Cuba: Boom or Bust?

In 2018, Cuban President Raúl Castro, brother of former dictator Fidel Castro, plans to step down from his position as Cuba’s president, marking the end of the Castro family’s 57-year reign. In his place, the Communist Party of Cuba prepares to welcome Miguel Díaz-Canel, who has been the Vice President since 2013. Before this historic transition occurs, however, President Raúl Castro intends to reaffirm the Party’s hold on the nation and, for the first time, he is looking beyond the traditionally employed mechanisms of oppression, such as restrictions on the freedom of movement and economic activity. In a surprisingly progressive move, Castro intends to ease Cuba through this period of transition by committing to economic reforms that seek to reintegrate the nation into the global economy.

To go about this, President Castro has sought to ameliorate relations with major players in the global market, namely the United States. The Obama Administration, which in recent years acknowledged the failure of the Cold War embargo placed upon Cuba, views the situation as an opportunity to capitalize on Cuba’s much needed liberalization. The formally estranged countries have just recently begun their efforts to normalize relations, primarily by loosening travel and trade restrictions. The US State Department removed Cuba from the international terror watchlist, which has led to a restoration of commercial flights as the Cuban borders opened to American tourists for the first time in over fifty years. But an important question remains: how exactly will this normalization impact the Cuban business climate and, subsequently, the Cuban populace?

As of now, many Americans and Cubans regard the recent détente as well as the proposed normalization and liberalization efforts with skepticism. Critics of the Obama Administration’s strategy claim that Cuban officials, who wield unlimited power over their extensive propaganda machine, will extract the financial benefits of this newfound trade without relinquishing political control or allowing for the development of an increasingly vocal Cuban middle class. Critics have also pointed out that there are still seven billion dollars in active American property claims held up in Cuba — the total worth of property seized when Fidel Castro nationalized the Cuban economy. American firms risk a great deal by entering a country with such an unchecked government, especially one with such a poor track record with American corporations.

Furthermore, despite its commitment to economic liberalization, the Cuban government remains hesitant to reach agreements during bilateral negotiations with American businesses. The telecommunication sector has proved a particularly difficult sell, as the Cuban government fears U.S. surveillance. The Castro government points to U.S. immigration laws, which incentivize emigration and brain drain from Cuba, as significant barriers to building trust with American corporations. Cuban officials fear reliance upon American ideas, capital and products as the economy opens up to trade and labor mobility with its neighbor. Fidel Castro’s venomous letter to “Brother Obama” has recently aggravated this Cuban sentiment, as the notorious dictator commented rather caustically that “we [Cubans] do not need the empire to give us anything.”

Cuba is no exception to the old maxim: Old habits die hard. Since the Cuban Revolution (1953–59), Cuba has maintained a centrally planned socialist economy. The Castro regime has made a practice of repressing its constituents, frequently coming under fire by the Human Rights Watch for encroaching on even the most fundamental rights. According to the Harvard Business Review, the government still owns most of the means of production and employs more than 80 percent of the work force. While the Cuban government boasts its low unemployment rate, which averaged 2.74 percent from 2000 to 2015, the international community has responded with skepticism, acknowledging these low numbers as mere attempts to mask a truly desperate situation. The nationalized economy has not worked well for Cuba in the past decade, as the nation’s average GDP growth rate has slowed to nearly one percent and continues to drop.

Since the collapse of the Soviet Union and implementation of the U.S. trade embargo, Cuba has maintained a heavy reliance on remittances from Cuban émigrés and oil subsidies from Venezuela, resulting in incredible market volatility. According to the 2016 Index of Economic Freedom, inefficient public sector spending is still high at over 60 percent of total domestic output, with average monthly wages for a Cuban citizen falling to a mere 584 Cuban Pesos per month, equal to about $22.24. The nation remains fractured under a dual currency, utilizing both the Cuban Peso (CUP) and the Convertible Peso (CUC), the latter being pegged to the American dollar. This is problematic because Cuban workers employed by the state are paid in the Cuban Peso, a distortion that makes for immense transactional inefficiencies for the average Cuban worker.

During his time in office, Raúl Castro has committed himself to a series of economic and institutional reforms with varying levels of success. In terms of increasing fiscal freedom for his constituents, Castro has established microcredit institutions, bank accounts, wholesale markets for the non-state sector, inheritance rights and a housing market. According to Granma, the official newspaper of the Central Committee of the Cuban Communist Party, President Castro also aims to “distance [Cuba] from those conceptions that condemned self-employment almost to extinction and stigmatized those who decided to join it, legally, in the 1990’s.” Over the past eight years, Castro has expanded the number of private sector employment categories, making it easier to obtain licenses validating private business ventures. Cuba’s restructuring efforts, however, still have a long way to go. According to the Brookings Institution, the nation still lacks much needed price reform, a unified currency, a realistic exchange rate and bank system reform. Recognizing this, President Castro remains determined to take advantage of the many changes in U.S. regulations that would assist Cuba in increasing exports, raising salaries and productivity, reducing state payrolls and increasing exports.

Cuba’s economic success in the coming years will primarily depend upon foreign direct investment, the greatest proportion of which will come from cooperation with U.S. businesses. Most American companies, however, regard the Cuban business climate with hesitance. In addition to the reasons outlined earlier, the Cuban population’s low earnings hold limited real purchasing power and demonstrate lackluster demand. More importantly, the atmosphere surrounding what is still a command economy does not lend itself well to typical U.S. business practices; the government owns all means of production and they ascribe to neither the rule nor the due process of law. American companies interested in investing in Cuba are hesitant for understandable reasons—their assets could be vulnerable to a high degree of risk.

Over the past year, however, some firms have enjoyed great success by opening shop in Cuba. AirBnB, for example, established a network in Cuba on April 1, 2015. Only one year later, according to Time, they have hosted more than 13,000 U.S. visitors and Cuba has become their fastest-growing market. Cubans who host tourists have benefited a great deal from the rise of AirBnB, earning an average of $250 per booking. Other American companies such as Carnival Cruises and Starwood Hotels have enjoyed similar success, forging relations with Cuba and capitalizing on the recent tourism boom. Yet, it is difficult to believe that such a limited market will create lasting economic gains for either nation. A robust tourism sector will promote neither industrialization nor high-tech industry, the hallmarks of a truly developed economy.

Carlos M. Gutierrez, chairman of the Albright Stonebridge Group and the U.S.-Cuba Business Council, echoed this sentiment, commenting to the New York Times, “We have to get rid of the embargo for this [success] to actually take hold.” So, in the meantime, Cuba must focus on creating a more ‘business friendly’ environment. Primarily, the Castro administration must commit to enforcing legislation, offer greater protection of property rights and unify the nation’s currency. Only then will Cuba, upon official Congressional dismissal of the embargo, be primed to advance into the next step of development and take part in a greater economic prosperity.