Cuba: Trouble in Paradise

The Economic State of Cuba in 2019

By Chris Vazquez*

HAVANA TIMES – In October, Ceiba Investments became the first Cuba- focused fund to ever be listed on the London Stock Exchange, raising $39 million in its first day of trading.  Launched in 2001, Ceiba is the dominant foreign investor in Cuban real estate assets, managing a portfolio focused primarily on the tourism-related and commercial real estate sectors of the economy. 

Ceiba owns stakes in four hotels and several office buildings from Havana to Varadero that it plans to expand using the money it raised by going public.  Currently valued at nearly $180 million, the fund also plans to build a new 400-room hotel in Trinidad, a town in central Cuba that is growing in popularity as a tourist destination.

These investments are coming at a much-needed time for Cuba given the economic implosion of Venezuela, their most important ally, from which Cuba has receive subsidized oil in exchange for medical and security services. 

Ceiba Investments Cuba photo

Until recently, the second largest recipient of Cuban medical services was Brazil.  In mid-November, Cuba decided to withdraw approximately 8,500 healthcare professionals employed by Brazil’s Máis Médicos program after Brazilian president-elect Jair Bolsonaro accused Cuba of treating their doctors like slaves by keeping around 70% of their salaries and not allowing their families to travel with them.  The termination of the program will reportedly cost Cuba’s economy around $400-$500 million, which is more than the annual revenue they receive from sugar exports. 

To add to its woes, Cuba also imports nearly 80% of its food, among other things, and the country struggles to meet its debt obligations given its lack of access to hard currency or to credit as a result of the US embargo.  

One attempt to put a band aid on this issue is Cuba’s dual currency system, whereby US citizens traveling to Cuba exchange their dollars for Cuban convertible pesos (CUC) at a 1:1 rate and pay a 10% tax plus 3% commission on top of that – but that’s neither here nor there.

It’s no secret that Cuba’s state-owned economy is struggling, with economic growth in 2017 amounting to a meager 1.8% by government figures.  In November, the official economic growth forecast for 2018 was also lowered from 2% to just 1% for the year.  Add onto that the disappointing sugar harvests and weak exports that characterized 2018 and the problems just get worse for Cuba. 

But perhaps what we should be focusing on is Cuba’s proposed solution to remedy its economic woes: foreign investment. In its new Constitution that is set to be voted on this February 24th, the country upgrades it’s need for foreign investment from “secondary” to “important.”  

Miguel Diaz Canel with Vladimir Putin when the Cuban president visited Moscow in November, 2018.  Photo: cubadebate.cu

In fact, soon after making an appearance at the United Nations in New York, Cuban President Miguel Díaz Canel went on his first international tour to the other side of the world, signing trade agreements and re-kindling bonds with current and former political allies like Russia, Vietnam, China, and North Korea – maybe he’s seen the writing on the wall regarding Venezuela.

Ceiba’s IPO is indicative of the foreign investment interest in Cuba.  Another such indicator was Havana’s 36th International Trade Fair, which took place at the Mariel Special Development Zone just one week after Ceiba went public.  

The fair is Cuba’s annual attempt to attract foreign countries, companies, and investors to do business there. Last year, proposed Cuban investment projects garnered a substantial amount of interest from abroad. However, one country whose presence at the trade fair was negligible, was the United States.  Given the political context at home, less than ten US businesses set up booths, a dismal turnout compared to the dozens that were present in 2015.

While it’s true that the US and Cuba have made some joint progress in the fields of security, medicine, agriculture, and travel, US companies outside these industries just aren’t interested. Trump has tightened a few of the screws that Obama loosened regarding the US embargo on Cuba, a Cold War relic that still exists today. 

Many young Cubans, Cuban Americans, and Americans who are not of Cuban descent agree that the embargo has long outlived its purpose and that policies of isolation serve only to hurt both the Cuban and the US people. I also sit in this camp, but I have often said that the measures taken by Trump are largely nominal and it is the messaging behind the general policy shift from engagement back toward isolation that has people and businesses concerned.

While Cuba tends to be polarizing and political in many aspects, lifting the embargo is one of the few areas in modern US identity politics where we are actually seeing some bipartisanship – who would’ve thought?  I’ve said it before and I’ll say it again that I am not a fan of the embargo because at this point all it does is serve largely as a mouthpiece and scapegoat for the Cuban government to blame their shortcomings on more so than anything else.

