Order Code RL30837
CRS Report for Congress
Received through the CRS Web
Cuba: An Economic Primer
February 7, 2001
Ian F. Fergusson
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
Cuba: An Economic Primer
Summary
This report provides an overview of the Cuban economy. Recent congressional
interest in Cuba has centered on the partial lifting of trade sanctions on agricultural
products and medicine. The 107th Congress may consider further easing of sanctions
or other alterations to the trade embargo in effect since 1962. The paper first presents
a brief historical overview of the Cuban economy. This history is characterized by
dependence on major powers: first Spain, then the United States, and then the Soviet
Union. The report then charts the different, and often conflicting, economic policy
courses that Fidel Castro has pursued since his rise to power in 1959.
The loss of Soviet support led the Cuban economy to the brink of collapse in
the period from 1989-93. The economy contracted by about one-third and there were
widespread shortages of food, medicine, and electricity. In desperate straits, Castro
turned to market-based reforms to resuscitate the economy. Since 1994, economic
growth has been generally positive, yet dependent on the world price of its principal
exports, sugar and nickel, and on the price of oil, its principal import.
Government spending represents about 60% of GDP, a huge level that the
Castro regime is now attempting to reduce. Subsidies to state-run enterprises are
being decreased and social services cut back. Taxes on the emergent dollar economy
have replaced state sector revenues as the prime source of income. Principal sources
of dollars in the economy are the tourist industry and remittances from the United
States. Dollar inflows partially finance the chronic trade deficits that have
characterized the economy since the Revolution.
Market driven reforms have occurred in five principal areas: state enterprise,
foreign investment, banking, entrepreneurship and agriculture. State enterprises are
being grouped into various holding companies. While these enterprises are not being
privatized, western accounting and business practices are being adopted, and subsidies
are being reduced. Joint ventures are permitted as long as they are consistent with
state policy. The banking system is being expanded and modernized to facilitate
investment, yet significant structural obstacles continue to cloud the investment
climate.
The labor force is skilled and highly educated. The government employs
approximately 75% of the workforce, yet widespread unemployment is apparent. The
nation’s infrastructure continues to operate, yet at reduced capacity due to aging
facilities. Sugar is the major agricultural crop, though production has been hurt by
underinvestment. Tobacco, coffee and citrus are also grown and exported. Cuba is
endowed with the world’s third largest reserves of nickel and cobalt. Cuba’s
manufacturing base was largely built during the Soviet era and is perceived to be
obsolete. The bright spot for the Cuban economy is tourism. The inherent tension
between the regime’s commitment to Marxism and economic liberalization may prove
an obstacle to further market-based, reforms.
Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Macroeconomic Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Inflation and the Price Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
International Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Trade and the Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Labor Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Economic Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
State Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Banking and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Transportation and Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Railways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Roadways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Coffee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Fruits and Vegetables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Fisheries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Industrial Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
List of Figures
Figure 1. GDP Level and Growth Rate,
1989-1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Figure 2. Origins of GDP, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 3. Origin of Imports, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 4. Destination of Exports, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 5. Exports and Imports by Sector, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 6: Labor Force by Sector, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 7. Joint Ventures by Partner, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 8. Joint Ventures by Sector, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 9. Sugar Production and Exports,
1989-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Florida
Nassau
Key Largo
New
U. S.A.
Providence
Gulf of Mexico
Eleuthera
Cat
Andros
Island
Key West
Island
San
Salvador
T h e
B a h a m a s
Cay Sal
Great
Rum Cay
Cuidad de
Bank
Exuma
(Bahamas)
la Habana
Long
Ha
H va
b n
a a
n
A t l a n t i c O c e a n
Island
Matanzas
Corralillo
Crooked
Cabañas
Cárdenas
La Esperanza
La
Island
La Habana
Isabela
Artemisa
Colón
Surgidero de
Jumentos Cays
San
Batabano
Pedro
Villa Clara
Pinar del Río
Cayo Coco
(Bahamas)
Cristóbal
Betancourt
Caibarién
Los Arroyos
Pinar
Gulfo de
Ciego
Cay Lobos
Guane
Batabanó
Cienfuegos
Acklins
del Río
Matanzas
Santa
de Avila
(Bahamas)
Island
Clara
Sancti
Cay Verde
Nueva
Morón
Cayo Romano
(Bahamas)
Cienfuegos
La Fe
Spíritus
Gerona
Playa
Girón
Sancti
Ciego
Spíritus
de Avila
Cay Santo
Santa Fe
Trinidad
Esmeralda
Domingo
(Bahamas)
Tunas
Nuevitas
Cayo
de Zaza
Júcaro
Isla
Florida
Isla de la
Largo
Juventud
de la
Camagüey
Great
Juventud
Inagua Island
Martí
Gibara
(Bah.)
(administered from Havana)
Victoria de
Camagüey
las Tunas
Holguín
Las Tunas
Antilla
Moa
Santa Cruz
Holguín
del Sur
Bayamo
Baracoa
Manzanillo
Santiago de Cuba
C u b a
Guantánamo
C arib bea n Se a
Granma
Niquero
Santiago
de Cuba
Caimanera
Provincial boundary
U. S. Naval Station
National capital
Cayman Islands
(U. K.)
Provincial capital
George Town
Secondary Cities
H a i t i
0
50
100
150 km
Montego Bay
0
50
100 mi
Annotto
Les
Bay
Navassa
Cayes
J a m a i c a
Port Antonio
Island
Savanna-
(U. S.)
la-Mar
Kingston
Morant
Bay
Adapted by CRS from Magellan Geographix.
Cuba: An Economic Primer
Recent legislative action amending economic sanctions against Cuba to allow for
the sale of agricultural and medical products to the island has heightened
congressional interest in U.S.- Cuban relations. This report is designed to provide an
introduction to the Cuban economy: an economy in the midst of transformation,
caught in the tension between ideology and necessity.
Background1
Sighted by Christopher Columbus in 1492, the island of Cuba was settled by
colonists from Spain in 1511. Despite its rich soil and advantageous growing climate,
it remained a backwater for two centuries. The port of Havana primarily served as
a naval base to protect Spain’s richer colonies in Central and South America. Sugar,
tobacco and coffee plantations became the mainstay of the economy by the late 18th
century. The port of Havana flourished with exports of these goods, the importation
of slaves, and as a naval hub of the Spanish fleet. After Spain’s loss of most of its
American empire by 1830, Cuba became its prized possession as well as the world’s
wealthiest colony. Due to its plantation economy and the wealth it generated for
Spain, slavery was not abolished in Cuba until 1886. By the late 19th century, the
United States had supplanted Spain as the foremost market for Cuban products. This
factor underlay Cuba’s political drift from Spain and her two wars of independence.
Cuba’s first revolutionary effort, called the “Ten Years’ War,” began in 1868.
Spain’s promise of political and economic reform ended that struggle in 1878. The
second war of independence began in 1895. The United States intervened in 1898
after the battleship Maine exploded in Havana Harbor under mysterious
circumstances. Cuban aspirations for independence were thwarted by this
intervention, however, as the island was occupied until 1902 and thereafter became
a U.S. protectorate.
