Some Good News and Bad Signs for Cuba's Economy

HAVANA, Cuba — The gleaming new tour buses pull beneath the posh hotel's portico, unloading scores of foreign tourists who set off a flurry of activity among a staff of Cuban desk clerks, bell hops and tour guides.

Less than two decades after its economy imploded with the collapse of its communist sponsor, the Soviet Union, Cuba has rebuilt itself as a Caribbean vacation magnet that now draws more than 2 million visitors annually.

But while the $2 billion Cuba now earns annually from tourism has helped rescue its moribund economy, experts say the communist island faces a daunting list of problems that leave it vulnerable.

Cuba's new president, Raul Castro, who took over the island's top post in February after his brother, Fidel, retired due to illness, must somehow reverse low productivity and wages, stop endemic pilfering, unravel currency problems that are creating income inequalities and spur farmers to grow enough food to feed the island's 11 million residents.

"It's a stagnant society," said Javier Corrales, a political scientist at Amherst College. "Cuba is poorer now than it was before the revolution in the late 1950s, and most economic indicators have not reached the levels of the late 1980s before the collapse of the Soviet Union."

That said, Cuba has made a remarkable recovery since the "Special Period" in the early 1990s when the island lost an estimated $6 billion in yearly Soviet subsidies and scarcity plagued the Cuban people.

Fidel Castro responded by turning to tourism, inviting a flood of foreign investment to help rebuild the island's neglected infrastructure. Slowly Cuba stumbled out of the crisis, its economy stabilizing if not exactly prospering.

Consumer goods returned, hundreds of thousands of Cubans found work in the tourism sector and the "Special Period" receded into painful memory.

Now, to hear the Cuban government tell it, the island's economy is going gang-busters, with GDP galloping ahead by 11.8 percent in 2005, 12.5 percent in 2006 and 7.5 percent in 2007.

The problem, economists say, is that Cuba has created its own method for calculating the figures, adding billions to account for the free health care, education and social services provided by the state.

"No other country uses this methodology," said Carmelo Mesa-Lago, an economist at the University of Pittsburgh. "Nobody knows what these numbers mean because the Cubans haven't said how they calculate these values. I did a speculative exercise and came out with GDP about half of the official figures."

Despite the controversy, most American scholars agree the Cuban economy is growing.

In addition to $2 billion in tourism earnings, the island has been buoyed by high prices for nickel, earning another $2 billion there, along with $400 million from sales of its world-famous cigars.

But other indicators are worrisome to outside economists. Cuban residents depend on an estimated $800 million to $1 billion a year in remittances from relatives abroad, primarily in the United States, while the Cuban state appears to be replacing its old Soviet sponsor with a generous new patron, Venezuela.

That country's socialist president, Hugo Chavez, is selling 100,000 barrels of oil to Cuba a day at $27 a barrel, providing a $2 billion annual windfall for the Cubans, Mesa-Lago said. Cuba repays Venezuela by sending about 30,000 medical and social workers there to provide services to Chavez's impoverished supporters.

"In 2006, Cuba calculated the value of those services at about $5 billion," Mesa-Lago said. "This has been a huge boost to Cuba, but it's very risky. History has proven that if the sponsor collapses, Cuba will be left in limbo."

Apparently hedging his bets, Raul Castro has inked trade deals with China, Iran and Brazil, opening new lines of credit worth billions, an essential tool for a nation that has no access to the World Bank or International Monetary Fund because of its long enmity with the United States.

But even as Cuba has signed new deals with foreign countries, it has cut back on partnerships with foreign firms. Some foreign companies have complained bitterly about rules governing the hiring and payment of workers and other red tape.

Cuban officials say they are reducing partnerships with smaller foreign companies to concentrate on big players in essential sectors, primarily deals with firms from Canada, China, India, Brazil and Venezuela to exploit Cuba's nickel and offshore petroleum.

But even as it makes progress in these sectors, Cuba is hobbled by its inability to feed itself. With its farm system beset by inefficiency and poor incentives, Cuba last year imported $1.6 billion in food.

To address this problem, in recent months Raul Castro has settled long-standing debts between the state and Cuban farmers, raised prices for milk and beef, increased farm worker pay and exhorted growers to plant more.

But even as he pushes these reforms, he's still dealing with the fall-out from a 2005 decision to drastically cut back the island's once-vital sugar industry due to low world prices. Dozens of mills were shuttered and about 150,000 sugar workers were thrown out of work.

While the Cubans claim they have been retrained and that national unemployment is less than 2 percent, outside economists think the numbers are two to three times higher.

Meanwhile, Cuba is experiencing a "brain drain," with skilled professionals leaving the island if they can, or giving up jobs as engineers or physicians making $15 a month to work in tourism, where they can earn far more.

The scramble by Cubans to work in tourism highlights yet another problem, Cuba's dual-currency system. Most Cubans are paid in regular pesos, while those who work in tourism have access to the convertible pesos tourists are required to use. The convertible pesos are worth 25 times more than regular pesos, creating huge income disparities and smoldering resentments among the populace.

"Raul knows the dual currency needs to be eliminated," said Paolo Spadoni, an economist at Rollins College in Winter Park, Fla. "The income inequality is a big problem."

Yet another headache is pilfering and black market activity.

While all Cubans get free food rations from the state each month, the hand-outs typically only last a week to 10 days. It's not surprising that many people steal from their workplace and sell the items on the black market, a practice so common that state-run companies reportedly factor 15 percent into their budgets to cover the losses.

"It's a real drag on the Cuban economy," Spadoni said. "It comes back to the crucial issue of incentives. They have to address this, but so far all they've done is call for more discipline, which won't solve the problem."

U.S. scholars believe Raul Castro is aware of the many challenges facing his economy. As interim leader over the past 19 months, he has called for an open debate on how to proceed.

But even if he introduces gradual reforms, the outcome is far from certain.

"Raul has raised expectations by asking for debate and hinting at reforms, but that opened a Pandora's box," said Mesa-Lago. "So far he has done very little. All we can do is watch and see what happens."