What's Next For Cuba?

Ingo Walter

(CNBC Jan 29, 2015)

Now that the decision has been made in Washington to reset Cuban-American relations, it’s a good time for an outside perspective on developments since the Communists took control of the country almost 60 years ago and where things may go from here.

Pre-Castro Cuban history was certainly turbulent – early extermination of the native Amerindians by the Spanish, a long history of slavery ending in 1870, the 1898 Spanish-American War which brought colonial liberation but not much else, dominant foreign business interests in key sectors, and a US bolt-hole for gambling and organized crime that ended in the rampant corruption of the Batista regime.

Nor was the next chapter much more inspiring, with its extended guerrilla war, atrocities that few people talk about nowadays, waves of mass emigration of desirables and undesirables, the failed Bay of Pigs invasion and a missile standoff with an entrenched USSR that came close to a tipping-point to thermonuclear war – and of course the longest trade embargo in history.

Many old timers of Cuban origin have long memories and powerful resentments. Newer generations consider their seniors trapped on the wrong side of history and want to get on with change. Just about everyone feels strongly.

A dispassionate look at Cuba today reveals a unique contemporary “natural experiment” in social engineering, a form of collectivism abandoned long ago by almost all who attempted it – achieving improved social welfare by working against human nature rather than with it. You can push water uphill, but only by wasting enormous amounts of human and physical capital. And even people who subscribe to the objective of improved collective welfare will still try to do what’s best for themselves in their daily lives, regardless of the economic command and control structure.

In this sense the Cuban experiment was doomed from the start. Combined with the US embargo imposed in 1960, it assures Cuba’s position at the nadir among the world’s economic underperformers. But it also assures Cuba’s potential as a rising star if things are managed well after the blocks come off. In financial terms, Cuba will be a “buy” when the time comes. A recent visit revealed impressive strengths buried not far below the surface.

Over eleven million people, comparatively well educated, with unusually strong extended family ties and sufficient entrepreneurial vigor to be explosive once preoccupation with working around the “dead hand” of the state gradually fades away. The few sectors already liberalized show plenty of sprouts, like a long-vacant lot after a spring rain, suggesting the latent power of lifting price and wage controls sometime down the road – there’s a reason farmers, budding restauranteurs and taxi drivers are among the best-off Cubans today.

Capital formation too is constipated by an archaic banking system that executes
transactions at a tenth the efficiency one might see in Botswana, and fails totally as a source of credit to incipient businesses and households. Cuban cooperatives and lending among family and friends are among the few forms of financial intermediation.

Like everyone else, Cubans will borrow and lend, save and invest once the bottle is uncorked. Future tourists will be amazed how fast the overcrowded wrecks of old Havana buildings get restored or repurposed stretching far beyond the Old Havana tourist zone.

If labor and capital get moved closer to their growth potential, there’s also plenty of knowhow to work with abroad and at home. State-of-the-art technology will find its way into Cuba quickly through licensing or foreign direct investment once international companies decide government is serious about sensible, just as it has in many other successful developing countries. And there will be plenty to work with, notably a decent educational and healthcare infrastructure and an impressive cohort of talented and motivated professionals.

Decomposing the economist’s usual sources of potential growth into labor, capital and productivity suggests that a bet on Cuba’s economic performance under market liberalization is low hanging fruit. Of key importance is institutional and legal framework that anchors and guarantees property rights in a fair and transparent way, without which high risk premiums will put a damper on much that could be achieved.

But there’s more. The Cuban diaspora is a unique potential asset that can be drawn upon if outstanding legal and property issues can be handled (as they have been in Europe) and as the irreconcilable advance to old age. Cuban immigrants to the US during the decades of hostility have on average done very well indeed in the professions, skilled trades and other pursuits. They and their progeny exist in large numbers, and as they say “… you can’t take the Cuba out of a Cuban.” Centrifugal force can work its magic in speeding things up if the playing field is laid out right. The “secret sauce” of development is entrepreneurship, and many countries rely on entrepreneurs from abroad. Cuba has plenty of them just across the Florida Straits to combine with locals long practiced in end-running and improvisation.

Then there’s the fortuitous disappearance of Cuba’s historical “crutches.” With the collapse of the Soviet Union after 1989 and the end of the cold war, the Russian pivot to internal development and withdrawal of once-massive economic aid to a country that was now of peripheral interest led to Cuba’s “special economic period” (near-famine) in the early 1990s. Cuba was left high and dry. Hugo Chavez’s economy crutch was no match, and today hangs by a thread as Venezuela verges on economic implosion. Intravenous drips are no substitute for sustainability, and Cuba today has a chance to plot a viable new course under disciplined market conditions – with a possible tailwind from depressed global oil prices.

Overlying everything, though, is the political dimension. Future economic conditions may show high promise, but can easily be overridden by politics. Human rights is on the front burner, shown by last week’s high-level US official visit to Havana. Defining human rights isn’t easy, despite the degree of consensus anchored in the U.N. Charter. Even then, engaging with human rights violators today ranges from US “sound and fury” to Chinese “when in Rome.” With China among the three largest US trade partners, there is no shortage of cynicism.

Even with agreement on political substance and alignment of policies, there’s always the issue of how to move the needle. Do trade and financial sanctions help modify national policies or harden them? The decades-old American Cuba embargo has been called both an abject failure and the key blocker of an even worse outcome. Who knows? It’s a reasonable guess, though, that the time has  can work its magic though the power of human nature, the invisible hand of the market, and sound economic development.