How much do you know about Cuban history? You have probably heard about Castro or the Revolution, and you might know that the Cuban economic system is different to most of the world. To understand the Cuban economy, it is absolutely necessary to understand Cuban history. Cuba can be called a socialist country. It is moving towards a mixed economy and for most of its history as an independent country, it has been dependent on a strong trading partner. Most of the labour force in Cuba is employed by state-run organisations.
In 2018, through a constitutional reformation, the state granted foreign direct investment, free-market rights, and private property rights.
Since then, the Cuban economy was slowly growing but came to a halt due to the Covid-19 pandemic. Eager to learn more? Read on!
A typical street of Havana today. Source: Alexander Kunze, Unsplash.
Cuba’s economy before the Revolution
In the early 1900s, the US was Cuba’s main business partner. During that time, US citizens used to own almost two-thirds of businesses in Cuba. Cuba was the seventh country by GDP per capita out of 47 Latin American countries in the 1950s. But there was a huge gap between rich and poor, white and black.
As almost 80% of the country’s trade was with the US, Cuba was facing a problem of capital outflow. Partnering with the US had boosted the sugar production of Cuba.1
Among Americans, Cuba was known as a party island. Many would visit Cuba as tourists to enjoy gambling, horse racing, and golfing. Cuba’s tourism sector and economy were rapidly growing until the Cuban revolution happened.
Cuba’s economy after the Revolution
After the Revolution, many private companies were nationalised starting with the International telephone and communications corporation. In the 1960s, Cuba reinstated its relations with the USSR. The USSR started buying sugar in exchange for oil from Cuba. Oil refineries like Esso, Shell, Texaco refused to refine Soviet oil. In the dire need to run the country, Fidel Castro (former president of Cuba from 1959 to 2008) nationalised the oil refineries on the island.2
As a consequence of this action, the US banned all imports from Cuba. The ban was termed as an ‘embargo’. This trade prohibition was implemented in 1962 and is held to date. As Cuba lost its main importer, it turned completely to the former USSR.
The USSR supported Cuba via many subsidies, debts, postponing debt payment schedules, and paying high prices for Cuban exports. The Cuban economy was growing and was stable until the fall of the USSR in 1989. Once again, Cuba lost its trading partner with almost 85% of its exports3.
After the fall of the USSR, the Cuban economy declined by 35% from 1990 to 1993. This pushed the country into what Castro called a ‘special period in a time of peace’. During this time, many black-market activities started taking roots in Cuba as the government failed to provide consumable goods to the population.
As a result, the government legalised privately owned small restaurants, repair shops, etc. The Cuban economy began to grow once again when it started to trade with Venezuela. In the past few years, however, the Cuban economy has been affected again due to the economic crisis in Venezuela.
Growth rate and forecast of the Cuban economy
According to the statistics provided by the World Bank, the GDP of Cuba was $103.13 billion in 2019, the highest value recorded. The average GDP of Cuba was $38.10 billion between 1970–2019. Cuba was expected to reach $97.30 billion by the end of 2022. The Cuban economy fell by almost 10.9% in 2020. In 2021, the economy recovered by 2%, and in the next year, the government forecasted the economy would grow by 4%. A 4% growth still means that Cuba will face shortages of necessary goods and services3.
Figure 1. GDP of Cuba – Growth and forecast (2018–25), StudySmarter Originals. Source: Statista
Figure 1 above shows the projected growth of the Cuban Economy. It is expected to very gradually increase it's GDP between 2022 and 2025.
The Cuban economic system: characteristics
Cuba is a planned socialist country that is moving towards a mixed economy. The government has implemented many reforms like allowing Cuban citizens to trade old cars, buy cell phones, stay in hotels, etc.
In the last few years, the government has also cut many jobs to make government-controlled organisations efficient. The Cuban government now permits privately owned small shops like bed-n-breakfast, repair shops, and daily needs shops (201 different types of private businesses).
