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Cuba's Economy: A Current

Evaluation and Several
Necessary Proposals
Omar Everleny , Pérez Villanueva & Pavel Vidal
Alejandro
Published online: 30 Mar 2010.
To cite this article: Omar Everleny , Pérez Villanueva & Pavel Vidal Alejandro (2010)
Cuba's Economy: A Current Evaluation and Several Necessary Proposals, Socialism and
Democracy, 24:1, 71-93, DOI: 10.1080/08854300903533085
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Cuba’s Economy: A Current Evaluation
and Several Necessary Proposals
Omar Everleny Pérez Villanueva and Pavel Vidal Alejandro

Introduction
In academic forums and in various publications, politicians, social
scientists and readers in general, both in and out of Cuba, have noted
that the economic well-being enjoyed by the Cuban people in the early
1980s was severely impacted by the economic crisis of the 1990s. But it
is clear to even the most skeptical of observers that the worsening of
conditions was attributable not only to external factors, such as the
breakup of the international socialist system, the tightening of the US
blockade, and the worldwide economic crisis suffered by underdeve-
loped countries, but also to internal factors that kept the country
from fully realizing its material and human potential.
In 2009, Cuba finds itself in the midst of a new economic crisis, in
which it maintains high import rates due to longstanding structural
problems in agrarian policy that have resulted in a high dependence
on food imports. Likewise, although to a lesser extent, energy needs
are very high and production requires many intermediate inputs.
This is added to low efficiency and productivity in both industry and
agriculture, and diminished financial liquidity in hard currency.
The institutional reforms of the mid-1990s led citizens to diversify
their sources of income. The market’s growing role in generating
income, as well as the unique strategies devised by the people, led to
a gradual social differentiation that persists despite various measures
implemented under the auspices of the “Battle of Ideas,” which
was basically a set of government programs aimed at halting the
deterioration of social indicators: education, health, culture, etc. The
so-called “Battle of Ideas” called for large centralized investment
projects that focused on the building and repair of schools, hospitals
and homes. Another component was as a huge energy conservation
plan that included the purchase of domestic appliances for equitable
distribution to the public.
Socialism and Democracy, Vol.24, No.1, March 2010, pp.71–93

ISSN 0885-4300 print/ISSN 1745-2635 online
DOI: 10.1080/08854300903533085 # 2010 The Research Group on Socialism and Democracy
72 Socialism and Democracy
Problems persisting many years after the onset of the economic

crisis called the “Special Period,” necessarily led to giving priority to
addressing the social inequalities engendered during that period.
Although it is evident that the country has tried to implement necess-
ary and profound economic changes at the lowest possible social cost,
there is a disparity between the pace of change and the urgency of
human need.
It is therefore necessary to analyze the state of the Cuban economy

through a set of indicators that reveal the current condition of the
country and the well-being of its citizens in an effort to gain an under-
standing of the challenges facing the country.
Gross Domestic Product (GDP) growth

The Cuban economy experienced a fluctuating but strong econ-
omic growth rate from 2001 to 2007, with an impressive 7.5%
average rise in the gross domestic product (GDP) at constant 1997
prices. From 2001 to 2003 growth was only 2.9% per year, but 2004 to
2007 saw annual averages of 9.3%, influenced by the new methodology
for calculating the GDP,1 the surge in exporting professional services,
and government spending on priority programs. Already in 2008
and 2009 there was a significant dip in economic growth, prompting
the government in 2009 to impose a new economic adjustment plan,
with negative consequences for the economic well-being of the popu-
lation (Figure 1).
Predictions suggest that Cuba’s drop in GDP will continue in 2009
and may even become more acute, resulting in the first negative
growth rate in 16 years.
The island’s economy has been subject to a series of external shocks,
which have severely complicated its operation: a drastic reduction in
terms of trade (– 38% in 2008), caused mainly by rising oil and food
prices and the falling price of nickel, three hurricanes in 2008 costing
around US$10 billion, and, more recently, the global financial crisis.
However, the deceleration of the GDP should not be attributed
solely to external factors. There are internal structural constraints
that have worked against sustaining high growth rates.
1. The new method of calculating GDP gives greater weight to the social services that
before were only valued at cost, since they are provided for free. Since 2004, “artifi-
cial” fees were established for use in GDP calculation. There is debate, including
within the UN Economic Commission on Latin America (CEPAL), about the validity
of this method and its implications for comparing the Cuban GDP internationally.
Omar Everleny Pérez Villanueva and Pavel Vidal Alejandro 73
Figure 1. GDP trends.

(Percent annual growth rate at 1997 constant prices)
Source: Oficina Nacional de Estadı́sticas (ONE), Anuario Estadı́stico de Cuba, various years,
and estimates by the Center for the Study of the Cuban Economy (CEEC), 2009.
Figure 2 shows the GDP trend along with two of the macroeco-
nomic indicators that largely explain it: exports of goods and services,
and investments. Exports provide the foreign currency to pay for
imports, and thus help to relax the restrictions on balance of payments
flows.2 Investments provide capital accumulation, essential for sustain-
ing economic growth in the medium and long term. Figure 2 also
illustrates that the strong GDP growth of 2004 – 06 – with an annual
average of 9.6% – was accompanied by an expansion of exports and
investment, with rates averaging over 20%. In those years, the Cuban
economy began to feel the benefits of agreements with Venezuela
and of the boom in the export of professional and technical services,
especially healthcare-related. In contrast, during the 2007 – 08 period,
exports and even more so investment slowed, resulting in a
deceleration of GDP growth.
The following are some of the structural factors that have influ-
enced the slowdown in exports, in investment and, ultimately, in the
Gross Domestic Product:
. Lag in agriculture and industry not compensated for by the expan-
sion of services.
. Little diversity in foreign trade. The balance of payments equili-
brium depends on the export of professional services to Venezuela.
2. The significant role of exports in Cuba’s GDP is empirically demonstrated in Vidal &
Fundora (2008).
Figure 2. Average annual growth of GDP, goods and services exports,

