Cuba Before Fidel

Monday, February 25, 2008
Cuba Before Fidel
BY ERIC N. BAKLANOFF

In 1958, on the eve of the Cuban Revolution, the United States was
purchasing two-thirds of the island's exports and was supplying 70
percent of its imports. Next to Brazil, Cuba was the most important
Latin American source of agricultural imports of the United States.
During the five-year period, 1954-1958, the United States purchased
three-fourths of Cuba's tobacco and 60 percent of its sugar.(...)

About 80 percent of the Cuban land mass was under cultivation or used
for grazing in the 1950s. The top soil is exceedingly fertile, deep,
rich and well-watered, and the topography favorable to widespread use of
farm machinery. An absence of climatic variation, however, limits the
island to the cultivation of tropical and semi-tropical crops and to
livestock raising. Domestic production supplied about 70 percent of
Cuba's food consumption. (...)

Cuba was one the most capitalized nations in Latin America. The World
Bank Mission observed that:

In the 161 sugar centrales, in the excellent central highway, in the
extensive system of public and private railroads, in the harbor
installations, in the cities, and their utilities, Cuba has the basis of
exceptionally fine equipment for modern economic activity and further
development.

An extensive, well-integrated system of highways provided the basis for
rapid postwar advance in the island's motorized transport industry. In
1957, Cuba's real income per capita (national income divided by
population) was $378, or fourth, in Latin America. Only Venezuela,
Argentina, and Uruguay ranked above Cuba and even Spain ($324) and
Portugal ($212), failed to reach Cuba's level. Except for Venezuela,
Cuba probably enjoyed the highest per capita income among all countries
in the wet tropical zone, extending from the Tropic of Cancer to the
Tropic of Capricorn.

Other measures provide a better approximation of the degree to which
real income was shared among the population. Cuba ranked third in Latin
America on a per capita basis in daily calorie consumption, steel
consumption, paper consumption and radios per 1,000 persons. In 1959,
Cuba had one million radios and the highest ratio of television sets per
1,000 inhabitants. (...)

The level of wages in Cuban manufacturing contributed significantly to
the nation's relatively high living standards. In 1957, wages averaged
$6 for an eight-hour day in manufacturing as a whole and ranged from
over $4 for unskilled workers to $11 for skilled employees in Cuba's
sugar mills. Real wages in Cuba were higher than any country in the
Western Hemisphere, excepting the United States and Canada.

Between 1949-58, the average annual share of national income paid in
workers' remuneration (wages, fringe benefits, pensions) was 65 percent,
and it showed a noticeable tendency to rise. Surprisingly by 1958, as
[Carmelo Mesa-Lago notes in Revolutionary Change in Cuba, University of
Pittsburgh Press, 1971], Cuba's percentage was surpassed by only three
developed Western countries: Great Britain, the United States, and
Canada. (...)

Cuba's new development strategy aimed at reducing the economy's
dependence on its traditional export staple while stimulating industrial
and agricultural diversification. Several measures were taken by the
government to give substance to this diversification strategy. In 1952,
Cuba negotiated a new trade agreement with the United States,
superseding the one in force since 1934. This agreement, notes Antonio
Jorge [in The Cuban Economy: Dependency and Development, University of
Miami North-South Center for the Research Institute for Cuban Studies,
1989] was favorable to Cuba for it allowed the country moderate
protection for its infant industries while simultaneously promoting
diversification of exports to old and new markets.

Unlike, e.g., Chile, Argentina, and Uruguay which—following the
so-called ECLA (CEPAL) Doctrine—pursued strongly inward-looking trade
strategies, Cuba in the late 1950s chose the more prudent middle course.
An Industrial Promotion Law was enacted in 1953 that granted, among
other things, tax incentives to new industries. Finally, credit was
mobilized through official development banks set up during the early
fifties. These included the Banco de Fomento Agrícola e Industrial de
Cuba (1951); the Financiera Nacional de Cuba, organized in 1953 mainly
to provide credits for public works; the Banco Cubano de Comercio
Exterior, founded in 1954 to encourage nontraditional exports; and the
Banco de Desarrollo Económico y Social, established in 1955 to
administer the government's development program. The public works
projects included the construction of a good water system for Havana, a
toll road and the tunnel under Havana Bay, and a new highway, the Vía
Blanca.

