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Cuba Economy

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The Cuban Government continues to adhere to socialist principles in organizing its state-controlled economy. Most of the means of production are owned and run by the government and, according to Cuban Government statistics, about 75% of the labor force is employed by the state. The actual figure is closer to 93%, with some 150,000 small farmers and another 150,000 "cuentapropistas," or holders of licenses for self-employment, representing a mere 2.1% of the nearly 4.87 million-person workforce.

The Cuban economy is still recovering from a decline in gross domestic product of at least 35% between 1989 and 1993 as the loss of Soviet subsidies laid bare the economy's fundamental weaknesses. To alleviate the economic crisis, in 1993 and 1994 the government introduced a few market-oriented reforms, including opening to tourism, allowing foreign investment, legalizing the dollar, and authorizing self-employment for some 150 occupations. These measures resulted in modest economic growth; the official statistics, however, are deficient and as a result provide an incomplete measure of Cuba's real economic situation. Living conditions at the end of the decade remained well below the 1989 level. Lower sugar and nickel prices, increases in petroleum costs, a post-September 11, 2001 decline in tourism, devastating hurricanes in November 2001 and August 2004, and a major drought in the eastern half of the island caused severe economic disruptions. Growth rates continued to stagnate in 2002 and 2003, while 2004 and 2005 showed some renewed growth. Moreover, the gap in the standard of living has widened between those with access to dollars and those without. Jobs that can earn dollar salaries or tips from foreign businesses and tourists have become highly desirable. It is not uncommon to see doctors, engineers, scientists, and other professionals working in restaurants or as taxi drivers. V

The government of Raul Castro announced several initiatives designed to increase revenues to the Cuban state by formalizing some business activities which were previously conducted in informal and illegal markets. Even in doing so, the Cuban Government is seeking tighter state control over the economy. The Cuban Government is aggressively pursuing a policy of recentralization, making it increasingly difficult for foreigners to conduct business on the island. Likewise, Cuban citizens are adversely affected by reversion to a peso economy and the dual currency regime in which Cubans are paid in pesos, but many goods are sold in "convertible pesos," worth approximately 23 times the regular peso.

In his February 24, 2008, inaugural address, Raul Castro said the Cuban Government would "advance in an articulate, sound and well-thought out manner" a series of measures that would raise the Cuban standard of living and tie individual prosperity to individual initiative and work performance. Castro also referred to excess "prohibitions and regulations," the simplest of which the Cuban Government would start removing "in the next few weeks." More complex "reforms," he said, could only be introduced after changes to certain legal regulations. This followed Castro's July 26, 2007, speech on economic development, in which he asserted that tackling problems in milk production would address some of Cuba's main economic challenges. On July 12, 2008, Raul Castro placed caveats on many of these initiatives by noting that global economic factors may delay implementation, including for wage increases for Cubans. In his speech marking the 55th anniversary of the start of the Cuban revolution on July 26, 2008, Raul Castro further tamped down expectations for change by warning that the global economy could delay his economic adjustments.

Since February 24, Raul Castro's government has announced it would pursue the following initiatives: Expanding access to public land for private farmers; permitting some Cubans to own their homes, increasing wages and retirement pensions; raising the retirement age; upgrading public transportation systems and infrastructure; licensing private taxis to operate; limited deregulation of the construction industry; expanding access to certain previously restricted consumer goods (like cell phones, computers, microwaves, toasters, DVD players, motorcycles, air conditioners, electric ovens, and agricultural supplies and tools), consolidation and modernization of Cuba's family doctor program, and launching a new 24-hour television station to include mostly foreign-produced content. Many of these initiatives, if implemented, would authorize activities that are already underway in Cuba's informal economy.

Prolonged austerity and the state-controlled economy's inefficiency in providing adequate goods and services have created conditions for a flourishing informal economy in Cuba. As the variety and amount of goods available in state-run peso stores has declined, Cubans have turned increasingly to the black market to obtain needed food, clothing, and household items. Pilferage of items from the work place to sell on the black market or illegally offering services on the sidelines of official employment is common, and Cuban companies regularly figure 15% in losses into their production plans to cover this. Recognizing that Cubans must engage in such activity to make ends meet and that attempts to shut the informal economy down would be futile, the government concentrates its control efforts on ideological appeals against theft and shutting down large organized operations. A report by an independent economist and opposition leader speculates that more than 40% of the Cuban economy operates in the informal sector. Since 2005, the government has carried out a large anti-corruption campaign as it continues efforts to recentralize much of the economy under the regime's control.

