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The Reduction of State-Sector in Cuba

13.10.2010

After more than five decades of centralized planning, Cuba’s labor force has been characterized by relatively low worker productivity, morale, and discipline; the predominance of the state sector as the country’s principal employer; lack of adequate inputs; access to obsolete technologies and production techniques; the absence of modern managerial systems and practices; and the traditional rigidities commonly associated with centrally-planned economies (CPEs).

To confront these deficiencies, and as part of a concerted effort to transform the Cuban economy, on September 13, 2010 the state-controlled national labor federation (Central de Trabajadores de Cuba, CTC) announced a plan to reduce the number of workers employed by the state by 500,000 from October 4, 2010 to March, 2011. The displacement of these half-million workers represents the first stage in a multi-tiered strategy to reduce the number of workers employed by the state sector by 1,000,000 (or 19.4%).

Displaced state workers will be relocated to sectors with deficits (i.e. insufficient workers) such as agriculture, construction, law enforcement, education, and industry (Ravsberg, 2010). Most of the reductions will apply to “bureaucratic functions” such as management and administration, to increase the share of “productive workers” (or “blue collar” workers) to 80% of the workforce in state-owned enterprises (SOEs) and ministries (Ravsberg, 2010). The state will issue 460,000 new licenses for self-employed workers in areas in which it can supply essential inputs (Ravsberg, 2010).

Self-employed workers will be able to directly negotiate the provision of their services to the state-owned producers, thereby creating new contracting opportunities between the state and the emerging private sector (i.e. self-employed workers). In addition, self-employed workers will be able to make contributions to the state-run social security fund, open bank accounts, obtain loans to expand their operations, and will pay taxes on their income or earnings (Ravsberg, 2010).

These measures, along with previously announced increases in the retirement age by five years to 65 years for men and 60 years for women, are part of a series of economic policy transformations implemented by the Cuban government in response to the severe economic crisis confronted by the island since 2008. As a response to this crisis, Cuba has implemented a series of economic changes including austerity measures focused on energy conservation, fiscal transformations to reduce the ratio of the fiscal deficit to gross domestic product (GDP), transfers of non-productive state-owned lands to cooperatives and private producers, and the liberalization of consumption.

The principal reasons given for the reduction of workers in Cuba’s state sector were the un-sustainability of the current system, under which the majority of the economically active population (83%) works in the state sector, the need to improve worker productivity, the heavy fiscal burden that unproductive workers represent for the state, and the need to reactivate the economy by increasing output and improving efficiency.

Approximately 83% of Cuba’s economically active population is employed by the state sector; the rest work cooperatives (4.8%) and the private sector (12.2%). There are an estimated 141,600 legally-registered self-employed workers (cuentapropistas) in Cuba, representing just fewer than 3% of the economically active population, but close to 17% of all non-state workers (ONE, 2010b). The agricultural sector is the country’s principal employer with 902,000, or 17.5% of the economically active population; other important sectors include education (695,600 workers), health care (671,200 workers), and industry (667,800 workers) (ONE, 2010b).

In 2009, the median monthly salary in Cuba reached 429 pesos (CUP), representing an increase of 3.4% with respect to 2008. At the prevailing exchange rate of 25 Cuban pesos (CUP) per convertible peso (CUC), this was the equivalent of 17.16 CUC or 18.53 USD per month.

Labor force participation has been relatively stable over the last decade. While nominal salaries and pensions were increased in 2005, their real purchasing power (adjusted for inflation) has declined due to repressed inflation (i.e. higher prices) in parallel markets. Liquidity has accumulated due to limited supplies in peso markets and limited opportunities for small entrepreneurs (both legal and illegal) to invest surplus earnings or income in their businesses or real property.

From a fiscal perspective, Cuba’s mostly state-employed work force has turned into an increasingly unsustainable burden for the state. Official statistics reveal that generous subsidies mostly in the form of free social services (e.g., health care and education), subsidized workplace meals, paid vacations, workplace-sponsored distributions of consumer goods packages, along with other direct and indirect transfers, including goods provided through the rationing system, have resulted in the explosion of fiscal expenditures, forcing the transformation of the labor market.

The experiences of other former communist countries that have transitioned to the “reformed” or “market socialist” model (e.g. China and Vietnam) suggests that once the forces of a more autonomous labor force are unleashed it is difficult to contain or reverse the economic reform process. The creation of new, alternative, economic spaces to allow an emerging (and increasingly autonomous) private sector to perform essential economic functions, which the state is unable to provide or cannot provide efficiently, has contributed to increased household incomes, better living standards, and economic growth.

However, despite the potential benefits provided by this type of economic transformation, due to existing levels of differentiation among the Cuban labor force, particularly in terms of age, transferable skills, and educational attainment, it is reasonable to expect that the recently announced measures will negatively affect some segments of the labor market disproportionately. Some of the most vulnerable groups include low skilled workers, workers with limited amounts or quantities of accumulated human and financial capital, workers with little or no knowledge of how markets work, workers without any desire, energy (or physical vigor), or attitude and aptitude to work as entrepreneurs or to become self-employed, and older workers near the end of their productive economic lives.

As Cuba’s experience with self-employment during the 1990s indicates, the transfer of state workers to the emerging private sector will contribute to increased income and social inequality. This phenomenon, however, even though it is likely to become more pronounced, is not new to most Cubans on the island: one of the lasting legacies of the market-oriented reforms of the 1990s has been increased inequality, and its acceptance by the majority of the population, particularly among those who were young or were born after the “Special Period.”

Another unintended consequence of the transfer of workers from the state sector is likely to be an increase in poverty. As some unprepared workers are (involuntarily) transferred to the non-government sector, and given no option but to fend for themselves by setting up small-scale businesses, many will fail, pushing them into poverty, leaving them emotionally stressed, and uncertain about their futures.

Source: http://cubacenter.org/english/the-reduction-of-state-sector

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