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Cuba Before Fidel

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A detailed look at Cuba's economy before Fidel Castro. An economy that was semi-industrialized and showing robust growth.


BY ERIC N. BAKLANOFF


In 1958, on the eve of the Cuban Revolution, the United States was purchasing two-thirds of the island’s exports and was supplying 70 percent of its imports. Next to Brazil, Cuba was the most important Latin American source of agricultural imports of the United States. During the five-year period, 1954-1958, the United States purchased three-fourths of Cuba's tobacco and 60 percent of its sugar.(...)


About 80 percent of the Cuban land mass was under cultivation or used for grazing in the 1950s. The top soil is exceedingly fertile, deep, rich and well-watered, and the topography favorable to widespread use of farm machinery. An absence of climatic variation, however, limits the island to the cultivation of tropical and semi-tropical crops and to livestock raising. Domestic production supplied about 70 percent of Cuba’s food consumption. (...)

 

Cuba was one the most capitalized nations in Latin America. The World Bank Mission observed that:


In the 161 sugar centrales, in the excellent central highway, in the extensive system of public and private railroads, in the harbor installations, in the cities, and their utilities, Cuba has the basis of exceptionally fine equipment for modern economic activity and further
development.

An extensive, well-integrated system of highways provided the basis for rapid postwar advance in the island's motorized transport industry. In 1957, Cuba’s real income per capita (national income divided by population) was $378, or fourth, in Latin America. Only Venezuela, Argentina, and Uruguay ranked above Cuba and even Spain ($324) and Portugal ($212), failed to reach Cuba’s level. Except for Venezuela, Cuba probably enjoyed the highest per capita income among all countries in the wet tropical zone, extending from the Tropic of Cancer to the Tropic of Capricorn.

Other measures provide a better approximation of the degree to which real income was shared among the population. Cuba ranked third in Latin America on a per capita basis in daily calorie consumption, steel consumption, paper consumption and radios per 1,000 persons. In 1959, Cuba had one million radios and the highest ratio of television sets per 1,000 inhabitants. (...)


The level of wages in Cuban manufacturing contributed significantly to the nation’s relatively high living standards. In 1957, wages averaged $6 for an eight-hour day in manufacturing as a whole and ranged from over $4 for unskilled workers to $11 for skilled employees in Cuba's sugar mills. Real wages in Cuba were higher than any country in the Western Hemisphere, excepting the United States and Canada.


Between 1949-58, the average annual share of national income paid in workers’ remuneration (wages, fringe benefits, pensions) was 65 percent, and it showed a noticeable tendency to rise. Surprisingly by 1958, as [Carmelo Mesa-Lago notes in Revolutionary Change in Cuba, University
of Pittsburgh Press, 1971], Cuba’s percentage was surpassed by only three developed Western countries: Great Britain, the United States, and Canada. (...)


Cuba’s new development strategy aimed at reducing the economy’s dependence on its traditional export staple while stimulating industrial and agricultural diversification. Several measures were taken by the government to give substance to this diversification strategy. In 1952, Cuba negotiated a new trade agreement with the United States, superseding the one in force since 1934. This agreement, notes Antonio Jorge [in The Cuban Economy: Dependency and Development, University of Miami North-South Center for the Research Institute for Cuban Studies, 1989] was favorable to Cuba for it allowed the country moderate protection for its infant industries while simultaneously promoting diversification of exports to old and new markets.

Unlike, e.g., Chile, Argentina, and Uruguay which—following the so-called ECLA (CEPAL) Doctrine—pursued strongly inward-looking trade strategies, Cuba in the late 1950s chose the more prudent middle course. An Industrial Promotion Law was enacted in 1953 that granted, among other things, tax incentives to new industries. Finally, credit was mobilized through official
development banks set up during the early fifties. These included the Banco de Fomento Agrícola e Industrial de Cuba (1951); the Financiera Nacional de Cuba, organized in 1953 mainly to provide credits for public works; the Banco Cubano de Comercio Exterior, founded in 1954 to encourage nontraditional exports; and the Banco de Desarrollo Económico y Social, established in 1955 to administer the government’s development program. The public works projects included the construction of a good water system for Havana, a toll road and the tunnel under Havana Bay, and a new highway, the Vía Blanca.


Cuba’s balance of payments position was strengthened in the 1950s by the development of the island’s tourist industry and the growth of export earnings for products other than sugar. The expanded operations of the U.S. government-constructed Nicaro Nickel Co. and the Moa Bay Mining Co., a subsidiary of Freeport Sulphur Company, assured Cuba a position as a major supplier of nickel in the world. Hotel construction from 1952 to 1958 almost doubled the existing hotel existing hotel capacity in Havana and other major cities. In addition, numerous hotels and motels were under construction in 1958, involving a total investment in excess of $90 million
and a projected capacity of 6,066 rooms. Foreign tourist expenditures in Cuba increased from $19 million in 1952 to a yearly average of $60 million in 1957-58. Four large hotels, the Habana Hilton, the Capri, the Habana Riviera, and the Nacional— owned by U.S. citizens or corporations—figured importantly in the island’s expanded capacity to accommodate

tourists seeking first class service.

