Cuba’s Economy

The Castro government transformed the Cuban economy from capitalism to Marxist-Leninist Socialism. The main element of Marxist-Leninist Socialism is the governments “nationalization of all means of production.” This phrase means that the government takes over ownership of all farms, factories, warehouses, railroads, banks, and so on. The government also sets all prices, wages, and salaries and plans all economic activity. The goal of Marxist-Leninist Socialism is to transform society into a classless society in which all workers contribute equal labor and receive equal pay. A one-party Communist political system leads a nation toward this goal, according to Marxist-Leninist theory. Communists refer to the “revolution” as the process that brings forth a classless society. Private business entrepreneurship is not tolerated.

Socialism in this extreme form is the opposite of capitalism. Capitalism promotes profit-making by individuals, pricing of goods based on their supply and demand, and earning of wages and salaries based on effort, skill, and education. When the Cubans chose to transform the economy into a fully Socialist model, they accepted collectivism and rejected individualism. Cuba’s economic policies since the 1960s vastly influenced all aspects of lifestyle, not only economic sectors. The subsequent decline in the development of social institutions, infrastructure, and residential construction has had a huge negative impact on the country. Government control over the economy entirely eliminated healthy competition and created fertile ground for corruption. Although it suffered from American economic sanctions, Cuba owes much of its dismal economic performance to its traditional choice of trading partners and its tightly controlled economic system.

TRADE WITH THE SOVIET UNION

Cuba’s economy was in shambles immediately after the revolution. The Castro government confiscated American bank accounts and the agrarian and industrial reforms took away property from Americans. Understandably, these policies drove away American investments, which had bolstered Batista’s economy by creating jobs for Cubans. Moreover, the United States, Cuba’s greatest customer for its sugar, slapped an embargo on American businesses trading with the island. The Organization of American States (composed of the United States and most Latin American countries) did the same thing. The embargoes made Cuba’s economic situation even worse. Without hard cash from trade, no money was available to pay for repairing the roads, bridges, and factories damaged during the revolution.

Castro replaced the U.S. economic dominance of Cuba with that of the Soviet Union. In the early 1960s, he turned to the European Communist bloc, which included the Soviet Union and its European satellites (Poland, Romania, East Germany, Czechoslovakia, Bulgaria, and Hungary) for assistance. Since Cuba was short on cash, the bloc traded with Cuba using a barter system, which means to trade for something without money. Cuba traded its sugar for oil, food, and raw materials.

The Soviet Union and Cuba manipulated this system. The Soviet Union made its payments for sugar in oil and other commodities at prices well below what they could get in the world market. In other words, the Soviet Union was taking a financial loss to subsidize Cuba’s fragile economy. Cuba often resold Soviet oil for hard currency at the higher world market price. The Castro government then used the oil money to finance expensive construction projects and social programs. Estimates of the amount of money Cuba earned by reselling oil range in the billions of dollars annually.

The Soviet Union’s motive for making such a deal was to make Cuba dependent on it economically. The ultimate goal of the Soviet scheme was to gain a strategic foothold in the Western Hemisphere. (Long-range guided missiles launched from Cuba could reach anywhere in the United States, excluding Alaska and Hawaii.) Castro’s government went along because it got hard cash and badly needed fuel for tractors, cars, and factories. Besides, Castro was leaning toward a Soviet-style political system by this time anyway. The Soviet Union became Cuba’s most important trading partner. It purchased 81 percent of Cuba’s exports and provided 66 percent of its imports by 1990. The Soviet assistance through the barter system meant that Cuba had large amounts of cash and did not particularly need any foreign investment.

The policy of barter exchange stimulated little development outside of politically profitable sectors. Cubans made minimal efforts to stimulate types of economic activity not dependent on barter with the Eastern Bloc. Instead of reinvesting wisely in potentially productive branches of economy and modem industrialization, the Cubans poured large amounts of cash into nonprofitable public projects. Any major disruption on the global level could create severe damages to their sensitive economic structure. With the Soviet Union’s demise this is exactly what happened.

Collapse of Soviet Trade

The barter of commodities for sugar ended abruptly when the Soviet Union collapsed in 1991. Soviet trade no longer could subsidize Cuba. Since then, the island has traded solely on a cash basis at market prices. Price inflation has ravaged the economy. Costs of energy, consumer goods, and food have been rising steadily since supplies from the Soviet Union dried up. In addition, the island has continued to suffer the effects of the U.S. trade embargo.

The shortage of fuel has shut down some factories and has slowed production in others. City dwellers rely on bicycles for transportation due to the scarcity of gasoline. Many farmworkers, in the absence of gasoline, tractor parts, and tires, now transport their crops by ox-drawn cart.

