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Posted July 31, 2006 by publisher in Cuba-World Trade

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http://www.coha.org | Council on Hemispheric Affairs

(original title Cuba comes in from the cold)

Bolstered by New Investments and Beneficial Trade Agreements, the Island’s Economy Surges while Washington Grumbles over Havana’s Possible Big Oil Surprise

For a country long in the grip of a paralyzing economic malaise, and with living standards which have not always endeared government officials to ordinary citizens, Fidel Castro’s May Day boast of 11.8 percent growth in the first three months of 2006 came as welcome news to a long suffering population. The upbeat report, reflecting a far better-stocked national larder than ever before, replaced the usual exhortations for personal sacrifices that the average Cuban was used to hearing from the leadership, which usually offers more fiery rhetoric than caloric intake. In front of more than one million people gathered at Havana’s Revolution Square, Castro trumpeted progress in all sectors of the economy, despite an unshakeable U.S. trade embargo. Since then, and in widely different locales, Fidel has continued to boast a climbing rate of economic growth, claiming that Cuba’s economy had expanded by 12.5% in the first quarter of this year. “We should thank [the blockade] because it has forced us to grow and rise to the occasion,” the near-octogenarian leader satisfyingly declared on May Day.

The fall of the Soviet Union in 1991 inaugurated the beginning of the very harsh “Special Period” in Cuban history. As its Eastern-bloc financial subsidies dried up and trade dwindled, the Cuban economy suffered a crushing 35% decrease in its GDP. As one U.S. observer noted, “Almost all of Cuba’s sugar harvest had been sold to the communist bloc throughout the Cold War era, and in return the island imported two-thirds of its food supply, nearly all its oil and 80% of its machinery and spare parts from the same sources.” As a result, after 1990, 85% of Havana’s export-import trade –mainly from Eastern Europe—was lopped off, bringing on extremely bitter days for Cuba’s population.

Now, after over a decade of struggle, the island is making a relatively extraordinary recovery: Havana has linked up with new trading partners while revitalizing old ones, resulting in a surging relationship with most of Latin America (albeit involving modest volumes) and much of the rest of the world. The growth has captured the attention of free-market, capitalistic economists who once deemed Cuba’s large state-controlled sector to be too inefficient to support a prosperous economy. The growth also has drawn an undeniable amount of attention to the nearly complete irrelevance of Cuba’s regional arch foe, the United States.

Growth in All Sectors of the Cuban Economy

Quantifying the Cuban economy is difficult, as government officials avoid utilizing standard international measurements as indicators of the island’s economic performance. Economic authorities in Cuba stepped up their criticisms of the international methodology for calculating GDP in 2005, as social benefits were usually exempt from the quantitative data traditionally relied upon. “GDP tells us very little. What purchasing power has a salary in light of social policies… All are lies and distortions,” Castro claimed. Havana’s calculations instead utilize an array of social factors when establishing economic benchmarks and parameters. One Cuban economist demonstrated exactly how the government tags economic growth on social projects, “(Cuba) offered an English course on television; how much would it cost if it had been sold as cassettes in a given foreign country?” By comparing the price of a particular social service with that of an analogue in a foreign country, the island-state can further adjust the true growth of its society. Furthermore, Cuban authorities tend to divide the economy into two main sectors, a practice which underscores the government’s social focus. The “socialist sector,” (as opposed to the non-socialist, free market sector) includes all goods distributed to Cuban citizens, operating in part on revenue generated by the free market sector, which includes all of the island’s foreign exchange earnings.

Both areas of the Cuban market have seen growth in recent years, although the socialist sector has gained relatively more momentum through contributions from the socialist-supporting Hugo Chávez of Venezuela. In his May Day speech, President Castro spotlighted the growing profitability of several sectors, proudly reporting enhanced earnings in construction, transportation and commercial activities. He also pointed to the island’s traditional triumphs with low infant mortality rates indicating the success of its widely admired health care system, and an improving educational system that currently has 500,000 Cuban students enrolled in its rapidly growing university system. Growth in these various sectors comes as a direct benefit from mushrooming new trade arrangements with the outside world, as well as from increasing foreign investment in tourism, oil exploration and nickel.

