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US-CUBA TRADE ASSOCIATION Doing Business in Cuba Citrus Club, Orlando, Florida April 13, 2006. OVERVIEW OF CUBAN BUSINESS ENVIRONMENT Prepared by: Paolo Spadoni Stetson University. Cuban Economy: Introduction. Deep economic recession in early 1990s Fall of former Soviet Union

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us cuba trade association doing business in cuba citrus club orlando florida april 13 2006
US-CUBA TRADE ASSOCIATIONDoing Business in CubaCitrus Club, Orlando, Florida April 13, 2006



Prepared by: Paolo Spadoni

Stetson University

cuban economy introduction
Cuban Economy: Introduction
  • Deep economic recession in early 1990s
    • Fall of former Soviet Union
    • Beginning of “Special period in time of peace”
    • Intensification of US sanctions (Torricelli, Helms-Burton)
  • Economic reforms
    • International tourism, foreign investment
    • Legalization of US dollars (remittances)
    • Self-employment, agricultural cooperatives, free farmers markets
  • Slow but constant economic recovery since mid-1990s
    • Reforms: good results
    • Re-centralization of the economy (search for efficiency)
    • Closer relations with Venezuela and China (and US food sales)
cuba s gdp growth 1989 2005
Cuba’s GDP Growth (1989-2005)
  • Sources: CEPAL; EIU; Cuban Government.
  • 1990-93: GDP contracted by 40.1%
  • Positive performance since then, but growth rate has fluctuated substantially
  • Record GDP growth of 11.8% in 2005 with “sustainable social” formula
cuba s new gdp formula
Cuba’s New GDP Formula
  • “Sustainable social” GDP
    • Recognizes value added of subsidized social services (healthcare, education, sports) provided by Cuban state to its population and to citizens from other countries, mainly from Venezuela.
  • Cuba’s arguments
    • Traditional GDP formula designed for market economies
    • Assigns no added value to subsidized social services
    • Uses cost calculations that do not reflect “true purchasing power” of Cuban population
    • Wages are low, but citizens pay no rent, free healthcare and education, subsidized utility services and basic products
  • New formula: key issues
    • What added value is assigned to Cuba’s vast social safety net?
    • Profitability in a market system?
    • What countries are used as a reference?
cuban economy current situation
Cuban Economy: Current Situation
  • Good economic performance in 2005
    • Main reason: unprecedented earnings from exports of medical and educational services, particularly to Venezuela
    • Exports of G&S from $5.9 billion in 2004 to $8.7 billion in 2005
    • Other reasons: higher revenues from tourism and nickel exports
  • But economy negatively affected by:
    • Severe energy crisis and continuing drought
    • Two major hurricanes in 2005 causing losses of about $2 billion
    • Strengthening of US sanctions
  • Future economic challenges
    • “Energy revolution” (small electricity generation plants)
    • Housing program (construction)
    • Improvement of transportation sector
    • Fight against “corruption and illegalities”
    • Reducing income inequalities
international tourism in cuba 1993 2005
International Tourism in Cuba: 1993-2005
  • Source: Anuario Estadistico de Cuba; Cuban Ministry of Tourism. *Author’s calculations
  • 2005: tourist arrivals 2.3 million (+12%), revenues almost $2.6 billion (+10%)
  • Gross revenues per tourist in 2005 about 23% below 1995 level
cuba main export products 2000 2005 u s million
Cuba: Main Export Products, 2000-2005 ($U.S. million)
  • Sources: Oficina Nacional de Estadísticas; EIU. *Preliminary estimates
  • Export performance
    • Growing nickel revenues mainly result of higher international prices
    • But injection of financing and technology by foreign partners (China

and Canada) expected to lift production

    • Decline of revenues from sugar exports, growth of tobacco exports
    • Pharmaceuticals and biotech exports estimated at $300 million in 2005
  • Imports
    • Fuel (Venezuela), foodstuffs (US), machinery/equipment, chemicals
  • Cuba’s main trading partners
    • Venezuela, China (US fourth largest import partner in 2004)
foreign investment in cuba
Foreign Investment in Cuba
  • Cuba’s opening to foreign investment in early 1990s (handful of hotel and
  • oil exploration joint ventures)
  • After 1993, number of international economic associations (AECEs)
  • increased and expanded to different sectors of the Cuban economy
  • Since 1998, preference for AECEs that involve higher amounts of capital
  • and loan financing
active international economic associations 1993 2005
Active International Economic Associations (1993-2005)
  • Source: Cuban Ministry of Foreign Investment (MINVEC)
  • Number of AECEs dropped from 403 in 2002 to 258 in 2005 (-36%)
  • Cuban authorities: country has been concentrating on businesses with results
  • Number of JVs more suitable to Cuba’s current needs
authorized and dissolved associations by year of dissolution 1988 2005
Authorized and Dissolved Associations by Year of Dissolution (1988-2005)
  • Source: Author’s calculations from MINVEC data.
  • About half of dissolutions occurred in last 3 years (and less authorizations)
  • 60 AECEs in process of dissolution at the end of 2005
foreign direct investment in cuba in u s million 1993 2004
Foreign Direct Investment in Cuba in $U.S. million (1993-2004)

