Cuba Inc. – Long way to go before opening to the free market

Cuba Inc. – Long way to go before opening to the free market

With just one meeting in December, the Obama administration managed to create a rapid domino and excitement effect among American and foreign investors. However, Cuba endures extensive social and economic problems, and with Castro’s tight control over the pace of change, it may take longer than expected for Cuba to be open to free market.

December 17th 2014 marks the end of 50 years of cold war enmity between Cuba and the U.S. Slowly normalizing bilateral relations, the Obama administration has set in motion several reforms in its Cuba policy, including authorizing Americans to import goods and services from Cuban entrepreneurs this past February.

U.S. officials have also welcomed financial institutions, such as the Development Bank of Latin America’s (CAF) interest in accepting Cuba as a member to help advance their reforms for greater openness to the global financial system.

As delegations of Republican U.S. Senators made a working visit recently to Havana to discuss the progress being made, officials from both countries have stated that the easing of sanctions and obstacles to trade with Cuba will allow the rhythm of change to accelerate.

Thus, as a result of constructive bilateral talks and officials meetings, U.S. senators have introduced a recent bill in June to effectively end the nearly 53-year-old U.S. economic embargo on Cuba. The Cuba Trade Act of 2015 and exploding U.S. business interest in Cuba has given hope for economic growth in the Caribbean island.

Moreover, the Obama administration set up a domino effect that cannot be stopped. Determined to restore relations and signing bilateral deals, the European Union has already engaged in rounds of talks with Cuba, paving the way for unrestricted trade and political cooperation.

Castro’s recent economic reforms: a new stance for the communist island

Although Raúl Castro has been a busy man over the past 6 months, engaging in political and economic meetings and accelerating reforms in the communist island, he had already begun a reform process a few years ago.

In order to boost a lagging growth rate, retain aggravated youth emigrating abroad, and prepare Cuba should Venezuela’s drastic economic crisis end the $1.5bn of aid Caracas provides Havana every year, Castro allowed self-employment, sale of cars and homes, and introduced a possible unification of Cuba’s dual currency system.

Fast forwarding to the past two years, Cuba moved towards implementing more profound economic and political reforms, including anti-graft investigations and new foreign investment law.

These positive signs showed the EU and other large economic powers that Castro had a new stance for Cuba. As EU-Cuba talks started in April 2014, the wheel of change was set in motion.

 Tight control over the pace of change

However, while Cuba’s small outsourcing sector is now open for Americans, ‘Cuba Inc.’ might not be ready for a major free market opening. As Havana has run its own government for over 50 years and is proud of its sovereignty, it’s socialist attitudes and communist bureaucracy present large impediments to future reforms and normalization of relations with the U.S. and the rest of the world.

Amid the U.S. inviting Cuba to open its doors to free market and American investments, Castro has put a brake on the new American excitement. In its socialist ideology, Castro’s cabinet was ordered to scrutinize the results of the country’s past limited free-market reforms to ensure Cuba is on the right path.

The reports showed that Castro’s measures had failed to lift growth and boost stock of foreign investment. Furthermore, as it has been controlling all production and services for the past 50 years, the Cuban government is unlikely to free the leash and let the new experiments run their course.

Cuba Inc. : Struggling internally

The military controls about 60% of the economy, particularly through large businesses (including Gaviota, the island’s largest hotel operator). With limited opportunities to grow as an investor, foreign businesses have complained about the uncertain legal environment, red tape bureaucracy, and a lack of control over labor.

Shortages and high prices have also led food supplies to be sourced on the black market. With these problems, investors with failing businesses often suffer through bribery and jail time in Cuba.

As a means to modernize Cuba’s socialist economic model and promote a more efficient public sector, Castro had created the Comptroller General’s Office in 2009. However, despite anti-corruption measures put in place by the governing body, the Cuban government still struggles to combat corruption, particularly in public, trade, and food sectors.

From large embezzlement of public funds, illegal sale of goods, and illicit enrichment, corruption will likely continue to be a pervasive challenge to social and economic growth.

In addition, human rights violations and political repression continue to be an alarming issue in the communist island and remain an impediment to ongoing U.S. and EU bilateral talks.

The Cuban Commission for Human Rights and National Reconciliation reported that there were at least 600 politically motivated arrests in May, the highest monthly arrests in the past 10 months. Officials have accused the Cuban authorities of not properly addressing the growing physical attacks, vandalism, and harassment the secret political police or State Security have conducted.

The U.S. and investors need to be cautious

Despite having approved $30 million for programs to promote democracy and strengthen civil society in Cuba, Obama’s administration and U.S. businesses need to be cautious with Cuba. Indeed, negotiators have failed to reach an accord to re-establish diplomatic ties and re-open the US embassy in Cuba.

Several republican presidential candidates also harshly criticized Cuba’s removal from the U.S. Terror blacklist, a sign that the détente will become an essential issue for the 2016 campaign. Thus, the end of the embargo and lifting bans on tourist visas may take longer than expected.

Lastly, with Castro’s recent announcement of stepping down as President in 2018, an alarming possibility of the military taking over the government creates uncertainty over the renewed push for reforms.

With next year’s communist Party Congress as a crucial moment for further change, the bonfire of expectations among U.S. and foreign businesses since December 17th might need to slow down. Cuba does not seem to be ready to open its doors to free market amid pervasive corruption, red tape, and slow economic growth.

Categories: Economics, Latin America

About Author

Alicia Chavy

Alicia Chavy has provided analytical and strategic support for Fortune 500 companies working to expand their business presence in the Asia-Pacific region at The Asia Group. Prior to her consulting experience, Alicia worked at non profit organizations where she conducted detailed assessments on foreign policy, security and economic issues in Latin America, Europe, and the Middle East. Alicia Chavy graduated from Georgetown University's School of Foreign Service, earning a Bachelor of Science in International Politics.