Cuba: Economy

GDP Growth
Real gross domestic product (GDP) grew by 2.1% in 2010, according to official statistics. However, Cuba uses a unique “social” method for calculating GDP which makes its figures impossible to compare with any other country in the world. The reported growth reflected a slight improvement on the 1.4% growth in 2009 and 1.9% growth the Cuban Government had forecast for 2010.

Economic Structure
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 83% of the labor force is employed by the state. An additional 5% of the labor force is employed by cooperatives closely connected with the state. Only 12% of the labor force works in the private sector, including private farmers, artists, and 142,000 self-employed ("cuentapropistas"), representing less than 3% of the entire workforce. More than 60% of the workforce is employed in non-productive sectors. However, the Cuban Government has announced its intention to undertake economic reforms to reduce the size of the state sector and create opportunities for small-scale enterprises. Implementation of these reforms remains pending.

Challenges
The Cuban economy suffers first and foremost from a lack of productivity and an overdependence on the external sector. Cuba suffered a significant decline in gross domestic product of at least 35% between 1989 and 1993 as the loss of Soviet subsidies laid bare the economy's fundamental weaknesses. To alleviate the economic crisis, in 1993 and 1994 the government introduced a few market-oriented reforms, including opening to tourism, allowing some foreign investment, legalizing the dollar, and authorizing self-employment for some 150 occupations. These measures resulted in modest economic growth, although the official statistics are deficient and provide an incomplete measure of Cuba's real economic situation. From 2000 to 2009, Cuba experienced a series of severe economic disruptions, including lower sugar and nickel prices, increases in petroleum costs, devastating hurricanes in 2001, 2004, and 2008, a major drought in the eastern half of the island, increasing external debt, liquidity issues, and stagnant or decreasing agricultural and industrial productivity. Significant economic assistance from Venezuela, and to a lesser degree China, has helped keep the Cuban economy afloat.

Living conditions in 2010 remained well below the 1989 level. Moreover, the gap in the standard of living is widening between those with access to convertible pesos and those without. Jobs that can earn salaries in convertible pesos or tips from foreign businesses and tourists have become highly desirable. It is not uncommon to see doctors, engineers, scientists, and other professionals working in restaurants or as taxi drivers. An estimated $1 billion in yearly remittances exacerbates the gap.

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 and prices at convertible peso stores remain unaffordable to most of the population, 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. A report by an independent economist and opposition leader speculates that more than 40% of the Cuban economy operates in the informal sector. Petty theft and corruption has reached such critical proportions that (now former) President Fidel Castro acknowledged it could bring the end of the revolution. In the last few years, the government has carried out an anti-corruption campaign, including the creation of a Comptroller General’s Office in 2009, repeated street-level crackdowns, and ongoing ideological appeals. So far, these measures have yielded limited if any results.

Venezuela
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 has 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.

Economic Reform
In his February 24, 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." More complex "reforms," he said, could only be introduced after changes to certain legal regulations.

Since February 2008, Raul Castro's government has announced it would pursue the following initiatives: Expanding access to public land for private farmers; eliminating or reducing excessive subsidies, including food rations and subsidized lunches in workplace cafeterias; reducing inflated employment rolls; permitting some Cubans to own their homes; increasing wages and retirement pensions; raising the retirement age; upgrading public transportation systems and infrastructure; new licenses for private taxis to operate; limited deregulation of the construction industry; expanding access to certain previously restricted consumer goods (like cell phones, computers, microwaves, toasters, DVD players, motorcycles, air conditioners, electric ovens, and agricultural supplies and tools); consolidation and modernization of Cuba's family doctor program; and launching a new 24-hour television station to include mostly foreign-produced content.

In April 2010, President Raul Castro announced that there are 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 represents more than a 50% increase from the number authorized in 2009.

In April 2011, the Communist Party Congress (CPC) held a party congress for the first time in 14 years, and endorsed reforms previously introduced by President Raul Castro. Most notably, these reforms include allowing the purchase/sale of private property and possible credit mechanisms for small businesses and cooperatives.

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.

