By Chow Wei Cheng
Four years after the collapse of the Soviet Union and the economic crisis that followed in Cuba, the Cuban economy is starting to grow again. Cuba's real GDP grew 0.7% in 1994, marking what is believed to be the beginning of a sustained recovery.
The demise of its largest trading partner and source of assistance, the Soviet Union, and the US economic blockade produced a savage drop in Cubans' production and income.
Yet today Cuba's prospects look better than those of many Latin American countries. The Mexican devaluation crisis, for example, is expected destroy up to 750,000 jobs, cut wages in real terms by 30% to 50% and spur inflation to 45%.
In a February issue of Time magazine, a feature on Cuba asked the question, "Will a tighter embargo really bring down Castro?". Time concluded in the negative.
Since the collapse of the Soviet Union, Cuba, like Vietnam, has been forced to become more integrated into the world capitalist economy. But the Cuban government is determined to do this in a way that will maintain the gains of the revolution.
The London Mining Journal has featured articles describing Cuba as one of the most "geologically prospective" countries for mining exploration. It points to Miramar Mining of Canada and Matlock Mining of Australia as among the first to start investing in Cuba's mining sector.
These have been followed by several other mining houses, including Australia's Western Mining Corporation, which could be investing up to A$450 million in a nickel project after successful appraisal.
More recently, Beta Asset Management in London announced plans to launch an investment fund for Cuba. The company set up for this purpose is called Havana Asset Management; it will raise US$40 million for direct investment in Cuban projects. Its latest research report contains some very interesting facts.
The report states, "Cuban officials, who tend to be admirably cautious, are reluctant to forecast a strong economic rebound, partly for concern that this might be interpreted by Cubans in the context of pre-1992 living standards, to which there will be no return in the foreseeable future. However, in absolute terms, and from current depressed levels, the economic recovery is likely to pick up from now on. Our forecast is that real GDP growth in calendar 1995 will increase to around 3% and then accelerate, to possibly 6-8% p.a., in 1996-1997."
They attribute the upturn to the growing popularity of Cuba as a tourist destination and Cuba's success in obtaining foreign financing for its export industries.
According to the research note, "international confidence in the durability of Cuba's renaissance is being engendered by contact with the new generation of leaders — the capable, confident, dynamic reformers now shaping the transition to a modern mixed economy".
Inflation
Cuba is making considerable progress against inflation. The amount of currency in circulation has dropped from a peak of 11.9 billion pesos in May 1994 to an estimated 9.6 billion by the end of the year. This compares with a long-term target of 3.5 billion, which the government views as manageable.
Havana Asset Management points out, "These achievements are the more impressive in that they took just seven months, following the introduction of a broad range of price increases and new tariffs in May and the unveiling of a new tax regime in August".
The government has reduced its deficit from just over 5 billion pesos in 1993 to 1.4 billion in 1994, a drop of more than 70% and far below an initial target of 3.2 billion. The report forecasts a deficit drop to 1 billion in 1995 and possible elimination of the deficit in 1996.
The government has cut subsidies to loss-making enterprises by nearly 40%, with a further 34% cut forecast in 1995 as more enterprises become self-financing and financed by foreign investment. This has enabled the government to increase the social assistance budget by 58%.
As a result of these measures, the peso was trading at around 50 to the US Dollar in March 1995 compared to more than 120 in mid-August 1994.
Cuba has begun to employ a technique used successfully in the past by countries coming out of hyper-inflation. In December a new convertible peso note (linked 1:1 to the US dollar) began to circulate. This was to replace all other convertible notes and tokens, with the stated aim of gradually building confidence in the new currency. The next step will be for the new notes to become sole legal tender in foreign currency shops.
The plan is to keep reducing the volume of old pesos in circulation and increase their value until the old convertible peso can be merged into a new, fully convertible, Cuban currency.
These monetary reforms will remove the reliance on US dollars as a store of value and will assist in the stabilisation of prices and the increasing of production, and will build confidence in the Cuban economy.
These measures will support the withering away of the black market as production increases again. US dollars were the stable medium of exchange on the black market, where goods not able to be bought with ration cards were traded.
The report states, "underscoring the pace of change, by early 1995 Cubans could purchase most goods on the free market in 'old' pesos and many vendors were reluctant to accept dollars".
The creation of 2800 profit-sharing cooperatives which now farm 50% of the non-cane producing land has stimulated food production. They have increased the availability of fresh meat and vegetables at newly authorised agricultural markets since October 1994, and these have exerted strong downward pressure on prices in the black market. Officials estimate that some prices have fallen 40% since August, and the black market is contracting.
The increase in output has and will continue to generate more tax revenue for the government. This will ease budgetary pressures and reliance on overseas funding.
Foreign investment
Foreign direct investment, negligible four years ago, is now rising strongly. Total capital commitments by foreigners now exceed US$1.5 billion. The actual investment was only around $200 million in calendar 1994, but this is expected to rise significantly.
The national tourism plan alone requires over US$2.1 billion for investment in hotels and facilities over the next six years.
By the end of 1994, 178 foreign joint ventures had been approved, compared with 80 at the beginning of 1993 and just 20 in 1991. The figure is expected to exceed 250 by the end of this year and 350 by 1997.
Most sectors will be opened to foreign investment. The most popular so far are tourism and natural resources. The sectors to remain the preserve of the state are health, eduction, sport, pensions and social security.
Increased foreign investment and access to financing contributed to the recovery of the economy last year, with 18 of 21 industrial sectors experiencing growth during the first nine months of 1994.
Tourist arrivals increased by about 14% to 620,000 with total gross earnings amounting to US$800 million. Last year's oil output exceeded expectations at almost 1.3 million tonnes. It is estimated that non-sugar industrial production rose by 8.5% in 1994, despite further reductions in subsidies to the state sector and continued severe capital shortages.