Sugar, which has been the mainstay of the island's economy for most of its history, has fallen upon troubled times. In 1989, production was more than 8 million tons, but by the mid-1990s, it had fallen to around 3.5 million tons. Inefficient planting and cultivation methods, poor management, shortages of spare parts, and poor transportation infrastructure combined to deter the recovery of the sector. In June 2002, the government announced its intention to implement a "comprehensive transformation" of this declining sector. Almost half the existing sugar mills were closed, and more than 100,000 workers were laid off. The government has promised that these workers will be "retrained" in other fields, though it is unlikely they will find new jobs in Cuba's stagnant economy. Moreover, despite such efforts, the sugar harvest continued to decline, falling to 2.1 million tons in 2003, the smallest since 1933. According to government reports, the harvest was not much better in 2004 (2.3 million tons), and continued to slide in 2005 (1.3 million tons), 2006 (1.2 million tons), and 2007 (approximately 1 million tons). According to government projections, Cuba expects to meet domestic sugar demand in 2009 for the first time after a major restructuring in 2002.

Tourism figures prominently in the Cuban Government's plans for development, and a top official cast it as at the "heart of the economy." Havana devotes significant resources to building new tourist facilities and renovating historic structures for use in the tourism sector. Roughly 1.7 million tourists visited Cuba in 2001, generating about $1.85 billion in gross revenues; in 2003, the number rose to 1.9 million tourists, predominantly from Canada and the European Union (EU), generating revenue of $2.1 billion. In 2004, the number of tourists to Cuba crossed the 2 million mark (2.05 million), including the so-called "medical tourists" from other Latin American countries seeking medical treatment at Cuban facilities. Since 2004, the volume of tourists has remained relatively consistent, at 2.32 million (2005), 2.2 million (2006), and 2.1 million (2007). During the first quarter of 2008 there was a 15% increase in tourists compared to the first quarter of 2007, according to the Caribbean Tourism Organization.

According to the Cuban Ministry of the Basic Industry (MINBAS), nickel became the leading export and the top foreign exchange earner in 2007, valued at approximately $2.7 billion. Nickel extraction in 2007 was 2.2% higher than in 2006. The main market for nickel exports is China. Cuba produced between 75,000 and 76,000 tons of nickel in 2007. The Cuban Government predicted that nickel and cobalt production would reach a record 80,000 tons in 2008. Cuba's pharmaceutical industry generated $350 million in exports in 2007, ranking second in foreign sales behind nickel and ahead of traditional products such as tobacco, rum, and sugar.

Remittances also play a large role in Cuba's economy. Cuba does not publish accurate economic statistics, but academic sources estimate that remittances total from $600 million to $1 billion per year, with most coming from families in the United States. U.S. regulation changes announced in June 2004 allow remittances to be sent only to the remitter's immediate family; they cannot be remitted to certain Cuban Government officials and members of the Cuban Communist Party; and the total amount of family remittances that an authorized traveler may carry to Cuba is now $300, reduced from $3,000. (See also the Commission on Assistance to a Free Cuba report at www.cafc.gov, cited below.) The Cuban Government captures these dollar remittances by allowing Cuban citizens to shop in state-run "dollar stores," which sell food, household, and clothing items at a high mark-up averaging over 240% of face value.

Beginning in November 2004, the government mandated that U.S. dollars be exchanged for "convertible pesos"--a local currency that can be used in special shops on the island but has no value internationally--for a 10% charge. The 10% conversion fee disproportionately affects Cubans who receive remittances from relatives in the U.S.

To help keep the economy afloat, Cuba has actively courted foreign investment, which often takes the form of joint ventures with the Cuban Government holding half of the equity, management contracts for tourism facilities, or financing for the sugar harvest. A new legal framework laid out in 1995 allowed for majority foreign ownership in joint ventures with the Cuban Government. In practice, majority ownership by the foreign partner is nonexistent. Of the 540 joint ventures formed since the Cuban Government issued the first legislation on foreign investment in 1982, 397 remained at the end of 2002, and 287 at the close of 2005. Due in large part to the government's recentralization efforts, it is estimated that one joint venture and two small cooperative production ventures have closed each week since 2000. Responding to this decline in the number of joint ventures, a spokesperson for the Ministry of Foreign Investment explained that foreign investment is not a pillar of development in and of itself. Moreover, the hostile investment climate, characterized by inefficient and overpriced labor imposed by the Communist government, dense regulations, and an impenetrable bureaucracy, continue to deter foreign investment. Foreign direct investment flows decreased from $448 million in 2000 to $39 million in 2001 and were at zero in 2002. In July 2002, the European Union, through its embassies in Havana, transmitted to the Cuban Government a document that outlined the problems encountered in operating joint ventures in Cuba. Titled "The Legal and Administrative Framework for Foreign Trade and Investment by European Companies in Cuba," the paper noted the difficulty in obtaining such basic necessities as work and residence permits for foreign employees--even exit visas and drivers licenses. It complained that the Government of Cuba gave EU joint venture partners little or no say in hiring Cuban staff, often forced the joint venture to contract employees who were not professionally suitable, and yet reserved to itself the right to fire any worker at any time without cause. It noted administrative difficulties in securing financing and warned that "the difficulties of state firms in meeting their payment obligations are seriously threatening some firms and increasing the risk premium which all operators have to pay for their operations with Cuba." The Cuban Government offered no response.

