Cuba: Not What Investors' Dreams Are Made Of

Fidel Castro Ruz's shoot down of civilian aircraft put Cuban dreams of American investors on hold. Even before, however, the reality of Cuban investment opportunities differed greatly from the dream.

Few Americans realize how tightly Mr. Castro holds the reins on the Cuban economy, or what desperate shape his economy is in. Since 1962, basic consumer goods have been rationed. Every Cuban adult is allotted seven eggs per month, one pound of chicken, one pound of beans, four pounds of rice, and six liters of milk. In all, more than 150 consumer products are rationed. To get these meager allotments, families must register with the National Rationing Board and buy their entire allotment at the same store every month, at government-set prices.

Castro's socialist stranglehold on the Cuban economy extends to the labor market as well. The government sets wages for everyone and decides who works where. All productive property is owned by the state. Cuba does permit self-employment in roughly 100 occupations, ranging from shoe-shiner to ox-cart driver. Licenses for self-employment are granted, however, only if local community leaders vouch for the person's moral character and the necessity of self-employment. Doctors, teachers, and university graduates are forbidden to be self-employed.

One has to wonder how such a tightly regulated economy could have survived so long, especially an economy with few natural resources other than abundant sunshine. The answer is simple: Russian subsidies. Shortly after Castro took power in 1959, Russia became Cuba's benefactor, purchasing Cuba's sugar at inflated prices and selling Cuba the oil, tractors, and fertilizers it needed at below-market prices.

When the flow of Russian aid ceased in 1992, the Cuban economy imploded. Without fuel, fertilizer, tractors, or spare parts Cuba could not harvest its all-important sugar crop. The 1995 crop was less than half the 1989 crop and the smallest since the 1940s. Factories are running at 30 to 35 percent capacity for lack of parts, machinery, and power. Electricity is available only four to six hours a day in rural areas and 10 to 12 hours in urban centers. Ox carts are used to transport people and products because gasoline is so scarce.

Castro has been scrambling for new props to hold up his slumping economy. He went hat in hand to China last year, but the Chinese agreed only to buy more sugar at market prices. Castro turned next to foreign investors. But having seen how quickly Castro can change the terms of a deal, they distrust him.

Castro has found a third source of dollars in his own country. Six hundred newly opened "dollar stores" sell "luxuries" such as jam, rum, or household appliances to all comers. Ironically, these stores have turned the flow of remittances from Cuban Americans into the most important dollar prop for the Cuban economy. That flow is diminishing, however, because of President Clinton's 1993 prohibitions and the newly expanded embargo.

Castro has to open up Cuba's economy in order to save it. But he doesn't see how he can loosen the reins without betraying the revolution. Private property threatens socialist equality by encouraging class distinctions based on wealth. Using the market rather than administered prices to allocate goods and labor threatens the socialist guarantee to satisfy everyone's basic human needs. The structural reforms needed to transform Cuba into a market economy demand a Faustian bargain that Castro doesn't want to strike.

Even if the door to markets in the United States opened, Castro couldn't preserve the failed socialist system. US investors would be no more eager than Spanish, Canadian, or Mexican investors to rush into Cuban projects until contract, property, currency, and trade reforms were in place. Even if everyone does want to build a hotel on Havana's fabled beaches, few will proceed until their property and management rights are secure.

Castro is running out of time. But until structural change comes, it doesn't make any sense to worry about missed investment opportunities in Cuba.