Poverty and inequality: the policy challenge Emily Morris International Institute for the Study of Cuba October 9 th 2008

Poverty and inequality: the policy challenge Policy objectives Measuring poverty and inequality in Cuba Assessing the record in context Policy debates and challenges

Policy objectives The “basic principle of the Cuban revolutionary process” is development with “equity and social justice”, involving –the redistribution of incomes in favour of workers and marginalised groups –the elimination of unemployment –the raising of living standards.

Measuring poverty and inequality in Cuba Measurements of poverty and inequality: Absolute poverty – “minimum level of income necessary to meet basic needs” –Extreme – not enough food –Moderate – not much money –Standard measures: equivalent to US$1 or US$2 a day. Relative poverty – less than half average income? Inequality – Gini coefficient In Cuba: –Big problem: how to measure real incomes?

Measuring poverty and inequality in Cuba: real incomes Economic crisis = lower real average incomes = more poverty, but how much? And for whom?

Measuring poverty and inequality in Cuba : calculating real wage growth: data Estimates

Measuring poverty and inequality in Cuba : calculating real wage growth: results …but which measure of consumer price inflation?

Measuring poverty and inequality in Cuba : real wages with rations and fixed prices

Measuring poverty and inequality in Cuba : the decline in CUP purchasing power The purchasing power of the extra peso remains small…

Measuring poverty and inequality in Cuba : the rise in US$ purchasing power …and the value of the dollar is still large

Measuring poverty and inequality in Cuba: the currency divide In 1993 US$2 could match an average month’s salary of 182 pesos (real value around US$150) to double it would take another US$150, or over 15,000 (150 x 100) pesos, or 82 months In 2007 US$20 would be needed to match a month’s salary of 400 pesos (real value around US$300) to double it would take another US$300, or 7,200 pesos (300 x 24), or 18 months

Measuring poverty and inequality: average real incomes disguise divergence The gap between peso and hard currency (US$/CUC) incomes widened in ; narrowed in Shortages, currency depreciation, agromarkets Higher wages, more bonuses, more goods on sale in pesos

Measuring poverty and inequality: findings Wages: average real disposable peso incomes barely recovered from collapse Poverty: basic needs have been met Inequality between peso earners was reduced by the crisis and remains small Most inequality still springs from duality between hard currency and peso, formal and informal, economies …which is different….

Assessing the record in context: real wages in transition Cuba’s decline in real average wages was not exceptionally severe -- and other entitlements reduced the impact on welfare

Assessing the record in context: infant mortality Positive proxy indicators: low and falling mortality rates …

Assessing the record in context: infant mortality in transition …comparing well with the “transition” economies

Assessing the record in context: inequality in transition Cuban income inequality increased – but comparisons are difficult

Assessing the record in context: findings The increase in poverty and inequality in Cuba was induced by post-CMEA economic crisis Its record in meeting basic needs and maintaining equality in the formal sector has been positive But the gap between dollar and peso economies persists

Policy debates Ideology: welfare priorities –Commitment to protect the vulnerable, maintain social cohesion and preserve human capital +Management and resources: targeting –Reforming institutional infrastructure –Raising spending –Improving accountability Auditing Decentralisation ¿ Markets: getting the prices right –How to square the exchange rate circle ? –How to improve incentives but contain inequality, using entitlements, bonuses and taxes ?

Conclusions Increase in poverty and inequality since 1990… … has been mitigated by policy A heterodox policy approach –bringing gradual improvement –but corrosive imbalances remain no simple solutions

Poverty and inequality: the policy challenge Emily Morris International Institute for the Study of Cuba October 9 th 2008