Introduction

Cuba is a country which suffers from many economic problems that are deep-rooted, tied to ideology, and difficult to solve. As Cuba faces its current economic situation, its leaders will have to decide which is more important: improving the economic conditions of its citizens, or holding fast to its communist, anti-US identity.

Cuba was discovered by Christopher Columbus in 1492, and at the crossroads of the Atlantic Ocean, Caribbean Sea, and Gulf of Mexico, quickly became a strategic outpost in Spain’s New World empire.1 In the late 1700s, following the collapse of the sugar industry in Haiti, Cuba expanded sugar cane cultivation throughout the island, and sugar remains Cuba’s primary agricultural and export product even today. Cuba did not receive its independence from Spain until 1898, when the United States defeated Spain in the Spanish-American War and Spain gave up all of its claims in Cuba. A United States military government ruled Cuba until 1902, and even when the first Cuban-led government was established in 1902, its constitution included a provision that allowed the United States to intervene in Cuban affairs and to permanently lease a naval base on Guantánamo Bay. Over the next thirty years, the United States would take advantage of those rights, sending military forces into Cuba whenever problems arose.

In 1933, a revolutionary group led by Fulgencio Batista took control of the government, and Batista dominated the country as a dictator on and off for the next twenty years. The United States supported Batista’s government, and American investments in Cuba continued to expand during the 1940s and 1950s, with US interests eventually controlling over 90 percent of Cuba’s telephone and electrical services and nearly 40 percent of its sugar industry.

By the 1950s, many Cubans were unemployed and poverty stricken, and political conflict, strikes, and demonstrations riddled the country. This prompted Fidel Castro, a young lawyer, to begin a long period of revolution against Batista in 1953. Originally defeated and imprisoned, Castro and his followers returned in 1957, and began to wage guerilla warfare against the government. Continued economic problems led to growing support for the rebels, and by 1959, Batista fled the country. Castro became the prime minister of a new Cuban government whose primary goal was to reduce US influence on Cuban affairs. To this end, the Cuban government seized US-owned businesses, and relations between Cuba and the United States became very strained very quickly. As relations with the United States declined, Cuba further distanced itself from its geographic neighbor by developing stronger ties with the United States’ chief rival, the Soviet Union, and officially becoming a communist country itself. In 1960, after Cuba took over all remaining US business in Cuba and began receiving aid from the USSR, the United States placed an economic embargo on Cuba, and in 1961, the US and Cuba ended diplomatic relations.

Over the next thirty years, Cuba and the Soviet Union remained closely tied and the USSR continued to provide Cuba with military and economic assistance. In 1991, when the Soviet Union disintegrated and subsequently withdrew aid and funding from Cuba, the Cuban economy suffered severe depression and near collapse. To ease this economic crisis, Cuba brought about limited capitalistic reforms that lessened state control over some sectors of the economy and also sought to improve relations with other countries, particularly Canada and Latin American and European nations in order to stimulate foreign investment. Cuba’s economy has improved since the early 1990s, but today, remains filled with problems.

SWOT Analysis: Strengths

Though often regarded as unsuccessful and oppressive, Cuba’s Communist revolution has produced some positive effects, especially in regards to education.2 Education is free and universal in Cuba, and Cuba has one of the highest proportions of university graduates in the world. All Cubans from the ages of 6 to 14 are required to go to school, illiteracy is practically nonexistent, and from preschools to graduate programs, Cuba provides an educational network which is the equal of any in Latin America. Though Cubans are often forced to endure shortages of books and learning materials, the average Cuban is sophisticated and highly knowledgeable.

Cuba rarely experiences temperatures below 40° F or above 100° F, which gives them an excellent climate for the production of sugar cane. Sugar cane is grown throughout the island, and Cuba is one of the world’s leading producers of sugar. Sugar production also dominates Cuban manufacturing, as there are more than 100 sugar mills throughout the country. Cuba’s semitropical climate also provides excellent growing conditions for coffee and tobacco, which are also very important export products for the Cuban economy. Cuban tobacco is considered to be of very high quality, and Cuban cigars are famous worldwide.