American influence was enshrined in the Cuban constitution through the Platt
amendment, which authorized U.S. intervention in order to guarantee the maintenance
of a government “adequate for the protection of life, property and individual
liberties.” Although the amendment was abrogated in 1934, the provision reflected
American economic ascendancy.
1Material for this section adapted from Ana Julia Jatar-Hausman, The Cuban Way:
Capitalism, Communism and Confrontation, (West Hartford CT: Kumarian Press, 1999);
Howard I. Blustein, et.al., Area Handbook for Cuba (Washington: Government Printing
Office, 1971); Simon Collier et.al., Cambridge Encyclopaedia of Latin America, (New York:
Cambridge University Press, 1992).
CRS-2
Cuba was granted preferential access to the U.S. sugar market in 1903, and until
the revolution, it was able to sell sugar under the American quota system for higher
than world market prices. This economic relationship with the United States enabled
Cuba to attain a higher aggregate standard of living than any other country in Latin
America. Yet, this wealth was spread unevenly. Rural poverty, illiteracy, and
stagnation contrasted with the wealth and bustle of the Havana metropolis.
Because of its protectorate status, Cuba was widely considered the safest
investment option in Latin America with U.S. investment leading the way. By the
1930s, the United States owned approximately 75 % the sugar cane under cultivation.
The United States purchased 2/3 of its sugar from Cuba, and the United States
accounted for 3/4 of Cuba’s imports in the 1950s. U.S. companies and affiliates also
owned refineries, power generation and manufacturing plants.
The 1959 revolution that overthrew the regime of Fulgencio Batista ended U.S.
economic hegemony over the island. The revolutionary government, led by Fidel
Castro, nationalized the property of foreign investors and expatriates. Castro
declared his Marxist-Leninist leanings in 1961 and began the process of transforming
the island into a socialist economy. The United States responded with a trade
embargo in 1962 and began efforts to isolate the island politically, economically, and
militarily. The Soviet Union, eager for a revolutionary foothold in Latin America,
supplanted the role of the United States as Cuba’s main benefactor.
Cuba followed several different economic paths after the revolution. Initially,
government planners (led by industry minister Ernesto “Che” Guevara) sought to
replace dependency on the United States with the promotion of widespread self-
sufficiency. The failure of this policy coincided with the integration of Cuba into the
‘socialist common market’, the Council of Mutual Economic Assistance. Cuba’s role
in this arrangement was to produce sugar, tobacco, and nickel for export. In return,
the Soviet Union and its Eastern European satellites would provide oil, machinery and
consumer goods.
The all-out drive to produce sugar distorted Cuba’s economic development and
inhibited the economy’s ability to produce other goods and services. In order to
revive the skewed economy, the government attempted numerous market reforms
from the late 1970s to mid-1980s quite similar to ones implemented again in the mid-
1990s. Experiments in managerial independence, farmer and crafts markets, wage
incentives, and self employment were undertaken. In addition, the first steps were
taken to open the country to investment from non-communist nations. However, by
the mid-80s the government came to the conclusion that these measures were
threatening the Marxist nature of the regime and the reforms were terminated. This
was followed by a period of ‘rectification’ in which the last vestiges of the overture
to the market were erased.
These domestic initiatives were eclipsed by the dissolution of the Soviet Union
and the collapse of the communist economic system beginning in 1989. The Soviet
Union had been subsidizing Cuba at the rate of $5 billion per year through subsidized
trade arrangements and soft credit. Because of this subsidization, the government was
able to provide free health care, universal education and subsidized foodstuffs. Soviet
CRS-3
support also made Cuba a regional military powerhouse that could project power to
Angola and Ethiopia in the late 1970s.
In the period from 1989 to 1993, the Cuban economy reportedly contracted by
approximately 35 percent. To cope with the loss of Soviet bloc subsidies, the
government declared a “special period in peacetime.” Food was rationed, energy use
curtailed and many state enterprises closed. Unemployment became widespread.
During this crisis, Castro turned again to market reforms to stimulate the beleaguered
economy. These reforms permitted private service sector business, allowing farmers
to sell excess crops at farmer’s markets, the creation of free-trade zones and the
legalization of the dollar as an alternative currency.
Macroeconomic Trends
The withdrawal of the Soviet subsidy led to a severe economic contraction in the
1989-1993 period. The implementation of market reforms has been credited with the
renewed growth of the Cuban economy since 1994, although this recovery has been
neither dramatic nor uninterrupted (See figure 1). Some observers interpret the
slowdown after 1996 to the restrictions placed on entrepreneurs and the non-state
sector after 1996, including the imposition of an income tax on private earnings.2
Despite the twin blows of record low
sugar prices and near record high oil
Figure 1. GDP Level and Growth
prices, the economy grew 6.2 percent
Rate,
in 1999, which has been attributed to
1989-1999
continued strength in the tourist
industry, now the country’s leading
gdp
gdp
level
growth
earner of foreign exchange.
rate
$bn %
30
10
GDP (left axis)
25
GDP Growth
5
20
0
15
The Cuban government estimated
GDP annual growth rate
(right axis)
-5
GDP for 1999 to be $25.9 billion in
10
-10
1998 on a 1981 constant-peso basis.
5
On a purchasing power parity basis, the
0
-15
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
economy was estimated at $18.6 billion
Source: ECLAC, 2000, Economist Intelligence Unit
in 1999, or $1,700 per capita.3 The
Cuban economy grew at a rate of 4.5
percent in 1999 and the forecast is to meet or exceed this level in 2000. The
government reports that the economy grew in the first half of 2000 by 7.7 percent on
an annualized basis, but that growth is expected to fall to 5.8 percent for the year as
a whole due to the effects of high world oil prices.4 It was reported that high oil prices
2Political Risk Services Report, Cuba, May 1, 2000.
3World Bank Group, World Development Report 1999, p. 14. Purchasing power parity
measures GDP at an exchange rate which equalizes purchasing power in each country.
4Economist Intelligence Unit (EIU) Viewswire, “Cuba: Country Outlook,” Nov. 15, 2000.
CRS-4
cost the economy an additional $80-85 million in the first quarter of 2000.5 An
energy conservation measure, decreed in June 2000, cut fuel supplies 5% across the
board. In addition, production suspensions and closure of factories not linked to
export earnings have been announced. Electricity rationing and power outages, which
have become less frequent with economic recovery, may again become necessary.
Reliable information about productivity gains, the basis for future economic
growth, is unavailable. Recently, Fidel Castro claimed that productivity growth and
improved efficiency was responsible for the country’s recovery, and claimed that
productivity had grown by over 3% a year since 1995.6 The source of this figure
remains mysterious, but it is indicative of changes being undertaken in state
enterprises that this figure has significance to him.
