The Cuban economy: not yet open for business

The Cuban economy: not yet open for business

Decisive gestures of reconciliation after a half century of tension between the US and Cuba were at the spotlight of the VII Summit of the Americas held in Panama City last April 10th and 11th.

Despite the ideological abyss that separates the United States and Cuba, economic pragmatism surfaces.

Longstanding sanctions have severely crippled the Cuban economy, which has been relying more and more on Venezuelan charity. But with the plummeting of oil prices and the weakening of Maduro’s Government, Cuba faces grim prospects, particularly in the absence of Castro’s cohesive leadership during times of adversity.

The Cuban political leadership must reinvent itself in order to stay in power, even if this means economically availing itself to its existential foe.

Meanwhile, numerous investment capitals have been eagerly following these historical rapprochements, eyeing the Caribbean island as fertile soil for businesses.

However, this might not be a prudent evaluation of the situation, and investors should not be overly-optimistic when it comes to economic liberalization in Cuba. There are profound domestic reasons why the Cuban economic aperture will occur slowly – similar to what occurred in China, an ‘illiberal’ aperture.

Any momentum gained by the bilateral diplomacy will be hindered by the domestic political dynamics of each nation. There are two distinctive obstacles that could hamper the US-Cuba thaw: the US Congress, and Cuban stratocracy.

Havana’s Praetorians

Changes in Cuba will not be abrupt, since reforms have and will continue to be overseen by the Revolutionary Armed Forces (FAR), which have a vested interest in the Cuban economy.

The Cuban FAR are among the world’s biggest in size (proportionally to its population) and are believed to control nearly 65% of Cuban enterprises.

Uniformed officers also retain the absolute majority of the Political Bureau of the Cuban Communist Party, the ideological kernel of the State. These same officers have the prerogative to select the Party Candidate, which acts as the legislative apparatus of the State Council.

Even after the retirement of the Castro family from office, the Revolutionary Armed Forces will still control the Communist Party. Cuban stratocracy can overshadow future administrations even without having a military officer acting as president.

Miguel Diaz-Canel, currently Vice-President of the Council of State, is widely considered to be the ‘Augustus’ of the Castro family. He is expected to succeed Raul when his mandate ends in 2018.

Some voices in Havana even suggest that Raul Castro would leave office before the end of his mandate, leaving the ideological-conundrums and costly decisions to his predecessor.

The fact that Diaz-Canel is the first civilian president since 1960 will simply turn the nation from an explicit stratocracy into a more concealed pretorianism. It makes sense that the Cuban FAR don’t want the embargo completely lifted, since living under siege has been the main political justification for them to hold firm over the economy.

Additionally, fast changes to such a system could entail instability. Thus, as long as the FAR can maintain their political gravitas, they will limit the pace of liberalization.

Washington gridlock

The second biggest obstacle for Obama’s plans to fully-restore the relations with the island is the Republican majority in Congress.

Obama’s bargaining powers are legally capped by the 1992 Torcelli Law and 1996 the Helms-Burton Act. The Helms-Burton solidified the 1962 embargo decreed by J.F. Kennedy, and an extensive catalog of presidential decrees and judicial rulings over Cuban affairs impede any president to unilaterally lift the embargo.

Yet, ironically, Republicans in Congress and the Cuban Revolutionary Armed Forces share the inclination for keeping the formality of the embargo, allowing both ends to remain steadfast on their rhetorical standpoints.

Obama doesn’t have the congressional numbers to modify nor prescribe such an act, but he still has the means to empty the 1996 Act of its fundamental content.

Essentially, the President can exercise its presidential prerogatives to circumvent the technical limitations of the Helms Burton act. Obama could request the US Treasury to modify the Cuban Assets Control Regulation, conceding trade and financial licenses and modifying travel restrictions.

However, Obama faces a difficult challenge. Ignoring and bypassing the 1996 act could offer a silver platter for the Cuban Communist Party: economic aperture without necessarily a political one.

Who will make the most out of this limited aperture?

The Obama administration, running out of time, will have to balance between its domestic pressures and the power dynamics of the island. An excessive use of executive orders to bypass the republican majority could indirectly help the Cuban military maintain their grip on the economy.

Thus, a radical opening of the Cuban economy should not be expected anytime soon. Small and focused economic measures to ease the sanctions, rather, will be the Obama administration’s more likely course.

Simple changes, such as a higher quota of remittances to the islands, or more travel visas for American citizens, will be enough to drastically change the outlook of the nation in the short run. Under such a scenario, Cuban-American capitals will likely retake the lead in public-private investments in the Island, overtaking the privileged position that Spanish and Italian capitals had over the last several decades.

Because the liberalization of private property, particularly in real estate, will not be immediate, investors who have family links in the island will have a head-start.

Categories: Economics, Latin America

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