Cuba's Economy: An Overview

investopedia

By Greg McFarlane 

It only took five-plus decades, but Cuba has begun intermittent steps toward joining the world community and putting a dent in the collectivism that turned one of the Caribbean’s most vibrant economies into a static charity case of historic duration.

Before La Revolución, Cuba was as developed a nation as any in the Caribbean. Sugar and tourism were the major industries, an influx of easy dollars coming from rich Americans with a penchant for gambling in an exotic but nearby nation with a welcoming government. The incoming Castro regime then preached equality over growth. Cuba’s communist dictatorship came close to achieving the elusive goal of all employment being provided by the government (it was as high as 91% at one point), albeit without the “withering away of the state” that Friedrich Engels naïvely predicted.

In light of a recent thaw in relations between Cuba and the United States, things are improving. It’s hard for them not to, given the baseline. By the grace of the island’s ruling class, Cubans have recently been granted permission to buy consumer electronics, stay in hotels and even buy and sell the Studebakers and Nash Ramblers that have been traversing the nation’s streets since Chuck Berry learned to duck walk. (For more, see: Countries Sanctioned By the U.S. - And Why).

Workforce

One illustrative indicator of an economy’s robustness is the ratio of the workforce that’s employed in agriculture. The most profound demographic shift in world history occurred in the early 20th century, when rapid technological advances in farm equipment increased yields and enabled far fewer people than ever to feed far more people than ever, in the process freeing the masses to do something other than spend their days growing food. (For related reading, see: China’s Economic Indicators).

More than anything else, the move away from subsistence farming is what distinguishes affluent nations from poor ones. Yet even today, much of the world – including Cuba – has yet to catch up. Case in point, one out of every 300 Luxembourgers tills the soil for a living. In Cuba, the comparable figure is one in five. Software engineers are rare in Cuba because, well, before you can design IT systems, you have to eat. (For more, see: Socialist Economies: How China, Cuba And North Korea Work).

Despite a workforce employed heavily in agriculture, the nation still can’t come close to feeding itself. Some 80% of food is imported, while square mile after square mile of arable land sits dormant. The government hasn’t deigned to allot it for growing crops, and of course no private farming operations could take it over anyway.

Market Reform

Since Fidel Castro transferred the reins of power to his brother Raul a few years ago, market reform has been slow. Ordinary Cubans are now permitted to engage in taxi operation, home remodeling for profit, private hairstyling and other rudimentary lines of work. To North American sensibilities, it’s hard to conceive of such ventures as being noteworthy, let alone being so important that they require the permission of federal bureaucrats. (For more, see: China's GDP Examined: A Service-Sector Surge).

But Cuban culture has much to unlearn. A country so unsophisticated that it only recently permitted its citizens to buy and sell each other’s houses (as opposed to merely bartering them, my bungalow straight-up for your cottage) isn’t going to be vying for domination with the likes of Japan or Germany anytime soon. These days you can open a restaurant in Cuba, but you can seat only a dozen people and hire only family members. That’s a handicap out of the gate that makes it impossible for Cuba to ever develop the next Ray Kroc or Bobby Flay. (For more, see: McDonald's: A History of Innovation).

In 2010, Cuba set the goal of having 35% of its labor force in the private sector or as the regime officially calls it, “non-state employment” within five years. But again, it’s not a case of simply getting a business license and hanging out a shingle or walking down Via Monumental with an armful of résumés. If you want a non-government job in today’s Cuba, your search starts with applying to the government for permission. Cuba is still several percentage points away from achieving that lofty but eminently achievable labor force goal. (For more, see: Countries with the Highest Government Spending-to-GDP Ratio).

It's Not All Bleak

The news isn’t all bleak. Rising global sugar prices have stimulated corresponding investment, but a future reduction in sugar prices will likely wipe out any gains. Tourism remains a more stable sector of the economy, less susceptible to market swings, given that climate and beaches are more or less permanently attractive to consumers. Even Fidel Castro himself acknowledged that “We live in a warm country. That is wealth.''

Cuba welcomes millions of visitors a year. That number even includes a few adventurous Americans, who typically have to travel via Canada and be less than forthcoming with border agents. Service jobs that cater directly to foreigners are among the most desirable and best paying in all of Cuba.

Foreign currency should always be welcome, particularly when said currency is being spent on replenishable services. A nation that once forbade foreign investment now searches it out, which is a welcome development if a long overdue one.

The Bottom Line

The past half-century (and more) of highly centralized control and economic sanctions means that Cuba has a long way to go to rebuild its economy. On the upside, it has rising sugar prices and tourism to help its balance sheet. And while it’s promising that Cuba counts Venezuela and Canada among its largest trading partners (top importer and exporter, respectively), one can only wonder at how quickly things will transform once Cuba regains full trade status with the economic superpower only 90 miles to its north. (For more, see: How to Invest in Cuba).