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Country Profile 2007

Cuba This Country Profile is a reference work, analysing the country’s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit’s Country Reports analyse current trends and provide a two-year forecast.

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ISSN 0269-5111

Symbols for tables “n/a” means not available; “–” means not applicable

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Comparative economic indicators, 2006

Gross domestic product(US$ bn)

(a) 2004.

Sources: Economist Intelligence Unit estimates; national sources.

(a) 2004.


(a) 2004.


(a) 2004.


Gross domestic product(% change, year on year)

Consumer prices(% change, year on year)

Gross domestic product per head(US$ '000)

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Cuba 1

© The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

Contents

Cuba

3 Basic data

4 Politics 4 Political background 5 Recent political developments 8 Constitution, institutions and administration 9 Political forces 13 International relations and defence

17 Resources and infrastructure 17 Population 19 Education 20 Health 21 Natural resources and the environment 21 Transport, communications and the Internet 24 Energy provision

26 The economy 26 Economic structure 28 Economic policy 31 Economic performance 33 Regional trends

34 Economic sectors 34 Agriculture 36 Mining and semi-processing 37 Manufacturing 38 Construction 38 Financial services 39 Other services

40 The external sector 40 Trade in goods 42 Invisibles and the current account 43 Capital flows and foreign debt 45 Foreign reserves and the exchange rate

47 Regional overview 47 Membership of organisations

48 Appendices 48 Sources of information 49 Reference tables 49 Population 49 Oil and gas production 49 State finances 49 Money supply

2 Cuba


50 Gross domestic product 50 Nominal gross domestic product by expenditure 51 Real gross domestic product by expenditure 51 Prices 51 Main composition of trade 52 Main trading partners 52 Balance of payments 53 External debt 53 Estimated foreign reserves 53 Exchange rates

Cuba 3


Cuba

Basic data

110,000 sq km (mainland 105,000 sq km; Isle of Youth 2,000 sq km; keys 3,000 sq km)

11.2m (2006, year-end, official estimate)

Subtropical

Hottest month, August, 24-32°C (average monthly minimum); coldest months, January and February, 18-27°C; driest months, January and February, 38 mm average rainfall; wettest month, September, 183 mm average rainfall

Metric system; also old Spanish units. Sugar is often measured in Spanish tonnes of 2,271 lbs and there is a Cuban quintal of 101.4 lbs made up of 4 arrobas. For area measurement, one Cuban caballería equals 13.4 ha or 33.16 acres

There are two domestic currencies: the Cuban Peso (CuPs), in which prices and wages are denominated within the domestic economy; and the Convertible Peso (CUC), used in “hard-currency” retail outlets. 1 Peso (Cuban or Convertible)=100 centavos (Cuban or Convertible). The official exchange rates, used in national income, fiscal and enterprise accounting aggregates are CuPs1:CUC1 and 93 convertible pesos:US$1. An “unofficial”, but legal, CuPs:CUC exchange rate is used for personal transactions. This rate is supposed to be freely floating, but has effectively become pegged. At the end of 2006 this “unofficial” rate was CuPs24:CUC1. The unofficial CuPs:US$ exchange rate at end-2005 was therefore CuPs22.2:US$1. US dollars exchanged for convertible pesos within Cuba are subject to a 10% commission charge; there is no such charge for the conversion of other currencies into convertible pesos. Since 2002 euros have been accepted in some tourist resorts.

5 hours behind GMT (April-October, 4 hours behind GMT)

January 1st; May 1st; July 26th-27th; October 10th; December 25th

Land area

Population

Climate

Weather in Havana (altitude 24 metres)

Weights and measures

Currency

Time

Public holidays

4 Cuba


Politics

The Partido Comunista de Cuba (PCC) has been the only legal political party since 1965, and it exercises de facto control over government policies. Elections to the Asamblea Nacional de Poder Popular (the National Assembly of Popular Power) take place every five years (see Constitution, institutions and administration). The president, Fidel Castro Ruz, who led the revolt that overthrew the US-backed government of General Fulgencio Batista Zaldívar in 1959, has been the head of the government since that year, when he was 33 years old. He was formally elected president by the National Assembly for the first time in 1976, and has been re-elected by the same body every four years since then. On July 31st 2006 he "temporarily" stepped down from office following an emergency operation, handing over power to his brother and deputy, Raúl Castro. He also assigned key responsibilities to six other senior figures. Fidel Castro s health has not recovered, so at the time of publication Raúl remained in the post of acting president.

Political background

Settled by Spain in the 16th and 17th centuries, Cuba was used largely as a naval base before the British occupation in 1762-63. Following the introduction of sugar plantations worked by African slave labour, Cuba became a prosperous sugar-based export economy, with the US as its main market. A crisis in the sugar industry in the 1840s and 1850s, compounded by the weakness of the Spanish colonial government, fuelled Cuba’s first war of independence (1868-78). Increasingly strained relations between Spain and the US, the dominant economic power in the region, culminated in US intervention in the final stage of the second independence war (1895-98).

Emerging victorious from this brief Spanish-Cuban-American war, the US imposed military government on the devastated island from 1899 to 1902. Under the Platt amendment, which was incorporated into the new Cuban constitution of 1901, the US retained the right to intervene in the republic’s affairs, and exercised it on a number of occasions (1906-09 and 1917-21). The US also won control of the Guantánamo naval base in eastern Cuba, which it still retains.

Instability and rising authoritarianism marked the period from independence to the 1930s. In 1933 a rebellion by students and soldiers brought a sergeant, Fulgencio Batista, to political prominence. Mr Batista stepped down as president in 1944, but seized power again in a military coup before an election scheduled for 1952 could take place.

Opposition to General Batista’s authoritarian and corrupt rule in the 1950s came mainly from student and guerrilla organisations. One such group, led by Mr Castro, attacked the Moncada army barracks in Santiago de Cuba in 1953. Mr Castro was captured, tried and imprisoned, but was released into exile in 1955. He and 81 of his followers returned to Cuba in December 1956 on a boat, Granma, to initiate a guerrilla campaign from the eastern Sierra Maestra

US intervention

Generals, guerrillas and students

Colonial rule

Cuba 5


mountains, with the support of some urban groups. By late 1958 the guerrillas had advanced into the populated lowlands, and following the collapse of resistance from the demoralised army, General Batista fled the country on January 1st 1959.

Mr Castro united various political groups to form the Organizaciones Revolucionarias Integradas (ORI), the Integrated Revolutionary Organisations, to initiate a transformation of Cuban society. Waves of Cubans fled to the US: first those associated closely with General Batista’s regime, then the business and professional classes. Relations with the US quickly deteriorated, and a partial embargo on Cuban imports was imposed in 1960. In January 1961, in response to the government’s expropriation of assets worth over US$1bn belonging to US enterprises, the US severed relations. The US Central Intelligence Agency (CIA) organised anti-Castro Cuban émigrés into an invasion force that failed in its attempted invasion at the Bay of Pigs in April 1961. The US then extended its partial embargo to include all goods.

Cuba turned to a welcoming Soviet Union for military protection and trade. Cuba’s protection from military attack by the US was assured in 1962, in a US-Soviet agreement that ended the Cuban missile crisis (sparked by an attempt by the Soviet Union to install nuclear missiles in Cuba). The new trade dependence was formally acknowledged in 1972, when Cuba became a member of the Council for Mutual Economic Assistance (CMEA), the Soviet trading bloc. Cuba thus became an enemy state to the US in the cold war.

The end of the cold war in 1990-91 meant that Cuba was able to normalise relations with most foreign governments in the 1990s, but relations between Cuba s still-communist government and the US remain hostile. The US continues to apply extensive economic sanctions against Cuba. Over the past few years there has been political pressure within the US for their relaxation, and US exports of agricultural products have been allowed since 2001. However, the rules for this trade, and enforcement of other restrictions, have been tightened over the past five years (see International relations and defence).

Recent political developments

Cuba is almost alone among the countries of the former Soviet bloc in having retained its one-party communist political system, although it has introduced some changes. In a constitutional reform of 1992 direct elections were introduced for the legislature (known as the Asamblea Nacional de Poder Popular ANPP, the National Assembly of Popular Power), and there have been several amendments to the procedures for selecting political representatives at local and national level. The system of broad consultation, through mass organisations and workers’ assemblies, has also developed, increasing the level of participation in national policy debates. Restrictions on religious organisations have been relaxed, and party membership has been opened to religious worshippers. Over the past decade the government has emphasised the role of youth in national political life, in an attempt to reverse the

Political adjustments in the 1990s

The longest cold war

6 Cuba


alienation of the younger generation that occurred during the economic slump of the 1990s.

On July 31st 2006, two weeks before his 80th birthday, Fidel Castro handed over power "temporarily" to his younger brother, Raúl Castro, following an emergency medical procedure. In his statement, Fidel Castro named a group of leaders to take over different aspects of policy. Two of these Carlos Lage and Felipe Pérez Roque are from the ranks of the younger generations that have been brought in to senior positions over the past decade in a deliberate effort to replace the guerrilla generation. The three named to take responsibility for the priority areas of health and education are older, two of them veterans of the guerrilla campaign that brought Mr Castro to power in 1959. The sixth, Francisco Soberón, is the exception, in that he has risen to prominence as a technocrat, rather than through the political route. His role is to help to steer economic policy, but he has no autonomy: he is to work as a member of a team of three, alongside Mr Lage and Mr Pérez Roque.

Main political figures

Fidel Castro Ruz (80)

The country’s leader since 1959. Although his brother has substituted for him since July 2006, he retains his titles as president, commander-in-chief of the armed forces and chairman of the Partido Comunista de Cuba (PCC, the Cuban Communist Party). There has been much speculation about his health, and it remains uncertain whether he will return to office. He is reported still to be involved in decision-making from his sick bed. If he recovers sufficiently, it is possible that he might retain the leadership of the PCC even if he permanently resigns from the presidency.

Raúl Castro Ruz (75)

Acting president since July 31st 2006, minister of defence and younger brother of Fidel Castro. As acting president he presides over the Council of State and Council of Ministers. He is also acting commander-in-chief of the armed forces and acting chairman of the PCC. As he is only a few years younger than Fidel, Raúl Castro can only be considered a temporary successor. If Fidel were to die, the constitution states that Raúl s successor as president would have to be elected by the National Assembly. With less charisma and authority than his brother, Raúl Castro s rule since July 2006 has been marked by a more collective leadership.

Carlos Lage Dávila (55)

Vice-president and de facto prime minister. For more than a decade he has served as head of the government’s economic team, and on July 31st 2006 was listed by Fidel Castro as the first of the three men in charge of economic management. At 55, he is considered to be a possible future president.

Felipe Pérez Roque (41)

Mr Pérez Roque was appointed minister of foreign affairs at the age of 34. He has a reputation for intelligence and diligence, and is regarded as a loyal servant of Fidel Castro. He was nominated as the third member of the economic team by Fidel Castro on July 31st 2006, maybe less for his economic expertise than political

Emerging leaders for the post-Fidel era

Cuba 7


dependability. As the youngest of the senior figures in government, he is regarded as a possible future president.

Francisco Soberón Valdés (62)

Head of the Banco Central de Cuba (BCC), the Central Bank, he has brought overseas business experience to the restructuring of the financial system. He became a member of the Council of State in 2003 and was co-opted on to the PCC s Central Committee in July 2006. He was named by Fidel Castro as the second member of the three-man economic team on July 31st 2006.

José Ramón Balaguer Cabrera (74)

Minister of public health, a priority area listed by Fidel Castro in his statement announcing his temporary handover of power in July 2006. A doctor by profession, Mr Balaguer has served as ambassador to the Soviet Union and was a member of the Politburo of the PCC between 1992-2004, heading its department of ideology, responsible for propaganda.

Ramon Machado Ventura (76)

Minister of education, another priority area mentioned by Fidel Castro in his July statement. Like Mr Balaguer, he trained as a doctor and a veteran of the guerrilla campaign. He was minister of public health from 1960-67. He has been a member of the PCC s Politburo and Council of State since 1976.

Esteban Lazo Hernández (63)

A long-standing member of the PCC s Politburo and a vice-president of the Council of State, he was named by Fidel Castro to share responsibility for education with Mr Machado. He has run the PCC s department of ideology since 2004, when Mr Balaguer left to become minister of public health.

Ricardo Alarcón de Quesada (69)

As president of the National Assembly and a former Cuban ambassador to the UN, Mr Alarcón has broad experience. His chances of eventually assuming the presidency have diminished with the arrival of a younger generation of leaders, but he retains a prominent position.

Among the next layer of leaders, two who first came to prominence in the Unión de Jóvenes Comunistas (UJC) have been identified as likely to rise to higher office. Otto Rivero (39), was appointed as an additional vice-president (there were already six) in 2004. In his vice-presidential post he has been given responsibility for the “battle of ideas”, a campaign for ideological reinforcement, education and youth-mobilisation. Yadira García Vera (51), who was appointed minister of basic industry in October 2004, has been charged with responsibility for the overhaul of the electricity network in a campaign dubbed the "energy revolution". The campaign, which involved an ambitious investment programme, has been heralded as a success.

More technocratic figures who play an important part in the design and implementation of economic policy include: José Luis Rodríguez García (60), an academic economist who became minister of economy and planning in 1993; Lina Pedraza Rodriguez (51), a senior member of the PCC who headed the Ministry of Audit and Control, responsible for overhauling reporting systems and anti-corruption efforts, from its inception in 2001 until she was appointed

8 Cuba


as one of 12 members of a reformed secretariat of the PCC s Central Committee in July 2006; and Georgina Barreiro Fajardo (42), who worked with Mr Soberón at the Banco central de Cuba (BCC, the Central Bank) before becoming minister of finance and prices in 2003.

The Cuban Catholic Church has emerged as an important voice since church-state relations improved in the early 1990s and, as its head, Cardinal Jaime Ortega (71) has assumed a higher profile since the pope’s visit in 1998. He has been careful to preserve the church’s neutrality, adopting a conciliatory stance, although occasionally cautiously critical. The church publishes the only official non-governmental magazine in Cuba and Cardinal Ortega has a weekly radio broadcast. Some individuals within the Catholic Church have argued for a more oppositionist stance, and some other churches are aligned with the dissident movement (see Political forces).

Constitution, institutions and administration

The current constitution was approved by referendum in 1976 and amended in 1992. It replaced that suspended when General Batista fled in 1959, and describes Cuba as a socialist workers’ state, in which the entire people own the basic means of production. It established the Poder Popular (People’s Power) system of deliberative and administrative assemblies, consisting of a 601-member National Assembly along with 14 provincial and 169 municipal assemblies. Establishment of an additional bottom tier of local government, the Consejos Populares (People’s Councils), was approved by the constitutional reform in 1992.

The National Assembly normally meets twice a year, although special sessions may be called. Parliamentary commissions meet throughout the year, monitoring developments and drafting legislation in advance of National Assembly plenary sessions. The 30-member Council of State has legislative powers and the Council of Ministers and the Executive Council (comprising the president, the first vice-president and six other vice-presidents) exercise executive and administrative functions. Fidel Castro is simultaneously head of state and head of the government.

A National Assembly election takes place every five years and provincial and municipal elections every two-and-a-half years. Following a constitutional amendment in 1992, national and provincial as well as municipal assembly members are directly elected. Between two and eight candidates per consti-tuency are nominated through a process of commissions and public meetings. There is only one candidate per seat. Voters choose either to approve or reject the candidates finally selected, who must obtain 50% of valid votes. Candidates are not required to be members of the PCC, but in practice the Party retains extensive influence over the selection of candidates, owing to the high numbers of Party members who are active in the process, even though it is not formally involved in the nomination process. The next national elections are due in 2008.

