January 5, 2005

2005 Index of Economic Freedom: Cuba

The Heritage Foundation, January, 2005.

Quick Study

Trade Policy 4.0
Fiscal Burden 4.4
Government Intervention 4.5
Monetary Policy 2.0
Foreign Investment 4.0
Banking and Finance 5.0
Wages and Prices 5.0
Property Rights 5.0
Regulation 4.0
Informal Market 5.0
Population: 11,263,720
Total area: 110,860 sq. km
GDP: n/a
GDP growth rate: 1.1%
GDP per capita: n/a
Major exports: seafood, nickel, tobacco, sugar
Exports of goods and services: n/a
Major export trading partners: Netherlands 19.8%, Russia 18.7%, Canada 14.8%, Spain 9.8%, China 7.5%
Major imports: machinery and equipment, chemical products, food, consumer goods
Imports of goods and services: n/a
Major import trading partners: Spain 11.8%, China 8.2%, Italy 6.3%, France 5.2%, Mexico 5.0%
Foreign direct investment (net): n/a


Cuba's command economy is sustained increasingly by partnerships with foreign businesses and other countries. According to the University of Miami's Institute for Cuban and Cuban-American Studies, because the flow of investment to the island has slowed, the government's hotel holdings include ventures with foreign partners in other countries like Mexico. Venezuela agreed to sell oil to Cuba at concessionary prices in 2000, and shipments of petroleum and gasoline have increased from 53,000 to 80,000 barrels per day, allowing Cuba to resell some in the world market for hard currency. Remittances from Cuban exiles living abroad have contributed to the economy, though a tightening of the U.S. embargo aims to reduce that revenue substantially. Cracking down on citizens receiving remittances from American relatives, Castro shut down state "dollar stores," which offer rationed goods beyond basic staples, in May 2004 and later reopened them with prices marked up 20 percent. The Labor Ministry has stopped licensing 40 categories of self-employment. The Economist Intelligence Unit predicts that an improving global economy could boost Cuba's economic growth by 3 percentage points, but an unrealistic exchange rate and the lack of any effective rule of law continue to make Cuba a risky place in which to do business. Cuba's fiscal burden of government score is 0.1 point worse this year, and its trade policy and monetary policy scores are 1 point worse. As a result, Cuba's overall score is 0.21 point worse this year.

Trade Policy
According to the World Bank, Cuba's weighted average tariff rate in 2002 (the most recent year for which World Bank data are available) was 9.4 percent, up from the 8.2 percent reported in the 2004 Index. As a result, Cuba's trade policy score is 1 point worse this year. The government inspects and approves most imports. In many cases, customs officials also confiscate imports (especially scarce goods like electronics) for their own use, and such corruption enjoys official sanction.

Fiscal Burden
According to information from the Pi Management Association, Cuba's top income tax rate is 50 percent and its corporate tax rate is 30 percent. In 2002, based on data from the Economist Intelligence Unit, government expenditures as a share of GDP increased by 2.7 percentage points to 56 percent, compared to a 2 percentage point increase in 2001. On net, Cuba's fiscal burden of government score is 0.1 point worse this year.

Government Intervention
The World Bank reports that the government consumed 23 percent of GDP in 2002. In 2001, based on data from the Economist Intelligence Unit, Cuba received 11.05 percent of its total revenues from state-owned enterprises and government ownership of property. The state, however, produces most economic output and employs most of the labor force. "The industrial sector…is dominated by large state-owned enterprises," according to the United Nations, and the EIU reports that the state employs more than 75 percent of the labor force. Based on the apparent unreliability of the figure for government revenues, 1 point has been added to Cuba's government intervention score.

Monetary Policy
Data from the Economist Intelligence Unit indicate that from 1996 to 2003, Cuba's weighted average annual rate of inflation was 4.21 percent, up from 1.84 percent from 1995 to 2002. As a result, Cuba's monetary policy score is 1 point worse this year.

Foreign Investment
All investments must go through the state, and licensing is required for all businesses. Cuba's constitution still outlaws all foreign ownership of property and real estate, and the number of foreign businesses operating in the country has fallen from 403 in 2002 to 342 in 2003. According to the Economist Intelligence Unit, "The decline in the number of joint ventures reflects the gradual shift in policy, as the authorities have subjected each proposal, as well as each existing enterprise to close scrutiny…. Apart from a conventional audit, these reviews explore whether the state's original objectives for establishing the enterprise are being met."

Banking and Finance
The government controls all banking activity. A monetary policy committee created in 1999 meets weekly to determine domestic interest rates. In mid-2003, the central bank's control over hard currency was strengthened by a new law under which transactions between Cuban enterprises must be carried out in peso convertibles rather than U.S. dollars. According to the Economist Intelligence Unit, "These enterprises now have to apply to banks for hard currency, a procedure similar to that of other countries with exchange controls." The new law has permitted over a dozen foreign banks to open representative offices but does not allow them to operate freely. Some changes also have been introduced in the insurance sector, among them the introduction of new insurance products such as travel and medical insurance, but the government fully controls this sector as well.

Wages and Prices
The government sets virtually all wages and prices, as well as numerous minimum wages that vary according to occupation. "Freely determined prices exist only in limited areas of economic activity," reports the Economist Intelligence Unit, "and these prices remain severely distorted by the dual exchange rate system as well as by state restrictions on the scope of markets and fixing of prices elsewhere. Most inter-enterprise and final prices remain fixed by the planning authorities."

Property Rights
Private ownership of land and productive capital by Cuban citizens is limited to farming and self-employment. According to the U.S. Department of State, "The Constitution…explicitly subordinates the courts to the ANPP [National Assembly of People's Power] and the Council of State, which is headed by Fidel Castro. The ANPP and its lower level counterparts choose all judges…. The law and trial practices do not meet international standards for fair public trials."

Cuba's government regulates the entire economy. Private entrepreneurship exists, but it is heavily regulated. According to The Economist, "Cuba, out of necessity, has allowed capitalism into its socialist system. But it then keeps capitalism down…with a mass of complex and sometimes contradictory rules and regulations. Just when [investors] find out how things work, the rules change again." In addition, "except for food service operations…assistants and employees are not permitted…. [P]rivate taxis are barred from picking up passengers at tourist hotels or airports…. [T]eachers may not work as private tutors." According to the same source, however, "In some cases, the legal framework eventually changes to accommodate the gray-market private sector."

Informal Market
Cuba's informal market is huge. Even basic economic activities-including the sale of milk and bread, transportation services, currency, and housing-are performed in the informal market. According to the Economist Intelligence Unit, "A sophisticated black market [in real estate] has emerged involving Cubans at all levels, from poor householders seeking payment in return for trading a large home for a smaller one to large-scale speculative developers who have accumulated substantial wealth." The Washington Times reports that "the black market…accounts for 50 percent of all retail transactions."

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