Cuba's Economic Slide

by Saul Landau and Daina Starratt

HAVANA - Cuba, the last bastion of socialism in the world, is making an inexorable, painful transition to a modified capitalism. It is integrating its economy into the world market and making concessions, grudgingly, to the dictates of venture capital and all the logical consequences that follow from its penetration of the island.

 For six years, Cubans have moved from privileged membership in the Soviet economic bloc to the lonely status of competitors in the court of world investment. To grasp the enormity of the change, compare Cuba in 1989, with $8 billion of imports (many on credit) and conducting 85 percent of its trade with the Soviet bloc, to 1994, when the country's imports have dropped to less than $2 billion and it imports COD.

 The Cuban economy has yet to level out from its dramatic descent after Soviet aid, beneficial trade, and investment drastically declined at the end of the 1980s. Cuban leaders now look to foreign capital as at least a temporary floor to stop the free fall of the economy. They ignore the paradox of depending on foreign capital to save socialism as a necessary concession to world reality, and confine their energy to salvaging the health care and education systems, the gains of the 36-year-old revolution.

 Cuban officials continue to speak confidently, as if they still possessed the pre- Soviet collapse capacity to retain degrees of socialist purity that other nations, like China and Vietnam, have had to forego. "We will keep control of the internal economy, while we open the export and tourist sector for foreign investors," Vice Minister for Foreign Investment Osvaldo Castilla contends. But how can officials distinguish between the two areas, especially as voracious foreign and Cuban entrepreneurs try to increase the private sector space? Rather than offering a blueprint for Cuba's conversion to world capital economics, while maintaining some socialist institutions on the island, Cuba's leaders resort to new versions of triumphant rhetoric.

The internal economy

 Today, above all, we must save the Revolution and survive," President Fidel Castro explained to a group of U.S. visitors last January. "And, under these very special conditions, we have to adapt and adjust our economic policy to the goals we pursue, which are not intended to imitate the capitalist model. They are not intended to give up socialism and its goals - even if we are obligated to use capitalism's mechanisms in a number of activities."

Fidel insists that the reforms will not necessarily pull Cuba inescapably down the capitalist path, and that even without the Soviet parent, Cuba will not compromise its commitment to socialism. But the government's inability to maintain a viable economy without Soviet support undermines slogans like "socialism or death." "In 1994 Cuba those words have become synonyms," says a Trade Ministry official, recounting one of the thousands of jokes about the economy that fill daily conversation.

 Since 1992, the state has not supplied much of the populace with sufficient food and other necessities. Changes made in 1993 and 1994 by the National Assembly in labor relations, price subsidies, taxes, and monetary policy take the country further from the eroding socialist model, but they do not offer a new model. Rather, the government responds to crises or to the unpleasant facts of dreary, daily life.

 In 1993, Fidel succumbed to mounting pressure and legalized the dollar rather than arresting a significant percentage of the population for possessing foreign currency. Legalization further undercuts the socialist ethic. Cubans with dollars lead privileged lives, whether or not they work for them. Some receive remittances from their families; others, like artists and writers who sell to foreign galleries or book publishers, earn hard currency. The majority of dollar-bearers work in the burgeoning tourist industry. Busboys, waiters, tourist taxi drivers and chamber maids use tips to buy food and other commodities at the dollar stores.

 "We are the true consumer society. Everyone consumes; no one produces," remarks Gutierrez Alea, Cuba's award winning film director. Without cheap oil, the government has had to ration ruthlessly, close down factories, reduce bus service and renege on its guarantee of 100 percent employment. One result of the transformation has been the resuscitation of the once despised timbiriches, the small business people.

 The National Assembly, after excruciating debate about socialist principles, agreed in 1993 to allow self-employment in 120 different occupational categories. By the summer of 1994, more than 150,000 individuals held self-employment licenses. Tens of thousands more are self-employed without permission - i.e. without paying taxes.

 Most recently, free agricultural markets, where food is openly sold in pesos, were re-opened on October 1. Fidel had closed "peasants' markets" some 10 years ago because he said they corrupted the population and the socialist system. But in the changed climate, Defense Minister Raúl Castro (Fidel's brother) stated firmly, "if there is food for the people, the risks are inconsequential." The Cuban government has also recently announced the opening of "industrial markets," where artisans will sell their wares in a similar manner. These markets will open December 1.

 By late 1994, Cubans have come to accept as routine what 10 years ago party watchdogs would have labeled "the distortions of capitalism." The University of Havana now offers graduate courses in "economic renovation," a euphemism for studying capitalism, that offers topics like sales and marketing and uses a text written by mainstream U.S. economist Robert Samuelson. Five years ago a professor suggesting such an addition to the economic curriculum would have faced ideological heresy charges.