Government

The electoral process

Cuba 9


Political forces

The PCC was formed in 1965 from a merger of the pro-Soviet Partido Popular Socialista, the Castro-led Movimiento 26 de Julio (26th of July, named after the date of the Castro-led attack on the Moncada barracks in 1953 see Political background) and an anti-Batista student organisation, Directorio Revolucionario. It has held power ever since and is the island’s only legal political party. The PCC and its youth wing, the UJC, have special constitutional status and the PCC has a strong influence over the National Assembly (see Constitution, institutions and administration). A host of other approved national organisations, apart from assemblies linked to the Poder Popular system, encourage grassroots involvement. These include forums for small farmers, women, students and industrial workers. The government describes the political system as participatory, in contrast to the representative model of liberal democracy.

Main official political organisations

Partido Comunista de Cuba (PCC)

The PCC is at the centre of the Cuban political system. It is the only legal political party and has around 800,000 members. Party branches have traditionally been workplace-based, and membership is by workplace recommendation, but in the past decade neighbourhood-based branches have begun to appear. Officially, the constitution differentiates the PCC from the state, allowing for elections for the legislature and local government assemblies in which the PCC does not stand, but in practice there has been a close relationship between the Party and the state. Although other political organisations have separate constitutions and function independently of the PCC, most of their leaders are members of the Party. Party membership endows no direct privileges, but members tend to benefit from job security, promotion prospects and special incentives. The PCC s strategy is determined at its Congresses. These have generally been held every five to six years, but the most recent Congress was held in October 1997. The Congress elects the Central Committee (150 members), which meets twice a year. The Central Committee in turn elects Politburo (25 members). The Politburo, which meets monthly, is the party’s executive body, within which the president, Fidel Castro, has repeatedly been voted General Secretary, and Raúl Castro deputy. An official Secretariat (12 members), appointed by the Politburo and confirmed by the Central Committee, was re-established in July 2006, having been scrapped in 1991. Of the 25 members of the PCC s Politburo, around one-half are also in the 30-member Council of State (see Constitution, institutions and administration).

Unión de Jovenes Comunistas (UJC)

This is the youth wing of the PCC for members between 15 and 35 years old. UJC members are political activists, helping to galvanise the public response to PCC or government-led campaigns. It is reported to have over 500,000 members. Membership of the UJC does not confer automatic progression to membership of the PCC.

Central de Trabajadores de Cuba (CTC)

The CTC represents the members of Cuba’s 13 official, industry-based labour unions with a total of around 3.3m members, in 80,000 workplace branches. Founded in

The Communist Party and mass organisations

10 Cuba


1939, the CTC predates the revolution and is one of the oldest unified workers’ organisations in the Americas. Following the revolution of 1959, the unions ceased to be independent of the government. The CTC has been given responsibilities in the electoral process overseeing the commissions that select candidates in the elections for the National Assembly. Its general secretary, Salvador Valdés Mesa, was elected to the post at the September 2006 CTC Congress. Like his predecessor, Pedro Ross Leal, he is a member of the Central Committee of the PCC. The CTC newspaper, Trabajadores, is generally bolder than the rest of the official press in its reporting of the frustrations of everyday life.

Comités de Defensa de la Revolución (CDRs)

The CDRs are the largest of the Cuban mass organisations, with cells at the local level of city blocks and the smallest villages. Founded in 1960 to combat counter-revolutionary insurgency, they have evolved into neighbourhood organisations with responsibilities ranging from organising street cleaning, vaccination and blood-donor campaigns, to helping to get the vote out at election time. However, the CDRs have retained their role as an arm of the system of internal security, gathering information on the activities of dissidents as well as organising night watches to guard against criminals. CDR membership is around 7m, representing around 85% of the population over the age of 14.

Asociación de Combatientes de la Revolución Cubana (ACRC)

Retired military personnel, who might have begun a second career when the economy was stronger, have become a significant political force over the past few years through their veterans’ association, the ACRC. Members have helped to organise supporters for demonstrations and other mobilisations called by the government, including the efforts by CDRs to detect criminals and monitor dissident activity.

Asociación Nacional de Agricultores Pequeños (ANAP)

ANAP comprises some 150,000 smallholders and their families, who own 50 acres or fewer. The economic reforms of the 1990s have increased the small farmers’ significance as suppliers of food to the farmers’ markets since they were opened in the mid-1990s. The productivity of ANAP farms has generally been higher than that of state farms, and they have established projects with foreign non-governmental organisations (NGOs) concerned with food security and sustainable agriculture.

Federación de Mujeres Cubanas (FMC)

The FMC has a membership of 3m, over 80% of women over 14 years of age. Originally established in 1960 to change attitudes towards women’s role in society and champion their right to work, the Federation is seen today as having lost much of its original raison d’être. However, it continues to provide social and educational services and contributes to political debate. Over the past decade, it has played an active part in promoting equal opportunities for women at work. It is led by Vilma Espín, Raúl Castro’s wife, who is a member of the Council of State.

Federación de Estudiantes Universitarios (FEU)

The first FEU was founded in 1923 by a communist student leader, Julio Antonio Mella. It was replaced in 1927 by the Directorio Estudantil, which was a significant force in the 1959 revolution. Fidel Castro was a member in his youth. In 1959 the new FEU was founded. Since then, it has been the main organisation for students in higher education, and it currently has more than 200,000 members.

Cuba 11


Federación de Estudiantes de Enseñanza Media (FEEM), and Pioneros

FEEM membership consists of more than half a million secondary school students. As well as providing a training ground for political activists, the FEEM also gives students a voice in the running of schools. For Cuba’s 1m primary school students, the Pioneros, reportedly modelled on the UK Scouts organisation, includes political grooming alongside play and educational activities.

There is dissent among those working within the state, but there is extensive restraint on its expression. The justification invariably used for this is national security: although criticism is supposed to be allowed, and is even periodically encouraged, strong attacks on government policy can be construed as threats to its authority. Even without meting out explicit punishments, the authorities are able to use a range of levers to influence behaviour, the most important of which is their influence over career prospects. There is no free press, but censorship of the work of academics, writers and artists has eased over the past two decades. Artists and writers also enjoy special privileges in terms of their ability to travel, cultivate international links and receive earnings from abroad. In early 2007, alarmed by a television appearance of a censor from the 1970s, artists and writers campaigned to ensure that there would be no return to former restrictions. In meetings with their representatives the minister of culture, Abel Prieto Jiménez, appeared to give assurances that there would be no tightening of censorship.

The organised domestic opposition consists of more than 100 small human-rights groups and proto-parties. Their activities are suppressed by the Cuban authorities, under laws forbidding “enemy propaganda”, “disrespect” and “acts against the independence or territorial integrity of the state”, as well as public order offences.

Cuban nationalism is deep-seated, and it is harnessed by the government to marginalise the illegal opposition. By highlighting links between dissident groups and organisations based in the US, many of which receive assistance from the US government, Mr Castro has been able to engender broad public rejection of dissidents. This has been an important factor inhibiting the growth of a domestic opposition. The fall in living standards and defeat of socialism in other Soviet-bloc countries since 1990 may have eroded confidence in the communist system, but unlike the other socialist countries, this has not created a climate of rebellion. Anti-government protest within Cuba has been small-scale and scattered. A spontaneous riot in central Havana in August 1994, when living conditions were at their worst for decades, was defused and there have been no further major incidents.

The number of political prisoners in Cuba is currently estimated by foreign observers to be between 100 and 1,000. The lower estimate includes only those deemed to be prisoners of conscience serving custodial sentences; the higher figure includes those who have committed other politically motivated crimes and those detained for short periods by the police. All estimates are well below those of the first decade of the Castro government, when the range was between 2,000 (a Cuban government figure) and 20,000 (a CIA estimate).

The illegal opposition Dissent

The illegal opposition

12 Cuba


In the past few years the Cuban authorities have maintained a hard line against dissidents deemed to be collaborating with the US government in its efforts to encourage "regime change" in Cuba. In March 2003, 75 people were arrested and swiftly sentenced to harsh prison sentences, accused of receiving direct support and instructions from the US authorities. Since then, there have been further arrests, but there have also been a number of early releases on medical grounds. A dissident human-rights organisation, the Comisión Cubana de Derechos Humanos y Reconciliación Nacional (CCDHRN, the Cuban Commission for Human Rights and National Reconciliation) reported at the end of 2006 that the number of political prisoners was 283, a decrease of 50 over the year.

Opposition leaders and organisations

Within Cuba:

Among the most prominent leaders in recent years have been: Elizardo Sánchez of the Comisión Cubana de Derechos Humanos y Reconciliación Nacional, the Cuban Commission of Human Rights and National Conciliation; Osvaldo Payá of the Movimiento Cristiano por la Liberación, the Christian Liberation Movement; Marta Beatriz Roque of the Instituto Cubano de Economistas Independientes, the Cuban Institute of Independent Economists; Vladimiro Roca, of the Asamblea para la Promoción de una Sociedad Civil Alternativa; Hector Palacios of the Partido Liberal; and Raúl Rivero of Cuba Press. Of these, Ms Roque, Mr Palacios and Mr Rivero were among 75 dissidents arrested and sentenced to long prison sentences in the spring of 2003. Ms Roque, Mr Palacios and Mr Rivero have since been released. Mr Sánchez and Mr Payá were spared detention, but their activities have been inhibited by the destruction of dissident networks and the atmosphere of suspicion following the revelation of the scale of infiltration of the movement by state security agents. A prominent Miami-based anti-Castro figure, Eloy Gutiérrez Menoyo returned to Havana in mid-2003. Mr Menoyo is a veteran of the pre-1959 anti-Batista campaigns, but was imprisoned for 22 years after forming a counter-revolutionary paramilitary group, Alpha 66. Before he returned to Cuba, his Miami-based organisation, Cambio Cubano, had opposed US sanctions and engaged in dialogue with the Cuban government. In some quarters, he is seen as a possible mediator between the Cuban government and the hardline emigrés, although he is distrusted by both sides.

Overseas:

The most outspoken opposition lobby has been established by Cuban emigrés based in the US, particularly in Miami. The most influential groups are the Cuban-American National Foundation (CANF), and the Cuban Liberty Council (CLC). After the death of its founder, Jorge Mas Canosa, in 1997, the CANF was weakened, and it has since split, with hardliners forming the CLC. Since he first took office in 2001, the US president, George W Bush, has appointed several Cuban-Americans to federal government positions and stepped up support for US anti-Castro organisations and Cuba-based dissidents, but divisions within the émigré community have deepened. Mr Bush is politically closest to the CLC, who were consulted during the preparation of new measures announced in May 2004 to tighten restrictions on émigrés’ freedom to travel to Cuba and to send remittances. These measures were opposed by the CANF.

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International relations and defence

Relations with the US overshadow all political, economic and international issues. The US classes Cuba as an enemy state. US trade sanctions have been in place since 1960. Efforts at détente during the 1970s and 1980s foundered on issues such as Cuban aid to third-world revolutionaries, the special status granted to Cuban migrants to the US, and US control of the Guantánamo naval base in eastern Cuba. Since the end of the cold war, US hostility has centred less on Cuba’s potential military threat and more on the lack of political and economic freedom. There is also a dispute concerning outstanding claims for compensation for property expropriated from US citizens and Cuban-Americans in the 1960s.

There have been no formal diplomatic relations since 1961, but the US and Cuban governments maintain an Interests Section in the other’s capital. In spite of the mutual hostility, bilateral security efforts to manage orderly migration and counter drug-trafficking have survived, and the two countries meteorological services co-operate closely to exchange information on hurricane activity.

US-Cuba relations: the decade after the end of the cold war, 1990-2000

1992: A new law (known as the Torricelli Law) tightened economic sanctions against Cuba in the hope that this would precipitate the government s collapse. 1994: Despite bilateral tensions, a new migration accord was agreed. 1996: The Cuban military shot down two small planes belonging to a Cuban émigré group, Brothers to the Rescue, that had been flying over Havana. US economic sanctions were tightened by the Cuban Liberty and Democratic Solidarity Act, known as the Helms-Burton Law, which aimed to curtail foreign investment, and the halting of all direct flights and remittances to Cuba. After 1996: mounting pressure in the US to relax sanctions led to some concessions, including the restoration of direct flights and direct mail services to Cuba, permission for Cuban-Americans to send remittances of up to US$1,200 a year to relatives. 2000: US food and medicine sales to Cuba were legalised, resulting in the first sales of food to Cuba in 40 years in January 2002.

While the political hostility has persisted, successive US administrations have been torn between conflicting pressures over the policy of maintaining economic sanctions against Cuba. On the one hand, the hard-line anti-Castro lobby, which is in favour of sanctions and support for political change in Cuba, remains an effective political force; on the other, many US political analysts have argued that sanctions have been ineffective and perhaps even counter-productive (by providing the Cuban government with a rallying point for nationalism), and there is a growing business lobby in favour of greater access to the rapidly growing Cuban market.

Although US policy towards Cuba has hardened under the presidency of George W Bush since 2001 the amount of trade between the two countries has been greater than at any time since US sanctions were first imposed. In late 2000, just before Mr Bush first took office, a change in US law allowed for limited one-way trade, with an exemption from restrictions for US exports of

Hostile relations with the US

With the US a debate over US sanctions continues

14 Cuba


agricultural and medical products, but only if the goods were supplied to non-government entities. In the context of political hostility, no progress was made in overcoming the obstacles to opening this trade for nearly a year. However, at the end of 2001, in the wake of a devastating hurricane, agreement was reached for the Cuban state to purchase US food imports. The trade grew rapidly, as US exporters responded to the opening up of a new market. In 2006 the trade amounted to around US$450m.

Notwithstanding the growth of food sales, the US administration has continued to resist calls for further relaxation of sanctions, vowing to use the presidential veto to block any such moves. In early 2005 new measures were introduced that have inhibited food sales. The anti-sanctions lobby, which now includes US exporters as well as church groups and even some sections of the Cuban-American community, has continued its campaign. The lobby in the US Congress is bipartisan, but its strength was boosted by the gains made by the Democratic Party in mid-term elections in late 2006.

Recent developments in US-Cuban relations

2001-02

With close ties with hardliners in the Miami-based Cuban-American lobby, the new US government of George W Bush vowed to veto any further bills to relax economic sanctions and tighten implementation of existing laws. Following the terrorist attacks on the US on September 11th 2001, Cuba was accused by US government officials of being among a list of nations belonging to an “axis of evil” and another list of “outposts of tyranny”, making it a target of US efforts to “spread democracy”. It was also charged with being a potential biological warfare threat to the US (on the grounds that it has an advanced bio-technology industry), a “state sponsor of terrorism” and of failing to combat “trafficking in persons”. The US increased moral support and material aid to dissidents within the island and to anti-Castro groups in the US and elsewhere.

2003

March/April: Cuba arrests and imprisons 75 dissidents (see Political forces) on charges that they had been collaborating with officials at the US Interests Section in Havana. October: A US Commission for the Assistance of a Free Cuba (CAFC) is established to “help to prepare the US government to provide effective assistance to a free Cuba”, and to step up enforcement of sanctions.

2004

June: CAFC recommendations are implemented, including further restrictions on émigrés’ rights to travel and send gifts and remittances to family members in Cuba and additional efforts to encourage Cuba-based dissidence. December: Cuba stages the largest civil-defence exercise for over 20 years. A major bilateral co-operation agreement between the Cuban and Venezuelan governments serves to compound US concerns.

