Cuba: An Economic Primer
Congressional research reportJun 20, 2002
Ask Donna
What actually matters in this document.
Text
Order Code RL30837
Report for Congress
Received through the CRS Web
Cuba: An Economic Primer
Updated June 20, 2002
Ian F. Fergusson
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Jennifer E. Stevens
Research Associate
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 and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Inflation and the Price Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
International Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Trade and the Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Labor Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Economic Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
State Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Banking and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Transportation and Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Railways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Roadways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Coffee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Fruits and Vegetables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Fisheries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Industrial Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Figures
Figure 1. GDP Level and Growth Rate, 1989-2000 . . . . . . . . . . . . . . . . . . . . . . . . 3
Figure 2: Origins of GDP, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 3. Origin of Imports, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 4. Destination of Exports, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 5. Exports and Imports by Sector, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 6: Labor Force by Sector, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 7. Joint Ventures by Partner, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 8. Joint Ventures by Sector, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 9. Sugar Production and Exports, 1989-2001 . . . . . . . . . . . . . . . . . . . . . . 17
Florida
U. S.A.
Gulf of Mexico
Eleuthera
Havana
Habana
Guane
Pinar
del Río
San
Cristóbal
Gulfo de
Batabanó
Atlantic
Cárdenas
Surgidero de
Batabano
Crooked
Island
Cienfuegos Santa
Clara
Cienfuegos
Sancti
Spíritus
Sancti
Spíritus
Ciego
de Avila
Cay Lobos
Cayo
Largo
Cay Verde
Morón
(Bahamas)
Ciego
de Avila
Cay Santo
Domingo
Esmeralda
Júcaro
Acklins
Island
(Bahamas)
Cayo Romano
Trinidad
Tunas
de Zaza
Jumentos Cays
(Bahamas)
Cayo Coco
Caibarién
Playa
Girón
Isla
de la
Juventud
Long
Island
Ocean
La
Isabela
Villa Clara
Pedro
Betancourt
Matanzas
Rum Cay
Corralillo
Colón
Santa Fe
Isla de la
Juventud
Great
Exuma
Matanzas
Nueva
Gerona
La Fe
San
Salvador
The
Bahamas
Cay Sal
Bank
La Habana
Artemisa
Cat
Island
Andros
Island
(Bahamas)
Cabañas
La Esperanza
Los Arroyos
New
Providence
Key West
Cuidad de
la Habana
Pinar del Río
Nassau
Key Largo
(Bahamas)
Nuevitas
Florida
Great
Inagua Island
(Bah.)
Camagüey
Camagüey
(administered from Havana)
Martí
Gibara
Victoria de
las Tunas
Holguín
Antilla
Las Tunas
Moa
Cuba
Santa Cruz
del Sur
Holguín
Bayamo
Caribbean Sea
Guantánamo
Granma
Niquero
Provincial boundary
Baracoa
Santiagode Cuba
Manzanillo
Santiago
de Cuba
Caimanera
U. S. Naval Station
National capital
Cayman Islands
(U. K.)
Provincial capital
George Town
Secondary Cities
0
0
50
100
50
Haiti
150 km
100 mi
Montego Bay
Savannala-Mar
Jamaica
Annotto
Bay
Port Antonio
Kingston
Morant
Bay
Adapted by CRS from Magellan Geographix.
Navassa
Island
(U. S.)
Les
Cayes
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 in the Spanish empire 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.
1
Material 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, and U.S. investment lead 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 selfsufficiency. 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.
CRS-3
Soviet 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 Trends2
GDP and Growth
2
GDP growth rate %
$mn
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).
