By Jeff Franks
HAVANA | Thu Dec 2, 2010 9:26am EST
Dec 2 (Reuters) - The success or failure of Cuba's economic reforms will
be the key issue to watch in the next year as the government moves to
strengthen the economy and ensure survival of the island's communist
system once the current aging leadership is gone.
The cash-strapped government is looking for ways to cut spending while
increasing income, and could get long-term help if offshore oil
exploration slated to begin in 2011 is successful. [ID:nN05129084]
All this occurs against a backdrop of only slightly tempered hostility
with the United States, including an ongoing dispute over a U.S.
contractor held by the Cubans on suspicion of spying. [ID:nN24221723]
President Raul Castro has taken aim at Cuba's chronic economic problems
with plans to slash 500,000 jobs from state payrolls by March while
expanding the private sector and encouraging less reliance on the state.
About 200,000 of those jobs are expected to shift over to employee-run
cooperatives that will be created at businesses currently operated by
the state. The government also has begun issuing 250,000 new licenses
for self employment and for the first time, the self-employed will be
able to hire workers. [ID:nN13223894] So far, 30,000 licenses have been
Self employment was first allowed in communist Cuba during the economic
crisis that followed the collapse of the Soviet Union, the island's main
ally, in 1991. There were 143,000 licensed self-employed in 2009, and
many more illegal ones.
The government's bet is that it can create enough jobs quickly enough to
absorb the laid-off government workers, most of whom it says were not in
productive positions. After the first 500,000 jobs are cut, it plans to
slash another 500,000 in the next few years, likely leading to more
private sector expansion.
Castro announced the ruling Communist Party would hold in April its
first Congress since 1997 to ratify the changes, many of which are
already in action. Before the Congress, Cubans are to provide input at
forums across Cuba. [ID:nN09241030]
The reforms are the biggest since Raul Castro succeeded brother Fidel
Castro as president in 2008, and come with many questions.
Among them are whether the cumbersome government bureaucracy can move
quickly to implement the plan and whether the new entrepreneurs will be
too handicapped by regulations, taxes and lack of credit to succeed.
Also, do the planned job cuts present the danger of many people ending
up without work and if so, what will the consequences be in a socialist
country where people basically have been guaranteed employment for decades?
But the key question is whether the reforms will accomplish what Castro
wants -- more productivity, a stronger economy and, ultimately, the
survival of communism, installed after his brother took power in a 1959
revolution. He has said maintaining the system is key to protecting
Other reforms have been made, particularly in agriculture, with the same
goal in mind. Castro, trying to increase output and reduce dependence on
budget-draining food imports, has leased fallow lands to private farmers
and taken other steps, but food production was down 7.5 percent in the
first half of this year, as farmers complain that they are still too
stifled by the state.
What to watch:
-- How quickly the government moves to implement reforms.
-- The numbers and performance of the newly self employed.
-- The effects of government layoffs.
-- Agricultural production.
CASH SQUEEZE, SOURCES OF REVENUE
Cuba, hit hard by hurricanes in 2008 and by the global financial crisis,
has been so short of hard currency that it stopped paying most of its
bills and froze Cuban bank accounts of many foreign businesses two years
ago. [ID:nN02159253] The situation has eased, but is not yet resolved.
To avoid future cash shortages, Castro has cut spending and sought more
income for the state, which controls 85 percent of Cuba's economy. He
has slashed imports by 30 percent.
Cuba is hoping to collect taxes from the newly self-employed and boost
revenues from old standbys like nickel exports and tourism, two of its
top hard currency earners.
The government has said it will allow construction of golf course
developments, with the goal of attracting wealthier tourists.
[ID:nN04118234] The courses will be a small piece of the tourist
industry in Cuba, but, given golf's image as the leisure sport of the
rich, a larger symbol of how far Cuba is prepared to go to improve its
The government also hopes to one day get more American tourists, should
the U.S. ease or eliminate the ban on most travel to Cuba under its
48-year-old trade embargo against the island. Republican gains in the
U.S. Congress in the Nov. 2 mid-term congressional elections make
changes less likely.
In a potentially game-changing development, a consortium led by Spanish
oil firm Repsol YPF (REP.MC) is expected to drill an exploratory well in
Cuba's part of the Gulf of Mexico in 2011. It previously drilled an
offshore well in 2004, but said it did not find oil in commercially
The drilling rig to be used, which has been under construction in China,
will be passed on to other companies such as Malaysia's state-owned
Petronas and a unit of India's ONGC (ONGC.BO) to explore in blocks they
have leased in Cuban waters.
The U.S. Geological Survey has estimated Cuba has about 5 billion
barrels of oil offshore, but Cuba says it may have 20 billion barrels.
Cuba currently depends on imports from its oil-rich socialist ally
Russia's state oil company Zarubezhneft has said it plans to begin
exploration next year in two blocks adjacent to Cuba's coast.
[ID:nN03329371] A unit of China National Petroleum Corp. is set to begin
a $6 billion upgrade of Cuba's Cienfuegos refinery, with financing
mostly by China's Eximbank, backed by Venezuelan oil. [ID:nN22266891]
What to watch:
-- Possible U.S. moves to ease its ban on travel to Cuba.
-- Movement of nickel prices, start of golf course projects.
-- Repsol's second deep water exploratory well in Cuba.
-- China's growing presence in Cuba energy sector
Cuba's relations with the United States have dominated events on the
island for more than a century. During the last five decades of open
hostility, the United States has tried to unseat the Castro brothers
through subversion, assassination, coercion and a half-baked invasion.
The long-standing trade embargo meant to topple the Castros through
economic strangulation remains in place despite its lack of success.
Cuba has used it to gain international support by casting itself as
David versus an overweening Goliath, and at home as a scapegoat for its
economic problems. [ID:nN26150816]
Despite modest changes at the beginning U.S. President Barack Obama's
administration, U.S.-Cuba relations have thawed only slightly and
near-term prospects for improvement look dim due to Cuba's detention of
U.S. aid contractor Alan Gross.
Gross has been held since Dec. 3, 2009 on suspicion of espionage and
providing illegal satellite communications equipment to government
opponents, but has not yet been officially charged with a crime. The
United States says he was only helping Jewish groups set up Internet
access, but Cuba is suspicious because he was working for a U.S.
federally-funded program seeking to promote political change on the island.
The U.S. government says it will take no major initiatives to improve
relations with Cuba as long as Gross is held. Cuba may want to hold him
until it gets something in exchange, such as the return of five Cuban
agents imprisoned in the U.S. or an end to the programs like the one
that sent Gross to Cuba.
The Cuban government is in the process of releasing political prisoners
and sending them to Spain to resolve one of its biggest problems with
the international community and to get its opponents out of the country.
While U.S. reaction has been guarded, the 27-nation European Union has
instructed its foreign affairs chief to explore improved relations with
Meanwhile, Cuba has steadily built relations with other key countries,
among them China, Brazil, Russia and Spain. It has a special
relationship with top trading partner Venezuela, whose President Hugo
Chavez is close to Fidel Castro and agreed in November to extend
economic cooperation another 10 years.
What to watch:
-- Fate of Alan Gross.
-- Continued release of political prisoners.
-- U.S. and EU reaction to Cuban reforms. (Editing by Kieran Murray)