Economic Overview

     For much of its history, Cuba was one of the more prosperous countries in Latin America. Under Castro, however, highly centralized economic control, flawed policies, and corruption have slowed economic growth, particularly in recent years.

     The state plays the primary role in the economy and controls practically all foreign trade. Under the slogan "Socialism or Death," the Cuban Government continues to proclaim Cuba a socialist or communist nation with an economy organized under Marxist-Leninist precepts. Most means of production are owned and run by the government. About 75% of the labor force is employed directly by the state.
     Responsibility for running the economy and for economic policy rests with the Council of State, although the government has devolved some authority to ministries and enterprises in recent years.

     Minimal public services are provided by the state, either free of charge or for nominal fees. Access to education generally is adequate, but urban housing and medical facilities have deteriorated, as has transportation.

Other aspects of Cuba's economy can be found in the following:

Current Economic Development
Soviet Subsidies
International Investments
Tourism
Sugar Production
Economic Growth

Statistics
     Economy
     Communication
     Transportation

Current Economic Development

     The government has undertaken several reforms in recent years to stem excess liquidity, increase labor incentives, and alleviate serious shortages of food, consumer goods, and services.

     In 1997, the Cuban Government created the Cuban Central Bank to play a role in monetary policy similar to that of a central bank in a market economy. The National Bank of Cuba continued as a commercial bank, and the Cuban Government is creating additional commercial banks. Some foreign banks have begun limited operations in Cuba.

     The major sectors of the Cuban economy are tourism, nickel mining, and agriculture, especially sugar and tobacco. Sugar, long the mainstay of the Cuban economy, was surpassed by tourism in the late 1990s as the main source of foreign exchange. Remittances from abroad, estimated at $500 - 800 million annually, are a major source of income in Cuba, and help sustain many families. An estimated 40% of the population have access to dollars. The Cuban Government stopped producing its annual statistical survey on the Cuban economy in 1990.

     The Cuban Government defaulted on most of its international debt in 1986, and remains outside of international financial institutions such as the World Bank. To finance imports, the government relies heavily on short-term loans. 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%.

     Economic growth resumed in the mid-1990s after the Cuban Government launched a concerted program to attract foreign tourism and investment. The Cuban Government estimated growth in 1997 at 2.5%. Estimated per capita income in 1997 was $1,540. Living conditions in 1998 are well below the 1990 level.

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Soviet Subsidies

     The Cuban economy suffered a 35% decline in gross domestic product between 1989 and 1993 because of the loss of Soviet subsidies. In October 1990, Castro announced that Cuba had entered a "special period in time of peace" and that the economy would function as if in time of war until the crisis had passed. Most goods are now rationed, and many previously imported from the Soviet Union simply have disappeared.

     To deal with the severe shortages brought on by the end of Soviet subsidies and the failure of socialist economic policies, the Cuban Government in the mid-1990s permitted Cubans to offer certain services privately under strict government regulation and scrutiny. It appears that employment in this sector peaked in 1996 at around 206,000 and fell in 1997 to about 170,000.
      In 1997, the Cuban Government introduced heavy taxes on this sector which forced many out of business. In 1994, the government introduced agricultural markets at which state and private farmers could sell at market prices what they have produced above the quota required by the state. This has helped to alleviate grave food shortages and nutritional problems.

     A popular example of this kind of venture has been small restaurants in private homes, known as "paladares." These seek to serve international visitors, but are subject to rules limiting employment of anyone outside of the owner's immediate family and forbidding sales of lobster or shrimp. Such rules are frequently violated, but restaurants and other entities are often closed for minor infractions.

     Government efforts to lower subsidies to unprofitable enterprises and to shrink the money supply caused the peso's black market value to move from a peak of 120 to the dollar in the summer of 1994 to a low of 18-20 to the dollar in late September before climbing to 20-21 at the end of 1996.