Figure 1. GDP Level and Growth Rate,
Some observers interpret the
1989-2000
slowdown after 1996 to the
restrictions placed on
30000
10
entrepreneurs and the non-state
28000
5
sector after 1996, including the
26000
imposition of an income tax on
0
24000
private earnings.3 Due mainly
22000
to increasing oil import prices,
-5
20000
which offset increases in world
-10
prices for sugar and nickel, the
18000
Cuban economy grew only 5.6
16000
-15
percent in 2000. However, an
1988 1990 1992 1994 1996 1998 2000
Year
oil agreement signed between
Source:
ECLAC,
2000,
Economist
Intelligence Unit
Cuba and Venezuela in
September 2000 appears to be
saving the economy a
significant amount in energy imports. Growth slowed to 3% in 2001 with drought
affecting agricultural output (including the sugar harvest), high oil prices, and a
resumed slump in world nickel prices. Reduced tourist revenues as a result of the
The Cuban government does not provide regular or reliable statistics on the country’s
economy. The last widely-available comprehensive survey of the economy was conducted
by the Economic Commission for Latin America and the Caribbean (ECLAC) in 2000,
hence many statistics in this report are from 1998. Reliable foreign-source statistics, such
as the Economist Intelligence Unit and the U.S.-Cuba Trade and Economic Council’s
Economic Eye on Cuba, have been used for more recent figures, where available.
3
Political Risk Services Report, Cuba, May 1, 2000.
CRS-4
September 11th attacks in the United States, and damage caused by Hurricane
Michelle, which crossed the island in November 2001, also slowed the rate of
growth. Michelle proved to be the worst hurricane to hit the island in fifty years.4
Cuban GDP for 2001 was estimated at $27.3 billion on a 1997 constant-peso
basis.5 On a purchasing power parity basis, the economy was estimated at $18.6
billion in 1999, or $1,700 per person. Reliable information about productivity gains,
the basis for future economic growth, is unavailable. In 2000, 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, and was 3.5% in 2001.7 Although price levels are not
tracked in dollar denominated goods, it was recently reported that the government has
raised prices in dollar stores for goods such as cigarettes, electronics and gasoline in
order to raise hard currency to finance imports.8
Monetary System
The Cuban peso, which depreciated to 120 pesos/dollar during the depths of the
economic crisis, had recently recovered its stability and was trading in the 19 to 23
peso range. However, the peso’s value depreciated recently due to economic fallout
from the September 11th attacks in the United States and damage caused by
Hurricane Michelle, and is now trading in the 24 to 28 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 de Cambios, were established in 1995
to facilitate the exchange of dollars and pesos. The official sanctioning of the dollar
4
Mark Frank and Andrew Cawthorne, “Hurricane Further Blow to Fragile Cuban Economy,”
Reuters, 7 November 2001; EIU Country Report, Cuba, March 1, 2002.
5
EIU Country Reports, “Cuba: Domestic Economy,” May 1, 2002.
6
EIU Viewswire, “Cuba Economy: Government Predicts 5 percent Growth this Year,”
November 28, 2000.
7
EIU Country Report, “Cuba: Domestic Economy,” March 1, 2002.
8
Wall Street Journal, June 6, 2002.
CRS-5
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. In addition, the Euro began circulating as legal tender in the Varadero tourist
district in June 2002.
Sources of dollars include the tourist industry, bonus payments to Cuban
workers in joint ventures, and remittances from abroad. These remittances from
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
Due to economic troubles in the U.S. and their effects abroad, remittances began to
decrease following the September 11th attacks in the U.S.; remittances for the
following October, for example, were estimated to be down 25 %.10 With annual
sales approaching $1 billion, the growth of dollar stores point to an increased
standard of living for residents
Figure 2:
with access to dollars,
Origins of GDP, 2000
reportedly 62% of the
population.11 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.12 Reacting to this trend,
the government passed a decree
in 1998 that permits Havana
officials to forcibly return
migrants to the provinces.13
Fiscal Policy
Public sector spending, by the government or by state enterprises, represents
approximately 60% of gross domestic product.14 The government’s 2000 budget
9
International Trade Commission, Economic Impact of U.S. Sanctions with Respect to Cuba,
Investigation no. 332-413, September 19, 2000, transcript, p. 195-200.
10
Claudia Márquez Linares, “Incentivos para trabajar,” Cubanet Independiente, November
20, 2001.
11
EIU Viewswire, “Cuba Economy: Surge in Dollar Consumer Spending,” January 4, 2000.
12
ECLAC 2000, Chart 69, Movimiento Migratorio interno, 1986-1998.
13
EIU Viewswire, “Cuba Economy- Sharp Social Divide,” October 25, 1999.
