONS FOR OTHER MODELS AND CONCLUSIONS
5.1 Implication for Endogenous Growth Models 43
5.2 Summary and Conclusions 47
REFERENCES 50
APPENDICES:
APPENDIX I: Cuban Accounting System
1.1 Cuban Social Accounting System 57
APPENDIX 2: Cuban Statistics
2.1 Population, Migration and Infant Mortality 60
2 .2 Enrollments by Type of Education 61
2.3 Cuban Economic Output and Income Per-Capita 62
2.4 Sugar Production, Prices and Soviet Subsidies 63
2.5 Cuban International Trade 64
2.6 National Income and Social Investment (Eduaction and Health) 65
APPENDIX 3: Cuban Institutional Reforms and Economic Policies
3.1 Cuba’s Institutional Reforms and Economic Policies (1959-1988). 67
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LIST OF TABLES
2.1 Macroeconomic Indicators 6
2.2 Sectoral Output Shares and GMP Growth Rate 8
2.3 Cuban Exports Structure 8
2.4 Cuban Imports Structure 9
2.5 Trade Balance and Trade Ratios 10
2.6 Students Enrollment by Level of Education 11
2.7 Total and Sectoral Labor Force 12
2.8 Population Growth, Illiteracy and Infant Mortality 13
2.9 Income Distribution in Latin America and Cuba 14
3.1 TFP Growth Estimations for the Cuban Economy 23
3 .2 Factor Contribution to Growth for the Whole Economy 23
3 .3 TFP Growth Estimations for Agricultural Sector 25
3.4 TFP Growth Estimations for Industrial Sector 28
3 .5 Aggregated and Sectoral Factor Rate of Growth 29
3.6 Factors Contribution to Cuban Economic Growth 29
3 .7 Rate of Growth of Factors for Different Depreciation Rates 32
3 .8 Factors Contribution to Growth for Different Depreciation Rates 32
3 .9 Economies of Scale Analysis-Regression Results 33
4.1 Econometric TFP Results Without Human Capital Adjustment 37
4.2 Econometric TFP Results With Human Capital Adjustment 39
4.3 World GDP Growth and Contribution of Factors to Economic Growth 40
5 .1 Singapore Patterns of Investment and TFP 44
5.2 Regression of Ln (Y/L) on Ln(K/L) 45
vi
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LIST OF ACRONYMS
DC Developed Country
DOL Division of Labor
GDP Gross Domestic Product
GMP Gross Material Product
GNP Gross National Product
GSP Global Social Product
LDC Less Developed Country
SDPE Cuban New System o f Economic Management and Planning
TFP Total Factor Productivity Growth
TMP Total Material Production
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ABSTRACT
The purpose of this research is to improve understanding of Cuban economic
growth and technological change during the period 1962-1988. An empirical growth
accounting analysis is conducted, which is combined with economic policy and institutional
analysis to explain Cuba’s process of economic growth.
This research has five sections. The first section is a general introduction. The
second section is a descriptive analysis of the historical patterns of Cuban economic
growth, international trade, factor accumulation, human capital and social achievement.
The third section contains estimates of Cuban aggregate and sectoral rates of technical
progress or total factor productivity (TFP) based on the traditional methodology of growth
accounting (Solow, 1957). This section also includes theoretical explanations of Cuba’s
rate of technical change, such as the extent to which technological change was embodied in
capital, and therefore economies of scale.
The fourth section contains an econometric estimate of TFP for the purpose of
validating previous results, which considers the well known assumptions of constant return
to scale and perfect competition in factor markets. In this section, a comparative analysis of
the TFP growth of Cuba and other world regions is conducted. The final section contains
an analysis of the results, the implications for linear endogenous growth models and
conclusions.
The results show that aggregate Cuban TFP decreased over time. The contribution
of TFP to economic growth, on average, is very low for the whole economy during the
period 1963-1988. The Cuban agricultural sector has experienced negative TFP growth. A
comparative analysis shows that Cuba’s centrally planned economy performed much worse
than most capitalist economies with respect to TFP growth and its contribution to
economic growth. Results show that most of the investment in education had little if any
economic return. In sum, a large amount of resources was wasted in the creation of human
capital, which under the centrally planned system, did not contribute much to technological
progress. Finally, it can be concluded that Cuban growth was won by massive capital
accumulation rather than technological progress.
viii
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Chapter 1
INTRODUCTION AND RESEARCH OBJECTIVES
1.1 Introduction
The literature detailing economic growth, technological change, and human capital
is vast and growing at a fast rate. In recent years there has been a revival in growth theory
which has resulted in a considerable body of theoretical and empirical work in this field.
New endogenous growth theory tried to explain those factors that are assumed to be
exogenous in the neoclassical framework. Thus, this revival of growth theory is
endeavoring to answer questions of whether growth policy could be formulated or
improved.
In the economic development literature today, the role of trade and technological
change, or total factor productivity (TFP) are key ingredients to economic growth. Thus,
most TFP empirical research tries to address questions, such as: (i) Does human capital
and international trade affect economic growth?; (ii) How much is the contribution of
technological change to economic growth?, and (iii) What is the effect of a trade policy on
TFP?
It is widely known that the importance of TFP changes over time. TFP measures
the economic and technical efficiency of the process of transforming inputs or resources
into products or final goods. The growth of an economy, or economic sector, is
determined mainly by the rate of growth of its productive resources (especially labor and
capital) and the rate of technological change or total factor productivity growth (TFP).
Thus, TFPs are important in explaining why some countries grow more rapidly than
others, or why some specific industries or sectors grow faster than others for a given
period of time.1 In addition, TFP is useful for the design of a country’s “catching up”
process, which involves economic policies directed to exploit some industries’ or
1 For an interesting comparative cross-country research on TFP, which includes Korea, Japan, Turkey
and Yugoslavia, see Nishimizu and Robinson, 1984.
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economic sectors’ comparative advantage, to keep the country competitive internationally
(Nishimizu and Robinson, 1984). Therefore, the differential rate of growth of sectoral
TFP is crucial determinant of the comparative advantage that could help growth and define
structural adjustment in the medium- to long-run in a specific country.
The empirical literature on growth and technological change has accumulated a
huge body of “stylized facts” about the contribution of TFP and factors input (labor and
capital) to economic performance.2 But empirical studies about growth and technological
change have rarely been applied to centrally planned economies, which in part, could be
explained because of the fact that researchers have difficulty in finding good and reliable
data. This makes this type of research a lengthy, if not an unattainable, task.
Because of the lack of empirical studies of Cuba’s growth and technological
change, Cuba’s economic growth is still generating interest, debate, and controversies
which challenge economists. This controversy is basically due to the fact that despite
Cuba’s small size, dependence on the sugar monoculture, lack of natural resources and
energy resources, and with a 20% illiteracy rate and poor health indicators in 1959, Cuba
embarked on a steady process of economic growth after 1960. Cuba’s gross material
product grew at an average rate of 4.4% in real terms from 1960 to 1988 and income per-
capita grew at a rate of 3.2% in real terms during this period.
This study tries to fill the void of empirical studies about Cuba’s growth and
technological change. This study tries to find answers among the controversies
surrounding Cuba’s process of economic growth, its links with technological change,
investment and the economic policies followed during the period 1962-1988.
1.2 Research Objectives
Empirical growth analyses based on time series analysis for an individual country,
and especially one which combines growth and human capital analysis with policy and
institutional analysis, is rarely seen (Solimano, 1996), especially applied to centrally
2 For a critical survey about total factor productivity, see Nelson (1981). For case studies applied to less
developed countries (LDCs), see Teitel and Westphal (1984) and Solimano (19%).
2
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planned economies. The present study tries to achieve this goal by performing an
empirical analysis of the Cuban economy during the period 1962-1988.
Cuba’s economic performance during 1962-1988 and the Cuban educational
program, which from the beginning of the revolution has always been regarded as an
important and integral link to social, and economic development, raises many questions.
Among these are: (i) Was the increased income per-capita in Cuba (1962-1988) a
consequence of a better educated labor force leading to a high rate of technological
change (TFP), or was it the result of increased investment resulting from Soviet
assistance/subsidies? (ii) How large is the contribution of the different factors (labor,
capital, and TFP) to total Cuban economic growth and to some specific economic sectors
of the Cuban economy? (iii) Has Cuba’s rate of technological change been lower or higher
than the capitalist economies? (iv) How much has Cuba’s educational investment
contributed to Cuba’s economic growth? (v) What has been the economic return of the
resources invested in the human capital?.
To find plausible answers to the questions stated above, this empirical study has six
objectives. The first one is to provide a descriptive analysis of the historical patterns of
Cuban growth, international trade, factor accumulation, human capital and social
achievement during the post-revolution period and before the end of the cold war. The
second goal is to estimate Cuba’s aggregate rate of technical progress or TFP growth
during the period 1962-1988. The third goal is to conduct a sectoral TFP analysis
(industrial and agricultural sectors) to have a better understanding of Cuba’s technological
change and economic growth. The fourth goal is to find some explanations for the TFP
results obtained. Thus, endogenous depreciation and economies of scale are tested. The
fifth goal is to analyze whether technological change in this centrally planned economy has
been higher or lower than the capitalist economies. The sixth goal is to compare the Cuban
economy and the Singaporean economy, to analyze their similarity and use these two
economies TFP results, to address some implications for endogenous growth models.
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1.3 Research Overview
The study has five chapters. The remaining chapters of this study are organized as
follows: Chapter 2 provides a brief overview of the Cuban economy, which covers some
macroeconomic indicators, productive structure, international trade, human capital, labor
force, and social indicators. This chapter also provides some background on Cuba’s
economy to have a better understanding of Cuba’s initial economic conditions and its
process of economic growth during the period covered.
Chapter 3 starts with a brief literature review related to economic growth,
technological change, and human capital. Then, an explanation of the rate of technical
progress or TFP is included. This chapter also contains an explanation of the
methodology (Solow, 1957) normally used to estimate TFP. The implicit assumptions of
the traditional methodology and its applicability to a centrally planned economy are
discussed. Then, aggregate and sectoral TFP are estimated using traditional methodology.
The factors contributing to Cuban economic growth are estimated at both the aggregate
and industry levels. Finally, two theoretical explanations (endogenous investment and
economies of scale) are included. An econometric estimation of the economies of scale of
the Cuban economy, and of the main two economic sectors (agriculture and industry), is
included.
Chapter 4 contains an econometric estimate of TFP with and without human
capital adjustment. This analysis is included to verify TFP results obtained in the previous
chapter. This chapter also compares Cuba’s rate of technological change with those of
other world regions. Chapter 5 presents the implications of the results obtained for
endogenous growth models. Finally, a summary and conclusions are given.
Appendix 1 contains a description of the Cuban National Accounting Systems
(Gross Material Product and Gross Social Product). Appendix 2 contains Cuban statistics
such as investment, output, international trade, human capital and social investment.
Finally, appendix 3 contains a general description of the economic policies undertaken by
the Cuban government after the revolution, in order to relate the use of particular
4
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economic policies with the TFP results to find some plausible explanation o f the results
obtained in this study.
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Chapter 2
A BRIEF OVERVIEW OF THE CUBAN ECONOMY
Cuba's economic history is directly linked to agricultural production. Cuba’s international
trade is mainly related to sugar production. As the revolution developed over the years, Cuba
constantly struggled with the need to diversify its economy and build an industrial base while
also needing to increase sugar production in order to accumulate the capital required to realize
the former. By 1959, 80% of Cuba's export revenues came from sugar. Although the Cuban
revolution tried to carry out plans for agricultural diversification, industrialization, and export
diversification, the Cuban economy is still as highly dependent on sugar exports as it was 30
years ago.
2.1 Macro Indicators
Table 2.1 shows a summary of Cuban main macroeconomic indicators and the
Soviet assistance received by Cuba.
TABLE 2.1: Macroeconomic Indicators
Period
Economic
Growth
(%)
Income
Percapita
Growth
Investment
as share of
GMP
Total Soviet
Assistance as
share of GMP*
Exports as
share of
GMP
Imports as
share of
GMP
1960-1964 1.9 -0.2 0.14 0.08 0.15 0.19
1965-1969 3.6 1.7 0.19 0.07 0.14 0.21
1970-1974 10.0 8.2 0.17 0.07 0.18 0.23
1975-1979 3.4 2.2 0.28 0.18 0.34 0.40
1980-1984 5.7 5.1 0.30 0.33 0.44 0.52
1985-1988 1.3 0.3 0.31 n.a. 0.40 0.60
AVERAGE 4.4 3.2 0.23 0.15 0.28 0.36
Notes: Economic growth has been estimated with Gross Material Product (GMP) since statistics of Gross Social Product
(GSP) is not as accurate as GMP (See Mesa-Lago and Perez-Lopez, World Bank Staff Working Paper Number 770,198S).
•Total Soviet Assistance includes Soviet trade subsidies (sugar, petroleum and nickel) plus development aid (for further
details, see, CIA, Directorate of Intelligence, 1984, p. 40 and 1989, p. 39. Also, see Appendix, Table A-2.S.
Source: Rodriguez (1990), Brundenius (1984), Mesa-Lago and Perez-Lopez (198S), CIA, Directorate of Intelligence
(1984, 1989) and author’s estimations.
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Table 2.1 shows that Cuba sustained an acceptable economic growth during the
period 1960-1988. Cuba’s gross material product (GMP)3 was able to grow at a steady
rate of 4.4% and per-capita income increased at an average rate of 3.2% during this
period. Cuba greatly increased the rate of investment, which went from 15% in I960 to
30% in 1988. Large amounts of resources were invested in agriculture, health, and
education (see Appendix 2, Table A-2.6). Data from Table 2.1 shows that between 1960
and 1964, there was no increase in income percapita. On the other hand, during the period
1965-1988 income percapita, increased at a considerable rate. Data show that the Soviet
assistance increased considerably over time (for further details, see appendix, Table A-2.4).
During the period 1960-64, soviet assistance were on average only 7% of GMP, but they
increased to a level of 33% of GMP for the period 1980-1984. The amount of Soviet
assistance was larger than the investments realized by the Cuban government for the period
1980-1984. In other words, during this period, it could be assumed that most of the
investments realized by the Cuban government were realized by using capital coming from
Soviet assistance4. Therefore, it could be inferred that the Cuban economy was losing its
saving capacity.
Note that the highest rate of economic growth (10%) was achieved in the period
1970-1974. Ironically, during this period, the investment rate was low (17%) and even
decreased from a level of 19% to a level of 17%. Additionally, the lowest rate of
economic growth (1.3%) was during the period 1985-1988, when the highest rate of
investment (31%) was observed. Looking at these figures, it seems that the Cuban
economy was not able to absorb such a high level of investment.5 Then, it can be
3 The Cuban accounting system is different from the western concept of Gross National Product (GNP).
Cuba uses the Soviet system of Global Social Product (GSP) and Gross Material Product (GMP), which is
also called “gross product.” For a detailed explanation of the Cuban Accounting System, see Brundenius
(1984). pp. 19-40, and Mesa-Lago and Perez-Lopez (1985) and this research Appendix 1.
4 Note that in a centrally planned economy, the investment is mainly realized by the government since
there are no opportunities for private enterprises or for private investment in financial instruments.
Therefore, private income is spent mostly in consumption.
5 If the rate of investment exceeds the country’s technical, human and institutional capacity to allocate it
in an efficient way, most of the investment goes to poorly managed projects. Hence, investment is not very
productive and depreciates. Similar conclusions are achieved by Miguel Figueras, the former Director of
Planning of the Cuban Ministry of Industry. For further details, see Figueras (1994).
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concluded that during the 1980s, investment was not allocated as efficiently as during the
1970s.
Table 2.2 shows the agricultural and industrial share of the total GMP and their rate of
growth. Data show that the share of agriculture in the total GMP decreased over time. On the
other hand, the industrial share remained constant over the last 25 years.