Inflation and the Price Level
Prices on foodstuffs and consumer commodities in Cuba have been kept
artificially low by subsidies. For Cubans, the traditional impediment to the
procurement of goods has not been their price, but their availability. This ‘hidden
inflation’ is the result of peso earnings only being able to purchase a rationed amount
of goods. Excess liquidity in the past fueled a black market, but now these excess
pesos are channeled into the dollar economy. The government has begun to raise peso
prices to reflect more accurately the cost of goods. Inflation in the peso sector has
been averaging 3% per year, yet that figure is forecast to increase to 4% in 2001.7
Although price levels are not tracked in dollar denominated goods, it has been
reported that prices have been falling in farmer and craft markets.8
Monetary System
The Cuban peso, which depreciated to 120 pesos/dollar during the depths of the
economic crisis, has recovered its stability and is now trading in the 19 to 23 peso
range. A convertible peso, which is set at par with the dollar, is used for official
transactions. In addition, the dollar and other foreign exchange has been legal to use
since 1993. Hard currency stores were established that year as an alternative outlet
to the black market. Official exchange centers, Entidades Casas des Cambios, were
established in 1995 to facilitate the exchange of dollars and pesos. The official
sanctioning of the dollar as an alternate means of exchange has contributed stability
to the economy by decreasing excess liquidity, easing inflation, and undermining the
black market for dollars.
Sources of dollars include the tourist industry, bonus payments to Cuban
workers in joint ventures, and remittances from abroad. These remittances from
5Ibid.
6EIU Viewswire, “Cuba Economy: Government Predicts 5 percent Growth this Year,”
November 28, 2000.
7EIU Crossborder Monitor, Business Outlook, Cuba, November 27, 2000.
8EIU Viewswire, “Cuba Economy: GDP May Exceed 4.5 percent Trend Growth Target in
2000,” August 24, 2000.
CRS-5
friends and family have been estimated as high as $800 million per year, although a
more realistic figure may be more in the neighborhood of $375-400 million yearly.9
With annual sales approaching $1 billion, the growth of dollar stores point to an
increased standard of living for residents with access to dollars, reportedly 62% of the
population.10 Yet, it has opened a permanent rift in incomes between those with
access to dollars and those without. This income gap has led to an internal migration
away from rural and eastern provinces to Havana and tourist destination areas.11
Reacting to this trend, the government passed a decree in 1998 that permits Havana
officials to forcibly return migrants to the provinces.12
Fiscal Policy
Figure 2. Origins of GDP, 1998
Public sector spending, by
the government or by state
e n t e r p r i s e s , r e p r e s e n t s
manufacturing
approximately 60% of gross
26.0%
domestic product.13 (In the
utilities
2.6%
U.S., combined federal, state,
transport and
3.6% construction
5.2%
communications
1.1% mining
and local government spending
6.2% agriculture
accounted for 17.3% of GDP in
1999.14) The government’s
18.7%
retail and commerce
2000 budget estimates revenue
of $13.5 billion and outlays of
25.8%
$14.3 billion.15 Government
10.9%
government and social services
real estate and business services
policy has been to keep the
Source: ECLAC 2000.
deficit at under 3 % of GDP,
although the above figures
suggest a deficit of 5.5%. The Cuban budget is not publically released, but available
information indicates that taxes on private enterprise account for an increasingly
greater share of government income, displacing revenues from state sector
enterprises.16 Yet, subsidies to state-sector enterprises are also falling, indicating
progress on the rationalization of the public-sector economy. These subsidies have
been estimated to account for 2.4% of GDP.17 Principal categories of spending are
health services, education, housing, social security and the military. Public investment
9International Trade Commission, Economic Impact of U.S. Sanctions with Respect to Cuba,
Investigation no. 332-413, September 19, 2000, transcript, p. 195-200.
10EIU Viewswire, “Cuba Economy: Surge in Dollar Consumer Spending,” January 4, 2000.
11ECLAC 2000, Chart 69, Movimiento Migratorio interno, 1986-1998.
12EIU Viewswire, “Cuba Economy- Sharp Social Divide,” October 25, 1999.
13PRS Group, Cuba: Labor Policies, May 1,2000.
14WEFA Group, U.S. Economic Outlook 2000-2006, December 2000.
15CIA World Factbook, Cuba (www.cia.gov/cia/publications/factbook/geos/cu.html)
16EIU Viewswire, “Cuba Economy: Fiscal Deficit Remains within Target Range,” February
7, 2000.
17Ibid.
CRS-6
continues to fall short of pre-crisis levels, reaching 6.5 % of GDP in 1999, compared
to 19% in 1990.18 This slowdown in investment spending reflects, in part, the
government’s preference for maintaining social services and employment protection
through subsidies to state enterprises.
International Debt
Four factors have led to Cuba’s isolation from the international financial
community. First, Cuba withdrew from the IMF as it allied itself closely with the
Communist economic community in the 1960s. Second, Comecon (the Soviet bloc
economic community) provided Cuba with low interest, liberally termed loans on
which the country became overly dependent. Third, Cuba then defaulted on its
international hard currency debt in 1986 which froze new lending. Fourth, Cuba has
been cut off from lending by U.S. financial institutions since the imposition of the U.S.
economic embargo, and non-U.S. banks have been reluctant to make investments due
to the country’s poor credit history and complications arising from the Helms -Burton
Act. As a consequence of this isolation, Cuba must rely on high interest rate (15-
20%) short-term loans.
Recently, the government has
Figure 3. Origin of Imports, 1998
attempted to remove itself from this
debt trap by negotiating bilateral
repayment accords with Britain,
Italy
France
Japan and Italy. This rescheduling
6.0%
Other Europe
7.6%
13.7%
renews Cuban eligibility for
Spain
14.5%
government backed credits from
Venezuela
9.2%
these nations. Inconclusive
negotiations have occurred for the
Mexico
Asia/Oceania
8.2%
9.1%
$11.2 billion debt owed to western
Canada
China
sources. Debt in the form of soft
7.7%
Africa 8.0%
Other Americas
2.4%
13.5%
loans and credits from former east
source: ECLAC, 2000.
bloc countries have variously been
valued at 20-22 billion rubles.19
Russia and her former satellites may conceivably seek repayment of this debt, if
western debt began to be repaid.
Trade and the Balance of Payments
Cuba was a charter signatory to the General Agreement on Tariffs and
Trade(GATT) in 1948. It remained active in the GATT process even during the
period of Soviet influence when it drifted away from other western international
financial institutions such as the IMF and the World Bank. Today, Cuba is a member
of the World Trade Organization (WTO). Although opposed by the United States,
18EIU Country Reports, “Cuba: Economic Policy Outlook,” August 3, 2000.
19The value of this debt in hard currency would be the subject of any negotiations on
repayment.
CRS-7
other hemispheric nations are supporting Cuba’s participation in the proposed Free
Trade Area of the Americas (FTAA). 20
Cuba has a primary product,
Figure 4. Destination of Exports, 1998
developing country trade pattern. It
exports raw materials and agricultural
products in exchange for finished
Netherlands
5.3%
goods and services, yet it is also
Spain
Russia
9.3%
26.7%
heavily dependent on oil imports.
