Economy of Cuba

From Wikipedia, the free encyclopedia

The economy of Cuba is a largely state-controlled, planned economy overseen by the Cuban government, though there remains significant foreign investment and enterprise in Cuba. Most of the means of production are owned and run by the government and most of the labor force is employed by the state. There is a trend towards more private sector employment. In the year 2000, the public sector employment was 76% and the private sector at 23% compared to the 1981 ratio of 91% to 8%.^[1] Capital investment is restricted and requires approval by the government. The Cuban government sets most prices and rations goods to citizens. The present Cuban Minister of Economy and Planning is José Luis Rodríguez García.

[edit] Special Period

Main article: Special Period

The Cuban economy is still recovering from a decline in gross domestic product of at least 35 percent between 1989 and 1993 due to the loss of 80 percent of its trading partners and Soviet subsidies. This era was referred to as the "Special Period in Peacetime" later shortened to "Special Period". The government has undertaken several reforms in recent years to stem excess liquidity, increase labour incentives, and alleviate serious shortages of food, consumer goods, and services. To alleviate the economic crisis, the government introduced a few market-oriented reforms including opening to tourism, allowing foreign investment, legalizing the U.S. dollar (although later partially reverted so that the US dollar is no longer accepted in businesses, it remains legal for Cubans to hold the currency), and authorizing self-employment for some 150 occupations. These measures resulted in modest economic growth. The liberalized agricultural markets introduced in October 1994, at which state and private farmers sell above-quota production at free market prices, have broadened legal consumption alternatives and reduced black market prices.

Government efforts to lower subsidies to unprofitable enterprises and to shrink the money supply caused the semi-official exchange rate for the Cuban peso to move from a peak of 120 to the dollar in the summer of 1994 to 21 to the dollar by yearend 1999. Living conditions in 1999 remained well below the 1989 level. New taxes introduced in 1996 have helped drive down the number of self-employed workers from 208,000 in January 1996.

Havana announced in 1995 that GDP declined by 35% during 1989-93, the result of lost Soviet aid and domestic inefficiencies. The drop in GDP apparently halted in 1994, when Cuba reported 0.7% growth, followed by increases of 2.5% in 1995 and 7.8% in 1996. Growth slowed again in 1997 and 1998 to 2.5% and 1.2% respectively. One of the key reasons given was the failure to notice that sugar production had become dramatically uneconomic. Reflecting on the Special period Cuban president Fidel Castro later admitted that many mistakes had been made, “The country had many economists and it is not my intention to criticise them, but I would like to ask why we hadn’t discovered earlier that maintaining our levels of sugar production would be impossible. The Soviet Union had collapsed, oil was costing $40 a barrel, sugar prices were at basement levels, so why did we not rationalize the industry.[1]’’

[edit] Recovery

Growth recovered again in 1999 with a 6.2% increase in GDP, due to the continued growth of tourism. Central control is complicated by the existence of the informal economy. Growth in recent years has picked up significantly, with a growth in GDP of 11.8% in 2005 alone, according to official Cuban information. Due to the reliance on declining Soviet era electricity generators, many areas of Cuba suffer frequent blackouts and brownouts for extended periods, creating additional pressure on society. To counter these problems, Cuba is currently undergoing an "Energy Revolution", with increased emphasis on efficient use of electrical energy and the innovative use of more efficient small-power generators linked in a synchronized network. There is talk of increasing the implementation of solar- and wind-powered generators. Though development was further hampered by large-scale damage created by Hurricane Dennis and Hurricane Wilma, which cut Cuba's electricity generation capacity by half in the areas most affected. As noted below, some argue that Venezuela now provides oil virtually for free on a scale equivalent to 1/2 to 1/3 of the former Soviet aid.

[edit] Tourism

Main article: Tourism in Cuba

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 it as the "heart of the economy". Havana devotes significant resources to building new tourist facilities and renovating historic structures for use in the tourism sector. Cuban officials estimate roughly 1.6 million tourists visited Cuba in 1999 with about $1.9 billion in gross revenues.