14
PRS Group, Cuba: Labor Policies, May 1,2000.
CRS-6
estimates revenue of $13.5 billion and outlays of $14.3 billion.15 Government policy
has been to keep the 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 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
attempted to remove itself from this
debt trap by negotiating bilateral
repayment accords with Britain,
Japan and Italy. This rescheduling
renews Cuban eligibility for
government backed credits from
these nations. Inconclusive
negotiations have occurred for the
$11.7 billion debt owed to western
Figure 3. Origin of Imports, 1998
Other Europe
13.7%
Italy
6.0%
France
7.6%
Spain
14.5%
Venezuela
9.2%
Asia/Oceania
9.1%
Mexico
8.2%
Canada
7.7%
Other Americas
13.5%
China
Africa 8.0%
2.4%
source: ECLAC, 2000.
15
CIA World Factbook, Cuba [www.cia.gov/cia/publications/factbook/geos/cu.html]
16
EIU Viewswire, “Cuba Economy: Fiscal Deficit Remains within Target Range,” February
7, 2000.
17
Ibid.
18
EIU Country Reports, “Cuba: Economic Policy Outlook,” August 3, 2000.
CRS-7
sources by the end of 2001.19 Debt in the form of soft loans and credits from former
east bloc countries have variously been valued at 20-22 billion rubles.20 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). Support for Cuba’s participation
in the proposed Free Trade Area of the Americas (FTAA) is waning throughout the
Western Hemisphere, and Cuba was singled out as the only country not invited to the
Summit of the Americas held in Quebec in April 2001. Castro has criticized the
FTAA as a form of annexation of Latin America by the United States.
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
goods and services, yet it is also
heavily dependent on oil imports.
Cuba recorded consistent trade
surpluses before the revolution, but
Cuba has been plagued with trade
deficits since 1961. During the 19851990 period, the merchandise trade
deficit averaged over $2 billion per
year. The trade imbalance moderated
somewhat during the economic crisis
period 1989-1993, but it rose to $3.1 billion in 2001. 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.
Netherlands
5.3%
Spain
9.3%
Russia
26.7%
France
3.5%
Other Europe
12.6%
Asia/Oceania
6.9%
China
6.2%
Canada
16.1%
Africa
Other America 2.7%
Mexico
7.6%
3.1%
source: ECLAC, 2000
19
20
EIU Country Risk Service, “Cuba: Economic Forecast Summary,” May 1, 2002.
The value of this debt in hard currency would be the subject of any negotiations on
repayment.
CRS-8
A l o n gs i d e i t s
participation in the
international trading
regime through the
WTO, it continues to
face a near total
Exports
Imports
economic embargo from
chemicals 10%
the United States.
raw materials 2.3%
tobacco & 14.5%
tobacco & beverages 0.7%
manufactured goods
beverages
Although no other
food and livestock
25.6%
19.5%
food and livestock
nation participates in
raw materials
comestible oil 1.1%
54%
20%
this 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
higher
priced
commodities
that it
Source: ECLAC, 2000.
traditionally purchased
from the United States.
These prices are often higher because the commodity must be shipped from a greater
distance than from the U.S. One study reported that additional costs due to the
embargo 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.
Figure 5. Exports and Imports by Sector, 1998
In November 2001, Archer Daniels Midland, ConAgra Foods, Cargill, and
Riceland Foods, Inc., became the first U.S. companies to agree to sell agricultural
goods to Cuba. The deal, valued at approximately $36 million, came about after
Cuban President Fidel Castro’s request to the U.S. government for speedy
authorization to buy food and medicines from the United States in the wake of
Hurricane Michelle, which struck the island on November 4, 2001. Cuba requested
U.S. items such as wheat, corn, rice, soybeans, soy oil, flour, pork lard, and chicken
leg quarters. At that time, Castro indicated that the purchases, to be paid for in cash,
would be the only ones made until the U.S. lifts its embargo against Cuba.22
However, contracts for an additional $37 million in agricultural products were signed
between February and April 2002.23
21
Raymond 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.