TABLE 2.2: Sectoral Output Shares and GMP Growth Rate
Industry GMP
Over Total GMP
Industry Output
Rate of Growth (%)
Agriculture GMP
Over Total GMP
Agriculture Output
Rate of Growth (%)
1963-1969 0.65 2.2 0.24 5.0
1970-1974 0.69 11.4 0.19 0.7
1975-1979 0.65 2.6 0.18 4.0
1980-1984 0.66 5.9 0.16 1.9
1985-1988 0.68 1.8 0.14 0.7
AVERAGE 0.67 4.7 0.19 2.7
Source: Rodriguez ( 1990) and Comite Estadistico Estatal (CEE), Anuarios Estadisticos de Cuba, several years.
Industrial and agricultural production are the main economic sectors in Cuba’s
economy, accounting for more than 80% of the total GMP or equivalent to 60% of the gross
social product (GSP).
2.2 International Trade
Cuba's main exports are sugar and sugar derivatives. In the 1980s, these accounted on
average for approximately 77% of the total exports. Recently, mineral exports (mainly nickel)
replaced Cuba's second chief export-tobacco. Tobacco exports accounted for 10% of total
exports in 1960, but after 20 years, it declined to 2% of total exports.
TABLE 2.3 Cuban Exports Structure (in percentage)
Type of Export 1957 1970 1975 1980 1987
Sugar 80.0 76.7 89.8 83.6 74.3
Tobacco 5.9 3.1 1.8 1.7 2.0
Minerals 5.7 16.7 4.7 4.8 6.6
Others exports 9.3 3.5 3.7 9.9 17.1
TOTAL 100.0 100.0 100.0 100.0 100.0
Note: Other exports include fish, citrus, fruits, minerals, and rum.
Source: Comite Estatal Estadistico (CEE), Anuario Estadistico de Cuba, several years, CIA, Directorate of
Intelligence (1984,1989), Rodriguez (1990) and author’s estimations.
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The dear concentration of international trade on sugar exports makes Cuba's economic
output extremely vulnerable to world sugar prices which dramatically fluctuated over the years.
During the period 1959-1988, some stability was guaranteed by the Russian guaranteed fixed
prices, which in general, were much higher than world prices (Appendix, Table A-2.4). But,
today, Cuba is very vulnerable to world sugar prices.
TABLE 2.4: Cuban Imports Structure (as percentage of total imports)
Type of Import 1965 1970 1975 1980 1986
Foodstuffs 25.2 20.0 19.0 17.1 10.4
Raw Materials 2.9 4.7 3.9 4.3 4.0
Fuel and Lubricants 9.8 8.7 10.0 20.5 33.5
Machinery & Transportation Equipment 15.4 28.1 24.2 35.1 30.8
Others 46.7 38.5 42.9 23.1 21.3
TOTAL 100.0 100.0 100.0 100.0 100.0
Source: CIA, Directorate o f Intelligence, 1984 (p. 33), 1989 (p.
31).
Data from Table 2.4 shows that foodstuffs were, on average, one of the most important
imports between 1963-1975, accounting for about 20% of total imports. Fuel and lubricant
imports increased considerably from 1960 to 1986. Today they account for one-third of total
imports. Note that imports of machinery and transportation equipment increased steadily at a
rate of more than 4% a year during the last 20 years. Cuban increasing dependency on
imported technology for machinery and transportation equipment is clear. Machinery and
transportation equipment imports indicate that Cuban industrialization program, which was
adopted as the main goal of the government after 1959, has partially failed with respect to this
specific manufacturing sector.6
6 Note that for middle income countries (a total of 37 countries), imported machinery and
transportation equipment as a share of total imports was 29% in 1965 and 35% in 1988. Results show that
Cuba was in a relative much better position in 1962 compared to 1986, with respect to the average of other
similar income countries. For further details, see World Bank, World Development Report (1990). pages
206-207.
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With respect to Cuba's imports,7 statistics indicate the degree of the nation's
dependency on imports.8 Cuba’s import dependence created a continuous trade balance deficit
for more than 32 years (Table 2.4; Appendix 2, Table A-2.5).
TABLE 2.4: Trade Balance and Trade Ratios
Year
Exports
(In Millions of
1965 Pesos)
Imports
(In Millions of
1965 Pesos)
Trade Balance
(In Millions of
1965 Pesos)
Exports
as% of
GMP
Imports
as% of
GMP
Trade Deficit
as% of
GMP
1959 636.0 674.8 -38.8 16.6 17.6 1.0
1962 522.3 759.3 -237.0 12.9 18.7 5.8
1970 1049.5 1311.0 -261.5 18.5 23.1 4.6
1976 2611.5 3179.1 -568.2 31.8 38.7 6.9
1982 4833.2 5530.6 -697.4 45.0 51.5 6.5
1987 5022.9 7583.6 -2560.7 40.4 61.0 20.6
Source: Comite Estatal Estadistico, Anuario Estadistico de Cuba, several years. Rodriguez (1990). CIA
Directorate of Intelligence (1884,1989), Zimbalist and Brundenius (1989) and author's estimations.
Cuban trade deficit went from 5.8% in 1962 to 20.6% of the GMP in 1987. The
increasing import share in total GMP and trade deficit figures suggest that the Cuban economy
was loosing import substitution9 and export capacity to control the trade deficit. This constant
international trade deficit contributed to Cuba's continuous reliance on Soviet financing.
Following the so-called “end of the cold war,” with the disintegration of the Soviet Union,
Cuba no longer received Russian financing for the trade deficits.
Note that Cuba's import statistics are not very accurate because some strategic goods such as weaponry,
were supplied free of charge from 1962-1970.
8 Note that Latin American countries weighted-average of imports with respect to GDP was 11% in 1985
and 12.7% in 1990. Note that after 1976, Cuba presents the highest rate of imports as share of GDP of all
Latin America countries with the exception of Panamti. Some Latin countries’ imports share of GDP for
1987-1993 are: Brazil (10%), Argentina (11%), Chile (29%), Colombia (21%), Salvador (34%), Peru
(15%). and Venezuela (27%). For further details, see Interamerican Development Bank, Statistics and
Quantitative Analysis. Department of Integration and Regional Programs (see www.iadb.org).
9 Note that the development model applied in Latin America during this period is called import
substitution, known as ISI, which was basically founded on the idea of developing an industrial base to
reduce the dependency on imported industrial products coming mainly from developed countries. Cuba's
industrialization program was mainly directed toward import substitution (Appendix 3).
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23 Human Capital
Human capital investment is a concept widely used by economists, meaning the process
of improving of the quality of the labor force. Thus, human capital is referred to as the level of
education of the labor force. This improvement of the labor force quality is basically achieved
by education and training (Becker, 1993). Since there is no accurate data concerning the rate
of change of education of the Cuban labor force, for purposes of discussion in this study, it is
assumed that human capital changes at the same rate as enrollment rates changes.1 0 Table 2.6
contains data on enrollment by levels in Cuba between 1958 and 1985. A comparison with
Taiwan is included.
TABLE 2.6: Students Enrollments by Level of Education (per 1,000 habitants)
Primary Secondary Higher Other TOTAL
Cuba
1958 104.9 11.8 3.8 0 120.5
1970 193.4 24.9 4.1 32.4 254.8
1975 205.2 57.1 9.0 31.3 302.6
1980 164.2 110.0 15.7 6.8 296.7
1985 116.8 110.0 23.2 2.0 252.0
Taiwan
1958 146.6 27.0 2.6 1.3 177.5
1980 126.1 89.0 18.5 12.7 146.3
1985 117.6 86.7 21.4 14.1 239.8
Note: For Cuba, secondary education includes technical schools. Other types of education include the worker farm
educational program developed alter the revolution.
Source: Taiwan data from Zimbalist and Brundenius, 1989, p. 168. Cuba data from authors estimations. For further
details, see Appendix 2, Table A-2.2.
With respect to education, Cuba considerably increased the rate of enrollment during
the period 1959-1988 (for further details, see Appendix 2, Table A-2.2). Data from Table 2.6
shows that human capital accumulation has been quite rapid in Cuba during the last 35 years.
Hence, it could be concluded that the Cuban government was successful in achieving a high
rate of enrollment during this period. This achievement was possible thanks to the huge
amount of resources destined for education. Investment in education was only 3.2% of national
income in 1960, but it increased steadily to a level of 13.1% of national income by 1988 (for
further details, see Appendix 2, Table A-2.6).
> n This approximation is assumed due to the lack of accurate and reliable data about graduation rates and
its relation with the labor force.
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The improving educational attainment of the labor force achieved in Cuba, should have
contributed positively to output by efficiency gains, which should be reflected in the rate of
technical change or TFP. Thus, one important issue to be researched in this paper is how
much was this human capital improvement contributed to Cuban economic growth. The two
crucial questions regarding human capital that I will try to address in the following sections are:
(i) how much of Cuba’s educational effort contributed to economic growth under the centrally
planned system, and; (ii) is there any economic return from the investment directed to improve
the Cuban human capital during the period 1962-1988?
2.4 Labor Force
Note that centrally planned economies have an astonishing power to mobilize
resources, especially labor. Hence, to understand growth in a centrally planned economy it is
essential to understand how the labor structure changes through time under this type of regime.
Empirical evidence shows that in the Soviet Union, the rapid rate of economic growth achieved
under communism, especially during the 1950s and 1960s,1 1 was mainly the result of the
increased labor force and capital rather than of technological change.1 2 Table 2.7 shows the
change in the labor force structure in Cuba through time.
TABLE 2.7: Total and Sectoral Labor Force (in percentage)
Year
Total Labor
(as % of Total
Population)
Productive Labor
(as % of Total
Population)
Industrial Labor
(as % of Total
Population)
Agriculture Labor
(as % of Total
Population)
Female Share of
Total Labor
Force (%)
1962 15 12 3.6 4.1 14
1970 23 18 4.9 7.6 18
1975 26 20 5.6 7.3 26
1982 28 21 6.1 6.5 35
1988 33 23 7.1 6.8 38
Note: Total labor force includes the categories of productive and unproductive labor force. For further details about
this two type of labor, see Appendix 1 and Soviet accounting system.
Source: CEE, Anuario Estadistico de Cuba, several years, and Brundenius (1984).
1 1 The average growth rate of the Soviet Union during 1950-1964 was 4.3%. The growth rate of the
U.S. was only 2.2% for this period. For further details, see Bergson (1968).
1 2 For further detail, see Krugman (1994) and Poznanski (1985).
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Data from Table 2.7 show that the labor force increased considerably after the
revolution. The labor force as percentage of total population surged from 15% in 1962 to 33%
in 1988. Thus, over the past generation the percentage of people into the labor force doubled,
but it obviously cxji not double again in the future.1 3 A large portion of this new labor force
were women, which more than doubled from 1962 to 1988. The analysis of TFP (Chapter 3)
clearly shows that increased labor inputs are directly correlated with the Cuban economic
growth.
2.5 Social Indicators
According to the 1953 census, one out of five Cubans were illiterate. The illiteracy in
certain rural areas was as high as 40%. Thus, the need to eliminate illiteracy was one of the
main goals of the revolutionary government when it came into power in 1959 (Table 2.8). By
March, 1961 the Cuban government embarked upon an ambitious literacy campaign designed
to eliminate illiteracy in a short period of time. From 1959 to 1962, the illiteracy rate was
reduced to 4%. By 1990 the illiteracy rate was 2.8%.
TABLE 2.8: Population Growth, Illiteracy and Infant Mortality
Year or Period
Rate of Population
Growth (%) Illiteracy (%)
Infant Mortality
(per 1000 births)
1959 1.4 21.0 35.0
1960-1969 2.0 5.0 38.0
1970-1979 1.4 4.0 28.0
1980-1988 1.0 3.0 15.0
1990 0.9 2.8 12.0
Sources: CEE, Anuario Estadistico de Cuba, several years, Dominguez (1978), Rodriguez (1990), and Zimbalist and
Brundenius (1989).
The rate of population growth dropped drastically during the last 30 years. This is the
result of two factors: the rate of migration (see Appendix 2, Table A-2.1) and a considerable
drop in the birth rate.
1 3 Labor force as percentage of total population can not double again, because today the labor force is
already 33% of the total population. Doubling this figure means that 66% of the population would be part
of the labor force. In reality this is not feasible, because to achieve that rate would mean that most of the
women, old men. and children would have to be part of the labor force.
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The infant mortality per thousand births was 36 in 1960, but it was reduced to 12 in
1990. This was the result of huge investments directed toward public health during this period.
Investment in education went from 2.0% of national income in 1960 to a level of 6.6% of
national income in 1988 (see Appendix, Table A-2.6).
Table 2.9 compares the income distribution in Cuba with Latin American countries. It
is important to note that Cuba’s income distribution overestimates inequality in the distribution
of purchasing power, since education and health are free and publicly provided (Zimbalist and
Brundenius, 1989, p. 162).
TABLE 2.9: Income Distribution in Latin America and Cuba (share of total income)
Latin America Cuba
1960 1975 1953 1962 1978
Poorest 20% 2.8 2.3 6.2 11.0 11.3
Next Poorest 20% 5.9 5.4 11.0 13.8 14.7
Poorest 40% 8.7 7.7 17.1 24.8 26.0
Next 30% 18.6 18.1 28.3 26.4 28.1
Richest 20% 26.1 26.9 31.5 27.7 25.8
Richest 10% 46.6 47.3 23.0 21.1 20.1
TOTAL 100.0 100.0 100.0 100.0 100.0
Source: Zimbalist and Brundenius, 1989, p. 163.
It is not surprising that Cuba’s performance in the distribution of income was more
favorable than Latin American countries, since the communist government played an important
role in distributing wealth toward the poorest part of the population.
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Chapter 3
UNDERSTANDING CUBAN GROWTH, HUMAN CAPITAL
AND TECHNOLOGICAL CHANGE
In the first part of this chapter a brief literature review about growth, human capital
and technological change is provided. Then, the implicit assumptions of the traditional
methodology (Solow, 1957) normally used to estimate TFP are explained. In addition, the
validity of traditional methodology, when applied to a centrally planned economy, is
discussed. This chapter also contains an explanation of the data base used in the
estimation of TFP and the way that stock of capital was determined. TFP estimations
(aggregated and sectoral) and their contribution to growth are included. Finally,
theoretical explanations (endogenous investment and economies of scale) of the results are
discussed.
3.1 Literature Review
Many theories have been developed by economists over the years to explain
economic growth and development. These theories usually try to pinpoint the determining
factors that contribute to growth and development such as trade, human capital,
technological change and institutions.
Starting with the classical view of Adam Smith (Wealth o f the Nations, 1776),
economic growth was defined mainly by: (1) division of labor (DOL); (2) the
development of domestic market by investing in infrastructure; (3) expanding the market
to the international sphere by using international trade as a tool; and (4) increasing capital
accumulation by increasing the savings rate. Smith saw education as necessary and
beneficial to prevent adverse effects of DOL and to encourage people to create inventions.
Thus, for Smith, education and technological change were linked and were crucial for
economic growth. Then, for Ricardo, free trade and income distribution were key sources
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of growth and development. In the case of John Stuart Mill, education was important for
development. Mill’s view was based on the premise of fairness--that people need equal
opportunities in life. Massive education provides the opportunity for everybody to start
from the same point. In order to achieve equality of opportunities, education is needed
and it should be provided by government at a low cost.
In sum, old political economists such as Smith and Mill considered education or
human capital an important factor for economic growth and development. But, investment
in human capital was, for the most part, ignored in discussions of economic growth until
the mid-1950s. In the works by Schultz (1961, 1963), Denison (1962), Mincer (1958,
1962) and Becker (1963), focus began to be directed to the role of human capital in
economic growth and technological change, and to determine the returns from education
and the proportion of the rate of growth of output due to investments in education.