Key Sectors
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 1 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 is unlikely they will 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 from 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; in 2003, the number rose to 1.9 million tourists, predominantly from Canada and the European Union (EU), generating revenue of $2.1 billion. In 2004, the number of tourists to Cuba crossed the 2 million mark (2.05 million), including the so-called "medical tourists" from other Latin American countries seeking medical treatment at Cuban facilities. Since 2004, the volume of tourists has remained relatively consistent, at 2.32 million (2005), 2.2 million (2006), 2.1 million (2007), 2.35 million (2008), 2.42 million (2009), and 2.53 million (2010). Tourism revenue, however, fell 11% in 2009 due to visitors traveling for less time and spending less money per person. Tourism revenue in 2010 rebounded only slightly to $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, valued at approximately $2.8 billion. Nickel extraction in 2007 was 2.2% higher than in 2006. The main market for nickel exports is China. Cuba produced between 75,000 and 76,000 tons of nickel in 2007. The Cuban Government predicted that nickel and cobalt production would reach a record 80,000 tons in 2008. The world nickel price dropped sharply in 2008, and nickel revenue fell 47% to $1.5 billion. Prices fell further in 2009, and revenue was $870 million. In 2010, world nickel prices rebounded and revenue most likely returned to 2008 levels, although Cuba has not yet released final revenue figures.

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 announced in April 2009 allow unlimited remittances to family members, excluding certain Cuban Government officials and members of the Cuban Communist Party. 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 anyone else in Cuba (with the same exclusions as above). The changes also authorize unlimited remittances to religious organizations in Cuba.

Beginning in November 2004, the government mandated that U.S. dollars be exchanged for "convertible pesos"--a local currency that can be used in special shops on the island but has no value internationally--at an 8% exchange rate conversion plus up to 2% in fees. In addition, the Cuban Government levies a 10% tax on every conversion of U.S. dollars (and only U.S. dollars). This results in nearly 20% in fees 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% tax on U.S. dollars. The Cuban Government captures 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.

Foreign Investment and Debt
To help keep the economy afloat, Cuba has actively courted foreign investment in targeted sectors. This 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. 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 nonexistent. The number of joint ventures increased from 1990 to 2002, reaching a peak of 403. Since 2002, the number of joint ventures has steadily declined to 218 in 2009. Responding to this decline in the number of joint ventures, a spokesperson for the Ministry of Foreign Investment explained that foreign investment is not a pillar of development in and of itself. Moreover, a hostile investment climate, characterized by inefficient and overpriced labor imposed by the communist government, dense regulations, and an impenetrable bureaucracy, continue to deter foreign investment. Investors are also 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.

In August 2010, the Cuban Government published a new law that extended the leases foreign investors could sign from 50 years to 99 years, exclusively for tourist properties. In December 2010, Cuban authorities announced that they were in talks with international firms to build up to 16 new golf courses in 2011. Currently there is only one 18-hole golf course in Varadero and one 9-hole course in Havana.

Another negative factor surfaced by the end of 2008 when the Cuban Government, facing a cash crunch, sought to renegotiate outstanding commercial debts and opted to freeze funds deposited in Cuban banks by foreign investors and suppliers. 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%.

Private Sector
The small private sector has been tightly controlled and regulated, with set monthly fees paid regardless of income earned and frequent inspections yielding stiff fines for violations of any of the many self-employment regulations. In 1993 the Cuban Government legalized self-employment for some 150 occupations in an attempt to provide jobs for workers laid off due to the economic crisis brought on by the loss of Soviet subsidies and to bring some forms of black market activity into more controllable channels.

A 2004 UN Economic Commission on Latin America and the Caribbean (ECLAC) report recommended that Cuba "redesign the parameters of competition in the public, private and cooperative sectors [and] redefine the role of the state in the economy." It recommended more flexibility in self-employment regulations, property diversification, economic decentralization, and a role for the market. Rather than expanding private sector opportunities, from 2003-2007 the government stopped issuing new licenses for most categories of self-employment, and tried to squeeze more of these private sector entrepreneurs out of business. Many opted to enter the informal economy or black market, and others closed. These measures reduced private sector employment from a peak of 209,000 to 142,000 in 2009. Later moves allowed greater room for private businesses in a very limited number of areas (taxis, barber shops).

In 2010-2011, the government increased to 178 the number of authorized activities in the self-employment sector and announced other intended reforms for the private, cooperative, and state sectors.

Sources: