Reference no: EM132223893

The Future of Cuba

Mike W. Peng

As Cuba gradually opens up its economy to market competition, private sector, and foreign investment, what does its future hold?

Cube is the only practitioner of communism in the Western Hemisphere. Five decades of communism have delivered some accomplishments. Life expectancy (at 79 years) is on par with that of the U.S., and Cuba has more doctors per 100,000 persons than Britain and France. Social benefits cover everyone from cradle to grave, providing free world-class health care and education in addition to free pensions and funerals. However, people are poor and income is low. The average monthly wage is only $19. Food is often in shortage, forcing the government to ration supply. Cuba’s 11 million people enjoy only 600,000 cars, with an average age of 15 years. Half of them belong to the state. Many 1950s vintage cars are still workhorses in the streets.

Raul Castro, the younger brother of the 88 year old leader Fidel Castro, took over as Cuba’s president in 2008 and as first secretary of the Communist Party in 2011. (For compositional simplicity, this case will refer to each Castro brother by his first name.) Raul has been busy, transferring a substantial chunk of the state-owned enterprises (SOEs) to private hands, freeing political prisoners, and signing the UN Convention on Human Rights, something that Fidel had refused to do. while change seems to be in the air, there are limits-after all, Raul is also a Castro. Neither “reform” nor “transition” is allowed to be mentioned. These words immediately bring back the painful memory of the collapse of the Soviet Union, which overnight withdrew subsidies and traumatized Cuba’s leaders. Instead, the changes are labeled “updating,” in which “nonstate actors” and “cooperatives” will be tolerated. “But,” noted the Economist,“whatever the language, this means an emerging private sector.”

Thanks to the Soviet collapse, the Cuban economy shrank by a painful 35% between 1989 and 1993. In desperation, Fidel declared a national emergency, opened Cuba for foreign direct investment (FDI)  and mass tourism, and legalized small family businesses and the use of the US dollar. He also found a new benefactor, Venezuela president Hugo Chavez, who (prior to his death in 2013) provided Cuba with cheap oil. In exchange, Fidel sent 20,000 doctors and professionals to work in Venezuela. Thus, the regime’s widely predicted demise did not materialize. After surviving the emergency, Fidel went back to the old ways. many family businesses and foreign ventures were shut down, and the US dollar ceased to be legal tender in 2004.

This time, Raul had proclaimed that changes are here to stay. While Fidel has a massive ego and is famously ideological, Raul is more modest and more pragmatic. Raul seems to realize that Cuban communism lives on borrowed time. The economy is terribly unproductive. Cuba has a legendary agricultural past- think of its world-famous cigars and sugar. However, state ownership of farms has been disastrous. Output per head of sugar in 2012 had dropped to an eighth of its level in 1958. State farms control 75% of arable land, but 45% of this lies idle. Raul has allowed private farmers and co-ops to lease idle state land. Yet, private farmers have a hard time scraping a living off land. This is not because the land is not fertile; it is. It is because of the grip of Acopio, the state-owned monopoly supplier of seeds, fertilizer, and equipment as well as the monopoly purchaser of farm produce. There is hardly a market to motivate farmers to try harder.

In manufacturing and services, SOEs are also notorious for shoddy quality and low pay. But there is one advantage in working for SOEs; plenty of opportunities to pilfer (steal) supplies from the workplace. Employees’ justification goes like this; The SOE belongs to the state, which belongs to the people-that is, us. Since our wages are low, we should feel free to take home the stuff that, after all, belongs to us anyway. Experimenting on a limited scale, Raul has allowed private entrepreneurs to own and operate small shops, such as barber shops, beauty parlors, and restaurants, as well as private taxis. Although by global standards these entrepreneurial opportunities are extremely limited, they nevertheless have attracted well-educated (but starving) professionals, such as teachers, doctors, and accountants. For example, a doctor who used to make $23 per month can now take home $40 in an improvised craft shop.

Slowly but surely, outside influence has arrived. While (until recently) US firms cannot do business in Cuba, multinationals from Brazil, Canada, China, and Spain have no such institution-based barriers. In 2013, 2.7 million tourists (a record) flocked to Cuba. While the US embargo is still technically in effect, from Miami, eight flights- technically labeled “charter” (not regularly scheduled) flights-go to Havana every day. In 2014, the parliament approved the Foreign Investment Law, which for the first time allows Cubans living abroad to invest in Cuba (unless, according to the foreign minister, they are part of the “Miami terrorist mafia” -otherwise known as the Cuban American community in Miami). Such investors are exempt from profit taxes for eight years, after which, instead of paying tax at the normal 30%, a 15% rate will apply. Havana Reporter calls this new law “game changing.”

Although still healthy, Raul is already 84. Given the inescapable “biological factor” (a Cuban euphemism referring to the eventual death of the Castro brothers), the days of the Castros running the show in Cuba are clearly numbered. In December 2014, President Barack Obama announced plans to gradually lift sanctions. Both Obama and Raul- separately in Washington and Havana- declared interests to restore commercial and diplomatic relations. What does the future hold for Cuba?

Answer the Following Case Discussion Questions (each response should be no less than 150 words):

1. Why has state ownership of farms resulted in a disaster in Cuban Farming?

2. On Ethics: What are the norms governing employee behavior in Cuban SOEs? Are these norms right or wrong?

3. The Economist predicted that “whatever the intentions of Cuba’s communist leaders, they will find it impossible to prevent the island from moving to some form of capitalism.” Do you agree or disagree?

4. Should foreign firms be interested in entering Cuba?

5. As US sanctions are gradually lifted, what will happen to Cuban politics and economy?