In 1980, the World Bank showed renewed interest in the development of human
capital (Wheeler, 1980). The results of Wheeler’s comparison of 88 developing nations
suggests that education, health, and nutrition contribute to growth of output not only
directly, but also indirectly, by increasing the rate of investment and by lowering the birth
rate. Wheeler also found that on average an increase in the literacy rate from 20% to 30%
caused national income to increase from 8% to 16%.
The fact that general investments have less effect on growth rates when they are
not supported by educational investment, has been supported by studies carried out by
Jamison and Lau (1982) and Psacharopoulos (1984). An empirical study by Mankiw,
Romer and Weil (1992), using an argumented version of the Solow model by adding
accumulation of human and physical capital, also determined that the presence of human
capital accumulation increases the impact of physical capital accumulation. Decades
earlier, Schultz (1963) had also expressed puzzlement over a residual he was finding when
measuring the increases in production over time, and determined that the missing piece
was the investment in human capital via education.
The neoclassical growth model was mainly defined by Solow (1956, 1957). His
model focused on capital accumulation and the quality of labor for economic growth. But,
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Solow’s model had a shortcoming in that it did not explain the link between growth and
technological change, since technological change is seen as exogenous.
The new endogenous growth theorists, starting from Paul Romer (1986) and
Robert Lucas (1988) have tried to find the determinant factors that drive economic
growth, such as human capital, new technologies, economies of scale, and international
trade. Lately, many empirical studies have been carried out to find out what factors are
important for explaining economic growth. Barro (1991) studied 98 countries for the
period 1960-1985, concluding that faster percapita real GDP growth is associated with a
higher rate of investment by either the private or government sector, a lower share in GDP
of government consumption spending, higher school enrollment rates, greater political
stability, and lower fertility rates.
3.2 Conceptual Points about Growth Accounting.
The starting point of most of the productivity and growth accounting is the
following aggregated production function.
Y, = F(K,,L,,t) ( 1)
Y, = A (t)G (K,,L,) ( 1’)
Here Yt, Kt, and Lt are the quantities of aggregate real output, physical capital and
labor respectively at time /, and t is an index of chronological time. The second equation
(T) is the traditional neoclassical growth model, which is a specific case of the first one,
since A(t) varies with time and independently o f K and L. Technological change is by
assumption disembodied, where a Hicks neutral technological change is assumed. If
productivity growth is Hicks neutral, the rate o f productivity growth is independent of
capital and labor inputs, and depends only on time. This is the basic neoclassical Solow
(1957) model.1 4
1 4 For a review of neoclassical growth models, see Sala-i-Martin (1990).
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By totally differentiating the production function (1’), and completing elasticities,
the equation (1’) can be written as follows:
Y = A+ak k+ p, L (2)
In equation 2 the sign (A ) denotes for the rate of growth of the variable, and
parameters or*,/?,, are the elasticities of capital and labor with respect to output
respectively. Finally, the term a is the is the residual, or the well-known neoclassical
expression for exogenous technological change.
As we know, not every quantity on the right side of equation (2) can be measured
directly. In fact, only the growth rate of output, capital and labor are directly measured.
Hence, the elasticity of output with respect to labor and capital must be estimated. Thus
some traditional assumptions have to be maintained, such as profit maximization with
competitive labor and output markets (perfect competition), and constant returns to scale
(CRTS), which implies that firms will set the return on capital equal to the marginal
product of the capital. Under these assumptions, the elasticity of output with respect to
capital (a) can be measured as the capital income in total output (GDP or GMP), and the
elasticity of output with respect to labor is measured as the labor share in aggregate output
(GMP). Note that the validity (or lack) of each of these assumptions affects the
measurement of technical progress, and therefore its contribution to economic growth.
One of the objectives of this study is to present alternative estimates of TFP growth-
without maintaining these assumptions. For that reason, two sections (section 3.8.2 and
section 4.1) have been included in the present study, to test the validity of these
hypotheses, and therefore to test the validity of the results obtained by using this
traditional methodology.
Note that the factor A(t) of equation (1’) represents the rate of technical progress
or total factor productivity (TFP), which in the traditional Solow (1957) model is
considered exogenous, and therefore it contains many implicit elements, such as: (1) the
capacity of people to create or to adopt new technologies; (2) it can represent the capacity
1 8
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of people to achieve a better way of combining means of production (Schumpeter view);
(3) it can represent the efficiency of incentives and its institutional arrangements; (4) it can
represent the efficiency o f the market to innovate or to adopt new technologies; (5) it can
represent economies of scale (constant, increasing or decreasing return); (6) it can contain
many possible forms of cost reduction (Harberger, 1990); (7) it can contain the efficiency
of energy use; (8) it can also represent the country or industry “catch-up” growth, based
on industry or country comparative advantages (Robinson and Nishimizu, 1984); and
finally (9) in less developed countries (LDCs), it can also represent the country or industry
capacity to adapt technology developed in developed countries (DC) to local conditions
(Teitel and Westphal, 1984).
For the above mentioned reasons, it is important to understand the determinants of
TFP growth, especially when they are aggregated for the whole economy, and seek an
explanation to this exogenous element or black box called A(t). Normally, country specific
and institutional empirical analysis can help to explain TFP growth. Also, sectoral analysis
of TFP growth is a technique used to determine which sector contributes most to the
aggregate TFP. Endogenous empirical analysis of TFP developed mainly by running
regressions of TFP on potential explanatory variables has been a widely used technique. In
this way researchers are trying to determine and quantify the factors that generate
technological change, such as, education, foreign trade, and economy of scales, among
others.1 5
An alternative method of estimating technical progress, by using equation (1) is the
direct econometric estimation of the aggregate production function. Such direct
estimation does not require any assumption (such as CRTS, and perfect competition)
beyond that of the functional form. Chapter 4 includes an econometric estimation of
aggregate and sectoral production function to estimate TFP.
1 5 For further details and several different applications of this type of analysis, see University of Chile,
“Special Issue on Economic Growth.” 1993.
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3.3 Production Function for Estimating Rate of Technical Progress or TFP
Using extensive data collected for this study, the traditional methodology (Solow,
19S7) was applied to the Cuban case using a Cobb-Douglas function, to improve
understanding of its economic growth.
In general, TFP could be estimated considering “sources of quality change” in
aggregated inputs, especially in labor. Normally, the labor quality adjustment is done by
using a labor input index,1 6 which considers different variables (e.g., education,
employment class, age, etc.) of the labor force. Due to the lack of data for constructing a
labor quality adjustment index, TFP was estimated without a labor quality adjustment.
Hence, labor is considered to be homogenous during the period 1962-1988.
A Cobb-Douglas production function without human capital adjustment factor is
applied to estimate TFPs at both the economy-wide and industry-levels (agriculture and
industry). Thus.
Y, = A ,K ,a L/ (3)
Taking natural log and then differentiating equation (3), the equation (4) is obtained. Thus,
d y_ }_ = dA__}_+ ^
dl Y dt a " K dt L dt
Then, discrete approximations of the time derivative (equation 4) can be written as,
= A d . a p AL (4’)
} • A K L
Where, A Y A K A A L are the rate of growth of output, capital and labor
Y ’ K L
respectively, in annual basis. The constants a and P are the elasticities of output with
respect to capital and labor respectively. The factor A A represents the rate of technical
A
progress or total factor productivity growth.
It is important to note that indirect estimation of TFPs over time by using the
equation (4’) , the three assumptions explained in the previous section are implicitly
1 6 For further details about how to build a labor quality adjustment index, see Jorgenson, Gollop and
Fraumeni (1987), pp. 261-300.
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considered. They are constant return to scale (CRTS), together with neutrality of technical
progress,1 7 and profit maximization with competitive output and factors’ markets.
3.4 Estimating the Stock of Capital
The use o f equation (4’) to estimate rate of technical change, requires time series
data for the stock o f capital. It is common practice to build time series for stock of capital,
based on perpetual inventories, using the investment time series. Other people use the rate
of growth in investment as a proxy for the rate of growth in capital.1 8 Since there is no
estimation of the stock of capital for the Cuban economy, then for this study, the
aggregated and sectoral stock of capital time series were constructed.
The methodology used in this study to estimate the stock of capital, considered the
assumption that the capital-output ratio is constant (equation 5) for a short period of time.'9
d(K/Y) K Y -K Y _ Q
dt Y2
Then, equation (S) is equivalent to the following identity.
KY = KY (5’)
In equation (5'), the dot means derivative with respect to time. Note that the change in capital
stock corresponds to the net investment. Then, denoting the gross investment by the letter Ig,
equation (5’) can be rewritten as:
1 7 A function with neutral technical change (Hicks neutral) takes the form r = A(t)f(K, L,t) ■ In a
specific case of a Cobb-Douglas. it would be expressed as Yt = A e “ Kta Ltf .
1 8 Victor Elias (1993) argues that using investment rate of growth instead of capital rate of growth
leads in most of the cases to a difference of less than 20% for the two estimates. In our case, using
investment rate of growth as a proxy for the rate of change of the stock of capital lead to results with a
difference greater than 200%. The author recommends the creation of the stock of capital series because it
leads to more accurate results.
1 9 For a further explanation and example of this methodology, see Harberger (1976), pp. 132-155.
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r _ Ug + 5K)Y
Y
(6)
In equation (6), 5,11 are the depreciation rate, and gross investment, respectively.
Then solving the above equation for A T , equation (7) is obtained:
(7)
(T+J)
A
In equation (7), Y corresponds to the rate of growth of output (GMP). Thus, equation
(7) is the equation used to estimate the stock of capital at the beginning of the period (1960).
The following year stock of capital is basically the initial stock of capital (Kt), plus gross
investment (Ig), minus depreciation of the capital stock of the previous year, and minus the
depreciation of the new capital (investment of the year). Thus, the following year stock of
capital is equal to:
K ^ = K ,+It -S k K ,-5 r Ig (8)
The stock of capital series was calibrated with the depreciation figures obtained
from the Cuban national account values. Cuba depreciation figures were compared with
other countries values.2 0 The rate of depreciation considered for the economy as a whole
and the industry sector was 4.5% which corresponds to the average value of depreciation
in similar income economies. Depreciation for agriculture was considered equal to 3.5%.
Depreciation rate of the new capital (investment of the year) was considered equal to
0.5%. A sensitivity analysis was conducted using a higher rate of depreciation to analyze
how sensitive are the TFPs, without detecting much variation in the TFPs obtained (see
section 3.8).
2 0 Depreciation figures from Cuban National Accounts Statistics were verified with Brundenius (1984)
estimates. In addition. Cuban depreciation estimates were compared with Chilean and Colombian figures,
finding that Cuban depreciation estimates are, on average, lower in about 20% than those countries’
estimates.
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3.5 Total Factor Productivity Growth for the Cuban Economy
Applying the traditional neoclassical methodology (equation 4’), with no human
capital adjustment, and using the aggregate rate of growth of productive factors (labor and
capital), and the sectoral factor shares, the TFP estimates are as follows:
TABLE 3.1: TFP Growth Estimations for the Cuban Economy
TFP
(%)
Output Rate of
Growth (%)
Investment Rate of
Growth (%) Investment/GMP
1963-1970 1.0 4.4 3.2 0.18
1971-1980 0.8 5.9 18.3 0.26
1981-1988 -1.2 3.8 4.9 0.31
AVERAGE (63-88) 0.2 4.5 9.3 0.25
Table 3.1 shows that Cuban rate of technological change (TFPs) decreased over
time, achieving negative values after 1980. On the other hand, investment increased
considerably from 1963 to 1988.
These results are contrary to what most economists would expect. In general,
empirical estimations of TFP applied to capitalist economies show that an increase of
investment, human capital, and a lower rate of population growth leads to higher TFP.2 1
Hence, one would have expect a higher rate of TFP growth for Cuba given the increasing
investment in physical and human capital creation, but the Cuban results are opposite.
Based on previous estimations of TFP (Table 3 .1), the factors contributing to the
aggregate economic growth are as follow:
TABLE 3.2: Factors Contribution to Growth for the Whole Economy
Labor
Contribution
to Growth (%)
Capital
Contribution
to Growth (%)
TFP
Contribution to
Growth (%)
Investment
as% of
GMP
Subsidies
as% of
GMP
1963-1970 30 57 13 18 7
1971-1980 22 70 8 26 15
1981-1988 35 81 -16 31 33*
AVERAGE (63-88) 28 70 2 25
Notes: * This figure represents the 1981-1984 average.
2 1 An exception is Young (1992, 1994). Young found similar productivity patterns for Singapore.
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Table 3.2 shows that Cuba’s average TFP contribution to economic growth is very
low (only 2%). The average contribution of capital to economic growth for the period
1963-1988 is very high (70%). From these results, it could be concluded that Cuba’s
economic growth has been basically driven by the increased investment. In addition,
Cuba’s economic growth during the period 1975-1988, is directly linked to the increased
level of Soviet subsidies which allowed the Cuban economy to achieve the high rate of
investment observed during this period (see Appendix 2, Table A-2.4). In sum, the TFP
growth results show that Cuba was not able to take advantage of the investment in human
capital to increasing efficiency by cost reduction and/or productivity increase, especially
during the 1980s.
Results from Tables 3.2 suggest that Cuban central planning policy, and especially
the New System of Economic Management and Planning (SDPE),2 2 failed to achieve
technological change. Note that the implementation of SDPE could have led to even a
lower rate of growth of technological change. This failure is even confirmed by Cuban
officials, who recognized the inefficiency of this plan (Zimbalist and Eckstein, 1987).
Cuba’s low rate of technical progress may simply be due to the absence of
competitive pressure and economic incentives that provides motivation to maximize
profits. The Cuban case of low contribution of TFP to economic growth seems to be a
common pattern o f the ex-socialist economies. Nishimizu and Robinson (1984) found that
in Yugoslavia, almost all the industries derived their growth from increases in factors
inputs, with zero or negative contribution from TFP growth. Bergson (1983) found that
most of the Soviet growth was based on rapid growth in inputs (labor and capital). Reality
shows that Stalinist and as Castro planners as well, moved millions of workers, especially
women, into the labor force. This research confirms Krugman’s statement, in that the
special strength of Soviet economies (centrally planned economies) was their ability to
~ The New System of Economic Management and Planning (SDPE) was introduced in the second half
of the 1970s. It was modeled on Soviet economic reforms. It attempts (1) to force enterprises on a self-
financing basis: (2) to increase incentives to achieve a better rate of growth of productivity; and (3) to
promote decentralization, organizational coherence, and efficiency (Zimbalist and Eckstein, 1987).
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mobilize resources (especially labor), not their ability to use them efficiently (Krugman,
1994, p. 69).
3.6 Sectoral Analysis of Total Factor Productivity Growth
For a better understanding of the aggregated TFP results obtained previously, a
sectoral analysis of TFP was conducted. This sectoral analysis included only agriculture
and industry, since under the Soviet national accounting system, the total output of
productive sectors is only aggregated into six categories (industry, agriculture,
construction, transportation, communications, and commerce). Due to the lack of
sectoral data, only sectoral analysis for industry and agriculture was conducted. Note,
however, that this sector represented approximately two thirds of the total GMP.
3.6.1 Total Factor Productivity for the Agricultural Sector
There is abundant literature on Cuban agricultural2 3 transformation after 1959, but
most studies focus on land ownership and sugar dependency. There is a complete lack of
studies related to growth and technological change in Cuban agriculture.