France
3.5%
Cuba recorded consistent trade
surpluses before the revolution, but
Other Europe
12.6%
Asia/Oceania
Cuba has been plagued with trade
6.9%
deficits since 1961. During the 1985-
China
6.2%
1990 period, the merchandise trade
Canada
Africa
16.1%
2.7%
Other America
Mexico
7.6%
3.1%
deficit averaged over $2 billion per
source: ECLAC, 2000
year. The trade imbalance moderated
somewhat during the economic crisis
period 1989-1993, but it rose to a new record of $2.74 billion in 1998. This deficit
mattered less during the time of Soviet influence when easy credit terms and subsidies
made the trade balance less of an economic priority. Recently, this large imbalance has
been caused by high prices for oil on which it is dependent, and by low prices for
sugar and nickel, two of its primary exports. Today, Cuba makes up for its
merchandise trade deficit by service sector inflows in the form of tourist revenues.
A l o n g s i d e i t s
Figure 5. Exports and Imports by Sector, 1998
participation in the
international trading
regime through the
WTO, it continues to
face a near total
Exports Imports
economic embargo from
chemicals 10%
raw materials 2.3%
the United States.
tobacco &
14.5%
manufactured goods
tobacco & beverages 0.7%
beverages
Although no other nation
food and livestock
25.6%
19.5%
food and livestock
participates in this
raw materials
54%
comestible oil 1.1%
20%
embargo, the policy
petroleum
16.4%
machinery
increases the cost of
chemicals 3.2%
machinery
27%
0.7%
trade in two ways. First,
manufactured goods
7.6%
it forces Cuba to buy
h i g h e r p r i c e d
commodities that it
Source: ECLAC, 2000.
traditionally purchased
from the U.S. These
prices are often higher because the commodity must be shipped from a greater
distance than the U.S. One study reported that additional costs due to the embargo
20Economic Commission for Latin America and the Caribbean, La Economía Cubana:
Reformas Estructurales y Desempeño en los Noventa, (Mexico City: United Nations Press,
2000), (ECLAC 2000), chart 33,34.
CRS-8
added 30% to the cost of Cuban imports.21 The Helms-Burton Act, which restricts
vessels from entering U.S. ports within six months of departing Cuba, also increases
shipping costs. Second, Cuba must pay higher finance costs because it is considered
a high risk by international creditors. Cuba can only obtain high interest short-term
financing, and U.S. financial markets are closed to Cuba.
The Labor Force
There are 11.1 million residents of Cuba living on the island. Partly as a result
of the regime’s emphasis on social services, Cuba’s population is well educated with
a high literacy rate (95.7 %), and life expectancy figures (74 years for men, 77 for
women) that are comparable to developed nations. The government, directly or
indirectly through state enterprises, employs 75 % of the workforce.22 Many of these
achievements, however, have been compromised by recent economic hardships.
According to a U.S. Department of Agriculture study, average daily caloric intake
decreased 38 % from 2,908 to 1,863 during the period 1989-1993.23 The economic
recovery has ameliorated these conditions, yet it is expected that living standards will
not regain 1989 levels for another 5 years under current growth rates.
Unemployment does exist and has become a problem for the government.
Recorded unemployment fell from 7.6 % in 1995 to 6 % at the end of 1999.”24
However, these figures only partially reflect the informal economy. Total employment
tells a different story. Only approximately 45 % of Cubans over 20 years of age were
officially employed in 1996. This figure points to a large alternative economy, if for
no other reason than that state pensions and other renumerations, denominated in
pesos, are not life-sustaining without supplement.25
Traditional employment is governed by the State Committee for Work and Social
Security (CETSS). Minimum wages for each sector are set by this agency. Workers
are hired for foreign joint ventures through this committee. Joint ventures pay the
employee’s wage to the CETSS in hard currency: the worker is then paid in pesos.
Foreign companies often pay more than $500 per month to the CETSS for each
employee; the average monthly salary is 237 pesos ($11). Employees of joint
ventures also often receive cash bonuses paid in dollars that supplement their income.
21Raymond C. Offenheiser, “U.S. Sanctions on Cuba: Assessing Their Impacts and Benefits
from Potential Trade,” Prepared testimony before the International Trade Commission,
September 19, 2000, p.3.
22PRS Group, “Cuba: Labor Policies,” May 1, 2000.
23U.S. Department of Agriculture, “Cuba’s Agriculture: Collapse & Economic Reform,”
Agricultural Outlook, October 1998, p. 26. 2,100 calories is considered the minimum
adequate caloric intake.
24EIU Viewswire, “Cuba Economy: GDP May Exceed 4.5 % trend growth target in 2000,”
August 24, 2000
25Gary H. Maybarduk, “Measures Not Taken: Issues for Today,” ASCE Cuba in Transition,
1999, p.283.
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While earnings are not high under this system, living expenses are also very low.
Ration cards allow the purchase of an inadequate food supply for about 15 pesos (70
cents) per month.26 This ration can
be supplemented at the country’s
Figure 6: Labor Force by Sector, 1998
300 farmer’s markets with dollars,
widely used in the entrepreneurial
economy and by employees of joint
venture and tourist enterprises.
manufacturing
utilities
12.4% 1.2%mining
Education and medical care are free,
1.2%
agriculture
construction 4.8%
19.8%
although medicines are often
retail, commerce
and tourism
9.6%
unavailable and hospital equipment
transport and
is outdated. In addition, rents are
communications
4.3%
unemployed
minimal and there are no taxes on
1.3%
real estate and
6.6%
business services
peso salaries. Periodically,
‘volunteer’ labor ‘contributions’ to
38.7%
government and social service
the revolutionary cause are
Source: ECLAC 2000
required, especially during the sugar
harvest.27 Labor organizations also
exist under the direction of the Communist Party and the state. However, these
bodies are not trade unions in any western sense of the word. They function to
mobilize political support for the state, not to bargain collectively with state
enterprises or joint ventures.
Economic Reforms
The near collapse of the economy during the 1989-93 period caused the
government to adopt certain market-based reforms. A number of these reforms had
been attempted during the 1970s subsequent to the economic strains experienced as
a result of the all out drives to produce sugar. The success of these market initiatives
and reforms were their undoing, however, as Castro came to believe these reforms
threatened to undermine the achievements of the revolution and of the Communist
Party. In 1993, Castro turned again to the market to rescue the regime from
desperate straits. Reform measures have been undertaken in the areas of state
enterprise, foreign investment, and banking.
State Enterprises
Government controlled economic entities continue to produce a majority of
goods and services in the nation and they account for the largest share of GDP. The
government has attempted to introduce economic efficiencies into this sector by
arranging state enterprises into holding companies that are established in the
consumer, retail, tourism, financial, distribution and service sectors. The three largest
26Karen DeYoung, “Cuba Climbs Economic Ladder,” Washington Post, 24, 2000.
