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Cuba's Economy

Thje year 2020 was a tough year for those workers employed in the country’s tourism sector, which had been decimated by coronavirus-related travel restrictions and the Trump administration’s harsh policies toward the island. Tourists who typically flocked to the island nation’s beaches and city streets to hear Cuban music, enjoy a meal and experience its unique culture likely won’t return until widespread vaccination makes international travel more feasible.

The Cuban government formally ended its dual currency system on 01 January 2021, devaluing its peso for the first time since the 1959 revolution that swept the late Fidel Castro to power. The government set the exchange rate at 24 Cuban pesos to $1, and the convertible Cuban peso, known as the CUC, would be phased out completely by June, leaving the island with one currency for the first time in more than 20 years. The so-called Restructuring Task, promoted by the government, implies unifying the current exchange rates, the cessation of the circulation of the convertible peso, and a general reform of salaries and prices, with the gradual elimination of excessive subsidies and undue gratuities.

Marino Murillo, member of the Political Bureau of the Cuban Communist Party and head of the Commission for the Implementation of the Guidelines, explained that this is an interdisciplinary and transversal process for the Cuban economy. It seeks, he said, to solve macroeconomic imbalances, reduce budget deficits, favor productive incentives and improve efficiency and competitiveness at international level.

Cuban President Miguel Díaz-Canel said, monetary and exchange rate unification is not the magic solution to economic and financial problems, "but it should lead us to increased labor productivity and a more efficient performance of the productive forces." He reiterated the importance and significance of this step, "which will put the country in a better position to carry out the transformations demanded by the updating of our economic and social model on the basis of guaranteeing all Cubans greater equality of opportunities, rights and social justice."

After the collapse of the Soviet Union, when Havana legalised the use of the US dollar alongside the Cuban peso in 1993. The use of US dollars had been banned in 2004 when the government created the CUC. The CUC had been used for state business and buying goods from abroad, but it can’t be taken out of the country.

The Economist Intelligence Unit estimated the Cuban economy grew 0.5% in 2019 but will contract 0.7% in 2020. The Cuban economy has been hard-hit by the reimposition of, and increase in, U.S. sanctions that impede international financial transactions with Cuba and by Venezuela’s economic crisis, which has limited Venezuela’s support to Cuba.

On 06 September 2019 the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended the Cuban Assets Control Regulations (CACR) to further implement President Trump’s June 2017 National Security Presidential Memorandum (NSPM) Strengthening the Policy of the United States Towards Cuba. These actions mark an ongoing commitment to implement the President’s Cuba policy. Previously, on June 5, 2019, OFAC further restricted non-family travel to Cuba by removing an authorization for group people-to-people educational travel, pursuant to an April 17, 2019 foreign policy announcement.

Cuban President Miguel Díaz-Canel on 28 February 2020 responded to the suspension of the sending of remittances to the island from outside the United States applied by the Western Union company, a decision attributed to the hardline policies of U.S. President Donald Trump. “Another measure against the Cuban people. This is how the empire acts, with total arrogance and contempt, but no one will stop us,” the Cuban president wrote. Remittances are a vital source of income for Cuba, a country that for years has had an endemic balance of payments deficit and is currently facing a worrying economic crisis due to lack of foreign exchange, which makes it difficult for the island to acquire basic products and prevents the State from complying with part of its financial commitments.

President Raul Castro said Cuba was going through some adverse circumstances and but rejected any notion of an imminent economic collapse. The socialist leader addressed his country during a plenary session of the National Assembly in Havana. Castro gave a sober speech on 08 July 2016 about his country's economic challenges but insisted that measures were being taken to lesson the impact of a potential downturn on the Cuban people, who he said will continue to grow and develop under the Cuban model of socialism.

Raul Castro told Cubans to prepare for tough times ahead, as the Communist country must cut spending and energy supply as it delt with a cash crunch and reduced oil imports from ally Venezuela. Cuban economic growth slowed to 1 percent in the first half of this year from 4.7 percent in the same period of 2015, Castro told the mid-year session of the National Assembly. This was half of what the government had forecast.

Venezuela is Cuba's key ally and main trade partner, as a result, the current crisis in the South American country is having a negative spillover effect on the island's economy. However, the Cuban president ratified the solidarity and commitment of his country to the Bolivarian Revolution led by President Nicolas Maduro and the Venezuelan people.

The government was working to increase the purchasing power of the Cuban peso, such as lowering the prices of essential goods. The country has a complex system of parallel currencies—the peso for Cubans, a convertible peso for tourists, and multiple other exchange rates. This alone renders international comparisons about things like market size or production capacity difficult.