and investments for three time periods spanning 2001 to 2008
(percentages).
Source: Author’s calculations based on data from the Oficina Nacional de Estadı́sticas
(ONE), Panorama Económico y Social. Cuba 2008 and on revised GDP figures published
in Serie de Cuentas Nacionales de Cuba. Años 1996–2007.
. Low multiplier effect of exporting professional services.

. Persistent low productivity in much of the state enterprise sector.
There have been no structural reforms sufficient to change that.
These factors are interrelated and result in a growth pattern that since
2004 has rested on the export of professional services. Furthermore,
they act on an economy with a small domestic market that, conse-
quently, is extremely vulnerable and dependent on imports, and
which has to cope with a costly economic blockade that, in financial
terms, has intensified over the last five years.
The agreements contained in the Bolivarian Alternative for the
Peoples of our America (ALBA) and in particular the opportunity to
earn outside income from the export of professional services has had
an undeniable and substantial impact on the Cuba’s balance of pay-
ments and GDP growth since 2004. These revenues are ongoing and
provide some level of security in a time of global economic crisis. The
problem is that these exports have begun to slow down and no substi-
tute has been identified in other sectors of the economy, all of which
have trailed behind with very low productivity. Industry and agricul-
ture have not been able to match the expansion of professional services.
The export of professional services is not linked to and does not have the
multiplier effect on the domestic economy that the sugar and tourism
industries have, for example. Those industries have driven growth in
previous decades. On average, sugar exports and tourism services
have stagnated in the last five years, affecting the diversification and
sustainability of export growth rates. In summary, the growth model
based on the export of professional services shows signs of structural
weakness and exhaustion, manifested in less availability of foreign

currency, greater relative scarcity of resources for investment projects
and, finally, a deceleration trend in the GDP.
Main sectors
The GDP structure of 2008 shows an accelerated decrease in the
relative importance of the agriculture, construction and transportation
sectors and highlights a significant increase in services accounting for
76% of the GDP.
The Cuban state’s allocation of GDP reflects the priority that it has
accorded to social programs within its overall development strategy.
Nevertheless, while gross fixed capital formation was 60% greater in
2006 than in 2001, its share of total spending has decreased to less
than 10% of GDP, in contrast to 1990 when it reached over 30%.
The Cuban economy has been adversely impacted by the context in
which it has had to develop, such as severe droughts, the scourge of
Figure 3. GDP structure for 2008 in percentages.
Source: Calculated by the authors based on ONE (2009).

violent hurricanes, the power generation crisis, and the escalation of

US pressure on the country, along with the global economic crisis
that began to be strongly felt by mid-2008. In 2009 structural problems
persist in the economy: hard currency shortages, monetary duality,
segmented markets, poor performance of the sugar and agriculture
industries, the inefficiency of public institutions, and distortions in
the relative pricing system due to an overvalued official exchange
rate and to a lack of convertibility. President Raúl Castro has publicly

commented about these problems on numerous occasions.3
At the sector level, there are positive results in some areas such as
oil and gas extraction. Oil production has increased six times since 1990
and gas production, which was negligible in 1990, is now over one
million cubic meters. This has allowed Cuba to reduce the volume of
oil imports at a time when international prices are soaring. In addition,
the petroleum agreement with Venezuela dampens the inflationary
spiral for the crude Cuba buys; through ALBA the island receives
low interest, long-term credit.
Overall manufacturing output has consistently decreased,
accounting for 13.3% of the GDP in 2008. But performance varies
notably by industry type. Nickel, beverages and liquor, tobacco and
others grew, while the sugar industry has collapsed. Harvests are
less than 15% of what they were in the early 1990s.
Sugar cane yields dropped to only one million tons in 2008, owing to
a drastic reduction in the availability of necessary inputs, the lack of
incentives for producers and growers, and the low priority given to
the sector in the 1990s. This divestment had a negative impact on cultiva-
tion, yield and production, resulting in a significant reduction in exports
and hence a major decrease in revenue and a disruption in financial flows
into the national economy. In addition, half of the sugar factories in the
country were closed. This downsizing meant solving the complex
problem of retraining 100,000 newly unemployed workers. An extensive
program was implemented, but it will not continue indefinitely, so
workers will have to look for new employment in the medium term.
Agricultural production and farmers’ markets are important to the
population’s food consumption and thus to its well-being. Agricultural
production has continued to decline in recent years, accounting for less
than 4% of the GDP in 2008, due to the aforementioned sharp decline in
cane production, a continued decline in the livestock industry, and the
stagnation of non-sugar crop cultivation. While acknowledging the
3. Speeches by Raul Castro, July 26, 2007, in the province of Camaguey, and February
24, 2008 in the National Assembly of People’s Power, Havana.
reality of tangible problems, including shortages of financial and

