The Economic Quest for the Development of Cuba
To state lightly, Americans generally frown upon communist countries. Though there are the obvious grievances of political and ideological differences that will not be discussed in this paper, the opinions with respect to the economy have also sparked heated discourse. Those that are capitalists feel that without a free market and the power of the invisible hand, the economy will not be efficient and eventually crumble. And in most cases, this assumption was true in the twentieth century. But with Cuba, a red country, communism may not be the major factor to blame at the present. Some feel Cuba has not focused enough on industrial growth, while others say it is the lack of physical capital combined with Cuba´s inability to attract foreign direct investment. Yet most agree that as a small third world country in today´s global economy, Cuba is facing many challenges to keep up with the pace of the world. In spite of its current condition, this country still has significant economic potential.
In reality, it is quite astounding to look upon Cuba and what this small country has had to encounter in the past fifteen years. At the start of the 1990´s, an economic crisis struck Cuba. When the Soviet Union collapsed and the socialist bloc disappeared, Cuba, being heavily reliant on this alliance, suffered immense economic consequences. The Soviet Union was Cuba´s trading partner and vital contributor through investments, provision of resources and technology. Because of their socialist relationship, eighty-five percent of Cuba´s trade,… including sugar and citrus fruit was with the Soviet Union, while at the same time eighty-eight percent of Cuba´s imports were imported from the Soviet Union (Saney 21). As this relationship ceased, combined with the strengthening of the U.S.´s sanctions against Cuba in 1996, Cuba was forced to modify its economy.
Appropriately, the 1990s proved to be a decade of great economic change in Cuba. Some of these transitions have been thoroughly examined, especially Cuba´s transformation of its traditionally central planned economy into a more decentralized system. Many economists also highlight Cuba´s loss of external funding during this period. This was important because it forced Cuba to establish more commercial credit and foreign investment, rather than rely on essentially free funds. However, the most profound change of the 1990s was probably the change in the country´s export profile. In the past decade the change in supply of Cuban products to the international market has been the most revolutionary period since sugar became the primary export at the end of the eighteenth century. This adjustment in Cuba´s economic structure emphasized the expansion of the tourist industry to a level where it succeeded in displacing sugar as the main source of gross revenue. (Grogg 1).
This era of Cuban economic history, although significant, has given rise to certain incorrect interpretations, such as those that contend the island´s new export structure has modernized the economy since service exports now eclipse commodities. So along with the general discussion necessary to clarify that the change in exports from goods to services does not necessarily lead to development, this paper proposes, first, to explore if the extent of change in Cuba´s economy in the 1990s has been substantial enough, and secondly, to present alternative methods to accelerate Cuba´s development.
The 1990s Innovative or Analogous Development?:
With significant changes in some respects occurring in Cuba, the economy has been seemingly moving in a positive direction. Because of Cuba´s external conditions, this country directed a new plan of development. More specifically, the end of the Soviet era forced Cuba to achieve a different way of interacting with the world economy. In the realm of trade, Cuba´s exports had to posses more desire with other countries. This mode of international involvement correlated to a pattern of development in the 1990s that is somewhat different from that which immediately preceded it (1979-89)(Monreal 12). Before, Cuba almost purely traded with the socialist bloc, but this is no longer an option. Thus, Cuba lessened its dependence on the sugar market because the country was now forced to produce more revenue that the sugar industry was not achieving. This crucial events at the start of the 90s caused Cuba to resort to tourism .
Looking beneath the surface of this occurrence, this development still continued with the old pattern in that tourism, like the production of sugar, relies heavily on natural resources (Monreal 14). Following the past, this motion towards tourism still reflected the Cuban Communist Party´s decision in 1976 to emphasize the development of industrialization (Cuban Communist Party, qt. in Monreal). As the current and past philosophies both help the domestic base produce more, Cuba has never stopped relying on exports that require significant natural resources. Therefore, the new economic plan differed not in its mission, but in the style of insertion as Cuba now interacted in a global capitalistic and competitive market. What truly emerges from this era is a new, but similar, economic plan, rather than a radical transformation of the previous way of thinking.
The Sustenance of Tourism:
With this new development of international tourism, Cuba has reestablished the challenge for this country to fulfill its long term goals of national development . In the present, tourism is cushioning the Cuban economy, while the other sectors are under performing (Grogg 1). Content with today´s overseas visitors, like those in this picture who enjoy Cuba´s tropical beaches, generating more than 40 percent of Cuba’s income, Cuba has made tourism its new national treasure (Cuba 1). Cuba’s towering mountains, coastal flatlands and temperate climate at first drew tourists in ever-increasing numbers despite the United States’ 43-year-old policy of discouraging financial dealings with this communist nation. However, Italy, Canada, Spain, France, Germany, Mexico and Britain — all in opposition to the U.S. policy — provide the bulk of Cuba’s tourists (Cuba 2). Due to this early and quick success, the government enjoyed tourism as a lifeline to its economy.