Applying equation (4’) and using the rate of growth of agricultural productive
factors (labor and capital) and the sectoral factor shares, the TFP estimates are as follows:
TABLE 3.3: TFP Growth Estimations for the Agricultural Sector
Agricultural
TFP
Agriculture Output
Rate of Growth (%)
Agricultural Invest
Rate of Growth (%)
Agricultural Invest as
Share of Agric GMP
1963-1970 -1.9 3.8 8.0 0.28
1971-1980 -1.2 2.7 10.3 0.35
1981-1988 -1.5 1.7 5.6 0.48
AVERAGE -1.5 2.7 8.1 0.37
Table 3.3 shows that the agricultural sector has experienced negative growth of
TFP for the period 1963-1988. Therefore, it could be assumed that resources invested
(especially capital) were not used efficiently in this economic sector.
In sum, Cuban agricultural output growth was basically driven by expansion of
inputs, especially investment, during the period 1963-1988. Note that the average
2 3 For further detail about Cuban agricultural policies, see Mesa-Lago (1981) and Rodriguez (1987).
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investment rate (1963-1988) in the agricultural sector was extremely high (37%). It was
three times higher than the industrial investment rate (12%).
Again, the only possible explanation is that most of the agricultural output was the
result of increased investment. It seems fair to say that the negative agricultural TFP,
reflect the low level of yields of Cuban agriculture.2 4
There is some empirical evidence that could help explain this Cuban agricultural
technological stagnation, such as:
1. Lack of achievement of a high rate of mechanization of the agriculture compatible
with the new increasing cultivated area (Appendix 3).
2. The Cuban government agricultural policy was poor and inefficient (Mesa-Lago,
1981, pp. 24-25). Central planning mistakes incurred in many instances; among those,
it was not able to take advantage of the better yield soils for the different crops
(Rodriguez, 1990), and the implementation of a wage system which was not linked
with the marginal productivity of the workers.
3. Lack of capacity to take advantage of economies of scale. The econometric study (
Section 3.8.1) shows that agriculture exhibits decreasing return to scale. Note that
the achievement of economies of scale is a crucial means of reducing costs and
increasing productivity. Normally, cultivating large portions of land leads to the
achievement of increasing return to scale and cost reduction. Hence, the structural
land ownership transformation taken after 1959, which divided the large farms
(Ialifimdios) into small portions of land to achieve a better income distribution,2 5 could
be partially responsible for this technological stagnation.
'4 During the last 40 years, the Cuban agricultural yields increased at a lower rate than the world
average. Today. Cuba’s average yields are less than 50% of those of developed economies. For further
details, see Figueras (1994) and Food and Agricultural Organization, Annual Reports (1969, 1990).
~ 5 For further details about Cuba Agrarian Reform, see Rodriguez (1987).
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4. The lack of markets and economic incentives2 6 which are impossible to be
implemented in a centrally planned economy. Central planning requires producers to
follow physical production targets instead o f consumer preferences or world market
signals.
5. The lack of a price signal that could create incentives for innovation. Note that the
Soviets subsidized prices for Cuban agricultural products (sugar), could have
discouraged the Cuban government from being innovative, since prices were set in
advance for a large period of time, consequently, Cuban income was assured
regardless of the level of innovation or efficiency achieved.
Other plausible explanation of this technological stagnation which requires further
empirical research could be attributed to external shocks such as climate disasters. In
agricultural output statistics, the loss due to a climate disaster is not accounted for. Note
that the only positive agricultural TFP growth estimated was for the period 1975-1979,
which achieved an average rate of 2.2%. At the same time, empirical evidence shows that
during this period, Cuban agriculture was affected by three severe droughts (see
Appendix 3.1).
It is possible to conclude that the Cuban centrally planned agricultural economic
policies were inefficient in their attempt to force some technological change during the
period 1963-1988. Additionally, Cuba was not able to take advantage of its investment in
human capital creation.2 7 The large investment destined to human capital creation,
complemented with the high level of investment in physical capital, could have led to an
increase in TFP growth, thus leading to an increase of agricultural output.
2 6 Note that Cuban farmers worked mainly under a national wage system, which classified the distinct
type of labor under groups, according to the degree of complexity of the work and the level of qualification
of the worker. Cuban wages were not linked with the marginal productivity of the labor. There was
almost a complete lack of economic incentives for labor.
2' For further details about investment in education, see Appendix Table A-2.6.
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3.6.2 Total Factor Productivity Growth for the Industrial Sector
The literature on Cuba’s industrial transformation after 1959 is very scarce.2 8 There
is no evidence of other studies concerning human capital and technological change in
Cuban industry. It is important to note that under the Cuban accounting system, the
industrial sector includes several industries2 9 (e.g., mining, electrical energy, oil, fuels,
electrical machinery, chemicals, paper products, wood products, construction products,
food, textiles, glass, etc.) which under the Western accounting system are classified by
different SIC codes under many subcategories (e.g., light manufacturing, heavy
manufacturing, mining, and services such as utilities). Due to broad Cuban accounting
aggregation, the Cuban industrial sector GMP accounted for 67% of total GMP.
Applying equation (4’) and using the rate of growth of industrial productive factors
(labor and capital) and the sectoral factor shares, the industrial TFP estimates are as
follows:
TABLE 3.4: TFP Growth Estimations for the Industrial Sector
Industrial
TFP
Industry Output
Rate of Growth (%)
Industry Invest.
Rate of Growth (%)
Industry Invest, as
Share of Indus. GMP
1963-1970 1.4 5.2 13.2 0.06
1971-1980 0.7 4.6 25.6 0.11
1981-1988 -0.3 4.3 6.0 0.19
AVERAGE 0.6 4.7 15.0 0.12
The results show that the industrial TFP growth achieved was moderate (0.6%) for
the period of 1963-1980. The industrial sector present negative growth of TFP (-0.4%)
for the period 1981-1988. Looking at Table 2.4 and Table 3 .4, it seems contradictory that
at the same time the imports of capital goods such as machinery and transportation
equipment were increasing, TFPs were decreasing.
Table 3 .4 shows that the ratio of investment to output in the industrial sector was
very low (12%) compared with the agricultural sector (37%). Industrial and agricultural
2 8 For further details about the Cuban industrial sector and reference notes, see Zimbalist (1987).
2 9 For further details, see Anuario Estadistico de Cuba (industrial production).
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TFP results and investment data suggest that the right level of investment, avoiding over
investment, could make people more productive, thus, achieving higher rates of
technological change.
3.7 Summary of Factors Contributing to Economic Growth
Previous results show that the industrial sector, which had a lower rate of
investment, had the higher TFP growth. Thus, for a better understanding of Cuban
economic growth and its linkage with input factors (labor and capital), the factors
contributing to economic growth have been estimated. Thus:
TABLE 3.5: Aggregated and Sectoral Factors Rate of Growth
Rate of Growth (%)
PERIOD All Economy (%) Agriculture (%) Industry (%)
Labor Capital TFP Labor Capital TFP Labor Capital TFP
1963-1970 2.4 4.5 1.0 2.4 8.8 -1.9 2.3 5.1 1.4
1971-1980 2.1 6.8 0.8 0.7 6.9 -1.2 2.3 5.5 0.7
1981-1988 2.6 6.1 -1.2 0.9 5.6 -1.5 3.9 4.1 -0.3
AVERAGE 2.3 5.8 0.2 1.3 6.7 -1.5 2.9 4.9 0.6
TABLE 3.6: Factors Contribution to Cuban Economic Growth
Contribution of Factors (as % of total economic growth )
PERIOD All Economy (%) Agriculture (%) Industry (%)
Labor Capital TFP Labor Capital TFP Labor Capital TFP
1963-1970 30 57 13 25 95 -20 26 58 16
1971-1980 22 70 8 1 1 108 -19 27 65 8
1981-1988 35 81 -16 18 112 -30 51 53 -4
AVERAGE 28 70 2 20 103 -23 35 59 7
Previous tables show that for the agricultural sector, the average TFP growth is
negative (-1.5), and its contribution of TFP to output is negative (-23%) during the period
of 1963-1988. In the industrial sector, the average TFP growth was moderate (0.6), but
its contribution to growth was very low (7%).
Looking at the previous results, some people might be tempted to argue that the
Cuban negative TFP during the 1970s and 1980s could be attributable to business cycle
fluctuations. But, in the case of Cuba that is not possible since this period is considered as
the golden era of the Revolution due to the high rate of economic growth achieved (Table
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1.1). Moreover, during this period, Cuba was receiving the largest amount of subsidies
from the Soviet Union, which isolated Cuba from world-business cycles.
It could be concluded that the large amount of investment in the agricultural sector
was mainly wasted. Cuba’s agricultural sector consumed the stock of capital, without any
technological change. It seems an irony, because Cuba’s industrial development strategy
was oriented toward getting resources from agriculture to develop an industrial base in
order to become an industrialized economy. Reality shows that agriculture was a big
consumer of resources, without good results in economic growth and technological
change. In addition, during the period 1963-1988, Cuba’s main exports were based on
agricultural products/0 but agriculture was not able to achieve any positive level of
technological change.
The Cuban governments’ interventionist policy during 1975-1988 was
accompanied by very low TFP performance, especially in agriculture. Thus, the creation by
governments of institutional mechanisms to deal with inefficiencies, may not always be an
efficient way to force technological change.
It seems difficult to understand why the massive investments in physical end human
capital led to such a low TFP in the 1970s and 1980s, but it seems a common pattern of
centrally planned economies. One plausible explanation is that the poor technological
change performance of a centrally planned economy is the result of the lack of markets and
economic incentives that make people more productive.
In general, this historically decreasing pattern of Cuban technological change could
be recited by the very well-known Latin proverb “escoba nueva barre bien” (a new broom
always cleans well). In other words, during the first years of communism, every body was
excited about the idea of communism and revolution. This initial excitement created high
powered incentives for people to work hard and be productive and innovative, which
could have led to the positive level of technological change observed during the 1960s.
Then, as people tired of the regime, due to the results of unfulfilled expectations and lack
of benefits from communism, they relaxed in their creativity and stopped working hard and
3 0 Note that on average, more than 85% of Cuban exports were agricultural products such as sugar,
fruits and tobacco.
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efficiently. Consequently, TFP decreased to negative levels, regardless of all the economic
policies implemented by the government (e.g., the SDPE program) to increase
productivity.
3.8 Theoretical Explanations of Cuban Technological Change
This section tries to find some possible theoretical explanations of results
previously obtained. First, the alternative of technological change embodiment in capital
is evaluated, then, the existence of economies of scale is analyzed.
3.8.1 Technological Change Embodiment in Capital
In a case of capital embodied technical change, the depreciation rate is
endogenous, because the appearance of newer technologies can eliminate rents on older
assets.'1 In the case of Cuba, it makes sense to analyze the effect of endogenous
depreciation because Cuba received a large amount of machinery and equipment from the
Soviet Union, which created a structural transformation in the economy and especially in
the industrial sector.3 2
The aggregated rates of depreciation used in the previous section could be low,
thus, there could exist the possibility that Cuban depreciation estimates are inappropriate
for an economy which experienced structural change. A higher depreciation rate implies
that the capital stock accumulates more slowly, thus, higher technological change.
To test the effect of endogenous depreciation, TFPs were estimated using the
methodology previously explained (equation 4), but using new stock of capital times
series, which were constructed by varying the depreciation rate. Tables 3.7 and 3.8 show
the new TFPs estimated and their contribution to economics.
3 1 For examples, see Solow (1959, 1962). For a formal model of technical progress embodied in capital,
see Hulten (1992).
3 ~ After the revolution, a large amount of equipment and investment was mainly destined to mechanize
the agriculture sector and to create an industrial base. Investment went to the development of new
industries and expansion of existing industries, such as cement, fertilizers, electrical, and mining among
others, which created a structural transformation of the Cuban economy, especially in the industrial sector.
For further details, see Appendix 3 and Figueras (1994) pp. 96-111.
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TABLE 3.7: Rates of Growth of Factors for Different Depreciation Rates
Rate of Growth (%)
All Economy (%) Agriculture (%) Industry (%)
Depreciation Labor Capital TFP Labor Capital TFP Labor Capital TFP
Previous Results 2.3 5.8 0.20 1.3 6.7 -1.50 2.9 4.9 0.60
Depreciation 10% 2.3 5.5 0.58 1.3 5.8 -0.97 2.9 3.7 1.26
Depreciation 20% 2.3 4.9 0.70 1.3 5.0 -0.66 2.9 2.6 1.65
TABLE 3.8: Factors Contribution to Economic Growth for Different Depreciation Rates
Contribution of Factors (as % of total economic growth)
All Economy (%) Agriculture (%) Industry (%)
Depreciation Labor Capital TFP Labor Capital TFP Labor Capital TFP
Previous Results 28 70 2 20 103 -23 35 58 7
Depreciation 10% 27 66 7 21 95 -16 37 47 16
Depreciation 20% 29 62 9 23 89 -12 41 36 23
The results show that increasing the rate of depreciation does not change the TFP
patterns much and TFPs contribution to economic growth as a whole. It seems that
depreciation has some effect in the industrial sectors, since TFP increased from 7% to
23%. It is difficult to believe that depreciation rates could be higher than 20%. Hence, the
upper bound or “best scenario” would be that Cuban technological change contributed
only 9% to the total output (Table 3.8). In sum, an endogenous rate of depreciation does
not provide much explanation about the low-level TFP growth during the period of 1963-
1988 in Cuba.
3.8.2 Economies of Scale
It is worth noting that the assumptions underlying neoclassical production theory
(methodology applied in previous chapter), namely constant returns to scale (CRTS) and
perfect competition of all factor inputs, are likely to be unsuitable for the Cuban centrally
planned economy. Thus, some people would tend to argue that the TFP results obtained
in previous chapters could be inaccurate, since traditional methodology assumes these
implicit assumptions. It could be that Cuba’s economy does not show CRTS as a whole.
Therefore, in this section, a Cobb-Douglas production function will be used to test the
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hypothesis of CRTS considered in previous estimations of TFP and to determine the real
elasticity of labor and capital to output. This analysis also helps us to dispel whether the
low TFP could be a result of the existence of decreasing return to scale. Thus,
r,=AK;-L,f (9)
Applying natural log to equation (9), we obtain a linear equation equal to:
InT, =lnA + rzln Kt + /?lnZ,f +e (10)
Applying ordinary least square (OLS) to equation (10) and using time series data
for the period 1962-1988, the results obtained are as follows:
Table 3.9: Economies of Scale Analysis— Regression Results (1962-1988)
Ln A a
P
a+3 N R2
Yt- Agriculture 2.56 0.37 0 1 1 0.48 27 0.94
Yt- Industry -2.64 0.71 0.38 1.09 27 0.98
Yt-Cuban Economy -3.89 0.52 0.54 1.06 27 0.97
Note that econometric estimation of equation (10) could lead to a multicollinearity
problem (Boskin and Lau, 1992; Harberger 1996). Our data base was tested for
multicollinearity problems without finding serious problems.3 3 On the other hand the null
hypothesis of the existence of CRTS for the industrial sector and the Cuban economy as a
whole would not be rejected.3 4
Results from Table 3.9 show that the aggregate elasticity of capital (0.52) and
labor (0.54) to output, is very close to the average value of factor share to total output,
which was considered in the previous section analysis where the averages were 0.51 and
0.49.
3 3 A Belsley. Kuh. and Welch (1980) test of multicollinearity was conducted. In the Cuban economy as
a whole, and the agricultural sector, there are no multicollinearity problems at all. The only regression
that presents some multicollinearity problems is the industrial sector.
3 4 Hypotheses is not rejected at 5% confidence level.
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Previous results show the presence of CRTS in the whole economy and industrial
sector. In addition, real elasticities are very similar to the values considered in previous
analyses. Hence, it can be concluded that results previously obtained by using the indirect
methodology is a good estimate of the TFP growth for the Cuban economy, since
assumptions about CRTS and elasticities are good approximations for the Cuban
economy.