The island also faces a serious food shortage. When the Soviet Union collapsed, Cuba was importing 40 percent of its food from the country. Now, the government issues ration cards (libretas) for food and other consumer goods that the cardholder can pick up at state stores (bodegas). A typical card allots small amounts of basic foods to the holder free or at a very low cost each month: about 1 pound (2.5 kilograms) of rice, 2/3 pound (1.5 kilograms) of sugar, 1/5 pound (1/2 kilogram) of beans, and 14 eggs. Everyone is supposed to receive one bread roll each day. The card allots other essential items, including clothing, toothpaste, and soap, as well as small amounts of vegetable oil for cooking, salt, coffee, crackers, canned tomatoes, and fruits and vegetables. The stores hand out small quantities of meat only once or twice a year.

There are always long lines of people waiting to pick up their food. Unfortunately, the state stores are often out of items listed on the card. Moreover, the amounts are quite small. No one survives solely on the ration card. Some people sell personal items, such as jewelry and family heirlooms, to buy food.

FIDELISMO

The Cuban people refer to Castro’s strict brand of Socialism as “Fidelismo.” In 1993, faced with a shortage of hard currency in the economy, Castro said that “life, reality…. Forces us to do what we would have never done otherwise…. We must make concessions.” The concessions to which he referred involved temporarily abandoning principles of the “Revolution” and tolerating capitalistic (profit-taking) influences. There have been five basic adjustments to Fidelismo since then.

First, Castro allowed Cuban citizens to receive U.S. dollars in the mail from relatives in the United States from 1994 to 2004. Cubans had been using these dollars to purchase foreign goods in Cuba’s black market. Castro set up special state-run “dollar stores” in which Cubans could legally spend U.S. dollars to buy such goods. This policy provided the Cuban economy with much-needed hard currency and it reduced people’s need to trade on the black market.

Second, in 1993, the government converted many big state-owned farms into cooperatives whose members set their own goals and share in profits. In addition, the government gave permission to urban dwellers to organize cooperatives on underutilized land on remaining state farms. Today, urbanbased cooperatives cultivate vegetables and other basic food crops. They farm 42 percent of Cuba’s arable land. Farmers from state farms and urban-based cooperatives now sell part of their production to the public in farmers markets (agrornercados) and set their prices in U.S. dollars.

Third, the Castro government now encourages joint business ventures. Joint ventures are profit-seeking partnerships between the government and foreign businesses. The government is using these partnerships to revive and diversify the manufacturing sector of the economy. Cuba’s educated and skilled labor force and low-wage rates are attractive to foreign companies. Joint ventures also are heavily involved in the construction and management of luxury state-owned tourist hotels.

Fourth, the government adjusted its own budget. It cut its subsidies to state-owned enterprises (80 percent of which were operating at a loss); raised prices on cigarettes, gasoline, alcohol, electricity, and other goods and services; and for the first time since the revolution, established a tax system.

Fifth, to meet demand for more services, the Castro government legalized self-employment in more than 150 different occupations that range from auto mechanics to hairdressers. These new businesspeople can charge whatever the market for their services will bring. Tourists see the most noticeable examples of these new businesses, such as small bed-and-breakfasts (casas particulares) and privately operated family restaurants (paladares).

The opportunity for self-employment has drawn hundreds of thousands of workers into this new sector of the economy. The government gets its share of the money spent on these services through a combination of monthly fees and income taxes. Unfortunately, the list of occupations does not include professions requiring university degrees. Consequently, educated people, such as professors and doctors, moonlight for extra income in better-paying self-employed jobs or in the tourism industry.

The adjustments of Fidelismo were a long way from permanent. They depended on Fidel Castro’s personal decisions. For example, in Havana in 2004, the Castro government stopped issuing licenses to 40 categories of self-employment, including the most popular ones, such as private restaurants. Police suddenly appeared and closed many of them down. Some observers believe this action was another of Castro’s “capitalist” adjustments, as these small businesses were selling food to tourists and thereby cutting into the profits of restaurants in government-owned tourist hotels.

As the twenty-first century unfolds, Cuba’s economy seems to be on an uncertain course. As one journalist described the beneficiaries of Fidelismo, “Like the boat people who still leave Cuba’s shores, these would-be capitalists are the‘land rafters’ of the socialist economy, embarking on a perilous and uncertain journey.”

