Cuba’s economic freedom score is 27.7, making its economy one of the world’s least free. Its overall score is one point higher than last year, reflecting slight improvements in fiscal and monetary freedom. Cuba is ranked at the bottom of 29 countries in the South and Central America/Caribbean region, and its overall score is significantly lower than the regional average.
Cuba’s state-run economy remains remarkably inefficient. As the largest source of employment, the government sector accounts for more than 80 percent of the labor force. The government has eased the rules on private employment in an effort to reshape the economy and improve efficiency, but many details of the reform are unclear.
Entrepreneurs have long been shackled with heavy regulations and tight government control. No courts are free of political interference, and private property is strictly regulated. Lack of transparency and excessive bureaucracy limit trade and investment. In an effort to court more foreign investment, Cuba has been building closer tieas with China and Venezuela.
A one-party Communist state with a command economy, Cuba depends heavily on external assistance (chiefly oil provided by Venezuela’s Hugo Chávez and remittances from Cuban émigrés) and a captive labor force. The regime refuses to allow free elections and restricts freedom of expression, property ownership, and other basic rights. The government continues to suppress all efforts to promote democratic change, and there are hundreds of political prisoners. In February 2008, Fidel Castro’s 75-year-old brother Raul became head of state, but an ailing Fidel reportedly still controls the Communist Party and state decision-making. Little reliable economic information is available, and official figures on per capita GDP may not reflect reality. The agricultural sector is devastated, tourism revenue has been falling, and the government has refused to introduce meaningful economic reform despite widespread poverty.
Business Freedom10.0 no change
The overall freedom to form and run a business remains constrained by the state. Only limited private entrepreneurship exists. The application of regulations is inconsistent and non-transparent.
Cuba’s weighted average tariff rate was 8.9 percent in 2009. The trade regime remains largely non-transparent, customs corruption is common, rules and regulations are burdensome, and imports and exports are dominated by the government. Twenty points were deducted from Cuba’s trade freedom score to account for non-tariff barriers.
Cuba has a high income tax rate of 50 percent. The top corporate tax rate is 30 percent (35 percent for companies with entirely foreign capital). In the most recent year, tax revenue as a percentage of GDP was 41.2 percent. Other taxes include a tax on property transfers and a sales tax.
Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending climbed to 78.1 percent of GDP, reflecting continued state dominance of the economy. Expansive government employment commitments are an obstacle to sound fiscal management.
Officially reported inflation has been low, averaging 1.1 percent between 2007 and 2009. Year-end 2009 deflation of –0.5 percent was achieved by suppressing food costs, but the removal of some goods from the food ration in the second half of 2010 is forecast to increase the year-end rate of inflation to 6.2 percent. The government determines prices for most goods and services and subsidizes much of the economy, although some private and informal-market retail activity is not government-controlled. Twenty points were deducted from Cuba’s monetary freedom score to account for measures that distort domestic prices.
Foreign investment must be approved by the government. The Foreign Investment Act theoretically guarantees transferability of profits to foreign countries; bans expropriation without compensation; allows transfer of ownership to other foreign investors; and permits three types of foreign investment: international association contracts, joint ventures, and totally foreign-owned companies. In practice, investment is inhibited by arbitrary and non-transparent regulation, discrimination against foreign and private domestic investment, and state control of the economy. Private-sector opportunities are limited. The government is aggressively pursuing recentralization of economic activity and maintains strict capital and exchange controls. Some restrictions have been loosened to permit investment commitments and credit lines from China and Venezuela. There is no foreign ownership of land.
Cuba’s financial sector remains underdeveloped, and access to credit for entrepreneurial activity is seriously impeded by bureaucracy and the shallowness of the financial market. Despite a decade of incremental changes, the government remains firmly in control. The Cuban peso is the domestic currency; a separate convertible peso is still required for foreign exchange and nonessential retail purchases. Over a dozen foreign banks have opened offices, but they are not allowed to operate freely. New products, such as travel and medical insurance and personal pensions, are being introduced. The government established a central bank in 1997 and converted the Banco Nacional de Cuba into one of a new set of state banks. Central bank authority was enhanced in 2005 to allow closer control of the use of hard currency and convertible pesos.
Cuban citizens may own land and productive capital for farming and self-employment. The constitution subordinates the courts to the National Assembly of People’s Power and the Council of State. The NAPP and its lower-level counterparts choose all judges. The law and trial practices do not meet international standards for fair public trials.
Freedom From Corruption
Corruption is perceived as significant. Cuba ranks 61st out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009. Customs officials reportedly have requested unauthorized fees or have confiscated the belongings of citizens legally residing overseas who were returning to Cuba after visiting relatives, and senior officials in large state-run tourism organizations have been jailed for corruption.
The formal labor market is not developed, and the government-controlled labor market has helped to create a large informal economy and “over-employment.” In an attempt to reduce labor market rigidity, the government implemented a measure to allow workers to hold more than one job. Its impact has been limited.