22
Nelson Acosta, “Castro Welcomes First Trade with United States,” Reuters, November 17,
2001.
23
Economic Eye on Cuba, April 10, 2002.
CRS-9
The Labor Force
There are 11.2 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, 78 for
women) that are comparable to developed nations. The government, directly or
indirectly through state enterprises, employed 75 % of the workforce in 2000.24
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 1989-1993.25
The economic recovery has since ameliorated these conditions (average daily caloric
intake had increased to 2,585 in the year 200026), 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 4.2 % at the end of 2001.
However, these figures only partially reflect the informal economy. Total
employment tells a different story. The official measure of unemployment in Cuba
excludes many categories of the non-working labor force, including those not
registering for work and those who seek work in the informal economy.27 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 lifesustaining without supplement.28
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.
24
PRS Group, “Cuba: Labor Policies,” May 1, 2000.
25
U.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.
26
Ministerio de Economia y Planificacion, “Cuba: Informe Economico Ano 2000,”
http://www.cubagov.cu/des_eco/mep/cuba2000.htm.
27
28
EIU Country Reports, “Cuba: Economic Trends,” February 1, 2001.
Gary H. Maybarduk, “Measures Not Taken: Issues for Today,” ASCE Cuba in Transition,
1999, p.283.
CRS-10
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.29 This ration
can be supplemented at the
Figure 6: Labor Force by Sector, 1998
country’s 300 farmer’s markets
with dollars, widely used in the
entrepreneurial economy and by
employees of joint venture and
manufacturing
12.4% 1.2% mining
utilities
tourist enterprises. Education and
1.2%
agriculture
construction 4.8%
19.8%
medical care are free, although retail, commerce
9.6%
and
tourism
medicines are often unavailable and
transport and
hospital equipment is outdated. In communications
4.3%
unemployed
addition, rents are minimal and real estate and 1.3%
6.6%
there are no taxes on peso salaries. business services
Periodically, ‘volunteer’ labor
38.7%
government and social service
‘contributions’ to the revolutionary
Source: ECLAC 2000
cause are required, especially
during the sugar harvest.30 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.
A new employment agency, the Servicio de Orientación Laboral y Empleo (the
labor and employment guidance service), was recently created to aid individuals
seeking work. Its first offices were opened in Havana, where jobs are scarcest
according to unemployment registration. This agency is designed to more efficiently
match labor supply with demand, with the individual taking a more active role in
seeking work and a diminished role for the government in allocation of labor.31
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.
29
Karen DeYoung, “Cuba Climbs Economic Ladder,” Washington Post, 24, 2000.
30
Joaquim 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
31
EIU Country Report: Cuba, May 4, 2001.
CRS-11
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 of these are Cubanacán, Cubalse and Cimex.32 Subsidies to state enterprises
in these holding companies are being reduced or eliminated, and western style
accounting practices are being introduced. These measures are part of the proceso de
perfeccionamiento empresarial (or business perfection program), meant to improve
efficiency across the board in Cuban enterprise. One trade consultant claims that
these firms have become, in essence, private companies with one shareholder, the
government of Cuba. Juntas de gobierno, or government boards, have been
established for 26 state enterprises and work in much the same way as the board of
directors of a publicly-held company. 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.33 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.34
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.35 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.36 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.”
32
Economist Intelligence Unit, Reassessing Cuba, (London: The Economist Group,
1997)(EIU1997), p. 99.
33
Kirby Jones, Prepared Testimony before the U.S. International Trade Commission.
September 20, 2000, p. 3-4.
34
Mariá C. Werlau, “Foreign Investment in Cuba: The Limits of Commercial Engagement,”
ASCE Cuba in Transition, 1996, p. 489.
35
Tom Baranauskas, Foreign Military Markets-Cuba, Forecast International/DMS, August
2000, p. 4.
36
Jorge Pérez-López, “Cuban Economic Reforms,” in ASCE Cuba Transition
Workshop: Internal and External Factors in Cuba’s Economic Transition, March 25, 1999,
p. 11.