Regional Political Shift Re-integrates the Island with the Hemisphere

The Washington-enforced political and economic isolation of Havana, long prescribed by the White House as the proper treatment for the perceived hemisphere’s preeminent pariah, began completely unraveling at the end of the Cold War. In recent years, a gradual resurgence of the Latin American left in recent years could be seen as a modest “pink tide” movement throughout South America. This shift significantly benefited Havana; for example, even one of the least ideological members of this group—Uruguay’s Tabaré Vazquez—quickly moved to restore relations with the island-state. Vazquez was not alone, and the new regional interest in cultivating ties with Cuba quickened the tempo of economic benefits for Havana. According to a 2005 debt report regarding the Castro regime, three of the country’s top creditors were regional economic leaders– Argentina, Mexico and Brazil– signifying an increasing confidence in Cuba’s growing economy. At the same time, it should be noted that it has been the Latin American countries with the closest ideological alignment with Havana that have come forth with the most tangible benefits for the island.

Venezuela’s swaggering Hugo Chávez undoubtedly has been Havana’s most valuable partner, with advantageous trade and barter arrangements between the two serving as a lynchpin of the relationship. A 2005 agreement sent 20% of Cuban doctors to serve in poor urban Venezuelan barrios, in exchange for a daily supply of 90,000 barrels of Venezuelan oil. Since Hugo Chávez’s election in 1998, collaboration between the two nations has become a core component of Caracas’ policy, and in recent months this trend has accelerated. For example, Venezuela-Cuba trade is expected to reach over US$3.5 billion in 2006 - a 40% increase over 2005. Given Venezuela’s oil-fueled economic clout, the upside for Cuba has been enormous, and the newest trade agreements have stimulated the two countries to even further intensify these various exchanges. Cuban physicians are currently training 40,000 Venezuelan medical students, and an estimated 100,000 ordinary Venezuelans are scheduled to have free eye surgery in Cuba this year. Cuba also has provided assistance to the Venezuelan literacy program, which reportedly has graduated 1.4 million enrollees since its inception under Chavez, and has come close to eradicating illiteracy in the country—only the second nation in the region to achieve this, after Cuba, which maintains a steady literacy rate of 97.8 percent.

Last December’s electoral triumph in Bolivia of fellow socialist Evo Morales seems to offer a comparable boon for Havana in terms of warm strategic relations and future access to Bolivia’s natural-gas driven, new-found wealth. The ill-concealed admiration for the legendary Cuban leader displayed by both Chávez and Morales has formed the basis for a number of beneficial barter agreements for Castro, as well as for his trade partners.

A Triangle of Trade Agreements: Cuba, Bolivia and Venezuela

Highlighting the island’s economic integration with other Latin American nations, in April 29, 2006, Bolivia joined Cuba and Venezuela in signing Chavez’s Bolivarian Alternative for Latin America (ALBA) trade agreement. ALBA, a proposed alternative to the controversial U.S.-sponsored Free Trade Area of the Americas (FTAA), presents a socialist vision for regional commercial cooperation, although at this point its value is largely political, symbolic and somewhat short on economic specifics. The socialist-based agreements are increasingly popular in the region, and on July 18, ALBA’s future initiatives were discussed among 100 representative Latin American groups during Argentina’s Peoples Summit, which hoped to configure possible solutions to neoliberalism-induced distortions in regional societies.

Instead of basing its economic strategy on deregulated profit maximization schemes, ALBA advocates a socially oriented trade model. After Colombia (traditionally the principal market for Bolivian soy) chose to pursue a bilateral free trade arrangement with the United States, Cuba and Venezuela agreed to buy or barter for all of Bolivia’s soybean exports, under the aegis of ALBA. In partial exchange for such products, Cuba has promised to send doctors to Bolivia in order to provide medical care in impoverished rural areas, as well as teachers to conduct literacy campaigns for the region’s poor. Reinforcing such ties among the signatories through the use of barter, discounted loans and credit policies, as well as through ordinary trade, is meant to demonstrate the “social trade” alternatives promoted by the three nations.