Cuba's balance of payments position was strengthened in the 1950s by the
development of the island's tourist industry and the growth of export
earnings for products other than sugar. The expanded operations of the
U.S. government-constructed Nicaro Nickel Co. and the Moa Bay Mining
Co., a subsidiary of Freeport Sulphur Company, assured Cuba a position
as a major supplier of nickel in the world. Hotel construction from 1952
to 1958 almost doubled the existing hotel existing hotel capacity in
Havana and other major cities. In addition, numerous hotels and motels
were under construction in 1958, involving a total investment in excess
of $90 million and a projected capacity of 6,066 rooms. Foreign tourist
expenditures in Cuba increased from $19 million in 1952 to a yearly
average of $60 million in 1957-58. Four large hotels, the Habana Hilton,
the Capri, the Habana Riviera, and the Nacional— owned by U.S. citizens
or corporations—figured importantly in the island's expanded capacity to
accommodate

tourists seeking first class service.

Cuban agricultural diversification gained momentum after 1952 and was
reflected in gains in exports of farm and livestock products other than
sugar. Rice production, advancing from 118,000 tons in 1951 to 261,000
tons in 1957, was a notable case of foreign exchange savings. The
livestock industry, second only to sugar as a source of farm income,
prospered during the fifties; Cuba's cattle herd was built up rapidly
from about 4 million head in 1952 to 5.8 million head in 1959.38
Starting from a small base, Cuba's fish catch grew notably, from an
annual average of 8,300 metric tons (MT) in 1948-52 to 22,600 MT in 1957.

Industrial diversification gained momentum in the 1950s with
particularly sharp increases registered from 1952 to 1957 in the output
of cement (56 percent), rubber tires (66 percent), and chemical
fertilizers (46 percent).39 Production of electric energy grew at a
cumulative annual rate of 10.6 percent from 1952 to 1957. Rapid advances
also were made in the manufacture of paper from bagasse, in flour
milling, and the dairy products industry. Cuba achieved self-sufficiency
in petroleum refining with a capacity at the end of 1959 of 83,000
barrels per day supplied exclusively by two U.S. affiliates, Texaco and
Exxon, and the Royal Dutch-Shell group.

According to the Banco Nacional, investment in Cuban industrial
installations exceeded $600 million from 1952 to 1956. Of this amount,
$324 million was invested in 154 new plants and $288 million in the
expansion of existing plants. The magnitude of these industrial
undertakings can better be appreciated by comparing the $600 million
investment increment with the accumulated industrial capital stock in
the sugar sector of $1,159 million (cited earlier): the new investment
in diversification equaled over half the capital in the sugar industry.
In its review of Cuba's economy, the U.N. Economic Commission for Latin
America observed that a significant number of projects were underway in
1957:

The purpose of these investment programs in the manufacturing sector is
to make Cuba completely self-sufficient at an early date in cement,
tires and tubes, glass containers, aluminum sheet and copper wire and
cables, and relatively self-sufficient in light steel products.

During the latter 1950s Cuba's steel mill, Antillana de Acero, was
mounted and operated by a Cuban entrepreneurial group (...)

With 1953 as a base year, the index of manufacturing production
(excluding sugar) rose from 133 percent in 1958 to 145 in 1959.43 This
robust growth rate during the first year of the revolutionary regime
suggests that many of these investment projects were still in their
gestation phase when Batista fell from power. Examples include the Moa
Bay plant which started operations in 1959 and the Cuban Telephone Co.
which, in 1957, began a five-year development program.