Regrettably in terms of economics, this demonstrates how Cuba is stuck in a cycle of relying on exports that have no higher return than to produce revenue. It reveals that Cuba has not created a new model which would develop other assets, like skilled labor, which would posses higher returns and development in the future. From an outsiders perspective, the Cuban economic-policy makers do not seem to understand the flaw with placing heavy weight on the export sector in this fashion. Most economists agree that at the root of this trend or economic planning is the reflection of a narrow economic base and poor diversification of production. Such third world countries, like Cuba, are then forced to have a high dependence on imports which ultimately does not lead to the significant growth these countries need in order to catch up with modernized societies(Monreal 12). These key issues are what need to be addressed and fixed by Cuba´s economic planners in order for this nation to develop.
Furthermore, in the late 90s and the early part of the 21st century, tourism is viewed as an unreliable export to base an economy. Cuba, as with all countries, was severely affected by the aftermath of the attack of the World Trade Centers on September 11, 2001. In an economic fallout, economic growth for Cuba in 2001 had been forecasted at between 4 and 4.5 percent; but following the attacks, growth dropped to 3 percent (Frank 1). This low growth that continued for two years was largely the result of a decline in tourism . In October 2001, the tourism sector experienced a 14 percent decline, that then translated into an overall drop of 5 percent for 2002 (Snow 1).
In sum, the change in the Cuban pattern of development in the 1990s was necessary, but unfortunately concentrated on breaking into the world economy by changing its industrialization process from a sugar economy to a more tourist-based system. This development model has proven to be profitable for Cuba, but it does not seem to provide long term solutions to changing the quality of life in this third world country.
The Export Summary of Resource Based Exports in the 1990s:
In order to gain perspectives on possible changes to help this country, one must analyze the trends in Cuba´s economy. First off, Cuba´s old export of goods contained four dominant products: sugar, minerals, tobacco and fish products. Now, the two primary Cuban goods at the beginning of the 21st century are sugar, a raw material, and nickel, a mineral; with a critical view, these exports are not leading to sufficient progress. Each export does not possess either technological complexity or potential for technological learning, both of which are key ingredients in order to develop (Oficina, 1999 qt. in Monreal).
The situation hardly changes when the range of exports is expanded beyond the four main exports: There are only five other Cuban products that are classified as principal exports, that is, those products whose share of total exports is 1.5 percent or greater. These five are iron and steel products, pharmaceuticals, fruits and vegetables, coffee and cement. In other words, three manufactured goods (pharmaceuticals, cement and iron/steel), one raw material (coffee), and fruits and vegetables, exports which are simple process manufactured goods(Oficina, 1999a qt. in Monreal).
As shown in the following table, Cuba´s manufactured goods are relatively insignificant as a principal export. This table largely demonstrates the lack of variety in the country´s industrial base, as medical and pharmaceutical products, the most unique and advanced good, is only 5.2 percent of total exports. Because of these percentage rates in comparison to the goods, Cuba´s exports of natural resources consist of very few attributes that will lead to greater productivity for the coming years.
Principal Exports, 1998 (Oficina, 1999 qt. in Monreal)
Export Value in Million US$ % of Total Exports
Sugars, sugar and honey 433,750 80
Mineral ores 39,820 7.4
Tobacco 11,440 2.1
Fish products 10,190 1.9
Agricultural products 18,390 3.4
Medical and pharmaceutical products 27,900 5.2
Subtotal 51,359 94.8
Total Exports 541,490 100
Nevertheless, the transformation of the Cuban economy in the 1990s has evolved the exports of this country. From the rise of tourism, the service exports have significantly changed Cuba´s export supply.
Although tourism only represented a minimal percentage of exports at the beginning of the decade, at its end and even in the present the service sector, including tourism, transportation and others, like communications, is almost double the total exports of merchandise from the country.
In spite of this improvement, there is not solid evidence that supports the assumption that this transformation, involving tourism, is in itself an indisputable indication of industrial upgrading (Monreal 17). Unfortunately for Cuba, the fact that tourism is generally its only connection to the world economy, is a sign that it is an underdeveloped country (Hockman 9). This statement does not blame tourism for causing or maintaining underdevelopment, but it is a simple observation that tourism is sometimes compatible with underdevelopment and in most scenarios does not lead to moving beyond it. Despite this well known fact in the economic world, Cuba´s exports of services, which is largely from tourism, has a disproportionate place within the total economy. The table on the next page reveals the evolution of exports and displays the growing disproportion:
Exports % of Total in 1990 % of Total in 1999
Sugar 76.7 11.5
Mining 7 9.8
Tourism 4.3 43.1
Tobacco 2.0 5
Fishing 1.8 2.4
Income – Transportation — 13.4
Income – remaining — 7.4
Total Exports of Goods and Services 100 100
———————————————————————————–(Oficina, 1999 qt. in Monreal)
Although this tourist activity has brought economic benefits, its accelerated growth has not led to a dramatic structural change that is needed for Cuba to truly profit and grow from international trade. However, the use of tourism is an advancement in the right direction. It simply should not be the final process of changes for the current development of Cuba.