The April meeting also included the unveiling of the Peoples’ Trade Agreement (TCP), an association aimed at deepening economic ties among the three nations. First conceptualized by Morales, this framework, like the ALBA, will further integrate Cuba with the economies of Venezuela and Bolivia. In April, Bolivian Foreign Minister David Choquehuanca was quoted by La Paz, a Bolivian daily, as saying that the agreement “is a peoples’ trade agreement, but also a space for integration… It is broader, and not limited to soybeans or coca.” The agreement establishes conditions of mutual cooperation and integration of the Cuban, Venezuelan and Bolivian economies, based on each nation’s comparative advantages, but it was mostly created “to put some meat on the bones of ALBA,” according to LatinNews. Details of the TCP aim to promote integration that elevates social welfare and a respect for history and culture in contrast to the traditional FTA, which prioritizes competition, privatization and the liberalization of markets. While Choquehuanca suggested that, “(Cuba) would buy manufactured goods, textiles, and wood (from Bolivia),” he acknowledged that unresolved details remain by noting that, “At the proper time, we are going to make known which commissions have been formed, and what volumes of products, times, and deadlines this represents economically.”

Veneconomy, a Latin American news source, reported that the signing of the TCP initiates Bolivia’s exportation of coca leaf in unspecified quantities to Cuba and Venezuela, promoting alternative usage of coca products such and for tea and medicinal purposes. Though coca leaves can hardly provide the foundation for dramatic economic growth, the exchange will telegraph the significant symbolism inherent in the agreement. These trade agreements, if less than comprehensive, nonetheless have helped launch Cuba back into the hemispheric fold as well as stimulate its economy, and Castro’s presence at the July 21 MERCOSUR meeting in Cordoba, Argentina, underscored this new reality. It is most likely that within several years, Cuba will be invited to become an associated member of MERCOSUR.

Economic Exchanges lead to Greater International Acceptance

The revitalization of the island’s economy has been bolstered by growing ties with investor nations from both inside and outside Latin America. These ties not only have helped drive Castro’s economic initiatives, but also have led to a greater level of international acceptance for the island. Ever since Castro opened Cuba to tourism in the early 1990s, the industry has flourished, annually attracting hundreds of thousands of tourists from Canada, Europe, Mexico, and other Latin American countries. The Cuban government has released statistics showing that in 2004 a record 2.05 million tourists resulted in gross revenue of $2.25 billion, and a comparable figure is expected to be achieved this year. Approximately half of these tourists are from within the Americas– mostly from Canada, Venezuela and Argentina– and the other half are from Europe, mostly from Italy, Germany and France. Tourism not only continues to buttress the economy, but it also increasingly exposes the island nation to visitors from around the world, usually resulting in a significant measure of good will for the regime.

Oil in Cuba’s Future?

Perhaps even a more significant potential contributor to Cuba’s economic growth are the revenues from oil, biomedical and nickel industries. Cuba’s Economic Exclusionary Zone, which lies in the North Cuban Basin between Key West and Havana, potentially holds petroleum reserves amounting to an estimated 4.5 to 9 billion barrels, according to some confidential, as well as public record sources. While Brazilian, Canadian, and Spanish companies have carried out test drilling in the zone for years, although usually with only minimal returns, new exploration efforts could soon be paying off. Spanish oil company Repsol YPF carried out deep-sea explorations and found existence of high quality oil in 2004, yet not in commercial amounts, and it continues to drill in a 4,132 square mile block. In 2004, Castro announced “very promising” deposits 55 kilometers off Cuba’s shoreline, in an area called Santa Cruz. China, whose rapidly industrializing and newly consumerized economy has displayed an insatiable need for energy resources, has become a formidable new player on the Cuban oil scene. Indian and Norwegian companies are also about to initiate drilling in the zone, and Venezuela has continued its active offshore exploration efforts as well. Furthermore, an agreement this past April with an Iranian official promised to fund both exploratory drilling and building refineries on the island, according to the Tehran Times. Russia also has expressed its interest in the possible commercial quantities of oil and natural gas reserves. In conjunction with the heightened levels of investment, Cuba is planning for the construction of 36 new oil rigs built in partnership with Chinese and Canadian companies within Cuban territorial waters.

Outside of Latin America, it is becoming increasingly apparent that China has started to play a major role in rehabilitating the Cuban economy, which accounts for over ten percent of the island’s trade. The Asian behemoth has rapidly become Cuba’s second-biggest trading partner, resulting in broadened ties that now include even the standby readiness for dispatching Chinese disaster aid should any act of nature wreak havoc on the island. This expanding tempo of investment activity also has included the effort to make Havana a conduit for traditional Chinese medicine, which will soon be spreading throughout regional markets. More importantly, Cuba’s nickel deposits are central to the interest of Chinese investors.