material resources, we must recognize that organizational and insti-
tutional problems have had a significant negative impact on economic
performance in these areas.
The economic reforms of the 1990s enabled some state agricultural
enterprises to be grouped into somewhat more flexible Basic Units of
Cooperative Production (Unidades Básicas de Producción Coopera-
tiva), but the highly centralized environment in which they functioned

discouraged producers and impeded any increase in yields or pro-
duction. The availability of external supplies was inadequate and the
state procurement and distribution enterprise, Acopio, set such low
prices for agricultural products that they were sometimes below the
cost of production. Figure 4 shows that the decline in the production
of starch crops (potato, sweet potato, cassava, plantains, etc.) and
vegetables (tomato, cabbage, lettuce, onion, etc.) – essential in the
Cuban diet – came at a time of runaway food prices worldwide.
Animal production has also been greatly affected by declines in the
cattle industry caused by droughts in the eastern provinces, inadequate
herd management and organizational problems. In addition, the cattle
industry has had to practically abandon its heavy dependence on
imported feed and feed from the sugar harvests.
Figure 4. Agricultural production in thousands of tons.
Source: Oficina Nacional de Estadı́sticas (ONE), Anuario Estadı́stico de Cuba, various years.
The agricultural sector’s poor performance weighed heavily upon

the country’s budgetary and trade deficits as large increases in food
imports were necessary to ensure a daily consumption of 3,209 kcal
and 88 grams of protein per capita in 2008 (although these figures
remained higher than in 1989). Low levels of agricultural production
and the resulting increase of food imports in an environment of rising
commodity prices has made it necessary to reconsider the country’s
agricultural strategy and policy, in search of development appropriate

to the situation and new ways to unleash the potential of the labor force.
Some changes of agricultural policy were made in the first half of 2008.
Among other measures, an incipient market for agricultural inputs
was established; land and livestock were provided to private produ-
cers; and municipal enterprises were strengthened, which is to say
that the verticality of decision-making has been reduced.
Construction has increased enormously in recent years. For
example, growth in the sector was 37.7% in 2006, concentrated in the
areas of petroleum, electricity, tourism infrastructure and in the
projects prioritized by the government as part of what is known as
the “Battle of Ideas.” By 2007, however, new construction decreased
as investments contracted due to a discrepancy between the resources
allocated to projects and the capacity to carry them out.
Although substantial resources were invested in the 1970s and
1980s to expand the supply of housing, the housing deficit was still
acknowledged to be a problem in 1989, and the crisis of the 1990s con-
tributed to the further deterioration of existing housing. Since 2001
there has been a sharp drop in housing construction as resources
were allocated to the recovery of housing damaged by multiple hurri-
canes and to other priorities. It has been clearly demonstrated that the
construction of new housing will not by itself resolve the housing issue.
Resources must also be allocated for the maintenance of Cuba’s
existing housing stock in Cuba. In 2006 the state therefore accorded
increased priority to housing construction to combat the deterioration
of existing housing and the housing deficit that had accumulated over
decades. A program was established for the construction of 100,000
housing units annually, emphasizing self-building rather than state
housing development. The program has many deficiencies (shortage
of construction materials, lack of qualified personnel, difficulties with
architectural designs, etc.) that must be solved right away, since the
program was only put in place in 2006, and in 2008 only built half
the number of units intended.
Problems with public transportation have had a negative influence
on the well-being of the Cuban population. Insufficient capital
formation in the sector led to a rapid deterioration of equipment. A

large-scale investment program outlined in 2007 permitted the impor-
tation of buses and other vehicles from the People’s Republic of China,
leading to major improvements in 2008.
In summary, Cuba’s GDP growth trend continues, but it is still
insufficient to regain the pre-crisis living standards of the 1980s
because of the structure of that growth. This means that new economic
policies are needed to stimulate domestic activity and achieve greater

production along with macroeconomic stability so as to meet goals of
basic services and social equity.
Since 2008, there have been signs of a political will to make Cuban
socialism more viable. Evidence of this has come in the form of remov-
ing some restrictions. For example, the sale of computers, DVD players
and cell phones to Cubans has been authorized. Before, these were
restricted to companies, diplomats and other resident foreigners.
Restrictions on Cubans staying in tourist hotels were also lifted. Resol-
ution 9 of the Ministry of Labor and Social Security allowed state enter-
prises to set employee wages independently, based on individual
performance. Previously wages were set by the central government.
Decree Law No. 259 turned over idle land in usufruct to individuals
and cooperatives and shifted management of the agricultural sector
toward non-state actors. Of the reforms implemented thus far, this
one has the most structural significance.
External sector
The customary current accounts deficit in Cuba’s balance of pay-
ments continues today, despite some positive changes. For example,
in 2005 Cuba enjoyed a surplus of over US$140 million due to increased
export of medical services (especially to Venezuela), export of nickel,
and the receipt of remittances widely estimated at between US$900
million and US$1 billion annually. But Cuba’s temporarily increased
import capacity did not especially favor the import of capital goods
(except for electrical generators); instead imports remain focused on
food (much of which could be produced domestically) and inter-
mediate goods.
Before the global crisis hit, Cuba’s nickel exports, unlike its sugar
exports, increased in both unit-price and total amount. Foreign sales
of nontraditional high-value-added products have also increased,
including in the areas of biotechnology, pharmaceuticals, and
advanced medical and diagnostic equipment. New markets have
been found for these products. Nickel continued to be Cuba’s most
important export in 2008 due to high prices on the international