The Hopeful Economic Future of Cuba:
Having a relatively positive impact, the economic management in Cuba over the past fifteen years has improved this nation despite the challenging decisions and circumstances. As the Gross Domestic Product, an economic measure of the quality of life in a country, was declining since the start of the economic crisis, it was finally halted in 1994. Up to the 9/11 attack, Cuba´s GDP grew at an average annual rate of 2.8 percent. If this would have continued, it would have meant that only in 2007, 13 years after the recovery´s start, the country would have surpassed its 1989 GDP level(Saney 120). As well, the UN Economic Commission for Latin America and the Caribbean, reported that Cuba’s economy grew 3 per cent in 2004, while growth was 2.6 per cent in 2003 (Cubasource 3).
Though these are positive trends, the market that is developing in 2005 contains very dangerous elements of distortion that threatens Cuba´s future. As Cuba continues to hope to cash in on tourism because of the growing number of tourists that are visiting, the island may be beginning to rely too heavily on this sector for national gross revenue. Art Padilla, a professor at North Carolina State University who has studied Cuban tourism, said:
The Caribbean tourism market, in general, is beginning to show signs of maturity. Total growth has flattened and there is a limit to what you can do
in Cuba and in regards to tourism. Anecdotal evidence suggests that many
first-time visitors to Cuba choose not to return because they are turned off by
poor service and the blatant disparity that exists between foreigners and
Cubans. (Martin 1)
As well, foreign investment has decreased in recent years. Due to the stagnancy of the manufacturing industry, Cuba is struggling to attract investors. The Economic Commission on Latin America and the Caribbean reports that net foreign investment in Cuba for the past two years has stood at zero (Martin 2). Since exports and foreign investment constitute a large portion of GDP and essentially determine Cuba economic stability, it is very disconcerting to see these sectors deteriorating or having the potential to dramatically dwindle in size.
Alternative Methods to Developing Cuba:
In lieu of the reaction policies, Cuba needs to move towards a more typical approach of development. Though development is not an exact science, certain economic principals can be applied that will help Cuba grow. In the past and the present, Cuba has had a low growth rate and a low GDP per capita. However, economic theory suggests that Cuba has hope to change this precedent.
In particular, the economic growth theory explains how technology and increased human and physical capital have provided people with the means to raise their productivity and improve their living standards(Taylor 690). Often technology is quickly dispersed among nations through international trade, while human capital is created over a longer period of time. Ironically for Cuba, it has a very strong system of education and a high level of human capital. According to UNESCO, literacy is at about 95.7 percent, and Cuba enjoys one of the greatest proportions of university graduates in the world. These statistics are so high because education is free (Martin 3). But, this nation´s greatest challenge is a shortage in physical capital and technology. By adding new supplies and capital, poor regions, like Cuba, will potentially catch up to the more advanced countries. This growth miracle has spread to parts of the world, especially in South-East Asia, and can spread to Cuba. Theoretically, nations like Cuba that have low levels of capital should attract a greater amount of investment, because by adding capital, productivity grows at a very high rate (Taylor 691). However, attracting investment from other countries is Cuba´s economic weakness.
In order to fix this dilemma, Cuba must strengthen relations with other countries. Suffering most from its ties with the US, Cuba can be successful without the backing of this world super power. However, one must recognize that clearly, as long as US and Cuba relations continue in hostility, there are obstacles to fully infiltrating the world system of trade. Yet, this is not necessary a purely negative situation. Reflecting on Cuba´s history, it is somewhat positive that at the moment this relationship is in its current state because most likely Cuba would repeat its traditional single-market dependence with the US that has characterized Cuba´s international relations (Miranda 132).
Due to the outcome of past affairs, Cuba has become pressured to diversify its trading partnerships and receive more foreign direct investment, the exact measures which will help Cuba´s likelihood of developing. Cuba´s first step in this direction was with Italy in 1998. Italy wanted a foothold in Cuba´s tourist industry. Though connected to tourism, this beginning was fundamental to the economy as more jobs were created from the construction of Italian resorts (Cuba 3). However, Cuba needs to continue to foster this relationship in order to gain a more steady course of revenue. By involving others in Cuba´s tourist industry, the stability of tourism will increase and be less likely to fluctuate.