Sources: Cuban Central Bank, May 2002; EIU. *1994 data are cumulative to that year.

  • Cuban experts: committed FDI is more than $6 billion (about half delivered)
  • AECEs by sectors and country
  • Leading sectors: basic industry, tourism, construction
  • Leading countries: Spain, Italy, Canada
  • In terms of capital invested
  • Leading sectors: telecommunications, mining, and tourism
  • Leading countries: Canada, Italy, Spain
  • FDI priorities
  • Mining, energy, oil, sugar derivatives, biotechnology, tourism
  • Tourism
  • 49 hotels under management contracts with 10 foreign companies in 2005
cuba s business climate
Cuba’s Business Climate
  • Complaints by European investors (June 2002)
    • Excessive utility costs due to the state monopoly on services
    • Bureaucratic hurdles, payment delays
    • Expensive dollar payments to Cuban workers recruited by state-entity
  • Cuba’s stance
    • Rules of the game always clear (FDI complementary)
    • Efficiency through re-centralization, more revenues to the state
    • Increased ability of Cuban government to respect payment obligations
  • Recent developments
    • Focus on large investment projects
    • Decline in number of cooperative production agreements
    • Free Trade Zones development halted in 2003
    • Major FDI operations in oil and mining
    • Virtually all new FDI projects are with China and Venezuela
    • But still opportunities for investors from other countries
aeces operating abroad by geographical area percentage as of june 30 2003
AECEs Operating Abroad by Geographical Area (percentage as of June 30, 2003)

Source: Centro de Promocion de Inversiones (CPI), September 2003.

  • Cuba’s investments abroad increasingly important
  • Major biotech and pharmaceuticals projects in East Asia (China, Malaysia,
  • India), Middle East (Iran), and Africa (Namibia and several other countries)
main indicators of aeces 1993 2005
Main Indicators of AECEs, 1993-2005
  • Source: Cuban Ministry of Foreign Investment
  • Main indicators of AECEs have shown constant progress
  • 2005: Increase in total sales, exports, domestic sales (even with fewer JVs)
  • FDI fostered competitiveness of Cuban production, import substitution
foreign investment big players in cuba
Foreign investment: Big Players in Cuba
  • A limited number of joint ventures with foreign partners have a large economic impact
  • 5 joint ventures account for vast majority of export revenues of AECEs
    • Corporacion Habanos S.A. (tobacco, Altadis)
    • Havana Club International S.A. (rum, Pernod Ricard)
    • Compañia Azucarera Internacional S.A. (sugar, unknown)
    • ETECSA (telecommunications, Telecom Italia)
    • Sherritt International (nickel)
  • Increasing dissolutions: little negative effect as long as big players continue to invest in Cuba
exports of aeces 1995 2005 as percentage of cuba s total exports of goods and services
Exports of AECEs, 1995-2005(as percentage of Cuba’s total exports of goods and services)
  • Sources: Author’s estimates from MINVEC and CEPAL data.
  • Important presence of FDI in oil, mining, and energy production
  • Foreign participation has substantial influence over the production and
  • marketing for five largest export sectors (sugar, nickel, tobacco, rum, fishing)
  • Cuban economy is improving
    • Increased foreign exchange earnings (first current account surplus)
    • New revenues from export of medical services (Venezuela)
    • Tourism, nickel exports on the rise, soft credits from China
  • Translating growth into tangible benefits for population
    • State investments in energy, housing, transportation, consumer products
    • More food imports,raising wages and pensions
    • Reducing gap between those with/without access to hard currency
  • Business environment
    • Cuba’s closer relations with Venezuela and China
    • Re-centralization of the economy
    • More controls, but also more efficiency?
    • Preference for large investment projects (with results)
    • Strong presence of FDI in Cuba’s most successful industries
    • Brightest investment opportunities in basic industry and tourism