 

Cuban agricultural diversification gained momentum after 1952 and was reflected in gains in exports of farm and livestock products other than sugar. Rice production, advancing from 118,000 tons in 1951 to 261,000 tons in 1957, was a notable case of foreign exchange savings. The livestock industry, second only to sugar as a source of farm income, prospered during the fifties; Cuba's cattle herd was built up rapidly from about 4 million head in 1952 to 5.8 million head in 1959.38 Starting from a small base, Cuba’s fish catch grew notably, from an annual average of 8,300 metric tons (MT) in 1948-52 to 22,600 MT in 1957.


Industrial diversification gained momentum in the 1950s with particularly sharp increases registered from 1952 to 1957 in the output of cement (56 percent), rubber tires (66 percent), and chemical fertilizers (46 percent).39 Production of electric energy grew at a cumulative annual rate of 10.6 percent from 1952 to 1957. Rapid advances also were made in the manufacture of paper from bagasse, in flour milling, and the dairy products industry. Cuba achieved self-sufficiency in petroleum refining with a capacity at the end of 1959 of 83,000 barrels per day supplied exclusively by two U.S. affiliates, Texaco and Exxon, and the Royal Dutch-Shell group.

According to the Banco Nacional, investment in Cuban industrial installations exceeded $600 million from 1952 to 1956. Of this amount, $324 million was invested in 154 new plants and $288 million in the expansion of existing plants. The magnitude of these industrial undertakings can better be appreciated by comparing the $600 million investment increment with the accumulated industrial capital stock in the sugar sector of $1,159 million (cited earlier): the new investment in diversification equaled over half the capital in the sugar industry. In its review of Cuba’s economy, the U.N. Economic Commission for Latin America observed that a significant number of projects were underway in 1957:


The purpose of these investment programs in the manufacturing sector is to make Cuba completely self-sufficient at an early date in cement, tires and tubes, glass containers, aluminum sheet and copper wire and cables, and relatively self-sufficient in light steel products.


During the latter 1950s Cuba’s steel mill, Antillana de Acero, was mounted and operated by a Cuban entrepreneurial group (...)


With 1953 as a base year, the index of manufacturing production (excluding sugar) rose from 133 percent in 1958 to 145 in 1959.43 This robust growth rate during the first year of the revolutionary regime suggests that many of these investment projects were still in their gestation phase when Batista fell from power. Examples include the Moa Bay plant which started operations in 1959 and the Cuban Telephone Co. which, in 1957, began a five-year development program.


From 1953 to 1957, the Cuban economy experienced a sharp upward trend in real capital formation, both private and public, signifying growing autonomy of this key variable from the exigencies of international trade. As Table 1 indicates, real gross investment increased from 220 million pesos in 1953 (about 11 percent of Cuba’s GDP) to an average annual level exceeding 480 million pesos in 1956-57 (nearly 19 percent of GDP). The accelerated capitalization of the Cuban economy in sectors other than sugar production is also reflected in the changing composition of imports. The purchase abroad of fixed capital goods (Table 2) climbed steeply from less than $100 million (20 percent of total imports) in 1953 to an average of $207 million annually (27 percent of imports) during the two years 1957-58.

Of the fixed capital goods purchased abroad in 1957-58, 63 percent was invested in industry, 10 percent in diversified agriculture, 13 percent in motorized transport, and an equal share represented construction equipment. The share of consumer goods, mainly foodstuffs, in total imports fell from 46 percent to 1953-54 to 38 percent in 1957-58. These data […] indicate that Cuba, in the 1950s, made important gains in diminishing its dependency on the sugar sector.


U.S. DIRECT INVESTMENTS

Following World War II, Cuba's investment climate was one of the most favorable in Latin America. The Constitution of 1940 guaranteed the protection of property and established the judicial procedure for special cases involving expropriation. Property could be expropriated only for just cause involving a public utility or social interest and, then, only through prior indemnification of the owner in cash as determined by the courts.


In sharp contrast to the more general postwar experience in Latin America, Cuba enjoyed financial stability through the period analyzed. The cost of living remained relatively stable, the peso continued at par with the U.S. dollar, and foreign exchange operations
were free of control. The magnitude of the nation's external public debt45 and the debt-service ratio were of minor importance throughout the 1947-1958 period. Profits, interest, and other factor payments could be freely remitted abroad and the risk of currency devaluation was negligible.


From 1946 on, new U.S. investments in Cuba assumed a highly diversified pattern and flowed into a spectrum of Cuba’s economic activities: infrastructure, manufacturing and commerce, petroleum refining, diversified agriculture, mining, and the tourist industry. The augmented production capabilities represented by U.S. subsidiaries and branches in Cuba were primarily directed to meet the requirements of the local market. Of the $403 million increment in U.S. direct investments in 1946-59, petroleum refining accounted for $129 million, manufacturing for $75 million, public services for $60 million, and commerce for $32 million. New investments in diversified agriculture, mining, and hotels account for the remaining $107 million. These U.S. business investments in Cuba were decisive in the growth of electric power and telephone service, in the rapid advance of petroleum refining, and the mining of nickel, and helped support the diversification and growth of manufacturing. (...)


