Cuba’s reforms need more power to attract investment

Cuba’s reforms need more power to attract investment

Cuba has undergone reforms during Raul Castro’s presidency, but they continue to progress slowly and lack substance. Still, the atmosphere is right for Cuba to make some improvements to its foreign relations, which could help its economy.

In 2006 when President Fidel Castro stepped down due to poor health, his brother Raul energetically took the stage. After some months of trying to fill his brother’s shoes and gaining the same amount of respect from the Cuban people, Raul Castro turned a direction. He began expressing his plans to improve Cuba’s position in the world, even going as far as suggesting economic reforms.

Since then, Mr. Raul Castro has indeed initiated some well-placed changes to the island’s Soviet-style system. He has given more freedom to farmers in managing their own production, opened state-owned enterprises and has made it slightly easier for small-scale entrepreneurs to do business. Such progressive decisions have caused more optimistic observers to claim market capitalism is finally on its way to Cuba.

However, Cubans themselves have realized that reforms are not always so clear-cut and have taken a more realistic approach to the situation. A good example is the recent decision to lift a ban on buying cars without government permission. While this is inherently a welcome development, government-set car prices are so high that most Cubans have no hope of ever affording one. The phrase ‘Raul’s mambo’ – taking two steps forward and one step back – seems appropriate to describe Cuba’s reform process.

But taking some steps forward is better than taking no steps at all. A hugely popular reform has been travel liberalization, whereby many Cubans can now travel visa-free for the first time since the 1950s. Some worried this would result in a mass exodus and ‘brain-drain’, but this seems surprisingly to have been avoided, calming more stubborn members of the Communist bureaucracy. In fact, money earned by Cuban expats sent back home has increased substantially and serves as a much-needed injection into Cuba’s sagging economy.

The economy is a main driving factor for reforms, and the Ministry of Foreign Trade and Foreign Investment has proposed a law that would upgrade foreign investment’s role in the Cuban economy from ‘complementary’ to ‘major’. The bill is set to be approved in an extraordinary assembly session in March, and will hopefully also improve Cuba’s current account balance.

But where will this investment come from? At the moment one of Cuba’s main trading partners is Venezuela, which may need to tone down its support for the Communist island due to its own economic problems. Fortunately, growing economies such as Brazil are stepping up their own relations with Cuba as part of a plan to increase their influence in an area where the U.S. and EU are almost absent.

Of course, the largest benefits would arise if the U.S. and EU would normalize their relations with Cuba. The U.S. embargo on Cuba prevents access to both cheaper imports and large markets for exports, and creates a big dent to Cuba’s economy. However, a hugely hailed handshake at Nelson Mandela’s funeral between Obama and Castro, as well as positive statements by U.S. authorities, seems to suggest a slow thaw in U.S.-Cuban relations.

As for the EU, similarly positive signs have emerged, including Commission President José Manuel Barroso hinting at modifications to the EU’s Cuba policy. Still, the main obstacle is Cuba’s lack of political freedom and uncomfortable human rights record. Without significant improvements in these departments, it is hard for the EU to justify any huge changes. Nevertheless, the Netherlands has broken from the EU consensus and pursued unilateral relations with Cuba, inviting the possibility for other member states to follow.

At best, Cuba displays both the will and the ability to change, but it is still stuck in a stubborn economic and political routine. Whereas the government itself is determined to pursue gradual, controlled changes, a more boisterous reform sweep is needed to overcome hurdles, for example as in the confusing twin exchange rate system, or allowing for greater political expression.

Such important decisions are needed to open Cuba to the world and usher in greater investment and more exports. At the same time, this would offer better tools for the government to provide services to Cuban citizens and stimulate greater domestic activity. For now, the question remains: Is Raul Castro the man to initiate this process or will Cuba have to wait for him to step down in 2018?

Categories: Economics, Latin America

About Author

Karl Sorri

Karl has gained global experience working at the Transparency International Secretariat in Berlin, the Political/Economic Section of the U.S. Embassy in Helsinki, and as a freelance journalist. Karl holds an MA in Politics from the University of Glasgow and an MSc in International Relations from the London School of Economics.