2005

August: Caleb McCarry is appointed as a “Cuban transition co-ordinator”, to oversee US efforts to bring about an end to communist government in Cuba.

Cuba 15


September: The head of the US Interests Section in Havana, James Cason, is replaced by a career diplomat, Michael Parmly December: An electronic sign to project news stories and quotes from famous human-rights campaigners is erected by the US Interests Section on the outside of its office.

2006

January: The Cuban authorities organise a demonstration of 1.4m protests against US failure to extradite Luis Posada Carriles, who is regarded by the Castro regime as a “terrorist” and is held on immigration charges in the US, and erect flags outside the US Interests Section offices to commemorate victims of “terrorism”; the flags obscure the electronic sign erected in December 2005. July: The second report of the US Commission for Assistance to a Free Cuba reiterates the US demand for regime change as a precondition for any relaxation of sanctions. When Fidel Castro temporarily hands over power to his brother, Raúl, the US position remains unchanged.

2007

January: Following a visit to Cuba by ten US Congressional representatives, bills are introduced in both houses of the US Congress for the lifting of restrictions on family visits, trade and remittances. 20 0 7

Whereas relations with most of the countries of the former Soviet bloc withered in the 1990s, Cuba’s relations with west European countries generally improved, with trade and investment relations being cultivated and diplomatic activity increased. Since 1996 the EU has maintained its objection to the extra-territorial provisions of the US Helms-Burton law, which include the denial of US visas to executives of foreign companies doing business with Cuba and the threat of legal action against US branches of such companies. In 1997 the EU requested a World Trade Organisation (WTO) dispute panel on the issue, but under pressure from the US it agreed in 1998 to suspend the panel in return for a US commitment that sanctions against European companies doing business in Cuba would be waived.

Although the EU does not favour economic sanctions, its relations with Cuba are constrained by concerns over civil rights. The EU’s “Common Position” on Cuba, first issued in 1996, encourages the development of economic relations, but makes a full EU-Cuban co-operation agreement conditional on political reforms. Since that time, Cuba’s relations with the EU have become increasingly strained. The arrest and imprisonment of 75 dissidents in early 2003 prompted the EU to impose a series of diplomatic sanctions. Although these sanctions were suspended in January 2005, there has been strong opposition within the EU particularly among the new members from the former Socialist bloc to a softer line on Cuba. In response to this pressure, the EU has explicitly encouraged its diplomats to maintain contacts with dissidents, a position that enraged the Cuban government, even though informal contacts with the dissidents were nothing new. As a result, Cuba now has little interest in cultivating relations with the EU as a body, preferring to work to expand bilateral ties with individual EU member states.

Diplomatic relations reopened with most nations in the Americas after Cuba’s ties to the Eastern bloc dissolved in 1990 and trade grew rapidly. The three most

The Americas

Relations with Europe strained by dissidents issue

16 Cuba


important regional trading partners are Venezuela, Canada and Mexico. Relations with Canada and Mexico, both members of the North American Free-Trade Agreement (NAFTA), have suffered high-profile setbacks because of political differences and sensitivities over the past few years, but in each case co-operation has been quietly restored once the political storm has subsided.

Ties with Venezuela have strengthened since the election of the Venezuelan president, Hugo Chávez, in December 1998, (who was re-elected for another six-year term in December 2006) and bilateral trade has expanded dramatically since late 2004, when the two countries signed an economic co-operation agreement under the auspices of the Alternativa Bolivariano para las Américas (ALBA, the Boliviarian Alternative for the Americas). Using its oil windfall, Venezuela has become not only Cuba’s most important supplier of oil, but also the biggest source of foreign exchange, as purchaser of the services of thousands of healthcare and education workers to support Mr Chávez’s social programmes. The two countries have also worked together, with Venezuelan funding and Cuban staff, to expand healthcare programmes in Latin America.

Since 2003 relations with Brazil, Argentina, Uruguay, Bolivia, Panama, Ecuador and Nicaragua have all benefited from the election of left-wing presidents, although some of these countries have been wary of the potential political cost both domestic and international of associating too closely with Cuba. Latin America and the Caribbean are the main beneficiaries of education and healthcare programmes based in Cuba. In the education sector, Cuba provides free education to thousands of students from the region (around one-third of them studying medicine) and since 2005, with financial support from Venezuela, it has carried out 500,000 free eye operations under a programme known as Operación Milagro (Operation Miracle).

Cuba has maintained its social and economic aid programmes to developing countries. The focus of these programmes has become more commercially based over the past decade, although some healthcare aid is still donated. Most of this work consists of Cuban professionals working in other countries (mainly in the healthcare services, but also in education and other technical assistance programmes), and free healthcare services and education offered in Cuba. Currently, the largest contingents of Cuban healthcare workers other than the major programme in Venezuela are in Central America, Bolivia and the Caribbean (including a large number in Haiti). Within Africa, relations with South Africa are particularly strong. Cuba has actively sought new commercial partners in the Middle East and Asia. China has emerged as an important strategic ally in recent years, with extensive economic and military co-operation, including substantial credit guarantees that have had a strong impact on the cost and availability of external financing. Cuba s economic relations with two other major economies Japan and Russia have both been helped by the rescheduling of debt: an important agreement was reached with Japan in 1998, and with Russia in 2006.

State spending on defence was cut from 9.6% of GDP in 1985 to 2.8% of GDP in 1995, and has remained under 5% of GDP since then, despite a doubling of its budget over the past decade. Military leaders play an important political role,

The developing world and Asia

Defence

Cuba 17


and occupy several ministerial posts in civilian sectors, including sugar, tourism, fisheries and transport. The armed forces have become increasingly involved in business activities, including farming, tourism and manufacturing. These businesses led the development of enterprise reforms during the 1990s, moving away from centralised state direction towards greater autonomy, efficiency and market-orientation. They also built a reputation for tight managerial and accounting controls.

Cuban defence forces, 2005 Active armed forces 49,000 Armya 38,000 Navya 3,000 Air forcea 8,000Other security services 1,076,500 Civil defence force 50,000 Territorial militiaa 1,000,000 State securityb 20,000 Border guardsb 6,500

Others Army of Working Youthc 70,000

a Estimate. b Ministry of the Interior. c Conscripts doing their national service in agriculture.

Source: International Institute for Strategic Studies, The Military Balance, 2003/04.

The main military threat is considered to be a potential US invasion. Conscious that it would be unable to resist a US invading force for long, Cuba’s national defence strategy rests heavily on deterrence by seeking to show that invasion would have a high cost. A force of around 1m civilians, the territorial militia, is trained to resist occupation, and military exercises involve the whole population; the largest of these for many years was staged in late 2004. A large military rally in December 2006 also appears to have been designed as a show of force to warn off foreign aggression. The state security apparatus is extensive, including a network of informers. In line with its policy of deterrence, one of the objectives of Cuba’s active international diplomacy is to maximise the political cost to the US of invasion.

Despite the hardening of US-Cuban relations in recent years, Cuban security services have continued low-profile co-operation with US security services on efforts to tackle illegal migration and drugs trafficking. Cuba also receives technical assistance on anti-drugs efforts from European countries.

Resources and infrastructure

Population

Cuba’s population stood at 11.2m at the end of 2006. Annual population growth has been less than 0.5% per year for the past decade, well below the Latin American average of 1.6%, and in 2006, according to official figures, the population actually declined slightly, as a result of a dip in the birth rate. According to official figures, net emigration since 2000 has averaged around 30,000 (around 0.3% of the population), of which 20,000 go to the US under a

The population is stable

18 Cuba


bilateral migration agreement. Both birth and death rates are low compared with the regional average. The low death rates have given the country a rapidly ageing population and therefore a rising old-age dependency ratio. According to the UN Economic Commission for Latin America and the Caribbean (ECLAC), the percentage of the population over 65 years rose from 8.4% in 1990 to 9.6% in 2000, and will grow to 15.8% in 2020, overtaking Argentina and Uruguay to become the highest ratio in the region apart from Puerto Rico and the US Virgin Islands. The average ratio of over 65s for the region as a whole was 4.7% in 1990 and is forecast to be 8.7% in 2020. However, the low birth rate means a declining young-age dependency ratio, so that Cuba s total dependency ratio (youth plus age) is lower than the regional average: in 2000 the total dependent population was 44.5% of the working population, compared with a Latin American average of 60.1%. However, the gap is closing: by 2020 Cuba s overall dependency ratio is forecast to rise to 47%, compared with a regional average of 50.5%. The results of the first full national census for 20 years, carried out in late 2002, were published in 2005.

The state is Cuba’s main employer, but the share of state employment was reduced in the 1990s: in 1990 it accounted for 95% of total employment, but by the end of the decade it had slipped to less than 75%. The main non-state jobs are in the agricultural sector, where traditional private small farmers, who accounted for most of the 5% of non-state workers before 1990, were joined by members of newly created farm co-operatives (known as Unidades Básicas de Producción Cooperativa UBPCs) that replaced many of the large state landholdings. New categories of self-employment and family businesses legalised since 1993 have had to operate under difficult conditions, with tight regulation and high taxes, and never accounted for more than 4% of the working population. A reduction in the list of authorised activities in 2004 does not appear to have substantially altered the number of the self-employed: according to official figures, there were 210,000 in 2005, up from 192,000 in 2002. The much-coveted jobs in joint-venture companies, in which Cuban state enterprises share ownership with foreign investors, account for less than 1% of employment.

An official data series showing a breakdown of employment by sector since 2000 shows that the number of jobs in the manufacturing and services sectors has increased by around one-quarter since 2000. By 2006 the services sector accounted for almost two-thirds of the 4.76m employed. Around one-half of those are engaged in the provision of community, social and personal services. Within this category, the healthcare and education sectors are the largest employers. The manufacturing sector, which employs only around 550,ooo, has also seen a 25% rise in employment since 2000, but the employment in the services sector has fallen by around one-fifth since 2000, from 1.2m to 1m.

During the recession in the 1990s workers were retained on the payroll, even while production declined and, in some cases, ceased, so that the official rate of unemployment rose to only 8% in the mid-1990s despite the 33% contraction of GDP in the first half of the decade. The rate of under-utilisation of the workforce was clearly much higher than that shown by official figures, which

Employment structure: the services sector dominates

Low official unemployment disguises under-employment

Cuba 19


included only those people officially registered as being without work. ECLAC estimates that open unemployment and under-employment together may have totalled 40% of the economically active population in the mid-1990s. As the economy began to recover in the second half of the decade, the official rate of unemployment fell. By the end of 2004 it was only 1.9% and it remained at this level in 2005 and 2006. The level of underemployment will also have fallen over the past decade, but the labour market remains generally slack. A large informal economy has helped to absorb some of the surplus labour and has even created some local labour shortages (mainly in construction and education) in places where the recovery of economic activity has been particularly strong, such as the capital city, Havana, and in Matanzas province.

The policy preference for disguising unemployment (by keeping people employed in their existing workplaces until alternative employment is found) has been a major drain on the fiscal accounts. A decision in 2002 to undertake a radical restructuring of the loss-making sugar industry (see Agriculture), involving a halving of the workforce, has increased the fiscal burden because the state has guaranteed the incomes of the 200,000 workers who will have to be retrained and redeployed. The expansion of the education sector since the late 1990s has also been an element of employment policy, both through directly absorbing surplus labour and by retraining workers from old industries for jobs in the expanding sectors.

Education

UN figures show that Cuba has the highest literacy levels and highest average levels of educational attainment in Latin America. Education at all levels is free at the point of provision. The government sees the maintenance of mass educational provision and a high uptake on tertiary education, particularly in science and technology, as economically and socially important.

Total education spending in pesos was little affected by the economic depression in 1990, but shortages of US dollar inputs severely affected the availability of materials and condition of buildings, while the low wages relative to opportunities in the informal and tourism sectors caused teacher shortages, and student enrolment in post-compulsory education fell as confidence in the benefits of education waned. In the second half of the 1990s the deteriorating trend was reversed. The exodus from teaching was stemmed by a government decision to increase teachers’ pay by around 30% in 1999, and enrolment in higher education has been helped by improved graduate employment prospects. Since 2002 the government has focused on education as a national priority. Education spending increased to over 11% of GDP in 2006, up from 6.3% of GDP in 1998. The school infrastructure has been renovated and modernised and new schools and higher-education institutions have been added. These include a new university, specialising in information technology, the expansion of provision for social-work training and cultural studies, and an extensive retraining programme for redeployed sugar workers. Thousands of new teachers have been trained in order to reduce primary school class sizes to a maximum of 20, and an extensive new network of adult education centres (in a programme known as "universalización de educación")

A leader in educational standards

20 Cuba


has been established, offering education to university level, as well as training programmes. Computers have been installed in schools, and there has been a major investment in developing educational television channels. According to the Oficina Nacional de Estadísticas (ONE), the national statistical office, by the 2005/06 educational year, there were 23 education professionals per 1,000 inhabitants, up from 18 in 1999/2000.

Health

The emphasis of the government on the universal provision of basic needs and healthcare has made Cuba’s health statistics comparable with those of industrialised nations. According to the ONE, in 2004 life expectancy at birth was 77.6 years (bettered in the Latin America and Caribbean region only by Chile and Costa Rica) and the infant-mortality rate was 5.3 per 1,000 live births (the best in the region). The main causes of death (heart disease, malignant tumours and cerebrovascular disease) are largely the same as those in developed countries. A preventative healthcare system, based on family doctors serving small patient groups, was developed in the 1980s. Cuba has the highest ratio of doctors to population in the world, with 628 per 100,000 in 2005.

Comparative health indicators Cuba US Chile Guatemala HaitiLife expectancy (years; 2001) 77 77 78 67 52Infant mortality rate (per 1,000; 2003) 6 7 8 35 76Maternal mortality rate (per 100,000; UN

estimate based on national data) 33 17 31 240 680

Physicians (per 100,000; 1990-2004) 591 549 109 90 25

Source: UN Development Programme, Human Development Report, 2005.

The economic crisis of the early 1990s damaged public health by affecting the availability of food, medicines and equipment. Nutritional standards dropped, although the guarantee of basic foodstuffs through a ration system and emergency food distribution systems mitigated the effects on the poorest. Spending on medical imports, including medicine and equipment, fell from US$227m in 1989 to US$74m in 1994. Between 1993 and 1996 food supplies returned to adequate levels, with average calorie intake per person up from 1,800 calories per head per day in 1993 to over 2,000 by 1996, and the proportion of babies born with a low birth weight was down from 9% in 1993 to 7.3% in 1996. Since 1996 nutritional standards have improved further. In 2005 average daily calorie availability was 3,300 per head.

Public healthcare service statistics, 2005 Health spending (% of GDP) 7.3Total no. of doctors 70,594Population per doctor 159

Population covered by family doctor service (%) 99.4Service facilities Hospitals 267 Polyclinics 444

Sources: Ministry of Public Health; Oficina Nacional de Estadística.

Health indicators rival OECD countries

Cuba 21


The state budget for the Ministry of Public Health was 7.3% of GDP in 2006, and the ministry has obtained some hard currency by developing healthcare tourism. The capacity of the pharmaceutical industry has increased rapidly over the past decade, both to increase the availability of medicines within Cuba and to begin to become a significant exporter.