Total sales of Cuban subsidiaries and branches of U.S. firms were about $730 million in 1957, of which $456 million (63 percent) were directed to the local market and $273 million (37 percent) to foreign markets. Of the $310 million agricultural sales, 80 percent were exported (principally sugar), and the balance reflected U.S. operations in cattle ranching, rice and tobacco growing. The preponderant share of the $150 million of manufactures sold by the U.S. affiliates (86 percent) was absorbed by the Cuban market, as were also the sales of petroleum products (98 percent). Exports of manufactured goods ($21 million) comprised mainly processed nickel. The services provided by U.S. affiliates—electric power, telecommunications, and public service railroads— were sold exclusively to Cuban customers ($118 million).


U.S. firms operating in Cuba also made critical contributions to the nation’s balance of payments position in 1957 through export earnings ($273 million), net capital inflows ($88 million), and foreign exchange saved through import substitution ($130 million). Offsetting these contributions were income remittances plus fees and royalties (totaling $56 million) and imports (other than imports of trading companies or of petroleum to be processed in Cuba) amounting to roughly $100 million. By this calculation, U.S. companies accounted for a direct net foreign exchange gain or saving to Cuba on the order of $335 million. (Analytically, one should deduct from this value an allowance for net production which would be yielded by total resources operating without the capital and organization provided by the U.S. subsidiaries. Considering the (a) existence of substantial slack in the Cuban economy and (b) the unlikelihood of Cuban entrepreneurs to engage in large-scale mineral development, one can conclude that the above-noted adjustment would not significantly alter the value added to Cuba's real national income.)


The U.S. subsidiaries in Cuba employed an estimated 160,000 persons in 1957 and of 2,000 supervisory, professional, and technical personnel, less than 500 were sent from the United States.48 Foreign subsidiaries were cited by the World Bank Mission as “among those employers who pay the highest wages and who, for the most part, scrupulously observe Cuba’s labor legislation.” While employing only seven percent of Cuba’s labor force, the U.S. companies in 1957 accounted for one-third of the island’s merchandise export earnings and a little under one-fifth of total government revenues. (…)


The participation of U.S. direct investments in the structure of the Cuban economy in the latter 1950s was considerable, as indicated by the following approximate shares: electric power and telephone service (90 percent), raw sugar production (37 percent), commercial banking (30 percent), public service railways (50 percent), petroleum refining (66 percent), insurance (20 percent), and nickel mining (100 percent).


Notwithstanding these large U.S. equity holdings in Cuba, it is very important to observe that private Cuban groups succeeded in winning ownership and control over economic activities formerly dominated by U.S. and other foreign investors. The outstanding cases are sugar, banking and insurance, and air transportation. A majority of the stock in the leading airline, Compañía Cubana de Aviación, originally a wholly-owned U.S. subsidiary, passed eventually into

Cuban hands.


From the 1930s on, Cubans purchased a large number of sugar mills from U.S., Canadian, Spanish, Dutch, and French interests. [..] The U.S. share of Cuban sugar production declined from 62 percent in 1935 to 37 percent in 1958. Other foreign investors, whose sugar mills produced 25 percent of Cuba’s sugar in 1935, had sold virtually all of their holdings by 1958. The divestiture of sugar mills by foreign enterprises was accompanied by the transfer of cane land to Cuban ownership. Significantly, the small farmers grew only nine percent of Cuba’s cane in 1932, but by 1958 their share was well over 50 percent.  In consequence, Cuban capital controlled three-fourths of the sugar mills; and these, in turn, accounted for 62 percent of the island’s sugar

production in 1958. Local business interests, whose share of Cuba's sugar production had been reduced to a mere 13 percent in 1935, thus regained their position of dominance after the Second World War.


Transfer of these foreign assets into Cuban ownership proceeded through normal commercial channels and procedures—a manifestation of the progressive maturation of the island’s business community and postwar prosperity.


ROBUST ECONOMY

On the eve of the Cuban Revolution, the island had an essentially semi-industrialized market economy with a strong orientation toward the United States its predominant trading partner and external source of direct investment. Cuba’s relatively small population (6.5 million in 1958), its location on the threshold of the United States, the largest “common market” in the world with which it had concluded preferential trade agreements; its tropical climate; and specialized resource endowment—these and other factors conditioned the island’s intimate commercial and financial ties with the United States.

(…)


The newly-installed Castro regime inherited an economy undergoing robust investment in the nonsugar sector. Several industrial projects were still in their development phase and continued into 1959. Domestic and U.S. enterprises clearly were mobilizing their capital resources in preparation for the anticipated Caribbean tourism boom of the 1960s of which Cuba could have been the principal beneficiary.

 

Eric Baklanoff is a research professor emeritus of economics, finance and legal studies at The University of Alabama. This column is based on an excerpt from his presentation Cuba On The Eve Of The Socialist Transition: A Reassessment Of The Backwardness-Stagnation Thesis presented at the 8th Annual Meeting of the Association for the Study of the Cuban Economy (ASCE) in Miami, Florida, August 6-8, 1998. Republished with permission from the author.



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