President Obama’s visit to Cuba hurled our hostile little neighbor into the headlines.
Unfortunate (or fitting) photo-ops aside (though they should be enjoyed briefly), how about a little real talk on the state of Cuba’s economy?
— The Weekly Standard (@weeklystandard) March 21, 2016
A few months ago, a Vox reporter visited Cuba. Their findings were similar to exposés of most statist run countries. Highly skilled, well educated individuals like doctors, engineers, and nurses forsake their professions to work in restaurants, drive cabs, and participate in various other “illicit” employment that pays better.
Though economic conditions have improved ever so slightly since Raul (Fidel’s brother) has been in charge, serious investors are hesitant to put skin in Cuba’s game:
Many of the U.S. executives who have taken a look at the island amid the first steps toward normalization between the two Cold War foes intend to sit on their hands for now, according to a survey of 437 business executives recently conducted by the U.S.-Cuba Trade and Economic Council, which advocates an end to the embargo.
“It’s not only the bureaucracy. It’s the Cuban government’s view of its economic, social and political system,” said John Kavulich, the president of the New York-based advocacy group. “The Cubans are less than enthusiastic.”
Cuban officials say they hope to attract some $2 billion annually in foreign investment in coming years. They are currently seeking bids on nearly 250 projects valued $9 billion in areas including hotels, marinas and golf courses, along with biotechnology, pharmaceutical and bottle factories.
Starwood Hotels and Resorts Worldwide Inc. on Saturday said it had landed a multimillion-dollar deal to manage two upscale Havana hotels and signed a letter of intent to assume management of a third.
Starwood, whose brands include the Westin, W, and Sheraton chains, is the first U.S. hotel company to enter the Cuban market since the 1959 Revolution. The deal fits Cuban officials’ stated desire to dramatically improve the island’s tourism offerings.
Yet, despite the crush of pitchmen pouring into Havana, only three dozen foreign-investment projects have been approved since a new investment law was adopted in 2014, Cuban officials say, out of a total of 200 on the island.
“This is not about doing whatever project that interests whichever foreign investor,” Deborah Rivas, the Cuban official charged with coordinating foreign investment, recently told Granma, the Communist Party’s newspaper. “We aren’t in the process of accelerating the privatization of the Cuban economy.”
Harvard Business Review reduces Cuba’s economic woes to three main issues:
- Lack of capital investment. Fixed capital investment in Cuba represents just 10% of GDP, which is half the regional average. This likely won’t change until the embargo is lifted, as that would facilitate the arrival of significant new foreign capital. Cuba currently requires billions of dollars in investment in communication infrastructure, an update to its dilapidated transportation network, and significant capital inflows into key productive sectors.
- Stalled state economy. Cuba’s large and inefficient public sector severely constrains the country’s ability to expand output. Lacking a true price mechanism to drive resource allocation, many state-run enterprises are unprofitable and kept afloat with implicit subsidies. While the Cuban government has made an effort to gradually shift workers out of the public sector (it has closed 24 state-owned enterprises for failing to meet output targets), only 25% of the Cuban workforce is currently employed in the private sector.
- Currency confusion. Cuba desperately needs to do away with its dual currency system. It uses two currencies, the convertible Peso (CUC) valued on par with the dollar and fully tradeable, and the Cuban Peso (CUP) valued at a rate of 24:1 with the dollar, which creates severe constraints for the development of Cuba’s export sector. While calculations would suggest the convertible peso is over valued, Cuban firms will need to see considerable devaluation to gain greater competitiveness.
Even if trade and local economies made strides to normalize, Cuba will face a long journey to relative prosperity.
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