Natural resources and the environment

Cuba is the largest island in the Greater Antilles. It is 1,250 km long and its width varies between 31 km and 191 km. The national territory, including offshore islands and keys, covers 110,000 sq km. Rainfall is comparatively high, with average rainfall of around 40mm even in the “dry season” from November to April. The hurricane season is June to November. A limestone plain covers almost three-quarters of the island. There is a large nickel deposit in the central-eastern province of Holguín and some oil in the coastal region of the north-west of the island. Exploration for oil in Cuban territory in the Mexican Gulf has only recently begun. There are three mountain ranges: the Sierra Maestra, which dominates the south-eastern part of the island and rises to 2,000 metres; the Guaniguanico range in the west (700 metres); and the central Guamohaya (Escambray) range (1,200 metres). Few of Cuba’s 200 rivers are suitable for hydro-electricity generation. Over 300 beaches provide potential for tourism.

Although protection of the environment is written into the constitution, methods used in agriculture (particularly in the sugar industry) have often damaged soil, and dilapidated and polluting industrial plant and machinery have been tolerated. A new environmental law was introduced in 1997 establishing a regulatory framework, including fines and the principle of environmental taxation. Since then, all new developments have required environmental impact studies and the number of environmental projects, some supported by international co-operation, has grown. Organic agriculture and alternative energy sources (including wind and solar energy) are now being promoted. A reforesting programme is under way, with a target for increasing coverage from 24% in 2005 to 29% of the land area by 2015. After more than a decade of underinvestment, improvements have been made in water supplies and treatment since 2004.

The eastern region has been affected by a series of droughts in recent years. After several years of low rainfall, the depletion of reservoir capacity in mid-2005 left 20% of the total population dependent on water supplied by trucks and caused severe losses in agriculture. Although heavy rains in late 2005 and 2006 brought the drought to an end, experts have suggested that a process of desertification may be underway.

Transport, communications and the Internet

Cuba’s 10,990-km network of paved roads, of which 682 km are highways, is well integrated with cities, towns and ports. The network deteriorated amidst the economic difficulties of the 1990s because of a lack of finance for repairs. A

Environmental issues

Roads and railways

22 Cuba


repair programme for tourism areas was partly financed by tolls on two roads servicing tourist resorts, but discussions about widening the scope for road concessions came to nothing. Fleet improvements (helped by a joint-venture bus-assembly contract with a Brazilian company, Busscar) allowed the number of bus passenger journeys to more than double between 1998 and 2004, but this was only enough to restore them to under half the number reported in 1990, before the economic decline. In 2005-06 investment in road repairs and vehicles for public transport accelerated, with new Chinese financing facilitating the importing of thousands of new buses. Inland road freight distribution is improving as old, fuel-inefficient trucks are being replaced by imported new vehicles for prioritised sectors. Private car-ownership and road traffic remain low by international standards.

More than half the railway system of over 11,000 km serves the sugar industry. The decline in the sugar harvest since 1990 and the closure of mills have hit freight levels, and a severe lack of investment in the 1990s led to depreciation of the network and rolling stock. The average speed on passenger railways was less than 30 km/h in the mid-1990s. Some foreign investment and imports of replacement engines began to bring to improvements in passenger services, particularly for the 750-km main arterial route between Havana and the second-largest city, Santiago, from 2003, but the average speed in 2004 was still only 34 km/h and many parts of the network continued to deteriorate. New sources of credits in 2004-05 have allowed the investment programme to pick up in 2005-06. Rolling stock and engines that arrived from China in early 2006 were unable to operate on Cuba s dilapidated infrastructure, and so work to repair the tracks has been reinvigorated. In 2006 the volume of rail freight (excluding sugar) jumped by 35%, but there was no rise in the number of passengers carried by the railway system.

Both air freight and air-passenger transport volumes increased sharply after Cuba’s opening to international tourism in the 1990s, and the subsequent rebuilding of trade relations. The total number of airports is 23, of which ten serve international traffic. Nine of the international airports have been upgraded since 1995, and there is now air-transport capacity for more than 8m tourists a year, compared with the current inflow of 2.3m. Havana and Varadero airports deal with 70% of international arrivals, and projects currently in progress will lift capacity in the two airports to 3m and 1.25m respectively. A rolling programme of airport development is in progress at the smaller regional airports: in early 2007 improvements were completed at Santiago and Manzanillo, and new work inaugurated at two more, serving Santa Clara and Holguín. Air-freight capacity was improved with the opening of a new cargo terminal at José Martí airport in Havana in 2002.

Civil aviation was restructured in 1997, when the national carrier, Cubana de Aviación, and a services company, Empresa de Aeropuertos y Servicios Aeronáuticos, together with smaller airlines providing domestic and regional services, were brought under the umbrella of the Corporación de la Aviación Cubana. During the economic crisis of the 1990s aircraft were leased from abroad to meet the growing demand from international tourism. Following an economic agreement with Russia in 2006, Cuba bought two new passenger

Air services and shipping

Cuba 23


aircraft, and in 2007 it plans to purchase two more, plus one cargo plane and six for agricultural spraying.

Cuba has seven major sea ports and 20 sea terminals. The decline in sugar exports since 1990 has been reflected in the fall in the volume of dry goods handled in Cuban ports from 9m tonnes in 1990 to only around 3.5m in 2006. Oil imports have also declined over that period, from 13.4m tonnes in 1989 to an estimated 4.1m tonnes in 2006. However, imports of other goods have recovered to pre-crisis levels. Maritime transport was decentralised in the 1990s and since then foreign capital and the entry of overseas shippers has provided finance and expertise for the expansion of some ports, but the Cuban merchant marine fleet, which was the Caribbean’s largest at the end of the 1980s, has shrunk to around half its former size, with around 30 vessels with a combined capacity of 600,000 tonnes. Since 2005 port management has come under scrutiny as part of the government s programme to increase efficiency and tighten accounting controls. Extensive pilfering was exposed in an auditing swoop in early 2006, leading to the replacement of personnel and the establishment of new procedures.

The problem of chronic underinvestment in Cuban telecommunications (telecoms) began to be addressed with the formation of the Empresa de Telecommunicaciones de Cuba (Etecsa) in 1994, a joint venture between the state and a Mexican company, Grupo Domos. An Italian company, Telecom Italia, has since replaced Grupo Domos as the foreign partner, but the upgrading programme has continued. A US decision in 1994 to authorise payments to Cuban operators for a share of revenue from US-Cuban services helped to finance the investment, and a further boost was given to development of the sector by the establishment of a new Ministry of Information Technology and Communications in 2000. The ministry has a mandate to speed the development of trade and e-business using information technology to make Cuba an “information society”. It has a range of autonomous subsidiary enterprises focusing on separate information technology (IT) industries such as telecoms, software, hardware, wireless, training and e-commerce. Each of these is actively seeking foreign partners.

The surge in investment included the digitisation of the country’s telephone network, replacing the archaic analogue telephone system with wireless application protocol (WAP). Digitalisation has dramatically improved reliability, but despite more than doubling the number of lines since 1997, there were still only 1.12m lines by the end of 2006, giving a telephone density of only 100 lines per 1,000 inhabitants, half the average for the Latin American and Caribbean region (according to data provided by the UN Development Programme UNDP). Of these, 94% were digitalised by the end of 2006.

In 2003 the communications ministry extended cellular services, which had initially been only available to businesses and tourists, to Cuban state entities and to individuals for personal use. At the end of 2006 there were around 100,000 mobile subscribers. The size of the market is limited by the fact that so far the bills have had to be paid in convertible pesos. There are plans eventually to extend the service to Cuban peso subscribers, but no date has been set for this.

Telecommunications

24 Cuba


Cuba s access to the Internet has so far been hampered by its lack of connection to an international cable link. Work on a national fibre-optic network was completed in 2004, with a joint venture between Teléfonos Celulares de Cuba (Cubacel), the national cellular-service provider, and an Italian company, Sirti, carrying out the work. US legislation prevents the connection to a US terminal of a fibre-optic cable between Cuba and Florida, but an agreement with Venezuela to lay a new 1,552-km cable between northern Venezuela and eastern Cuba, conceived as the first stage of a network to link the Caribbean and Latin America, was signed in January 2007. Work is planned for completion in 2009.

Official policy is to seek to maximise access to IT through state channels. The number of personal computers (PCs) is relatively small, at only around 650,000 in 2006 (58 per 1,000 inhabitants), although there is a rapid rate of expansion, with more than 200,000 added in 2006, according to ministry officials. To broaden access a nationwide network of public-access computer clubs, giving free lessons and access to computers, has been established, and computers have been installed in all schools. According to official statistics, 2.5m people have access to PCs at educational establishments, and of the 88,000 PCs that they use, 40% have access to the Internet. Local post offices provide public access to e-mail, although many facilities do not provide international access. Access to the Internet, though, is mainly restricted to government offices, research and educational institutes and enterprises. In 2004 (the most recent year for which data are available), there were only 143,000 Internet users, only 13 per 1,000 inhabitants. To boost the level of expertise in the field of IT, a university specialising in informatics opened in 2002 near to Havana. In the same year a dedicated IT software-production facility was opened at Tarará, east of Havana, to spearhead a software export industry. In January 2007 officials announced that Cuban users would switch from Microsoft software to open-access systems, because of difficulties in obtaining the products and upgrades produced by US-based Microsoft.

Energy provision

Until 1990 Cuba imported oil from the Soviet Union in exchange for sugar at favourable terms of trade. When Soviet supplies fell to little more than 1m tonnes/year (t/y), Cuba had to source oil on the world market. Oil imports fell steeply, from 13.4m tonnes in 1989 to 5.5m tonnes in 1993. Since then, oil imports have declined further, but more gradually, as an increase in domestic oil and gas production and, to a lesser extent, improvements in energy efficiency and the use of alternative energy sources, have allowed Cuba to increase consumption while reducing dependency on imports. However, increasing international prices have lifted fuel import costs since the late 1990s: In 2006 the Economist Intelligence Unit estimates that spending on fuel imports was US$1.7bn, compared with less than US$700m in 1998. However, this remains below the 1989 level of US$2.6bn.

Domestic crude oil and gas production has increased from 500,000 tonnes of oil-equivalent (toe) in 1991 to around 4.5m toe (around 30m barrels, or 80,000 barrels a day b/d) in 2006, around one-half of total oil consumption. The expansion has been facilitated by over US$500m in foreign investment in the

Oil and gas

Cuba 25


sector since the early 1990s. Until now, the oil has come from wells in a field close to the north coast of the western provinces, where new wells are being developed. An oil find announced at the end of 2004 (of an estimated 100m barrels, equivalent to 3.5 years’ extraction), has encouraged further exploration. Joint ventures with two Canadian companies, Sherritt International and Pebercan, have made a large contribution to oil production from these wells over the past decade, but in 2005 a new Chinese partner, Sinopec, signed a joint-venture agreement for exploration and development of new wells. Drilling started in 2006.

In the longer term hopes are pinned on Cuba’s unexplored deep-sea territory in the Mexican Gulf. In 1999, 59 oil-exploration blocks in Cuba’s Mexican Gulf territory were made available to foreign partners for the first time. So far, fewer than 20 of the blocs have been taken up. In 2004 a Spanish company, Repsol, drilled the first exploration well, and reported mixed results: oil was found, but not in commercial quantities. The company, which has five blocks, plans to sink another well in 2008, in partnership with an Indian oil company, ONGC Vinesh, and a Norwegian company, Norsk Hydro. ONGC also has two separate deepwater blocks and Sherritt International has four.

A contract was signed in early 2006 for the modernisation of a large Soviet-built oil refinery at Cienfuegos (with a capacity of 11m t/y, or 220,000 b/d). Petróleos de Venezuela (PdVSA, the Venezuelan state oil company) had made a commitment to bring the refinery in to service, and has secured the option to undertake further associated investments in the port of Cienfuegos.

Cuba remains vulnerable to oil-price or supply shocks, with oil-importation costs still amounting to around one-fifth of total import spending. Since 2000 Venezuela has become Cuba’s main supplier, with PdVSA selling around 100,000b/d oil on preferential terms, linked to the sale of Cuban professional services (mainly medical) to Venezuela. This reduces Cuba’s vulnerability to oil price changes and also means that, if Cuba were to reduce national import needs to below the level of supply agreed, it could increase its export earnings by reselling Venezuelan oil. However, it also leaves the economy susceptible to damage if deliveries from PdVSA are interrupted, as they were by a strike in late 2002/early 2003.

Around 86% of Cuba’s electricity generation is thermoelectric. By mid-2003 all of the oil-powered production was fuelled by Cuban crude. To make this possible, major investments were made to upgrade Soviet generating plants and convert them to be able to use the heavy-grade Cuban oil. Cuban gas, extracted from its oil wells, accounts for a further 12% of electricity generation. A further 1% is powered by diesel. The sugar industry generates its own power using cane waste, and other sources (including hydroelectric plants and solar power) are used on a small scale. The use of solar energy has increased since the opening of a photovoltaic cell factory in 2003, but as yet it is restricted to remote areas, and provides only a tiny proportion of the total. Six sites have been identified as the most suitable for wind energy, and in December 2006 officials announced that Cuba s first wind farm would be built on the Isle of Youth, using French technology. Plans for the completion of a Soviet-built nuclear-

Power generation is mainly fuelled by Cuban crude

26 Cuba


power station, which was mothballed after 1990 for lack of capital, were abandoned in 2000.

After years of electricity shortages and disruptions to supplies, a major investment programme was launched in 2006, the year designated by the authorities as "the year of the energy revolution". In the first half of the 1990s fuel shortages and the deteriorating condition of power plants and distribution networks had reduced generation from 15,200 gwh in 1990 to only 11,000 gwh, resulting in frequent power cuts. Although generation was gradually restored to 15,900 gwh by 2003 thanks to more reliable fuel supplies, repairs and investments, this was still only just sufficient to meet demand in the peak months, leaving the system vulnerable to interruptions when the equipment (much of which is in a poor condition) failed. After problems in the largest electricity plant had caused serious disruption in 2004-05, the minister for basic industries, Marcos Portal, was replaced. Under the leadership of the new minister, Yadira García, the "energy revolution" has built a decentralised network, with local generators and back-up facilities, to reduce dependence on the few large generating plants that had previously been at the core of the system. Although work is continuing on the transmission network in 2007, industry officials have reported that by the end of 2006 not only had the number of supply interruptions been greatly reduced, but there had also been improvements in generating efficiency. The decentralised network is also designed to accommodate the development of local plants using renewable fuels, such as wind, solar power and bio-fuels.

The government, which subsidises domestic fuel costs, has always sought to promote energy efficiency, but low energy prices ensured that the influence of official exhortations was undermined by the lack of economic incentives. Since 2005 it has taken a more active approach. At the end of that year it raised household electricity prices sharply (with the biggest rises for the largest consumers), and in 2006 it undertook a national campaign to replace energy-inefficient domestic appliances with more efficient ones. Free energy-saving lightbulbs and subsidised refrigerators, water pumps and cookers were distributed nationally.

The economy

Economic structure Main economic indicators, 2006a Real GDP growth (%) 9.5

Consumer price inflation (year-end; %) 5.4Current-account balance (US$ m) 39

Exports of goods fob (US$ m) 2,587Imports of goods fob (US$ m) 9,357External debt stock (US$ m)b 15,154

Population (year-end; m) 11.2

a Economist Intelligence Unit estimates. b Hard-currency debt only.

Sources: Banco Central de Cuba; Economic Commission for Latin America and the Caribbean; press reports.