From 1953 to 1957, the Cuban economy experienced a sharp upward trend
in real capital formation, both private and public, signifying growing
autonomy of this key variable from the exigencies of international
trade. As Table 1 indicates, real gross investment increased from 220
million pesos in 1953 (about 11 percent of Cuba's GDP) to an average
annual level exceeding 480 million pesos in 1956-57 (nearly 19 percent
of GDP). The accelerated capitalization of the Cuban economy in sectors
other than sugar production is also reflected in the changing
composition of imports. The purchase abroad of fixed capital goods
(Table 2) climbed steeply from less than $100 million (20 percent of
total imports) in 1953 to an average of $207 million annually (27
percent of imports) during the two years 1957-58.

Of the fixed capital goods purchased abroad in 1957-58, 63 percent was
invested in industry, 10 percent in diversified agriculture, 13 percent
in motorized transport, and an equal share represented construction
equipment. The share of consumer goods, mainly foodstuffs, in total
imports fell from 46 percent to 1953-54 to 38 percent in 1957-58. These
data […] indicate that Cuba, in the 1950s, made important gains in
diminishing its dependency on the sugar sector.

U.S. DIRECT INVESTMENTS

Following World War II, Cuba's investment climate was one of the most
favorable in Latin America. The Constitution of 1940 guaranteed the
protection of property and established the judicial procedure for
special cases involving expropriation. Property could be expropriated
only for just cause involving a public utility or social interest and,
then, only through prior indemnification of the owner in cash as
determined by the courts.

In sharp contrast to the more general postwar experience in Latin
America, Cuba enjoyed financial stability through the period analyzed.
The cost of living remained relatively stable, the peso continued at par
with the U.S. dollar, and foreign exchange operations were free of
control. The magnitude of the nation's external public debt45 and the
debt-service ratio were of minor importance throughout the 1947-1958
period. Profits, interest, and other factor payments could be freely
remitted abroad and the risk of currency devaluation was negligible.

From 1946 on, new U.S. investments in Cuba assumed a highly diversified
pattern and flowed into a spectrum of Cuba's economic activities:
infrastructure, manufacturing and commerce, petroleum refining,
diversified agriculture, mining, and the tourist industry. The augmented
production capabilities represented by U.S. subsidiaries and branches in
Cuba were primarily directed to meet the requirements of the local
market. Of the $403 million increment in U.S. direct investments in
1946-59, petroleum refining accounted for $129 million, manufacturing
for $75 million, public services for $60 million, and commerce for $32
million. New investments in diversified agriculture, mining, and hotels
account for the remaining $107 million. These U.S. business investments
in Cuba were decisive in the growth of electric power and telephone
service, in the rapid advance of petroleum refining, and the mining of
nickel, and helped support the diversification and growth of
manufacturing. (...)

Total sales of Cuban subsidiaries and branches of U.S. firms were about
$730 million in 1957, of which $456 million (63 percent) were directed
to the local market and $273 million (37 percent) to foreign markets. Of
the $310 million agricultural sales, 80 percent were exported
(principally sugar), and the balance reflected U.S. operations in cattle
ranching, rice and tobacco growing. The preponderant share of the $150
million of manufactures sold by the U.S. affiliates (86 percent) was
absorbed by the Cuban market, as were also the sales of petroleum
products (98 percent). Exports of manufactured goods ($21 million)
comprised mainly processed nickel. The services provided by U.S.
affiliates—electric power, telecommunications, and public service
railroads— were sold exclusively to Cuban customers ($118 million).

U.S. firms operating in Cuba also made critical contributions to the
nation's balance of payments position in 1957 through export earnings
($273 million), net capital inflows ($88 million), and foreign exchange
saved through import substitution ($130 million). Offsetting these
contributions were income remittances plus fees and royalties (totaling
$56 million) and imports (other than imports of trading companies or of
petroleum to be processed in Cuba) amounting to roughly $100 million. By
this calculation, U.S. companies accounted for a direct net foreign
exchange gain or saving to Cuba on the order of $335 million.
(Analytically, one should deduct from this value an allowance for net
production which would be yielded by total resources operating without
the capital and organization provided by the U.S. subsidiaries.
Considering the (a) existence of substantial slack in the Cuban economy
and (b) the unlikelihood of Cuban entrepreneurs to engage in large-scale
mineral development, one can conclude that the above-noted adjustment
would not significantly alter the value added to Cuba's real national
income.)

The U.S. subsidiaries in Cuba employed an estimated 160,000 persons in
1957 and of 2,000 supervisory, professional, and technical personnel,
less than 500 were sent from the United States.48 Foreign subsidiaries
were cited by the World Bank Mission as "among those employers who pay
the highest wages and who, for the most part, scrupulously observe
Cuba's labor legislation." While employing only seven percent of Cuba's
labor force, the U.S. companies in 1957 accounted for one-third of the
island's merchandise export earnings and a little under one-fifth of
total government revenues. (…)

The participation of U.S. direct investments in the structure of the
Cuban economy in the latter 1950s was considerable, as indicated by the
following approximate shares: electric power and telephone service (90
percent), raw sugar production (37 percent), commercial banking (30
percent), public service railways (50 percent), petroleum refining (66
percent), insurance (20 percent), and nickel mining (100 percent).

Notwithstanding these large U.S. equity holdings in Cuba, it is very
important to observe that private Cuban groups succeeded in winning
ownership and control over economic activities formerly dominated by
U.S. and other foreign investors. The outstanding cases are sugar,
banking and insurance, and air transportation. A majority of the stock
in the leading airline, Compañía Cubana de Aviación, originally a
wholly-owned U.S. subsidiary, passed eventually into

Cuban hands.

From the 1930s on, Cubans purchased a large number of sugar mills from
U.S., Canadian, Spanish, Dutch, and French interests. [..] The U.S.
share of Cuban sugar production declined from 62 percent in 1935 to 37
percent in 1958. Other foreign investors, whose sugar mills produced 25
percent of Cuba's sugar in 1935, had sold virtually all of their
holdings by 1958. The divestiture of sugar mills by foreign enterprises
was accompanied by the transfer of cane land to Cuban ownership.
Significantly, the small farmers grew only nine percent of Cuba's cane
in 1932, but by 1958 their share was well over 50 percent. In
consequence, Cuban capital controlled three-fourths of the sugar mills;
and these, in turn, accounted for 62 percent of the island's sugar

production in 1958. Local business interests, whose share of Cuba's
sugar production had been reduced to a mere 13 percent in 1935, thus
regained their position of dominance after the Second World War.

Transfer of these foreign assets into Cuban ownership proceeded through
normal commercial channels and procedures—a manifestation of the
progressive maturation of the island's business community and postwar
prosperity.

ROBUST ECONOMY

On the eve of the Cuban Revolution, the island had an essentially
semi-industrialized market economy with a strong orientation toward the
United States— its predominant trading partner and external source of
direct investment. Cuba's relatively small population (6.5 million in
1958), its location on the threshold of the United States, the largest
"common market" in the world with which it had concluded preferential
trade agreements; its tropical climate; and specialized resource
endowment—these and other factors conditioned the island's intimate
commercial and financial ties with the United States.

(…)

The newly-installed Castro regime inherited an economy undergoing robust
investment in the nonsugar sector. Several industrial projects were
still in their development phase and continued into 1959. Domestic and
U.S. enterprises clearly were mobilizing their capital resources in
preparation for the anticipated Caribbean tourism boom of the 1960s of
which Cuba could have been the principal beneficiary.

Eric Baklanoff is a research professor emeritus of economics, finance
and legal studies at The University of Alabama. This column is based on
an excerpt from his presentation Cuba On The Eve Of The Socialist
Transition: A Reassessment Of The Backwardness-Stagnation Thesis
presented at the 8th Annual Meeting of the Association for the Study of
the Cuban Economy (ASCE) in Miami, Florida, August 6-8, 1998.
Republished with permission from the author.

Latin Business Chronicle (5 June 2009)

http://www.latinbusinesschronicle.com/app/article.aspx?id=2108