Until the late 1980s, the Soviet Union and its Central and East European allies bought 85 percent of Cuba's exports, provided a like share of imports, and were the main source of the island's development financing. The collapse of socialism in these partner-countries—coupled with Cuba's "rectification process," which began in 1986 and eliminated incipient market-oriented policies—prompted an economic crisis from which the country has been unable to recover. And although 1993-94 saw modest improvement in some key sectors, such as tourism, agriculture, and oil production, and a moderate curbing of excess demand in the economy, these positive trends have been offset by the continuing deterioration of the sugar industry. This downward trend is expected to continue in 1995, which could again drag down the overall performance of the Cuban economy.

Sparse Statistics

Official information on the Cuban economy is virtually nonexistent. The latest published statistical yearbook dates back to 1989, the year that trade and economic relations with the former COMECON partners started to break down. For more up-to-date information, analysts have to rely on the public speeches of Cuban leaders and guestimates by Cuban and foreign economists. But finally, in October 1994, Bohemia, a local weekly magazine, published selected economic statistics for the period 1988-93. This allowed, for the first time, a glimpse into recent economic performance.

Cuba's gross domestic produce (GDP) in 1993 was estimated at 10.0 billion pesos, only a little more than half the 19.3 billion pesos produced by the economy in 1989. Per capita GDP also shrank to about half over the four-year period, from 1,828 pesos in 1989 to 909 pesos in 1993, according to Bohemia. This output decline significantly exceeded economic contractions experienced during the same four years by the transition economies of Central and Eastern Europe—even those that underwent the more radical adjustments.

Cuban merchandise exports in 1993 were valued at 1.7 billion pesos, 69 percent lower than the 5.4 billion pesos exported in 1989. Over the same period, merchandise imports fell by 75 percent, from 8.1 billion pesos to 2.0 billion. The trade deficit fell to 0.3 billion pesos from 2.7 billion, because Russia refused to finance bilateral trade deficits. In 1993 crude oil and oil products made up 44 percent of Cuba's imports (in value terms), compared with 32 percent in 1989. The sharp increase in the share of oil in Cuba's shrinking imports meant that purchases of consumer goods, raw materials, and machinery had to be cut back, adversely affecting consumption and the agriculture and manufacturing sectors. In 1993-94, up to 80 percent of the island's factories stood idle, because of a lack of fuel, raw materials, machinery, and spare parts.

Cubans saw their consumption of food and both durable and nondurable consumer goods sharply reduced, with rationing reinstated for a wide range of staple foods and personal hygiene and clothing items, and monthly allowances scaled back. Electricity shortages and blackouts have become commonplace, and transportation has been cut back sharply. And the chief beneficiaries of government policies, public health and education, have declined severely in quality.

Between 1989 and 1993 the budget deficit nearly tripled, ballooning to 4.6 billion pesos in 1993, nearly 50 percent of GDP. The scarcity of consumer goods, and the government's policy of continuing to pay 60 percent of wages to workers even if they were laid off, resulted in a sharp rise in the population's cash holdings, which grew from 5.0 billion pesos in 1990 to 11.4 billion pesos in 1993.

Sugar production, still the mainstay of the economy and the most significant source of export revenue, fell by 43 percent during the period, from 7.3 million tons in 1989 to 4.2 million tons in 1993. (The sugar industry hit hardest between 1992 and 1993, when production fell from 7.0 million tons to 4.2 million tons. Nickel production fell by 35 percent, from 46,600 tons in 1989, to 30,200 tons in 1993. Oil production—a rare bright spot in Cuba's economy—has been rising and in 1993, for the first time, exceeded the 1 million ton mark. Despite this increase, however, domestically produced oil still accounts for less than 20 percent of total oil consumption.

International tourism is another sector that has performed well. Buttressed by foreign investors who have set up joint ventures with domestic enterprises, Cuba's tourism industry has steadily attracted many foreign visitors and generated increasing revenues. In 1993, 600,000 foreign tourists visited the island, double the total in 1989. Tourism's gross income increased more than fourfold during 1989-93, from 166 million pesos to 720 million pesos.

As for 1994, the handful of available economic statistics indicate the following:

•The 1993-94 sugar harvest, which ended in June 1994, yielded only about 4.0 million tons of sugar, 5 percent less than the 4.2 million tons produced in 1993, an amount that was already considered "disastrous."

•Production of root tubers, staples in the Cuban diet, dropped to 21 million quintals (1 quintal equals 100 pounds) from a yield of 25 million quintals in 1993.

•More than 600,000 tourists visited Cuba in 1994, an increase over 1993, but still lower than expected. Gross 1994 revenue from tourism has been estimated at about 800 million pesos, of which about 30 percent is figured to be net revenue.

•Crude oil production expanded again, setting a new record of 1.3 million tons.

•The budget deficit in 1994 was slashed to 1.5 billion pesos, and households' cash holdings were reduced by 1.2 billion pesos (from 11.4 billion pesos).

Speaking to the World Economic Forum in Davos, Switzerland, in late January 1995, Vice President of the Council of State Carlos Lage reported that the economy grew by 0.7 percent in 1994. Lage did not provide any additional information or statistics on economic growth by sectors. Considering the poor sugar harvest and the lackluster performance of other sectors, it can be assumed that the Cuban economy in 1994 experienced negative growth despite Lage's statement to the contrary.

Since the mid-1980s Cuba's economic policies have undergone several important shifts:

•In 1986 Castro announced the beginning of a "rectification process," under which the Soviet reform model, which had been implemented progressively since the mid-1970s, was abandoned. Economic decisionmaking was centralized, and the nascent market-oriented mechanisms being tried throughout the economy were reversed.

