Last week, New Orleans-based writer Craig Guillot, who covers economic development and manufacturing, among other categories, for Chief Executive, traveled to Cuba on a combination business/pleasure trip. Reflecting not only on this trip, but also on similar trips he’s taken throughout Latin America, Craig filed this report on Cuba’s business climate for our CEO readers.
Cuba’s beaches and historic towns may be ready for travelers, but its economy isn’t quite open to U.S. businesses. Even if the U.S. trade embargo were to fall tomorrow, it could be awhile before CEOs find the country a welcoming place for a profit-driven entity.
I just returned from the island nation, and even as a traveler one can quickly see that Cuba isn’t just another developing nation in Latin America. From the airport and transportation infrastructure to communications and supply chains, state-controlled entities and the lack of a competitive free market have created an economy where choices are limited and quality is poor.
My first two hours in the country were spent trying to leave the airport. During that time, a power outage stopped the conveyor belt and luggage had to be hand placed in a giant pile. Two workers unloaded two 737s with only one truck available to move baggage. Yes, I know Cuba is a developing country. But so too is Bolivia, Peru, and Nicaragua, and they all have modern, functioning airports. A Cuban woman returning from Florida told me it’s par for the course in Havana.
While President Obama made efforts to normalize relations with the country in 2014, President Trump announced in June that he would roll back many of those initiatives. But even before then, tourists and businesses weren’t exactly flocking to Cuba. U.S. air carriers were eager to initiate direct service to the island in 2015, but five airlines have already cut back or cancelled flights due to low demand.
Some opportunity exists
With a pent-up need for products and services, there are certainly business opportunities in Cuba. If the country were a U.S. state, it would have the eighth-largest population with 11 million people. And aside from its lack of resources and economic challenges, it has the highest literacy rate in Latin America and some of the best trained doctors.
Cuba is certainly in a period of profound transformation and has been engaged in slow economic liberalization since Raul Castro took over in 2008. Cubans now can travel abroad and own vehicles and homes. Families can rent their homes to foreigners through Airbnb, and the Cuban government now allows self-employment in more than 200 categories. Small business and entrepreneurship isn’t thriving like it is in other Latin American nations, but it is growing. There are now more than 500,000 people working in the “non-state” sector, and in June, a group of 90 entrepreneurs formed the first private business association in the country.
Based on the numerous discussions I had with ordinary Cubans, there’s growing enthusiasm for government to further loosen the reigns on the economy. A family I stayed with in Playa Giron said the newly-granted legal right to rent out their house and cook meals for foreigners has provided a much-needed influx of opportunity and cash.
“Forming a joint venture can involve giving up final control over the import, distribution and final sale of your product.”
But Cuba is still a communist country with a centrally-planned economy. Billboards and murals of Fidel Castro and Che Guevara are everywhere proclaiming things like “Socialism or death!” and “The Changes in Cuba are for More Socialism.” It will take more than the dismantling of the embargo to change a culture that is so deeply ingrained in the government.
The Heritage Index of Economic Freedom ranks Cuba as one of the most economically repressed economies in the world. It’s third to last on the list of 180 countries, just ahead of Venezuela and North Korea. Heritage says state control of the economy is both pervasive and inefficient, hampering the creation of a private sector. And while the government has recently eased rules on private employment, it says entrepreneurs are shackled by tight government control and institutional shortcomings.
Cuba may be eyeing the road to capitalism, but it’s going to be a long, hard and bumpy ride. Fortune 100 companies with scale and power are making inroads with the Cuban government, but mid-market companies may find that the country’s risk and hassle outweigh its market potential. And while many of the Cubans I met seemed eager to engage in a free market, it could be a radical cultural shift for a population that has lived under a planned and state-controlled economy for 50 years. Consider that only a small portion of Cubans have even left the island, let alone have any experience working or living in a market-driven economy.
Stratford Analysts recently said that despite the embargo, Cuba won’t be ripe for most U.S. businesses for years. The country still uses a complex dual currency system, it’s heavily dependent on Venezuela for oil, and its infrastructure is in poor condition, even by Latin American standards. To make matters worse, any foreign investments not only have to go through government ministries but ultimately fall to the country’s military elite and Raul Castro’s son-in-law.
The costs may be too high to justify a business plan
Pablo Gonzalez Alonso, director of Latin American Research at Frontier Strategy Group, said that despite changes, the risks of operating in Cuba are significant and unchanged by policy. He said while the government has been trying to become a better partner to outside investors, its limited access to foreign currency and control remains a problem. “Forming a joint venture can involve giving up final control over the import, distribution and final sale of your product,” Alonso said.
I had to travel to Cuba with all cash because U.S. credit cards still don’t work there due to the embargo and the lack of financial infrastructure. U.S. dollars are penalized 10% right off the bat and throwing in the 3% fee, it adds up.
If I had to give up 13% of my funds simply to stay with a family and eat a meal, I couldn’t imagine the complexities of trying to invest hundreds of thousands or millions of dollars in a business operation. When I wanted to access the Internet, I had to go to public parks and buy access cards on the black market from college students. And at that, Internet was still slow and unreliable. If emailing a colleague back home was that complicated, just imagine trying to coordinate with stakeholders or corporate headquarters back in the U.S. In Playa Giron, I went to a store to buy a snack and found only beer, rum and rice.
The future of Cuba hinges not only on the next moves of the Trump administration but on the country’s own government. Raul Castro has announced he will leave office in February 2018, but a successor has yet to be announced. Ordinary Cubans may fly American flags and have great admiration for our economic foundations and the country’s beaches and historic towns may be welcoming adventurous travelers, it may be a while before profit-driven CEOs see the country as open for business.