Havana night scene.  Photo: Rolando Chow Riviera

Moreover, it has been proven that engagement between the US and Cuba benefits the Cuban people in a tangible way, with Cuban Airbnb hosts making over thirty times the average monthly salary of a Cuban state sector worker back when US-Cuba relations flourished.

The numbers don’t lie, and this is just one example. Regardless, the point is that we must place an emphasis on being objective when assessing how a given policy impacts the group of people it affects (in this case the Cuban people) if helping that group is indeed the goal.

That said, I can’t let the Cuban government off the hook that easily. Yes, the embargo is disastrous for the Cuban economy, but it seems that Cuba also institutes its own embargo against its people.

You see, the Cuban government has estimated that it needs about $2 billion in foreign investment per year to sustain a healthy level of economic growth (with actual figures totaling dramatically less), but various organizations like the Havana Consulting Group estimate that almost $2.5 billion leaves the country every year with Cuban shoppers who travel to places like Guyana and Port-au-Prince in Haiti to purchase cheap goods for resale in Cuba. 

Let me break this down – The private sector in Cuba is very small, made up of close to 600,000 licenses for self-employed workers (some possess more than one).  Almost exactly one year ago, the Cuban government froze the issuance of private business licenses until they could come up with increased regulations for business owners.  These regulations came out in July and officially went into effect on December 7th, although there were some last-minute tweaks. 

Originally, the regulations would have limited business licenses to one per person and limited restaurant seating capacity to 50 chairs per restaurant, among other restrictions.  The last-minute adjustments did away with these limits, but the new regulations still harm Cuban entrepreneurs and hamper the growth of the private sector on the island.

It doesn’t take a genius to see that the new business regulations are fundamentally aimed at preventing the accumulation of wealth and property by business owners. The Cuban government does not want private enterprises in Cuba, but it knows they are doomed without them.

The government began allowing private businesses in 2010 after it laid off nearly half a million workers in an attempt to lean out bloated state payrolls. It was only after the private sector was created that the government began depending on its tax revenue to stay afloat. Cuba became caught in a paradoxical pickle, realizing it needed capitalism in order to maintain a socialist system. 

This is just one element that makes Cuba the backwards dystopia it is, where engineers drive taxis and people have greater access to free healthcare and education than they do to deodorant and toilet paper. This may sound like crude humor, but it’s the reality the Cuban people face. 

At the root of the problem is this: The state competes with the private sector. You may be asking yourself how the state can even stand a chance, and the answer is that they control the wholesale markets given the monopoly they have on imports and exports. The private sector is allowed to do business but is handicapped by not having access to raw materials. 

Cubans are traveling in large numbers to make purchases in the Panama Free Trade Zone as well as to Guyana and Haiti.

The result, as I alluded to earlier, is billions of dollars leaving the country with Cuban shoppers and entrepreneurs who buy raw materials abroad and bring them back to Cuba for re-sale.  Other countries, most recently Panama, have capitalized on this by making it very easy for Cubans to reallocate their dollars away from Cuba and into their markets.  

For decades now, the Cuban government has overseen and to some extent sponsored the outflow of human and financial capital from the island abroad. Cuba invests in its people by investing in their education and their health. But I have always said, and will continue to say, that there is no point in being the most literate, skilled, and healthy population if your skills and education do not transfer to financial stability and your quality of life remains perpetually poor: The fruits of the Revolution are rotten. 

I have never met a Cuban or Cuban American who is not proud to call themselves Cuban, myself included. If Cuba demonstrated that it values the human capital it creates by allowing its people to invest in themselves and in their businesses on the island, few would ever leave, and the nation would flourish. 

If they made the projects for which they’re seeking foreign investment available to Cubans, maybe they could stop depending on foreign countries and companies for their livelihood. Cuba’s greatest asset is the Cuban people. Ingenuity and work ethic run in their blood.  They are not being valued by their government, and Cuba is bleeding as a result.

*A Havana Times guest writer who will be contributing more articles in the future.

Also read: Havana Is Not Your Hipster Playground by Chris Vazquez

 

17 thoughts on “Cuba: Trouble in Paradise

  • February 13, 2019 at 9:08 pm
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    I agree. I’ve been saying this the first time I went to Cuba in 2005. Two currencies is ridiculous. I noticed then that the people are very well educated. However, after they complete their education they have no real means of earning a living because of the government’s strict policies of free enterprise. See South Vietnam for good examples of more free enterprise.

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    • February 14, 2019 at 8:38 am
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      Thanks for the reply Al. They do a good job of developing human capital, then watch it leave the country in search of a place where that capital is valued accordingly.