 In November 1993, Cuban economic planners listened avidly as two officials from the International Monetary Fund (IMF), formerly labeled a "temple of capitalism," advised them on the virtues and consequences of the Eastern European transition to the market. Cuba has petitioned to re-enter the World Bank and the IMF, but the United States continues to veto admission on ideological grounds.

Tourism and the export sector

 Non-U.S., foreign capital appears disinterested in Cuba's revolutionary rhetoric, seeing only the advantages of exploiting the island's skilled labor force and easy repatriation of profits. As a Brazilian entrepreneur visiting Cuba remarks, "Cuba is like a puddle of water and I see myself as a sponge."

 In June 1994, Ernesto Melendez, minister of foreign investment and economic cooperation, reported that there were 146 joint venture enterprises between Cuba and 28 other nations, in 25 sectors of the economy. An additional 130 projects were under consideration. The Spanish lead the investors with 32 joint ventures already established. Ironically, Canada and Mexico, the United States' NAFTA trading partners, are also ranking investors in Cuba.

Major sectors of the economy, including tourism, mining, pharmaceuticals and telecommunications, are open to foreign investment. President of Parliament Ricardo Alarcón says foreign investment is now open to all sectors of the economy, even sugar cane production, which had been previously off-limits.

 Cuban officials emphasize that they have maintained their sovereignty in the joint venture partnerships, by selling shares rather than entire businesses to foreigners. According to Vice Minister Osvaldo Castilla, the government transfers its shares to a Cuban company which then sells a percentage to a foreign investor. "The ideal is 51 percent Cuban, and 49 percent foreign; but each case is different. For example, in the case of theInternational Textile Company , 70 percent is Mexican owned, because it is so difficult to sell textiles abroad."

The government also tries to control labor relations. Joint ventures pay a government-operated employment firm in dollars for their employees. The government then pays these employees in pesos, and also continues to provide them with health care and pension benefits. The joint ventures can fire employees, who then return to the government employment pool and receive "unemployment" until or if they find a new job. Although the Cuban government provides no accurate data, officials admit that unemployment and underemployment have become serious problems.

 Most foreign investors have shunned problem-ridden industries and are drawn instead to tourism. A decade before the Soviet collapse, foreign investors coveted profits that they envisioned through the sale of Cuba's climate and beaches. By 1994, tourism has become the principal area of foreign investment and the country's second most important economic activity after sugar production.

 Cuba also offers investment opportunities in industries that spin off of tourism, like Voral Negro, a growing jewelry manufacturing and distribution concern that offers its products in tourist hotel stores. Aristides Ruiz, its director, glows over the gold and silver earrings, bracelets and necklaces, inlaid with black coral. "We use primitive equipment," he explains as he watches an artisan use a 1940s press and blow torch to mold a ring, "but the quality, we think, matches the standards of Europe."

In 1993, 560,000 tourists brought $720 million to the island. This year, the industry hopes to attract to beach resorts upwards of 600,000 visitors, mostly from Canada, Western Europe and Latin America, who should spend some $900 million. Armando Amieva, commercial attaché at the Cuban Interest Section in Washington D.C., shows no defensiveness in promoting investment in the tourism sector. "It provides the most rapid turnaround for investor's dollars," he says. Indeed, investors expect to recoup their investments in the hotel sector within four years - and then reap big profits.

 Cuba has negotiated joint hotel ventures with companies like Sol-Melia, Raytur, and Guitart Hotels of Spain, LTU of Germany, Superclub of Jamaica, Delta Hotels of Canada and the Dutch Golden Tulip International. Such enterprises have provided 1,200 new hotel rooms in Varadero Beach alone and project an expansion of 7,200 more over the next five years. Cuba hopes to continue to expand in this sector, and is banking on the allure of its beautiful beaches and skilled work force, in which "one of every eight working adults is a skilled technician and one of every fifteen holds a masters or better," according to Regino Boti, vice president of CIMEX, a newly created company to promote investment and business.

 Mineral exploration, mining and refining rank second to tourism in attracting foreign investment. Mineral production declined dramatically in recent years due to oil, chemical compounds, spare parts and raw material shortages, but even with the cutbacks, Cuba remains the world's fifth largest nickel producer. Canadian investors in nickel also look with interest at Cuba's still un-mined cobalt, the world's largest deposits of the mineral.

