FT Management Reports
October 14 2003

Castro's Cuba feels the post-Soviet cold

By Marc Frank

Cuba must ease restrictions on small businesses and co-operatives to revive an
economy suffocating under the impact of foreign exchange shortages, according
to a study to be published soon by the UN Economic Commission on Latin

The draft of the Eclac study, prepared in conjunction with Cuba's state-run
National Institute for Economic Research, says the country's isolation from
international capital markets and inefficiencies linked to state management - as
well as the continuing impact of US sanctions - are partly to blame for the
island's problems.

After noting that growth slowed to 3 per cent in 2001 and 1.1 per cent last
year, the report says "new economic policy actions are required to stimulate
internal reactivisation forces and achieve more productive dynamism with
macroeconomic stability."

In the early 1990s President Fidel Castro's government initiated a cautious
opening to foreign investment, legalised some family-run businesses and the
dollar, turned to tourism and began a gradual decentralisation of the command
economy after the gross domestic product declined 35 per cent.

However, Cuba's estimated 180,000 self-employed work under tight control
and in the face of constant pressure from the authorities.

Overall in spite of a steady recovery of economic growth, standards of living
remain well below levels achieved before the collapse of the Soviet Union and
infrastructure continues to crumble. Public transport is a particularly serious
problem, with bus and train services running at less than a third of the level of

The study echoes the conclusions of similar research published earlier this year
by the Centre for Study of the Cuban Economy, a Havana University
think-tank, and suggests controls must be eased.

The earlier report, too, urged greater liberalisation, arguing that the reforms
were "exhausted, and in need of new conditions (deregulation) to function."

However, all the indications are that the government intends to strengthen state
domination of the economy, partly because rising nickel prices and a rebound in
the tourism industry are easing immediate economic difficulties.

Juan Triana, director of the centre at Havana University, said the economy had
demonstrated surprising resilience this year despite the foreign exchange

"Even with a tense foreign exchange situation and the sugar harvest's
worse-than-expected results, the forecast growth of 1.5 per cent will be met,
and perhaps a bit more. Next year we should see moderate recovery resume,"
he said.

Tourism - which accounts for about 42 per cent of economic output and close
to 50 per cent of hard currency earnings - is recovering from the slump that
followed the September 11 2001 terrorist attacks in the US. Tourist numbers
have risen by 15 per cent so far this year. Nickel prices have doubled over the
last 18 months to more than $10,000 per ton, boosting revenues from an
industry that has tripled production over the last decade.

Business at Cuba's state-run dollar stores was up 15 per cent through June and
should top $1.3bn (€1.1bn, £779m) this year, according to an internal survey
of the country's thousands of retail outlets. The stores were established in the
1990s to capture the family remittances, tips and bonuses that flowed into the
population's hands after the US currency was made legal tender along side of
the peso.

Mr Triana said high oil prices continued to drag down economic performance,
as Cuba still imports 50 per cent of its minimum fuel requirements - although
that is down from close to 100 per cent a decade ago. Oil and gas production
are now the equivalent of between 80,000 and 90,000 barrels a day and local
fuel powers 100 per cent of electricity generation.

An agreement with Venezuela to take 53,000 b/d on preferential terms has
worked well this year, after being interrupted for six month of 2002 by coup
attempts and strikes in the South American country.

Under the deal, 20-25 per cent of payments are due over a 17-year period as
long as oil prices remain above $24 per barrel.

Foreign exchange shortages make the economy extremely vulnerable, however.
Cuba is not a member of the IMF or any other multilaterals and began
defaulting on its now more than $11bn in foreign debt in 1986. As one
Havana-based diplomat noted: "They have no access to medium- and
long-term funding to ride out any sudden drop in foreign exchange earnings or
natural disaster."