market. The export of pharmaceutical and biotechnology products
also took off. The current structure of export products indicates a sig-
nificant transformation. Medicines have been the third most important
export subsector, while the sugar subsector has become less important.
Nonetheless, sugar remains one of the products for which Cuba has the
most productive potential.
Food purchases remain high because of inadequate agricultural

production, and imports of equipment and raw materials for economic
recovery have increased. This has led to a fairly substantial trade deficit
of around 10 billion (convertible) pesos, which may lessen with
increased domestic production of some currently imported items.
But for this to happen, the Cuban government must give top priority
to providing incentives for workers, while also implementing
necessary institutional changes and eliminating over-centralization.
The recovery in the export sector is undeniable (see Figure 5), but
the value of exports in 2008 was still 31% less than in 1989. In contrast,
imports have grown rapidly, exceeding their 1987 levels by 75% in
2008.
In 2008 Cuba’s main trading partners were Venezuela, China,
Canada, Spain, and the United States (for imports of food), along
with some European countries. This represents a structural change,
in terms of composition by region, in comparison to the early 1990s.
The service sector became the greatest generator of export income
starting in 2004, but with significant qualitative changes as the value
Figure 5. Foreign trade of goods and services in US$ millions.
Source: ONE, Anuario Estadı́stico de Cuba, various years. Havana.

of knowledge-intensive services overtook the value of the tourist

sector in generating income.
Income from tourism exceeded US$27 billion in the period from
1990 to 2008, growing from US$243 million in 1990 to US$2.36 billion
in 2008. More than US$7 billion was spent on tourist development
during that period. Of that amount, more than US$2.3 billion was
spent on tourist infrastructure, airport capacity, and new technology
for tourist services and telecommunications. Some 26 million people

visited the country during that same period, and the number of hotel
rooms increased from 12,900 in 1990 to 47,000 in 2009, nearly half of
them managed by international hotel companies.
Foreign investment has been concentrated in key sectors such as
petroleum, nickel, telecommunications, and tourism. International
investment by Cuba has appeared in incipient form, primarily in
biotechnology in Asian markets such as China, India, and Malaysia.
At the same time, Venezuelan investment in the Cuban economy has
increased.
Although balance of payments data for 2008 and 2009 have not yet
been published, it is reasonable to anticipate a worsening of the balance
of payments in these years. The current account of the balance of pay-
ments has been under deficit pressure from increasing interest pay-
ments on the growing foreign debt and from rising imports that are
significantly overshadowing export growth. Substantial deterioration
in the terms of trade has been decisive. The average price of nickel
has fallen while the average price of food and fuel that Cuba imports
has risen. This has caused a heavy strain on the stability of the inter-
national balance of payments, resulting in payment postponements
and defaults and a growing foreign debt.
Professor Carmelo Mesa-Lago notes that foreign debt was US$18.3
billion in 2008 (54% active and 46% “immobilized” or unpaid for
years), three times the debt of 1989. That is excluding the debt to
Russia – estimated at US$21 billion – but including the debt to Vene-
zuela, estimated at between US$5 billion and US$8 billion. The total
debt, including non-convertible debt with former socialist countries,
is estimated at US$45.9 billion. The foreign currency debt alone
amounted to 380% of exports, in contrast to the regional average of
83% in 2006. Moody’s rates the Cuban debt as “speculative and
poor.” Citing the rise in oil and food prices, Cuba suspended payments
to Canada, Japan, Germany and France and also reported delays in
payments for lack of cash. This increases the risk of a general default,
diminishes the country’s financial credibility, and restricts access to
new credit in the international market (Mesa-Lago 2008).
The global crisis spread to Cuba in 2009, exerting added pressure

on the balance of payments and affecting payment systems and
banking operations. The excess demand for hard currency has
caused a considerable delay in bank transfers, and in turn, has
created more pressure on bank balance sheets, already affected by
liquidity constraints imposed by the international financial crisis.
To deal with the hard currency deficit, Cuban economists have
thus far reviewed the business plans of state enterprises, reduced the
foreign travel budgets of ministers by half, reduced and suspended
imports to certain sectors, postponed investments, decreased other
budgeted expenses and limited cash withdrawals from bank accounts
by foreigners. More recently, the emphasis has been on reducing and
controlling energy use by institutions. The state sector has drastically
reduced its electricity use, which accounted for the consumption of
approximately 50% of imported fuel. Officials argue that not taking
these measures would compromise the ability to buy food and
medicine.
Macroeconomic stability
Inflation
Since 1989, inflation in Cuba has gone through different stages. In
the early 1990s hyperinflation hit mostly the informal market, since the
state kept official prices frozen. The years with the steepest price
increases in that market were 1991, with more than a 150% increase,
and 1993, with more than 200% increase. The inflation was the result
of the economic crisis, the economic policy adopted in order to tackle
it, and the related fiscal and monetary imbalances. From 1990 to
1994, GDP contracted by 34.8%. The budget maintained expenditures
for education and health, and subsidies to state-run enterprises grew
in order to sustain employment. The average fiscal deficit from 1990
to 1993 was 24.9% of GDP.
Given the country’s limited capacity to access the international
financial market and the lack of a public debt market, the fiscal
deficit was financed by a loan from the Central Bank (at that time the
National Bank) to the state budget. The monetization of the fiscal
deficit led to an increase in monetary liquidity and a high rate of
inflation in the informal markets.
A result seldom mentioned is the control of inflation achieved
through economic policy since 1995. However, in a context of monetary
instability it would have been impossible, for example, to maintain
savings accounts in Cuban pesos open to foreign investment or to
Figure 6. Consumer price index (annual percentage variation).