Fidelismo and internal economic policies well illustrate how the Communist ideology can impose a heavy burden on economic progress. No country has ever become a successful economic power under the dictatorship of a single, ideologically blindfolded individual. Each time the Cuban economy showed signs of improvements in recent years, it occurred because the government allowed individuals to begin organizing private business ventures. At the same time, private ownership is philosophically against the Communist ideology. Thus, even minimal freedoms had to be taken away in order for Fidel Castro to keep the Cuban economy on a firm Socialist path. Realizing that something had to be done if economic conditions were to improve, Ratil Castro immediately allowed some basic freedoms for Cubans. They now can purchase previously banned products, such as microwaves and computers, but the heavy hand of the government and its control over the populace still remains visible.

TRADE TODAY

Cuba has modified international trade in recent years. Currently the most important partner is Venezuela, which provides supplies of below-the-market-price oil. In return, Cuba assists Venezuela’s need for medical professionals. This relationship grew since the regime change in Venezuela in the late 1990s. The latest president, Hugo Chavez, an admirer of Socialism, has tightened the friendly relationship with Fidel and Ratil Castro. Once again, barter exchange continues to assist the Cuban economy.

Other trade partners are China, members of the European Union, and Canada. Russian influence is still significant, although only a fraction of the past close relationship. Underdevelopment in food processing, heavy industry, and modern manufacture sectors create the need for Cuba to continue to heavily rely on imports. A negative trade balance (more imports than exports), which leads to growing debt, acts as a major barrier for more rapid development.

CUBA’S GDP, AVERAGE INCOME, AND ECONOMIC ACTIVITIES

Gross Domestic Product (GDP) is the value of all goods and services that a country produces in a given year. A country’s average income is the income that each person would have if each citizen were to receive an even share of the GDP. According to the World Fact Book, a CIA publication, Cuba, in 2008, had a GDP of $55.18 billion and an average income of about $5,000. When adjusted for local purchasing power, the numbers actually double, but overall Cuban economic data always requires careful reading. Governmental influence on the economy leads to manipulation of official data and skewed numbers to fit political interests. Western institutions often must estimate the real value of Cuban accounts.

Manufacturing

When Castro came into power, the government confiscated all factories. Industrial production was placed under the control of large state bureaucracies. With the breakup of the Soviet Union in 1991, the importing of cheap raw materials for manufacturing ended. The Cuban government had to close the factories and lay off thousands of workers. Many of the former factory workers now work as manual laborers in the countryside. Manufacturing accounted for about 23 percent of the GDP in 2008. Cuban factories produce leather goods, textiles, plastics, cement, clothing, and numerous everyday items ranging from cosmetics and perfumes to mattresses and toiletries. Sugar mills are one of the largest employers in the manufacturing sector.

Agriculture

The island’s low population density and favorable combination of climate, topography, and soils make it especially suitable for agriculture. About one-fourth of the land is arable (suitable for producing crops). Cuba’s principle agricultural crops are sugarcane, tobacco, citrus, and coffee. Agriculture (along with fishing and forestry) was responsible for 4.4 percent of the GDP in 2008. This figure gives the false impression that agriculture is not very important to the economy. It does not include the income generated by the processing of agricultural products, such as sugar—the country’s main and most valuable export item.

Sugarcane accounts for about 68 percent of the value of all exports. Diego Velazquez, Cuba’s first Spanish governor, introduced sugarcane in the town of Baracoa. Cuba is one of the world’s major exporters of cane sugar. More than one half of the island’s cultivated land is devoted to this crop. The manufacture of sugar from cane is the chief product. By-products include molasses, syrups, industrial alcohol from molasses, and rum. The cane harvest occurs during the dry season, from January through April.

Despite sugarcane’s importance relative to other crops, its production is a shadow of what it used to be. Peak years of production occurred when the Soviet Union traded oil for Cuban sugar. When the Soviet Union collapsed, sugar exports fell dramatically. For example, exports in 2003 were 75 percent below 1990 levels.

The Soviet practice of paying for Cuban sugar at world market prices hid inefficiencies that extended from field to factory. These inefficiencies were to blame for a general 40-year decline in yields: Laborers were harvesting both mature and young cane plants indiscriminately, and old and obsolete equipment was operating in most sugar mills. A severe decade-long (1995-2004) drought in eastern Cuba and crop damage caused by devastating hurricanes added to the industry’s woes.

The government recently took steps to rescue the sugarcane industry by improving harvesting methods, closing inefficient plants, and consolidating better equipment in remaining plants. Yields appear to be rising. Cuba’s red clay soils and plains areas in Matanzas, Villa Clara, and Sancti Spiritus provinces have the greatest concentrations of sugarcane fields. Only a few areas do not cultivate sugarcane. They include the Zapata Peninsula, the Isla de la Juventud, and the island’s mountain ranges.

