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    Cuba’s Economy

    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    Government rescinded some of the changes that had led to the rise of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.

    http://www.globalsecurity.org/military/world/cuba/economy.htm