Source: Economic Report Central Bank of Cuba and ONE data.
de-dollarize the economy as occurred in 2003 and 2004.4 In general,

it would have been rather difficult to improve economic growth.
The monetary stability created by monetary policy has decisively
contributed to economic recovery.
Since 1995 the National Office of Statistics (ONE) has been
drawing up a Consumer Price Index (CPI) listing average prices for
the three markets throughout the country. The formal market registers
the prices of rationed or non-rationed goods and services offered
by the state to the public and represents 40% of the total CPI. The
other two are the agricultural market and the informal market, each
making up about 30% of the CPI. This CPI does not include, for the
time being, the prices at markets in convertible pesos.
The evolution of this indicator is seen in Figure 6. The Preliminary
Overview of the Cuban economy by CEPAL (UN Economic Commis-
sion for Latin America) reported that in 2008, the inflation rate acceler-
ated to 4.9%, in comparison to 2.8% in 2007. One can see that inflation
has not been high since 1995; in fact in some years there have been
declines in average prices. Recently there has been strong pressure to
raise prices, with five consecutive increases of more than 2%. But
4. After 10 years of US dollar circulation in the economy, in 2003 current bank accounts
of state enterprises changed to convertible pesos. In 2004 de-dollarization extended
the use of convertible pesos to individual bank accounts and retail markets.
even so, as an average it remains within the range of what is accepted

internationally as low inflation.
Balances and monetary policy

Table 1 shows the recovery of monetary and fiscal equilibrium
beginning in 1995, following the hyperinflation of the 1990 – 1993
period. In order to stabilize prices, it was necessary to decrease the
fiscal deficit and maintain it at an average level of 3% of GDP. This

reduced the amount of money in the hands of the people (the monetary
aggregate M2A measures the value of cash and savings accounts held
by individuals) and then monitored its increase. The exchange rate
for the Cuban peso was revalued and has been stable since.
In order to recover monetary stability, a package of measures
known as “financial reorganization measures” was applied in 1994,
which included charging for services that were previously free,
increasing certain prices of products sold by the state to the population
(mainly alcoholic beverages and cigarettes), and establishing various
taxes and fees. Other parallel actions were taken that also contributed
to monetary stability, such as partial dollarization, the opening of agri-
cultural markets and facilities to receive remittances, expansion of self-
employment, industrial downsizing, the development of tourism and
foreign investment, etc. In 1994 the convertible peso was created and
pegged to the US dollar. This currency operated marginally in the
retail market for approximately 10 years until in 2003 – 2004 its use
was expanded as part of the de-dollarization of the economy.
Monetary policy was strengthened with the creation of the Central
Bank of Cuba and its Monetary Policy Committee, which systemati-
cally analyzes the variables linked to monetary equilibrium and that
have an impact on inflation. The exchange rate of the Cuban peso in
official currency exchanges (Cadeca) is set by the Monetary Policy
Committee, but it is based on the public’s currency-trading activities
at the exchange houses. So ultimately the exchange rate is determined
by the currency demand pressures generated by wage and other
income sources in Cuban pesos and the supply of foreign exchange
generated by tourism, remittances, etc. Farmer’s markets, stores run
by MINCIN (Ministry in charge of state-owned retail stores in Cuban
pesos), and self employment are also influential, since they increase
the demand for Cuban pesos. In addition, the buying and selling of
currencies is affected by the expectations and confidence of the popu-
lation regarding the different currencies.
The Central Bank has also employed another tool. It adjusts the
interest rate in order to maintain monetary equilibrium for the
Table 1. Monetary and fiscal equilibrium.

Fiscal deficit / GDP Change in M2A1 Exchange rate2
Percent Percent Peso-USD
1990 10.0 19.8 7.0

1991 23.2 31.6 20.0
1992 32.7 27.4 45.0

1993 33.5 32.1 100.0
1994 7.4 210.0 40.0
1995 3.5 27.0 30.0
1996 2.5 3.1 21.2
1997 2.0 21.0 23.0
1998 2.4 2.8 21.6
1999 2.3 2.0 21.4
2000 2.4 5.9 21.5
2001 2.5 17.6 26.5
2002 3.2 10.4 26.5
2003 3.4 20.9 26.5
2004 3.5 7.7 26.5
2005 4.2 – 24.5
2006 3.1 – 24.5
2007 3.2 – 24.5
2008 6.7 – 24.5
Source: ONE, Anuario Estadı́stico and Banco Central de Cuba. estimates from CEPAL.
1. The monetary aggregate M2A includes the cash on hand and in bank accounts in Cuban pesos of
natural persons.
2. Average between the buying and selling exchange rate. After de-dollarization occurred in 2004, the
exchange rate refers to the relationship between the Cuban national peso and Cuban convertible peso.
population. The Monetary Policy Committee fixes interest rates on

bank deposits in the three currencies for all banks comprising the
Cuban financial system. Table 2 shows the rates for the different cur-
rencies at the close of 2008.
The interest rate increase in Cuban pesos and the favorable differ-
ential that has sustained the interest rate of national currencies in
relation to deposits in dollars has helped to encourage savings in the
national currencies, and therefore, has also helped to stabilize official
currency exchanges and the exchange rate. In addition, it has served
to reduce consumption demands and therefore price pressures.
Table 2. Interest rates on deposits for natural persons, December 31,

