Cuba's Economy

Cuba's Economy



Cuba has a dual economy, with two distinct systems operating side by

side. The socialist peso economy applies to most Cubans, providing them

with free education, free health care, universal employment,

unemployment compensation, disability and retirement benefits and the

basis necessities of life: food, housing, utilities and some

entertainment at very low cost. The free-market dollarized economy

operates in the tourist, international and export sectors, and

substantially sustains the socialist economy.



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 90%, with the only private employment

consisting of some 200,000 private farmers and some 100,000

"cuentapropistas," or private business owners.



The country's population is approximately 11 million. The Government

continues to control all significant means of production and remained

the predominant employer, despite permitting some carefully controlled

foreign investment in joint ventures. Foreign companies are required to

contract workers only through state agencies, which receive hard

currency payments for the workers' labor but in turn pay the workers a

fraction of this (usually 5 percent) in local currency. In 1998 the

Government rescinded some of the changes that had led to the rise of

legal nongovernmental business activity when it further tightened

restrictions on the self-employed sector by reducing the number of

categories allowed and by imposing relatively high taxes on

self-employed persons. In September 2000, the Minister of Labor and

Social Security publicly stated that more stringent laws should be

promulgated to govern self-employment.



The Cuban economy is still recovering from a decline in gross domestic

product of at least 35% between 1989 and 1993 due to the loss of Soviet

subsidies. 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 decline in tourism,

and a devastating November 2001 hurricane created new economic pressures

on the country, threatening to take back the few improvements made in

the mid- and late 1990s. Shortages of food and fuel increased dramatically.



Cuba experienced a surge in foreign tourist visits over the past decade,

from a few thousand in 1990 to 1.4 million in 1998. In the mid 1990s

tourism surpassed sugar, long the mainstay of the Cuban economy, as the

primary source of foreign exchange. Tourism figures prominently in the

Cuban Government's plans for development, and a top official cast is 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

2000, generating about $1.9 billion in gross revenues, but the

government's hopes for continued growth in this sector were unrewarded

by the downturn in the global economy in 2001 and the negative effects

on tourism regionally after September 11. The final figures for 2001

show negligible growth in the number of tourists and no change in gross

revenues over 2000. The prospects for 2002 are for decreased tourist

arrivals and revenues.



Remittances play a large role in Cuba's accounts, accounting for between

$800 million and $1 billion per year to an $18.6 billion economy. The

majority of remittances come from families in the United States that are

permitted by U.S. law to send to the island up to $1,200 in a year. This

provides nearly 60% of the Cuban population with some access to dollars.

The Cuban Government tries to capture these dollars by allowing Cuban

citizens to shop in "dollar stores" and expanding the categories of

goods that can only be purchased with dollars. Last year's global

economic slump delayed and reduced remittances, which contributed to

Cuba's faltering economic growth. 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. Plans are to align production with world prices and

close almost half the existing sugar mills, laying off more than 100,000

workers. These workers will be "retrained" in other fields and given new

jobs.



To help keep the economy afloat, Havana actively courts 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 practically nonexistent. By the end of 2000,

nearly 400 joint ventures were operating in Cuba, representing

investment by 46 countries of between $4.2 billion and $4.5 billion,

although about 70 of these would not be considered foreign investment by

international standards because they operate outside of the country.

Many of these investments are loans or contracts for management,

supplies, or services normally not considered equity investment in

Western economies. Investors are 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. As of

August 2002, 18 executives of two foreign companies have been excluded

from entry into the United States. 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 1993 the Cuban Government made it legal for its people to possess and

use the U.S. dollar. Since then, the dollar has become the major

currency in use. To capture the hard currency flowing into the island

through tourism and remittances--estimated at $800 million to $1 billion

annually--the government has set up state-run dollar stores throughout

Cuba that sell food, household, and clothing items. 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 common to

meet doctors, engineers, scientists, and other professionals working in

restaurants or as taxi drivers.



To provide jobs for workers laid off due to the economic crisis, furnish

services the government was having difficulty providing, and to try to

bring some forms of black market activity into legal--and therefore

controllable--channels, Havana in 1993 legalized self-employment for

some 150 occupations. The government tightly controls the small private

sector by regulating and taxing it. For example, owners of small private

restaurant can seat no more than 12 people and can only employ family

members to help with the work. 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

have reduced private sector employment from a peak of 209,000 to

approximately 108,000 in 2000. 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.



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.



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%.



According to official figures, the economy grew 3.6 percent during 2001.

Despite this, overall economic output remained below the levels prior to

the drop of at least 35 percent in gross domestic product (GDP) that

occurred in the early 1990's. This drop was due to the inefficiencies of

the centrally controlled economic system; the loss of billions of

dollars of annual Soviet bloc trade and Soviet subsidies; the ongoing

deterioration of plants, equipment, and the transportation system; and

the continued poor performance of the important sugar sector. The

2000-2001 sugar harvest was more than 3.5 million tons, the second worst

harvest in more than 50 years. In November Hurricane Michelle killed

five persons and caused severe damage to tens of thousands of homes, the

telecommunications system, and the electrical infrastructure; it also

destroyed much of the export-earning citrus crops and affected 54

percent of the sugar crop. The Government continued its austerity

measures known as the "special period in peacetime," which were

instituted in early 1990's. Agricultural markets provide consumers wider

access to meat and produce, although at prices beyond the reach of most

citizens living on peso-only incomes or pensions. Given these

conditions, the flow of hundreds of millions of dollars in remittances

from the exile community significantly helped those who received dollars

to survive. Tourism remained a key source of revenue for the Government.

The system of so-called "tourist apartheid" continued, with foreign

visitors who paid in hard currency receiving preference over citizens

for food, consumer products, and medical services. Most citizens

remained barred from tourist hotels, beaches, and resorts.



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