C Population (annual growth rate): 0.

6% (1998)
Expo
Illite rts
racyasrate
sha re
(age
Gulfofof GDP:
15 ): United 11%
3% (1999)
(1993)
Mexico States
Atlantic Ocean
CASE S TU D Y Bahamas

The Economy Havana

●
Dominican

of Cuba* Mexico
Haiti
Republic

Jamaica

Belize

Honduras Caribbean Sea

Nicaragua

Geographic, Social, and El

Costa
Rica
Economic Indicators Salvador Panama

Pacific
Ocean Colombia

Area: 114,524 km 2
Population: 11.2 million (2000)

GDP per capita (PPP): $3,967 (1998)

GNP per capita (ave rage annual growth rate): 8.1% (1989–
1993) Agricultu re as sha re of GDP: 11%
(1993)

Unde r-5 mo rtality rate (per 1,000 live births): 8 (1999)

Child malnut rition (unde rweight): 8% (1992–1997)
Females as sha re of labor force: 39% (1997)

Human Development Index: 0.783 (medium) (1998)

Life Expectancy 76 (1999)

uba, larger than the other Caribbean is- from Africa to work in the bur geoning sugar
lands combined (about the size of Eng- indust ry. The contempo rary Cuban ethnic
land), sepa rates the Gulf of Mexico from the mixtu re is a complex and seamless
Caribbean Sea. From its disc overy by Colum- contin- uum from Spanish to African with
bus in 1492 until gaining nominal political in- recogniz- able additional components
dependence in 1902, Cuba was the center of including de- scendants of Chinese
the Spanish colonial system in the Weste rn labo rers impo rted in
Hemisphe re. The Spanish eradicated the
abo riginal population and impo rted slaves
*Cont ributed by Professor Frank Thompson, an economist at
the University of Michigan. Reprinted with permission.
C .S .9 .2 .1
C .S .9 .2 .2 Problems and Policies: Domestic

the nineteent h centu ry. In the two Cuba n instituted dramatic economic
wars for independenc e from Spai n (1868–
1878,
1895–1898), both the leadership and the ranks
of the insu rgent forces included former slaves
as well as Creoles (Cuban-bo rn Spania rds).
In the long decline of Spanish power
in Latin Ame rica, ownership and contr ol
of much of the Cuban economy was
acqui red by U.S. firms in the nineteenth
centu ry. As Cuban independence forces
nea red victory over colonial rule in 1898, the
United States invaded Cuba, and the peace
treaty between Spain and the United
States later that year transfer red
sovereignty to the latte r. Annexa- tion was
conside red, but instead Cuban for- mal
independence was decla red in 1902 after an
elected Cuban government reluctantly ac-
cepted an amendment to the first Cuban
constitution granting the U.S. sweeping pow-
ers of inte rvention. ( The remaining U.S. mili-
tary installation in Cuba, at Guantánamo
Bay, dates from 1902.)
U.S.-based firms remained dominant in
most major sectors of the Cuban economy
until the revolution of 1959. The largest in-
dust ries were sugar and its derivatives (e.g.,
rum), tou rism, and tobacc o, but other
signifi- cant sectors included utilities (the
AT&T- owned Cuban Telephone Company
had only an English name), transpo rtation,
and min- ing. Regulations modeled on
southe rn U.S. Jim Crow laws were
imposed, and Havana, the Cuban capital,
became infamous for pro- viding U.S.
vacationers pleasu res forbidden at hom e.
Cuban governments in this period,
noto riously cor rupt and compliant to U.S.
in- terest s, culminated in the brutal
dictatorship of Fulgencio Batista.
On New Year’s Day 1959, after an
improba- ble struggl e, a revolutiona ry
movement with middle-class leadership but
initially based in the destitute peasant ry of
easte rn Cuba, over- threw the Batista regim e.
Its most prominent leader was Fidel Castr o,
a 1951 Havana Uni- versity law graduat e.
The new government immediately
change s, including nationalization of agricul- tural
holdings in excess of 400 hecta res (largely
foreign- owned sugar plantations). In a quick
succession of tit-fo r-tat measu res, the United
States cut Cuba’s sugar impo rt quota, Cuba
nationalized other U.S.- owned assets (including
petroleum and telephones), and the United
States imposed a punitive em- bargo. In
February 1960, Cuba negotiated a suga r-for-oil
exchange with the Soviet Union that began the
ext raordina ry transfo rmation of Cuba from a de
facto component of the U.S. economy to, 2-years
later, an anomalous Weste rn Hemisphe re nation
conducting 85% of its foreign trade with the Soviet
blo c.
The exten t of Cuba’s politica l sub-
servienc e to Soviet policy demand s over the
ensuin g three decade s is disputed , but that Cuba
becam e quit e dependan t economically on the
Sovie t blo c is clear. Cuba expo rted agricultu ral
product s, prima rily suga r, in ex- chang e largely
for oil and manufactu red good s, with an
implici t subsid y (estimated relativ e to world
ma rket prices ) for Cub a in the rang e of $5
billio n per year. Excep t for a residua l and
economicall y significan t sector of private
farms, the Cuba n econom y be- cam e
almos t enti rely state- owne d and state-
managed.
After the U.S.-sponso red inv asion by
Cuban counter revolutiona ries was defeated
at the Bay of Pigs in 1961 and the diffusal of
the Cuba Missile Crisis of 1962, in which So-
viet missiles were withd rawn and the United
States pledged not to invade the island, Cuba
then proceeded on a unique path of eco-
nomic development.
The major consequences of this pr ocess of
development were sustained and substantial
growth in national income per capita and,
even more strikingl y, a momentous egalitar-
ian shift in the dist ribution of incom e. By
1986 Cuba’s income inequality index (Gini
coefficient) was among the lowest in the
world. Especially notable were the transfor-
mations in health and education. Despite
 Human Capital: Education and Health in Economic
C .S .9 .2 .3
Develoment