In addition, the economies of scale results obtained in this section provide at best, a
partial explanation for the decreasing and low TFP growth found in the agricultural sector.
Economies of scale do not provide many answers to the decreasing TFP found in the
Cuban industrial sector.
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Chapter 4
ECONOMETRIC AND COMPARATIVE ANALYSIS OF
CUBAN RATE OF TECHNOLOGICAL CHANGE
In the first part of this chapter, two econometric estimations of TFP growth are
performed. The first is an econometric estimation of TFP without human capital
adjustment, and the second includes human capital adjustment. This analysis is included to
verify previous chapter results. This chapter also contains a comparative analysis of Cuban
TFP contribution to growth with other world regions.
4.1 Econometric Estimation of Total Factor Productivity Growth
One of the principal contributions of the previous chapter are the TFP results
obtained and how they explain the Cuban economic growth— both at the aggregate and the
sectoral level. Krugman’s (1994) publication in Foreign Affairs, where he mentioned Kim
and Lau’s (1994) and Young’s (1992, 1994) works, encouraged debate regarding the
validity of the TFP obtained under the application of different methodologies (indirect
method or econometric method). Subsequently, Harberger (1996) criticized the validity of
some econometric estimation of TFPs due to multicollinearity problems, and proposed a
third methodology to estimate TFP which is the “two deflator method.”3 5 Harberger
(1996, p.2) shows his preference for TFP estimates by using either the traditional growth-
accounting methodology (Solow, 1957) or his two-deflator method instead of econometric
estimation. It is clear that Harberger’s preference could not be extrapolated when
estimating TFP growth for a centrally planned economy, since traditional methodology
assumptions could not be suitable to a centrally planned economy. Therefore, under the
absence of a multicollinearity problem, an econometric estimation of TFP could be a better
way to estimate TFP growth as opposed to than using traditional methodology.
3 5 For further details about Harberger’s criticism of econometric estimation of TFP and his two deflator
method, see Harberger (1990, 1996). For an application of the two deflator method applied to Mexico’s
manufacturing sector, see Torres (1997).
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Unfortunately due to the lack of accurate and reliable data it is not feasible to apply the
two-deflator method 3 6 to estimate TFP growth for Cuba. Note that the two-deflator
method applications lead to similar results of those obtained by using traditionally growth
accounting methodology.3 7
With the purpose of avoiding the criticism about the use of traditional growth
accounting methodology to estimate TFP growth in a centrally planned economy, where
the strong assumption of perfect competition could not hold, TFP will be estimated using
econometric methodology, and compared with previous results. Results obtained in this
section show that results obtained under the two methodologies are consistent.
4.1.1 TFP Without Human Capital Adjustment (Hicks Neutral Function)
Growth accounting can be conducted by subtracting from the residual the
contribution stemming from increases of the inputs (especially human capital) as well as
the contribution from research and development. With the purpose of comparison with
previous TFP estimates where human capital adjustment was not considered, in this
section TFP will be estimated without considering human capital quality adjustment. In
other words, quality of labor is considered constant through time.
In general, when TFPs are estimated econometrically, it is convenient to keep the
assumption of CRTS because it reduces the number of independent parameters to be
estimated, and thereby, mitigates the possible multicollinearity among the data on capital
and labor inputs and time (Boskin and Lau, 1992). According to results from the previous
chapter (section 3 .8.1) it is reasonable to keep the assumption of CRTS, especially for the
Cuban economy and industrial sector.
3 6 The two-deflator method is characterized by: (i) the use of a single “numeraire-cum-deflator”
(usually the GDP deflator or consumer price index) to deflate all nominal flows needed in the growth
accounting exercise; and (ii) the use of ‘standard worker” as the basic unit, in which labor is measured as
the measurement of any worker's labor quantum by his total earnings divided by the real wage of the
standard worker (w*) (Harberger, 1995).
3‘ Conclusions from the presentation “Studying the Growth Process” by Harberger (1997), Western
Economic Association, 72 Annual Conference, Seattle, July 9-13,1997.
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The right way of estimating technical progress econometrically is by including in
the production function a term (terms) to capture the effect of technical progress through
time, in order to allow technical progress to be non-linear over time. Thus, the Hicks
neutral equation (11) was estimated econometrically.
Y , =A(t)f(Kl,L[) = A0-en Kta ■ L ™ (11)
Then, in equation (8) the rate of technical progress or TFP is equal to:
•-* ('> _ _ r (12)
A e"
Applying natural log to equation (11), leads to equation (13).
Inf, =lnA + r -t + a\nK, + (l-a)lnZ ,f + £ (13)
Thus, the linear equation to estimate TFP growth econometrically is,
ln(Y,/L') = lnA+ rt + a\n(Kt /L,) + £ (13’)
Econometric estimation of equation (13’) led to the following results.
Table 4.1: Econometric TFP Results Without Human Capital Adjustment (1962-1987)
Ln A r a N R2 TFP (%)
Yt- Agriculture -0.748 -0.0423 1.00 27 0.86 -4.2
Yt Industry 0.589 0.00418 0.67 27 0.74 0.4
Yt-Cuban Economy 0.394 0.00427 0.47 27 0.84 0.4
Thus, the estimated aggregated production function for the Cuban economy is:
>1962-1988 = 1.4829 -e 000427' • A T 047 . Z .033' (14)
The capital elasticity with respect to output obtained (0.47) for the Cuban
economy as a whole is very close to that obtained indirectly using national accounts (0.51)
and used in the indirect estimation of the TFP. The average rate of technical progress
during the period 1962-1988, obtained econometrically for the Cuban economy as a
whole, is equal to 0.4, which is vety close to that obtained using indirect methodology
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(0 2). Therefore, Table 4.1 results confirm the validity of TFP obtained in the previous
section for the Cuban economy as a whole.
Econometric estimations of TFP for the agricultural sector over the period 1962-
1988 are much lower (-4.2%) than those obtained indirectly (-1.5%). In both cases,
agriculture presents negative growth of TFP during the period 1962-1988.
4.1.2 Estimation of TFP with Human Capital Adjustment
In this section, econometric estimation of TFP, adjusted by human capital quality,
was conducted. Let us assume the following Hicks neutral production function.
In equation (12), Ht corresponds to human capital. Thus, if one assumes that labor
Lt is homogenous and that each unit of labor has been trained with S years of schooling,
the human capital augmented labor (Mincer, 1974), is given by:
The function < f> ( S ) represents the efficiency of a unit of labor with S years of
schooling relative to one with no schooling ( < f > (0)=0 ). Note that, if < j > (S)=Q for all S, this
is the standard production function considering no human capital adjustment factor. The
derivative of < f > (St) is the return to schooling estimated in a Mincerian wage regression.
Psacharopoulos (1994) surveyed evidence on return to schooling for many
countries. Based on his summary of Mincerian wage regressions, it could be assumed that
the function 0 (St) could be assumed linear.
In the specific case of Cuba, the lack of reliable data does not allow the estimation
of the Mincerian wage regression. Hence, based on lack of data and the fact that the
function < f > (St) could be linear, then the following human capital augmented labor function
is considered.
(15)
(16)
(17)
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Thus, equation (18) correspond to a Cobb Douglas function with human capital
quality adjustment.
Y t = A(t)f(KtJHt) = A0-en-K,a- (e* • Lt )°~a) (18)
In equation (18), r and X , are the rate of technical progress (TFP) and the human
capital factor adjustment, respectively. The main issue in using equation (18), is to
estimate in some way, the parameter for human capital quality adjustment (X), which is
considered to be directly related with the level of education of the labor force.
Cuba’s human capital adjustment factor was estimated by the average rate of
secondary, plus technical and university, enrollment over the total labor force between
1958 and 1984. Hence, a four-year lag was considered. The four-year lag represents the
usual period for people to become active in the labor force after enrolling. In 1958, the
secondary, plus technical and university enrollment as percentage of total population, was
1.54% and by 1984, it was 13.6% (Appendix 2, Table A-2.2, column 12). Thus, the
human capital adjustment value considered is equal to 0.45 ((13.6-1.54)/27). Based on
empirical studies applied to the US economy,3 8 the quality adjustment factors estimated for
Cuba seems to be a conservative value. Applying natural log to equation (18), the
following linear equation is obtained, which is used to estimate the TFP econometrically.
ln (K , / L') = lnA +t ■(r + A(l-a))+aln(Kl / L,) + e (19)
Applying ordinary least squares (OLS) to equation (19), the results are as follows:
Table 4.2: Econometric TFP Results With Human Capital Adjustment (1962-1987)
Ln A r(TFP) a X N R2 TFP (%)
Yt- Agriculture -0.748 -0.042 1.00 0.0045 27 0.86 -4.2
Yt Industry 0.589 0.0027 0.67 0.0045 27 0.74 0.27
Yt-Cuban Economy 0.394 0.0019 0.47 0.0045 27 0.84 0.19
3 8 Denison (1962, 1967) considers education as a quality adjustment factor of 0.52. Jorgenson and
Griliches (1972) consider a factor of 0.75. For a survey of adjustment factors, see Boskin and Lau (1992).
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Thus the aggregate production function for the entire Cuban economy with human
capital adjustment is:
V 1 yfOOft -0.0019f r/* 0.47 / 0.0045f r \0_53 / a / \ \
m 962-1988 =14829-e A, ■ (e - L,) (20)
As expected, results from Table 4.2 show that in general, Cuba’s aggregate TFP
growth with human capital adjustment (0.19) is lower than that estimated econometrically
without human capital adjustment (0.42). Note that the TFP value with human capital
adjustment for the Cuban economy obtained econometrically (0.19) is very similar to that
one obtained using traditional methodology (0.2). The results from Table 4.2 confirm
previous section findings, in the sense that TFP growth for the Cuban economy as a whole
are around 0.2 for the period 1962-1988.
4.2 Comparison of Cuba*s Technological Change with Other World Regions
Table 4.3 provides a comparative historical analysis of Cuba’s rate of technical
progress during this period with respect to other regions.
TABLE 4.3: World GDP and Contribution of Factors to Economic Growth
GDP (%) TFP Contribution to growth (%) GMP(%) TFP (%)
Country/Region 1950-73 73-80 80-89 1950-73 1973-80 1980-89 1963- 1963-
1988 1988
Cuba 4.4% 210.2)*
Chile 3.42 3.39 2.9 51 (1.75) 44 (1.48) 26 (0.74)
Latin America 5.79 5.20 1.34 42 (2.43) 23 (1.20) -97 (-1.30)
Asian Countries 7.73 7.51 7.64 51 (3.93) 31 (2.31) 54 (4.09)
Adv. Countries 5.34 2.23 2.56 69 (3.26) 47 (0.93) 47(1.20)
Note: * Figures in parentheses represents the value of TFP (in percentage).
Source: Hoffman (1993), pp. 128-130.
Cuba’s rate of productivity change or TFP growth is very low by international
standards. Figures from Table 4.3 show that, on average, during the period 1963-1988,
Cuba’s growth of TFP and its contribution to growth (only 2%), is much lower than most
of the capitalist economies.3 9 Note that in Asian countries, the TFP contribution to growth
3 9 Similar results were found by Poznanski (1983) when comparing the technological performance of
Soviet Union countries with respect to the U.S. and Western Europe.
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has been on average approximately 42% during the last 40 years. In Chile, value of TFP
growth during the debt crisis (1980s) was 0.74%, a value almost four times larger than the
Cuban value (0.2%). Obviously, Cuba should have performed better than Latin America
during the 1980s because it was isolated from the debt crisis.
It is important to note that these research findings about the low contribution of
TFP to economic growth are supported by other empirical studies of TFP applied to
centrally planned economies studies (Nishimizu and Robinson, 1984, Poznanski, 1985).
Most of these studies show that in centrally planned economies, the rate of technological
change (TFP) is significantly lower than those o f capitalist economies.
There are several plausible explanations for this poor technological change
performance in Cuba. The Cuban specific factors that explain this poor performance (e.g.,
lack of economy of scales, inefficient implementation of incentives, etc.) were explained in
the previous chapter. In addition, Cuba’s poor technological change was also a result
from the fact that Cuba traded mostly with the Soviet bloc countries (especially
technology).4 0 This fact isolated Cuba from possibilities to incorporate new techniques
and more advanced technologies4 1 which could have helped to increase the TFP.
The crucial issue for a centrally planned economy is the way that allocative
decisions are made. In general, in centrally planned economies, economic policies follow
political decisions instead of price signals or market forces. These facts put people, even
the government, in a situation where there is no incentive for cost reduction, institutional
improvement, and quality improvements, because there is no personal gain or marginal
benefits from technical improvements or cost reduction.
The main conclusion is that a centrally planned economy can only obtain a very
modest rate of technological change regardless of the policies or institutions that are
4 0 Poznanski states that by the mid-1960s, the goal of the Soviet Union and Eastern Europe countries
was to import and use Western technology to revitalize their technological stagnating industries to catch
up with the West (Poznanski, 1985).
4 1 Studies (Amann, Cooper and Davies, 1978) showed that Soviet technology lagged far behind the
most advanced Western countries' technology in most civilian technologies. The only exception was
weaponry. Studies showed that regarding computers, the Soviet Union remained 10 years to 15 years
behind the West.
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implemented to increase technological change.4 2 In sum, the acceleration of technological
change is more efficient in the presence of price signals and market incentives.
The results obtained suggest that Cuba should redesign its allocative system by
implementing broader economic reform, which considers the import of Western
technology, as well as the use of markets and price signals for better allocative purposes.
4 2 Soviet Union (see Poznanski, 1985) policies directed to increase technological change have been
generally unsuccessful. Results from this study validate Poznanski’s assumption.
42
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Chapter 5
IMPLICATIONS FOR OTHER MODELS AND CONCLUSIONS
This chapter discusses the implications of the results obtained in this study for
endogenous growth models. Then, a summary and conclusions are included.
5.1 Implications for Endogenous Growth Models
It is important to note the results obtained in this study for Cuba are very similar to
those found for the economy of Singapore (Young, 1992). Both countries experienced a
considerable factor accumulation (human and physical capital) through time, especially in
the last 30 years. Both, Singapore and Cuba’s TFP contribution to economic growth are
close to zero. Hence, in this section, the author will borrow Young’s (1992) findings for
Singapore4 3 and compare with Cuban findings, to draw some conclusions and implications
for endogenous growth models.
The results for Cuba obtained in this study could help to dispel or to complement
Young’s statement that these types of TFP growth results are unfavorable toward linear
endogenous growth models emphasizing on the accumulation of factor of production.
(Young, 1992, p. 45). This is because linear theoretical models which emphasize the
accumulation of human and physical capital would predict that increased factors
accumulation would tend to raise TFP growth. Thus, the Cuban results found that
increased human and physical capital led to lower TFP growth, would also be unfavorable
to this type of model. This type of model would not be able to explain the Cuban and the
Singapore cases regarding the pattern of TFP growth over time. Clearly the Singapore and
Cuba findings show the opposite results. On the other hand, those endogenous growth
models that emphasize marginal products of accumulable factors (Jones and Manuelli,
1990) would predict that rapid factor accumulation (e.g., physical capital) should show a
rapid decline in the share of national income accruing to the principal non-accumulative
4 3 For further details, see Young (1992), p. 45.
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factors (i.e., raw labor). Cuba’s share of unskilled labor income over GDP increased
dramatically (Table 2.6), and Singapore shows a constant share of unskilled labor in total
payment to labor (Young, 1992, Table 10, p.46). Now, the crucial issue to discuss, is
whether there is any problem with linear endogenous models, or are these two economies
exceptions because of their high level of investment in the presence of a low level of
human capital and interventionist governmental policies?
