On Friday, two weeks after returning from Cuba, we held our final class where students presented their analysis of an industry within Cuba and we discussed our key takeaways from the trip. Ultimately, all students agreed that Cuba is in a period of transition but must overcome many major hurdles before it can move towards stabilizing its economy.
As I mentioned in an earlier post, the Cuban government is working towards shifting employment away from state-owned enterprises with a stated goal of non-state enterprises representing 45% of employment in 2017. Today there are 200+ categories of non-state owned enterprises that are permitted by the Cuban government. While many non-state enterprises were formed in the 1990’s, a majority of them were shut down in the early 2000’s. The failure of the businesses can be largely attributed to un-economic overregulation (many of which are ideologically driven laws), lack of formal business training for entrepreneurs and dearth of investment capital (both from investors and banks).
Disparity of Wealth
The Cuban Government wants Cuba to prosper but is worried about prosperous Cubans. Following the 1959 Revolution, the gap between the poorest and the wealthiest Cuban citizens has been quoted to be roughly 4x at its peak. As one could imagine, this gap has rapidly expanded since 2010 when Raúl Castro took action to allow more private sector jobs in Cuba. In order to mitigate wealth disparity, the Cuban government has placed significant restrictions on entrepreneurs’ ability to own multiple businesses, to gain scale and to gain foreign investment. For example, entrepreneurs are only permitted to own one type of each business (e.g., a restaurant owner can only own one restaurant).
The Importance of Tourism
While tourism in and of itself is a critical industry to Cuba’s economy, tourism is also integral to nearly every other industry that operates on the island. Although there is economic equality amongst Cuban citizens, they represent an extremely minor portion of Cuba’s GDP. The average Cuban citizen earns $30-$80 per month whereas we spent roughly $100 per day on the island (excluding hotel accommodations). As a result, nearly every business on the island is focused on selling to tourists given that selling to Cuban citizens is not an economically viable business.
Foreign Direct Investment & Ownership
Cuba realizes that its future economic development is highly dependent on foreign direct investment. That said, while Cuban law does not explicitly prohibit total foreign owned assets, there are only six today (as of August 2015). Further, the U.S. and Cuba do not currently recognize court judgements within each other’s jurisdiction.
Financial Market Infrastructure
Cuba currently maintains a dual currency system. Furthermore, the banking system complicates even the most basic transactions (e.g., deposits and fund transfers). Today, Cuba lacks ATMs and the ability to widely accept credit cards; this creates a large challenge for any consumer facing industry, forcing businesses to rely on cash transactions.
As a result of these issues, many investors and multi-national corporations are patiently waiting on the sidelines until they deem the risk-reward tradeoff in Cuba to merit investment.
-Michael Echemendia ’16