In November of 2004, the Chinese invested $500 million to resume the construction of the ferronickel plant left unfinished by the USSR, and Cuba has been projected to export 4,000 tons of nickel annually from 2005 through 2009. The mineral, when combined with iron produces steel and is an essential building block for that nation’s rapid industrial growth. China’s investments in Cuban nickel have allowed for exports of the commodity to significantly increase, guaranteeing a steady stream of revenue to the Cuban government at a time when world nickel prices are soaring.

Resources from Improve Sources

The spate of foreign investment in Cuba has enabled the island to invest heavily in long-needed domestic infrastructure, as well as to create a solid base for the development of future modern technology. Coupled with Havana’s consistent emphasis on human capital, these initiatives are laying the groundwork for meaningful, if not guaranteed economic growth. Free- market revenues have been put to good use by the government, and Castro now claims that the country will be able to cut its oil bill by $1 billion a year through savings from new investments in the electricity industry. Cuban citizens have suffered repeated power outages that frequently left their homes in the dark throughout the past 15 years, but Castro’s call for an “energy revolution” has brought prospects for a new, dependable light to the nation, to the cheers of the average Cubano.

Phasing out inefficient machines and oil-run energy generators, while installing 4,000 new ones across the country and investing in environmentally-sustainable fuels, Castro promised that by May 1, approximately 95 percent of Havana’s households can count on no more power outages. As a part of this program, the government has provided its citizens with free, new, energy efficient light-bulbs, while helping to diminish wasteful domestic consumption that was a drag on the country’s growth potential. “By the beginning of June, some 370,000 refrigerators had been replaced, while obsolete television sets in the provinces of Pinar del Rio, Havana, City of Havana, Granma and Santiago de Cuba also had been discarded in favor of newer models. Also… they are replacing the high energy consuming air conditioners,” reported one Cuba news source. A Cuba government official confirmed that this is what indeed has happened; proclaiming that “the blackouts are gone!”

The Cuban government also fully funds the nation’s investment in human capital, and while offering universal education, students are incorporated into a system in which their services and labor are put to work, as what the authorities describe for the good of society. For example, the Economist reported in its June 17-23 issue that 28,000 students of Social Work and Economics are actively investigating the efficiency of the social sector as an initiative to eliminate corruption. This strategy could help make the country’s heavy investment in human capital viable in the short term, while redoubling the amount of social benefits that its political system could eventually offer to the entire citizenry, if the model works out. The education of Cuban citizens is also paying off, facilitating the integration of Cuba with the rest of region. Not only are there Cuban doctors and Cuban literacy programs with trade partners Bolivia and Venezuela, but also Ecuadorians that are now being educated by Cubans. Cuba´s “Yo si puedo” literacy program is being implemented in 17 of 22 provinces, and 17,432 Ecuadorians already have been taught to read and write by the program. It is notable that Ecuador has not joined the Latin American “pink tide” movement, demonstrating a remarkable flexibility when it comes to Cuban literacy aid, as Ecuador is not politically aligned with socialist nations.

The United States Remains on the Sidelines

The U.S., needless to say, has been entirely absent from the rolls of new investors in Cuba. The long-standing embargo and the recent stepped-up enforcement of the single-minded and vengeful Helms-Burton legislation have dashed any attempts at rapprochement. This has scuttled the highly delimited initiatives that Washington has engaged in with North Korea and Iran, not to mention the all but complete reconciliation that the White House achieved with Vietnam and Libya. U.S. oil companies have been prohibited by the Bush Administration from investing or participating in any manner in the Cuban energy industry, a subject which was addressed by the “Western Hemisphere Energy Security Act of 2006,” which would provide U.S. oil companies with a profitable loophole in the administration’s otherwise unremitting hard-line stance to any form of island trade. This exception will allow U.S. oil firms to pursue oil exploration in Cuban-controlled waters, and it is justified as a resolve to the energy crisis through a form of minimum collaboration with a promising Cuban oil scene.