27Joaquim F. Otero, Testimony prepared for the International Trade Commission hearings,
The Impact of U.S. Sanctions with Respect to Cuba, September 19, 2000, p.3
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of these are Cubanacán, Cubalse and Cimex.28 Subsidies to state enterprises in these
holding companies are being reduced or eliminated, and western style accounting
practices are being introduced. One trade consultant claims that these firms have
become, in essence, private companies with one shareholder, the government of Cuba.
These companies reportedly can borrow in international financial markets, are audited
by western accounting firms, and can undertake new business deals without state
interference. The government can and does intervene, as a shareholder, to assure
continued profitability.29 Others point out that with continued central planning,
complete autonomy from government edicts is unlikely. It has also been reported that
many of these enterprises are run by and for the profit of the Cuban Armed Forces.30
Foreign Investment
Cuba introduced its first foreign investment statute, Decree Law 50, in 1982.
Joint ventures were allowed under this provision, but foreign investors were limited
to a 49 % stake. The cultivation of foreign investment began in earnest with the
withdrawal of Soviet support. By 1995, 185 joint venture arrangements had been
approved with an estimated value of $1.5 billion.31 In that year, Decree Law 77 was
adopted to codify many practices under which joint ventures operated and to
guarantee the irreversibility of government policy towards foreign investment.32 The
new law authorizes 100% foreign ownership of investments, full remittance of
profits abroad, the transfer for investment to third parties, the establishment of free
trade zones, and investment in real estate. It also protects foreign investors from
expropriation, except in the interest of “public utility or social interest.”
28Economist Intelligence Unit, Reassessing Cuba, (London: The Economist Group,
1997)(EIU1997), p. 99.
29Kirby Jones, Prepared Testimony before the U.S. International Trade Commission.
September 20, 2000, p. 3-4.
30Mariá C. Werlau, “Foreign Investment in Cuba: The Limits of Commercial Engagement,”
ASCE Cuba in Transition, 1996, p. 489.
31Tom Baranauskas, Foreign Military Markets-Cuba, Forecast International/DMS, August
2000, p. 4.
32Jorge Pérez-López, “Cuban Economic Reforms,” in ASCE Cuba Transition
Workshop: Internal and External Factors in Cuba’s Economic Transition, March 25, 1999,
p. 11.
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Figure 7. Joint Ventures by Partner,
Figure 8. Joint Ventures by
1998
Sector, 1998
Spain
82
Agriculture
11
Canada
69
Minerals
34
Italy
56
France
16
Petroleum
20
United Kingdom
13
Manufacturing
113
Mexico
13
Tourism
66
Netherlands
9
Transport
11
Other Latin America
62
Communications
3
Rest of World
42
Construction
31
Total
362
Real Estate
17
Source: ECLAC, 2000
Others
56
Total
362
Source: ECLAC, 2000
Despite the government’s official embrace of foreign investment, each joint
venture must be reviewed by a council of ministers or commission of foreign
investment.33 The government has used its power to direct investment into areas it
considers beneficial to the economic or social life of the nation. For example, the
government recently imposed a moratorium on the approval of more than 50 real
estate property ventures, declaring that available resources needed to be concentrated
in tourist infrastructure.34 Other contracts have been cancelled outright, and
compensation has been determined unilaterally by the Cuban government.35 Critics of
Cuban investment cite such arbitrariness as hazards of investing in the regime. They
note that structural weaknesses such as the lack of a commercial code, an
independent judiciary to enforce that code, uncertainty over the approval process for
foreign investment, the lack of a domestic market, and the difficulties associated with
the U.S. embargo continue to undermine the climate for investment in Cuba.
Banking and Credit
Cuba began to modernize its banking sector in 1997. The Banco Central de
Cuba (BCC) was established to coordinate national monetary policy. This move was
seen as a recognition of the greater role of monetary policy in an economy
increasingly influenced by the market. The bank is expected by some to work
symbiotically with government economic planners to influence the price level, interest
33Some claim final decisions on joint ventures are made by Fidel Castro. Castro has reportedly
expressed his irritation in having to “waste his time in meetings with ‘idiots and swindlers’
who come to Cuba ‘with false offers and documents, and all sorts of meaningless proposals,’”
Werlau, p. 464.
34 EIU Viewswire, “Cuba Economy: Move to Soothe Foreign Investors Over Property
Measure,” July 18, 2000.
35Werlau, p. 461.
CRS-12
rates, credit allocation, and exchange rates.36 The existing Banco National de Cuba
(BNC), which has some 200 branches, has shifted its focus from monetary policy to
commercial banking. In addition, exchange houses have been established to provide
exchange between pesos and dollars. The traditional savings and loan bank, the Banco
Populaire de Ahorro, is becoming more of a full fledged bank with commercial
lending, foreign exchange, and investment services. Interest rates on deposits remain
low, however, and savings accounts are not seen as a method of accumulation. The
banking system is also becoming wired to accommodate automatic teller machines,
credit cards and direct deposits.37
Entrepreneurship
Since 1993, Cubans have been allowed to engage in approximately 140
categories of small-scale private enterprises. These cuentapropistas (literally,
workers on their own account) generally engage in service or craft oriented
enterprises such as driving services, tailoring, tutoring, repair services or household
restaurants (under 12 seats) known as paladares. Entrepreneurs cannot form
businesses, nor can they hire employees. These activities can net 3.5 times the
average peso salary38, and part-time entrepreneurship often supplements government
salaries. The number of people engaged in these activities reached an estimated peak
of 208,000 in December 1996. The government’s suspicion of these activities,
together with confiscatory taxes and stifling regulation, had reduced their number to
an estimated 165,000 by 1998.39
Agriculture
Cooperative farms known as Basic Units of Cooperative Production (BUCPs)
were established in 1993 in an effort to increase the efficiency of state run
plantations. Farmer’s markets were legalized by the government in 1994. Envisioned
as a source for surplus foodstuffs from the BUCPs, they instead have been sourced
mainly by independent farmers who lease from the state. The productivity of the
cooperative farms has been hampered by the continued restrictions placed on them by
state planners. Planting regimens and inputs are still prescribed by the government,
and that has served as a drag on productivity. According to a 1997 report, sources of
supply to the markets were: state run farms (41 %); private supply (50%); and
cooperatives (4.8%). 40 Another factor hindering the development of these markets
36Armando S. Linde, “The Effectiveness of Cuba’s Banking Sector Reforms,” in ASCE Cuba
Transition Workshop, March 25, 1999, p.3
37EIU1997, p. 119. However, credit cards issued by U.S. banks are inoperable in Cuba.
38Philip Peters and Joseph L. Scarpaci, Cuba’s New Entrepreneurs: Five Years of Small Scale
Capitalism, Alexis de Tocqueville Institute, August 1998 [http://www.adti.net/html_files], p.7.
39Ibid, p.5.
40Roger R. Betancourt, “Cuba’s Economic ‘Reforms’: Waiting for Fidel on the Eve of the
Twenty-First Century,” in Internal and External Factors in Cuba’s Economic Transition,
Shaw, Pittman, Potts and Trowbridge Cuba Transition Workshop, March 25, 1999.
