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Government rescinded some of the changes that had led to the rise of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