SWOT Analysis: Weaknesses

In addition to the emphasis on improved education, the Castro regime also renovated many hospitals and built many new hospitals and clinics throughout the country. Health care in Cuba is subsidized by the government, and every Cuban town and neighborhood has a clinic with a doctor and nurse living there, but there are no drugs, antibiotics, or diagnostic equipment to speak of. Because of this, Cuba focuses on holistic care, acupuncture, and herbal medicine. The government prohibits Cubans from purchasing any modern, manufactured medicines, and vitamin deficiencies, low-birth weight babies, tuberculosis, and typhoid are on the rise. Behind this prohibition is the fundamental communist value of equality, which in this situation means that “if something vital cannot be provided for all, in cannot be allowed for any.”2

The preeminence of the black market in Cuba presents another great weakness. Very basic economic activities, like the sale of milk, bread, housing, and transportation, are often performed illegally. According to The Washington Times, “the black market…accounts for 50 percent of all retail transactions.”3 Most of the materials available for purchase on Cuba’s black market are stolen or misappropriated from state warehouses and businesses. Corruption is also commonplace, as customs officials often confiscate imports (especially scarce products such as electronics) for themselves, and individuals frequently engage in insider deals with government contacts.4

Cuba is also plagued by inefficient labor, which is not surprising, since worker’s wages are not tied to their productivity. When 45 percent of the country’s most inefficient sugar mills were closed in 2002, Castro kept the laid-off workers on the state payroll. Since Cuban mill workers who are so inefficient as to be laid off are paid the same as those who are still working, incentive to work as efficiently as possible is completely undermined.

SWOT Analysis: Opportunities

Foreign investment, and particularly in the area of tourism, represents a key opportunity for the Cuban economy. In 2003, the tourist industry earned $2 billion,5 a huge figure, especially when you consider that Cuba’s total 2003 GDP was only $15 billion. Much of Cuba’s 2.6 percent economic growth rate6 can be attributed to the double digit growth in the tourism industry, which Economics Minister Jose Luis Rodriguez refereed to as “the most dynamic factor in our economy.”7 Tourism once seemed to lead the way toward a decentralized Cuban economy, with several European hotel firms investing in the island under joint ventures and enjoying the quasi-independence that the government allowed. Now, the government is studying how to re-centralize tourism, as Cuba takes a step back from this slight economic opening. In 2003, joint ventures were stripped of much of their control of day-to-day business, as government ministries have resumed power over decision making. Foreign investment has not yet been directly affected by these changes, but foreign businessmen say that investment is slowing, as decisions must be approved by more extensive layers of bureaucracy on a case-by-case basis.8

SWOT Analysis: Threats

The economic embargo which the United States has had on Cuba since October 1960 represents the single largest economic threat that Cuba faces. Along with the collapse of the Soviet Union, the US embargo has led to the stagnation and deterioration of the Cuban economy over the last several years. In 2000, the economic sanctions were lifted somewhat, as Congress enacted legislation which allowed the sale of US food and medicine to Cuba, but in 2004 the Bush administration limited family visits and remittances to Cuba in an effort to limit the supply of US dollars. Castro responded by withdrawing US dollars from the economy for the first time since they were legalized in 1993. This exchange in policy decisions is characteristic of the way the two nations have traded blows over the past forty years and leads to the irony of the US embargo: interestingly enough, while contributing to Cuba’s economic devastation, many experts believe that the US embargo has greatly helped Castro to stay in power, stirring up Cuban nationalism by enabling him to portray the underdog in a David vs. Goliath battle with the United States, and giving him an excuse for Cuba’s economic failure.

Problems

Cuba is riddled with many different problems, but they all stem from the overall problem of Castro’s communist regime and its policies.

Cuba’s inefficient labor force is one of the greatest problems caused by its communist policies. As mentioned earlier, workers are not really held accountable for their lack of production, and even when they are identified as being inefficient, they are not punished, as the state is committed to full employment and a national pay schedule. This makes the state reluctant to lay off employees, and even when they are laid off, as in the example of the sugar mills mentioned earlier, the displaced workers are kept on the state payroll. As long as workers can fall back on the crutch of a national pay schedule no matter what results they produce, there will be no reason for them to be productive.

