THE CUBAN ECONOMY SINCE THE REVOLUTION (ER IM 69-44)

Created: 3/1/1969

OCR scan of the original document, errors are possible

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DIRECTORATE OF INTELLIGENCE

Intelligence Memorandum

The Cuban Economy Since the Revolution

CIA HISTORiOU mm PROGRAM RELEASE iivfiJLL:

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ER9

CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence9

INTELLIGENCE MEMORANDUM

The Cuban Economy Since the Revolution Summary

Substantial problems held growth of theduring the past decadeate wellaverage for other Latin Americanefficiency declined sharply aspoorly educated managers grappled.with theproblemsewly centraliZedhigh rate of investment producedmallin capital stock, partly becauseused to maintain and replace US equipmentexpense of new investment. Drought in fourpast eight years brought large variations incrop, which induced changes in total outputmanagement problems. The outlookis for an increase in the rate ofercent annually,esult oflabor supply, the introduction ofinto some sectors, and growing experience

The regime shifted its top priority' from industry to agriculture innd is now stressingof sugar and cattle. The goal ofillion metric tons of sugar0 almost certainly will not be met, although output couldillion tons to giveubstantial boost in foreignearnings. Industrial output, mostly liqht manufacturing and processing of agricultural products.

l/0te_: This memorandum was produced solelu bu CIA It was prepared by the Office of Economic Research and was coordinated with the Office of Current Intelligence.

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is now moderately above prerevolution levels because of fuller use of capacity. Some major projects are under way to expand output of electric power, cement, and fertilizer, but agriculture will grow more rapidly than industryhole,

Cuban imports have remained higher and exports lower than before the revolution, and the economy has been subsidized by loans and grants from the Communist countries averaging aboutay. Trade with the Communist countries was negligible before the revolution but now accounts for more than three-fourths of total trade, Cuba has long-term debt to the Communist countries of1 billion and short-term debt to several Free World countries of more0 million. Payments have been made promptly to the latter countries/ but defaults and refinancing have characterized debts to the Communists -

Consumershole are worse off under Castro. Per capita consumption of goods and services has declined aboutercent The lot of; landless farm workers and urban service workers has improved because of higher wages and increasedexpenditures on health and education. levels for most other groups havewhile high income groups have lostverything. Acute shortages of nearly every kind of consumption good have appeared, and Cubans'now queue up for many daily essentials. Prices in therolled retail market areercentnd prices in the extensive black market are five times higher than legal prices. Little improvement in living conditions is in prospect during the next few years because the supply of goods and services is expected to grow only slightly faster than the

CONFIDENTIAL

Structure of the Economy

has many of the characteristics ofdeveloped country. Agriculture absorbssingle share of the labor force, closepercent, and the economy is heavilythe production and exportingle However, the country also has some ofof more developed countries. per capita is probably among the largestAmerica; industry is fairly well developedabout the size of agriculture in value of output.

About half of all land under cultivation is devoted to sugarcane, which accounts for aboutercent of agricultural output, and sugar products provide overercent of Cuba's export earnings. This dominance of sugar reflects the relativein other areas of Cubanactor that seriously handicaps the entire economy. For example, aboutercent of Cuba's imports nowof foodstuffs, most of which could be produced domestically, and more thanercent of the total food supply (principally grains, fats, and oils) is imported. Cuba is self-sufficient in sugar, coffee, and tobacco and in most fruits, vegetables, and livestock products.

Cuban industry produces mainly light consumer goods, while the development of heavy industry has scarcely begun. The Cubans must import allmall part of their capital goods and durablegoodsubstantial share of theirgoods. Virtually all mineral fuels must be imported. The country is self-sufficient in tobacco products, beverages, footwear, apparel, soap and cosmetics, and cement. Aboutercent of industry is engaged in processing of agricultural products, and the balance of Cuban manufacturing dependson imported raw

The composition of Cuban output has changed little since the revolution. Industry andhowever, have gained slightly larger shares of the labor force at the expense of agriculture. The ownership of production facilities changed drastically after the revolution) most economic activity has now been nationalized. The only important remnant of private ownership is in agriculture, where aboutercent of the agricultural land is still in the hands of individual farmers, whose activities are closely regulated by the state.

