Prior to the 19th century, Spanish colonial administrators did not place much importance on the economy of Cuba. The island was poor in precious minerals, so Spain largely ignored Cuba. Instead, Spain focused on mainland colonies, such as Mexico and Peru, that were rich in gold, silver, and precious gemstones. Spanish authorities used Cuba’s hardwood forests to provide wood for shipbuilding and repairs for the galleon fleets that arrived in convoys in Havana harbor twice a year to transport the wealth of Spain’s American colonies back to Europe. Colonial administrators used the harbor as a stopping point between Spain and her colonies, giving Cuba strategic rather than economic importance. Cuban residents lived on relatively small farms and eked out meager livings raising cattle, tobacco, some sugarcane, and commodities to supply the ships. The residents were allowed to trade only with Spanish merchants. The merchants charged high prices for imported goods, while colonists made only small profits from exports.
Cuba’s economy changed after the Haitian Slave Revolt of 1791. Haiti had formerly been the world’s leading sugar producer, but sugar production plummeted after Haitian slaves drove out their French masters. Cuba’s sugar growers took advantage of this situation to increase their own share of the sugar market, and Cuba became the greatest producer and exporter of sugar in the world. Growers consolidated small farms and imported African slaves to cut and process the cane. It is estimated that more than 800,000 slaves were imported to Cuba between 1800 and 1870.
During the 19th century, Spain permitted colonists to trade freely with merchants from other nations. Foreign investors, primarily from the United States, bought land and sugar refineries, thus sustaining the importance of sugar. United States citizens also made significant investments in railways, tobacco, minerals, banking, and public utilities. After the wars of independence in the late 19th century, Cuba’s new sugar industrialists helped rebuild and modernize the sugar milling process. In 1902 Cuba and the United States signed a trade agreement that guaranteed that a certain amount of Cuban sugar would be sold to the United States. This agreement fortified Cuba’s economic security. During these years, Cuba continued to maintain a close economic association with the United States. This relationship increased the stability of the Cuban economy, but it had negative effects as well. The work force remained underpaid, and capital drained out of Cuba into the hands of foreign investors, particularly those in the United States.
After the Cuban Revolution, the Castro government promised to address perceived economic inequities within the Cuban population and between Cuba and the United States. Castro nationalized large agricultural estates, sugar refineries, foreign industrial and mining firms, and privately owned urban properties. These policies were not well received by U.S. government officials, who worried that Castro was a Communist. At the time, the United States was involved in the Cold War, an ideological struggle between Communist and capitalist nations. Communist ideas in the Western Hemisphere were seen as threats to U.S. interests. As a result, U.S. president Dwight D. Eisenhower severed diplomatic relations with Cuba in 1960.
Also in 1960, Eisenhower issued an executive order implementing a partial trade embargo to prohibit the importation of Cuban goods. The Congress of the United States institutionalized the embargo in 1961 with the passage of the Cuban Democracy Act. In return, Castro nationalized an estimated $8 billion in U.S. assets. The United States’ hostility toward the Castro government encouraged an economic alliance between Cuba and the USSR, the world’s leading Communist nation. The USSR offered Cuba generous subsidies and trade agreements that provided agricultural machinery, crude oil, and technological instruction in exchange for Cuban sugar to make up for lost trade with the United States. Castro announced that Cuba would become a socialist state and a member of the Council for Mutual Economic Assistance (COMECON), the economic alliance of Communist nations. Thereafter Cuba became one of the USSR’s closest allies.
During the 1960s Cuba centralized economic activity under JUCEPLAN (Junta Central de Planificacion), the state’s centralized economic planning agency, which set policy and implementation schedules. In the early years of the Revolution, JUCEPLAN diversified the economy using an import substitution plan. To reduce Cuba’s dependency on imports from Western countries, the government increased the production of items for domestic consumption. By 1968, however, it reversed course and focused once more on sugar production to earn capital and broaden trade with Communist nations. Strict centralized planning prohibited small, independent businesses from generating goods and services of any kind. Despite the power exercised by centralized planners, government officials often had limited experience in applied management. Ideological loyalty, not merit, was the measure of promotion into managerial positions. Between 1962 and 1970, planners experimented with a variety of programs to boost economic production, often reversing previous decisions with disastrous effects.