Electricity network overhauled in an "energy revolution"

Cuba 27


Services dominate the Cuban economy, and their dominance has increased in recent years. According to the Economist Intelligence Unit estimates based on the latest available national sources, services accounted for 69.2% of GDP in 2006, compared with 57.2% in 1990. In Cuba, the sector s characteristics are unusual. The state dominates, not only as provider of non-commercial services, but also as the controller of the trade in commercial services. There is a sharp contrast between services provided in the domestic economy and those orientated towards external markets. In the domestic economy, services activities are concentrated in an exceptionally large welfare state, in which the state takes on responsibility for providing universal free health, education and welfare systems, as well as an extensive system of public administration. In the external economy, a large international tourism industry grew to dominate services in the 1990s, while professional services (mainly in health and education) sold abroad have become more important in the past five years. During the economic crisis of the early 1990s, the welfare state s share of GDP grew as the rest of the economy shrank, and this, together with the expansion of tourism and exports of professional services, explains the growing dominance of services in the Cuban economy.

The demise of the sugar industry, lack of finance for agricultural imports and weak incentives for farmers have resulted in a shrinking share of agriculture in the Cuban economy: in 1990 agriculture accounted for 10.8% of GDP; by 2006, according to Economist Intelligence estimates, it was just 4.6%. Until 2002 sugar accounted for around one-half the land area under cultivation, but a radical restructuring programme initiated in that year has halved the area. Eventually, this is expected to allow for an expansion of other export agriculture (mainly citrus and tropical fruit) as well as food crops and forestry, although drought in 2004-06 has set back these plans.

Comparative economic indicators, 2006

Cubaa HaitiaDominican

Republic a Mexico a Jamaicaa

GDP (US$ bn) 40.3 4.9 37.5 818.3 10.3

GDP per head (US$) 3,584 565 4,158 7,616 3,855

GDP per head (US$ at PPP) 9,863 1,943 8,738 10,813 4,605

Consumer price inflation (av; %) 6.1 13.1 7.6 b 3.6b 8.6b

Current-account balance (US$ bn) 0.0 0.0 -0.8 -3.2 -1.1

Current-account balance (% of GDP) 0.1 -0.3 -2.1 -0.4 -10.3

Exports of goods fob (US$ bn) 2.6 0.5 6.3 252.2 2.2

Imports of goods fob (US$ bn) -9.4 -1.7 -11.0 -258.1 -5.0

External debt (US$ bn) 15.2 1.4 8.6 130.1 7.6

Debt-service ratio, paid (%) 11.0 3.8 11.8 15.6 12.2

a Economist Intelligence Unit estimates. b Actual.

Source: Economist Intelligence Unit, CountryData.

Industry accounted for 26.2% of GDP in 2006, down from 32.1% in 1990. After a sharp decline in industrial production in the early 1990s, new investment has brought a recovery in some industries. These include nickel mining, steel production, light industries supplying the tourism sector and, since a new housing programme was launched in the second half of 2005, in the construction materials industry. The decline in the sugar crop has meant a

28 Cuba


shrinking sugar-processing industry, although there has been a shift from processing raw sugar to higher value-added processing.

Economic policy

Following the 1959 revolution, the economy was transformed from a capitalist to a centrally planned system integrated into the Council for Mutual Economic Assistance (CMEA, the Soviet trading bloc), which Cuba joined in 1972. In response to the economic emergency caused by the dissolution of the CMEA in 1990, dubbed the “special period in peace time” by the president, Fidel Castro, (see Economic performance), the government abandoned five-year plans and adopted emergency measures. It centralised the allocation of resources, while introducing limited reforms in the external sector in an effort to secure new sources of hard currency. All state investment was suspended, apart from projects intended to bring in hard currency (including tourism facilities and a biotechnology programme); a food programme was introduced to achieve greater food self-sufficiency; spending on the armed forces and central administration was radically reduced; there were drastic cuts in the use of electricity and oil; and initiatives to recover and manufacture spare parts were promoted. The reforms in the external sector included an opening to foreign direct investment (FDI) in joint ventures and the development of tourism.

Despite the sharp decline in output and the supply of goods and services in the formal economy, the government kept the level of employment and nominal wages stable. The result was that the real value of wages fell rapidly, as there were shortages of many goods and the black-market value of the Cuban peso collapsed. With the state-run economy unable to provide anything but an inadequate subsistence, the informal economy flourished. This gave rise to a sharp increase in income inequality, even though relative nominal wages within the formal sector were unchanged, as those operating in the informal sector earning many times the real value of incomes in the formal sector.

In 1993 the government turned its attention to the monetary imbalance that had accumulated as a result of the economic collapse, and to more far-reaching structural reforms. After extensive debates in specially convened “workers assemblies” and the national assembly, a series of radical fiscal retrenchment measures adopted in 1994 slashed the fiscal deficit and so strengthened the black-market value of the Cuban peso. Liberalising reforms introduced in 1993-95 provided some stimulus to trade and brought some improvement in efficiency. The new agricultural markets grew to play an important part in the supply of food to the cities, and have become a major source of income for farmers. The network of hard-currency retail shops that have been made possible by the domestic circulation of foreign exchange have also provided the government with an important source of foreign exchange, as part of the retail mark-up is paid to the state.

Central planning responds to crisis, 1990-93

Stabilisation and limited liberalising reforms, 1993-95

Cuba 29


Stabilisation and economic reform, 1993-95

1993

• Possession of foreign currency de-penalised. • New Unidades Básicas de Producción Cooperativa (UBPC, basic units of

co-operative production) established to replace many state farms. • The scope for self-employment broadened.

1994

• State administration rationalised, including the abolition of 15 ministries. • Prices of non-essential goods raised. • New taxation system established. • Foreign trade decentralised. • Banking reform begun. • Enterprise restructuring process initiated. • Free markets set up for agricultural produce and also some crafts and

manufactured goods.

1995

• New foreign-investment law passed and a new ministry responsible for foreign investment and economic co-operation established.

• Sight and time deposits in hard currency authorised for nationals. • Automation of banking network begun. • A new currency, the Convertible peso (CUC) issued at par with the US dollar. • Black market in foreign exchange replaced by official bureaux de change for

personal transactions using a legal, but “unofficial” market rate of exchange.

The initial reforms led to speculation that a transition to a market economy, along the lines of the transformations in central and eastern Europe, was beginning. However, the wave of liberalising reforms did not continue. The opening to private enterprise remained limited, with self-employment, private restaurants and private renting so tightly controlled and heavily taxed that their numbers have fallen since 2000. A new law to allow the growth of a market in property was mooted, but after several years of discussion the project was abandoned in 1999. A law setting up a group of new free-trade zones (FTZs) was passed in 1996, but with interest from foreign investors proving to be negligible the experiment was quietly abandoned in 2005, with the zones being redesignated as “development zones”, with a more limited scope. The management and monitoring of foreign trade and inward investment has subsequently become increasingly centralised.

Although liberalisation has not progressed, there have been further structural reforms of the economy since the mid-1990s. Most of these concern the monetary and financial system. In a programme known as Perfeccionamiento Empresarial, the accounting systems of state enterprises have been overhauled with the introduction of financial accounting and redeployment of labour; the tax system has evolved, with the extension of direct taxation; international trade has expanded strongly; and foreign business participation has continued to grow, despite close vetting by the Ministry for Foreign Investment and Economic Co-operation (Minvec). Some of the most important developments

Liberalisation stalls, but monetary policy advances

30 Cuba


have been in the financial system. The creation of a new Central Bank (the Banco Central de Cuba, BCC) in 1997 heralded a new phase in the process of economic restructuring. This has involved shifting control of the economy away from the old planning apparatus, with ministries at the heart of its command structure, towards a more market-oriented system, with an emerging financial system regulated by the Central Bank.

Reform of the financial system and exchange rates, 1997-2006

1997-2000

• Creation of the Banco Central de Cuba (BCC), a new Central Bank, to supervise a developing financial sector and to conduct monetary policy.

• Monetary policy committee set up. • Consumer credit established. • Interest-bearing savings accounts, promissory notes and factoring introduced.

2001-04

• Upgrading of the state s audit commission to the status of a ministry. • The Convertible peso replaces the US dollar for all transactions between Cuban

entities operating in hard currency. • The Convertible peso replaces the US dollar in all domestic hard currency retail

outlets. A 10% surcharge to be charged on transactions in US dollars.

2005-06

• Cuenta Única en Ingresos en Divisas del Estado (a sole account for hard-currency state income) established within the BCC to handle all Treasury and joint enterprise receipts in Convertible pesos and hard currency.

• Approval of the BCC s Comité de Aprobación de Divisas (CAD, hard-currency approvals committee) required for hard-currency transactions of over US$5,000

• The “unofficial” (but legal) Cuban peso:Convertible peso exchange rate is changed from CuPs26:CUC1 to CuPs24:CUC1 an 8% revaluation of the Cuban peso. (The official rate is unchanged at CuPs1:CUC1.)

• The CUC is revalued by 8%, from CUC1:US$1 to 93 convertible centavos:US$1. • The first domestic foreign-currency-denominated bond is issued by the BCC and

bought by state-owned banks, to consolidate the BCC s existing liabilities to the banking sector.

The reforms in the system of money and finance have been coupled with an overhaul of accounting systems. These are aimed not only at tackling the endemic problems of pilfering, petty corruption and tax-evasion, but also at improving the efficiency of the allocation of finance. The Ministry of Audit and Control created in 2001 has been well resourced and has strong backing from the political leadership. In 2005 the campaign against economic crime entered a new phase, when thousands of newly trained “social workers” took over a series of activities identified as having a high level of pilfering, including petrol stations and ports. Having used these swoops to gather data on the level of transactions recorded before and after the takeovers, the authorities have radically restructured the organisation of these activities. However, the root causes of the problem the strong incentives and ample opportunities for illegal enterprise springing from the coexistence of a range of sets of prices (some

The government clamps down on the black economy

Cuba 31


state-controlled and some free-market) and two widely divergent exchange rates (the “official” and “unofficial”) remain. Government officials have stated that exchange-rate unification is a policy priority, and that they are working towards this end, but argue that the conditions are not yet right.

Economic performance

Gross domestic product (% real change; constant 1997 prices)

Annual average 2006 2002-06GDP by output 9.5 4.4 Agriculture -6.0 -3.1 Industry 11.8 3.4 Services 9.5 5.3

Sources: Economist Intelligence Unit estimates, based on available data from Oficina Nacional de Estadísticas.

Data problems

Availability and reliability. The Cuban authorities have a well-established infrastructure for the collection of extensive and relatively reliable data on physical output. However, there are problems with valuations and weightings as a result of distortions in the domestic price system and exchange rates. These problems make valuation of total GDP difficult (see box: The official Cuban measure of national income). Cuban official economic data are published mainly by the Oficina Nacional de Estadísticas (ONE, the national statistics office) and the Banco Central de Cuba (BCC, the Central Bank). They are not verified by the IMF, but the UN Economic Commission for Latin America and the Caribbean (ECLAC) has generally accepted the Cuban data as a fair representation of economic performance. Timeliness. Macroeconomic and sectoral data are published only annually: there are no quarterly or monthly updates, although when results are positive they are often reported in official speeches. Preliminary annual data are reported in speeches at the regular December National Assembly meeting, and the ONE usually publishes a brief summary of the main indicators during the first quarter of the following year; the full set of indicators usually has to wait until halfway through the year. Transparency. There are important gaps in the data, such as the absence of any figures for foreign-exchange reserves, and sometimes a lack of clear definitions or comparable methods used. In the absence of support from the IMF and World Bank, which generally provide technical assistance to improve the comparability of data, the Cuban authorities have sought to work with UN advisers and foreign academics. However, Cuba’s concerns about national security have impeded transparency in the area of data-dissemination.

The official figures show that, after contracting by one-third in real terms between 1990 and 1993, the economy began a recovery in 1994. Since then, most sectors have reported some growth, led by services and mining. We estimate that total real GDP in 2006 was around 15% larger than in 1990. The total real output of services in 2006 was around one-third higher than in 1990, while industrial output as a whole had only just recovered to its 1990 level. Within the industrial category the surge in mining output (up by more than

Economic collapse and recovery in the 1990s

32 Cuba


150% since 1990) was offset by the relative weakness of manufacturing, where total real output was still 6% down on its 1990 level. The agricultural sector as a whole remains depressed, with total aggregated output in 2006 still at only 55% of its 1990 level. The sector s performance has been dragged down by the slump in the production of sugar, which was the most important merchandise export in 1990: in 2006 the sugar crop was only 13% of its 1990 level (see Economic sectors: Agriculture).

The official Cuban measure of national income

Background

In 2003 the Cuban authorities began to use a new measure for GDP that differs from the international standard method. In the Cuban measure, the value of freely provided government services are not measured at cost, as in the standard method, but by using an estimate of the market value of the services, which is higher. The justification offered by the authorities for the different method of valuing freely provided services is that in Cuba the costs of these services are lower than in other countries. One reason for this is that no income tax is paid on state salaries. This means that the cost of labour in the healthcare and education sectors is understated (because, in effect, wages are paid net of tax), and therefore the value of these services is understated if the standard methodology is used.

Impact on measurement of economic structure and performance

For the purposes of the Economist Intelligence Unit’s model (which is used to calculate risk ratings), we have made estimates of Cuban GDP according to the international standard method. Nominal GDP. Our series, using our own estimates based on the available data for valuation of government consumption and services according to standard definitions, gives a level of nominal GDP of around 20% below that reported using the Cuban method. Real GDP growth. The real increase in freely provided government services outstripped that of the rest of the economy in 2003-06, with the result that the Cuban measure produces higher national income growth rates than the standard measure. For 2003 the Cuban authorities announced GDP growth rates for both measures: for the standard measure it was 2.9%, but for the new Cuban measure it was 3.8%. For 2004, 2005 and 2006 the Cuban authorities have published national income data using only the Cuban method. The official growth rates given are 5.4% for 2004, 11.8% for 2005 and 12.5% for 2006. On the basis of the available information and using the standard GDP definition, we estimate that GDP growth was 4.2% in 2004, 8.5% in 2005 and 9.5% in 2006. These estimates will be subject to revision as more data becomes available.

The measurement of inflation is difficult, because retail spending is divided between a number of markets (Cuban peso and convertible peso, state and private, legal and illegal). Price behaviour varies widely between these outlets. In the state-run peso shops, rationed basic goods are sold at highly subsidised fixed prices. The Cuban peso cost of purchases in the state-owned shops that sell goods in convertible pesos is inflated by the distorted domestic “unofficial” exchange rate (which was CUP24:CUC1 in January 2007). Prices in the free

Inflation

Cuba 33


markets for domestically produced agricultural and industrial products are determined by market conditions, and have tended to fall as availability has improved since the markets were established in 1994. Prices on the black market, which operates in both convertible pesos and Cuban pesos, fluctuate most widely.

Inflation (% change)

Annual average 2006 2002-06Consumer prices (av) 6.1 4.69

Source: Economist Intelligence Unit estimates, based on available data from the Banco Central de Cuba.

The Oficina Nacional de Estadísticas (ONE) collects data on price movements in all the markets, but does not routinely publish the result. Between 1990 and 1994, when prices were rising quickly and the unofficial (and not yet legalised) exchange rate collapsed, no inflation figures were published. We estimate that the purchasing power of the Cuban peso more than halved during this period. From 1995 to 2004 the Central Bank published a consumer price inflation figure once a year: in 1995 and 1996 the index fell by a total of around 15%, because of the appreciation of the unofficial exchange rate, but it rose by a total of around 12% over the next eight years. No official figures have been published for 2005 or 2006, but we estimate that inflation has accelerated to around 6-7% a year.