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is the restriction on intermediaries to sell the products. Foodstuffs can only be sold by
producers, and middlemen are prohibited on ideological grounds.
Transportation and Communications
The economic hardship resulting from the end of Soviet assistance is apparent
from the state of the nation’s infrastructure. By developing country standards, Cuba
had an advanced, though uneven, system of transportation, power and water.
Although infrastructure has become frayed by a decade of underinvestment, a recent
report described its condition as “serviceable.”41 Cuban officials see the nation’s
infrastructure as an opportunity to attract foreign investment.
Air
Air transportation has received priority attention for new investment because of
its relationship to the tourism industry. The opening of a new terminal at José Martí
International Airport in Havana reflects the role of Canadian financing. Prime Minister
Jean Chrétien joined President Castro at its opening ceremony in 1997. The new
terminal costs $62 million, $26 million of which was provided by Canadian export
financing, and it can accommodate 3 million passengers per year. Improvements at
other domestic airports reflect the importance to the government of improved air
service. The national airline is Cubana de Aviación. It serves 36 destinations in
Europe, Canada and Latin America. Two other smaller airlines supplement domestic
flights. In addition, forty overseas airlines serve Havana.
Railways
Cuba has an extensive rail network that links all major cities with passenger and
freight service. Over half of its 8900 miles of track were constructed for and
maintained by the sugar industry. Considerable investment is needed to upgrade and
modernize the trackage and rolling stock for both networks. The passenger network
carries 20-25 million travelers per year and is a principal method of inter-city
transport. In 2000, a French trade mission announced a $9 million agreement to
modernize trackage and replace rolling stock on the Havana-Santiago de Cuba
mainline. 42
Roadways
The road network has also been neglected. The road network consists of 18,000
miles of highways, primary, and dirt roads. The pre-revolutionary Carretera Central,
a 720 mile national highway stretching from Pinar del Rio east to Santiago de Cuba
serves as the spine of the road network. This roadway is being supplemented by the
Autopista Nacional, a controlled access divided highway. The motorway, halfway
complete, has been halted for lack of funds. Tolls were implemented in 1996 in order
41EIU1997, p. 127.
42EIU Country Reports, “Cuba: Infrastructure,”August 3, 2000.
CRS-14
to raise funds to repair roads, and toll revenue is meant to lure investors to joint
venture roadway projects.
Shipping
The reorientation of trade away from the United States after the revolution led
to a restructuring of the nation’s ports. Previously, commerce with the coastal United
States could proceed with relatively light ships or even ferries. This type of shipping
was adequately handled by the island’s many small ports. Conducting trade over much
larger distances (with the Soviet bloc) made necessary the construction and
consolidation of port facilities. Export facilities were constructed at Matanzas,
Guyabal and Cienfuegos to handle the emphasis placed on the sugar traffic. Cuban
ports continue to operate in the post-Soviet era at reduced capacity, recently reported
to average 27 million tons.43 This infrastructure can make Cuba a pivotal
transhipment point for future Caribbean trade.
Telecommunications
Basic telephone service, much less Internet access, is financially out of reach for
most Cubans. There are approximately 5 lines per 100 residents in Cuba, and the use
of communal and pay phones are the norm. The state telephone company, Etecsa, has
entered into a joint venture with the Italian telecommunications firm Stet, to
modernize the telephone network. It was reported that at the end of 1999, there were
440,000 telephone lines, 40% of them digital.44 Internet access is beginning, but its
future growth may be complicated by government suspicions and prohibitive pricing.
Agriculture
Cuba’s economy has traditionally relied on agricultural output. Sugar has always
been the staple crop, but tobacco, citrus, and coffee have also been important. Today,
the agricultural sector occupies 20 % of the workforce, though it contributes only 6.2
% of GDP. It is characterized by low capital investment and low-yield production
techniques. Before the revolution, land was distributed unequally with 8% of the
population owning 70% of the land.45 Plantations were the traditional type of
organization and 25 % of the land mass was owned by Americans. These large scale
production operations were replaced with state-owned agricultural collectives. Some
small scale tenant holdings continued, and private property has never been eliminated
completely in the agriculture sector.
43PRS Risk Services, Cuba, May 1, 2000.
44EIU Country Reports,”Cuba: Infrastructure,” August 3, 2000.
45“Cuba’s Agriculture: Collapse and Economic Reform,” USDA Agricultural Outlook, Oct
1998,(USDA), p.26.
CRS-15
Sugar
Cuba’s economy is dependent on sugarcane. In the 1860s, Cuba produced 1/3
of world sugar output. During the 5-year period before the revolution, sugar
production averaged approximately 5.4 million tons. Subsidized sugar prices during
the Soviet era led to maximized production. Sugar remained at levels between 74 %
and 80% of total Cuban exports during the Soviet area.46 During Cuba’s peak
production year in 1970, 9.2 million tons were produced and nearly half the land mass
of the country was utilized to produce cane.47 Today, approximately 40 % of the land
continues to be used for sugar production. Cane planting in the 2000-1 season is
forecast to be 335,000 hectares.48
Sugar production is controlled by the Ministerio del Azúcar. Until very recently,
the ministry has resisted ceding control over any aspect of the sugar crop to joint
ventures or foreign investment. This reflects the legacy of foreign (primarily U.S.)
domination of the sugar industry before 1959. The Cuban government is now seeking
partners to modernize the sugar industry and to invest in sugar cane derivatives. One
joint venture being undertaken is a $10 million investment with Spain to distill alcohol
for beverages, pharmaceuticals and cosmetics.49
It is becoming
Figure 9. Sugar Production and Exports,
apparent that the sugar
1989-2000
i n d u s t r y f a c e s
structural challenges.
While the sugar
million
tons
m i n i s t r y i s
10
implementing a drive
for efficiency at the
8
expense of maximized
6
production, the major
reform in the sugar
4
sector occurred in
2
1993 when the large
s t a t e c o n t r o l l e d
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
plantations were split
production
exports
into Basic Units of Co-
Source: ECLAC 2000, EIU
operative Production
( B U P C ’ s ) . T h e s e
cooperatives were designed to use worker incentives to increase production by
allowing workers to share profits. Yet, these units must still obey planting and
delivery targets which may require sub-optimal harvesting. Most BUPC’s continue
46William A. Messina, Jr., “Cuban Agricultural Trade, Past, Present and Future,” Prepared
Testimony before the International Trade Commission, September 20, 2000.
47Canadian Trade Commissioner Service(CTCS), Cuba: A Guide for Canadian Business,
{http://www. infoexport.gc.ca/docs/view-f.asp?did=214&gid=193}, p. 14.
48USDA, p. 27
49EIU Country Reports, “Cuba: Agriculture,” August 3, 2000.