CRS-12
Figure 7. Joint Ventures by Partner,
1998
Spain
Canada
Italy
France
United Kingdom
Mexico
Netherlands
Other Latin America
Rest of World
Total
Source: ECLAC, 2000
82
69
56
16
13
13
9
62
42
362
Figure 8. Joint Ventures by
Sector, 1998
Agriculture
Minerals
Petroleum
Manufacturing
Tourism
Transport
Communications
Construction
Real Estate
Others
Total
11
34
20
113
66
11
3
31
17
56
362
Source: ECLAC, 2000
Foreign partnerships in Cuba had an estimated value of $4.3 billion by the end
of the year 2000.37 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.38 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.39 Other contracts have been cancelled outright, and
compensation has been determined unilaterally by the Cuban government.40 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
37
Carmelo Mesa-Lago, “The Cuban Economy in 1999-2001: Evaluation of Performance and
Debate on the Future,” p. 6.
38
Some claim final decisions on joint ventures are made by Fidel Castro himself. 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.
39
EIU Viewswire, “Cuba Economy: Move to Soothe Foreign Investors Over Property
Measure,” July 18, 2000.
40
Werlau, p. 461.
CRS-13
symbiotically with government economic planners to influence the price level,
interest rates, credit allocation, and exchange rates.41 April 2000 marked the creation
of interest-bearing savings accounts for individuals. The existing Banco Nacional
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 Popular de Ahorro, is becoming more of a full fledged bank with
commercial lending, foreign exchange, and investment services. The banking system
is also becoming wired to accommodate automatic teller machines, credit cards and
direct deposits.42
In spite of these new incentives to keep money in savings accounts or
investments, the growth in savings accounts has been very slow. The persistence of
a cash driven economy helps to explain low numbers of savings account holders, as
do the low interest rates on deposits. Savings accounts are not generally seen as a
method of accumulation. Perhaps most importantly, however, is the extent of the
formal economy. Because most peso wage-earners have little available to save, their
potential savings would come from informal economy activities. Because all banks
are state-owned, they can be used to monitor the activities of account-holders. Many
of those involved in the informal activity are likely to avoid bank accounts in order
to evade taxes or to prevent detection of illegal activities.43
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 salary44, 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 162,000 in 2000.45
41
Armando S. Linde, “The Effectiveness of Cuba’s Banking Sector Reforms,” in ASCE
Cuba Transition Workshop, March 25, 1999, p.3
42
EIU1997, p. 119. However, credit cards issued by U.S. banks are inoperable in Cuba.
43
EIU Country Reports, “Cuba: Economic Outlook,” May 4, 2001.
44
Philip Peters and Joseph L. Scarpaci, Cuba’s New Entrepreneurs: Five Years of Small
Scale Capitalism, Alexis de Tocqueville Ins t itute, August 1998
[http://www.adti.net/html_files], p.7.
45
EIU Country Reports, “Cuba: Economic Policy,” May 4, 2001.
CRS-14
Agriculture
Cooperative farms known as Basic Units of Cooperative Production ( UBPC46)
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 UBPC, 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%). 47 Another factor hindering the development of these
markets 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.”48 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
46
Unidades Básicas de Producción Cooperativa
47
Roger 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.
48
EIU1997, p. 127.
CRS-15
maintained by the sugar industry. The passenger network carries 20-25 million
travelers per year and is a principal method of inter-city transport. Considerable
investment is needed to upgrade and modernize the trackage and rolling stock for
both networks. 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. 49 The Cuban government invested more than $7 million for railway
upgrades in 2000 and 2001, including acquisition of 44 railcars, technical repairs, and
training of Cuban technicians abroad. Vice President Carlos Lage announced that
between the years 2002 and 2003, Cuba would acquire about 200 used railcars from
Germany and Mexico for restoration on the island.50
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
to raise funds to repair roads, and toll revenue is meant to lure investors to joint
venture roadway projects.
Shipping
Cuba has seven major sea ports and 20 sea terminals. 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.51 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 75 lines per 1,000 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. Digitalization of the switching network is reported
49
EIU Country Reports, “Cuba: Infrastructure,”August 3, 2000.
50
Yahoo!, “Cuba efectua millonaria inversión para modernizar sistema ferroviario,” October
14, 2001.