TABLE 5.1: Singapore Patterns of Investment and TFP
PERIOD Capital Share of
Total Output
Rate of
Investment Labor
Contribution of
Capital TFP
1961-1965 0.15
1966-1970 0.562 0.24 0.14 0.64 0.23
1971-1975 0.553 0.35 0.31 1.05 -0.36
1976-1980 0.548 0.34 0.32 0.63 0.0S
1981-1985 0.491 0.39 0.42 0.78 -0.20
Average 0.538 0.29 0.30 0.77 -0.07
Source: Young (1992) and author's estimations.
To solve this puzzle, let us first review Singapore’s and Cuban pattern of
investment and contribution of TFP to economic growth. There are some clear similarities
between the Cuban and Singaporean economy, among those: (1) both countries increased
their rate of investment from about 15% to over 30% in a period of 15 years; (2) in both
economies, the rate of growth of investment was higher than the rate of growth of human
capital; (3) both countries showed a very high average capital share of total output (over
50%); (4) both countries showed decreasing TFP over time and it was at the same time
that investment and human capital increased; (5) both economies experienced zero or
negative technological change (TFP) when the level investment was over 25% as share of
output; (6) in both economies, the labor contribution to economic growth was about 30%
and the capital contribution to economic growth is around 70%; and finally (7) both
countries presented very interventionist governments; thus, both countries attempted to
industrialize their country by the creation of state companies.4 4
4 4 For further details about Singapore economic policies and public enterprises, see Young (1994), pp.
20-30.
44
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Table 5.2 presents time series regressions of log output per worker on a constant
and the natural log of capital per worker.4 3 The large coefficient on capital (coefficient B),
well in excess of capital share, can represent strong evidence in favor of linear models. As
Young notes, if one believes in a concave neoclassical production function, then the large
coefficient in the regression could represent its correlation with the error term of the TFP,
therefore, investment is considered endogenous
TABLE 5.2: Regression of Ln (Y/L) on Ln (K/L)
Country Coefficient (B) Standard Error Grade R2
Hong-Kong 0.81 0.035 b
Taiwan 0.57 0.012 d
Cuba (62-88) 0.56 0.050 0.83
China 0.53 0.050 d
Korea 0.50 0.017 b
Yugoslavia 0.50 0.044 b
Singapore 0.39 0.035 c
Chile 0.36 0.087 c
Costa Rica 0.36 0.040 c
Cuba Industry (62-88) 0.92 0.110 0.74
Cuba Agriculture (62-88) 0.28 0.062 0.44
Notes: Coefficient B refers to the regression: ln (Y/L) = C + B*ln (K/L). Grades refer to the Summers and Heston
quality rating.
Source: Young ( 1992, pp. 48-49), and complemented with Cuban results (author's estimations).
Results from Table 5.2 show that Cuba’s sectoral empirical evidence is mixed. The
high coefficient of the industrial sector (0.92) is evidence in favor of linear models. Thus,
in the industrial sector, capital stock could have increased endogenously. In this case,
Cuban interventionist policies should be lower in this sector compared with the agricultural
sector. Note that the empirical evidence does not allow to address this fact accurately.
In agriculture, the low coefficient (0.28) does not favor linear models, but its low
coefficient could be the result of diminishing returns to capital. In sum, exogenity in
capital accumulation in the agricultural sector could have been a consequence of
government interventionist policies which can be considered as exogenous, and could have
led to decreasing returns to scale which the Cuban agricultural sector presents.
~ 1 5 Cuban results were obtained using the author’s database.
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The result for Cuba as a whole is neutral. There is no evidence in favor of linear
models because the coefficient on capital (0.56) is very close to that of capital shares
(0.51). Hence, there is not much evidence supporting an endogenous capital accumulation.
Cuba’s and Singapore’s aggregated results could lead one to argue that linear
endogenous growth models are not a useful tool for explaining the growth process of these
countries. But, I would argue that linear models are not very useful when explaining
economic growth in some specific cases where the economy (human capital and
institutions) is not able to absorb efficiently a high level of investment, especially in the
presence of an interventionist government which allocates investment inefficiently.
It is believed that linear models could provide some insight in the process of
economic growth, but the results presented suggest that their use has to be constrained
(e.g., cases where there is not an over investment—maybe investment lower than 25%)
and there are few interventionist governmental, thus, the allocative efficiency of markets
can work. As an example, let us assume that in a country with an interventionist
government, where there is a lack of human capital, technical capacity, and efficient
institutions (e.g., Ethiopia), the rate of investment is increased dramatically from 10% to
30% in a short period of time (10 to 15 years). It is would be highly likely that the TFP
results would be very similar to those found in Cuba and Singapore. Obviously, these
types of specific cases could not be explained with linear endogenous growth models.
In sum, in the specific case of (i) a presence of governmental interventionist
policies, such as those of Singapore and Cuba; with excessive increased capital
accumulation which is driven by governmental policies and not by market forces; and; (ii)
under a lack of enough human capital, technical capacity and efficient institutions prepared
to absorb efficiently a high increase of investment, a low and decreasing TFP growth could
be observed, and in that specific case, linear endogenous growth models are not a good
tool for finding an explanation.
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5.2. Summary and Conclusions
At first glance, some general conclusions can be drawn. First, that both the Cuban
economy as a whole, and its industrial sector, can be characterized by constant returns to
scale during the period 1962-1988. Second, the analysis of Cuba’s agricultural sector
revealed decreasing returns to scale during the period 1962-1988. Third, this study results
show that TFP growth for the Cuban economy was decreasing steadily over time,
becoming negative by the 1980s. Fourth, the average rate of change in technical progress
(TFP) of the Cuban economy was vety low (0.2%)-value much lower than for most of the
capitalist economies growing at the same rate as Cuba’s. Fifth, the results for the
agricultural sector revealed a very high negative rate of technical change, thus indicating
complete technological stagnation in this sector. Sixth, the high rate o f investment led to
clear over-investment, especially in agriculture, which complemented the interventionist
policies in contributing to such a low level of TFP.
With respect to the agricultural sector it can be concluded that: (i) Cuba’s
centrally planned economic policies for technological change in agriculture were extremely
inefficient and most of the investments depreciated rapidly; (ii) human resources were used
in an inefficient manner so that the return on investment in human capital was nil; and (iii)
there was chronic over investment, especially in agriculture, which could have led to a
lower TFP growth.
The agricultural TFP growth results obtained in this research show that Cuba’s
governmental agricultural planning was very poor and inefficient, thus confirming the
similar conclusions of other studies (Mesa-Lago, 1981, pp. 24-25). According to Mesa-
Lago, this poor planning is the result of a lack of manpower, its inexperience in knowledge
and expertise, and the lack of maintenance controls of agricultural equipment.4 6
With respect to the industrial sector, it can be concluded that the TFP was also
decreasing over time, but in this case the average value for the period of 1962-1988 is
positive (0.6). The gains in productivity during the 1960s could be considered reasonable,
4 6 According to Mesa-Lago. the lack of maintenance of agricultural equipment caused the breakdown
of costly equipment that depleted the locomotive fleet by 50% (Mesa-Lago, 1981, p. 26).
47
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but again, by the 1980s, TFP growth had become negative. It seems ironic that, even
though this sector was able to achieve a moderate level of technological change during the
period 1962-1988, it had the largest shortage of capital.
The results of this study clearly show that Cuba’s growth during 1963-1988 was
almost entirely the result of capital accumulation rather than productivity gains. The
decreasing TFP growth for the 1970s and 1980s complemented with the increasing
amount of subsidies received from Soviet Union, seems to suggest that Soviet dependency
created inefficiency in Cuba.
Results shows that Cuba’s case is very different from that of capitalist’s economies,
where an increase of capital stock and human capital may create an increase in
technological change. Cuba’s unique case could be partially explained by the lack of
economic incentives for innovation and by the extreme inefficiency of the centrally planned
investment policy in allocating resources.
In sum, the main conclusion from this empirical analysis is that the Cuban
development strategy partially failed. The progress in Cuba was much like Russian growth
in the past (Krugman, 1994). It was won by massive, often wasteful capital accumulation,
rather than productivity growth. In other words, Cuba’s centrally planned development
strategy consumed large sums of the capital received from Soviet subsidies. These
subsidies were largely wasted, and did not contribute to technological improvements.
Hence, it could be concluded that the main problem with a centrally planned economy is
the lack of the right economic incentives and price systems. Without them, there is not
much technical progress, leaving centrally planned economies behind those of capitalist
countries with respect to contribution of technological change economic growth.
This study results show that most of the investment in education had little if any
economic return, especially those investments in the agricultural sector. In other words,
large amounts of resources were wasted in the creation of human capital, which under the
Cuban centrally planned system, did not contribute much to technological change.
The comparative analysis between Cuba and Singapore seems to suggest that it
could be an optimal level of investment that could maximizes technological change. It
48
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seems that the optimal level is directly related to the country’s technical capacity
(infrastructure, level of technology, research capacity, etc.), human capital, the efficiency
of its institutions and the markets. Investment over the optimal level, approximately 25%
for Cuba and Singapore, leads to a reduction in technological change, and under this
scenario, linear endogenous growth models would not be veiy useful for finding
explanations.
TFP results and comparative figures with other world regions show that if Cuba
should retain its centrally planned economy, it will have a very difficult time catching up
with the rest of the world. To correct this path, Cuba should consider different economic
policies. Those policies should try to make better use of markets and implement economic
incentives to encourage technological change. Thus, Cuba could exploit the human capital
already created, the learning process of industrialization, and the mechanization of the
agriculture and to achieve a better growth, without much additional capital accumulation.
Finally, additional research is needed for linking Cuba’s international trade and
public policy with technological change in order to arrive at a fuller understanding and
quantification of the effects of the determinants o f Cuba’s low level of technological
change.
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APPENDIX 1
CUBAN ACCOUNTING SYSTEM
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1.1. Cuban Social Accounting System
Cuba’s national accounting system is different from the Western concept of Gross
National Product (GNP), in that it utilizes the Soviet system of Global Social Product
(GSP) and Gross Material Product (GMP),1 which is also called as “gross product” or
“gross internal product.”
The Soviet accounting system differentiates between productive sectors and non
productive sectors. All the productive sectors are aggregated into six economic
classifications (industry, construction, agriculture, transportation, communications and
commerce). GSP and GMP includes the productive sectors. Both GSP and GMP
include the production of “material goods” in agriculture, industry (including fishing,
mining, and others) and construction. In addition, GSP includes the value of “material
services,” such as transportation, communications and trade which are directly related
with the production of material goods.
Both GMP and GSP exclude the value of “non-material services” or “non
productive sectors,” such as education, recreation, art, sports, tourism, credit and finance,
state administration, health care and so forth. Normally in Cuba, the non-productive
sectors account for about 29% of total output, corresponding with the other 71% in
productive sectors.
Some authors tried to compare GSP and GMP to GDP by adding some estimates
of NSM’s (non-material services) and correcting the results by using some inflation
estimates (Perez-Lopez, 1987, Mesa-Lago, 1981, Mesa-Lago and Perez-Lopez, 1985).
One still wonders though about the reliability of the Cuban GDP estimates in constant
dollars. The World Bank proposed a methodology of transformation, but the different
studies arrived at different results with a high range of errors. In a cross-country
comparative study of Cuban performance against other non-planned economies, it is
1 In the Cuban case, G M P is less likely to be affected by double accounting than GSP as result of
the 1970s national accounts desegregation of large production units (see M esa-Lago and Perez-
Lopez. World Bank Staff W orking Paper 770, p. 7, 1985).
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necessary to use GDP, but for purpose of this single study country, it is more accurate
using GSP or GMP to avoid errors of conversion and estimations. The statistics used in
the present study are in millions of constant pesos with a 1965 base.
The national accounting system practiced in Cuba since 1962 is the following:
TOTAL MATERIAL PRODUCTION (TMP) or PRODUCCCION MATERIAL TOTAL:
TMP = Gross value of Agriculture + Gross Value of Industry(include mining) + Gross
Value of Construction.
GLOBAL SOCIAL PRODUCT (GSP) or PRODUCTO SOCIAL GLOBAL:
GSP = TMP + Gross Value of Transport + Gross Value of Telecommunications + Gross
Value of Commerce.
GROSS MATERIAL PRODUCT (GMP) or PRODUCTO MATERIAL BRUTO:
GMP = GSP-Intermediate Inputs.
NET MATERIAL PRODUCT (NMP) or INGRESO NACIONAL:
NMP = GMP-depreciation
GLOBAL SUPPLY (GS) or OFERTA GLOBAL:
GS = GMP + imports
DISPOSABLE PRODUCT (DP) or PRODUCTO DISPONIBLE:
DP = Global supply-exports.
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APPENDIX 2
CUBAN STATISTICS
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TABLE A-2.I: Cuban Population, Migration and Infant Mortality
Year Population Migration Infant Mortality
(per 1000)
Population Growth (%)
1958 6,824,000 •4,449 33,4
1959 6,977,200 -12,345 34,7 2.25
1960 7,077,200 -62,379 35,9 1.43
1961 7,190,800 -67,468 37,6 1.61
1962 7,317,900 -66,264 41,5 1.77
1963 7,511,800 -12,201 37,1 2.65
1964 7,712,700 -12,791 37,4 2.67
1965 7,907,100 •18,003 37,8 2.52
1966 8,063,500 -53,409 37,2 1.98
1967 8,215,100 -51,972 36,4 1.88
1968 8,352,700 -56,755 38,2 1.67
1969 8,489,400 -49,776 46.7 1.64
1970 8,603,200 -56,404 38,7 1.34
1971 8,752,000 -49,631 37,4 1.73
1972 8,929,100 -16,856 27,4 2.02
1973 9,092,700 -7,073 28,9 1.83
1974 9,231,900 -3,893 29,0 1.53
1975 9,366,000 -2,891 27,5 1.45
1976 9,493,000 -2,891 22,4 1.36
1977 9,600,700 •968 19,4 1.13
1978 9,686,400 •3,462 19,6 0.89
1979 9,754,500 -16,270 19,4 0.70
1980 9,693,900 n.a. 19,6 -0.62
1981 9,753,200 n.a. 18,5 0.61
1982 9,848,300 n.a. 17,3 0.98
1983 9,945,700 n.a. 16,8 0.99
1984 10,043,200 n.a. 15,0 0.98
1985 10,152,600 n.a. 16,5 1.09
1986 10,254,900 n.a. 13,6 1.01
1987 10,356,200 n.a. 13,3 0.99
1988 10,468,800 n.a. 11,9 1.09
1989 10,576,921 n.a. 11,1
1.03
Sources:
Comite Estatal de Estadisticas (CEE), Anuario Estadistico de Cuba, La Habana: Cuba, several years.
Rodriguez (1990), Mesa-Lago (1981), Dominguez (1978) and CEE, Anuario Demografico de Cuba, 1980.
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.
TABLE A-2.1: EnroUnnnli b y T ype o f Education (I95>-I9»9>
r i m s
i is is is
e i
W 1 5
1 0
IT* w
j ib
7
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61
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.