Size and Distribution of GNP

5. The Cuban economy has made slow progress since the revolution, varying from year to yearrend lino that shows little increase for the periodhole (see the accompanying chart).

GNPeasured7 prices,illion pesos, or aboutercent more than in the peak prerevolution year Most of thein economic activity arise in agriculture, principally because of variations in the sugar crop. Output in industry (other than sugarransportation, and services has been relatively stable during the period (see

6. Total output declined moderatelyrimarily because of lower agricultural production in the wakeevere drought the year before. Output probably will increase9 becausehas improved and the government has increased its efforts to expand crop production. The economy probably will not recover7 level, however. The efforts that are currently being made tougar crop ofillion tons next year9 harvest, and sugar production evidently will remain close* to the low output

ross National Product

19

Pesos

i

5

7

production Industrial production

310

365

265

210

l 0

250

130

(exceptorestry, and fishing

'I'l

(except sugar milling)

and communications

30

national product

160

5

166

The total supply of goods and servicesfor domestic consumption and investment has been more stable and has grown slightly faster than GNP because of the influx of aid from the USSR and other Communist countries. Gross domestic expenditures (the supply of goods and services) probablyillion pesoseasured7 prices, nearlyercent more than The supply of goods and services has increased no faster than the population, however, and therefore has changed little in per capita terms.

The composition of gross domestic expenditures has changed significantly since the revolution {see Government consumption expenditures have increased sharplygrowing fromercent of the total7 toercentesult of increased spending for the armed forces and forpublic health, and other government services. Investment expenditures have changed littlehare of the total. Private consumption declined fromercent of total expenditures7

Changes in Living Conditions

private consumption under Castroat the level of the best prerevolutiongrowth of the population has reduced peras indicated below:

Capita Consumption rear esos)

Per Capita Consumption *ear esos)

8

7

0

In spite of this poor record, the circumstances of those in the lowest income groups have improved, particularly the landless farm workers and urban workers in the services sector. They have benefited most from higher wages, expanded employment, andgovernment expenditures on health and Consumption levels for other groups, however, have deteriorated since the revolution, and highgroups have suffered drastic cuts in consumption.

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shortages of almost every kind ofgood have appearedhe result of

a large increase in consumer purchasing power while the supply of goods and services remained unchanged. Disposable personal income7 is estimatedillion pesos comparedillion pesos This represents an increase ofercent, in per capita money incomeime when per capita consumption of goods and services declined by aboutercent. The government responded to this market imbalance by rationing most consumer goods, and Cubans now queue up to buy nany daily essentials. In addition, retail prices were permitted to rise and7 averaged aboutercent highor than Moreover, an extensive black market operates with prices about five times higher than legal prices. The estimated cost of living indexboth legal and black market prices,

Growth of the Economy's Resource Base

i

There was extensive underemployment ofin Cuba when the Castro regime came to power. Industry was operating well below capacity,was high (aboutercent of the labornd land resources were poorly utilized. Host of the gains in output since the revolution have been made by putting idle resources to use rather than bythe economy's resource base.

Cuba has maintained the same relatively high rate of gross investment that it had before theestimated at aboutercent of GNP. The total stock of capital equipment, however, hasvery little. The trado embargo by, tho United States (see paragraphsas denied Cuba the normal flow of spare parts needed to maintain its industrial, agricultural, and transportationmost of which has been manufactured in the United States. onsequence, replacementfor Cuban equipment have been abnormally high,arge part of the investment. Netto capital stock in agriculture has been somewhat greater than in industry. Mechanization ofis greater than before the revolution, and an extensive reclamation program has brought additional land under cultivation or into improved pasturage..

The labor force has grown since the revolutionesult of population growth and the increased

employment ol women. It also has been more fully employed, though unemployment has not been eliminated entirely. illion people wereduring the months of peak economic activity., employment probablyillion.

14. Increased employment has not producedgains in output. Nationalization broughtmanagersrop in efficiencythe economy. The productivity of the labor force has also suffered because of inadequate technical direction, equipment breakdowns resulting free, poor maintenance and absence of spare parts, and theeffect on worker incentives of consumer goods shortages and rationing* Moreover, thereritical shortage of some skilled labor because of the emigration of professional personnel, technicians, and skilled workers. The extensive educationalundertaken by the Castro government have not ccenpensated for this loss,hortage of trained personnel continues to handicap the economy. In addition, much of the increase in employment has been absorbed by industry, construction, and services (including tho armedhile agriculture has lost labor through the drift of rural population toward cities and teams. Tho shortage of labor has been responsible in part for the failure ofproduction to expand, which in turn has limited tlie performance of the whole economy.

