In 1997 Cuba’s GDP grew 2.5 percent overall and 1.9 percent per capita, far less than the official target of 4-5 percent growth. Cuban officials blamed this poor economic performance on the failed sugar harvest, difficulties of borrowing from foreign capital markets, the heavy burden of debt repayment, bad weather, and crop devastation by pests.

Lackluster Growth

In 1998 Cuba’s GDP grew just 1.3 percent—0.7 percent per capita—compared to a planned growth rate of 2.5-3.5 percent. Jose Luis Rodriguez, Cuba’s Vice President and Minister of Economy and Planning, said this low figure was due to the U.S. embargo and the global financial crisis that has reduced international credit and driven down commodity prices for Cuba’s exports—particularly sugar and nickel. He also attributed the low figure to the excessive rainfall associated with Hurricane Georges and the severe drought that followed.

GDP per capita reached 1,100 pesos in 1998; at 1998 rates of increase it would take nearly 26 years to raise this to even Cuba’s meager GDP per capita level of 1,989—1,861 pesos.

In 1997 gross domestic investment as a percentage of GDP reached 10.3 percent and in 1998 it reached 10.9 percent—still about 60 percent less than the1989 level. The inflation rate peaked at 25.7 percent in 1994 then practically disappeared in 1996. It slowly picked up after that, reaching 5 percent in 1998.

Weak External Sector

Cuba’s imports expanded faster than its exports in 1997-98, mainly due to weak world prices and a decline in the quantity of sugar exports. In 1997 the value of exports reached 1.8 billion pesos—66 percent less than the 1989 level—but it fell again in 1998, to 1.6 billion pesos. Imports in 1997 totaled 3.7 billion pesos—54 percent less than the 1989 level—and rose to 3.9 billion pesos in 1998. With fewer exports in relation to imports, the merchandise trade deficit widened, as it had in the 1980s. At that time, however, the Soviet Union routinely paid for the additional imports that Cuba needed.

Cuba’s terms of trade dropped 40 percent in 1989-97 as the prices of sugar and nickel, two key export commodities, fell. In 1993-97 declining volume and price of sugar caused its share of total exports to decrease from 66.2 percent to 46.6 percent. The overall decline in terms of trade was partly offset by a fall in the world price of oil—Cuba’s principal import commodity—that reduced the share of oil in total imports from 35.4 percent in 1994 to 26.4 percent in 1997 (compared to 32.0 percent in 1989).

The external hard currency debt rose from 6.2 billion pesos in 1989 to 10.5 billion pesos in 1995 and declined to about 10.1 billion pesos in 1997. Because Cuba had very little access to capital markets during this period, changes in the value of hard currency debt were due mainly to accumulated debt service and fluctuations in the value of the dollar compared to the currencies in which the debt is denominated. Cuba’s hard currency debt includes a substantial debt to Russia—which assumed the debt of the former Soviet Union. (Because Cuba’s official exchange rate is 1 peso=1 dollar, the government often reports external sector statistics in pesos or dollars, interchangeably. In reality, one dollar was traded for 8 pesos in 1989, roughly 78 in 1993, 95 in 1994, 19 in 1996, 23 in 1997, and 20 in 1998.)

Cumulative foreign investment—as officially reported—reached 2.1 billion pesos by 1995 and rose to just 2.2 billion pesos by August 1998, suggesting that foreign direct investment was stagnant over this period.

Economic Bright Spots: Remittances and Tourism

Private remittances from friends and families living abroad have become the most dynamic element of the balance of payments. Remittances grew from about 18 million pesos in 1991 to 255 million pesos in 1993, and—after Cuban citizens’ use of foreign currencies was decriminalized—to 744 million pesos in 1996 and about 761 million pesos in 1997. Revenues from remittances were substantially higher than revenues from exports of sugar or nickel, or net revenue from tourism.

Gross revenue from tourism steadily rose from 168 million pesos in 1989 to nearly 1.5 billion pesos in 1997 and in 1998 to 1.9 billion pesos—more than ten times 1989 gross tourism revenue. Net tourism revenue was about one-third of the gross value, however, due to a high share of imported inputs. Net tourism revenue rose 405 percent during 1989-97.

Agriculture’s Weak Spots

In 1998 sugar production sank to 3.2 million tons, 61 percent less than the 1989 level, and lower than it had been in 55 years. (The previous production low was in 1943 when 2.8 million tons of sugar were produced.) Average annual sugar output during 1993-98—3.9 million tons—was about half the 1982-89 annual average of 7.4 million tons.

The nonsugar agricultural sector has also performed poorly and its recovery has been sluggish and unsteady. 1997 output levels for export commodities were below 1989 levels; fish and citrus were down 36 and 20 percent, respectively. And production of key domestically consumed commodities was also well below 1989 levels; milk was down 51 percent, eggs were down 45 percent, and rice was down 27 percent from 1989 outputs. The same trend characterized output of noncitrus fruits, poultry, beef, and pork. Only corn and plantains had higher output in 1997 than in 1989.