The rapid growth of tourism has had widespread social and economic repercussions in Cuba. This has led to speculation of the emergence of a two-tier economy^[2] and the fostering of a state of tourist apartheid on the island. This situation was exacerbated by the influx of dollars into the Cuban economy during the 1990s, potentially creating a dual economy based on the dollar (the currency of tourists) on the one hand, and the peso on the other. Scarce imported goods - and even some of local manufacture, such as rum and coffee- could be had at dollars-only stores, but were hard to find or unavailable at peso prices. As a result, Cubans who earned only in the peso economy, outside the tourist sector, were at an economic disadvantage. Those with dollar incomes based upon the service industry began to live more comfortably. This widened the gulf between Cubans' material standards of living, in conflict with the Cuban Government's long term socialist policies.^[3]

[edit] Agriculture

Main article: Agriculture of Cuba

Sugar remains an important part of the Cuban economy with large amounts of land, labour, and other resources dedicated to the industry. Sugar production in 1989 was over 8 million tons, but fell to about 3.5 million tons in the 1994-95 harvest, one of the lowest on record. With increased fertilizers and management attention, subsequent harvests have improved but remain well below the 1989 level. Prospects for regaining that level of output are poor unless the Cuban Government undertakes substantial reform of the sugar industry, something it has been reluctant to do, since it has become government policy to substantially and deliberately phase out the sugar industry.

[edit] Industry

Oil pumps in Cuba

More recently Cuba's world-class biotechnology and pharmaceutical industry is gaining in its importance to the economy. It has been claimed that soon it will become Cuba's main source of foreign exchange. Among the products sold internationally are vaccines against various viral and bacterial pathogens, and promising anti-cancer vaccines are undergoing exhaustive clinical trials. Some Cuban scientists, like V. Verez-Bencomo, have been awarded international prizes for their contributions in biotechnology. Cuban vaccines are sold, among other countries, in Russia, China, India, Pakistan, and several Latin American countries.

[edit] International trade

The Netherlands receive the largest share of Cuban exports (22.8%)^{[citation needed]}, 70 to 80% of which through Fondel Finance, a company owned by the Van 't Wout family who have close personal ties with Fidel Castro. Business, however, goes through the ministers and the family expect that after Castro's death little will change - possibly a change in the form of government that will give the ministers more influence.

[edit] Foreign Investment

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. However, as part of an economic agreement with Venezuela, Venezuelans are allowed to hold 100% ownership in businesses. Cuban officials said in early 1998 that 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. Investors are constrained by the U.S.-Cuban Liberty and Democratic Solidarity Act which provides 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 United States.^{[citation needed]} Over 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.^{[citation needed]}

Tobacco plantation, Pinar del Rio

US Dollar

In 1993 the Cuban Government made it legal for its people to possess and use the U.S. dollar, nicknamed fula. From then until 2004, the dollar became a major currency in use. To capture the hard currency flowing into the island through tourism and remittances - estimated at $500-800 million annually - the government set up state-run "dollar stores" throughout Cuba that sold 'luxury' food, household, and clothing items, compared with basic necessities, which were bought using the Cuban peso. As such, a gap in the standard of living developed between those with access to dollars and those without. Jobs that could earn dollar salaries or tips from foreign businesses and tourists became highly desirable. It was common to meet doctors, engineers, scientists, and other professionals working in restaurants or as taxi drivers.

However, in response to stricter economic sanctions by the US, and because the authorities were pleased with Cuba's economic recovery, the Cuban government decided in October 2004 to remove the American dollar from circulation. In its place, the Cuban convertible peso is now used, which although not internationally traded, has a value pegged to that of the dollar. A 10% surcharge is levied for conversions from US dollars to the convertible peso, to discourage the entry of dollars into the country; this surcharge does not apply to other currencies, so it acts as an encouragement to tourists to bring currencies like Euros, pounds sterling or Canadian dollars into Cuba. Indeed, an increasing number of areas rich in tourism now also accept Euros directly for many transactions.