The impact of removing all barriers to US–Cuba travel is uncertain, but it is the focus of much interest in the region. Tourism is the main driver of growth and employment in many of the island countries in the Caribbean, where Cuba is a giant, not only in land size but as a tourist destination too. After Cancún in Mexico and the Dominican Republic, Cuba is the third largest destination for tourists in the Caribbean.

There is substantial potential for increased foreign investment and commercial engagement in Cuba’s economy. The tourism and agriculture sectors offer two recent examples for such engagement. Cuba has long maintained strong education and primary healthcare systems, producing a talented workforce that appears eager to participate more fully in the globalized economy of the 21st century. Cuba has also fostered an innovative biopharmaceutical sector that appears capable of further international growth.

Cuba is famous for its hand-rolled cigars made from high quality tobacco leaves cultivated on the island. It's the result of a tradition passed from generation to generation and highlighted by the Habanos International Cigar Festival held every year in Havana. Western Cuba has lands gifted with high fertility levels and local climate, which favor the cultivation of tobacco, an aromatic plant grown here for over five centuries. Habanos leaders said their company as of 2020 was marketing 27 cigar brands worldwide and that the company earned over $500 million in 2019, which affirms the importance of this export product for the Cuban economy.

Cuba's Economy - Background

Cuba is a relatively small market of about 11 million people. Its close proximity to the United States makes it a natural trading partner, yet since 1960, the United States has maintained economic sanctions against Cuba that preclude normal trade relations. Cuba maintains a centrally planned economy, with prices and wages largely set by the government.

Despite the almost subsistence-level wages of most Cubans, they are generally much better off than citizens of many other developing countries because their meager salaries are supplemented with free education, subsidized medical care, housing, and some subsidized food. In terms of the Human Development Report’s human poverty index (HPI), which focuses on the proportion of people below a threshold level in basic dimensions of human development — living a long and healthy life, having access to education, and a decent standard of living — Cuba ranked an impressive fifth in Latin America and the Caribbean in 2003.

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.

Cuba announced on 08 July 2013 its readiness to reform state-owned enterprises in 2014 by granting them more autonomy. It is necessary to change the rules and remove all the obstacles to the management system, Vice President Marino Murillo said during the last session of the National Assembly of People's Power (parliament). "If we don't transform the socialist state companies positively, we won't be able to bring up to date the Cuban economic model," he said. Murillo said that one of the changes is to lift limits over the payment of wages. Meanwhile, all the state-owned companies will be able to use 50 percent of their profits after tax, which will enable the companies to recapitalize and make their own investments. Despite the rising role of the private sector, the state-run companies will continue to be the most important link in the chain of Cuban economic model, he noted.

In power for five decades, Fidei Castro converted Cuba into a Marxist-Leninist society with no individual freedoms or private property and with a Soviet-style centrally planned economy (see Glossary) run by a vast and cumbersome bureaucracy that has stifled innovation, productivity, and efficiency. Despite massive Soviet aid, the Cubans sank to unprecedented levels of poverty, aggravated further by the collapse of communism in the former Soviet Union and Eastern Europe.

In the early 1980s, the Cuban Revolution reached a critical stage in its development. Persistent structural and managerial problems in the economy, low prices for Cuba's export products, and an inability to break away from economic dependence on the Soviet bloc forced a reexamination ofbasic goals. Because production in most key sectors had fallen short of expected targets, emphasis was placed on increased planning with more modest goals. The regime adopted Soviet economic methods, decreased emphasis on moral incentives, and attempted to create more efficient economic organizations. In the process, the Cubans suffered more austerity, with greater rationing offood and consumer goods, and, therefore, harder times.

The collapse of communism in the early 1990s had a profound effect on Cuba. Soviet economic subsidies to Cuba ended as of January 1, 1991. Without Soviet support, Cuba was submerged in a major economic crisis. The gross national product contracted by as much as one-half between 1989 and 1993, exports fell by 79 percent and imports by 75 percent, the budget deficit tripled, and the standard of living of the population declined sharply. The Cuban government refers to the economic crisis of the 1990s and the austerity measures put in place to try to overcome it euphemistically as the “special period in peacetime.” Minor adjustments, such as more liberalized foreign investment laws and the opening of private (but highly regulated) small businesses and agricultural stands, were introduced. Yet the regime continued to cling to an outdated Marxist and caudillista (dictatorial) system, refusing to open the political process or the economy.

The international dimensions of the Cuban government's strategy for survival required the active cultivation of foreign investment and, therefore, of better political relations with market-economy countries. To resist the increased United States economic and political pressures on Cuba, Fidel Castro's government needed to find some international support.