The intensified hard-right definition of U.S. regional policy, under Secretary of State Condoleezza Rice’s tenure, was made abundantly clear by the Treasury Department’s recent decision. At the Sheraton hotel officials were ordered to expel a delegation of Cuban technicians attending its industry seminar from its Mexico City facility, a move which the Bush Administration lamely attempted to justify under Helms-Burton restrictions. Though trade rules were somewhat relaxed in 2000 to allow cash sales of U.S. agricultural products to the island, due to growing unpopularity in Republican-governed farm states of anti-Havana restrictions, the Bush Administration struck back with the U.S. Office of Foreign Assets Control. The blow mandated in February 2005 that Havana pay cash for any U.S. imports before they are loaded onto island-bound vessels. As a result of this decision, bilateral agricultural transactions fell 26 percent by last April. Challenging the administration’s anti-Castro administration rage, the House also has taken on the issue, drafting the Moran amendment (H.A. 1049), which calls for the abolishment of all restrictions on trade with Cuba that have been implemented by the Treasury Department.

The Bush Administration’s obdurate stance is not without its detractors: there is a growing bipartisan coalition in Congress that favors lifting the embargo. This trend is encouraged by the considerable profits that the U.S. agro industry multinationals have collected because of the relaxation of some sanctions against the Cuba trade in 2000. Since 2001, Cuba has spent $1.75 billion on U.S. livestock and agricultural products, according to the Inter-Press Service. U.S. producers from 37 states and 157 companies have benefited from the exchange. Suspension of the embargo would not only open up U.S. economic relations with Cuba to an unprecedented degree, but perhaps also facilitate the gradual normalization of diplomatic relations between the two ancient foes. This is precisely why such an enlightened decision is not likely to come about under this administration.

Diplomatic relations appear even further out of reach after the build-up of Washington’s somewhat ghoulish delight of the anticipation of Castro’s death. The recent Bush Administration’s $80 million transitional plan for “democracy,” which involves the funding of the Castro’s opponents, fails to even remotely try to find a common ground with the island-state. With its anti-Havana position already cast in concrete, Bush’s unremitting drive for hemispheric free trade is sharply contradicted by opposing instincts which painstakingly spells-out a prohibition on such commerce with Cuba.

Aligning Ideologies

As Cuba normalizes relations with almost every country in the world, it is the U.S. which, in fact, is risking diplomatic isolation due its rigid foreign policy. Industrialized countries are racing to ramp up their ties with Havana, some to exploit Cuba’s potential oil resources, and others to gain access to its sophisticated bio-medical capabilities. Yet the U.S. has remained hermetically sealed to any wind of change, moored to an archaic policy in almost all of its other relationships. Notably, today it is common to find western-style democracies, like Spain and Canada, with a range of domestic and foreign policies similar to those of the U.S., engaging in normal economic ties and diplomatic connections with Cuba. Another important break through occurred at the of the MERCOSUR meeting; in the presence of Fidel Castro, all of the attending leaders pledged to expand trade with Cuba.

Castro has found such a liaison between countries of antithetical ideologies to be a thoroughly reasonable state of affairs, though he continues to maintain that, “Socialism will remain, in the end, the only real hope for peace and the survival of our species.” Cuba’s expanding involvements with China, India, the Middle East and now its prospective participation in the summits being staged by the non-aligned movement (NAM), have managed to break up Washington’s best efforts to isolate the island-state.

At the present moment, the State Department is absorbed in working to bring a new generation of hardships on Cuba. Yet soon, due to the island’s newfound sources of relative prosperity, centered on its encouraging relationships with Venezuela and China, these tactics simply won’t work. While the outsized influence of Miami’s extremist wing of the Cuban exile community has made it impossible for Washington to actively promote rational discourse with Havana, the arguments are mounting against the White House’s patently forlorn policy of attempting to asphyxiate Havana both politically and economically, while seeking to negotiate with every other conceivable pariah nation, because it’s good for business.

This analysis was prepared by COHA Director Larry Birns and Research Associate Adrienne Nothnagel


The Council on Hemispheric Affairs, founded in 1975, is an independent, non-profit, non-partisan, tax-exempt research and information organization. It has been described on the Senate floor as being “one of the nation’s most respected bodies of scholars and policy makers.” For more information, please see our web page at http://www.coha.org ; or contact our Washington offices by phone (202) 223-4975, fax (202) 223-4979, or email .(JavaScript must be enabled to view this email address)

  1. Follow up post #1 added on August 01, 2006 by J. Perez

    Wouldn’t it be grand if Cuba can come to economic prosperity in spite of the U.S. embargo?


  2. Follow up post #2 added on September 05, 2006 by Pete Chavez

    It could never.  I heard some suspect movie star was directly involved in it’s success(the embargo)by keeping it from being mentioned in any dcmntrys. on Cuba.


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