  Sherritt Inc. of Canada has a 15-year contract for nickel from Moa Bay, off the northeast coast of Cuba. It invested $1.2 billion last year to renovate the smelter at Moa and to construct a sulfuric acid plant there. In June, Sherritt announced a contract with Cuban-owned Compania General de Niquel to mine, refine and market nickel and cobalt internationally. Furthermore, Sherritt's refinery in Fort Saskatchewan, Alberta, which uses the Cuban nickel, will be included in the jointly owned assets, giving the Cuban company a piece of Canada. Other international mining partnerships include British, Italian, Canadian and Australian corporations working in exploration, mining and refining.

 Cuban oil production has increased from 120,000 tons in 1960 to 1,100,000 tons in 1993. In June, Sherritt Inc. and Fortuna Petroleum Inc. of Canada, in partnership with Cuban state petroleum company Cubapetroleo, struck oil in the Cardenas Bay, in Matanzas Province some sixty miles east of Havana. Initial tests demonstrated a production capacity of 3,750 barrels per day. In the same month, the British-Borneo Petroleum syndicate announced an agreement for a 50 percent working interest in another oil exploration project.

 In September 1994, Mexpetrol, a Mexican consortium consisting of PEMEX, the National Bank of Foreign Trade, the Mexican Petroleum Institute, Mexican Maritime Transportation, and several private firms, signed a $200 million deal to take over Cuba's Cienfuegos oil refinery. Mexico will pay Cuba in a debt equity swap and give Cuba a percentage of the refined oil.

 The Cubans have also attracted foreign investments in citrus cultivation. In 1993, Cuba negotiated three joint-ventures with Greek and Israeli investment companies for citrus and fruit production. Israeli BM Corp., for example, runs one of two citrus packing houses in Jaguey Grande. At 115,000 acres, the joint venture's citrus plantation is the largest under single management in the world. Production has increased considerably under BM Corporation's management, with the introduction of Israeli drip irrigation technology. By 1995, Cuba hopes to produce 1.6 million tons of citrus - a 60 percent increase from 1993 levels.

 A fourth sector of Cuba's economy, the pharmaceutical and biotechnology industries, provide additional prospects for foreign exchange. Cubans are able to produce recombinant interferon and the drug PPG, "that not only reduces cholesterol," Castro chortled to a visitor in January, "but stimulates your sex drive as well." Cuba's biomedical sector has patented additional products, such as meningitis B and hepatitis B vaccines, a remedy for vitilaigo, and an ointment which enables real skin and not scar tissue to grow over burns. In the early 1990s, Cuba received more than $200 million for selling 10 million doses of its meningitis B vaccine, three quarters of which went to the Brazilian government to fight an outbreak in Rio de Janeiro. In June, the Brazilian government negotiated a $30 million deal to import Cuban medicines that will allow Cuba to repay part of its $40 million debt.

 Mexicans and more recently U.S. companies have signed accords with Cuba to improve telecommunications. An upgraded system is essential to attracting foreign entrepreneurs. In June, the Mexican consortium Grupos Domos signed a letter of intent to purchase 49 percent of EmtelCuba, the Cuban phone system, for $740 million. The telephone and oil agreements with Mexico will cancel nearly all of Cuba's $340 million debt to that nation.

 In October 1994, the U.S. Federal Communications Commission, acting on State Department recommendation, approved proposals from EmtelCuba with Wiltel International, MCI, LDDS Communications, Sprint, and IDB-Worldcom to provide direct communications between the United States and Cuba. AT&T, which has provided limited, operator-assisted long distance service to Cuba since 1921, also signed an agreement to expand the existing service. Negotiations over the U.S.-Cuba phone link had been stalled because the Cubans had asked for a $4.75 surcharge, which the U.S. government refused, claiming that it would allow the Cubans to earn too much money, in contravention of the embargo policy. In the end, the two countries settled upon a $1 surcharge, even though the U.S. government receives $1.75 for calls to Guantanamo Base.

The social repercussions of capital

Cubans need the dollars and technology provided by these foreign investors, but capital carries baggage that contains serious threats to the revolution. As Carlos Fernandez de Cosio, chief of the Foreign Ministry's U.S.-Canada department, explains, "I think the capacity to cope with foreign investment will be the biggest challenge of the revolution." His euphemistic understatement underscores Cuba's dilemma.

 The most obvious social distress of the new arrangements comes as a result of the expansion of Cuba's tourist industry. Those over 50 remember the Havana of the 1950s, a U.S. tourist playground dominated by gangsters who also ran gambling, drugs and prostitution. "We are aware of the problems associated with the tourist industry," Commercial Attaché Amieva says. "We have prepared our population with education and training. We are doing all that we can to prevent tourists from bringing in drugs. We have done environmental studies to make sure that the new developments do not destroy the environment."