Cuba faces another problem demographically. It is predicted that over the next two decades, Cuba’s population will decrease by 22 percent in the age groups ranging from (0-44), while the number of mature working-age citizens (45-64) and retirees (65+) will increase drastically, by 70 percent or more. These demographic changes will make it incredibly difficult for the government to continue to support the extensive social services (such as health care, education, and pensions for retirees) that have been one of the actual successes of the Revolution as the shrinking labor force must carry the social service burden not only for themselves, but for the rapidly expanding older population as well.

Cuba’s problems with the black market and corruption will continue as long as US sanctions and the communist government’s restrictions make many products, some of them basic necessities such as eggs and medicine, virtually unavailable. Unlike with many countries, Cuba’s black market is huge not because products are cheaper there, but because they are only there.

Alternative Courses Of Action

According to The Economist, “Cuba, out of necessity, has allowed capitalism into its socialist system. But it then keeps capitalism down…with a mass of complex and sometimes contradictory rules and regulations. Just when [investors] find out how things work, the rules change again.”3 At some point, Castro is going to have to decide what is more important: jump-starting the economy with increased capitalistic measures, or maintaining the tight centralized control that has been associated with his government over the past forty years.

Increasing capitalistic measures, specifically by allowing freer access to foreign investors and giving joint ventures and state enterprises more direct control over their businesses, including the ability to have some influence over wages and prices, would help to alleviate many of the problems which Cuba faces.

If workers were paid based on ability and productivity, rather than all being paid according to a national pay schedule, employees would have more incentive to work efficiently, and the current horrendous problems that Cuba experiences with inefficiency would be reduced drastically.

Also, the increased capitalist characteristics of the Cuban economy would provide a basis for improving relations with the United States, and perhaps eventually the lessening or lifting of the US trade embargo. While, as mentioned before, the US embargo helps Castro attain support from the Cuban people, it devastates the Cuban economy, and as long as it is in place, Cuba will continue to struggle. If the embargo were to be lifted, products of all sorts could flow freely into Cuba, eliminating the need for the black market by giving Cubans the opportunity to attain vital products such as food and medicine legitimately.

Finally, Cuba is in need of economic restructuring, as the current economy is too dependent on the tourism and sugar industries. A more diversified Cuban economy would enable the nation to continue to function if these two industries were to suffer.

Recommendations

Working to improve relations with the United States would provide Cuba with the potential for virtually unlimited gain. In the days before the Revolution, 65 percent of Cuban exports and 75 percent of Cuban imports were tied to US-Cuban trade. After the Revolution, the Soviet Union replaced the US as Cuba’s primary trading partner, but in the years following the fall of the USSR, Cuba has been scrambling to find trading partners to fill the void. The United States would be eager to trade with a Cuba that was less antagonistic toward America and capitalism in general.

Cuba is in desperate need of the money brought into the country through foreign investment, but its inconsistent policies regarding the rights of foreign investors threaten to greatly diminish the positive impact that foreign capital could have on its economy. The current trend has been for the government to loosen control over economic operations just long enough to encourage investment and get the economy flowing, and then suddenly cut back on this freedom in order to keep ultimate economic control firmly in government hands. In order to be truly successful in the long run, Cuba must continue to gradually loosen control over economic operations of joint ventures and state enterprises without suddenly curtailing foreign investment and the relatively free enterprise when it becomes popular. Foreign investment is vital for Cuba; it is essential that the government make somewhat of an effort to cater to the requirements of foreign investors who are used to having control over their business operations.

Sugar has been Cuba’s main product for hundreds of years, and will continue to be important, and tourism has largely been responsible for keeping the Cuban economy going over the past decade, but the economy must be based on more than these two industries. A hemispheric economic downturn and new worries about international terrorism have hit both of these industries over the past couple of years, and have illustrated the need for diversification.

Analysis

It will be incredibly difficult for the current government to implement these necessary changes, as much of Cuba’s current identity is tied to its conflict with the United States and the fact that it has clung to communism despite the poor resulting economic conditions on the island. However, if Cuba truly wants to improve its economy, it must be willing to transform this identity.

Giving more economic control to joint ventures and state enterprises would serve as a catalyst for the Cuban economy. Enabling companies to set competitive wages and prices would motivate employees and businesses alike to be more productive, and would encourage foreign corporations to invest their capital in the Cuban economy.