Performance of the Major Economic Sectors

Agriculture

15, Agricultural output has fluctuated more than any other sector of the economy since the revolution, and the long-term trend of production shows little or no growth. This poor showing is not the result of neglect, because development of agriculture has been Cuba's principal economic objective sincenvestment in agriculture has increased sharply Imports of agricultural machinery andhave been highfor example, imports of tractors, as shown in the following tabulation:

3

SOXFTOFiVriArl.

'

Much of the imported machinery and equipment has been for replacements, but some net investment has been realized. The total land area under cultivation has expanded. Applications of fertilizer also have risen sharply, as follows:

Thousand Tons

160

215

330

222

Year Applications

460

755

These positive factors have been offset, however, by widespread mismanagement, the shortage of labor, and droughts thatthe island in four of the past eight years.

Production7 ofillion tons of sugar, although far below the goal, was the,largest crops shown in the chart. Production8 declined because of dry weather. Plans call for annual production0 ofillion tons of sugar, but, even with favorable weather conditions, limited harvesting capacity probably will hold the level to somethingillion tons.

Sugarcane land nowillion hectares, about as large an area as Cuba has ever devoted to this crop. It was reducedime to make room for other crops but more recently has been increased in order to achieve0 sugar production goal. In the years just before the revolution,accounted for more thanercent of all land under cultivation, whereas it now accounts for about

ercent.

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10. Cuba is now engaged in an extensive effort to increase coffee production by planting many new coffee trees. During the past three or four years, many new citrus trees also have been planted. Since the revolution, Cuba has made several efforts toits production of vegetableenaf fiber has been introduced, and its cultivation is being expanded. Cotton was grown extensivelyew years but has been largely abandoned because of disease and harvesting problems. Cuba is trying to solve these problems, however, and apparently hopes to restore cotton production. Root crops have been given considerable attention; their productionis higher now than at any previous time. Rice production also is increasing, after being sharplyew years ago.

19. Significant efforts are being made to improve livestock farming. Large numbers of breeding stock have been imported, and artificial insemination practices have been introduced in order to enlarge and improve the cattle population. At the same time, the area devoted to improved pasturage has beenand production of hay, ensilage, and other cattle feeds has increased. Production of eggs has also increased greatly.

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eONTIDIN TIM,

20. Despite the efforts to expand agricultural activities other than sugarcane production, sugar will continue to dominate agriculture for the next several years at least. Output of sugar probably will increase faster than that of other agricultural products During the following several years, sugar production is likely to stabilize while production of other crops and livestock products ontinues to expand.

Industry

has been some increase inabove prerevolution levels, largely afuller utilization of capacity. ewhave been built since the revolution,additions have been partly offset by theof older plants, and totalhas grownittle. Supplies offraw materials have been slow tobecause of the failures in agriculture.

is presently carrying out majorexpand its production of electric power,and sugar. These projects willdevelopment, although tlie plannedwill exceed Cuban needs for manydevelopment plans aro vague but probablyconstruction of small plants in foodfabricating, and chemical and paper The principal limitation on Cuba's abilitythese plans will be the availabilityfinancing.

23. Cuba has exhausted most of the econoaic development credits extended by the Eastern European Communist countries and Communist China, and new credit probably will not be forthcoming from'these sources. arge part of Cuba's unutilized credit from the USSR is being used to cover the expansion and repair of existing sugar mills and to construct the large new fertilizer plant now being built at Nucvitas. The regime has contemplated theof one or two large new sugar mills, probably with assistance from the USSR, but these projects have not yet been initiated and may not be built. Cuba and the USSR have had long-range plans tothe nickel industry; Soviet credits for this purpose were extended as far back These plans appear to be in abeyance, however, and it is

unlikely that anything will be done in,the near

24* Cuba probably will receive some additional credits from Free World sources over the next few years, but no projects have been specified. If the credits are large enough, they may bc used to build new fertilizer capacity.