2008 (annual rate in percent).
Period in months
Currency initial 3 6 12 24 36
Cuban peso (CUP) 0.50 4.00 4.50 6.00 7.00 8.00
Convertible peso (CUC) 1.00 3.00 3.50 4.00 4.50 5.50

US dollar (USD) 0.50 1.50 1.75 2.00 2.25 2.75
Source: Vidal (2007).
Although not all Cubans have savings accounts, from the macro-
economic standpoint and for monetary stability, saving activities them-
selves are very important. Typically around half of the liquidity of the
population remains in the form of savings in banks. Therefore, the
decisions made by savers have a significant effect on the stability of
exchange rates and prices.
Along with the Monetary Policy Committee and its instruments,
the role of the Organization of Internal Finances Analysis Group
(Grupo de Análisis del Saneamiento de las Finanzas Internas, GASFI)
in assuring monetary stability should be highlighted. The heads of
the Ministry of Economy and Planning, the Ministry of Finances and
Prices, MINCIN, and the Central Bank meet every month in the
GASFI to plan the actions each one should take to maintain monetary
equilibrium in the population. This is where monetary policy, fiscal
policy and planning meet. All this planning and organization of mon-
etary policy has served to maintain monetary equilibrium since 1995.
Nevertheless, in 2008 inflation climbed, causing a dangerous 6.7%
increase in the fiscal deficit, the highest in 14 years. In 2009, the
global crisis and other internal factors continued exerting pressure
on monetary stability and even impacted Cuban banks. If this con-
tinues, monetary and financial stability could return to being among
the principal objectives of the country’s economic policy.
Personal incomes
The real wage
Table 3 presents an estimate of the real wage, offering a quantita-
tive look at one of the most talked about events in the Cuban
economy: the crisis of the 1990s. The drop in the purchasing power
of workers’ wages in state-run enterprises and institutions, and its
Table 3. Estimate of real wages.

A B C C/B
Inflationa Price indexe Average nominal salaryd Average real salarye
Year (percent) (1989 ¼ 1) (Cuban pesos) (1989 Cuban pesos)

1989 1.00 188 188

1990 2.6b 1.03 187 182
1991 91.5b 1.96 185 94
1992 76.0b 3.46 182 53
1993 183.0b 9.78 182 19
1994 28.5b 8.95 185 21
1995 211.5 7.92 194 24
1996 24.9 7.54 202 27
1997 21.9 7.68 206 27
1998 22.9 7.90 207 26
1999 22.9 7.67 222 29
2000 22.3 7.50 238 32
2001 21.4 7.39 252 34
2002 27.3 7.93 261 33
2003 23.8 7.63 273 36
2004 22.9 7.85 284 36
2005 23.7 8.14 330 41
2006 25.7 8.61 387 45
2007 22.8 8.85 408 46
2008 4.9c 9.25 414 45
Source: Updated version of Table 1 in Vidal (2007).

a
Annual percentage change of the CPI as calculated by ONE.
b
Authors’ calculations based on formal market data and informal market data reported by CEPAL
(1997), maintaining a 40% adjustment for the formal market and 60% for the informal market (30% of
the agricultural market is added to the informal)
c
CEPAL (2004)
d
ONE Anuario Estadı́stico de Cuba.
e
Author’s calculations.
continued low level, has caused a lack of incentive, emigration of

skilled labor, and illegal activities, among other distortions.
The annual inflation rate is expressed cumulatively in column B of
Table 3, from 1990 to the present, with the result that a Cuban peso in
1989 is equivalent to 9.25 pesos today. The mean nominal wage is
located in column C, which in 2008 was 414 Cuban pesos, more than
double the 1989 value (188 Cuban pesos). In the last column, the
nominal wage (C) is divided by the price-level (B), to give the real
value of the mean wage measured in 1989 pesos. A gradual recovery
can be discerned in the real wage starting in the mid-1990s, although
it is still very far from pre-crisis levels. At the close of 2008, the real
wage was equal to 45 Cuban pesos, that is, 24% of what it was in 1989.
When comparing column A to B, one can see the difference between
inflation and price levels; inflation is low starting in 1995, but the price
levels are much higher than before the crisis due to the hyperinflation
of the early 1990s. Table 3 distinguishes monetary stability from pur-
chasing power and helps to focus the discussions of prices and wages
on a single concept that sums up both things: the real wage. Estimates
of the real wage show the need of Cuban families to resort to other
income sources in order to cope with the impact of the crisis.
The calculations in Table 3 are not exact, but are estimates, since
there are no official data on inflation before 1995. Nevertheless,
the trend of real wages is confirmed by other estimates of the CPI
made in the 1990– 1994 period.
To measure the purchasing power of the real wage in Cuba it is
common to divide it by the exchange rate used in the official currency
exchanges and then express the wage in US dollars. This method leaves
out the subsidies, free services and other benefits that the Cuban
government offers the population and which are not included in the
wage. This makes international comparison difficult. The calculation
of the real wage is a less biased approach because it compares different
moments in time during in which subsidies and gratuities have existed.
Curently, a higher proportion of basic goods has to be obtained from
unsubsidized markets; therefore the decline in the population’s
purchasing power is greater than suggested by examining only the
wage-trend.
The ration card

The deterioration of the real wage did not bring dire poverty to
Cuban families, since important social expenditures and subsidies,
including the ration card, were maintained. Today one can see progress
in macroeconomic conditions: certain production sectors have
recovered, trade and financial relations with other countries have
been re-established, and GDP has grown. In this context, the possibility
of doing away with the ration card has been discussed. Given the
low level of the real wage, this evidently cannot mean the elimination
of the subsidies related to the ration card, but rather a change in the
way they are made available.
The domestic food market is highly segmented. Analyzing the

ration card system could be a step toward unifying the various food
markets into just one. It is widely felt that the ration-card food
distribution system stopped fulfilling its original purpose, which was
to ensure equity, some time ago. At present it subsidizes equally
those who need it and those who do not. This method of distribution
does not favor or encourage growth in productivity, as some people
simply adapt to it.