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International Investments

     While continuing to limit private investment by Cuban citizens, the Cuban Government is actively courting international investment. It has attracted investment from Canada, Italy, the United Kingdom, Mexico, Spain, France, and other countries. Foreign entities can own up to 100% of the equity of an investment. Estimates of the amount of international investment paid in vary widely, but it is thought to be between $1.1 billion to $1.4 billion since 1990.

     Cuban officials said early in 1998, there were a total of 332 joint ventures. Many of these are loans or contracts for management, supplies or services, normally not considered equity investment in Western economies. Nevertheless, Cuban officials said in early 1998, that they intend to be more selective in the investment they permit in Cuba.
      Investors are constrained by the U.S. Cuban Liberty and Democratic Solidarity Act (also known as the Libertad or Helms-Burton Act) which provides for sanctions for those who "traffic" in property expropriated from U.S. citizens. As of March 1998, 15 executives of three foreign companies have been excluded from entry into the U.S. Over a dozen companies had pulled out of Cuba or altered their plans to invest there due to the threat of action under the Libertad Act.

     Another focal point for international investment that is significant to Cuba's economy stems from the Juragua nuclear power plant. Despite the fact that Cuba is not a party to the Nuclear Non-Proliferation Treaty (NPT), it signed the Treaty of Tlatelolco, a Latin American regional non-proliferation regime, but has not ratified the treaty and brought it into force. Cuba has entered into an agreement with the IAEA to apply safeguards to individual nuclear facilities, including the partially completed Juragua nuclear power plant. The reactors that would be installed are of the VVER-400 type, an advanced model of the Soviet pressurized water reactor. There are serious concerns about the safety of the plant. However, since the plant does not appear to be economically viable, no international investors have been willing to provide funds for completion of the facility.

Tourism

     Tourism, a top Cuban official said, is the "heart of the economy." The Cuban Government is stressing its beaches and has actively encouraged sex tourism to attract Europeans, Canadians, and Latin Americans. Cuban officials expect 1.4 million tourists in 1998, an increase of 20% over 1997. The Cuban Government forecasts 1998 gross revenue from tourism as $1.8 billion. 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. Many businesses, including many run by the Cuban Government, and individuals do not accept Cuban pesos.

     Those with access to dollars can purchase imported goods at government-run dollar stores that are not accessible to average Cubans with pesos who must shop in under stocked peso stores. Thus, those jobs that can earn dollar tips from foreign tourists and business traveler shave become highly desirable. It is not uncommon to meet skilled doctors, teachers, engineers, and scientists working in restaurants or as taxi drivers.

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Sugar Production

     Sugar remains an important part of the Cuban economy, with large amounts of land, labor, and other resources dedicated to its production. Sugar production in 1989 was over 8 million tons, but fell to about 3.5 million tons in the 1994-1995 sugar harvest, one of the worst on record. With increased fertilizers and management attention, the 1995-1996 harvest improved, according to official Cuban estimates, to about 4.4 million tons.
     Cuba was unable to sustain this level of output, however, and the 1996-1997 harvest declined. The threat of U.S. actions against those who finance the sugar harvest--where there are extensive numbers of confiscated properties--had a major impact on the 1996-97 harvest. Prospects for future harvests are considered poor unless the Cuban Government undertakes substantial reform of the sugar industry, something it has not been willing to do.

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Economic Growth

     Havana announced in 1995 that GDP declined by 35% during 1989-1993, the result of lost Soviet aid and domestic inefficiencies. The drop in GDP apparently halted in 1994, when Cuba reported a 0.7% growth. Government officials claimed that GDP increased by 2.5% in 1995 and 7.8% in 1996.
     Export earnings rose an estimated 40% in 1996 to $2.1 billion, largely on the strength of increased sugar shipments to Russia and higher nickel production through a joint venture with a Canadian firm. With the economic recovery, imports rose for the second straight year, growing by an estimated 26% to $3.5 billion. Living standards for the average Cuban, however, have not improved significantly.

     Cuban failure to launch serious economic reforms has led to the development of a large black market and growing corruption.

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