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      • February 22, 2019 at 4:53 pm
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        Very much agree with you. They have it backward looking for foreign investors, when they are so many people in Cuba that are entrepreneurs. I wish Cuba could follow China example on this regard. The government is afraid or loosing control, and that cuban people with money will influence a change in politics. China demostreted there is not need for this fear. China gave their on people opportunity for business and now they are a world giant. Hope some of that mentality and results cold also happened in Cuba

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  • February 14, 2019 at 5:04 am
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    You say ‘that the measures taken by Trump are largely nominal and it is the messaging behind the general policy shift from engagement back toward isolation that has people and businesses concerned.’
    However the fines against foreign banks trading with Cuba are real and extremely large: the French bank, Societe Generale – $1.3Billion: BNP Paribas – $8.9Billion: Credit Agricole – $0.8Billion: Barclays Bank $0.3Billion: Royal Bank of Scotland – $0.1Billion: HSBC – $1.9Billion: ING Group – $ 6Billion:the list goes on.
    The effect of American sanctions on Cuba is real and massive. It no exaggeration to say that NO other country on earth has ever experienced such a prolonged and massive economic embargo: do not belittle it.
    What is it about Cuba that makes American capitalism so frightened? America doesn’t care about humanity: just look at its foreign policy all around the globe. Cuban communism, without the embargo, would flourish and thus threaten the existence of the Beast itself.

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    • February 14, 2019 at 8:37 am
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      Hey John, a couple of points here. Firstly, you’re right to bring up the fines on banks and other businesses. Let me backtrack and clarify that the nominal nature of the reversal in policy was referring primarily to individual American travel to the island. The messaging and change in policy presents real risk to businesses wishing to invest or do business on the island, so we have seen a very real contraction in that area as a result (hence my description of the lack of American business presence at the International Trade Fair last year).

      Secondly, the line you quoted refers ONLY to the general policy shift from one of engagement under Obama back to isolation under Trump. This shift in policy and accompanying messaging does not refer to the economic embargo on Cuba, which has been in place since the 60’s – long before Obama. I completely agree with the devastating impact the embargo has had on the island and I do not belittle that impact in the slightest.

      Finally, and with all of the above said, Cuban communism would still cripple the spirit of the Cuban people and the economy of Cuba whether the embargo existed or not because it is an inherently flawed system of government that does not acknowledge market forces, human nature, or the way life works in general. The embargo, while devastating to the Cuban state, is a scapegoat for the Cuban government’s ineptitude.

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    • February 14, 2019 at 8:59 am
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      Sure, like Venezuela. This was sarcasm.

      The embargo has a cost to the Cuban Economy, but the cost is not 100% of the GDP. It costs 10% at most. Cuba does not produce much, and it is not a consequence of the embargo. It is a consequence of the whole corrupt system.

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      • February 17, 2019 at 2:12 pm
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        Hey Neo, I’m not sure what your point is about Venezuela. But yes, the Cuban system is flawed and broken. And many Cubans have adopted the mentality that if something appears to be broken on the surface, it is that way intentionally. It is that way to “keep Cuba free and independent from foreign powers.” This contrasts the entire paradigm most people live by: If something is broken, you fix or replace it. Therefore, it would stand to reason that Cuba purposely propagates it’s circumstances.

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        • May 28, 2019 at 5:49 pm
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          Well you can write and explain all you want about the problems in Cuba , what is the thuth is ,I left in 1962 at the age of 12 via Peter Pan and now I’m 69 years old never seen anything change nor it will ever change, the only purpose of the Castro’s is and always will be making themselves rich . They don’t care one bit about the Cuban people. They count of the Cubans in the US to care for their families still living in Cuba.

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  • February 14, 2019 at 2:04 pm
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    Awesome commentary and insight! I feel like I could have written this piece in the sense that everything I read is definitely among the things I have said and expressed over the recent past. I’m Cuban-Canadian and I’m very much interested in participating in the socio-economic development of the island. I applied for my re-patriation approval as soon as it became legally feasible and was approved. I bought real state in Havana and hope to help develop the financial intermediation industry on the island to help put all that human capital to its most effective use. I believe Cuba has immense potential for economic growth!