The Soviet Union was frustrated with Cuba’s inefficiency, chaos, and waste. Castro, however, was determined to remain independent of close Soviet control over Cuba’s economy. In 1968 he committed Cuba to a sugar harvest of 10 million tons intended to earn sufficient capital to allow Cuba to trade with the West and to limit Soviet influence. The actual harvest of 8.5 million tons fell short of the mark, and it dislocated the rest of the economy, as professionals from throughout the island worked in the fields rather than conducting other business. The Soviets responded by threatening to cut off economic support unless Cuban planning followed five- and ten-year plans that matched Soviet trade needs. JUCEPLAN continued as the planning agency, but strategists had to demonstrate to the Soviets that production was rational, sustained, and kept in compliance with COMECON trade balances.
In 1972 Cuba joined the COMECON. Cuba supplied its COMECON partners with fruit, a vacation site, and sugar. To keep the Cuban economy functioning, the USSR paid more than the world market prices for Cuban sugar, traded petroleum to Cuba, and forgave Cuban debt. The USSR provided favorable trade agreements that resulted in Cuba receiving goods worth $5 billion per year more than the value of the goods Cuba exported to the USSR. By 1970 more than 70 percent of Cuban trade was with the USSR, and another 15 percent was with its Eastern European allies. This relationship with the USSR allowed Castro to provide education, health, employment, and food to the vast majority of the population.
Although the economic agreements with the USSR stabilized the Cuban economy and provided the population with necessities, they did not address the chronic shortage of consumer goods. The Cuban government had rationed goods since 1962, when shortages first began. Government planners were unable to increase productivity to make goods more available. Shortages were also the result of a fundamental government policy that stressed the importance of producing sugar and developing export industries to bring foreign money into Cuba. These programs diverted funds and resources from the development of industries that would have produced consumer goods.
Cuba’s economic problems became even more serious after 1989, when Communist governments began to collapse in Eastern Europe and the USSR reduced its aid to Cuba as well as its trade with the island. Cuba’s gross domestic product (GDP) fell at least 35 percent between 1983 and 1993, with the steepest decline between 1990 and 1993. From 1989 to 1992, imports fell from $8 billion to $2.2 billion. In 1992, for the first time since 1959, government agencies and industries had to account for cost, spending, and prices. All agencies had to seek their own sources of income to sustain themselves. This meant establishing business relationships outside the country or promoting tourism inside Cuba to acquire valuable foreign currency.
As the economy declined, Cubans had trouble purchasing basic items. Although wages remained constant, supplies of goods declined and prices increased. Although Cubans were making just as much money, there were fewer goods available, and the goods that were available were very expensive. Transportation, telephone services, food, and clothing became scarce.
To help remedy the economic hardships, in 1992 Castro allowed Cubans to buy goods with U.S. dollars. He permitted Cubans who had access to dollars from relatives overseas or through international work to acquire and spend them. Their purchases brought U.S. currency into circulation. Because the state did not produce enough needed goods, foreign commodities imported by the government provided the only relief from scarcity in basic food and health products. The government sold these goods in “dollar stores”—special stores that accepted only U.S. dollars as payment. This process ultimately brought valuable U.S. currency into government coffers.
Castro also permitted individuals to open small private enterprises falling within about 100 categories, such as hairdressing, car repair, and scissor sharpening. He reopened farmers’ markets, which had been closed in 1985 when the government halted a five-year experimental program allowing farmers to sell excess produce for profit.
By 1994 the Cuban economy began to recover from its free fall, but its production level remained at about 30 percent of its industrial capacity. Between 1994 and 1998, the Cuban economy recovered modestly as the GDP grew about 2.5 percent per year, despite an abysmal sugar harvest in 1994. The unemployment rate was estimated at about 25 percent. The state stores were nearly empty, and the black market provided nearly all items.
In 1995 the Cuban government changed economic policy again, this time with a capitalist goal: to bring more foreign currency into Cuba. Without Soviet aid, Cuba had to purchase, among other things, machinery, petroleum, some agricultural products, automobiles, medicines, and soap. Castro initiated a few joint ventures with foreign investors and independent foreign operations in businesses such as transportation, tourism, and communications in the amount of $2.1 billion in 1995. To jump start the economy, the government encouraged tourism and biomedical products. Tourism brought in about $1 billion in 1995, adding to Cuba’s foreign exchange reserves and lessening the trade imbalance. State-owned firms managed their own accounts in foreign currency without restraints from JUCEPLAN. The government also, at least in theory, made state foreign exchange funds available for loans to domestic business. By 1998, however, no other activity had replaced the profitability of sugar.
By the mid-1990s, government fiscal policies were focused on cutting costs. The government cut back public-sector spending and reduced the deficit. Cuba also limited the size of government agencies and set standards for their efficiency. The government also cut military and law enforcement.