The new cooperatives created in 1994 are inefficient and highly dependent on the state; the state directs their production and buys virtually all of their output at below-market prices, creating severe disincentives. In 1997 these cooperatives’ share of cultivated land was 57.6 percent but their share of total sales to the public in free agricultural markets was 3.6 percent. The private sector’s shares of land and market sales were 16.9 percent and 72.7 percent while the state farms’ shares were 25.5 percent and 23.7 percent, respectively.

Oil and Nickel Production on the Rise

Nickel production decreased 43 percent in 1989-94 but shot past 1989 levels in 1996 and kept climbing to reach a record high in 1998 of 68,000 tons—44 percent more than 1989 production. This was mainly a result of Canadian investment.

Foreign investment has also boosted oil production; international oil companies are engaged in numerous production partnership agreements with the Cuban government. Production of domestic oil—which accounts for about one-fifth of total consumption—is a national priority since it helps reduce Cuba’s very high dependence on imported fuels and large oil import bill. Domestic oil extraction steadily rose in 1992-95 to reach 1.5 million tons. Production was virtually stagnant in 1996-97 but recovered in 1998 when about 1.6 million tons of domestic oil were reportedly produced—a new record.

Overall manufacturing output decreased during 1989-93 but began to recover thereafter. In 1997 output was below 1989 levels for electricity (-12 percent), cement (-55 percent), and cigars (-32 percent).

Disquieting Social Indicators

Employment declined from about 4.4 million workers in 1989 to 4.1 million in 1996, rising to 4.2 million in 1997. The "open" unemployment rate decreased from a 1995 peak of 7.9 percent to 6.9 percent in 1997. Equivalent unemployment—adding those who are temporarily displaced and receiving unemployment compensation—peaked at 35.2 percent in 1993 and decreased to 27 percent in 1996. No estimates are available for 1997.

In 1995 the government announced that it would dismiss 0.5-0.8 million redundant workers in the state sector. Three years later these dismissals were largely abandoned, likely due to a lack of job creation in the private sector. The private sector could not expand because of government interference—increasing the cost of business permits 300 percent, and increasing the various fees for the self-employed 650 percent. As a result, in 1996 the number of legally registered self-employed people dropped 18.5 percent—to 170,000—increasing to just 175,000 by the end of 1997. Average real wages in urban areas fell steadily in the early 1990s—by 1995, to 58.5 percent of their 1989 level. They rose slightly in 1996, to 61.2 percent of the 1989 level.

Overall health standards in Cuba deteriorated during 1989-96; the rate of reported cases of contagious diseases per 100,000 inhabitants rose 160 percent for tuberculosis, 75 percent for hepatitis and syphilis, 53 percent for chicken pox and 22 percent for acute respiratory diseases. Surprisingly, the reported infant mortality rate decreased during this period, from 11.1 per 1,000 live births in 1989 to 9.0 in 1996 and 7.2 in 1997.

In 1996/97 university enrollment dropped to 112,000 students—significantly less than the 242,000 students enrolled in 1989/90. Enrollment levels in economics and education fell 63 percent and 66 percent, respectively. A major reason for the overall drop has been the lack of incentives for university graduates, who are usually unable to find jobs in the state sector and who are prohibited from self-employment. The ratio of extreme income inequality in 1995 was 800:1, as compared to 4.5:1 in 1987; official figures released in mid-1998 reveal that a teacher makes 143 times the salary of a restaurant operator. Rationing has been extended to nearly all consumer goods, but is no longer an effective equalizer because monthly rations cover less than two weeks of minimum food requirements. Food and other necessities for the rest of the month have to be bought in dollar shops or on the agricultural and black markets, at very high prices affordable only to those who earn or receive hard currency from abroad.

What to Expect in 1999

In 1999 it is expected that GDP will grow 2.5 percent, domestic investment will grow 11.5 percent, and the budget deficit will be under 3 percent of GDP. Sugar output is expected to reach only 3.6 million tons and oil production may exceed 2 million tons for the first time.

These very modest predictions for 1999 contrast with the ambitious targets for the medium term—1998-2002—that the Fifth Party Congress set in October 1997. Those targets called for:

The severe drought of 1998—attributed to El Niño and reportedly the worst since 1941—will likely affect both the 1999 sugar harvest and the grandiose target of 7 million tons of sugar envisaged for 2002. The sowing of new cane for the 2000 harvest has been delayed significantly; only half of the target crop has been sown.

To reverse Cuba’s economic crisis, Cuban authorities need to embrace more profound political and economic reforms. They must reform prices, permit and encourage private property and private sector activity, privatize the large and inefficient state sector, create capital and labor markets, and create a social safety net for the most vulnerable groups of the population. The inflexibility of the regime on staying the course does not bode well for a meaningful and sustainable economic recovery in Cuba in the near future.

Carmelo Mesa-Lago is a professor of economics at the University of Pittsburgh and a professor of international relations at Florida International University.

Jorge Pérez-López is an international economist at the U.S. Department of Labor.