Services

provided by the governmentgreatly since the revolution. Thethe services sectorhole, however, hasbocausoecline in retail andand personal services. There probablysome increase in housing services.

government's payroll has doubledbut in real terms government servicesare onlyoercent higher thanpublic health, and the armedfor most of this increase. in current prices for these servicesfour times thats shown in thetabulation, although the increase in realwas only about two to three times the

Million Current Pesos

y

of Education

of Public Health

Forces

a. Ending onune.

Other Sectors

27. Construction hasubstantialof new workers in the pastears, and total output has increased significantly. Shortages of building materials have made further increases In construction difficult.

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Transportation has grown substantially. As in the case of industry, higher production has been achieved mainly by the increased utilization ofsince total capacity probably has changed little Cuba's internal transportation system now carries more passengers and freight than in prorevolution years. Passenger traffic has more than doubledomplete data on freight loadings are not available, but in view of recent levels of sugar production and the increased consumption ofommodities (POL, fertilizer, andt seems likely that the sys-tom moves more freight now than. The transportation system probably could handlemore traffic if that were required. Cubaarge pool of underutilized military trucks that are made available for civilian transportation when needed.

The Cuban merchant marine has increased greatly the volume of freight that it handles. Its cargo capacity has grown from0 tons before-the revolution toons today. The expanded fleet now addsillion to Cuba's foreign exchange earnings annually, most of it in convertible currency. The size and activity

of the fishing fleet have also been expanded greatly.

Poftelgn. Trade*

imports, averaging moreNP7ave been sustained at-level than exports in recent years (seebecause of the substantial flow of aidcountries. All categories of importsexcept nonfood consumer goods, whichsharply, as shown in the Hollowing

* See the Appendix, Tables 3 through 6.

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nillion us S

7

Nonfood consumer goodsmaterials and

semifinished

Capital

Imports of capital goods and raw materials andgoods increased aboutercent7 ignificant share of the growth in capital goods imports, however, reflects higher prices.

ItSI

'rom Ito United Slates exclude ransom payments tn kkvd valuedillion2illion

niiiHUiniin

31. The principal food imports are wheat, wheat flour, rice, corn, fats, oils, and beans. Theraw materials and semifinished goods are raw cotton, cotton yarn, wood pulp, fertilizer, crude

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6QMF.DBMTIA*

and synthetic rubber, industrial tallow, tin plate, and iron and steel products. Fuel imports consist almost entirely of crude petroleum and petroleum products. Capital goods imports arc primarily of machinery and equipment but include some building materials, the most important of which is lumber.

32. The value of exports declinedollowing the revolution and has not yetto its former level. The declineesultower volume of sugar exports as wellrop in nonsugar exports because of production problems, increased domestic demand, and the loss of markets in the United States. The tabulation below shows exports7he latest year for which detailed information is available.

Million US $

57

and byproducts

concentrates

and tobacco

direction of Cuban trade has changed greatly since the revolution. Trade with Communist countries, which was negligible priorow accounts for more than three-fourths of Cuba's total trade. The USSR has replaced the United States as Cuba's largest trading partner, though its position is not as important as that formerly held by the United States. boutercent of total Cuban trade was with the United States, whereas the USSR now accounts for aboutercent of Cuban trade.

The USSR normally purchases aboutercent of Cuba's sugar exports, and an additionalercent generally is taken by other Communist countries, even though these countriesroup are self-sufficient in sugar. Consequently, about half of the Cuban sugar imported by Communist countries is reexported, either directly or indirectly, to Free World markets. The

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total volume of Cuban sugar exports has variedfree* year to year (see the Appendix,nd the USSR has adjusted itsto Cuban production, reducing its imports in poor crop years and increasing thorn when production recovers. Soviet credits to Cuba also reflect these changes, being increased when sugar exports fall and reduced as exports increase.

redirection of trade towardhasource of additionalfor Cuba. The machinery and equipment

that Cuba now buys from its Communist trading partners are frequently not well suited to its needs, and the prices Cuba pays are significantly higher than prices for comparable items from Free World sources. Trade with Communist countries also has added to Cuba's freight charges and has complicated the management of inventories.