During its close relationship with the USSR, Cuba focused on the production of sugar, which it exported to the Soviet Union at high prices, and relied on all kinds of Soviet imports in return which they received at low prices. This may have worked at the time, but it made Cuba incredibly dependent on both the USSR and its sugar industry. In recent years, the tourism industry has taken off, which has reduced some of the dependence on sugar, but Cuba needs to develop other key industries as well. Two promising options are oil and nickel production, both of which are on the rise in Cuba. An increase in oil production would be especially beneficial, as it would decrease Cuba’s dependence on expensive imported oil.

All of these changes would be helpful to the Cuban economy, but the greatest current barrier to a prosperous Cuba is the US trade embargo, and even with these other capitalist reforms, Cuba will continue to struggle as long as it remains an economic adversary of the world’s only superpower. With over forty years of antagonistic behavior toward one another, Cuba and the United States will not become best friends overnight. Implementing capitalist reforms will help, but the Castro administration will also have to ease up on anti-US rhetoric, and improve the current human rights situation within the country. The United States is by no means opposed to having better relations with Cuba, but will not get rid of its trade embargo as long as Castro remains openly opposed to America and its policies. Improving US-Cuban relations and hopefully lifting or easing the embargo will certainly be difficult, but the possible benefits make it worth the effort.

Summary

Despite Cuba’s long history, dating back to its discovery by Columbus in 1492, the Revolution of 1959 remains the most crucial and pivotal moment, and provides the basis of the identity and economy that Cuba possesses today.

The Revolution brought about numerous social reforms, the most successful of which is the excellent education system, which remains as one of Cuba’s greatest strengths. Cuba also possesses a very temperate tropical climate which encourages growth of key products such as sugar cane and tobacco. Unfortunately, Cuba also suffers from several economic problems, such as inefficiency in the labor force, a high level of corruption and black market activity, and a lack of goods available for purchase and consumption. Many of these problems are closely related to government policy.

Foreign investment, specifically through tourism, offers a great opportunity for Cuba to attain capital which can help to breathe life into its struggling economy. At the same time, a harsh US trade embargo greatly hampers the Cuban economy, and keeps it in a perpetual state of need.

In order to improve economic conditions in Cuba, it is necessary to implement a degree of capitalist reforms, specifically in reference to wage and price controls, to encourage productivity and decrease black market activity. Even more beneficial would be the improvement of relations with the United States and the possible cessation of the current embargo.

Cuba finds itself occupying a unique position, as the sworn adversary to US policy and the capitalist way of life, despite being located only 90 miles south of Florida. This position is made even more unique by the close historical ties that Cuba and the United States share. As Cuba faces the new century with aging leaders from a fading Revolution, the hope for economic progress in Cuba lies in reestablishing ties with the giant to the north that has influenced their history so much already.

1Perez, Jr., Lous A. “Cuba.” World Book Encyclopedia. Chicago: 2004.
2“Cuba Climbing: People, Economy and Environment.” December 7, 2004.
3Feulner, Jr., Edwin J., Miles, Marc. A, O’Grady, Mary Anastasia. 2004 Index of Economic Freedom. Heritage Foundation and Dow Jones & Company, Inc.: 2004.
4“A Legacy of Dysfunction: Cuba After Fidel.” RAND Corporation. December 7, 2004.
5“Dollar replaced by ‘monopoly money’ in Cuba.” Economy News. December 7, 2004.
6“Cuba.” CIA: The World Factbook. December 7, 2004.
7Snow, Anita. “Cuba creeping toward economic recovery.” Miami Herald. December 7, 2004.
8“Tourists: by the left, march.” Economist.com. December 7, 2004.
9“Cuba.” CIA: The World Factbook. December 7, 2004.
10Snow, Anita. “Cuba creeping toward economic recovery.” Miami Herald. December 7, 2004.


Other resources which were not cited but which were consulted during the writing of this paper:
Bussey, Jane. “Cuba: Dollar decision a sign of distress.” Miami Herald. December 7, 2004.
Mesa-Lago, Carmelo, and Perez-Lopez, Jorge. “Cubs’s Economy: Twilight of an Era.” Transition Newsletter. December 7, 2004.