[edit] Biotechnology and Informatics

Since the very beginning of revolution, the idea of a more diversified and more sophisticated production of wealth in the island was present. In an early speech Fidel Castro announced that "the future of Cuba ought necessarily to be a future of men doing science". In the mid 80's and during all the 90's this dream grew as a set of Biotechnology I+D institutions at the west of Havana. The so called polo cientifico del oeste is a biotechnological park, located at the west of Havana, and with some tens of institutions devoted to the development of human, animal and agricultural biotechnology. This park is claimed to be a successful experiment of Cuba’s economy, as it was able to create first world standard biotechnology institutions, with several patented drugs and a net annual income of some hundred million US dollars. Although most of the small institutions have a negative net balance and rely on government subsides, successful vaccines and drugs from bigger institutions, like CIGB and CIM greatly overcome the deficit, and put this sector as one of the most important in Cuban economy.

In recent years, the Cuban government decided to make a big investment in a similar experiment, this time creating a technological park and a nearby Computer Science University intended to be an Informatics analogue of the successful Biotechnology adventure. Although in both cases market is a big issue, Cuba is relying in its world recognized high educational level for the fast developing of these new knowledge based economy.

[edit] Self-Employment

To provide jobs for workers laid off due to the economic crisis, 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, which has fluctuated in size from 150,000 to 209,000, by regulating and taxing it. For example, owners of small private restaurants (paladares) can seat no more than 12 people^{[citation needed]} 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. In recent years there has developed what is called "urban agriculture," production which takes place on small parcels of land in the cities. Growing organopónicos (organic gardens) in the private sector has been attractive to city dwelling small producers who get to sell their products in the same place where they produce them, avoiding taxes and enjoying a measure of government help from the Ministry of Agriculture (MINAGRI) in the form of seed houses and advisors.

[edit] Connection with Venezuela

The relationship cultivated between Cuba and Venezuela in recent years has resulted in agreements that Venezuela provide cheap oil in exchange for Cuban "missions" of doctors which aid and help to improve the Venezuelan health care system. Cuba, with the second-highest per capita number of physicians in the world (behind Italy), sends tens of thousands of doctors to other countries as aid, as well as for obtaining favorable economic terms of trade.

According to some experts, this is virtually for free. While Venezuela says that Cuba is paying part of the bill with the professionals, medicines, books and other items that Cuba sends, some independent analysts say the numbers don't add up. Havana would have to be collecting about $80,000 per year per Cuban worker in Venezuela to cover the costs of its oil imports, the analysts say. Instead, Cuban doctors in Venezuela receive about $3,000 per year, according to three Cuban doctors who defected from the program. The White House's point man on plans for a post-Castro transition, Caleb McCarry, recently told The Miami Herald that U.S. estimates of total Venezuelan subsidies to Cuba per year "are up to the $2 billion figure." This can be compared to the $4 billion to $6 billion that Moscow once pumped into Cuba per year.[2]

[edit] Economic Freedom

The 2006 Index of Economic Freedom Report ranks Cuba 150 out of 157 nation surveyed. The report states typical imports are food, fuel, clothing, and machinery. Exports include nickel, cigars, and state-sponsored labor, for which the government charges many times what it pays in state salaries. Lacking investment, Cuba's sugar industry is no longer viable: The island has become a net importer. Venezuela now supplies up to 80,000 barrels of oil per day on generous credit terms, although Cuba produces small amounts of poor-quality sulfurous crude on its own. Venezuelan assistance has also enabled Cuba to retreat on limited liberal reforms such as allowing self-employment in careers like snack vending and bicycle repair.[3]

[edit] Other Statistics

Electricity - production: 15,650 GWh (2004)

Electricity - production by source:
fossil fuel: 89.52%
hydro: 0.65%
nuclear: 0%
other: 9.83% (1998)

Electricity - consumption: 14.62 TWh (2003)

Electricity - exports: 0 kWh (2003)

Electricity - imports: 0 kWh (2003)

Agriculture - products: sugarcane, tobacco, citrus, coffee, rice, potatoes, beans; livestock

Exports - commodities: sugar, medical products, nickel, tobacco, shellfish, citrus, coffee

Imports: $6.916 billion f.o.b. (2005 est.)