Nor does this form of distribution provide alternatives to the con-
sumer, who has to buy the goods at a set location with a limited supply
of items. In fact, the quantities and composition of rationed products
today are rather far from those initially supplied on the ration card
when it was established (1962). At current levels of food consumption,
rationed distribution covers the needs of approximately 12 days per
month. More specifically, the ration card covers 10 days’ worth of
protein and nine days’ worth of fat per month.
The ration card is a way to assist people by providing an allotment
of foodstuffs at subsidized prices, ensuring that no individual or family
that needs aid is left outside of the rationing system. However, it is not
cost-effective to the extent that it assists families who, given their level
of income, do not need such subsidies.
An alternative is to not subsidize products but rather to help low-
income families directly. Not subsidizing families with higher incomes
would lead to savings and an improved capacity to aid those with
scarce resources. In this way, eliminating the ration card would
result in an increase of resources per capita for assigned subsidies.
There is the obvious risk of a needy citizen being left out. The challenge
lies in being able to identify the low-income and high-income families,
and create a fair dividing line between them.
Principal challenges
The Cuban economy faces many complex challenges to maintain-
ing its social and economic project and retaining the capacity to
increase the well-being of the population. Social and economic distor-
tions must be confronted, and time is short.
. Internal factors that continue to constrain economic growth must be
overcome in the short to medium term. Among them are shortages of
hard currency, which causes consumer needs to go unmet.
. State enterprises are currently subject to an adverse environment
that includes problems related to price setting, the official exchange
rate, the framework of exchange regulations, the centralized author-

ization of purchases, and other planning, regulation, and auditing
mechanisms. Enterprises must achieve a level of efficiency sufficient
to be competitive on the international market.
. The so-called income/consumption model is still seriously distorted as
evidenced by its effects on labor motivation. Labor compensation
systems must be made coherent in order to resolve problems in satis-
fying the needs of workers through salaries, other forms of income, or

redistributive channels. This model’s effect on market segmentation
and the availability of goods and services must also be addressed.
. The restructuring of the sugar industry remains incomplete, and
therefore the recovery of production in the industry has stalled,
also affecting the production of food on land ceded to growers for
this purpose by the Sugar Ministry (MINAZ).
. There has been no progress toward achieving food self-sufficiency
through improvement of the model of agricultural management.
. Greater short-term priority should be placed on addressing the
decapitalization of infrastructure and equipment, given the cumulat-
ive effects of their deterioration.
. Cuba’s production specialization must be changed radically, from an
economy based on exploitation of natural resources to one based on
the intensive use of knowledge. Cuba’s strong potential in knowl-
edge-intensive development does not by itself guarantee positive
outcomes.
. The strategic challenge is to grow, as other benefits derive from
growth. However, new springboards must be found to increase
production. Performance is declining in sectors and activities
such as tourism that have been used to increase production in the past.
. Measures should be accelerated to recover previous levels of social
equity. Despite progress in recent years with measures such as the
distribution of household appliances associated with the Energy
Revolution,5 the problem of family income has not been resolved sat-
isfactorily for the majority of Cuban families. Part of the population is
still unable to cover all their expenses with the incomes they receive
from the formal sector. As a result they have to seek income from
alternative sources or do without a series of goods and/or services.
5. The Energy Revolution is an energy conservation program. It includes distributing

electrical appliances, replacing incandescent with energy-saving light bulbs, improv-
ing energy production capacity via small, decentralized generation plants, and utiliz-
ing gas and renewable energy.
. While Cuba is an advanced country as measured by social indicators

concerning health, education, culture, and other areas, access to
certain goods and services in areas including recreation, travel,
transportation, and communication is far below the world average
for comparable countries.
. It is necessary to consider devaluation of the official exchange rate
and the creation of an exchange mechanism for the Cuban peso in
institutions as part of the process to eliminate the double currency,

replace the ration card by another system of subsidies that is more
efficient and has better distributive results, and make institutional
changes that would lead to fewer ministries and less centralization
in the public sector.
. Cuba reaped substantial benefits from its relationship with Vene-
zuela in the 2004 – 2007 period. Nevertheless, the relationship has
additional untapped potential to develop reindustrialization pro-
grams that would complement and support new dynamic sectors
and allow for the recovery and expansion of sectors that are strategic
in light of their impact on the quality of life of the population and on
the export sector.
. Cuban state enterprises have not taken on innovation as one of their
basic tasks. Not only does the economic system suffer from func-
tional deficiencies but it has led to a kind of dead end, unless there
is a substantial transformation (Monreal 2008).
Conclusions
The Cuban economy enjoyed an expansive cycle from 2004 to
2007 that was closely linked to agreements with Venezuela and the
export of professional services. During that period the importance of
services to the total GDP increased, reaching 76%, while agriculture,
industry and tourism stagnated. The deficit between imports and
exports of goods rose. A shift in trade relations, with Venezuela and
China predominating, was accompanied by an increase in foreign
debt and fewer foreign companies operating on the island. At the
same time, inflation was controlled and in general fiscal equilibrium
was maintained. However, the real wage remained extraordinarily low.
Since 2008, a reverse process has begun, with a slowdown exacer-
bated by the global crisis but also caused by external imbalances and
structural weaknesses that were left unresolved during the period of
expansion. The new government of Raúl Castro has implemented a
set of changes and oriented economic policy priorities toward import
substitution, increased agricultural production, control of energy
expenditure, and diversification of foreign trade and financial relations.