Fifteen years after the demise of the Soviet Union the Cuban Government found in Hugo Chavez’s Venezuela a new benefactor. The politically motivated preferential relationships with this country have replaced tourism as the main engine of growth for the Cuban economy since the second half of 2004. Its main component has been the exchange of medical services for oil at indexed prices and with long-term financing of up to 50% at subsidized interest rates. The transfer of financial resources from Venezuela to Cuba has also materialized in credits for projects at concessionary interest rates, the creation of joint ventures and a large number of cooperation projects.

As a whole, the preferential economic relationship with Venezuela allowed the Cuban Government to more than double its import capacity, which had historically been closely related to GDP growth, and to carry out multibillion dollar investments both in infrastructure and productive sectors. This factor, together with almost tripled nickel prices in the world market between 2004 and 2008, explains the high growth rates registered in this period, but also allowed (now former) President Fidel Castro to start reversing some of the liberalizing and decentralizing reforms introduced in the 1993-2003 period.

In the fall of 2008 three hurricanes severely battered the island's economy prompting many to speculate that the system could not recover from the devastation. However, nearly all observers have been amazed at the steady progress the GOC has made in restoring the miserable but adequate quality of living in place before the disasters. The government faces serious challenges but its ability to muddle through cannot be underestimated. The Cuban people under the numbing effects of decades of repression, have long been accustomed to adapting, often with remarkable ingenuity, to whatever new deprivation comes their way. There is no reason to think that a new round of ration reductions or rolling power outages will change this fact.

In his 2008 inaugural address, Raul Castro said the Cuban Government would "advance in an articulate, sound and well-thought out manner" a series of measures that would raise the Cuban standard of living and tie individual prosperity to individual initiative and work performance. Castro also referred to excess "prohibitions and regulations," the simplest of which the Cuban Government would start removing "in the next few weeks." Ever since, at every opportunity, Castro has emphasized the need, even urgency, of enacting economic reforms. Since 2008, the government has authorized private farmers to work small plots of fallow public land; eliminated some subsidies, including food rations and subsidized lunches in workplace cafeterias; allowed a limited number of traders to operate privately; allowed used cars to be sold; and expanded access to certain previously restricted consumer goods (like cell phones, computers, and home appliances), among other things.

Under Raul, a series of limited reforms were implemented, such as the highly-touted lifting of restrictions on the entrance of Cubans into hotels and restaurants that heretofore had been open only to tourists. With little change in the average Cuban's disposable income, however, reforms such as these were more symbolic than real. Of greater potential impact was a provision to allow for greater private use of vacant land, essentially establishing a sharecropping system with the state as the landlord.

At the same time, the government used the crises created by the multiple storms of 2008 to crack down on ordinary citizens as well. Citing the need to protect scarce resources, the government shut down scores of small businesses upon which Cubans depend for services and supplies not provided by the government. The activities of these businesses were indeed "illegal," since in Cuba only the state has the right to carry out commercial activity. But, just as the failure of the government to deliver these services helped create the vast and complex black market that exists here, its enforcement of the law created immediate and almost total absence of many goods and services. In announcing the measures in the spring of 2008, Raul Castro said he planned to end many of the "absurd prohibitions" that characterize life in Cuba. Post-storm efforts to maintain internal order have brought those prohibitions back with a vengeance. Individuals were arrested for having a single bag of cement or for possessing cake dough (to make cake dough one would have to have more than the legal allotment of eggs, milk and flour so, ipso facto, possession of cake dough is an offense that makes one subject to arrest).

In April 2010, President Castro announced that there were more than 1 million “excess” workers in Cuba. In September 2010, the Cuban Government announced that more than 500,000 state workers, 10% of the workforce, would be laid off by the first quarter of 2011. To absorb these workers, the government said it would reduce regulations on private sector employment and expand the cooperative sector. In October 2010, the Cuban Government published new rules regulating the self-employment sector, including new activities (increasing the number of activities authorized to 178), opening the door for self-employed workers to hire labor, and introducing a new tax scheme to include taxes on sales, profit, payroll, and social security. By the end of 2010, the Cuban Government announced it had granted 75,000 new licenses for self-employment activities, which represented more than a 50% increase from the number authorized in 2009.

In April 2011, the Communist Party held a party congress for the first time in 14 years, and endorsed reforms previously introduced by President Raul Castro. Most notably, these reforms included allowing the purchase/sale of private property and possible credit mechanisms for small businesses and cooperatives. In late 2011, the Cuban Government announced that it would allow the donation, sale, and purchase of homes for the first time since the early days of the revolution.

