The Washington Post
Monday, July 24, 2000; Page A20

Cuba Climbs Economic Ladder

                  Lack of Investment, Extensive Food Imports Slow Reform

                  By Karen DeYoung
                  Washington Post Staff Writer

                  HAVANA—The Havana Palace, a 73-unit condominium building with
                  pool and garage, is nearing completion in the upscale Miramar section of
                  the Cuban capital. Designed to be sold to foreigners with business interests
                  in Cuba, or those merely looking for a Caribbean pied-a-terre, it is one of
                  17 projects being built under a joint venture construction program
                  authorized by the Cuban government in 1997.

                  But two months ago, foreigners were suddenly prohibited from buying the
                  condos. A terse announcement by the Ministry of Foreign Investment and
                  Economic Cooperation said all but a handful of the approximately 2,300
                  units in the foreign-financed initiative will be purchased by the government,
                  which presumably will rent them to approved foreigners.

                  It is not clear where cash-strapped Cuba will get the estimated $175
                  million needed to buy out foreign investment in the project. It's even less
                  clear what spooked the government into canceling the sales program.
                  Rumors in the business community range from panic over an inability to
                  provide sewer and water hookups, to fears that anti-Castro exiles would
                  try to buy the condos through third parties, to complaints by Communist
                  hard-liners that the private ownership initiative had simply moved too fast.

                  Whatever the reason, the condominium episode is cited by many business
                  representatives and economists here as an illustration of the two steps
                  forward, one step back liberalization policies Cuba has implemented since
                  beginning its long climb from economic rock bottom in the early 1990s.

                  Some openings seem here to stay; President Fidel Castro said last month
                  he believed Cuba would "never again" find it necessary to ban private
                  possession of dollars, and he touted the wisdom of individual ownership in
                  certain agricultural sectors. But the sudden and unexplained closure of
                  others has put many existing and potential investors on edge.

                  "There is a jerkiness" in the way Cuba conducts business that makes
                  investors nervous, said a representative of one major foreign investor who
                  requested anonymity. "The regulatory framework is not there. When
                  momentum is interrupted, it feels like you're going backward."

                  A Cuban economist who works inside the system put it more broadly.
                  "For a foreigner to want to go to a country and invest a large sum of
                  money, the government has to be coherent. They can't say on the one hand
                  they want something, and, on the other, have a leader who gives public
                  speeches denouncing the international financial system."

                  Castro continues to denounce the International Monetary Fund and the
                  World Bank along with "the insanity of privatization," even though the vast
                  bulk of Cuba's $11 billion foreign debt has been overdue for years and the
                  government is largely restricted to short-term international financing for
                  imports at what Cuba's Central Bank calls "onerous" interest rates.

                  Much of what Cuba imports is food. While the government seeks an end
                  to the U.S. trade embargo, the main benefit of pending U.S. legislation
                  eliminating a ban on food sales would be the difference between the cost of
                  carrying Chinese and Vietnamese rice halfway around the world versus the
                  price of shipping Louisiana and Arkansas rice across the Gulf of Mexico.

                  But it is investment that is crucial to Cuba's continued recovery from the
                  rapid economic fall following the abrupt end in 1989 of about $4 billion a
                  year in subsidies from the Soviet Union.

                  "In economic terms, Cuba sustained terrible damage," during the 35
                  percent contraction in the economy that occurred virtually overnight,
                  Castro said in a recent interview. "Supplies of fuel, food, raw material and
                  parts for machinery and factories were abruptly and almost completely cut

                  While many outsiders did not believe any economy could survive such a
                  precipitous downturn, severe belt-tightening and new foreign investment
                  have put Cuba's gross domestic product into the plus column, where it has
                  remained since 1994. The Cuban Central Bank said the economy grew
                  6.2 percent last year, and 4.5 percent growth is projected for 2000.

                  But the price has been high for individual Cubans. Government-subsidized
                  rations, ranging from 12 eggs and six pounds of rice a month to 1 bread
                  roll a day, are considered about half of what is necessary. The monthly
                  ration basket costs less than 15 pesos a person, or about 70 cents; that
                  figure more than doubles with the addition of subsidized milk for children
                  under 7. The current domestic exchange rate is 21 pesos to the dollar.

                  Beef is still largely unavailable--most cattle in Cuba are milk producers and
                  unauthorized slaughter is illegal--and shellfish is reserved for tourists and
                  export. Domestic chicken production is one-fourth what it was in 1989
                  because imported feed is deemed too expensive, and pork production is
                  less than one-third.

                  The average monthly salary last year was 221 pesos--$10.52 at the
                  domestic exchange rate--according to the Central Bank. Most people do
                  not pay rent, utilities are subsidized and education and health care are free,
                  although there is a chronic shortage of medicines.

                  "You have to do a lot to make up for what was lost between 1989 and
                  1993," said the Cuban economist, who asked not to be identified. "It
                  would take 8 to 9 percent growth annually to reach the point where
                  individuals actually feel a difference.

                  "They've gone through 10 years saying that people can live on one piece of
                  bread a day," he said. "It's a problem you can't see from the outside, but
                  anybody who spends two weeks in Cuba knows what it is."