As Cuba was a purely socialist country, there was a ban on private ownership of businesses. State factory workers used to steal consumable goods from factories to sell via these ‘black-market’ shops. This ban was mainly lifted because the government wanted to control all these activities that were considered as ‘black market’. To gain control of these activities, the government allowed privately run small businesses.
The farmers can sell their produce directly in the free market via ‘Agropecuario’ (farmers' markets), after selling a fixed quota of produce to the government at fixed prices. The government also enters in ‘joint venture’ with the foreign investors and foreign ownership can be increased to 100% eventually.
GDP contributions per sector to the Cuban economy
Figure 2. GDP of Cuba by sector, StudySmarter Originals. Created with data from Statista
As you can see in figure 2, in 2020, the service sector contributed to the maximum chunk of 73.51% of GDP followed by the industry sector (23.02%), and agriculture (2.76%). The service sector mainly includes supplying well-trained medical professionals to other countries like Venezuela, and tourism.
Cuba imports machinery to support its industrial sector. The agricultural produce is not sufficient to sustain the whole population. Hence, Cuba imports food. As mentioned above, there are oil refineries on the island, so Cuba imports crude oil and exports refined oil.
Other exports include cane sugar, pharmaceuticals, fish, and beverages (like rum). There is also mining on the island and because of that the country also exports Nickel ores. The main trading partner of Cuba is Venezuela, but the country also trades with countries like Mexico, China, Brazil, Germany, and Italy.
World ranking of the Cuban economy
Cuba ranked in 176th place in the economic freedom index. This means that according to the Heritage Foundation the country has little economic freedom. There are restrictions on private businesses in areas like arms manufacturing, education, and medical services.
The debt of the Cuban economy
The debt of the Cuban economy is also a reason Cuba is falling back. The country reported debt of almost $18 billion USD in 2018.6 Cuba has been granted some debt waivers, subsidies, and nominal rates of interest from countries like Russia ($32 billion USD), China ($6 billion USD), and Mexico ($485 million USD).
The Paris club nations have already waived $8.5 billion USD out of $11.1 billion USD.6 Cuba had to pay the remaining amount over 18 years, but it is currently falling back on the payment plan.
Facts about the Cuban economy
- Cuba ranked 176th in economic freedom.
- 80% of the workforce is government employed.
- The growth rate of the Cuban economy is predicted to be between 2%-4 % in the next years.
- Cuba has skilled medical workers that provide services in neighbouring countries
- Due to the low productivity in the public and agriculture sectors, the informal sector and black-market activities are increasing.
- Cuba does not have a stock market.
The Cuban regime still promotes Cuba as a socialist country. However, for a country’s economy to perform well, the government needs to undertake many reforms. Economists believe that the Cuban government has to accept that the economy is in transition from a planned socialist economy towards a mixed economy by promoting capitalism in some sectors.
Cuban Economy - Key takeaways
- Cuba is a socialist country with a planned mixed economy
- Cuba has centralized information and decision-making structure
- Cuba has recently given rights to own vehicles and land privately to its citizens
- The economy of Cuba is based primarily on the service sector
- Cuba imports food, machinery, crude oil majorly along with other goods
- Cuba exports refined oil, cane sugar, pharmaceuticals, fish, and beverages
- Foreign investment is possible in Cuba via joint ventures
- Cuban citizens can own small businesses privately
Sources
Cuba – Overview of the economy, Nations encyclopedia, https://www.nationsencyclopedia.com/economies/Americas/Cuba-OVERVIEW-OF-ECONOMY.html
Tim Padgett, 'Cuba after Castro: Can exiles reclaim their stakes?', Time, 2006.
Marc Franc, 'Cuba sees slow economic recovery at 4% in 2022', Reuters, 2021.
Aaron O'Neill, 'Distribution of GDP across sectors in Cuba', Statista, 2022.
'Cuba defaults on Paris Club debt: says it will meet its commitments', The Caribbean Council, https://caribbean-council.org/cuba-defaults-on-paris-club-debt-says-it-will-meet-its-commitments/
Marc Franc, 'Exclusive: Cuba fails to make payment in key debt accord, sources say', Reuters, 2020.
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