TABLE A-2.3: Cuban Economic Output and Income Per-Capita
Year Population
GMP (Millions $ 1965) Income-per-Capita
Value of
Total GMP
Total GMP
Rate of
Growth (%)
Value of
Agricultural
GMP
Value of
Industrial
GMP
(1965 Pesos) Growth of
Income
per-Capita
(%)
1959 6,977,200 3,837.3 n.a. n.a. 550.0
1960 7,077,200 3,994.2 4.1 n.a. n.a. 564.4 2.6
1961 7,190,800 4,156.5 4.1 n.a. n.a. 578.0 2.4
1962 7,317,900 4,056.7 -2.4 940.6 2,746.2 554.4 -4.1
1963 7,511,800 3,953.2 -2.6 904.2 2,700.7 526.3 -5.1
1964 7,712,700 4,193.3 6.1 958.5 2,831.1 543.7 3.3
1965 7,907,100 4,508.8 7.5 1,074.0 2,913.0 570.2 4.9
1966 8,063,500 4,417.6 -2.0 1,041.9 2,858.2 547.9 -3.9
1967 8,215,100 4,902.5 11.0 1,119.9 3,185.1 596.8 8.9
1968 8,352,700 5,008.1 2.2 1,352.4 3,129.9 599.6 0.5
1969 8,489,400 4,915.2 -1.9 1,289.2 3,178.0 579.0 -3.4
1970 8,603,200 5,666.2 15.3 1,229.6 4,000.3 658.6 13.8
1971 8,752,000 5,903.4 4.2 1,152.6 4,177.0 674.5 2.4
1972 8,929,000 6,477.6 9.7 1,215.6 4,458.3 725.5 7.6
1973 9,092,700 7,286.5 12.5 1,271.5 4,988.3 801.4 10.5
1974 9,231,900 7,893.1 8.3 1,324.3 5,395.6 855.0 6.7
1975 9,366,000 7,934.8 0.5 1,400.4 5,284.1 847.2 -0.9
1976 9,493,000 8,214.2 3.5 1,448.6 5,445.3 865.3 2.1
1977 9,600,700 8,457.5 3.0 1,502.2 5,505.1 880.9 1.8
1978 9,686,400 9,150.4 8.2 1,591.3 6,002.0 944.7 7.2
1979 9,754,500 9,299.4 1.6 1,611.9 6,118.4 953.3 0.9
1980 9,693,900 9,418.4 1.3 1,587.6 6,261.8 971.6 1.9
1981 9,753,200 10,623.5 12.8 1,791.8 7,013.2 1,089.2 12.1
1982 9,848,300 10,748.4 1.2 1,692.6 7,244.6 1,091.4 0.2
1983 9,945,700 11,265.2 4.8 1,675.1 7,585.1 1,132.7 3.8
1984 10,043,200 12,211.6 8.4 1,750.6 8,131.2 1,215.9 7.3
1985 10,152,600 12,824.0 5.0 1,726.4 8,732.9 1,263.1 3.9
1986 10,254,900 12,867.0 0.3 1,773.0 8,794.0 1,254.7 -0.7
1987 10,356,200 12,440.5 -3.3 1,735.8 8,468.6 1,201.3 -4.3
1988 10,468,800 12,836.3 3.2 1,800.0 8,697.3 1,226.1 2.1
Average 4.4 3.1
Sources:
Rodriguez, Jose. Estrategia del Desarollo Econdmico de Cuba. La Habana, Cuba, 1990.
Mesa-Lago, Carmelo and Jorge Perez-Lopez. World Bank Staff Working Paper Number 770, 1985.
Comite Estatal de Estadisticas de Cuba. Anuario Estadisticos de Cuba, La Habana, Cuba, Several Years.
R eproduced with perm ission of the copyright owner. Further reproduction prohibited without perm ission.
Reproduced w ith permission o f th e copyright owner. Further reproduction prohibited without permission.
I J 1 V u i i o a i a i r i s u a c i a n
Sugar Production and Sugar E ^orta(lon)
k i a n , e is u o u t ic i l u i u i a a u
| Sugar Prices Serial i U saistsnra
Vaar Total
■ - - « -AS - -
rraoucoon
(Tom )
E q w lslo
Russia
(Tans)
( 0
E v e rts to
cthsr
Communtot
Countrtaa
m
World Pries
(U S C anM h)
(3)
i - i ^ ■ - -
W QnO rn C i
(US 9/Ten)
(4)
USSR Pries
(UOCenM Jb)
(5)
USSR Pries
(US I/Ten)
(«)
SovM Trade
SubaM seftem
Sugar Trade
(000s e l US 9)
P )
Total Soviet
A ssM vicft
(O OOsefUSt)
(9)
Total Soviet
A a iM a ra
(OOOeeM006Pesos)
(9)
Total SovM
A ssistance as
pem atdags c l
G M P(«)
(10)
1050 0930,000 n s . n a 2.07 06.3 4.00 90.0 n a 327,000 327,000 0.02
1900 5042,900 n o . n a 3.14 00.1 4.09 90.0 n a 327,000 327,000 0.19
to o t n.a. n a . 2.70 00.4 4.09 90.0 220,000 327,000 327,000 7.07
1002 n a n a. 2.70 01.2 4.09 90.0 220,000 327,000 327,000 000
1003 n a n a 0.34 103.5 0.11 134.4 220,000 327,000 327.000] 027
1004 4,474,500 M n a . 5.77 1209 0.11 134.4 225,000 327,000 327,000 7.00
to e s 2.00 40.0 6.11 134.4 220,000 327,000 327,0001 7.20
1900 4,537,400 n a . n a . 1.01 3 0 0 O il 1344 225,000 327,000 327,000 7.40
n o . n a 1.02 42.2 0.11 134.4 225,000 327,000 327,000 667
M n a . 1.90 4 1 9 0.11 134.4 225,000 327000 327000 0.03
n a n a . 3.20 70.4 6.11 134.4 220,000 327,000 327,000 0.65
1,097,000 3.00 01.0 0 9 4 130.7 220,000 327,000 327,000 5.77
4.00 90.0 0.41 1410 01000 970,000 070,000 9 6 6
7 07 100.9 0.45 1419 0 014000 000303 0.70
0.40 207.9 1192 290.0 71,000 011,000 013.445 7.06
|tS 7 4 | 5,024,9001 1975,000) 1091,OOO| 290 0 052.5 10.30 424.0 -400,000 330,000 279,339 3.54
2007 440.1 20.30 070.0 077,000 1,004,000 000.707 10.96
11.01 203.2 27.43 0039 900,000 1009,000 I047,4O4i 10.19
0.10 1700 2094 592.7 1030,000 0270000 1,021,429 19.17
791 1710 30.71 9070 0427,000 0940,000 0099050 2099
9.00 212.3 37.17 017.7 2024,000 0170,000 2003074 23.70
20.15 010.3 4730 10420 1,105,000 3,403,000 0539033 20.90
1901 7950000 1,011,000 ie .e e 371.4 30.10 7720 1,300,000 4,430000 4407,100 32.64
1902 0010,100 1,234,000 0.30 , 104.4 39.00 000.0 0900,000 4,001,000 0827,439 3561
1903 7,100,000 3,315,000 1070,000 0.50 100.3 4090 10100 0927,000 4,707,000 4,029,040 3767
1904 0000,000 3050,000 n a 5.10 114.0 44.00 900.0 3,151.000 4,407.000 3,944040 30 70
1905 0,003900 n a . n a . 4.05 09.1 4900 1070.0 3,565,000 4495,000 4,104,313 31.69
1900 7054,000 n a . n a 0.00 133.3 50.00 1113.2 0530,000 n a . n a n a
1907 7.110000 n a . n a 0.70 140.7 0090 11130 n a . n a . n a. n a
Note:
Prices of sugar are FOB prices in Caribbean.
Total Soviet Assistance (column Sand 9) includes Soviet bade subsidies (iug», petroleum and nictd) plus development aid. See, CiA-Directorate of intelligence (1919),p. 40.
O v
u >
Sources:
CRE, Anuario Estadisticode Cuba, U llabana. Cuba 1975, 1980,1983.1889. CIA, Directorate of Intelligence (DOI), 1984,1989. Author's estimations.
Column ( I) and (2), from DOI ( 1984), page 36 and DOi (1989) page 33.
Column (7) and (8), from DOI (1984). page 40 and DOI (1989) page 39.
Column (9) and (10), author's estimations.
TABLE A-2.5; International Trade
J i l t
■ s r r r
wrn I# . |A I*-w ia'ia irf-ii w ia'M 'u iji ia > ia u w ij w u 1 1 & i a is i- u'm
» L
i | l
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S f S'
Ip
¥ S T8 ¥ ¥ ¥ 5
1
§
1 I
1 r
1
1
8 i II I i
8
8 8
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I
$ §
s
» I5
*lf
8
8
¥ ¥
f
8
i
88 8
* 1 !
s
n
8
§ i
si
S
1 1
if
i i
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11
. W w
U |
i i
4 1 S
31
I
J
8 2
*
§ s 8 8 8 8 8 8 8
— JO
* 3s
‘III
i j £ i
64
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TABLE A-2.6: National Income and Social Investment (Education and Health)
Year
(In millions of Current Cuban Pesos) Ratios in Percentage
Value of
National
Income
Investment in
Education
Investment in
Health
Investment in
Education as % of
National Income
Investment in
Health as % of
National Income
1959 2,326.2 76.5 25.7 3.3 1.1
1960 2,625.5 83.7 51.3 3.2 2.0
1965 3,888.2 260.4 148.9 6.7 3.8
1970 3,517.6 351.1 216.4 10.0 6.2
1975 8,112.6 808.5 304.2 10.0 3.7
1976 8,355.6 978.5 323.8 11.7 3.9
1977 8,412.8 1,047.9 322.1 12.5 3.8
1978 9,466.0 1,156.9 390.8 12.2 4.1
1979 9,620.9 1,272.1 409.3 13.2 4.3
1980 9,853.1 1,340.8 440.2 13.6 4.5
1981 11,503.5 1,349.1 559.0 11.7 4.9
1985 13,931.7 1,696.8 860.1 12.2 6.2
1986 12,857.4 1,640.2 769.7 12.8 6.0
1987 12,202.2 1,600.0 810.2 13.1 6.6
Source:
Rodriguez, Jose. Estrategia del Desarollo Economico de Cuba. La Habana: Cuba, 1990, page 218 and 293.
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APPENDIX 3
CUBA’S INSTITUTIONAL REFORMS AND ECONOMIC POLICIES
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3.0 CUBA’S INSTITUTIONAL REFORMS AND ECONOMIC POLICIES
In order to fully understand the Cuban growth, human capital and technological
change, it is a prerequisite to have a full understanding of the historical institutional
reforms and economic policies taken. Thus, this historical review of Cuba’s economic and
institutional policies implemented by the Cuban government serves to provide a foundation
to explain the results obtained in previous chapters. This review was used in previous
chapters to produce a combined growth and technological change analysis with country
details and evidence to support the quantitative results obtained.
3.1 Introduction
This appendix focuses on global and sectorial economic growth in Cuba during the
period 1959-1988. Special attention was be given to the impact of population, education,
investment and public policy. Some economic policies implemented by the Cuban
government directed to solve the pre-Revolutionary problems, are discussed. While
politics has played a major role in Cuban economic performance, only economic policies
are discussed in this appendix.
It has been argued that the Cuban model has been successful in the achievement of
social goals such as foil employment, better income distribution, and available social
services and goods. Therefore, it is contended that the Cuban model could benefit other
LDCs countries. On the other hand, some scholars have focused on economic factors such
as Cuba's failure to break away from the sugar monoculture dependency on international
trade, and the deficit in the trade balance, to argue that the Cuban model has failed. This
study research took a different point of view. It focused on growth, human capital and
technological change. Basically, it was concluded in previous chapters that the Cuban
model failed to achieve a higher rate of technological change and to obtain some economic
return from investment on human capital creation.
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3.2 Economic Policies During the Post-Revolution Period (1959-1988)
3.2.1 Economic Policies: 1959-1960
The economic problems existent in Cuba in 1958 were the low rate of relative
growth, sugar monoculture, dependence on the United States in regard to investment and
trade, high rates of unemployment, and income distribution inequalities between rural and
urban sectors.
The main objectives of the revolutionary government were as follows: (1) basically
to remedy the unequal land distribution through the Agrarian Reform Act; develop the
productive bases of the economy by means of rapid industrialization; provide full
employment to all and therefore improve the living standards of the workers, and
implement a fairer income distribution system; (2) to achieve agricultural diversification,
industrial development, reducing the historical dependence on sugar, and increasing the
rate of attaining full employment; and (3) to improve the living conditions for the rural
population and low-income urban workers.
To meet these goals, the government instituted the following policies: (1) the
enactment of the Agrarian Reform Act which gave land to the landless peasants; (2)
improved the efficiency of public administration; (3) invested 2,000 million pesos in
industry; (4) initiate a vigorous campaign to convince Cubans to consume more Cuban
products, rather than foreign imports; and (5) the expropriation of North American assets,
banks and industries under the control of the Cuban upper-class. Also, the notion of full
employment had its roots in the Cuban Program Manifesto of the 26th of July Movement.
To achieve the objectives already mentioned, the following acts, laws and actions
were carried out in the following chronology events:
March 3, 1959: Act 122. The Cuban government took over control and
management of the Cuban Telephone Company, and affiliate of the International
Telephone and Telegraph Corporation, (ITT). Rates were reduced, (3-3-59).
March 1959: Act 135: Rent reductions for housing was 30%-50%.
August 1959: Act 502. Thirty percent reductions on electricity rates paid to the
Cuban Electric Company.
68
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May 17, 1959: Prime Minister Castro signed the Agrarian Reform Act which
limited land holdings and expropriated land, which was subsequently compensated for over
the years. At that time 75% of the arable land was owned by foreigners. Such land was
redistributed to landless peasants.
April 1960: The land holdings of the United Fruit Company were expropriated
after an agreement regarding the amount and manner of compensation to be paid could not
be reached, despite almost a year of negotiations.
June 1960: Cuba orders the nationalization of the oil refineries (British-owned
Shell, U.S.-owned Texaco, and Esso) because of the refusal to refine Soviet petroleum.
July 2, 1960: U.S. Congress enacted termination of Cuba’s sugar quota. July 3,
1960: Cuba authorized nationalization of all U.S. business and commercial property in
Cuba.
October 1960: Cuba nationalized all the banks (with the exception of the Canadian
ones) along with 382 of the largest businesses owned by the bourgeois Cubans.
This all occurred after months of open hostility and numerous acts of economic
sabotage exhibited by Cubans. Castro then stepped up the program of economic
restructuring which was taking on an anti-capitalist character. By the end of 1960, the
economic base of the former dominant national classes and the North Americans had been
expropriated and nationalized in an irreversible way that has continued to the present time.
The measures mentioned above produced an income redistribution among the
urban and rural working classes. This process was heightened by the almost complete
elimination of rent payments which affected 85% of the agricultural workers.
Unemployment was reduced by 40% in the first two years of the revolution. With respect
to real wages, there is some disagreement between statistics, but in general, it is safe to
assume that wages increased by about 30%. However, the way in which income
redistribution was carried out prevents an accurate evaluation of its actual economic
impact on the country.
The drastic reforms carried out by the Cuban government created political and
economic repercussions on Cuba’s international relations which were offset by the
fraternal assistance offered by the Soviet Union and socialist countries. The Soviet Union
69
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guaranteed that they would not stand by and allow Cuba to fall, and they made a
commitment to supply Soviet oil to Cuba and to purchase Cuban sugar.
In summary, the Cuban economic policy from 1959 to 1960, was only able to
accomplish some of its initial objectives, thus failing to meet all of the original goals of the
Program Manifesto of the 26th of July Movement.
3.2.2 Economic Policies: 1961-1963
In this phase of the revolution, certain objectives were put forth for Cuba’s
economic development. By the end o f the 1960s, the state apparatus seemed
uncontrollable because practically all of the industry was centrally administered by the
state. In February 1961, the government created the Ministry of Industry, reorganized
JUCEPLAN (Junta Central de Planificacion or Central Planning Broad) and began to form
entities of JUCEI (Juntas de Coordination, Ejecucion e Inspection) or municipal level
which represents the beginnings of local governments.
It is important to point out, that at this time Cuba did not have a long tradition of
courses in economic studies. In the 1940s, courses in the accounting had been developed,
and in the 1950s, only a few dozen graduates possessed economic studies from the
Universities of Villanueva and Oriente. In addition, hundreds of technicians and
professionals left the country for political reasons and Cuba was therefore lacking the
necessary personnel with at least minimal economic backgrounds to carry out the planning
goals of economic development. Cuba also lacked the proposals for economic
development.
