What to Expect In Cuba

Note: In January 2015 your bloggers participated in an 8-day trip to Cuba under the recently liberalized Obama "People to People" program. The timing turned out to be fortuitous since the announcement of US-Cuban mutual recognition and possibly far-reaching liberalization occurred while we were there. Neither of us had focused professionally on Cuba before the trip. In Havana we had access to a number of Cuban academics and scholars concerned with economic and financial affairs. We did, of course, arrive with a number of preconceptions, having lived through some 60 years before and after the Cuban Revolution. In many ways what we found was surprising. 

Feb. 2, 2015

By Roy C. Smith

A recent visit to Cuba revealed as much enthusiasm in the streets of Havana, where signs still proclaim “Socialism or Death,” as in the US for the 17 December announcements by Presidents Obama and Castro to “normalize” relations. Normal relations would change everything, but there is still a lot to do.

Indeed, the Cubans had little choice over whether to do this as their economy is on the verge of collapse.

Cuba was Latin America’s third richest nation when the Revolution occurred in 1959. Today it is the ninth, ranking 110^th globally in GDP per capita. Cuba exports some sugar and tobacco but imports just about everything else, including 80% of its food.

Fidel Castro, now 88, declared his regime Communist in 1961; everything was nationalized and turned into a Soviet style command economy with 85% of the workforce employed by the state. Its Utopian economic model depended on massive support from the USSR for 30 years, and, after its demise, from Venezuela, whose continued assistance is doubtful due to falling oil prices and economic trouble at home.

Fidel emphasized social gains: effectively providing schools, medical and other services so his “New Cuban Man” is today literate, healthy, and classless.

But Cubans are also all equally poor with limited opportunity for improvement. Once elegant buildings from the colonial and post-colonial periods are crumbling into decay; there is still a housing shortage so several families share buildings and apartments. The population is aging and the birth rate is low. Few people have savings, and fewer still have checking accounts or access to credit.

A university professor we met earns $30 a month and freelances as a cab driver to supplement his income. His wife, a dentist, is on a three-year contract in Yemen. The doorman at a chic new restaurant for foreigners turned out to be a senior psychiatrist. Even the elite has to hustle to make ends meet.

But, Big Changes Since 2006

In 2006, after becoming ill, Fidel transferred power to his brother Raul, now 83, and Raul succeed Fidel as President in 2008. Unlike his charismatic, fanciful brother, Raul is taciturn, pragmatic and realistic. He has recognized the need to reform the Cuban economy “to provide a more prosperous and sustainable socialism.”

Raul quickly initiated a series of economic reforms that cumulatively have changed Cuban life significantly. Most Americans and Europeans have little appreciation of the considerable amount of deregulation that has occurred in the eight years that preceded the 17 Dec. announcement.

Farmers may now lease land from the government to cultivate whatever they want and keep half the profits. Accordingly, farmers markets have begun to flourish and fresh produce is plentiful.

Cubans may travel abroad, and Cuban-Americans to Cuba, much more freely.

The state still owns your home, but you have a right to live in it that can now be sold. If a family is lucky enough to own a car, it will probably be one that was on the road before 1959. Now, these “old timers” too can be sold in what is now called the “offer and demand” market. 

Small businesses now may be created. New shops, dance studios, art galleries and restaurants have sprung up everywhere in people’s homes or in leased spaced. Until recently these had to be one-family efforts, but now they can be done as “co-ops,” in which several individuals can combine their resources. Entrepreneurs in various forms are starting to get rich, creating some early signs of income inequality.

In 2010 Raul began laying off 500,000 workers from 2,000 state owned enterprises, forcing them to seek “self-employment” wherever they could in the private economy.

This was followed by a second wave of 500,000 that would mean a shift of about 20% of the country’s workforce to the private sector by 2016. This was the most drastic thing to occur in the socialist state economy since its inception, and was shocking to most Cubans, but accepted without social unrest.

In 2011, Raul pushed the Communist Party to adopt a further “311 Point” liberalization program, though much of it is yet to be implemented. One point is to allow much more open discussion of ideas about reforms; an influential cadre of bright, young economists from the University of Havana whom we met has emerged to urge a much faster implementation of the reforms.

But even after all these efforts, the Cuban economy grew only 1.4% in 2014.

On 15 January, President Obama announced a further liberalization of US citizens’ travel in Cuba and remittances by Cuban Americans, encouraging belief that the US is serious about normalization.  

What Next?

Diplomatic negotiations have begun, but are expected to take time and be cumbersome. There is no sign that the US trade embargo will be lifted soon, but its lifting is now widely discussed in Congress and lobbied by various interest groups.

Normal diplomatic relations will lead to more normal economic ones that will open a floodgate of market forces-- of Americans wanting to invest in the next great post-Communist turnaround opportunity, and of Cubans wanting to sell agricultural commodities and anything else they can in the US.

These new market forces will change things in Cuba faster and more profoundly than anything else.

But for Cuba such a sharp conversion to market economics represents a major existential challenge. If change occurs too quickly, as in China, Cuban socialism, the pride and rationale of the Revolution, may disappear. Raul and much of the old guard want to preserve the old system by reforming it, not replace it with modern capitalism. They want to go slow to protect Cuba’s socialism but once market forces are released and public expectations build up, they may not be able to. Raul has said he will stand down as President in 2018.

In the meantime, managing transition to a reformed, semi-market economy is going to a major challenge. Cuba lacks almost all the infrastructure it will need to move to the next level, including a basic financial system (banking, securities, insurance) and modern agricultural and industrial bases.

How well, and how quickly these can be created will determine whether Cuba, with its 11 million well-educated, increasingly entrepreneurial minded population can make the most of the opportunity. Doing so could mean ending up as a successful Caribbean entrepot nation (like Singapore) managing trade and finance throughout the region, transshipping goods, developing light manufacturing and its gorgeous beaches for tourism. This would require large amounts of foreign capital and managerial know-how that Cuba currently lacks and government rules currently impede.

If it falls short of this, Cuba is likely to make it only to being one of several, small, unimportant semi-socialist Caribbean island-economies struggling to get by and competing with each other for tourism dollars.

Thus the stakes are high, and, at this point, the odds seem fairly long. But there will be plenty of investors willing to take the bet. Its going to be interesting one.