Investors are also constrained by the U.S.-Cuban Liberty and Democratic Solidarity (Libertad) Act that provides sanctions for those who "traffic" in property expropriated from U.S. citizens. More than a dozen companies have pulled out of Cuba or altered their plans to invest there due to the threat of action under the Libertad Act.

In an attempt to provide jobs for workers laid off due to the economic crisis and bring some forms of black market activity into more controllable channels, the Cuban Government in 1993 legalized self-employment for some 150 occupations. This small private sector is tightly controlled and regulated. Set monthly fees must be paid regardless of income earned, and frequent inspections yield stiff fines when any of the many self-employment regulations are violated. Rather than expanding private sector opportunities, in recent years, the government has been attempting to squeeze more of these private sector entrepreneurs out of business and back to the public sector. Many have opted to enter the informal economy or black market, and others have closed. These measures reduced private sector employment from a peak of 209,000 to less than 100,000. Moreover, a large number of those people who nominally are self-employed in reality are well-connected fronts for military officials. No recent figures have been made available, but the Government of Cuba reported at the end of 2001 that tax receipts from the self-employed fell 8.1% due to the decrease in the number of these taxpayers. Since October 1, 2004, the Cuban Government no longer issues new licenses for 40 of the approximately 150 categories of self-employment, including for the most popular ones, such as private restaurants.

In June 2005, 2,000 more licenses were revoked from self-employed workers as a means to reassert government control over the economy and to stem growing inequalities associated with self-employment. The licenses for self-employed workers were typically for service-oriented work, allowing the Cuban people to eke out a small living in an otherwise impoverished state. Moreover, workers in Cuba's tourist sector--at resorts where native Cubans are prohibited unless they are on the job--have been prohibited by a Ministry of Tourism regulation from accepting gifts, tips, or even food from foreigners, in a further attempt at increasing the tourist apartheid that exists on the island.

A 2004 UN Economic Commission on Latin America and the Caribbean (ECLAC) report recommended that Cuba "redesign the parameters of competition in the public, private and cooperative sectors [and] redefine the role of the state in the economy." It recommended more flexibility in self-employment regulations, property diversification, economic decentralization, and a role for the market. The Cuban Government, however, is today reversing the economic liberalization of the 1990s and re-centralizing its economy. Evidence of this is found in the decline in the number of firms participating in the perfeccionamiento empresarial, or entrepreneurial improvement (EI), program, which is based on capitalist management techniques. EI was instituted in the 1980s as a military-led pilot project, and in 1998, the Cuban Government extended it from military to civilian "parastatals," reportedly to foster capitalist competitiveness. At first, the government highlighted participating companies' achievements in cutting costs and boosting profitability and quality and suggested that the increased autonomy of state managers under EI was producing an efficient form of socialism with a strong link between pay and performance. However, many in the Communist Party, even Fidel Castro himself, resisted EI. Many of the original participants have since left the program and participating firms have seen little growth in revenue. The EI program has fallen far short of expectations and the Cuban Government no longer heralds its successes or its future prospects. In 2003 the Cuban Government also tightened foreign exchange controls, requiring that state companies hold money in convertible pesos and obtain special authorization from the central bank before making hard currency transactions. Practically speaking, this restricted companies from using the dollar for internal trade. Following this, in 2004 the government announced that all state entities must stop charging in U.S. dollars and charge only in pesos for any products and services not considered a part of a company's "fundamental social objective." It also recently implemented new requirements to channel imports through monopolistic Soviet-style wholesale distribution companies.

Cuba's precarious economic position is complicated by the high price it must pay for foreign financing. The Cuban Government defaulted on most of its international debt in 1986 and does not have access to credit from international financial institutions like the World Bank, which means Havana must rely heavily on short-term loans to finance imports, chiefly food and fuel. Because of its poor credit rating, an $11 billion hard currency debt, and the risks associated with Cuban investment, interest rates have reportedly been as high as 22%. In 2002, citing chronic delinquencies and mounting short-term debts, Moody's lowered Cuba's credit rating to Caa1--"speculative grade, very poor." Dunn and Bradstreet rate Cuba as one of the riskiest economies in the world.


Information by U.S. Department of State




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