The reality of economic reforms to date has not matched the government's urgent language, and the government has so far unveiled limited measures that have fallen short of true market liberalization. The government continues to hamper private sector growth with tight restrictions on the supply of goods and labor, high taxation that discourages hiring and profits, a ban on professional entrepreneurs, limited access to transportation and credit, a monopoly on importation, legal uncertainty and lack of transparency, and a host of other disincentives and restrictions. The reforms introduced so far, at a very slow pace, have been insufficient to reverse the deep systemic crisis first brought to light with the departure of Soviet economic support and exacerbated by a liquidity crisis that peaked in 2008-2009.

Exports of professional services, mainly doctors and nurses to Venezuela, has been the main source of hard currency revenues for the Cuban economy since 2005.

Sugar, which was 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 2009, it had fallen to barely one 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. Almost half the existing sugar mills were closed, and more than 100,000 workers were laid off. The government promised that these workers would be "retrained" in other fields, though it was unlikely they would find new jobs in Cuba's stagnant economy. The sugar sector has continued to decline since the restructuring, with output registering a downward trend and averaging just 1.6 million tons during 2003-2009.

Tourism figures prominently in the Cuban Government's plans for development, and a top official casts it as 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 2001, generating about $1.85 billion in gross revenues; by 2010 that number was 2.53 million, and had generated $2.4 billion.

According to the Cuban Ministry of the Basic Industry (MINBAS), nickel became the leading export and the top foreign exchange earner in 2007. In 2009, world nickel prices generated $870 million. Cuba's pharmaceutical and biotechnology industry is another emerging sector, ranking third in foreign sales behind nickel and oil products, and ahead of traditional products such as tobacco, rum, and sugar. Exports of pharmaceutical and biotech products were between $300 and $350 million in 2007-2008 and jumped to $520 million in 2009.

Remittances also play a large role in Cuba's economy. Cuba does not publish accurate economic statistics, but academic sources estimate that remittances total from $800 million to $1.5 billion per year, with most coming from families in the United States. U.S. regulatory changes in 2009 and 2010 allow unlimited remittances to family members and religious organizations. The total amount of family remittances that an authorized traveler may carry to Cuba is now $3,000. In January 2011, the United States announced further changes that permit anyone under U.S. jurisdiction to send up to $500 per quarter to someone in Cuba. The changes also authorize unlimited remittances to religious organizations in Cuba.

In 2004, the government mandated that U.S. dollars be exchanged for "convertible pesos" or CUCs--a local currency that can be used only in Cuba and has no value internationally. The Cuban Government levies a 10% penalty on U.S. dollar exchanges that disproportionately affect Cubans who receive remittances from relatives in the United States. However, Western Union announced in December 2010 that it received permission from the U.S. and Cuban governments to remit payments in Cuban convertible pesos, thus avoiding the 10% surcharge. The Cuban Government captures these dollar remittances by allowing Cuban citizens to shop in state-run "dollar stores," which sell food, household, and clothing items at a high mark-up averaging over 240% of face value.

To help keep the economy afloat, Cuba has actively courted foreign investment in targeted sectors. Although majority foreign ownership has been permitted since 1995, it has seldom been allowed. Foreign investment often takes the form of joint ventures with the Cuban Government holding half of the equity, management contracts for tourism facilities, or financing for agricultural crops. The number of joint ventures has steadily declined since 2002 to 218 in 2009. Moreover, a hostile investment climate, characterized by inefficient and overpriced labor, dense regulations, and an impenetrable bureaucracy, continue to deter foreign investment.

In 2010, the government published a new law that extended the leases foreign investors could sign from 50 years to 99 years, exclusively for tourist properties, and said that it was in talks with international firms to build up to 16 new golf courses in 2011. None had moved forward by the close of 2011.

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. Therefore, Havana must rely heavily on short-term loans to finance imports, chiefly food and fuel, and structured financial instruments tied to more stable revenue sources (e.g., nickel, tourism, and remittances). Because of its poor credit rating, an $18 billion hard currency debt, and the risks associated with Cuban investment, interest rates have reportedly been as high as 22%.

Years of doing without have conditioned the Cuban people to live on very little beyond promises, and quick and decisive government action against anyone who steps out of line ensures that complainers are dealt with. Cubans are losing whatever ability they may have had to accept their lot in life. Generations have faced scarcity of basic goods, and lack of freedom to speak and act as they pleased, but they survived and found a way to "resolver" the problems of daily life. There is now much greater frustration about the government's failure to create the conditions necessary to improve the economy, and willingness to accept the status quo is evaporating.

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Page last modified: 08-01-2021 13:56:34 ZULU