•In 1990 Cuba adopted a "Special Period in Peacetime" emergency program in response to the economic and trade consequences of communism's breathtaking decline. Austerity measures have been instituted in combination with policies to stimulate key sectors such as sugar production, nonsugar agriculture, biotechnology, and tourism.

•More recently, Cuba redefined its economic strategy, announced an open-door policy to foreign investment, and began cautious liberalization of certain sectors of the economy.

Stop-Go Reform Policies

In 1992 Cuba's National Assembly passed a number of amendments to the 1976 Constitution, clarifying the concept of private property and providing a legal basis for transferring state property to joint ventures with foreign partners. During 1993 and 1994, when the economy was in a freefall and economic collapse seemed imminent, Cuba introduced tax holidays and other financial incentives to attract foreign investors. Cuban officials have stated that as of November 1994, 165 joint ventures with partners from 35 countries had been established, mostly in the tourism industry, and by the end of 1994 these joint ventures had attracted $1.5 billion in foreign capital. (This high figure probably includes foreign investments that have been pledged but not yet realized.)

In addition to its policies aimed at attracting foreign investors, the government has introduced some reform measures, including:

•Dollarization. In June-August 1993 the government made it legal for Cuban citizens to use and hold hard currency. In so doing the administration hoped to eliminate the black market (the mid-1993 black market rate for the peso was 135 to the dollar, despite an official exchange rate of 1 peso to the dollar) and stimulate hard currency remittances from families and friends abroad. Special stores were established where Cubans could use their hard currency to buy items not available for pesos. Travel to the island became easier for relatives and friends living abroad. (Plans to encourage remittances were thwarted in 1994, however, when the United States clamped down and eliminated such flows in response to a sharp increase in unauthorized migration from Cuba.)

•Authorization of self-employment. To legitimize the booming black market for services and handicrafts, and to ease unemployment, the Cuban government in September 1993 specified more than 100 jobs that could be performed by the self-employed. In addition to fees and taxes, several restrictions were imposed: the self-employed had to apply for a license, could not hire employees, and faced limits in the marketing of their products or services. Professionals, such as teachers, physicians, and nurses, were not permitted to be self-employed, however; as the government explained, these professionals owed the state their service to compensate for the huge expenses incurred in their education and training. As soon as self-employment was authorized, private eateries (paladares) sprang up all over the country under the provisions of the law that allowed self-employment in food preparation. The government moved in quickly to eliminate the paladares, arguing that they were inconsistent with the authorized forms of self-employment.

•Creation of agricultural cooperatives. In September 1993 the National Assembly approved the breaking up of large state farms into cooperatives. To give farm workers an incentive to increase efficiency in production, the cooperatives were given user rights to the land they cultivated. Cooperative members have their own bank accounts and elect their own management.

The pace of change slowed down with the last quarter of 1993. A sweeping law against "improper enrichment" came into effect in May 1994. The law granted the government sweeping powers to confiscate the cash, goods, and other assets of individuals found guilty of profiteering, and it provided for retroactive application of sanctions for this offense. Food shortages during the summer of 1994 generated popular discontent, which began to threaten the regime's political stability.

Farmers' Market Comeback

A new set of economic reforms was approved in the second half of 1994.

•Institution of a new tax code. To introduce financial discipline, raise revenue to finance government expenditures, and reduce idle monetary balances, the National Assembly in August 1994 approved a new tax code to be implemented gradually beginning in 1995. The new system would be expanded to tax enterprise income, including that of joint ventures with foreign investors, as well as enterprise assets; also included are taxes on personal income, though application of this provision has been deferred. Subsidies to the public and to enterprises have been slashed.

•Reinstatement of farmers' markets. In late September 1994 Cuba reinstated farmers' markets, where producers of selected agricultural produce could sell a portion of their output at prices set by supply and demand. (But first, cooperatives and private farmers have to meet their obligations to the state, known as acopio, and pay a participation fee; a sales tax is also assessed.) The markets have reportedly made a good start, quickly increasing the amount of produce available to the public, although at high prices. These farmers markets are similar to the mercados libres campesinos (farmers' free markets) that operated during 1980-86 and were scuttled during the rectification process.

•Establishment of artisan markets. A network of artisan markets was established in October 1994 to permit the sale of a wide range of consumer products at prices determined by the market. Artisans sell their handicrafts at these markets; state enterprises may join in as well to dispose of their inventories.

•Introduction of the convertible peso. In December 1994 the convertible peso was introduced to gradually replace the dollar and other foreign currencies within Cuba. The convertible peso, valued at par with the dollar, would eventually be used in tourism and at the "dollar outlets "authorized since mid-1993. Bonus payments made to workers in certain key industries that generate hard currency, for example, tourism, tobacco, and oil extraction—are to be paid in convertible pesos rather than in foreign currencies as is the practice now.

Cuba's economy contracted by about 50 percent between 1989 and 1993 and probably contracted again in 1994, as modest recoveries in some areas were more than offset by a ruinous sugar crop. Prospects for an economic turnaround in 1995 are bleak. The sugar crop could fall to below 3.5 million tons, further eroding the country's ability to finance imports. Cuba's economic strategy of opening the economy to foreign investment, coupled with its piecemeal adoption of economic liberalization measures, may prolong the Castro regime's life, but it will not turn the economy around. Comprehensive political and economic reforms that can turn Cuba into a market economy are essential if Cuba's economy is to grow and prosper.