Tobacco is a New World crop. The Arawak Indians smoked it for ceremonial purposes. Tobacco is Cuba’s second most valuable crop. It accounts for about 18 percent of the total value of the country’s exports. Cuban tobacco is famous worldwide for its hand-rolled luxury cigars. Tobacco farms (vegas) produce the finest cigar tobacco in western Pinar del Rio Province, in an area called Vuelta Abajo, and in the Partidos areas in central Havana Province. Laborers only pick the tobacco leaves by hand and store the harvested leaves in drying sheds. These sheds (casas de tabaco) have tall, steeply pitched thatched roofs and dot the landscape of tobacco-growing areas.

Citrus fruits, such as grapefruits and oranges, are Cuba’s third most important agricultural export. Cuba had preferential trading agreements with the Eastern European Communist bloc for its citrus production. Citrus production peaked in the late 1980s, but the end of these agreements in the early 1990s caused output to plummet by 50 percent. The export value of citrus fruits accounted for about 5 percent of the total value of exports in 2003. The island’s other fruits include pineapples and bananas. Farmers grow pineapples for commercial purposes in central Camaguey Province. Typically, rural dwellers grow banana plants and mango trees near their homes for the shade and tasty fruit.

During the late eighteenth century, a French coffee grower fleeing the Haitian rebellion brought coffee to Cuba. Coffee is a mountain crop, and growing areas are very picturesque. Short-sleeved farmers, their faces shaded by broad-brimmed hats, pick the red coffee berries by hand. They load heavy sacks of berries onto mules and transport them to collection points. Small processing plants remove the pulp from the berries and sun dry the beans. (When picked, the small seeds of the coffee shrub are generally referred to as berries; when dried or roasted they are called beans.)

The regions of highest yield are the Escambray Mountains in south central Cuba and in the Sierra Maestra and the Baracoa massif area in southeastern Cuba. A government program started in 1994 to resettle people in abandoned coffee farms (fincas) in the mountains of eastern Cuba is responsible for a resurgence of production there, most of which is for domestic consumption.

Mining

An ore is a concentration of metallic minerals in rock. Mining is the process that extracts (separates out) the ore from the rock. Cuba has several mineral ores: nickel, cobalt, chromite, copper, gold, tungsten, manganese, and iron. Rock formations in the island’s mountainous areas contain deposits (concentrations) of the ores.

Cuba has 16 percent of the world’s nickel reserves. Only the United States has a larger supply. Cuba is one of the larger producers of mined nickel. Cobalt, which is a by-product of nickel operations, is also important to Cuba’s mineral sector. Metal scientists (metallurgists) use nickel in batteries and in plating (covering in a thin layer) other metals that are prone to erode chemically. Doctors use the radioactive property of cobalt to treat cancer patients. Metallurgists mix small quantities of the metal with aluminum oxides to make a dark blue pigment for inks, paints, and varnishes. Metal scientists also use cobalt in high-strength alloys (combinations of metals).

High prices of nickel in the early 2000s have proved lucrative for the Cubans. Since 2008, prices rapidly declined following global economic trends. The country still remains invested in expanding the production and export of nickel. Joint ventures with Venezuelan companies were in the process of building new plants in 2009.

Small mines yield copper (for making wire) and manganese (for making wear-resistant alloys of copper and iron). The mines are in Pinar del Rio and Santiago de Cuba provinces. (The Western Hemisphere’s oldest copper mine is near the city of Santiago de Cuba.) There is a chromite mine in Holguin Province. Chromite is the source of the mineral chromium. Plating chromium onto another metal makes such things as shiny car hubcaps and bumpers. Mixing it with steel creates stainless steel flatware, such as knives, spoons, and forks.

Miners in Pinar del Rio and Cienfuegos provinces quarry limestone. Cement plants crush the limestone and make it into lime powder and cement. Sugar mills use burned lime powder to separate sugarcane pulp from sugar juice. Many sugar mills operate their own limestone quarries and lime kilns. Lime makes mortar and plaster, as well as fertilizer. Various manufacturing processes use it in making paper, textiles, and soap. Cuban miners also mine small amounts of gold (for jewelry and dentistry), silica sand (for making glass), and gypsum (for making plaster of Paris and cement).