Because of these disadvantages, trade with the Pree World remains attractive to Cuba and usually is increased when it has the necessary foreign ex-change. For example,ollowing aboom in the world sugar market that sharply increased Cuba's hard currency incomeimports from the Free World more than doubled. Low sugar prices in most years, however, have restricted Cuba's foreign exchange earnings, and it has had only limited success in increasing the output of products other than sugar thatotential for expanded trade with the Free World.

Cuban foreign exchange policy is designed to limit the use of convertible currency in trade and to substitute barter trade. Virtually all trade with Communist countries and trado with several Free World countries is conductedarter basis. Cuba now has bilateral clearing agreements with Spain, Morocco, the UAR, Algeria, and Syria as well as the Ccenmunist countries. Financing trade through bilateral clearing accounts and maintaining its special economicwith the USSR have reduced Cuba's need forof convertible currency, and these reserves have droppedery low level ofillion.

Foreign Aid

38. Communist countries haveontinuous flow of economic aid creditsnd Cuba had

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utilized1 billion by the end8 billion of this was drawn from the USSR,0 million from che Eastern Europeannd the rest from Communist China. Host of these credits carry interest ratesercent and are repayable over anyear period. The repayment schedules mean little, however, because Cuba has never been able to meet them, and theunist countries have refinanced the debts when necessary. Approximatelyercent of these credits have been used to cover Cuba's persistent tradewith the Communist countries. 05 million.has been used to cover the cost of the thousandsechnical advisors from the USSR and Eastern Europe that have served in Cubatr.illion represents credits extended to cover accumulated interest charges that Cuba has not been able to; pay.

39. In addition to direct aid in the form of credits. Communist countries have extended economic assistance to Cuba by paying premium prices for sugar imports. 1he standard price paidy Communist countries for Cuban sugarents per poundnd in3 the price was increased1 cents per poundhere it has remained, ln most years the average priceby Cuba for sugar exports to the Free World countries (as shown in the tabulation below) has been well below the price paid by the Communist Sugar subsidy payments totaled2 billion.

* As of the endubans estimated* debt to Eastern European countries wae as follows:

Million VS $

East

-

Cents per Pound of Raw Sugar

8

also has received credits fromsources over the past several years. debt amounted to more0 million Allmall part of it is heldand suppliers in the United Kingdom,Spain, These loans to cover Cuban importsgoods and other items are conventionalcredits rather than economic aid. DebtWorld suppliers and banks hasut Cuba's credit positionto be reasonably good. Payments toboon made promptly in recent years, andhave been made on debts dating fromdays of the revolution and even from the Nevertheless, Cuba probably will needor eliminate its trade deficit with Freeover the next several years in orderits credit rating.

Effects of the US Trade Embargo

the revolution, Cuba conductedpercent of its trade with the Unitedercent of Cuba's machinery apdof US origin. By instituting its policy ofand economic denial tho United States soughtthe development of the Cuban economy. has denied Cuba access to spare partsof its machinery and has caused the diversion

of an uncommon amount of resources to maintenance and replacement at the expense of new investment and the import of raw materials and consumer goods* Cuba has had to import from Communist countriesandew non-Communist onesthe producer goods which previously came from the United Stated.

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US embargo has had little impactoutput of agriculture, the main determinanteconomic growth. Furthermore, as theendured, the effect of the embargo hasembargo has limited the growth of Cuba'splant, but since the country still hascapacity, this has not been the mainthe sluggish growth in industry. Privateconfiscated early by the regime, andcannibalized in increasing numbers toparts that could not be obtained fromStates. Now, almost all transportationequipment is of Communist ororigin.

Economic Policies and Problems

economic policies and aims of thehave changed over time. In the flushrevolutionary victory, Castro espoused aambitious range of economic objectivesreform, agricultural diversification,nationalization of theof income, and improved livingand other benefits for the lower classes. these major objectives were pursuedthe first two or three years after theon the assumption that they could be achieved

at little cost to the rest of the economy and withoderate deemphasis of sugar production.. Only after the impossibility of rapid progress on all these fronts became apparent did the regime step back toew and clearer set of priorities.

inollowingsugar harvests and other economicthe precedingonths, the regimepriority to rapid increase in sugar Earlier goals for industrialization andpopular welfare were deferred at leastsugar goal0 million tons, could beemphasis was given to cattlethe goal of developing significant exportsproducts. This stress on sugar andCuba's development path more agricultural than

it had been, and the regime has resigned itself to Cuba's primary role as an agricultural exporter for many years to come.

