Recent Trends in the Cuban Economy

I. What is the current situation regarding the Cuban economy?

The official answer to this question is that the Cuban economy hit bottom in 1994, began to rebound in 1995 and shows strong growth in 1996 (projected 5 % growth in GDP). The government points to a 33 percent increase in sugar production, strong growth in production of nickel, and also in tourism as the leading sectors for this rebound from the severe declines in the 1990-93 period. They also point to other indicators, such as an increase in certain foodstuffs produced, an increase in the "parallel" market exchange rate of the peso (from 35 per US dollar down to 22), a stabilization in the unemployment rate (8%), and even an improvement in certain social indicators, such as infant mortality. They cite a significant decline in the budget deficit and in the amount of money in circulation, both of which cause (repressed) inflation. They also point to a growing number of joint venture agreements and foreign investment, even in the face of the Libertad ("Helms-Burton") legislation.

What is our analysis?

1. Sugar: note from the attached table that sugar production in 1995 was less than half the average produced in the 1986-89 period, which was not the highest period of sugar production. Production in 1996 was approximately 4.5 million tons versus 3.3 million tons in 1995 —there you have the 33 percent increase— but the sugar sector was so deteriorated, they had to obtain US$300 million in suppliers credits to purchase inputs such as fertilizer, at above-market rates of interest, for a total cost of US$350 million, which cancelled out the receipts from the extra 1.2 million tons produced.

2. Nickel: the problem with the increased output in this sector is that there has been a recent downward trend in nickel prices, and the current price may be below production costs.

3. Tourism: there has indeed been vigorous growth in tourism, but net receipts are low for two reasons —most of the tourism expenditures result from all-inclusive packages purchased abroad, and most of the money stays abroad; second, the tourism packages are priced very low, thus attracting relatively low-income tourists who do not spend large sums once they reach Cuba.

4. Foodstuffs: there has been an increase in production of certain food items, but not others, and the level had dropped so low that ordinary citizens do not really see it as an end of the severe crisis years of 1990-93. Moreover, increases can be attributed to the liberalization of the food markets; now people are able to purchase goods sold by individual producers. Nonetheless, there is still considerable discontent generated by the difficulty of "making ends meet" in terms of food.

5. Social indicators: regarding the rate of unemployment, this is really not a useful statistic given the fact that more than 90% of employment is in the state sector and one has no idea about discouraged workers, etc. Interestingly, once the government allowed self-employment in some 135 occupations in 1993, a very large number of people opted for this (200,000 licensed and another 200,000 unlicensed), and the rate of resignations from government jobs due to disability shot up; the government says this was because people wanted to receive a form of workers compensation while they started out as self-employed. Regarding infant mortality, one of the reasons for Cuba's rate being one of the lowest in the world is that the state places great pressure on women to have abortions for a variety of reasons, health and other, and consequently the abortion rate is extremely high.

6. Foreign investment: it is too early to predict the real effect of the Libertad legislation on the flow of foreign investment, particularly since the President put Title III on hold until January 16, 1997, i.e., after the election. How much investment has materialized thus far? Probably around US$500 million. What are its effects? Probably the sociological and political effects of tourism and foreign investment are more important than the economic effects. The nomenklatura and certain other small groups (e.g., prostitutes) are able to take advantage of employment or dollar-generating opportunities, which means direct access to dollars and/or food.

7. External financing: Cuba has a foreign debt in convertible currencies (i.e., excluding debt with Russia and ex-Socialist bloc countries) of almost US$10 billion, almost all of which was contracted by the Castro regime. Cuba has been in default on its Paris Club obligations since 1986 —prior to the demise of the Socialist bloc and to the ending of Soviet subsidies. This means that Cuba has extremely limited access to credit, a recent indication being the extraordinarily high interest rates paid for the sugar-related suppliers credits obtained in 1995.

II. What is the outlook for the Cuban economy?

First of all, foreign investment cannot be the principal "engine of growth" of the Cuban economy. The principal obstacle to economic growth in Cuba are the economic policies of the Castro regime. One of the best examples are the "paladares," which are small restaurants opened by individuals in their own homes. Well, having more than four tables is illegal, one can only have family workers, and the license costs approximately 1,000 pesos, which is extraordinarily high considering that average monthly wages are around 250 pesos. Even during the period of the "Revolution," higher rates of growth were achieved during a period —roughly 1975 to 1986— when liberalizing reforms were implemented. But in 1986 —just prior to glasnost and perestroika in the Soviet bloc— Castro officially declared the "Process of Rectification of Errors" (popularly dubbed "Ratification of Errors") and moved back to a Stalinist command system, outlawing farmers markets, etc.

You can see the result of this in the attached table: almost no growth of GDP, as opposed to an average of 7.2 percent per year in 1981-85. Can Castro reverse economic policies again, as he did in 1986? We believe that unless the blockade is lifted —but this means the blockade imposed on the Cuban people by the Castro government— Cuba will not rebuild its shattered economy in any meaningful way. The main problem with the U.S. embargo is that it tends to shift the blame for the system's failure away from the Castro regime, in Cuba and elsewhere, when the problems of Cuba are made in Cuba. The questions then may be, is Castro capable of reversing direction again, will the 1993-95 reforms stay in place, or will they continue to reform or liberalize? Obviously, this will depend on several factors, one of which relates to U.S. actions, and another to the political risk attached to economic policies.

One school of thought is that no further significant reforms will be implemented, largely because the inner circle believes that those already in place are sufficient to "turn the corner" and are politically manageable. Another school of thought is that after the reelection of President Clinton the "reformers" in Cuba will be supported by Castro, who will try to engineer a solution in which the "gains of the Revolution" will be preserved. Apparently, the Congress of the Communist Party scheduled for the end of the year has been postponed and presumably only the Central Committee will meet to approve but not debate certain policies, and some see this as a signal that further reforms are intended. Yet another school of thought sees the Libertad legislation as effectively blocking all possibility of meaningful rapprochement between the U.S. and Cuba before 2000.

Here we have the case of a country with a relatively well-educated and healthy population, a good natural resource base, proximity to the largest market and source of financing in the world, and an expatriate community with considerable entrepreneurial, marketing and financial resources and an unflagging interest in its native country. And yet we also have a very real human tragedy.

Thank you.

*Presentation given at the Stanton Group meeting.
Washington, D. C., September 26, 1996

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New Cuba Coalition
P. O. Box 14077
Washington, D. C. 20044-4077
Dr. Emilio-Adolfo Rivero — President
Ernesto Díaz-Rodríguez — Vice President
e-mail: cuba@idt.net