Regional trends

Cuba is divided into 15 administrative regions: 13 provinces, each with a population of between 400,000 and 1m; the City of Havana, with a population of 2.2m; and the “special municipality” of the Isle of Youth, with only 87,000 inhabitants. Over 75% of Cubans live in urban areas, reflecting the low share of GDP accounted for by agriculture. Sugar is cultivated in most of the provinces, tobacco mainly in the west, coffee mainly in the east and citrus in the centre and on the Isle of Youth. Nickel extraction is concentrated in the eastern province of Holguín, and most of the oil wells are in Matanzas province, close to the capital, Havana. The tourism industry, which has shown the strongest growth over the past decade and a half, has developed fastest in the City of Havana and the resorts on the northern coast of Matanzas, Ciego de Ávila and Holguín provinces. The cities of Santiago de Cuba and Trinidad (in the province of Sancti Spíritus) have also become important tourism destinations.

Havana contains around one-fifth of the total population. Migration to the capital was slower than elsewhere in Latin America between 1959 and 1990, because of a deliberate policy of promoting development in the regions: Havana’s population grew by a modest average of 0.7% a year in that period, compared with 3-5% in other Latin American capitals. However, the onset of the economic crisis in 1990 raised the pace of internal migration towards the capital, which has attracted much of the tourism trade and foreign-investment activity. Although legislation introduced in 1997 provided the authorities with the power to limit internal migration, slowing the flow, there is still a trend towards migration from the poorer eastern provinces, where unemployment

34 Cuba


has been highest, towards the west (particularly Havana and Matanzas province), where economic dynamism is strongest.

Population by province, 2006 (year-end)

‘000 % of totalPinar del Río 731 6.5

Havana 734 6.5City of Havana 2,169 19.3Matanzas 682 6.1

Villa Clara 812 7.2Cienfuegos 401 3.6

Sancti Spíritus 464 4.1Ciego de Ávila 420 3.7Camagüey 785 7.0

Las Tunas 532 4.7Holguín 1,034 9.2

Granma 833 7.4Santiago de Cuba 1,046 9.3

Guantánamo 512 4.6Isle of Youth 87 0.8Total 11,240 100.0

Source: Oficina Nacional de Estadísticas.

Economic sectors

Agriculture

According to national income figures, agricultural output shrank by one-half during the economic crisis of 1990-94 then picked up by a third in 1995-2000. The recovery has not been sustained. After several years of stagnation, output fell once more in 2005 and 2006, leaving the 2006 aggregate level of agricultural output still only 55% of the 1990 level. Although agriculture accounts for only around 5% of national income, it employs around one-fifth of the workforce, so the stagnation of the sector is of concern to policymakers.

The agricultural sector is divided into the sugar and non-sugar sectors: the sugar industry, encompassing the agricultural and industrial stages of production, comes under the remit of the Ministry of Sugar, while non-sugar agriculturewhich has mainly been concerned with food production for domestic consumption has traditionally been the concern of the Ministry of Agriculture. However, this division has been blurred in recent years, as some of the land formerly planted to sugar has been converted to food production while remaining under the remit of the sugar ministry, and non-sugar crops (mainly tobacco and citrus) have increased their share of export earnings.

Most of the decline in agriculture since 1990 arises from the collapse of the sugar sector, with output down from 8.4m tonnes in 1990 to only 1.1m tonnes in 2006 (see The external sector). The root cause of sugar s decline has been the loss of preferential sugar export prices and cheap imported inputs under Soviet

Weaknesses persist

The sugar decline has not been reversed

Cuba 35


bloc trading arrangements. At world market prices much of Cuba s sugar production is uneconomic, and the authorities have been seeking to restructure the industry to restore profitability. Most of the large state sugar plantations were converted into a new form of enterprise, the Unidades Básicas de Producción Cooperativa (UBPC, basic unit of co-operative production, which give members usufruct ownership rights) between 1993 and 1998. Efforts to improve efficiency and overhaul the incentives structure succeeded in reducing costs and increasing awareness of the low returns in the industry in 1990-2002, but failed to increase the harvest. In mid-2002 a decision was finally taken to rationalise the industry, with the closure of around one-half of the mills and transfer to other uses of around one-half of the agricultural land under sugar. The state undertook to maintain the salaries of the workforce during retraining and redeployment. Output fell to a record low in 2006, but is expected to begin to pick up in 2007.

The official plan for the sugar industry prioritises the development of higher value-added sugar products, including organic sugar, alcohol and other by-products. To seek partners for investment and marketing, two new companies were inaugurated in the sector shortly before the restructuring plan was announced: a state finance company, Corporación Financiera Azucarera (Arcaz), with initial capital of US$50m; and a trading company, Compañía Azucarera Internacional (Caisa), a joint venture between the sugar ministry and a foreign partner. However, with the harvests in 2003-06 leaving little sugar to process once domestic consumption and export contracts were met, there have been no reports of significant developments in these areas.

A series of reforms have been introduced in an effort to increase output and efficiency in the non-sugar agricultural sector since 1990. A food programme introduced in 1991 placed emphasis on voluntary labour and import-substituting production; the creation of UBPCs in the mid-1990s transferred land ownership of non-sugar farms, as well as sugar farms, from the state to the co-operative sector; the introduction of free agricultural markets in 1994 opened new opportunities for farmers to sell directly to the public at market prices; the opening of the sector to foreign investment created potential new sources of capital; the establishment of urban farms by local communities boosted the supply of fresh vegetables; some agricultural procurement prices have been adjusted in an effort to improve incentives; and the authorities have encouraged the development of organic production.

The changes in structure and incentives in domestic agriculture have played a part in stimulating food production since 1990. Crops of fruit and vegetables for domestic consumption have picked up strongly since 1994, and are now higher than before the economic crisis of the early 1990s, despite a lower level of imported inputs. However, import dependency remains high for some staple crops particularly rice, beans, soya and wheat. There is a mixed picture for animal products. The once-successful dairy industry is also still performing well below pre-1990 levels, but pork production has recovered. The expansion of non-state pork production, from under 20% of the total in 2000 to 60% by 2004, explains much of the rise in production. Despite the improvements in food production, domestic market prices remain high and supplies are erratic and of

Reform of non-sugar agriculture continues

36 Cuba


low quality. These problems prompted a debate on the issue of food supplies at the National Assembly meeting in December 2006, leading to a call by government leaders for a review of the food production and distribution system as a whole. This may herald further changes in agricultural policy in the coming year.

Foreign involvement in non-sugar agriculture has so far been restricted to the financing, management and marketing of a handful of crops destined for export markets such as rum, cigars and fruit juices. However, the pace of inward investment has been inhibited not only by the threat of US sanctions against companies deemed to be “trafficking” in nationalised land or property, but also by a heavy burden of state regulation and price controls. Citrus production recovered to pre-crisis levels by 2000, after falling by over 40% between 1990 and 1994. The crop is vulnerable to hurricanes: in 2002 hurricane damage accounted for a 50% fall in production, and after bouncing back with a record harvest in 2003 the crop was again hit by severe hurricanes in 2004 and 2005. Tobacco production fell by 50% between 1990 and 1993, but has also returned to pre-1990 levels, with the help of harvest pre-financing from Europe. In 2000 a Franco-Spanish company, Altadis, purchased 50% of Habanos, the state company responsible for marketing cigars internationally. The deal has been followed by a reorientation of policy, with the emphasis placed on maintaining the premium for Cuban cigars rather than maximising output growth.

The annual fish catch before the economic crisis of the 1990s was around 130,000 tonnes; a lack of investment, fuel and working capital reduced this by around two-thirds between 1990 and 1994 and there has been no recovery since then. The development of fish farming went some way to making up the shortfall in the 1990s, rising from around 20,000 tonnes in 2003 to over 70,000 by 1998. There was also much enthusiasm about the potential of lobster and shrimp farming, but there has been little published information on developments in the past few years, suggesting that performance has been disappointing.

Mining and semi-processing

Nickel plus cobalt reserves in the north east of the island, in Holguín province, are among the world’s largest. Cuba is the world’s sixth-largest producer of nickel and produces 10% of global cobalt supply. Gold, copper and chromium are being extracted on a small scale, as are industrial minerals, particularly zeolite. Nickel output from Cuba s three plants more than doubled, from 26,900 tonnes to 67,700 tonnes, in the four years to 1998, mainly because of a joint venture with Sherritt International of Canada, which has expanded production at one of the plants. The agreement with Sherritt gives the Canadian company a share of the mining operation and its Cuban counterpart a share of the nickel processing plant in Canada. Total Cuban nickel production peaked at 76,530 tonnes in 2001, and since then has stabilised close to that level. Strong prices have lifted nickel earnings from US$430m in 2002 to an estimated US$1.5bn in 2006, more than one-half of total goods export earnings.

Fishing

Nickel has become a mainstay of the economy

Non-sugar export crops attract some foreign interest

Cuba 37


High international nickel prices have encouraged new foreign investor interest since 2002. Annual output from the existing upgraded plant is planned to rise to around 125,000 by 2010, and in January 2007 the authorities announced that a new joint venture with Venezuelan partners would bring into operation a partially completed plant that had been mothballed since 1990, at a cost of US$500m. Interest in the Camarioca plant had previously been registered by both British and Chinese investors. According to official statements, the Cuban-Venezuelan agreement involves Cuba taking a share of a plant in Venezuela that will use Cuban ferro-nickel to produce stainless steel.

Manufacturing

Official data suggest that overall manufacturing output contracted by one-third in 1990-95, and although there has been a recovery in some branches, the overall level of manufacturing output has not yet returned to its 1990 level. The overall weak performance is explained by the sector s former dependence on the Soviet trading bloc, with cheap imported fuel and intermediate goods, plentiful concessionary finance and integration into east European supply chains. One of the sectors that has shrunk the most since 1990 is the sugar-processing industry, where activity has contracted in line with the harvest to less than one-quarter of its former size. Non-sugar manufacturing output, after halving in the early 1990s, recovered almost to its 1990 level by the end of the decade, as Cuban suppliers benefited from the stimulus from the growing domestic market, but growth has been weak since then. In 2001-03 output was hit by a downturn in demand from the domestic hard-currency markets and tourism, together with tight access to external financing for inputs; and even in 2004-06, when new public investment programmes drove a surge in domestic demand, only a few branches of manufacturing flourished.

The government s stated policy towards manufacturing is to seek to improve efficiency and competitiveness rather than maximise output. However, progress has been slow, in part because these objectives have been balanced against a commitment to full employment, which means that workers cannot be laid off unless there is alternative employment available. Manufacturing enterprises have been substantially restructured since the mid-1990s, with large firms divided into smaller units, and a degree of financial control devolved from the ministerial to the enterprise level. Profit and loss accounting plays a greater role, subsidies have been cut back and financing is increasingly being allocated on the basis of projected future returns. But with prices still centrally controlled and a continued lack of a single exchange rate, the price system does not act as an efficient allocator of resources, and enterprise managers still have to refer major decisions concerning output and employment to the planning authorities.

In terms of the output structure, the government has sought to engineer a shift towards higher value-added production, and particularly manufacturing associated with Cuba s scientific research. State investment in the 1990s was concentrated in the development of biotechnology and pharmaceuticals, both to ensure supplies for the national healthcare system (which was experiencing acute shortages of medicines) and in the hope of fostering an important export

Manufacturing industries face further adjustment

38 Cuba


industry in the medium term. Although data are sparse, official statements suggest that export earnings have started to take off, with some reports of total earnings reaching US$300m in 2006.

Construction

The construction industry has been growing rapidly since 2004. After contracting by around 75% between 1990 and 1993, construction activity only recovered to less than half of the 1990 level by 2004, but in 2005 it rose by nearly 20% and in 2006 by a further 38%. In most of the 1990s, housing and public works almost halted, and activity associated with the development of tourism accounted for most of construction work. Since then, there have been major investment programmes in education and healthcare infrastructure, and housing. The housing programme, launched in the second half of 2005, involves the completion of around 10,000 units per month. Major construction projects in the mining and energy sectors are also being planned.

A limited opening to foreign investment and ownership was initiated in 1995, but just as foreign investment started to surge in 1998-99 (raising the number of joint ventures from four to 18) officials began to lose enthusiasm. In April 2000 the opening of the sector was abruptly ended and Cuban partners in existing projects bought back unsold units from their foreign partners. The move was described by the Cuban authorities at the time as “a pause” in the development pending a review of infrastructural capacity in Havana, but there has been no sign of a reopening of the sector since then.

Financial services

The financial system has been transformed over the past decade. A process of restructuring, modernisation and expansion, was initiated in 1994, and in 1997 a new Central Bank, the Banco Central de Cuba (BCC), was established, removing central-bank functions from the Banco Nacional de Cuba (BNC). The BNC has become one of the set of new state-owned banks. A chain of casas de cambio, or Cadecas), for changing Cuban pesos for US dollars at the “unofficial” rate (see The external sector: Foreign reserves and the exchange rate) has also been created. Over a dozen foreign banks have opened representative offices. The domestic banking system has been computerised, a clearing system established and automatic cash-dispensing terminals installed for holders of local and international credit cards and Cubans receiving social security payments.

Like other reforms, banking modernisation is proceeding at a cautious pace and the state retains control. The authorities justify their gradualism as a means of ensuring adequate supervision and lessening the possibilities for speculation, fraud and corruption. The financial sector is expanding and changing in response to the evolving business and political structure. Products not known for 35 years, such as travel and medical insurance and personal pensions, are being promoted. The first insurance joint ventures with foreign capital were announced in 1997. Enterprise reform has made it necessary to securitise inter-company debt, leading to the introduction of factoring and promissory notes in

Cuba 39


2000. Interest-bearing personal and enterprise accounts are in place and the level of deposits has expanded quickly from a low base. The authorities are working to develop a market in financial securities, including sovereign debt. The issuance by the Central Bank of 400m in foreign-currency bonds in the domestic market in late 2005 and early 2006 marked a milestone in this process. These bonds, which consolidate existing debt, were listed on the London Stock Exchange in April 2006, with an interest rate of 7%.

As the new financial system develops, it is intended to play an increasing role in mobilising domestic savings and facilitating greater financial autonomy for enterprises, as central planners allow decisions concerning the allocation of finance to be devolved to the new financial institutions. A monetary policy committee, established in 1999, meets fortnightly to set domestic interest rates. The importance of this committee is expected to increase as the role of the financial sector develops. The Central Bank’s control over the circulation of hard currency has been strengthened by a series of rule-changes since 2003. In the middle of that year, all transactions between Cuban enterprises (but not joint ventures) previously carried out in US dollars were required to be carried out in pesos convertibles (Pc), convertible pesos. In January 2005 the rules changed once more to give the Central Bank closer control of the use of both hard currency and pesos convertibles, with all such deposits required to be held at the Central Bank and the authorities’ approval required for transactions (see also Economic policy).

Other services

During the 1990s international tourism evolved from a peripheral activity to become the most dynamic sector of the economy. By the end of that decade, it had become the main foreign-exchange earner, with gross revenue of close to US$2bn, (with 1.8m arrivals), compared with only US$243m (and 340,000 arrivals) in 1990. Since 2001 the industry s expansion has slowed: between 1990 and 2000 the number of tourist arrivals grew by an average annual rate of 18%; in 2001-06 the rate of increase was just 5%. In part, this reflects simply the fact that the industry has moved from take-off towards maturity, but growth in 2001-06 was also hit by a global downturn in 2001-02 followed by an appreciation of the Cuban convertible peso in 2005 and a shift in government policy towards tourism, in which state-owned operators have been encouraged to target profitability rather than growth.

The tourism sector is an important employer, with around 100,000 people on the industry’s official payroll (and many more working in tourism-linked activities, in both the formal and informal economies) and has helped to stimulate the recovery in domestic sub-supply sectors. The industry is managed by a set of state-owned corporations formed when the Ministry of Tourism was restructured in the early 1990s. Each corporation can negotiate with overseas partners for agreements involving management, marketing or injections of foreign capital. Changes introduced in 2004 as part of the government’s drive to reduce corruption and increase efficiency have involved a reduction in the number of tourism corporations and a tightening of auditing requirements.

