Castro's Cuba feels the post-Soviet cold

Cuba must ease restrictions on small businesses and co-operatives to revive an economy suffocating under the impact of foreign exchange shortages, according to a study to be published soon by the UN Economic Commission on Latin America.

The draft of the Eclac study, prepared in conjunction with Cuba's state-run National Institute for Economic Research, says the country's isolation from international capital markets and inefficiencies linked to state management - as well as the continuing impact of US sanctions - are partly to blame for the island's problems.

After noting that growth slowed to 3 per cent in 2001 and 1.1 per cent last year, the report says "new economic policy actions are required to stimulate internal reactivisation forces and achieve more productive dynamism with macroeconomic stability."

In the early 1990s President Fidel Castro's government initiated a cautious opening to foreign investment, legalised some family-run businesses and the dollar, turned to tourism and began a gradual decentralisation of the command economy after the gross domestic product declined 35 per cent.

However, Cuba's estimated 180,000 self-employed work under tight control and in the face of constant pressure from the authorities.

Overall in spite of a steady recovery of economic growth, standards of living remain well below levels achieved before the collapse of the Soviet Union and infrastructure continues to crumble. Public transport is a particularly serious problem, with bus and train services running at less than a third of the level of 1989.

The study echoes the conclusions of similar research published earlier this year by the Centre for Study of the Cuban Economy, a Havana University think-tank, and suggests controls must be eased.

The earlier report, too, urged greater liberalisation, arguing that the reforms were "exhausted, and in need of new conditions (deregulation) to function."

However, all the indications are that the government intends to strengthen state domination of the economy, partly because rising nickel prices and a rebound in the tourism industry are easing immediate economic difficulties.

Juan Triana, director of the centre at Havana University, said the economy had demonstrated surprising resilience this year despite the foreign exchange shortage.

"Even with a tense foreign exchange situation and the sugar harvest's worse-than-expected results, the forecast growth of 1.5 per cent will be met, and perhaps a bit more. Next year we should see moderate recovery resume," he said.

Tourism - which accounts for about 42 per cent of economic output and close to 50 per cent of hard currency earnings - is recovering from the slump that followed the September 11 2001 terrorist attacks in the US. Tourist numbers have risen by 15 per cent so far this year. Nickel prices have doubled over the last 18 months to more than $10,000 per ton, boosting revenues from an industry that has tripled production over the last decade.

Business at Cuba's state-run dollar stores was up 15 per cent through June and should top $1.3bn (EU1.1bn, £779m) this year, according to an internal survey of the country's thousands of retail outlets. The stores were established in the 1990s to capture the family remittances, tips and bonuses that flowed into the population's hands after the US currency was made legal tender along side of the peso.

Mr Triana said high oil prices continued to drag down economic performance, as Cuba still imports 50 per cent of its minimum fuel requirements - although that is down from close to 100 per cent a decade ago. Oil and gas production are now the equivalent of between 80,000 and 90,000 barrels a day and local fuel powers 100 per cent of electricity generation.

An agreement with Venezuela to take 53,000 b/d on preferential terms has worked well this year, after being interrupted for six month of 2002 by coup attempts and strikes in the South American country.

Under the deal, 20-25 per cent of payments are due over a 17-year period as long as oil prices remain above $24 per barrel.

Foreign exchange shortages make the economy extremely vulnerable, however. Cuba is not a member of the IMF or any other multilaterals reulting on its now more than $11bn in foreign debt in 1986. As one Havana-based diplomat noted: "They have no access to medium- and long-term funding to ride out any sudden drop in foreign exchange earnings or natural disaster."

Bush's Cuban quandary***The issue dividing these carefully jousting factions is how Cuba should represent itself to the outside world at a time when its economy is in tatters and it desperately needs foreign friends to come to its aid. Recent arrests, imprisonment of dissidents, and even political executions have soured opinion in European countries like Spain, Italy, France, and Germany where Castro once could find some sympathizers. Meanwhile, President Bush is hanging tough against the normalization of relations between the US and Cuba, which might open the floodgates to trade and travel and generate an inflow to Cuba of desperately needed American dollars.

One Republican senator, Norman Coleman of Minnesota, visited Cuba a few weeks ago in a mind to vote for lifting the sanctions. But after meeting with dissidents, he changed his view. The crackdown in Cuba has also caused slippage of support in the House for lifting the US ban on travel to Cuba, which some economists think could funnel more than $500 million a year into that country. Last month, the House voted 227 to 188 to lift the ban, but support is down from 262 who favored it last year. The president is opposed to such liberalization and, last week, pledged tighter enforcement of the embargo.

"Cuba must change," Mr. Bush told Cuban exiles and anti-Castro groups, and he said he is setting up a government commission to help move Cuba to democracy whenever Castro leaves power. Cuban exiles are a critical Florida voting bloc in the upcoming presidential election.

This was not the softening in the US position that Castro deems essential if he is to ease his terrible financial crisis. One former confidant of Castro says the Cuban leader is now confronted by a dilemma. On the one hand, he could woo Bush by offering a carrot with the concessions apparently being advocated by some of the more pragmatic supporters in his entourage. This could involve going forward with the referendum urged by Oswaldo Paya and the other petition signatories.

The alternative, says this source familiar with Castro's thinking, is to brandish a stick at the US by "raising the ante." He could unleash a flood of Cuban refugees in the direction of the US, thus creating a "massive migration crisis" in the midst of the presidential election campaign. That is a prospect the president cannot afford to take lightly. ***

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