The main objective of the economic development plan was basically to rapidly
industrialize the country to reduce the dependence on the U.S. In I960 a five year plan
was prepared by the well-known Polish economist, M. Kalecki, along with a group of
economists, titled “Hypothetical Outline of the Five-Year Plan, 1961-1965 for the Cuban
Economy.” As well, the Chilean economist, Jacques Chonchol, had prepared a “Proposal
for a Five-Year Plan for Cuban Agricultural Development, 1961-1965.” The main goals
for Cuban economic development were established in these two proposals.
Between 1961 and 1965, Cuba basically applied the planning experiences of other
70
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socialist countries, but constraints were great and Cuba lacked the level of human capital
to carry out the socialist models. For these reasons, great emphasis was placed on the
need to reform, and to develop and expand the education system to conform with the
developmental needs of the nation.
The program of industrial development was not very successful in the oil, chemical
and metallurgical industries during this period due to the lack of intermediate input. The
purchase of imported intermediate inputs in 1963 created a problem in the balance of
payments. On the other hand, the lack of an efficient state administration limited the
process of industrialization as well. In addition, some sectors of the economy were almost
completely paralyzed due to the effects of the U.S. blockade, which began in the fall of
1960, and had gone into official effect in February 1962, thereby prohibiting all US exports
to Cuba. During 1962 and 1963, the U.S. government extended and tightened the
embargo in the following ways: (1) barring U.S. ships from touching Cuban imports or
exports, blacklisting foreign shipping firms that traded with Cuba; (2) forbidding any U.S.
govemment-purchase imports to be transported on foreign vessels that stopped in Cuban
ports; (3) barring all third-country imports with contained Cuban imports (e.g., nickel, oil.
sugar, etc.), (4) forbid travel to Cuba by U.S. citizens and forbid them to spend money for
travel or stay in Cuba; and (5) putting pressure on other countries to join in the economic
boycott and suspend all commercial flights to the island.
Cuba’s industrial growth for the period 1961 to 1963 reached 16%, only slightly
lower than the originally projected figure of 18.8%. On the other hand, in order to plant
other crops, the model for agricultural diversification eliminated 130,000 hectares of
cultivated sugar canes, and in some cases, those were the sectors with highest yields. This
action along with poor weather condition produced a reduction in agricultural yields and
worker productivity. Sugar production dropped from 6.8 million tons in 1961 to 3.9
million tons in 1963. This also heightened the balance of payment problems which was
later reduced with the aid of the Soviet Union, who granted Cuba 34 million rubles in
credit. The revolutionary government had to realize at this time that changes to the
productive structure could not be carried out so fast.
71
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3.2.3 Economic Policies: 1964 -1966
This period was characterized by the decision to return to agriculture, with
renewed emphasis on sugar as the main vehicle to achieve economic development. The
plans from earlier years for rapid, heavy industrialization had to be postponed since they
required too much capital for importation of construction and heavy equipment which was
still lacking in the Cuban economy. In addition, Cuba’s educational efforts were a long
way off from producing the technical and skilled labor force needed to carry out industrial
development. Thus, the relatively low skills necessary for an agricultural labor force
favored the expansion o f this sector. It was reasoned that the increased sales of sugar
would produce the foreign exchange needed to invest in industrialization; and furthermore,
that Cuba was better suited than the Soviet Union or other socialist countries to produce
sugar. In turn, those countries were better equipped than Cuba to produce machinery.
The difference in import input was also decisive factor since in the agricultural sector the
direct coefficient of import input was only 6%; whereas for industry it was as high as 20%
(Rodriguez, 1990, p. 108). Thus, there was an increased focus on the rural sector and
measures were taken to draw surplus urban labor that would have been occupied in
industry, to the countryside through compulsory military, volunteer labor mobilizations,
restrictions on labor mobility, and selective incentives favoring countryside rather that the
city (Mesa-Lago, 1981, p 23).
It was also a period of ideological debate over which model for economic
organization should be followed. The revolutionary government began testing alternative
socialist models, which became known as the Mao-Guevarism and the Libermanism
models. Both models were employed in different sectors of the economy at the same time.
One of the main features distinguishing the two from each other was the notion of moral
(Mao-Guevarism) versus material (Libermanism) incentives to induce better productivity
and develop the material base (Mesa-Lago, 1981, pp. 18-23).
Cuba was able to stabilize economically during this period due to its participation
in the socialist market economies, and in particular, with the Soviet Union. These trade
relations caused Cuba’s external trade to grow three-fold in only two years. In January of
1964, the Soviet Union and Cuba signed an agreement where the Soviet Union guaranteed
72
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to increase their sugar imports by 150% and purchase Cuban sugar between 1965 and
1970 at 6.11 cents per pound. The world price for sugar at that time was only about half
of that amount. This also provided economic stability and allowed Cuba to develop a
planned economy. It should also be pointed out that just prior to this period, the value of
Cuban sugar exports had increased due to an increase in the price of sugar in the world
market, making it more advantageous for Cuba to trade with non-socialist countries and
caused a decrease in Cuba’s trade with socialist countries. The negative results of this
period was that imports also rose dramatically, causing the deficits to continue.
3.2.4 Economic Policies: 1967-1970
This next five-year began with a reactivation o f further collectivization in
agriculture which peaked in 1968, with the “Revolutionary Offensive.” At this time the
state took over the remainder o f the non-agriculture private sector, thus transferring to the
public sector 56,000 small businesses, including street food outlets and bars, repair and
handicraft shops (Mesa-Lago, 1981, pp. 23-27). The period also began with Che’s
resignation from the Ministry of Industry. By mid-1966, Fidel Castro declared that
economic organization would follow the Mao-Guevarist approach with some adjustments
“a la Fidel.” JUCEPLAN lost its control over central planning and was limited to research
and some logistical functions basically to respond to the needs established by the political
leadership’s decision making. Annual macroplans and medium-rang plans were replaced
by mini-sectorial specific plans. The Ministry of Finance was dissolved and consolidated
into the National Bank. State enterprises were also consolidated, thus reducing their total
number.
The Cuban government recognized that the labor productivity fell due to the
decision to suspend productivity bonuses and overtime in an effort to eliminate material
incentives and replace them with moral ones. At the same time, an emphasis was placed
on capital accumulation over consumption, and worker absenteeism rose. Interest loans to
private farmers and taxes were also eliminated, and a disproportionate increase of money
in circulation occurred leading to a loss of currency values since there were fewer
consumer goods available.
73
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Perhaps the most well-known and notable characteristics of the 1966-1970 period
was the big push to harvest 10 million tons of sugarcane through a gradual process of
incrementation by 1970 (Rodriguez, 1990, p. 122). It was projected that 30% of the
sugarcane harvest would be mechanized by that time when, in actuality, it only reached
2.4%. This failure meant that massive numbers of human resources had to be mobilized
for the “zafra” (harvest period), thereby draining the labor force from virtually all other
sectors of the economy. Five hundred thousand people were mobilized at the peak of the
campaign, and 1,200,000 for this entire period.
Only 8.5 million tons of sugar were reached in 1970, falling 15% below the target
of 10 million tons, and the total sugar production output for that five-year period fell 25%
short of the projected goal. The failure was due to a number of factors. First, the number
of professional cane cutters had dropped drastically from 370,000 in 1958 to 70,000 in
1970 (Brundenius, 1984, p. 56). Second, the failure to reach the 30% mechanization of
the harvest meant that hundreds of thousands of workers and volunteers had to be
mobilized who were lacking in the adequate skills, thus reducing the labor productivity in
sugar because of the cutting process. This, plus a lack of organization, caused much of the
cane that was harvested to lay idle in the fields too long, be cut too high or too low, or
before it was ripe, and this translated into a low-sugar content once the sugarcane reached
the mills. Although the 8.5 million tons was a record high, it had been achieved at too
high a cost and with a waste of resources and depletion o f resources in other economic
sectors thereby offsetting any increase in sugar output (Brudenius, 1984, p.56).
It was also projected that during this period, the non-sugar industry would be
further developed in the area of fertilizers, cement, machinery, dairy, fishing, canned
goods, and electric energy. The projected goals were not met by 1970, when it was
realized that because of the lack of an indispensable technical-material base and
organization many industrial plants and equipment that had to be installed to realize these
goals did not occur. In fact, much of the costly acquired equipment rusted on the loading
docks or in warehouses, or ended up at construction sites that were totally paralyzed or
partially paralyzed due to slow construction.
It is also important to mention that much of the poor planning was due to the lack
74
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of adequately trained statisticians to gather and compile the statistics required to make
realistic projections and plans. It is evident that accounting techniques and management
were downplayed when one looks at the fact that student enrollment in universities and
technical schools in the fields of economics and management in 1969 was one-twelfth of
what it was in 1965 (Mesa-Lago, 1981, pp. 24-25). Furthermore, either because of lack of
manpower, or its inexperience in knowledge and expertise, and lack of maintenance
controls, breakdowns of costly equipment occurred that depleted the locomotive fleet and
reduced a 50,000 inventory of tractors to 7,000 (Mesa-Lago, 1981, p. 26).
Despite these economic development failures in the latter half of the 1960s, Cuba
witnessed a remarkably successful reduction in illiteracy due to the Great Literacy
Campaign of 1961 and the subsequent follow-up of continuing education for adults.
Professional graduation from the universities increased, thus continuing advances in the
area of public health, an increase in egalitarianism, the reduction in wage differentials, and
an expansion of select free social services. Even though labor productivity had dropped in
the second half of the 1960s and the economy had suffered serious setbacks, Cuba’s
overall average annual growth for the entire decade of the 1960s was slightly higher than
4% and almost 85% of the projected investment was realized.
3.2.5 Economic Policies: 1971-1974
The economic organization errors and the failures of the development strategy
employed in the previous five-year period brought about a re-evaluation of economic
planning and a shift from idealism and utopianism to realism, pragmatism, and a return to
central planning. This phase of the revolution is usually referred to as the
“Institutionalization o f the Revolution” and is also characterized by an increased role of the
Soviet Union in Cuban affairs and in the direction of economic planning. There was a
return to the strategy of developing annual macroplans and for the first time, preparations
were carried out by the JUCEPLAN with respect to drafting the first five-year plan, 1976-
1980, and three alternative plans in the case of possible negative changes in the price of
sugar. Plans were also drafted for 1981-1985, along with a 20-year development and
forecast play (1980-2000) (Mesa-Lago, 1981, pp. 27-32, and Brundenius, 1984, pp. 57-
75
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58).
In contrast to the 1966-1969 period, the years 1970-1974 experienced an average
economic growth of 10%, causing a strong recuperation in the economy. The factors
contributing to this growth were more efficient organization, previous investments, better
allocation of capital, a steady outflow of trained personnel (managers, engineers, skilled
workers), the booming sugar prices, and accelerated industrialization (Brudenius, 1984, p.
57, Mesa-Lago, 1981, pp. 176-177.) With respect to the operation of plants built with
Soviet aid and technology, Cubans were sent to the Soviet Union to receive technical
training for the operation and maintenance of Soviet technology and equipment and Soviet
technicians were sent to Cuba to assist with the same.
Some of the objectives that were planned sought the objectives of increasing
sugarcane production, developing further the non-sugar agricultural sector without
increasing imports toward that end, carrying out more construction projects, especially in
the much-needed area of housing and healthcare facilities, and developing industry,
especially heavy industry.
Due to better and more efficient planning and organization, and an increase in the
state’s investment, many of the goals of this period were realized. As a result, Cuba
gained a modest but important sector producing combine harvesters, fertilizers, pesticides,
and other agricultural outputs. There was also an increase in the number of by-products
produced from sugarcane, such as bagasse for the paper industry and methanol for the
chemical industry. In the area of the fishing industry, by the mid-1970s Cuba had
increased the catch from 22,000 metric tons before the revolution, to 150,000 after it.
Cuban shipyards produced thousands of fishing vessels of different sizes and types and
built storage and freezing facilities, along with other related plants.
3.2.6 Economic Policies: 1976-1980
The latter half of the 1970s did not have as impressive results in the area of
economic growth rate as the first half due to agricultural plagues and difficulties in
implementing a new model of economic organization.
The government considered the following objectives for this period: (1) increase
76
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the use of technology and mechanization in the agricultural sector and gradually diversify
the directly related industries, (2) invest efficiently in the fanning and animal husbandry
industry, (3) produce more scientists and doctors, (4) guarantee a stable volume of
sugarcane production to assure the collection o f foreign exchange needed to continue with
investments in the process of industrialization, (5) the creation of the necessary domestic
base for the systematic development of the productive forces to supply equipment and
material to industry and agriculture with the final goal of input substitution (Rodriguez,
1990, p. 152).
The economic evolution of this period was not exempt from difficulties. The
already mentioned decline in sugar prices as well as three serious droughts, African swine
fever, sugarcane rust rot and blue mold to tobacco plagues caused serious setbacks.
Additionally, 40% of the imports came from non-socialist countries since they were items
not produced in socialist bloc countries. The above-mentioned problems forced the
economy to readapt to the financial constraints which, for the most part, affected light
industry and machine industry. The economic growth for this period was only 3.5%.
On the positive side, the construction industry goals were met and there was
notable development in the infrastructure of the island, electricity grew to 49.7% in the
five years, surface irrigation by 41.6%, and road and highway paving increased
considerably. More scientists and doctors graduated from schools and sugarcane
production was stabilized.
2.3.7 Economic Policies Period 1981-1988.
The main goals for this period can be summarized as follows: (1) consolidation of
the industrial development along with reducing foreign dependency; (2) to increase the
economic efficiency by increasing productivity; (3) to achieve a greater growth of exports
than the rate of growth of imports to reduce trade deficit (4) to allocate resources more
efficiently in basic investment; (5) to reinforce the cooperative system of production in the
agriculture; and (6) and to achieve a sustainable growth of 5%.
In general, in order to meet these goals, the government focused on the search for
more effective planning means and methods to confront the trade deficit. The strategy to
77
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increase economic productivity (Rodriguez, 1990) was done by (1) the development of
economic education for workers; (2) by increasing the economic incentives system (3) and
by improving the planning system. In sum, it could be said that this strategy had a serious
deficiency due to the lack of coordination between economic structure and the political-
social order. Political structures did not allow the creation of a plan to increase
productivity (Rodriguez, 1990).
In sum, Cuba performed lower than expected because only a 4% rate of growth
was achieved instead of the 5% which was planned. On the other hand, the trade deficit
was not reduced, it even increased considerably. During this period the industrial sector
grew at a rate of 4.3%, which is slightly greater than the rate of growth of GMP. This was
accomplished by an increase in technical quality and productivity which was augmented by
the implementation of a bonus and award system instituted in the 1980s. These incentive
mechanisms, which are similar to those used in capitalist countries, produced some hoped-
for results in the Cuban industrial sector. In addition many of the planning and
coordinating mistakes committed in earlier years were corrected. During this period,
exports increased at a rate of 6.9%, which was much lower than the rate of growth of
imports which achieved a rate of 9.9%.
Up to the present day, Cuba is still struggling to overcome its trade imbalance and
foreign debt. The trade deficit has continued to grow, reaching 19.3% of GMP.
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Creator Madrid-Aris, Manuel Enrique (author)

Core Title Growth, human capital, and technological change in a centrally planned economy: Evidence from Cuba

School Graduate School

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,Economics, Theory,OAI-PMH Harvest,sociology, social structure and development

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Nugent, Jeffrey B. (committee chair), Betts, Caroline Marie (committee member), Kalaba, Robert E. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-22045

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Legacy Identifier 1391090.pdf

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Rights Madrid-Aris, Manuel Enrique

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Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

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