Tourism

40 Cuba


The retail sector consists of a range of different markets. Essential goods are supplied by the state through a ration system at heavily subsidised prices in domestic currency. In addition, agricultural and industrial product markets sell goods at unregulated prices, and a few services (such as small restaurants and hairdressers) are offered by extremely small private businesses. The difference in price between the various markets is large: in some cases the hard-currency shops sell at 40 times the price of rationed goods. The state’s control of prices in the peso economy, combined with shortages and restrictions on the scope of legal private enterprise, has given rise to a large informal, or black-market, retail sector.

Since the advent of the economic crisis in 1990, most of the limited supply of consumer goods has been sold in state-owned US dollar shops. Until 1993 most Cubans were unable to hold US dollars legally, so the shops mainly sold to tourists and expatriate workers. However, the legalisation of the holding of US dollars in 1993 resulted in a sharp rise in spending in the dollar shops, which are owned by state companies. The replacement of the US dollar with the Convertible peso for domestic “hard-currency” retail sales in late 2004 has not had a significant impact on sales. The Economist Intelligence Unit estimates, on the basis of available information, that domestic dollar sales increased from around US$50m in 1994 to around US$1.5bn by 2006. The retail margin in these outlets is fixed by the state at around 250%. This provides a vital source of income for the government. In 1999 new shops selling similar goods, but in pesos, were introduced. Prices in these outlets were fixed at levels almost as high as the hard-currency prices, converted using the unofficial exchange rate.

The external sector

Trade in goods

Cuba s external accounts have undergone a complete restructuring since 1990. The demise of the Soviet bloc in 1990-91 caused a collapse in earnings from goods exports and an even sharper decline in import capacity, as access to external financing was severed. As a result, the trade deficit narrowed sharply from US$2bn in 1990 to US$540m in 1992. In that year the services surplus was US$320m. Since then, goods export earnings have remained well below the 1990 level, but import capacity has been swelled by a rapid rise in earnings from services and other sources of foreign exchange. The goods deficit reached US$6.8bn by 2006, according to Economist Intelligence Unit estimates, but this figure was nearly matched by the surplus on services of US$6.1bn.

There has also been a major adjustment in the geographical distribution of goods trade since 1990. Whereas the countries of the Soviet bloc accounted for around 80% of trade in 1989, three years later the same countries accounted for only around one-quarter. Trade with western Europe, the Americas and China has grown in importance. Trade with the Americas is now dominated by Canada and Venezuela. Imports from the US, which had been prohibited by US law since 1961, resumed in 2002, but trade with the US is restricted to imports of food and agricultural products; no other imports, and no Cuban exports to the US, are allowed. US sanctions have encouraged some traders to route sales

The retail sector

Trade patterns have been transformed since 1990

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to Cuba through third countries, creating inconsistencies in data collected by different authorities.

In 2006 total goods exports were still less than half of their 1990 value, despite having doubled since 1993. Most of the decline since 1990 is accounted for by the collapse in sugar earnings, which are down from 80% of merchandise exports (at US$4.3bn) in 1990 to only 6% (or around US$150m, according to our estimates) in 2006. Cuba has been the world’s leading sugar exporter for generations, but now it produces little more than it requires for domestic consumption. Underlining sugar s loss of strategic importance for the Cuban economy, its share of total earnings from both goods and services exports has declined to only around 2%. Its decline is a result of a sharp reduction in both price and output (see Economic sectors: Agriculture).

Earnings from non-sugar merchandise exports, which contracted by two-thirds between 1990 and 1993, had recovered to their 1990 level of around US$1bn by 1999 and have doubled again since then. However, diversification has been limited. The most important contribution to earnings growth has been from nickel exports, which overtook sugar in 2000 and accounted for nearly 60% of earnings from goods exports (at around US$1.5bn) in 2006 according to our estimates, up from only 7% (US$400m) in 1990.

Most of the other main exports are still the traditional products: tobacco, rum and citrus. Of these, tobacco products mainly cigar are the largest earner, with annual income of around US$200m. The most significant non-traditional export categories are pharmaceuticals and biotechnology products, which have been developed as part of the government’s strategy to move towards higher value-added exports. According to official reports, US$1bn was invested in the sector in the early 1990s, despite the scarcity of hard-currency finance at the time. The industry substantially reduced import needs for the Cuban healthcare system in the 1990s, but exports took more than a decade to take off. Full data are not available, but the UN Economic Commission for Latin America and the Caribbean (ECLAC) estimated the value of the industry’s exports at around US$115m in 2003, and in 2005 Cuban official statements suggested that the figure had risen to US$300m, although this may include earnings from production licences as well as exports. The main customers to date have been in the developing world, where barriers to entry are relatively low. The first major export breakthrough in the 1990s was the sale of a meningitis B vaccine to Brazil. This has been followed by a broad range of biomedical and agricultural products, and the take-off may be explained by agreements with Indian and Chinese partners. To gain access to the global market for pharmaceutical and biotechnology products, Cuba has had to adopt international intellectual property standards (including the agreements and standards of the World Trade Organisation WTO of which Cuba is a member).

Import capacity, which was slashed by 73% between 1990 and 1993 as export earnings collapsed and access to finance dried up, has since recovered. In 2006, according to our estimates, import spending was 26% higher than its 1990 level. The recovery was initially led by tourism earnings, but increases in earnings from other services have provided a strong boost in the past few years, while

Nickel leads goods exports

Imports still dominated by fuel and food

42 Cuba


the growth of merchandise exports, remittances and foreign investment, have also contributed.

Dependence on imported food and fuel has traditionally been high. Even before the economic crisis of the early 1990s they accounted for 40% of import spending; by 1993 the share had risen to 60%. The trend in this ratio has been downwards since then, but high international prices for both fuel and soft commodities in 2004-06 have interrupted the trend: in 2006, according to our estimates, food and fuel still accounted for 40% of spending on goods imports, up from 35% in the late 1990s. This is despite a surge in capital goods imports in 2005-06, prompted by the acceleration of the government s investments in infrastructure, particularly in the energy and transport sectors. According to official data, capital goods imports in 2006 were more than double their 2004 level, at around US$1.7bn. However, this remains below the pre-crisis level of US$2bn in 1990.

Invisibles and the current account

As Cuba is not a member of the IMF or World Bank, these standard international sources provide no data on Cuban external accounts. The Banco Central de Cuba (BCC, the Central Bank) and Oficina Nacional de Estadísticas (ONE, the national statistics office) have published a series from 1993 onwards. The definitions used in compiling the external accounts are consistent with international standards, but the Cuban authorities have reduced the data published on current flows other than goods trade since 2002, on the grounds that such information could help the US government in its efforts to target economic sanctions to maximise their effect. Some of the gaps in the data have been filled by ECLAC, which publishes statistics taken from official Cuban sources.

The services balance improved from close to zero in 1990 to a surplus of over US$6bn in 2006, according to our estimates. Until 2003 the expansion of the surplus was driven mainly by the increase in tourism: gross earnings from tourism rose from US$243m in 1990 to US$2.4bn in 2006. This is more than the amount earned by all goods exports combined. Other services that have made significant contributions since 1990 include telecommunications, transport and cultural services, but these have been dwarfed in 2004-06 by the rapid expansion of the sale of professional services, mainly in the health sector. We estimate that agreements with Venezuela since 2004 involving the employment of Cuban professionals not only to treat Venezuelans, but also for projects serving other countries in Latin America and the Caribbean, lifted Cuba’s earnings from non-tourism services by as much as US$3bn in 2006, outstripping earnings from tourism.

The Cuban authorities do not publish inflows and outflows on the factor incomes account (profits and interest) separately: the only published figure is for net flows. The size of the income deficit has fluctuated around 2% of estimated US dollar GDP since 1995. High interest rates have been paid on short-term borrowing and profit repatriation by foreign partners in joint ventures has been growing. On the other hand, the authorities have been seeking to reduce

Services: first tourism, now doctors

Factor incomes: US$1bn hard to categorise

Data gaps

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dependence on short-term credits and to reduce the average interest rates paid. Although no data is available from the Central Bank on factor flows since 2001, figures published by ECLAC suggest that the efforts to reduce net outflows may be bearing fruit, as the estimated income deficit narrowed from US$600m in 2004 to US$200m in 2005 (the last year for which data was given). The net figure may also have been reduced by a rise in inflows of profits and interest payments from abroad. Cuban entities have interests in around 40 joint ventures registered abroad, but there are few published details of these businesses. Officials have also suggested, without giving any data, that the level of international reserves has been rising, and that this might have helped to lift interest inflows.

Net current transfers rose rapidly for most of the 1990s, from only US$18m in 1991 to US$813m in 1998. They appear to have stabilised since then, although the Central Bank has provided little information since 2001. Current transfers include remittances sent by families living abroad (mainly, but not only, in the US) as well as money earned by Cubans operating in the informal tourism sector (ranging from those who rent rooms to informal guides and prostitutes). ECLAC estimated that family remittances accounted for US$700m of the US$799m net current transfers in 1999, but there is no reliable information on the breakdown between these categories.

According to ECLAC estimates, net current transfers grew from US$740m in 2000 to over US$1bn in 2004. Since then, both family remittances and earnings from the informal tourism sector are likely to have been inhibited by government action: in the case of family remittances, by measures introduced by the US government in June 2004 to tighten restrictions on the sending of remittances by Cuban-Americans, in the hope that this would exert pressure for political change in Cuba; and in the case of earnings in the informal sector, by measures taken by the Cuban authorities to clamp down on all forms of informal economic activity.

Capital flows and foreign debt

Cuba is not a member of the World Bank, the IMF or the Inter-American Development Bank (IDB) and so receives little multilateral agency development assistance. Until 1990 its current-account deficit (which was US$2.5bn, or 11% of GDP in 1990) was mainly financed by substantial grants and credits on generous terms from the Council for Mutual Economic Assistance (CMEA), the Soviet trading bloc. When these sources dried up in 1990-91, Cuban import capacity was severely curtailed, as there was extremely little available from alternative sources of finance. Between 1992 and 2003 the current-account deficit averaged less than 2% of GDP, reflecting Cuba’s restricted access to international capital. In 2004-06 new sources of financing have come from China and Venezuela. According to official statements, this has coincided with a small surplus on the current account, resulting in a strong increase in international reserves. However, no data on the level of international reserves has been published.

External financing is restricted

Current transfers

44 Cuba


Cuba s main sources of multilateral assistance are EU emergency relief and UN agencies such as the World Food Programme, the UN Development Programme (UNDP), the UN Regular Programme of Technical Assistance (UNTA) and the UN Children’s Fund (UNICEF). Flows from multilateral sources have been small a total of only US$20m in 2004, the most recent year for which data are available as have been flows of bilateral aid, at only US$69m in 2004. There is no official information on the level of bilateral aid and official lending from Venezuela and China in 2005.

Foreign investment has been allowed since 1982, but it was not until the collapse of the CMEA and the ensuing economic crisis that foreign private-capital flows began to become significant. The largest investments to date have been in nickel mining, oil, tourism and telecommunications. Under the 1995 foreign-investment act, all sectors are open to foreign capital except defence, public healthcare and education. US investors are barred from Cuba by US legislation. Investors from other countries are deterred by the unresolved question of US property claims. A 1996 US law known as the Helms-Burton law increased the threat of prosecution of foreign investors in Cuba. Reported net foreign direct investment (FDI) flows are erratic. Individual projects, such as a telecoms joint venture agreed in 1994, a cigar-distribution joint venture signed in late 1999 and agreements with Venezuela for the completion of a large oil refinery in 2006 and nickel plant in early 2007, have a large impact as the number of projects is still small. Moreover, the only figure given by the Central Bank is for “net direct investments”, and these include not only foreign investment in Cuba but also Cuban investments abroad. Little financial information is available on Cuba s overseas investments, which include a share in a nickel-processing plant in Canada, and pharmaceuticals investments in India and China.

Other flows on the Central Bank’s capital-account figures are described only briefly and reveal little. The category “net long-term capital flows excluding FDI” (which has ranged between US$20m and US$600m between 1993 and 2001, the period covered by the published data series) includes repayment of principal arrears, making it extremely difficult to estimate the total of loan capital inflows. “Net other capital” has fluctuated even more widely (between a net outflow of US$560m and a net inflow of US$580m) over the period. Inflows in this category include new short-term bank borrowing and suppliers’ credits, both secured and unsecured, whereas outflows include repayments of interest arrears and increases in funds held offshore by Cuban entities.

The Bank for International Settlements (BIS) produces annual data on assets and liabilities with BIS-reporting banks, but in Cuba’s case these are a poor record of net international transactions. Given US legislation deterring international banks from handling Cuban business, it can be assumed that a relatively large proportion of flows are being channelled through non-BIS-reporting institutions.

Cuba’s total hard-currency debt in 2005 was CUC13.4bn according to the Central Bank. With an exchange rate of CUC0.93:US$1, this is equivalent to

Foreign investment data are sparse

Other capital flows are hard to fathom

Foreign debt: "immobilised" and "active"

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US$14.4bn. We estimate that this amounts to around 40% of GDP. In 1986 all servicing on bank and bilateral official debt with Western governments was suspended, and, according to the Central Bank, 56% of the debt consists of principal and interest arrears on debt contracted before that date, described by the BCC as "immobilised debt". That leaves US$6.4bn "active" debt, on which debt service is being paid.

Almost half the hard-currency debt is owed to suppliers and financial institutions. Since the mid-1990s, a number of rescheduling agreements for this commercial debt have been reached on a bilateral basis. These include major agreements with Japanese and German creditors. Official debt is almost all bilateral, as Cuba has no access to the major multilateral financial institutions, the World Bank and the IMF. Bilateral agreements for the rescheduling of short-term official debt have been secured with France, Spain, Italy, Germany and the UK. There has been less progress, however, in attempts to reach agreement on the rescheduling of around US$4.5bn of outstanding medium- and long-term official debt that has not been serviced since 1986.

One of the sticking points in negotiations with the Paris Club over the rescheduling of official medium- long-term debt has been the treatment of Cuba’s debt to the former Soviet Union. The debt was almost 20bn convertible roubles (then with an official exchange rate at parity with the US dollar) at the time of the Soviet Union’s disintegration. Cuba and Russia have been unable to agree over the current value of the debt. If the terms applied to other Latin American debtors to the former Soviet Union were applied to Cuba, the debt, including interest arrears, would have a current value of around US$1bn. Russia has claimed much more, whereas Cuba has argued that the debt should be written off on the grounds that Cuba’s liabilities to Russia are less than Russia’s liabilities arising from non-delivery of contracted supplies in the early 1990s. There is no sign of agreement over the fair current valuation of this debt.

Foreign reserves and the exchange rate

The Cuban authorities refuse to release any data on the stock of international reserves, on national security grounds: it is argued that the information would be of use to the US in its attempts to weaken the Cuban economy. However, there is some information on the annual change in international reserves: between 1993 and 2001 the Central Bank published an annual figure for the net annual change in international reserves; ECLAC has published data from 2002 to 2005, based on information provided by the Cuban authorities; and Cuban officials have made public statements on the rise in reserves in 2006. According to the data series derived from these sources, we estimate that total reserves have increased by US$2.8bn since the depths of Cuba s economic crisis in 1993. On the assumption that the level of reserves was at a very low level in 1993, we estimate that by 2006 total international reserves reached US$3bn.