51
PRS Risk Services, Cuba, May 1, 2000.
CRS-16
to be 65% completed in Havana and 40% completed in the rest of the country. There
are also currently two cellular telephone services available on the island. Internet
access is beginning, but its future growth may be complicated by government
suspicions and prohibitive pricing. According to the Economist Intelligence Unit,
official government policy is to seek to maximize access to information technology,
and to that end, a program was launched in 2001 to provide universal access to e-mail
via internet terminals in every local post office in Cuba.52 Yet, it has recently been
reported that the government has implemented new legislation to severely restrict the
sale of personal computers and data storage devices. Acquisition of computer
equipment must now be cleared by the Ministry of Internal Commerce.53 While it is
estimated that about 60,000 Cubans (out of a population of over 11 million) have email accounts, out of 110,000 computers on the island, only a few hundred have full
access to the world wide web. This indicates that access to many internet resources
is unavailable even to the small number of Cubans who do have access to e-mail, and
even then it is controlled by the government as a tool of propaganda to further the
ideals of the Cuban Revolution.54
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 23 % of the workforce, though it contributes
only 14.5 % of GDP55. 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.56 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.
52
EIU ViewsWire, “Cuba: Transport and Communications,” November 12, 2001.
53
CubaNews, June 2002, p.13.
54
Shanthi Kalathil and Taylor C. Boas, “The Internet and State Control in Authoritarian
Regimes: China, Cuba, and the Counterrevolution,”Carnegie Endowment for International
Peace Global Policy Program Number 21, July 2001, pg. 10-11.
55
Ministerio de Economia y Planificacion, “Cuba: Informe Economico Ano 2000,”
http://www.cubagov.cu/des_eco/mep/cuba2000.htm.
56
“Cuba’s Agriculture: Collapse and Economic Reform,” USDA Agricultural Outlook, Oct
1998,(USDA), p.26.
CRS-17
Sugar
metric tons
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
Figure 9. Sugar Production and Exports,
maximized production. Sugar
1989-2001
remained at levels between 74
% and 80% of total Cuban
9000
exports during the Soviet
57
8000
area. During Cuba’s peak
7000
production year in 1970, 9.2
6000
million tons were produced
5000
and nearly half the land mass
4000
of the country was utilized to
Today,
produce cane.58
3000
approximately 40 % of the
2000
1988 1990 1992 1994 1996 1998 2000
land continues to be used for
sugar production, and sugar
production
exports
accounts for one-third of total
merchandise exports. The Source: ECLAC 2000, EIU
2001 harvest of 3.5 million
tons was the third-lowest in
56 years. Sugar production was forecast to increase to 4 metric tons during the 20012002 season, but it is estimated that Hurricane Michelle destroyed up to 10 % of
maturing cane and damaged between 35 and 50 % percent of the crop. By May 2002,
it was estimated that the harvest would not exceed the 3.5 million tons of the 2001
harvest.59
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.60 In early
March 2002, the government announced the formation of a joint venture company
with an unnamed foreign investor to engage in the sugar export trade. This company,
57
William A. Messina, Jr., “Cuban Agricultural Trade, Past, Present and Future,” Prepared
Testimony before the International Trade Commission, September 20, 2000.
58
Canadian 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.
59
Latin American Monitor/Caribbean, May 2002, p.7.
60
EIU Country Reports, “Cuba: Agriculture,” August 3, 2000.