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    • February 17, 2019 at 2:20 pm
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      The potential is there, overwhelmingly so. But the appetite to put that human capital to use is non-existent. The state does it just enough to siphon off the needed tax revenue. Cuba is extremely risky from an investment standpoint. Here’s why: People and businesses invest because they want to receive a return on their investment that exceeds their initial investment. The amount which the return should exceed the investment depends on how much risk is involved. Any risk assumed when investing in Cuba should be multiplied because your interests as an investor (return) are not aligned with the government’s interest (control). Given that the Cuban Communist Party is the supreme law of the land (which is about to be enshrined into law in the new Constitution), they have absolute control. The fact that they have absolute control and your interests are not aligned makes the risk not worth the return for many. That said, I too have thought about investing in Cuba and hope to do so one day. I would love to own a property and rent it out to travelers. I would have Cubans run the establishment and pay them fair wages, much like they would receive in the U.S. This is one of my profound dreams.

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  • February 14, 2019 at 5:10 pm
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    Chris, good writing again, your articles will become top hits on this site. I can’t believe how ironic foreign investment is–help me connect the dots here.
    First, up until 1959, foreign control and ownership of property, assets and industries was rampant enough that Castro was able to sell the revolution, partly on the idea of driving out the dark forces of corruption and taking these things back, putting them back into the hands of Cuba and the Cuban people. And in itself, this was not such a bad idea to articulate, given some of the circumstances…From that revolutionary turn, a system arose that, combined with our blockade, has isolated Cuba and left the Cuban people so far behind the curve of life in so many ways, that a tropical island paradise barely grows any of its own food, and as you like to point out, doctors and engineers strive to drive taxis. Now, like the Wizard of Oz behind the curtain, the Cuban government awaits the inevitable dissolution of its failed venture, its untenable system…while deepening its voice and proclaiming its answer of the day: foreign investment…which will lead right back to foreign control and ownership of property, assets and industries.
    It is one big, slowly rolling hamster wheel…a perverse fever dream if not a flat out nightmare of governance. Two blessings within this brutal cycle: one is the buoyant and unbreakable nature of the Cuban people that everyone seems to recognize; the other is the inevitable surfacing of capitalism in a way that not only keeps the Cuban economy on some life support, but also keeps giving hope to the Cuban people, and shows them, and the world who visits and watches, that something else is near on the horizon. Let’s hope it’s something good for the Cuban people.

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    • February 17, 2019 at 2:06 pm
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      Dan! Thanks again for the replies. Again, I agree with your analysis and you are right to question the current paradoxical reality. I agree the Revolution needed to happen. Cuba has always been owned by someone: Spain, the U.S., and now the CCP. The sad reality is that it’s not about finding the most opportune system to run a country or maintaining Cuban sovereignty from foreign powers or any of that propaganda. It comes down, at the root, to this: “How can we keep our heads above water economically and maintain power & control?” That’s the central question for the CCP. Because at the end of the day we know that market forces are necessary to maintain and grow an economy. It’s tried and true. But when it’s about maintaining control, I think the strategy seems to be to give the people enough to keep them complacent in a sense. Tourism itself since the Revolution only became a factor after the fall of the USSR, when Cuba needed cash to stay afloat. Now there is a renewed call for foreign investment. If they only opened the gates so the private sector on the island could develop and flourish, they could grow the economy.

      Reply
  • February 14, 2019 at 9:57 pm
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    Cuba is one of the most beautiful destinations in the Caribbean. It is the largest and most diverse. It has an incredible potential. Currently, the tourist figure quadrupled to the previous decade.

    Reply
  • February 16, 2019 at 3:06 pm
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    There are memories of Marti and Fidel in many places, when will there be a new leader that will lead the Cubans in a modern revolt against the present crisis.

    And yes a mean crisis, having visited Cuba 7 times during the past 5 years, I can not help but wonder why such an educated population does not rise up en mass and say enough is enough. One sees people sitting around all day with nothing to occupy them, they wait in line for almost everything due to the short supply of so many essentials. There is an increasing shortage of so many items including food. Many are forced to find less than normal ways to make ends meet. One has to carefully check every financial transaction to ensure the bill is correct and then that the change is correct.
    With so many professionals having been at work in foreign countries, there must be a common awareness of the shortcomings of the present system. Yes, medical care might be free or nearly free, but all medications are either expensive or almost nonexistent.
    This last visit, two weeks ago, was the most frustrating as I observed not only an significant increase in prices as well as many more items on various menus that were not available.
    The government kept publishing increasing tourist figures. This includes many tourists arriving on cruise ships. They spend very little time and money in Cuba. Talking with various casa particulaire owners, their number of guests are down.
    The outlook, as long as the aging old guard remains in solid control, is less than rosy.