Though concentrated in another realm of Cuba´s economy, China is also a potential country that could be a stable source of investment. Fortunately, over the past few years, China has taken greater interest into Cuba´s economic affairs. In fact, China has just recently pledged to increase economic and political ties with Cuba as both sides see a bright future of friendship and cooperation (Frank 1). China, desperately in need of minerals to feed its economic boom, appears to be ready to form a strategic partnership, particularly in the nickel sector. Drawn by the nickel industry, China has allowed Cuba to double its production of nickel from its current level of 75,000 tons a year (China 1). Wanting to boost economic and trade relations with Latin American countries, China has become an important partner for Cuba and represents almost 10 percent of the island’s foreign trade (Chinese 1). By developing this relationship, Cuba will not only gain from trading, but also be influenced by China´s flow of technology and their successful ventures. Cuba´s Government Minister Ricardo Cabrisas said, bilateral trade with China between January and October reached 600 million dollars and added that there was plenty of potential for investments in the biotechnology, tourism, telecommunications and electronics sectors (Chinese 2). Cuba needs to seek out this investment in order to create more business on the island backed by Chinese funding. One analyst claimed that Cuba would be able to retain 51% ownership of the companies created with Chinese capital(China 1). From the nickel projects alone, China has poured in millions of dollars so that Cuba can buy machinery and supplies for communications and electronics. Not only is China starting to invest in Cuba, but also Hu Jintao, China´s president, has promised to promote tourism to Cuba, where 10,000 Chinese visitors are expected this year. With these multiple benefits from this relationship alone, Cuba should work to flourish this new partnership in order to spark rapid growth in its economy.
Because China will gradually increase economic relations as profits exist, Cuba needs to solidify its ability to import and export goods by strengthening its ports. Cuba´s ports are a crucial element to the island´s international trade and economy. However, most lack the ability to load and unload efficiently. An area that needs immediate attention, Cuba´s ports are struggling to meet good standards:
The government is losing millions of dollars a year to inefficiency at the
docks, with ships unable to meet contractual obligations to discharge cargoes
on time. … While Havana is a modern port that is well maintained, it is
inevitably turning to tourism as its main business, with the cruise industry
This means that Cuba must develop more ports that explicitly deal with cargo. Anaiaz Rodriguez, the director of the government-run Investment Promotion Center in Havana, declared that it is obvious that Cuba needs to enhance the ports Mariel and Santiago de Cuba so that all commercial activity can be transferred to these ports(Luxner 2). This development in the maritime industry leads to a system of specialization of port areas. Cuba currently has 34 ports with 172 docks. If each port is able to focus on a specific function, Cuba´s port facilities would perform at a higher level and spread out the maritime traffic more evenly. Due to current results, such as Cuba´s ports only handling 42.2 percent of the traffic it once recorded in 1999, Cuba´s recovery and improvement of its economy will be quite a way off if this island does not develop its indispensable ports.
Desperately wanting to grow, Cuba has sought many means to develop as a country. Only time will tell which venture of development will be successful for Cuba. There does exist, however, means to ensure, or at least give the best opportunity for this nation to grow. Even though Cuba´s economic planners are bound to make mistakes due to the unpredictable future, those that are currently directing Cuba´s economy must always be willing to adapt to the world economy in order for Cuba to stay in the mainstream of international trade.
Because Cuba has positively changed a lot as a whole in the past fifteen years, its future contains hope. Though economics is not an exact science, Cuba can stay weary of historical trends in regards to its development. This will help Cuba steer clear from repeating similar mistakes of its own past and learn from the successes of other developing countries on how to improve a third world country´s economy. With some good fortune, more modernized countries will look at Cuba for potential to invest. If Cuba stabilizes it economy, by relying less on tourism and building its maritime industry, this country will have a better opportunity of obtaining significant foreign investment from multiple countries.
Though changes in Cuba´s economic structure will have a great cost on certain industries, it will be worth development. With the look of Havana offering a striking view of Cuba’s struggle to develop, on the same city block where there are broken buildings reminiscent of bombed-out cities from WWII, there are also new, brightly-painted luxury hotels staffed by smartly dressed Cubans welcoming guests — while next door the laundry of the masses hang like decorations on lines (Grogg 3). As this demonstrates a society full of disparity, addressing Cuba´s economy is the only way to create more efficiency with greater equity. This has and will be a difficult task, and some may even believe that it is impossible. But, substantially raising Cuba´s productivity appears to be feasible. Cuba, stereotypically known for its famous cigars, smooth rum, rich coffee and people who are as sweet as the sugar the island produces, is a land ready for true change and a spark that will improve this third world country.
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