                  Many Cubans are sustained by the economic liberalizations that allow them
                  to receive, earn and spend extra money outside the government system.
                  Although estimates vary widely, between 30 and 60 percent of Cubans
                  have access to modest amounts of dollars, through joint venture employers
                  or money sent from abroad. Consumer goods are available in
                  government-run dollar stores, and farmers are allowed to sell food on the
                  open market once they have met their state quota.

                  As the economy begins to recover, however, some of the space that was
                  opened for private entrepreneurs has begun to narrow. Although some
                  Cubans are allowed to run restaurants in their homes, few licenses have
                  been granted for such enterprises. Restaurateurs said there were none in
                  the last two years. Frequent government inspections verify that those
                  businesses do not expand beyond set limits and make sure taxes are paid.

                  Some argue that while Cuba's basic economic structure can continue to
                  produce growth over the medium term, it has little long-term promise.

                  Tourism and sugar production, which together produce 70 percent of all
                  foreign exchange, have expanded substantially in the last five years, but
                  most of the cash goes right back out to pay for imports. Sugar prices are
                  falling and, while more than 1.6 million tourists visited Cuba last
                  year--nearly half from Canada and Europe--the need to import most of
                  what they consume limits profitability.

                  The impact of structural changes has been mixed. What was once a
                  centralized, Soviet-style system has been decentralized into a number of
                  individual, state-owned companies. While still subject to quotas, these
                  companies have varying degrees of autonomy, can sign contracts with each
                  other and handle their own marketing. Some, particularly in the tourism
                  sector, have signed management contracts with foreign companies.

                  But old habits die hard, and unrealistic quotas or slow production have put
                  a number of the companies in debt--many to other Cuban enterprises.
                  Government audits of 300 state-owned companies this spring showed that
                  only a third had acceptable accounting practices. The Central Bank
                  announced a crackdown, noting there was little, if any, documentation of
                  transactions for "billions of pesos" between individual companies.

                  Foreign investment can be profitable for those with the nerves for it. Most
                  enterprises are in Cuba on a 50-50 basis in which Cuba contributes land
                  and facilities and foreigners pay for capital costs and labor. Taxes average
                  30 percent and all profits can be repatriated.

                  While some are interested only in getting a foot in the door while waiting
                  for more stable economic conditions, others have made substantial
                  commitments. The U.S.-Cuba Trade and Economic Council, which is
                  funded by U.S. businesses, said Cuba's largest foreign investor is Spain's
                  Altadis, which spent a reported $500 million in December for half of
                  Cuba's Habanos S.A., the government's tobacco and cigar export

                  Second is a subsidiary of Telecom Italia, which bought a 29 percent
                  interest in the Cuban national telephone company for a reported $400
                  million. The third largest, according to the council, is Canada's Sherritt
                  International Corp., with investments in nickel, oil, gas, electricity
                  generation and other sectors.

                  But even the hardiest investors retain doubts. In the "risks and
                  uncertainties" section of its 1999 annual report, Sherritt noted that Cuba's
                  policies on foreign investors and payments "could be affected by the
                  political environment and economic pressure. . . . The corporation is
                  entitled . . . to certain [Cuban government] assurances . . . that protect it
                  from adverse changes in law," but such changes were unpredictable and
                  beyond company control, the report said.

                  "Right now, they've got a period of grace, a window of opportunity" to
                  institutionalize a system governing all aspects of foreign investment, said a
                  representative of one foreign investor. "These are all the things that people
                  who put money into a place expect [and] it's needed in every sector."

                  Those who are openly critical of the government's political model,
                  however, say its demands will trump the economy every time. "There is no
                  economic model in Cuba," said Marta Beatriz Roque, an economist
                  recently released from a lengthy prison term for sedition. "They used to say
                  it was socialist, but it's really not now. But it's not capitalist. It's like a
                  laboratory test tube. They pour things in, and see what happens."

                  Paying for Food

                  Every Cuban receives a ration book each month allowing the purchase of
                  food and other supplies at government-subsidized prices. Other goods are
                  available at market prices. The average monthly salary in Cuba was 221
                  pesos in 1999, according to the Cuban Central Bank, and the current
                  domestic exchange is 21 pesos to the dollar.
                  Food/supplies; Quantity (Per month); Total price (In pesos)
                  Rice; 6 lbs.; 1.50
                  Sugar; 6 lbs.; 0.75
                  Legumes (half peas, half beans); 1.5 lbs.; 0.48
                  Coffee; 0.25 lbs.; 0.80
                  Eggs; 12; 1.80
                  Meat; 1 to 2 lbs.; 0.75 to 1.50
                  Cooking oil; 0.125 lbs.; 0.15
                  Salt; 1 lb.; 0.10
                  Fish; 1 to 2 lbs.; 1.00 to 4.00
                  Laundry soap; 1 bar; 0.20
                  Bath soap; 1 bar; 0.25
                  Tooth paste; 1 tube; 0.65 to 1.00
                  Quantity (Per day)
                  Bread; 2.8 oz.; 0.05
                  Milk (through age 6); 2.1 pints; 0.50
                  Quantity (Per week)
                  Soy yogurt (age 7 to 13); 6.3 pints; 3.00