Imports - commodities: petroleum, food, machinery, chemicals

Imports - partners: Spain 14.7%, Venezuela 13.5%, US 11%, China 8.9%, Canada 6.4%, Italy 6.2%, Mexico 4.9% (2004)

Current account balance: $-748 million (2005 est.)

Debt - external: $13.1 billion (convertible currency); another $15-20 billion owed to Russia (2005 est.)

Economic aid - recipient: $68.2 million (1997 est.)

Exchange rates: Cuban pesos (CUP) per US$1 - 25 (2005) (nonconvertible, official rate, linked to the US dollar)

[edit] Notes

1. ^ Social Policy at the Crossroads Oxfam America Report
2. ^ Tourism in Cuba during the Special Period
3. ^ Lessons From Cuba Travel Outward

[edit] See also

Cuba Portal

• Agriculture of Cuba
• United States embargo against Cuba
• Sociolismo
• Rationing in Cuba
• Ubre Blanca the Cuban cow used by Fidel Castro in the 1980s to symbolise Cuba's economy

[edit] External links

• Economic Illegalities and the Underground Economy in Cuba by Archibald Ritter, Professor of Economics, Carleton University
• Association for the Study of the Cuban Economy (ASCE)
• What Castro wants- Time Story about the U.S. embargo.
• Cuba Comes in from the Cold- Council on Hemispheric Affairs
• Cuba: An economic tiger in the Caribbean?
• Russia negotiating Cuba debt and fresh credit
• Cuba's debt to Spain

v • d • e

World Trade Organization (WTO)

Albania • Angola • Antigua and Barbuda • Argentina • Armenia • Australia • Bahrain, Kingdom of • Bangladesh • Barbados • Belize • Benin • Bolivia • Botswana • Brazil • Brunei Darussalam • Burkina Faso • Burundi • Cambodia • Cameroon • Canada • Central African Republic • Chad • Chile • China • Colombia • Congo • Costa Rica • Cote d'Ivoire • Croatia • Cuba • Democratic Republic of the Congo • Djibouti • Dominica • Dominican Republic • Ecuador • Egypt • El Salvador • European Communities¹ • Fiji • Former Yugoslav Republic of Macedonia (FYROM) • Gabon • The Gambia • Georgia • Ghana • Grenada • Guatemala • Guinea • Guinea Bissau • Guyana • Haiti • Honduras • Hong Kong, China • Iceland • India • Indonesia • Israel • Jamaica • Japan • Jordan • Kenya • Korea, Republic of • Kuwait • Kyrgyz Republic • Lesotho • Liechtenstein • Macao, China • Madagascar • Malawi • Malaysia • Maldives • Mali • Mauritania • Mauritius • Mexico • Moldova • Mongolia • Morocco • Mozambique • Myanmar • Namibia • Nepal • New Zealand • Nicaragua • Niger • Nigeria • Norway • Oman • Pakistan • Panama • Papua New Guinea • Paraguay • Peru • Philippines • Qatar • Rwanda • Saint Kitts and Nevis • Saint Lucia • Saint Vincent & the Grenadines • Saudi Arabia • Senegal • Sierra Leone • Singapore • Solomon Islands • South Africa • Sri Lanka • Suriname • Swaziland • Switzerland • Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu • Tanzania • Thailand • Togo • Trinidad and Tobago • Tunisia • Turkey • Uganda • United Arab Emirates • United States of America • Uruguay • Venezuela (Bolivarian Republic of) • Vietnam • Zambia • Zimbabwe

¹ All twenty-seven member states of the European Union are also members of the WTO in their own right:
Austria • Belgium • Bulgaria • Cyprus • Czech Republic • Denmark • Estonia • Finland • France • Germany • Greece • Hungary • Ireland • Italy • Latvia • Lithuania • Luxembourg • Malta • Netherlands (— For the Kingdom in Europe and for the Netherlands Antilles) • Poland • Portugal • Romania • Slovakia • Slovenia • Spain • Sweden • United Kingdom