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    Updated June 22, 2012, 11:16 p.m. ET

    For Cuba, Chávez's Health Is a Vital Statistic


    MEXICO CITY—For more than a year, Venezuelans have fretted over how they

    will fare as their charismatic president, Hugo Chávez, faces dual

    battles of cancer and a fall election. But Mr. Chávez's fate may pose an

    even greater cause of concern in another country—Venezuela's Communist

    ally, Cuba.

    In more than a decade of friendship between Mr. Chávez and Cuba's

    rulers, Venezuela has sent cash and oil subsidies worth billions of

    dollars a year. Those handouts could come under threat without Mr.

    Chávez in power to back them—showing how the flip side of Venezuelan

    largesse is a deep potential Cuban vulnerability.

    In 2010, Venezuela accounted for at least 40% of Cuba's overall trade in

    goods, up from 27% the year before. That figure was more than the trade

    levels of the next five countries combined.

    Overall, Venezuelan assistance and trade with Cuba accounted for up to

    22% of Cuba's annual economic output in 2010, according to Carmelo

    Mesa-Lago, a professor emeritus at the University of Pittsburgh and an

    economist who is writing a book about the Cuban economy.

    "It's hard to imagine that another country would enter into such a large

    relationship as this," said Philip Peters, a Cuba analyst at the

    Lexington Institute, a Virginia-based policy group.

    The extreme situation has drawn comparisons to Cuba's relationship with

    the Soviet Union, which underwrote the Cuban economy for decades until

    its sudden collapse in 1989. What followed was what Cubans call the

    "Special Period" of the 1990s, during which the Cuban economy contracted

    35% in three years, leading to rationing of food and electricity.

    Cuba is on more solid footing than it was then. But it still faces the

    U.S. economic embargo, and economists say the ending of Venezuelan

    largess would be a massive blow.

    "This could be a disaster," Mr. Mesa-Lago said. "If this help stops,

    industry is paralyzed, transportation is paralyzed—and you'll see the

    effects in everything from electricity to sugar mills."

    Mr. Chávez has long called Fidel Castro, Cuba's retired dictator, a

    father figure and mentor. For 12 years, the Venezuelan president has

    propped up the ailing island's economy with generous subsidies. They

    include roughly 105,000 cut-rate barrels of oil a day—about half of

    Cuba's energy needs for petroleum, economists believe—and cash payments

    for a stream of Cuban doctors, sports trainers and teachers who work in


    Under the arrangement, Venezuela pays the Cuban government $135,000 a

    year for each doctor it sends over, 27 times the salary of the average

    Venezuelan public doctor, Mr. Mesa-Lago estimates. Cuba gets similar

    payments for sending teachers and sports trainers.

    The oil arrangement is also unusual: Not only does Venezuela sell the

    oil to Cuba at what is believed to be submarket prices, it also extends

    Cuba 25-year loans at 1% interest—well below the rate of inflation—that

    Havana uses to foot about half of the bill.

    Venezuela is also supporting Cuba through investment. From 2000 to 2011,

    Venezuela signed deals for 370 investment projects in Cuba for an

    estimated $11 billion. They included $1.4 billion to renovate an idle

    refinery in the coastal town of Cienfuegos. The plant, from 1991, used

    defunct Soviet-era technology and had never operated.

    Last year, Venezuela installed an 820-mile fiber-optic cable meant to

    bring high-speed Internet to Cuba. It still hasn't been put into use.

    Aside from several projects from Brazil and China, few other countries

    have been able to establish a firm foothold in Cuba at all. Economic

    reforms pledged by President Raúl Castro have focused on changing the

    domestic economy—allowing for the sale of homes, for example—but have

    done little to attract outside investors.

    As for Mr. Chávez, the president says his health is improving but isn't

    giving many details. This month he said recent tests after treatments in

    Cuba and Brazil had "turned out absolutely fine." But many in the U.S.

    government believe his condition has worsened. Mr. Chávez has surprised

    critics by appearing on the campaign trail and making plans this weekend

    to host Iran's President Mahmoud Ahmadinejad, another old ally.

    Mr. Chávez's opponent in the election, Henrique Capriles, trails the

    popular president in the polls. But Mr. Capriles has a handy lead over

    any of Mr. Chávez's likely successors, polls show. Mr. Capriles hasn't

    yet taken a position on the Cuban subsidies, although Mr. Chávez's oil

    handouts to foreign countries are broadly unpopular at home.

    Cuba is on better economic footing today than it was two decades ago.

    Three-quarters of Cuban trade was linked to the Soviet bloc, and the

    collapse of the Soviet bloc left Cuba's contracts with state companies

    from East Germany to Bulgaria invalidated almost overnight. Fidel Castro

    famously urged Cubans to abandon cars for thousands of bicycles he imported.

    Since then, Cuba has opened its doors to tourism, which in 2010 was a

    $2.2 billion industry that accounted for roughly 4% of gross domestic

    product. The Obama administration recently began allowing relatives of

    Cubans to send unlimited remittances, which could serve as a lifeline.

    Cuba has also made an effort to become an oil producer in its own right,

    working with Spanish firm Repsol YPF S.A. to drill offshore oil. A

    platform was erected last year, but the size of the deposits is still

    unknown. The project suffered a disappointment late last month when

    Repsol said it would stop looking for oil in Cuba after an exploratory

    well came up dry and had to be capped and abandoned.

    Few analysts think a departure of Mr. Chávez would lead to political

    revolt in Havana that would threaten the Castros' regime. But it might

    force Cuba to accelerate free-market reforms. The crisis of the 1990s

    forced Cuba to adopt limited free-market reforms to survive, including

    the first licenses for private restaurants. When times got better under

    Mr. Chávez, Fidel Castro rolled back the reforms.

    "If Chávez were to kick the bucket, then the impetus toward reform would

    probably return because there wouldn't be any other alternative," said

    Arch Ritter, an economist specializing in Cuba at Carleton University in


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