CRS-16
to operate at a loss. Yield per hectare is approximately 1/3 less than international
standards.50 They suffer from shortages of fertilizer and spare parts. In addition, there
is overcapacity in the sugar refining sector. The ministry left approximately one-third
of the least productive sugar processing mills idle during the1999/2000 harvest. 51
Tobacco
Cuba’s climate and soil provide an ideal locale for what many consider to be the
world’s finest cigar leaf. Currently, tobacco is cultivated primarily by private farmers
in cooperatives using land in long-term leases. In 1999, 120 million cigars were sold
around the world, primarily to Europe, but also to the Middle East and Asia. Plans
to increase production to 300 million have been abandoned in favor of a more modest
aim of 170 million and to concentrate on maintaining quality. While there is room
for cultivation improvements, there are capacity constraints. The most fertile lands
in the river valleys are already under cultivation: moving to less desirable terrain will
affect the quality and cachet of Cuban cigars.52
Coffee
Coffee production is organized either in state run plantations, or in a manner
similar to tobacco, that is, private farmers cultivating leaseholds organized into
cooperatives. The latter organization, from 1994, has attracted approximately 6900
smallholders who produced 15 % of the coffee crop. Yield continues to lag in the
state run farms, however. New organic coffee production is being established in the
Sierra Madre and Escambria Mountains, although production in the former is hurt by
a persistent drought that has affected the eastern provinces.
Fruits and Vegetables
Cuba produces oranges, grapefruits and limes for export. Cuba is the third
largest producer of grapefruits in the world after the U.S. and Israel. Israeli and
Chilean citrus concerns were some of the first foreign investors to set up joint
ventures in the Cuban agricultural sector. Citrus sector production was reported to
be 744,500 tons in 1998. Vegetables are consumed primarily in the domestic market.
Shortages of inputs and storage facilities have hampered growth and possibilities for
export. The lack of agroindustrial inputs such as fertilizer, pesticides and herbicides
may increase the opportunity for export of organic foods.53
50EIUCountry Reports, “Cuba: Agriculture,” August 3, 2000.
51EIU1997, p.78.
52Joseph M. Perry, et.al., “The Cuban Cigar Industry as the Transition Approaches,” in ASCE
Cuba in Transition 1999, p. 414-425; EIU Country Reports, “Cuba: Agriculture,” August
3, 2000. ; Maybarduk, “Measures” p.4.
53USDA, p. 29.
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Fisheries
The Cuban fishing industry was hampered by the introduction of 200 mile
economic exclusion zones by Caribbean nations in the 1970s. With Soviet help, Cuba
acquired a deep sea fishing trawling capability. This fleet, dependent on cheap oil, has
been mothballed since the 1990s. The tourist trade has provided a renewed market for
local seafood such a shrimp, tropical lobster, and reef fish.54
Manufacturing
Mining
Cuba possesses 1/3 of the world’s supply of nickel and is one of only four
countries to have significant reserves of cobalt. Falling prices for nickel ore
throughout the 1990s have meant falling revenue earnings for this sector of the
economy. According to one estimate, revenue has fallen from $4.5 billion in 1990 to
$400 million in 1998. Nickel production reached 59.5 thousand tons in 1996 and is
projected to reach 70 thousand tons in 2000.55
The mining sector was one of the first to establish joint ventures to replace
necessary inputs and parts no longer supplied by the Soviet Union. The legal basis for
joint ventures in mining was promulgated into law in 1994. The Office of Mineral
Resources in the Ministry of Basic Industries enters into contracts with joint venture
partners for 25-year concession periods. Ownership of all mineral resources remains
with the state. Joint ventures have been established with mining concerns in Canada,
South Africa and Australia.56 These firms have entered agreements to modernize
Soviet era (or earlier) processing plants.
Energy
Subsidized energy was one of the most salient features of the Soviet presence in
Cuba. Russia’s policy of providing cheap oil to Cuba has also been a factor in the
economic difficulties in the post-Soviet period. Oil was provided to Cuba at below
market prices in the form of barter agreements for Cuban sugar. Sugar provided in
this arrangement was priced considerably above the world price. At one time in 1986,
the Soviets bought sugar for 51 cents per pound during a time when world prices
averaged 6 cents. Usually, however, sugar was more moderately valued, averaging
three times the world price.
This arrangement has had two lingering effects for the Cuban economy. Energy
efficiency was not a concern to planners or to enterprises. Hence, much of the post-
1959 economy was built without energy costs as a significant factor of production.
54Ibid, p. 29.
55EIU1997, p. 65.
56Background for this section (gopher.voa.gov:70/00/pub/cuba/info/business/mining)
CRS-18
Power plants, industrial facilities, and machinery were delivered without concern for
energy efficiency. The collapse of the socialist economies and the end of cheap oil,
meant much of the socialist infrastructure became not only obsolete, but prohibitively
expensive to operate.
Overdependence on cheap energy continued to haunt Cuba after the Soviet era.
Electricity has often been rationed and priority is given to export earning enterprises.
However, this shortfall has spurred Cuba to explore new sources of supply. Cuba
does not have extensive reserves of oil and the oil it does possess is inferior grade,
thick and sulfuric. During the 1990's, however, it has increased the supply of
domestically produced oil from 5 % to 20 % of current needs. This oil is primarily
suited for powering Cuba’s Soviet and Czech power plants.57 In 1999, domestic fuel
provided half the fuel for these plants. Cuba still was expected to import 40-45 million
barrels in 2000, at record prices that are expected to strain the economy further.58
Joint ventures have provided much needed investment in the energy sector.
French and Russian firms are engaged in offshore exploration and drilling. Mexico has
invested $100m with the state firm CUPET to reopen the refinery at Cienfuegos to
process both domestic and Mexican crude oil. 59 Projects to modernize five Soviet and
Czech thermoplants have been undertaken by French firms and projects to update
other power plants have been announced involving Canadian, Spanish, Chilean and
French firms.60
Cuba also exploits biomass (bagasse) generated from the harvest of the sugar
crop. It is burned to generate steam and electricity for sugarcane mills and other
generating facilities. The Soviet Union broke ground on a nuclear reactor at Juraguá
in Cienfuegos province in 1982, and it provided over $1billion in assistance for this
project before Russia mothballed the facility in 1993. Periodically, Cuba, Russia or
western companies announced plans to complete the facility, but these plans never
materialized for lack of funds. Today, the plant remains idle, approximately 75 %
complete, primarily lacking instrumentation and control systems.61 In December
2000, it was reported that high level Cuban officials had announced that the
government had abandoned plans for completion of the plant because it was no longer
“economically viable.”62
57Economic Commission for Latin America and the Caribbean, The Cuban Economy:
Structural Reform and Economic Performance, (Mexico City: United Nations, 1997)
(ECLAC1997), p. 259.
58Economic Eye on Cuba, 17 September 2000.
59Tom Baranauskas, Foreign Military Markets-Cuba, Forecast International/DMS, August
2000, p. 4.
60Jonathan Benjamin-Alvarado, “Investment and International Cooperation in Cuba’s Energy
Sector,” ASCE Cuba in Transition, 1998, p. 180.
61See generally, Alvarado, pp. 173-191.