CRS-18
Compania Internacional Azucarera, S.A., is expected to assume the duties of
Cubazucar, the sugar export entity of the Ministry of Foreign Trade.61
It is apparent that the sugar industry faces structural challenges. While the sugar
ministry is implementing a drive for efficiency at the expense of maximized
production, the major reform in the sugar sector occurred in 1993 when the large
state controlled plantations were split into the UBPCs. These 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 UBPCs continue to operate at a loss. Yield per
hectare is approximately 1/3 less than international standards.62 They suffer from
shortages of fertilizer and spare parts. In addition, there is overcapacity in the sugar
refining sector. UBPCs are estimated to operate 74% of Cuba’s sugar cane
plantations, in part explaining the failures of the sugar sector in the recent past.63 The
ministry left approximately one-third of the least productive sugar processing mills
idle during the1999/2000 harvest,64 and it is estimated that even fewer mills were
used during the 2000/2001 harvest (105 mills, down from 112 the previous season).65
In June 2002, it was reported that the government was proposing to radically
restructure the sugar industry by closing 71 of the state’s 156 mills, reducing the
amount of cane in cultivation, and reducing the sugar industry workforce by up to
200,000 employees.66
Tobacco
Cuba’s climate and soil provide an ideal locale for what many consider to be the
world’s finest cigar leaf. Cigars and tobacco leaf form Cuba’s third largest export
earner, after sugar and nickel, and brought in $150 million in revenue in 2000.67
Currently, tobacco is cultivated primarily by private farmers in cooperatives using
land in long-term leases. In 2000, 226 million cigars were sold around the world,
primarily to Europe, but also to the Middle East and Asia. Eighty million Havana
cigars were produced in the first half of 2001, putting production ahead of schedule
to meet the year’s target output. While there is room for cultivation improvements,
there are capacity constraints. The most fertile lands in the river valleys are already
61
Reuters, “Cuba’s new Sugar Exporter Seeks Profitability,” March 8, 2002.
62
EIU Country Reports, “Cuba: Agriculture,” August 3, 2000.
63
Carmelo Mesa-Lagos, “The Cuban Economy in 1999-2001: Evaluation of Performance and
Debate on the Future,” p. 10.
64
EIU1997, p.78.
65
CubaNews, “Authorities abandon cost-control efforts as they push to produce sugar at any
cost,” May 2001.
66
Reuters, “Cuba Shifts Sugar Strategy After Recovery Flops,” June 6, 2002.
67
Reuters, “Cuba produces record 80 million cigars in first half,” July 16, 2001.
CRS-19
under cultivation: moving to less desirable terrain will affect the quality and cachet
of Cuban cigars.68
Coffee
The 2000-2001 coffee crop of 12-15 million kilograms represented a 30 percent
decline from the previous year’s harvest. Initial estimates of the 2001-2002 harvest,
which began in August, called for an output increased by 20 % over last year’s crop,
but due to damage from Hurricane Michelle it is unknown if the harvest will reach
these estimates. 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
6,900 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. Analysts estimate that
Hurricane Michelle destroyed between 15 and 20 % of Cuba’s 2001-2002 citrus
harvest. 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. An Israeli-Cuban joint
venture in Matanzas province cultivated exports worth $76 million in 2000.69 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.70
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 long-distance fleet operates only
sporadically, subject to fuel availability, and usually in Canadian waters with whom
Cuba has a bilateral fishing agreement. The coastal fleet is remains in operation,
with the catch going to the tourist or export markets.71 Cuba is now focusing its
68
Joseph 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.
69
EIU Country Report, “Cuba: Agriculture,” May 4, 2001.
70
USDA, p. 29.
71
Chuck Adams, “Recent Changes in Management Structure and Strategies of the Cuban
(continued...)
CRS-20
fishing industry efforts on high-value, non-traditional products. The tourist trade has
provided a renewed market for local seafood such as shrimp, tropical lobster, and reef
fish.72 A new autonomous enterprise, called Pescavente, has been created to facilitate
foreign investment in the fishing sector. Despite this optimism, it has been reported
that the Fisheries Ministry has been beset by a major corruption scandal that has
called into question the ability to reform economic sectors without privatization or
foreign management.73 The goal of the industry’s five year development plan is to
increase the gross catch by over 50 %, bringing it to 400,000 tons. The gross catch
for 2000 was 162,000 tons.74
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. Nickel production reached 76.6
thousand tons in 2001, but a 50% drop in prices has reduced the value of exports by
approximately $150 million from the previous year.75 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. These firms have entered agreements to modernize Soviet era (or earlier)
processing plants. While modernization has brought increasing production, the
viability of present operations at current world prices has become an additional worry
for the regime.76
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
71
(...continued)
Fishing Industry,” in Cuba in Transition X, Association for the Study of the Cuban
Economy, 1999.