Our estimate for the level of international reserves would imply import cover of around three and a half months in 2006. Given the lack of free international financial flows, this provides a comfortable cushion against shocks. Cubans have been free to receive and exchange convertible currency within the

Complete data block on international reserves

46 Cuba


country since 1993, and foreign investors can freely repatriate profits and dividends, but other foreign-exchange transactions are tightly controlled. There are no currency or financial markets, and the authorities impose restrictions on foreign exchange for travel, limits on personal exports of goods from Cuba and prohibits the importation of goods by private individuals other than for personal use. All hard currency purchases by Cuban entities of over US$5,000 require the approval of the Central Bank s foreign-exchange commission. US law adds to the restrictions, by forbidding all investment flows, limiting the transfer of remittances, and blocking all bilateral trade apart from US food and agricultural exports to Cuba.

There are two domestic currencies: the Cuban Peso (CUP), in which prices and wages are denominated within the domestic economy; and the Convertible Peso (CUC), used in “hard-currency” retail outlets. One peso (Cuban or Convertible)=100 centavos (Cuban or Convertible). The official exchange rates, used in national income, fiscal and enterprise accounting aggregates are CUP1:CUC1 and 93 convertible centavos:US$1.

An “unofficial”, but legal, CuPs:CUC exchange rate is used for personal transactions only. This rate is available in a network of bureaux de change, known as Cadecas. It is supposed to be freely floating, but has effectively become officially pegged. At the end of 2005 this “unofficial” rate was CUP24:CUC1. The unofficial CuPs:US$ exchange rate at end-2005 was therefore CuPs22.2:US$1. The official policy is to continue the stabilisation efforts until this unofficial exchange rate moves close to a purchasing power parity level. Eventually, a unified exchange rate is envisaged, but no timescale has been set for this.

US dollars exchanged for convertible pesos within Cuba are subject to a 10% commission charge; there is no such charge for the conversion of other currencies into convertible pesos. Since 2002 euros have been accepted in some tourist resorts.

Two official exchange rates and an unofficial one

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Regional overview

Membership of organisations

Cuban membership of regional organisations is limited to those organisations not subject to a US veto. This means that the Cuban government is excluded from participation at the Americas Summit, the Organisation of American States (OAS), the Inter-American Development Bank (IDB) and negotiations over the Free-Trade Area of the Americas (FTAA). Cuba has actively participated in other regional organisations. It was a founder member of the Association of Caribbean States (ACS) in 1995; joined the Latin American Integration Association (LAIA) in 1999; joined Cariforum as a full member in October 2001; completed a trade and economic co-operation agreement with the Caribbean Community (Caricom) in 2002; belongs to the Caribbean Tourism Organisation (CTO). It has indicated a desire to negotiate with the Mercado Común del Sur (Mercosur), the southern cone customs union, comprising Argentina, Brazil, Paraguay, Uruguay and Venezuela as full members, and Bolivia, Chile, Colombia, Ecuador and Peru as associate members.

In December 2004 Cuba signed a Tratado de Comercio de los Pueblos (TCP, a Peoples Trade Agreement) with Venezuela, outlining co-operation under the auspices of the Alternativa Bolivariana para las Américas (ALBA, Bolivarian Alternative for the Americas). The ALBA is a project led by the Venezuelan president, Hugo Chávez, to forge economic, social and political ties between Latin American and Caribbean countries as an alternative to the US-led efforts to create the FTAA. The TCP agreement has resulted in a sharp increase in Cuba s economic links with Venezuela and expansion of its earnings from the sale of professional services, mainly in the health sector. In 2006 and 2007 ALBA TCPs were also signed by Bolivia, Nicaragua and Ecuador, paving the way for an expansion of Cuban exports of professional services to those countries, with funding from Venezuela.

Cuba is a member of all UN agencies, including the regional body, the UN Economic Commission for Latin America and the Caribbean (ECLAC) and the World Trade Organisation (WTO). It has been accepted as a full member of the African, Caribbean and Pacific (ACP) group of countries associated with the EU, although it is not a beneficiary of ACP-EU trade agreements.

48 Cuba


Appendices

Sources of information

Banco Central de Cuba, Cuba: Economic Report (annual)

Ministerio de Salud Pública (Ministry of Public Health), website www.infomed.sld.cu

Ministerio de Finanzas y Precios, Presupuesto del Estado (annual, 1997-2003)

Oficina Nacional de Estadísticas, Anuario Estadístico de Cuba (annual, 1989 and 1996-2003)

Centro Latinoamericano y Caribeño de Demografía (CELADE), website www.eclac.org/Celade

F O Licht, International Sugar and Sweetener Report

International Institute for Strategic Studies, The Military Balance (annual)

OECD, Geographical distribution of financial flows to developing countries (annual)

UN, Direction of Trade Statistics Yearbook (annual)

UN Development Programme, Human Development Report (annual)

UN Economic Commission for Latin America and the Caribbean (ECLAC), Anuario Estadístico de América Latina y el Caribe (annual) and Cuba: Evolución Económica Durante 2003 y Perspectivas Para 2004.

World Tourism Organisation, Tourism Market Trends—Americas

Archibald Ritter (ed), The Cuban Economy, University of Pittsburgh Press, Pittsburgh, Pa, 2004

Ana Julia Jatar-Hausmann, The Cuban Way: Capitalism, Communism and Confrontation, Kumarian Press, Bloomfield, CT, 1999

Louis A. Pérez, On Becoming Cuban: Identity, Nationality, and Culture, Harper Collins, New York, 2001

David Stanley, Lonely Planet Cuba, Lonely Planet, London, 2000

Tad Szulc, Fidel, A Critical Biography, Harper Collins, New York, 2000

Hugh Thomas, Cuba or the Pursuit of Freedom, DaCapo Press, Cambridge, MA, 1998

National statistical sources

International statistical sources

Select bibliography

Cuba 49


Reference tables Population (m; average)

2002 2003 2004 2005 2006Total 11.18 11.22 11.24 11.24 11.24 % change 0.2 0.3 0.2 0.1 0.0


Oil and gas production ('000 tonnes of oil equivalent)

2001 2002 2003 2004 2005Crude oil 2,885.5 3,627.9 3,679.8 3,253.0 3,265.8

Natural gas 535.1 526.2 592.2 633.8 766.6Total 3,421 4,154 4,272 3,886.8 4,032.4

Source: Oficina Nacional de Estadísticas; Ministry of the Economy and Planning.

State finances (CUP m at current prices unless otherwise indicated)

2001 2002 2003 2004 2005Revenue 15,034 16,197 17,548 18,822 23,290 Direct taxes 5,038 5,448 5,856 6,426 5,038 Indirect taxes 7,259 8,097 8,096 9,940 7,259 Non-taxation income 3,900 4,394 5,239 7,274 3,900 Expenditure 15,771 17,193 18,622 20,241 26,387 Current expenditure 13,016 14,755 16,122 17,439 22,158 Capital spending 1,990 1,949 2,083 2,287 3,182 Exceptional items 766 489 418 516 1,047

Balance -738 -997 -1,074 -1,419 -3,097 % of GDP -2.5 -3.2 -3.3 -4.2 -4.8

Sources: Ministry of Finances and Prices; Oficina Nacional de Estadísticas.

Money supply (CUP m unless otherwise indicated; end-period)

2001 2002 2003 2004 2005

Money (M1) incl others 6,403.3 6,941.2 6,650.5 7,389.8 9,739.4

% change, year on year 26.7 8.4 -4.2 11.1 31.8

Quasi-money 5,934.3 6,675.6 6,840.3 7,134.8 7,848.3

Money (M2) 12,337.6 13,616.8 13,490.8 14,524.6 17,587.7

% change, year on year 17.6 10.4 -0.9 7.7 21.1

Source: Banco Central de Cuba.

50 Cuba


Gross domestic product (market prices)

2001 2002 2003 2004 2005

Total (US$ m) At current prices 27,504.0 28,413.7 29,873.4 32,003.9 35,775.5

Total (CUP m) At current prices 29,557.0 30,680.2 32,337.2 33,972.1 36,831.0

At constant (1997) prices 27,267.7 27,686.2 28,502.2 29,691.4 32,216.0

% change, year on year 3.0 1.5 2.9 4.2 8.5

Per head (CUP) At current prices 2,649 2,743 2,883 3,024 3,276

At constant (1997) prices 2,444 2,475 2,541 2,643 2,866

% change, year on year 2.7 1.3 2.7 4.0 8.4


Nominal gross domestic product by expenditure (CUP m at current prices where series are indicated; otherwise % of total)

2002 2003 2004 2005 2006

Private consumption 19,608.2 20,982.9 21,006.9 22,559.5 25,369.9

63.9 64.9 61.8 61.3 59.6

Government consumption 8,545.6 8,546.7 9,323.4 8,614.7 9,477.7

27.9 26.4 27.4 23.4 22.3

Gross fixed investment 3,074.1 2,944.9 3,237.5 3,821.5 4,986.8

10.0 9.1 9.5 10.4 11.7

Stockbuilding 15.0 108.0 124.6 773.2 298.1

0.0 0.3 0.4 2.1 0.7

Exports of goods & services 3,872.0 4,649.9 6,120.8 8,863.6 12,021.2

12.6 14.4 18.0 24.1 28.2

Imports of goods & services 4,434.7 4,895.2 5,841.1 7,801.5 9,573.6

14.5 15.1 17.2 21.2 22.5

GDP 30,680.2 32,337.2 33,972.1 36,831.0 42,580.1


Cuba 51


Real gross domestic product by expenditure (CUP m at constant 1997 prices where series are indicated; otherwise % change year on year)

2001 2002 2003 2004 2005Private consumption 17,596.7 17,971.8 19,086.1 19,380.0 19,453.3 3.8 2.1 6.2 1.5 0.4Government consumption 5,406.1 5,719.4 5,979.3 6,106.6 5,910.8 2.2 5.8 4.5 2.1 -3.2Gross fixed investment 3,496.1 3,183.9 2,972.4 3,187.0 3,843.1 -2.8 -8.9 -6.6 7.2 20.6Stockbuildinga 312 213.7 97.8 297 875.3 0.5 -0.4 -0.4 0.7 1.9

Exports of goods & services 4,967.1 4,778.4 5,054.7 6,017.3 8,777.1 -3.6 -3.8 5.8 19.0 45.9Imports of goods & services 4,510.3 4,181.0 4,688.1 5,296.5 6,643.6 -3.8 -7.3 12.1 13.0 25.4GDP 27,267.7 27,686.2 28,502.2 29,691.4 32,216.0 3.0 1.5 2.9 4.2 8.5

a Change as a percentage of GDP in the previous year.


Prices (% change, year on year)

2001 2002 2003 2004 2005

Consumer prices (av) -4.1 8.8 0.6 1.3 7.0

Sources: Economist Intelligence Unit.

Main composition of trade (US$ m; fob-cif)

2001 2002 2003 2004 2005

Exports fob Sugar 550.3 448.1 288.6 271.5 159.5

Nickel 437.8 407.1 584.2 1,028.4 1,097.6

Tobacco products 216.9 144.3 215.3 216.8 242.8

Fish products 80.7 98.5 65.1 89.0 84.6

Total exports incl others 1,661.5 1,421.7 1,671.6 2,188.0 2,112.1

Imports cif Machinery & equipment 1,236.9 982.5 1,000.5 1,196.3 1,797.4

Foodstuffs 823.6 798.0 947.7 1,119.7 1,616.7

Fuel 977.3 868.9 996.3 1,310.4 1,759.0

Chemicals 477.7 427.4 415.3 531.9 604.3

Total imports incl others 4,838.3 4,140.8 4,612.6 5,562.0 7,528.1


52 Cuba


Main trading partners (% of total)

2001 2002 2003 2004 2005

Exports fob Netherlands 20.1 20.9 25.1 29.6 28.4

Canadá 13.7 14.3 16.0 22.3 20.7

Venezuela 1.3 1.4 10.5 10.1 11.4

Spain 8.6 10.2 10.7 8.0 7.6

Imports cif Venezuela 19.7 17.5 14.8 20.5 24.7

Spain 11.3 12.5 10.9 10.5 11.8

China 14.3 13.6 12.6 11.4 8.7

US 0.1 4.2 8.5 8.0 6.2


Balance of payments (US$ m)

2001 2002 2003 2004 2005

Goods: exports fob 1,661.5 1,421.7 1,671.6 2,188.0 2,112.1

Goods: imports fob -4,838.3 -4,140.8 -4,612.6 -5,562.0 -7,528.1

Trade balance -3,176.8 -2,719.1 -2,941.0 -3,374.0 -5,416.0

Services: credit 2,571.0 2,450.0 2,979.0 3,450.0 5,140.0

Services: debit -358.2 -625.0 -650.0 -740.0 -590.0

Income: credit 109.1 84.7 78.8 113.1 299.9

Income: debit -611.3 -684.7 -728.8 -763.1 -699.9

Current transfers: credit 815.9 823.0 918.0 977.0 973.0

Current transfers: debit -3.0 -3.0 -3.0 -3.0 -3.0

Current-account balance -653.3 -674.1 -347.0 -340.0 -296.0

Financing (– indicates inflow) Movement of reserves -47.0 43.0 -220.0 -1,480.0 -500.0

Use of IMF credit & loans 0.0 0.0 0.0 0.0 0.0


Cuba 53


External debt (US$ m unless otherwise indicated; debt stocks as at year-end)

2001 2002 2003 2004 2005

Public medium- & long-term 7,341.8 7,379.0 7,287.0 10,374.1 11,426.9

Private medium- & long-term 0.0 0.0 0.0 0.0 0.0

Total medium- & long-term debt 3,840.2 3,886.0 3,784.0 10,374.1 11,426.9

Official creditors 2,205.3 2,227.0 2,127.0 7,922.0 8,780.9

Bilateral 2,188.1 2,210.0 2,110.0 7,858.7 8,710.7

Multilateral 17.2 17.0 17.0 63.3 70.2

Private creditors 1,634.9 1,659.0 1,657.0 2,452.1 2,646.0

Short-term debt 3,551.1 3,520.5 4,013.0 3,414.9 3,058.1

Interest arrears 2,106.0 2,027.9 1,947.2 1,836.1 2,062.3

Use of IMF credit 0.0 0.0 0.0 0.0 0.0

Total external debt 10,892.9 10,899.5 11,300.0 13,789.0 14,485.0

Principal repayments 249.1 225.9 253.4 288.5 546.5

Interest payments 604.6 577.5 611.4 797.9 437.5

Short-term debt 204.6 167.5 201.4 342.2 322.7

Total debt service 853.7 803.4 864.7 1,086.4 984.0

Ratios (%) Total external debt/GDP 39.6 38.4 37.8 43.1 40.5

Debt-service ratio, paida 16.7 17.0 15.4 16.6 11.8

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.


Estimated foreign reserves (US$ m; end-period)

2001 2002 2003 2004 2005

Total reserves incl gold 589.6 546.6 766.6 2,246.6 2,746.6

Source: Economist Intelligence Unit.

Exchange rates (CUP per unit of currency unless otherwise indicated; annual averages)

2002 2003 2004 2005 2006

US$ 1.000 1.000 1.000 0.946 0.926

£ 1.50 1.63 1.83 1.72 1.71

€ 0.94 1.13 1.24 1.18 1.16

¥ 0.0080 0.0086 0.0092 0.0086 0.0080

MePs 0.104 0.093 0.089 0.087 0.085

C$ 0.637 0.714 0.769 0.781 0.817


Editors: Emily Morris (editor); Robert Wood (consulting editor) Editorial closing date: February 26th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

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