Such rhetoric belies the facts of life in Cuba, where dollars fuel a parallel economy that weakens the coherent fibers of Cuban society. Those working in tourism, from prostitutes to hotel porters, and those who receive dollars from relatives in the United States, enjoy privileges simply by virtue of having convertible currency. Unusual inequities result. A tourist cab driver or a prostitute can earn in a week the equivalent of a doctor's annual salary.

 Ten years ago, there was almost no serious crime in Cuba. In January 1994, a group of 120 U.S. visitors celebrating New Year's in Havana suffered 12 different muggings in the course of a week. Meanwhile, Cuban officials try to downplay the seriousness of the upsurge of crime and especially the reappearance of prostitutes.

 An informal sex tourism trade has developed on the island. Castro acknowledged this when speaking to Brazilians in 1992, but said, "Our hookers don't do it out of obligation, of necessity. Here prostitution doesn't occur for that reason but because somehow they like it."

Despite this questionable assertion as to the motivations of Cuba's prostitutes, need is quite relative. For three decades, Cubans lived well compared to most Third World countries, but recently, they have slid downwards - from a guaranteed 3,000 to less than 1,700 calories a day.

Obstructing investment

 U.S. leaders, the arch missionaries of free trade and capitalist values, continue to pursue Mafia-style revenge policies against Fidel Castro. Washington calls current policy to stop trade, commerce, investment and travel between the United States and Cuba an "embargo;" Cubans say it is a "blockade" because Washington interferes with other nations' efforts to do business with the island.

 Despite Cuba's apparent attractiveness as an investment opportunity, big capital hesitates to invest in an area the United States has made the object of an ideological vendetta. The Cubans claim that U.S. intimidation dissuades 9 out of 10 potential investors.

On October 26, 1994, the United Nations General Assembly voted overwhelmingly 102 to 2, against the U.S. embargo policy, marking the third straight year of UN calls to change the policy. The European Union and member nations of the Ibero American summit have also condemned the embargo. And Cuba's leading dissident, Elizardo Sanchez, says, "U.S. policy impedes rather than helps" the reform cause.

 International opinion has had little impact. As if smelling blood, U.S. policy makers tightened restrictions on Cuban trade after the Soviet Union collapsed. "The beast is wounded," said Jose Sorzano, former National Security Council official. "It's time to go in for the kill."

This militancy marked a dramatic shift from the policies of the 1970s, when the Nixon and Carter administrations had eased embargo restrictions in response to pressure from U.S. subsidiaries operating abroad. By 1973, Argentine-made Fords, Chevies and Dodges were sold in Cuba and by the end of the decade the number of loopholes in the embargo had increased. Cubans bought U.S. products from subsidiaries in Panama, Canada and various Caribbean islands.

 But the increased trade caused alarm bells to sound in the offices of the Cuban American National Foundation (CANF), a right-wing association of Cuban businessmen that has played an extraordinary role in shaping U.S. policy toward Cuba over the last decade. CANF acquired an inordinate share of political clout by making strategic campaign contributions and gaining influence in key sectors of both political parties

 In 1989, to block investment in Cuba's tourist industry, the Treasury Department's Office of Foreign Assets Control named Tabacalera, a large Spanish government-owned company, a "specially designated national of Cuba," thus depriving the company of any trade or commerce with a U.S.-based company. This dramatic pronouncement occurred just weeks after Tabacalera announced its plan to undertake a joint venture with the Cuban government to develop a tourist enclave. The Spanish government protested, and after several weeks of discussions with the Departments of State and Treasury, the company was "undesignated." On the following day, Tabacalera canceled its joint venture "for economic reasons."

"It was a classic case of threat and intimidation," a Spanish diplomat told Multinational Monitor. "The U.S. officials said that if Tabacalera went ahead with the project there would be many obstacles to restoring trade between it and U.S. companies. For example, if Tabacalera used any U.S.-made part in any of the development work or construction, that would violate U.S. law, and all trade and commerce would be cut. Under those conditions, who would be crazy enough to continue?"

In April 1991, Wagner Canhedo, the president of a Brazilian investment group and owner of VASP airlines, personally led the negotiations for a 60 percent interest in the Cuban airline Compania Cubana de Aviacion. Canhedo was willing to invest $800 million. Cuba needed cash and new aircraft to replace its aging Soviet aircraft for its new tourism plans. VASP would benefit from Cubana's access to juicy air routes to Europe.