72
Ibid, p. 29.
73
CubaNews, February 2002.
74
Carmelo Mesa-Lagos, “The Cuban Economy in 1999-2001: Evaluation of Performance and
Debate on the Future,” p. 9.
75
EIU Viewswire, “Cuba Industry: Nickel Sector Hurt by Low World Prices,” March 5,
2002.
76
Ibid.
CRS-21
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 post1959 economy was built without energy costs as a significant factor of production.
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. This oil is primarily suited for powering Cuba’s Soviet
and Czech power plants.77 Domestic production now provides 42.% of Cuba’s total
energy needs: of the remaining 58% covered by imports, 46% are oil derivative
imports and 12% crude oil.78
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. 79 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.80
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, and provides Cuba with about 25% of its energy needs.81 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
77
Economic Commission for Latin America and the Caribbean, The Cuban Economy:
Structural Reform and Economic Performance, (Mexico City: United Nations, 1997)
(ECLAC1997), p. 259.
78
Carmelo Mesa-Lagos, “The Cuban Economy in 1999-2001: Evaluation of Performance and
Debate on the Future,” p. 7.
79
Tom Baranauskas, Foreign Military Markets-Cuba, Forecast International/DMS, August
2000, p. 4.
80
Jonathan Benjamin-Alvarado, “Investment and International Cooperation in Cuba’s Energy
Sector,” ASCE Cuba in Transition, 1998, p. 180.
81
Carmelo Mesa-Lagos, “The Cuban Economy in 1999-2001: Evaluation of Performance and
Debate on the Future,” p. 7.
CRS-22
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.82 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.”83
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.84 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.85
Biotechnology
Cuba has developed a promising biotechnology and medical equipment industry.
The genesis of this industry was President Castro’s interest in producing the anticancer 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
82
See generally, Alvarado, pp. 173-191.
83
Washington Post, December 20, 2000.
84
ECLAC1997, p. 194-5.
85
EIU Country Reports, “Cuba: Manufacturing,” August 3, 2000.
CRS-23
pharmaceuticals in a stricter world intellectual property regime.86 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.87
Cuba’s medical supplies importer, Medicuba, has recently become an exporter of
medical products, and exports medicines and biotechnology products to over 20
countries in Latin America, Africa, Asia, and Europe. Medicuba has patented or
registered most of its 260 products in 34 countries.88 Cuba also engages in a program
of “exporting” or “exchanging” Cuban medical personnel, and “importing” patients
for medical treatment. This medical tourism is becoming an increasing source of
income for the country.
Tourism
The bright spot in the Cuban economy has been 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 sector. Cuba’s first joint venture was between this entity and a
Spanish firm to develop a hotel in Varadero in 1988. The tourist sector reportedly
employed 81,000 in 1998.89 Over the last five years tourism has grown around 10%
annually; but in the wake of the September 11th attacks on the World Trade Center
and the Pentagon, tourism has decreased sharply and approximately 20 hotels closed
with resulting personnel layoffs. About 1.77 million tourists visited Cuba in 2001,
a figure virtually unchanged from 2000, yet tourist revenues declined 8.16% from
2000 levels.90 The largest percentage of these tourists are 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. This latter practice is illegal and can
result in legal action and the imposition of fines by the Department of the Treasury.
86
Carmelo 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.
87
CTCS, p. 18.
88
“Medicuba expands into drug exports,” CubaNews 9.5, May 2001.
89
CTCS, pp. 11-12.
90
Economic Eye on Cuba, March 18, 2002 quoting Ministry of Tourism figures.
CRS-24
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.91 Low occupancy and returnvisitor rates are also cause for concern. 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
supplemented central planning with market mechanisms in order to maintain stability
while continuing reform.92
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.93
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.
91
Gary H. Maybarduk, “Measures Not Taken: Issues for Today and Tomorrow,” ASCE,
Cuba in Transition, 1999, p. 285.
92
Rolando H. Castañeda and George Plinio Montalván, “The ‘New’ Cuban Economic Model
(or Socialism with Cuban Characteristics),” ASCE Cuba in Transition,1995 , p.154-190.
93
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.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.