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    • February 17, 2019 at 2:33 pm
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      Hi Dave, I think there’s a multitude of reasons why the population doesn’t rise up. Remember that we’re now past the 60-year mark of the Revolution. There is the still lingering presence of the old guard, respect for the current authority, admiration for leaders past, culture, indoctrination in the school system, propaganda. There is an overall lack of context which is now just starting to shift, but people in the provinces have fractions of the exposure to the outside world that people in Havana have. No one has guns, people remember what was fought for, they believe their current system keeps Cuba free from American imperialism – there’s a TON to unpack here. I personally don’t see a new revolt or revolution happening in Cuba. Every time it came close (the last notable time being el Maleconazo) Castro opened the floodgates and released the political pressure that was brewing in the teapot that is Cuba. Throughout post-revolutionary history, Cuba encountered its turning points like Venezuela is facing now. But Cuba is no longer where Venezuela is. People sit and wait, wishing for a better future. But that revolutionary fervor to take matters into your own hands and create a better future – I just can’t feel it in Cuba when I’m there. Side note: I’m not too crazy about a country rallying behind one person or one person being the “leader” or the “savior,” whether that person is José Martí, Fidel Castro, or someone else. People need to understand they have the power to change their lives and their circumstances. They need to believe they own their destinies and then they need to be given room to run. That said, there is the cultural element of machismo and in Latin America it’s very common to rally around a strongman.

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  • February 18, 2019 at 3:33 pm
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    This article makes some good points, but misses important ones as well. All island economies need foreign trade and foreign investments. Cuba is no different. And in today’s world that means dollars.

    One of the most adverse impacts of the blockade is the difficulties Cuba faces is changing tourist dollars for Euros and then spending them for imports. Estimates are that they loose 15% in purchasing power through bank fees for this conversion. Annual costs of the blockade are 3 billion dollars. Even an inefficient, bureaucratic government could do a lot with that money.

    Secondly, Cubans for the most part don’t buy “raw materials” abroad. They buy finished products that are manufactured elsewhere and resold at home. While this puts needed products on the shelves the money that leaves Cuba never return or circulates within its own economy.

    And lastly, but of critical importance, by importing 80% of its food, Cuba is contributing to its own economic crisis. When China began modernizing in the late 70’s despite having nearly 840 million people who were very poor, they were for the most part, food secure and thereby free from the need for foreign agricultural imports. Of course this has changed but food security enabled much of that change. Cuba needs to produce much more from its agricultural sector.

    Cuba has nowhere near the scale nor manufacturing base that China had when economic transformation began, so Cuba must decide whether to take a similar radical stance. Right now they are taking half steps and getting a corresponding limited impact on their economy.

    Finally, let’s be honest. Cuba could ‘reform’ politically, they could elect a liberal democratic president and increase the capitalization of its economy. But none of these measures will satisfy the US. America corporations wants to own Cuba’s greatest assets and wants full penetration of the entire Cuban economy by American banks and hedge funds. They in effect want to turn the Cuban clock back to 1940.

    One need only look around Latin America to see that this has been and remains the cornerstone of US policy in the region. The way forward may depend on changes in the US as much as from changes in Cuba.

    Reply
  • February 21, 2019 at 9:45 am
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    Great analysis. Quite objective and devoid of political intentionality. Many of the comments are also on point. I will be coming back, definitely.
    How damaging is the Embargo/Blockade to the Cuban economy compared to the policies established by it’s own government?
    I live in Cuba and I can say that the effects of the embargo/blockade are real and affect above all the quality of life of Cubans. It also affects citizens and companies from third countries. It has existed for many decades and we have “accustomed” to accept that it exists. But we must always remember that it is imposed by a third country in violation of international rights. It is like, close your eyes, imaging Trump announcing the US will do that to your country and maybe you will understand how wrong it is.
    I agree with Victor and his view on the international policy of the US towards Latin America. Totally.
    Now let’s talk about the Cuban government and its policies… I totally agree with Chris. I am also proud of being Cuban, in certain aspects of the international policy I agree with the position taken by my government, I am also happy to have good doctors to take care of my kids, but in terms of providing for the people the possibility of prospering and finding independently how to improve their quality of life… no sir. We need a change and we need it now.
    About the embargo/blockade there is nothing the Cuban government can do. Sad but true. So why not focusing in being creative? If you want different results, then approach the problem in a different way. Provide the means, give enough freedom and encourage entrepreneurship creating a business enabling environment. Use taxes to promote certain economic activities, not to discourage people from being successful and accumulate wealth.
    Who cares how you call it? What you need is a system that will not only allow people to survive, but also to develop and pursue its ambitions.

    Reply

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