Overview, revolution and growth rate (2023)

How much do you know about the history of Cuba? You've probably heard of Castro or the revolution, and you may know that the Cuban economic system is different from most other countries in the world. In order 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 has depended on a strong trading partner for most of its history as an independent country. Most workers in Cuba are employed by government organizations.

In 2018, the state granted foreign direct investment, free market rights and private property rights through a constitutional reform.

Since then, the Cuban economy has been growing slowly but has ground to a halt due to the Covid-19 pandemic. Would you like to find out more? Continue reading!

A typical street of today's Havana. Source: Alexander Kunze, Unsplash.

The economy of Cuba before the revolution

At the beginning of the 20th century, the United States was Cuba's most important trading partner. During this time, US citizens owned almost two-thirds of the companies in Cuba. Cuba was the seventh country by GDP per capita out of 47 Latin American countries in the 1950sThere was a huge gap between rich and poor, between black and white.

With nearly 80% of the country's trade being with the United States, Cuba faced a capital outflow problem. The connection with the US had boosted Cuba's sugar production.¹

Among Americans, Cuba was known as a party island. Many would visit Cuba as tourists to enjoy gambling, horse racing and golf. Cuba's tourism sector and economy grew rapidly until the Cuban Revolution took place.

The economy of Cuba after the revolution

After the revolution, many private companies were nationalized, beginning with the International Telephone and Communications Corporation. In the 1960s, Cuba resumed relations with the USSR. The USSR began buying sugar in exchange for oil from Cuba. Oil refiners like Esso, Shell, Texaco refused to refine Soviet oil. Faced with the urgent need to govern the country, Fidel Castro (former President of Cuba from 1959 to 2008) nationalized the island's oil refineries.²

As a result of this action, the United States banned all imports from Cuba. The ban was dubbed an "embargo." This trade ban was introduced in 1962 and is still in effect today. When Cuba lost its main importer, it turned its full attention to the former USSR.

The USSR supported Cuba through many subsidies, debts, postponing debt service plans and paying high prices for Cuban exports. The Cuban economy grew and remained stable until the breakup of the USSR in 1989. Once again, Cuba lost its trading partner with almost 85% of its exports.³.

After the fall of the USSR, the Cuban economy shrank by 35% between 1990 and 1993. This propelled the country into what Castro called a "special period in peacetime." During this time, many black market activities began to take root in Cuba as the government failed to provide consumer goods to the population.

As a result, the government legalized privately owned small restaurants, repair shops, etc. The Cuban economy started growing again when it began trading with Venezuela. In recent years, however, the Cuban economy has been hit again by the economic crisis in Venezuela.

Growth rate and forecast of the Cuban economy

According to World Bank statistics, Cuba's GDP in 2019 was $103.130 million, the highest ever recorded. The average GDP of Cuba between 1970 and 2019 was $38.10 billion. Cuba should reach $97.3 billion by the end of 2022. The Cuban economy contracted by almost 10.9% in 2020. In 2021 the economy recovered by 2% and for the coming years the government forecast economic growth of 4%. . 4% growth still means Cuba will face shortages of necessary goods and services³.

Figure 1. Cuba GDP Growth and Forecast (2018-25), StudySmarter Originals. Source: Statistics

Figure 1 above shows the projected growth of the Cuban economy. It is expected to increase its GDP very gradually between 2022 and 2025.

The Cuban Economic System: Characteristics

Cuba is a planned socialist country moving towards a mixed economy. The government has implemented many reforms such as B. Allowing Cuban citizens to trade in old cars, buy cell phones, stay in hotels, etc.

In recent years, the government has also cut many jobs to make state-controlled organizations efficient. The Cuban government now allows small, privately owned businesses such as bed-and-breakfasts, repair shops, and convenience stores (201 different types of private businesses).

Since Cuba was a purely socialist country, private ownership of companies was forbidden. State factory workers used to steal consumables from factories to sell through these "black market" stores. This ban was lifted mainly because the government wanted to control all these activities, which were considered "black market". In order to gain control over these activities, the government allowed small businesses to be run privately.

Farmers can sell their produce directly on the open market through “agropecuario” (farmers' markets) after selling a fixed quota of produce to the government at fixed prices. The government also enters into a "joint venture" with foreign investors, and foreign ownership can eventually increase to 100%.

Contributions of GDP by sector to the Cuban economy

Figure 2. Cuba's GDP by sector, StudySmarter Originals. Created with Statista data

As can be seen in Figure 2, the service sector contributed the largest share of GDP in 2020 at 73.51%, followed by industry (23.02%) and agriculture (2.76%). The service sector mainly includes the supply of well-trained medical professionals to other countries such as Venezuela and tourism.

Cuba imports machinery to support its industrial sector. Agricultural production is not sufficient to feed the entire population. That is why Cuba imports food. As mentioned above, there are oil refineries on the island, hence Cuba imports crude oil and exports refined oil.

Other export goods are cane sugar, pharmaceuticals, fish and beverages (e.g. rum). Mining is also practiced on the island and therefore the country also exports nickel ores. Cuba's main trading partner is Venezuela, but the country also trades with countries such as Mexico, China, Brazil, Germany and Italy.

The debt of the Cuban economy

The indebtedness of the Cuban economy is also a reason why Cuba is going backwards. The country reported nearly $18 billion in debt in 2018.⁶Cuba has received some debt forgiveness, subsidies and nominal interest rates from countries such as Russia ($32 billion), China ($6 billion) and Mexico ($485 million).

The Paris Club Nations have already given up $8.5 billion out of $11.1 billion.⁶Cuba had to pay the balance for 18 years, but is currently using the installment plan.

The Cuban regime still promotes Cuba as a socialist country. However, for a country's economy to function well, the government needs to implement many reforms. Economists believe the Cuban government must accept that the economy is in transition from a socialist planned economy to a mixed economy that encourages capitalism in some sectors.

Fuentes

1. Cuba - Economic Overview, Encyclopedia of Nations, https://www.nationsencyclopedia.com/economies/Americas/Cuba-OVERVIEW-OF-ECONOMY.html

2. Tim Padgett, "Cuba after Castro: Can Exiles Get Their Stakes Back?"Hour, 2006.

3. Marc Franc, "Cuba sees a slow economic recovery of 4% in 2022",Reuters, 2021.

   (Video) The American Revolution - OverSimplified (Part 1)

4. Aaron O'Neill, “GDP Distribution among Sectors in Cuba,” Statista, 2022.

5. "Cuba defaults on Paris Club Debt: Says it will honor their engagements", The Caribbean Council, https://caribbean-council.org/cuba-defaults-on-paris-club-debt-says-it-will-meet- your-obligations/

6. Marc Franc, “Exclusive: Cuba defaults on key debt deal, sources say,” Reuters, 2020.