However, the steps taken so far are only a small fraction of those needed
to address the structural challenges to the island’s economy and signifi-
cantly increase the purchasing power of the Cuban family.
There is a growing consensus regarding the need to debate and
further transform the Cuban economic model, which essentially still
looks like the Soviet model based on state ownership of most of
the economy, wage labor and centralized resource allocation and

price determination. Adherence to this model has been independent
of the existence of the US blockade, which intensifies to an extreme
the external constraints on Cuba’s economic growth.
Structural challenges must be solved by changing the management
mechanisms of state enterprises, enabling greater employee partici-
pation and greater autonomy for managers to make decisions and set
prices. In addition to transforming the inner workings of state enter-
prises, their economic environment must change too, giving the
market and competition a greater role.
Along with this crucial transformation, more opportunities for
non-state forms of ownership must be provided. Cooperative owner-
ship should be allowed in the services sector and small industry.
Foreign investment should be facilitated and expanded to areas
currently off limits such as the sugar industry. The failure of “real
socialism” in Eastern Europe and the continued inefficiency and
vulnerability of the Cuban economy should prompt radical changes
in the economic model without giving up its social benefits.
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Banco Central de Cuba. 1997, 1999, 2001. Informe Económico. Havana.
CEPAL. 1997. “La economı́a cubana. Reformas estructurales y desempeño en
los noventa.” México: Fondo de Cultura Económica.
CEPAL. 2004. Balance preliminar de las economı́as de América Latina y el Caribe.
Santiago de Chile: Cepal.
Garcı́a Álvarez, Anicia and Viviana Togores González. 2002. El acceso al
consumo en Cuba y su repercusión en la vida cotidiana. CEEC.
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y externos, estado de las reformas y perspectivas”. Presentation at the
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Socialism and Democracy

Cuba's Economy: A Current

To link to this article: http://dx.doi.org/10.1080/08854300903533085

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Omar Everleny Pérez Villanueva and Pavel Vidal Alejandro

Socialism and Democracy, Vol.24, No.1, March 2010, pp.71–93

Problems persisting many years after the onset of the economic

It is therefore necessary to analyze the state of the Cuban economy

Gross Domestic Product (GDP) growth

Figure 1. GDP trends.

Figure 2. Average annual growth of GDP, goods and services exports,

. Low multiplier effect of exporting professional services.

weakness and exhaustion, manifested in less availability of foreign

Figure 3. GDP structure for 2008 in percentages.

Source: Calculated by the authors based on ONE (2009).

violent hurricanes, the power generation crisis, and the escalation of

rate and to a lack of convertibility. President Raúl Castro has publicly

reality of tangible problems, including shortages of financial and

tiva), but the highly centralized environment in which they functioned

Figure 4. Agricultural production in thousands of tons.

The agricultural sector’s poor performance weighed heavily upon

agricultural strategy and policy, in search of development appropriate

formation in the sector led to a rapid deterioration of equipment. A

policies are needed to stimulate domestic activity and achieve greater

important export in 2008 due to high prices on the international

Food purchases remain high because of inadequate agricultural

Figure 5. Foreign trade of goods and services in US$ millions.

Source: ONE, Anuario Estadı́stico de Cuba, various years. Havana.

of knowledge-intensive services overtook the value of the tourist

for tourist services and telecommunications. Some 26 million people

The global crisis spread to Cuba in 2009, exerting added pressure

Figure 6. Consumer price index (annual percentage variation).

Source: Economic Report Central Bank of Cuba and ONE data.

de-dollarize the economy as occurred in 2003 and 2004.4 In general,

even so, as an average it remains within the range of what is accepted

Balances and monetary policy

fiscal deficit and maintain it at an average level of 3% of GDP. This

Table 1. Monetary and fiscal equilibrium.

1990 10.0 19.8 7.0

1992 32.7 27.4 45.0

population. The Monetary Policy Committee fixes interest rates on

Table 2. Interest rates on deposits for natural persons, December 31,

Convertible peso (CUC) 1.00 3.00 3.50 4.00 4.50 5.50

Source: Vidal (2007).

Table 3. Estimate of real wages.

Year (percent) (1989 ¼ 1) (Cuban pesos) (1989 Cuban pesos)

1989 1.00 188 188

Source: Updated version of Table 1 in Vidal (2007).

continued low level, has caused a lack of incentive, emigration of

The ration card

The domestic food market is highly segmented. Analyzing the

simply adapt to it.

rate, the framework of exchange regulations, the centralized author-

fying the needs of workers through salaries, other forms of income, or

5. The Energy Revolution is an energy conservation program. It includes distributing

. While Cuba is an advanced country as measured by social indicators

institutions as part of the process to eliminate the double currency,

expenditure, and diversification of foreign trade and financial relations.

the economy, wage labor and centralized resource allocation and

Pérez, Omar Everleny. 1998. “Cuba’s Economic Reforms: An Overview” in