Why Cuba’s economy could stay trapped in the Stone Age


Rick Newman, Yahoo Finance


This story is part of a weeklong Yahoo series marking one year since the opening of relations between the United States and Cuba.


Google (GOOGL) wants to help the Cuban government roll out broadband Internet across the country. The Cuban government appears to prefer dial-up service.


Not for themselves, of course. Roughly 5% of Cubans -mostly elites such as government officials and favored citizens- already have broadband at home. But the Communuist government of Raul Castro worries that broader Internet coverage will make it harder to monitor citizens and control information. “The old people who run the Cuban government don’t really get the Internet,” says Carl Meacham of the Center for Strategic and International Studies. “They figure you can do surveillance better with dial-up.” So Google’s offer to connect the majority of the country -at very little cost- has gone nowhere.


The restoration of diplomatic ties between the United States and Cuba earlier this year has generated modest excitement about new economic opportunities -- for Cubans and foreigners alike -- in a nation that desperately needs to be modernized. Castro himself has called for liberalization, generating hopes of an economic revolution in the island nation. “His economy was stuck in a dead end,” President Obama told Yahoo News in a recent exclusive interview. “The only way for him to get out of that was to engage economically with us.”


But reports of Cuba’s rebirth have been greatly exaggerated. The Cuban economy remains under the control of a totalitarian regime that would lose power and influence if liberalization were to occur. Unlike China, Cuba does not have a plan to use capitalist tools in service of communist ideals. It has few of the internal resources needed to generate wealth and is deeply suspicious of western experts who know how to modernize. On top of that, there’s still a U.S. trade embargo against Cuba, and the U.S. Congress seems unlikely to pass legislation required to revoke it.


Not quite a land of opportunity


Cuba under Raul Castro, Fidel’s younger brother, has liberalized in a few small ways. European hotel and travel companies, not subject to the U.S. embargo, have been operating there for years. It’s now easier for ordinary Cubans to get permission to travel outside the country. And Cuba has loosened rules allowing more individuals to set up small shops. Economic growth is above 4% this year, a notable improvement.


But Cuba is hardly a golden opportunity brimming with promise. It has a confusing currency system with two different monetary units, neither tradeable on international markets. Cuba’s government controls most businesses of any size, which is why 75% of all workers are employed by the state. In China, the private sector employs 75% of all workers. Cuba claims an unemployment rate of less than 3%, yet an estimated one-third of state employees hold unneeded, make-work jobs, and stories abound of people trained as doctors, teachers and other professionals working as cab drivers or hotel clerks, because they can earn more in tips from tourists than they can from a state economy stuck in 1960.


If Cuba were to allow some basic capitalist practices with clear ground rules, it might attract plenty of foreign investment. It’s an appealing locale, after all. GDP per capita is about $7,000, which is one-eighth the level of the United States but still far higher than in Haiti and slightly larger than in the Dominican Republic, Ecuador or Belize. And strong ties with Cuban expatriates in Florida and other parts of the U.S. would provide a ready source of eager investors if opportunities appeared sound.


For the most part, they don’t, however. At least not yet. The Cuban government can’t get credit and must pay for imports in cash. Agriculture remains so rudimentary, despite recent improvements, that lack of adequate food for ordinary Cubans is still an occasional problem. American agricultural firms and food companies do ship goods to Cuba, but payment must be made in advance and cargo ships sometimes languish at port in New Orleans, as merchants await payment.


Some Cuban entrepreneurs have found successes recently in niches the government seems willing to let them claim, whether legal or not. One clever service is a lineup of (usually American) movies, TV shows, magazine and other types of media downloaded onto flash drives and sold to Cuban subscribers every week. Airbnb has caught on, because Cubans are happy to rent their homes to tourists for extra cash (arrangements must be made over the phone rather than online). There are Craigslist-type web sites catering to the tiny portion of the population that does have Internet access, mostly near Havana. And American companies that produce power equipment say they’ve had some success selling Cuba gear needed to upgrade and expand the nation’s electrical grid, which only provides a few hours of power for most Cubans each day.


Most U.S. companies checking out Cuba, however, are small or mid-sized firms willing to take risks for a bit of growth. The cream of the U.S. economy, so far, seem to be taking a pass. “It’s hard to find a big, name-brand company going into Cuba in a big way,” says trade expert Gary Hufbauer of the Peterson Institute for International Economics. “It’s just very difficult to do business there.” Cuba attracts less than $500 million in foreign direct investment each year, which is tiny for a nation of 11 million people. The Dominican Republic, with a similar population, garners more than four times as much FDI.


Despite the political opening with the United States, Cuba’s most promising trade partner may be China. "They’ve studied the Chinese model quite carefully and they have a lot of visits with the Chinese,” says Hufbauer. “That’s the path they’d like to follow.” The huge Chinese telecom firm Huawei, in fact, might get a lot of the business Google lost out on. Google’s not complaining.



Cubanálisis - El Think-Tank