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 In 1998 the Government rescinded some of the changes that had led to the rise of legal nongovernmental business activity when it further tightened restrictions on the self-employed sector by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.