62Washington Post, December 20, 2000.
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Industrial Manufacturing
Cuba imported manufactured goods primarily from the United States before
1959, and so did not develop a large manufacturing sector until after the Revolution.
The dislocation of trade patterns associated with the U.S. embargo necessitated
Cuba’s search for alternate sources of goods. With increasing Soviet assistance, Cuba
attempted to develop an industrial model based on self-sufficiency that relied on the
integrated use of its existing agricultural economy. Cuba would focus its
manufacturing efforts on products it needed for its agricultural and extractive
industries such as fertilizer, chemicals, steel and machinery. Thus, Cuba’s industrial
development strategy depended on political as well as economic factors.
The development of manufacturing industries as linkages to the agricultural
sector, their reliance on imported capital goods from the Soviet bloc (which usually
rendered them not only obsolete but inappropriate to the size and capacity of the
Cuban economy), and trading arrangements based on socialist fraternity, rather than
economics, has created an unwieldy and unsustainable industrial infrastructure. As the
Economic Commission for Latin America and the Caribbean (ECLAC) has noted,
easy credit terms from socialist states promoted manufacturing capacity in Cuba, but
“with little discipline in selecting technology or investment projects.” Hence, Cuba is
saddled with idled, inefficient, manufacturing concerns that it cannot afford to
operate.63 Light, consumer oriented manufacturing has shown the greatest promise
in adapting to market signals. This sector employs approximately 100,000 workers,
and is the force driving GDP growth. This sector is being encouraged to substitute
imports to supply the tourist sector and supply the dollar markets.64
Biotechnology
Cuba has developed a promising biotechnology and medical equipment industry.
The genesis of this industry was President Castro’s interest in producing the anti-
cancer drug, interferon. A Center of Genetic Engineering and Biotechnology was
established in 1986 to produce and develop interferon, other drugs, and new products.
Sales primarily have been to former East bloc trading partners and to developing
countries. Questions have been raised about the thoroughness of testing practices for
these drugs and the continued ability to market essentially copied pharmaceuticals in
a stricter world intellectual property regime.65 Of Cuba’s approximately 150 scientific
research laboratories, 100 are dedicated to pharmaceutical applications and 20
specialize in developing medical equipment. Many of the vaccines and medicines are
derived from sugar and sugar byproducts.66
63ECLAC1997, p. 194-5.
64EIU Country Reports, “Cuba: Manufacturing,” August 3, 2000.
65Carmelo Mesa-Lago, “Cuba’s Economic Policies and Strategies for the 1990s,” in Irving
Louis Horowitz, editor, Cuban Communism 1959-1995 (New Brunswick NJ: Transaction
Publishers, 1995), pp. 207-210.
66CTCS, p. 18.
CRS-20
Tourism
The bright spot in the Cuban economy is its expanding tourism sector. Cuba
traditionally has been a popular tourist locale. Prior to the Revolution, it was the most
traveled destination abroad for Americans, who accounted for 85 % of the 350,000
yearly visitors. Linked in socialist ideology to exploitation and American domination,
tourism from capitalist nations was de-emphasized during the period of Soviet
influence. While it proved to be a popular tropical destination for Russian and East
European officials, tourism from these countries only averaged approximately 30,000
visitors per year.
With the Soviet era winding down, Cuba rethought its relationship with the
tourism industry. The government set up a state-run enterprise, Cubanacán, to
develop the tourist industry. Cuba’s first joint venture was between this entity and a
Spanish firm to develop a hotel in Varadero in 1988. Today, tourism is Cuba’s leading
source of foreign exchange, estimated at over $2 billion annually. The tourist sector
reportedly employed 81,000 in 1998.67 From 1990-1998, tourism revenues grew from
1.2 % to 7.5 % of GDP. In the 1999-2000 season, however, tourism’s rate of growth
has slowed from an average annual rate of 18% to 8.1%, attributed variously to an
economic slowdown in Latin America, weakness of European currencies, and a
clampdown on sex tourism.68 About 1.6 million tourists visited Cuba in 1999, with
the largest percentage from Canada. Americans can travel legally to Cuba under
certain specified conditions, or they can receive a Cuban travel card in third countries
such as Mexico or Canada that enables the traveler to avoid having their passport
stamped.
The tourism sector is not without its problems. Observers have noted that the
tourism business has been slow to develop linkages with the rest of the economy.
Many of the goods used as inputs in the tourism sector must be imported, draining the
amount of foreign exchange actually retained.69 Some have noted the emphasis on
developing tourism is similar to the economy’s excess production of sugar in the early
years of the revolution.
Conclusion
During the 1990s, Cuba initiated limited, yet significant reforms. Cuba’s reform
effort has been compared to the perestroika reform effort in the Soviet Union and the
Asian Market Socialism Model (AMSM) practiced in China, Vietnam and Laos. Both
of these models have attempted to introduce incentives and improve efficiency while
preserving a large measure of state control in the economy and society. The AMSM,
however, has differed from perestroika by encouraging foreign investment, the
emergence of a private sector, and competition. The Asian model has gradually
67CTCS, pp. 11-12.
68 EIU Viewswire, “Cuba-Tourism,” November 3, 2000.
69Gary H. Maybarduk, “Measures Not Taken: Issues for Today and Tomorrow,” ASCE,
Cuba in Transition, 1999, p. 285.
CRS-21
supplemented central planning with market mechanisms in order to maintain stability
while continuing reform.70
Fidel Castro has spoken approvingly of the Asian model as a preferable
alternative to the “big-bang” approach to privatization, price reform, and trade
liberalization that occurred subsequent to the collapse of Soviet-style communism.
Yet, Cuba’s reforms have often lagged behind those of the Asian socialist economies,
and have resembled, in scope and application, the ill-fated perestroika reforms of the
last years of the Soviet Union.71
Castro has indicated that market reform in Cuba is not being conducted for its
own sake, but for the perfection of socialism. Thus, fundamental contradictions
between centrally planned and free-market economies threaten to complicate further
reforms efforts. For example, attempts to rationalize the exchange rate could lead to
a reduced standard of living as prices rise and subsidies are reduced or removed. This
reduced standard of living may exacerbate the existing differences between those who
earn pesos and dollars. In addition, the government’s attempt to promote efficiency
and curb subsidies to state enterprises may result, if carried to its logical conclusion,
in the closing of money-losing enterprises. Progress in this area, however, will conflict
with government’s desire to contain unemployment. As a result, tension will probably
continue between the regime’s desire to introduce market forces and its ideological
commitment to Marxism.
70Rolando H. Castañeda and George Plinio Montalván, “The ‘New’ Cuban Economic Model
(or Socialism with Cuban Characteristics),” ASCE Cuba in Transition,1995 , p.154-190.
71 Jorge F. Pérez-López, “Coveting Beijing, but Imitating Moscow: Cuba’s Economic
Reforms in a Comparative Perspective,” in Cuba in Transition, (Washington: Association for
the Study of the Cuban Economy,1995), p. 12-20.