emig ration in the early 1960s of most profes- markets (although a very meager state ration
sional s, largely to the United State s, the
health and education systems were dramati-
cally expanded until, by the early 1980s, life
expectanc y, infant mo rtalit y, lite racy, and sci-
entific and technical education statistics for
Cuba approached those of highly developed
count ries, even though per capita incom e,
though substantially inc reased since the rev-
olution, r emained in the range of less
devel- oped count ries.
In the early 1960s, Cuba had suffe red an
eno rmous economic shock. Abruptly
seve red from its traditional markets by the
U.S. em- bargo, the count ry, with great
difficult y, reori- ented its production and
trade to the possi- bilities and demands of
the Soviet bloc. The resulting system
diffe red impo rtantly from Soviet models
but was not significantly mo re efficient.
Neve rtheles s, substantial economic
development did take plac e.
With the collapse of Easte rn
European communism in the early
1990 s, howeve r, Cuba suffe red an even
mo re traumatic eco- nomic shock than it
did when the U.S. em- bargo was imposed
three decades earlie r. The advantageous
Cuban suga r-for-Soviet oil arrangement
evapo rated. Essential inputs and spa re
parts for the whole of Cuban indus- try and
agricultu re became unobtainabl e. Ag-
gregate output (and consumption)
plum- meted by over one-thi rd.
After sometimes chaotic emer gency
meas- ures as the crisis worsened in the early
1990s, a succession of fundamental changes
in eco- nomic institutions and policies
have since ensued. Some elements of this
rest ructu ring have significantly diminished
the control of economic activity by
cent ral autho ritie s. Thus a large portion of
state- owned land has been turned over to
newly organized agricul- tural coope rative s,
which are to some deg ree worke r-managed.
A substantial po rtion of consumption,
especially of food, is now allo- cated
through relatively competitive retail
system remains in place). A sector of most noticeable investments have occur red
self-em- ployed service pr oviders has in tou rism, which had been almost enti rely
been estab- lished, all owing dormant for three decade s. But quite
regulation and taxation of some of substantial sums have also been committed to
what had previously been illicit eco- petroleum and mine ral (especially nickel)
nomic activitie s. ext raction and to refining, telecommunica-
In a no less dramatic change of tions, and the pr oduction and marketing
polic y, cer- tain sectors have been of high-value-added agricultu ral de rivatives
opened to foreign pri- vate investment, (e.g., alcoholic beve rage s, tobacc o, and cit-
with Cuba seeking to project itself as rus).
“open for busines s” with competitive Yet even with the growth of foreig n invest-
advantages in unexploited ment and coope rativ e an d self-empl oy-
oppo rtunities and an unusually ment , the vast majo rity of the Cuba n labor
healthy and well-educated workfo rce. force remain s empl oyed in the state secto r,
And, in spite of intense U.S. oppo- whic h is still for the mos t part astonishingly
sition, billions of dollars of investment inefficien t despit e continual , well-adver-
have since flowed into Cuba, prima rily tise d campaign s for imp rovement s. The
from Mexi- can, Canadian, and transfo rmatio n of the econom y in the last
European multinational corpo ration s. decade has bee n wrenchin g for Cuba n soci-
U.S. firms remain on the side- lines, ety. The dramati c fall in per capit a income
excluded by U.S. (not Cuban) law. has recoupe d only slowly sinc e 1993 and has
Almost all foreign investment in bee n accompanie d by visibl e unempl oy-
Cuba takes place in joint ventu res men t (though t banished since the early
with state- owned entities and in most 1960s) and what many see as an “inversion of
such joint ven- tures the Cuban the social pyrami d”—not only has income
pa rtner holds a controlling sha re. The
C .S .9 .2 .4 Problems and Policies: Domestic
inequalit y obviousl y increased, the few benefi-
ciaries seem to be almos t enti rely thos e in-
volved, licitly or illicitly, in the small pa rt of the
econom y affecte d by foreig n investment,
mainl y tourism. The U.S. dolla r denominate s a
portion of the Cuba n econom y from which
mos t Cuban s, especiall y thos e who have most
suppo rted and benefite d from the revolution
of 1959 , feel ma rginali zed. But popula r discon-
ten t remains tempe red by persistin g egalitar-
ian acces s to the healt h and educatio n system s.
The futu re of the Cuban political economy
is not predictable with any confidenc e. As has
been true for two centu ries, much depends
on U.S. policie s. For exampl e, the
immig ra- tion policy under which Cubans
are granted a uniquely privileged status
(starkly denied other economic refugees)
has dramatically shaped Cuban domestic
and foreign policy, as has an array of U.S.
economic sanction s, which became even
mo re stringent in the
1990s. An end to this embargo would let
loose a wave of catch-up U.S.
investment that
could conceivably retu rn Cuba once again to
the status of a de facto U.S. economic sub-
sidia ry, although U.S. investors would suffer
some disadvantage given their late sta rt. Even
mo re impo rtant here is the potent Cuban
perception that genuine national indepen-
dence must be maintained. Nationalist
senti- ment is the bedrock of popular
suppo rt for the regime still headed by
Fidel Castr o, which, though by no means the
most author- itarian or repressive in the
world, remains un- willing to risk domestic
political competition.
For over four decade s, Cuba has offe red an
example of economic development in which
compa ratively high levels of resources for
building and maintaining human capital
have been provided in an exceptionally egali-
tarian way. Given the gene rally low develop-
ment of the rest of the Cuban political econ-
omy, maintaining this development strategy
through the process of recovery from the eco-
nomic traumas suffe red a decade ago re-
mains pr oblemati c.