 U.S. officials informed the Brazilian government and VASP that, should they buy Cubana shares, they might not be able to buy spare Boeing parts for their commercial aircraft. In addition, they told Brazil that the Pentagon would cease purchase of Bandeirante troop transport planes made in Brazil. When confronted with this as an example of threat and intimidation, a U.S. national security official, speaking with a smile, says, "We didn't threaten them or tell them not to go through with the deal. We just advised them about what might happen if they did."

In 1992, the United States stepped up pressure on Cuba still further with the Cuban Democracy Act of 1992, authored by Congressman Robert Torricelli, D-New Jersey. During his candidacy, Bill Clinton strongly supported this legislation, which closed the loopholes of previous decades by prohibiting U.S. subsidiaries from trading with Cuba and banning ships that docked in Cuban ports from U.S. ports for six months. This past summer, the Cubans submitted a complaint to the United Nations detailing the extraterritorial pressure placed upon foreign governments and companies under the Clinton Administration.

 Some U.S. friends and allies responded to the tightening of the embargo by passing blocking laws that seek to limit the effectiveness of Torricelli's Bill. For example, business people in Canada or Britain who refuse to do trade with or invest in Cuba because of the Cuban Democracy Act are subject to prosecution by their governments. An official from the Canadian International Trade Office, explains, "The Canadian government has its own policy of advising potential investors about the U.S. claim against Cuba." The official firmly states that the United States does not dictate Canadian policy. As if to emphasize this point in action, Canada resumed aid to Cuba in March 1994, beginning with $300,000 in emergency food.

 In September 1993, the State Department instructed U.S. missions abroad to request foreign governments to pressure their nationals and firms not to negotiate with Cuba or make state investments. U.S. representatives maintained that investors would inevitably get bogged down in lawsuits, as soon as Cuba sold expropriated U.S. goods or goods made on expropriated U.S. properties to foreign buyers. Further, the United States would be "displeased" to see its friends and allies doing business with Cuba as long as its government remained antidemocratic. Cuba claims that as a result of such "persuasion," negotiations with businesses from various countries, even deals already agreed upon, have fallen apart.

A U.S. official visited with executives of the Canadian Sherritt Inc., for example, to persuade them not to establish business relations with the Compania Cubana de Niquel because the site allegedly once belonged to a U.S.-owned refining plant, expropriated by the Cuban government in the early 1960s. When asked about the specific "persuasive" methods, a Sherritt official says, "Sherritt's current negotiations in Cuba are sufficiently sensitive that it is not appropriate for us to make a public response to your question." Sherritt Inc. appears to have been undaunted, however, by the U.S. approach and finalized a major deal with the Cubans.

Those businesses which have resisted U.S. pressure have had to deal also with threats from right-wing Cubans and CANF in the United States. When the Italian company Benetton announced its intention to open a string of retail outlets in Cuban tourist centers, Miami Cuban Americans threatened to boycott its U.S. stores. Benetton persisted. Similarly, Cuban exiles threatened to boycott all Colombian products last March if the Colombian government did not halt its plan to send 15,000 to 20,000 barrels of oil a day to Cuba.

 The United States has also exerted strong pressure on Cuba's nearest neighbors to isolate the socialist nation. In February 1993, Washington threatened to remove the preferential economic status and deny tariff parity for the exports of members of the Confederation of Caribbean States (CARICOM) if they allowed Cuba membership in the organization. CARICOM members acceded to Washington's demands to prevent Cuban participation in their confederation, but did include Cuba as part of their new trade bloc, the Association of Caribbean States (ACS), which formed in July.

A more open future

 Cuba is integrating itself into the world economy despite the heavy U.S. pressures. Economists at think tanks have drafted comprehensive plans for converting the Cuban economy, but the political leadership has remained in a state of denial over the extent to which labor relations, subsidies and entitlements will undergo drastic changes in the near future as a result of the return of capital. It will be difficult for even the staunchest revolutionary to talk business all day with CEOs and IMF officials and then shift gears and act like intransigent socialists at Party meetings.

 "The best Cuba can hope for in the middle-run future," says Julio Carranza, an economist at the Havana-based Center for the Study of the Americas, "is to become a Third World social democracy. After all, it's still a lot better than most of the Third World."

 While Congressman Torricelli vows to continue to "wreak havoc in Cuba," the balance of U.S. elite opinion has shifted against the embargo. When that shift and the business interests it represents translate into political force, as they will, the embargo will begin to erode, and U.S. Fortune 500 companies will again be vying with European competitors for pieces of a potentially lucrative Cuban market.