The problems ,of the Cuban economy stem in large part from the impact of the revolution on economic management. The centralization of decision making and management in the hands of the state created unusual demands for efficient and experienced personnel in government. Castro staffedew governing class that was strongly motivated but totally inexperienced and poorly educated. The revolution drove into exile many of Cuba's old-line managers and technicians and destroyed the effectiveness of many of those who remained. The lower quality of management and the shortage ofare still felt throughout the economy*

Centralization of management was carried to excess in tho earlier years, and the decision-making process became bogged down by the concentration of too much authority in too few hands. Thoregime also failed to develop an adequate set of planning criteria to replace the free market system in allocating resources. Some of the most glaring deficiencies of overcentralization have been correctedowever. Cuban economic policies became somewhat more rational after the early emphasis on industrialization was replaced by top priority to agriculture. High priority also is being given to the development of such industries as power,materials, and fertilizer, which either support and complement agriculture or are basic to theof the economyhole. Nevertheless, some Castro programs still appear to be unrealistic

in view of Cuban resources and prospects. The plan to produceillion tons of sugar by0 is the most outstanding example, because Cuba would have difficulty finding markets for that much additional sugar without the risk of substantially depressing prices. Moreover, the current drive to,triple cement production by thos is out of proportion to the probable growth of the construction industry, and the program of clearing new agricultural land is questionable because of the short supply of farm labor and the inefficient use of existing land.

Economic Prospects

hich marked the low point intransitionocialist structuro,has grown at an average annual rate of loss than

2 percent in realr about the same as the growth in population. he economy

' Average annual growth rates have been computed from the elope of the least squares trend line*

probubly will grow at an average annual rateercent. Most of this growth will be accounted for byercent annual increase in the labor force. In addition, some improvement in labor productivity probably will be achieved as greater mechanization is introduced into various sectors of the economy where little existed before and as the regime makes some progress in its general management of economic activity. As in the past decado, poor management willajor constraint on economic growth.

Agricultural production will grow more rapidly than nonagrlcultural production. Cuba almost certainly will not achieve its production goal ofillion tons of sugarut output may well riseillion tons or more during the next several years. Output of crops other than sugarcane and of livestock products also can be expected to risethe Castro government probably will continue to focus its development efforts on agriculture.

Expor-ts are likely to increase morehan GNP, since -tlie main export items are agricultural. The rise in exports should be sufficient to reduce the large annual -trade doftcits. Imports probably willless rapidly than GNP (in contrast to theof the (pastears) because of increased.ofras normally imported and because economic growth will be concentrated in areas with

low import ^requirements . Cuba's trade deficits, which have .averaged0 million annuallyontributed to -the Accumulationebt of3 billionhe end This debt probably will continuein the years ahead, although :morc slowly -then--in the past.

part of Cuba's economic growthprobably .will be used to reduce its trade-the domestic supply of goods and servicesfor consumption and investment is expectedmore slowly than GNP and only slightlythe population. Little improvement inis in prospect.

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Table 4

Cuba: ImportB from Free World Countries

Million US S

L

6 5

i um-Luxemb ourg

4

Arab Republic

Kingdom

States

a/

a/

Germany

Free World

3

a/

a/

Excluding US ransom*paymente in kind valuedillion2il-lion

;"

rr

ilTIAL

Table 7

Cuba: Sugar Exports to Communist Countrios

USSR

Communist China

Bulgaria

Czechoslovakia

East Germany

North Korea

Poland

Yugoslavia

Other Communist countries

Total

0

587

0

0

19

Thousand Metric Tons

4

a/

a/

b/

b/

B

ton* 4 tona in 5 ihivpad to the USSR on

China'* account in repaymentoan mad* by th* USSR to China. Including shipment* to th* USSRn th* pr*viou* footnot*.

Table 8

Cubai Sugar Exports to Free World Countries

Thousand Metric Tons

4 9

.

and territories

' I'm *

Arab Republic

bJ

Kingdom

States

Free World

BBB

589

708

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