Geologists did not discover Cuba’s main oil field until 1981. The delay was due, in part, to Cuba’s supply of cheap oil from the Soviet Union. In the absence of Soviet oil since 1991, foreign investments are boosting domestic oil drilling, exploration, and refining. The government has several joint ventures involved in drilling and exploring for more oil. Cuba’s partners in these ventures are companies from Brazil, Canada, France, Spain, Sweden, and the United Kingdom. Production is for domestic use and accounts for about one-fifth of the nation’s total consumption. Venezuela and Mexico supply most of Cuba’s imported petroleum.

Oil production is at record levels with current refining capacity of about 300,000 barrels per day. Nearly all of the oil is currently coming from a field stretching between Havana and Cardenas. Refineries in Havana, Cienfuegos, and Santiago de Cuba convert the thick crude oil into usable products such as motor oil, gasoline, diesel, kerosene, and sulfur.

The discovery of potentially large oil reserves near the Cuban side of the Gulf of Mexico has triggered further exploration in the past several years. Cuba gave concessions to foreign companies to search for basins under the deep sea. It also cooperates with Venezuelan experts in search for oil. If proved and economically feasible, oil deposits can be a major stimulus for the Cuban economy.

Fishing

Before the 1959 revolution, Cuba’s commercial fishing industry fished the island’s shore waters and deeper waters of the Gulf of Mexico and Caribbean Sea. The catch included a complement of reef fish (snapper and grouper); spiny lobster; sponge in shore fisheries; and mackerel, tuna, and billfish in deep-water fisheries. Most fishing was for the Cuban market.

After the revolution, the Cuban fishing industry became an important supplier of seafood products for the world market. The Castro government used money from resold Soviet oil to purchase expensive deep-water fishing boats. However, in the late 1970s, most nations in the Western Hemisphere imposed 200-mile limits for economic zones. This policy was not a protest against Castro’s politics; it was part of a general movement among nations to claim resources of the sea. Nevertheless, the 200-mile limit denied Cuba access to most of the Gulf of Mexico and Caribbean waters.

Cuban fleets had to operate in more distant, deeper waters in the Atlantic and Pacific oceans as a result. Open ocean fishing is more expensive: Fuel costs are higher and catches of deep-water fish (mackerel, herring, and hake) bring low prices per unit of volume. The high-seas fleet was almost totally shut down in the 1990s, when Cuba stopped importing Soviet fuel. As a result, Cuba’s total fish catch in early 2000s was 50 percent below that of 1986.

Forty major processing plants freeze, smoke, salt, and package a variety of seafood products for sale at home and abroad. The shore fleet still plays an important role in providing seafood to the Cuban people. Part of the catch goes to Asia (particularly Japan), Canada, Europe, and Latin America.

The seafood industry accounts for 5 percent of Cuba’s exports. Havana is the most important fishing port. Important secondary ports are Surgidero de Bataban, Santa Cruz del Sur, and Manzanillo. Tuna and hake are the most important species taken in deeper waters. Fisheries in waters closer to shore provide good yields of shrimp, lobster, and red snapper.

Tourism

Cuba was the first Caribbean nation to attract tourists. In the mid-1950s, virtually every North American who traveled to the region chose Cuba as their only destination. More than 270,000 Americans were coming to the island each year. The arrivals ceased with the introduction of U.S. economic sanctions. Cuba’s warm temperatures, scenic cultural and physical landscapes, and sheer size make this island a tourist agent’s dream. In 1988, as political and economic problems began to mount in the Soviet Union, Cuban officials decided to establish a tourism office for the first time, and an increase in tourism took place almost overnight.

Tourism, some experts say, is what kept the country away from bankruptcy during the post-Soviet period of economic hard times. Cubans managed to attract primarily Europeans and Canadians to their beaches. Interested in hard-to-match beauty and an inexpensive visit, many foreigners chose to fly to Cuba. Tourism replaced sugar exports as Cuba’s main source of foreign exchange in the mid-1990s. The growth in this industry has been astounding compared to other sectors of the economy. The annual number of visitors that Cuba has received has grown from 340,300 tourists in 1990 to more than 2 million today. The global economic downturn in 2008 had a negative impact on Cuban tourism. Toward the end of the first decade of the twenty-first century, the number of visitors is in sharp decline. Certainly this sector of the country’s economy will regain its past strength in numbers of dollars once the global economy rebounds. One type of tourism is steadily gaining ground—medical tourism. Affordability of medical procedures, supported by a well-educated medical staff, makes Cuba an attractive destination for individuals requiring medical attention. The high cost of medical care in the West is one of the leading reasons why flying to Cuba is worth considering. If the current U.S. embargo on travel to Cuba is lifted, millions of American tourists could give the country’s tourist industry and overall economy a tremendous boost. The world’s largest traveling population, after all, is only a stone’s throw away across the Straits of Florida.