Why Cuba’s economy could stay trapped in the Stone Age

Why Cuba's economy could stay trapped in the Stone Age
By Rick Newman

Google (GOOGL) wants to help the Cuban government roll out broadband
Internet across the country. The Cuban government appears to prefer
dial-up service.

Not for themselves, of course. Roughly 5% of Cubans—mostly elites such
as government officials and favored citizens—already have broadband at
home. But the Communuist government of Raul Castro worries that broader
Internet coverage will make it harder to monitor citizens and control
information. "The old people who run the Cuban government don't really
get the Internet," says Carl Meacham of the Center for Strategic and
International Studies. "They figure you can do surveillance better with
dial-up." So Google's offer to connect the majority of the country—at
very little cost—has gone nowhere.

The restoration of diplomatic ties between the United States and Cuba
earlier this year has generated modest excitement about new economic
opportunities -- for Cubans and foreigners alike -- in a nation that
desperately needs to be modernized. Castro himself has called for
liberalization, generating hopes of an economic revolution in the island
nation. "His economy was stuck in a dead end," President Obama told
Yahoo News in a recent exclusive interview. "The only way for him to get
out of that was to engage economically with us."

But reports of Cuba's rebirth have been greatly exaggerated. The Cuban
economy remains under the control of a totalitarian regime that would
lose power and influence if liberalization were to occur. Unlike China,
Cuba does not have a plan to use capitalist tools in service of
communist ideals. It has few of the internal resources needed to
generate wealth and is deeply suspicious of western experts who know how
to modernize. On top of that, there's still a U.S. trade embargo against
Cuba, and the U.S. Congress seems unlikely to pass legislation required
to revoke it.

Not quite a land of opportunity
Cuba under Raul Castro, Fidel's younger brother, has liberalized in a
few small ways. European hotel and travel companies, not subject to the
U.S. embargo, have been operating there for years. It's now easier for
ordinary Cubans to get permission to travel outside the country. And
Cuba has loosened rules allowing more individuals to set up small shops.
Economic growth is above 4% this year, a notable improvement.

But Cuba is hardly a golden opportunity brimming with promise. It has a
confusing currency system with two different monetary units, neither
tradeable on international markets. Cuba's government controls most
businesses of any size, which is why 75% of all workers are employed by
the state. In China, the private sector employs 75% of all workers. Cuba
claims an unemployment rate of less than 3%, yet an estimated one-third
of state employees hold unneeded, make-work jobs, and stories abound of
people trained as doctors, teachers and other professionals working as
cab drivers or hotel clerks, because they can earn more in tips from
tourists than they can from a state economy stuck in 1960.

If Cuba were to allow some basic capitalist practices with clear ground
rules, it might attract plenty of foreign investment. It's an appealing
locale, after all. GDP per capita is about $7,000, which is one-eighth
the level of the United States but still far higher than in Haiti and
slightly larger than in the Dominican Republic, Ecuador or Belize. And
strong ties with Cuban expatriates in Florida and other parts of the
U.S. would provide a ready source of eager investors if opportunities
appeared sound.

For the most part, they don't, however. At least not yet. The Cuban
government can't get credit and must pay for imports in cash.
Agriculture remains so rudimentary, despite recent improvements, that
lack of adequate food for ordinary Cubans is still an occasional
problem. American agricultural firms and food companies do ship goods to
Cuba, but payment must be made in advance and cargo ships sometimes
languish at port in New Orleans, as merchants await payment.

Some Cuban entrepreneurs have found successes recently in niches the
government seems willing to let them claim, whether legal or not. One
clever service is a lineup of (usually American) movies, TV shows,
magazine and other types of media downloaded onto flash drives and sold
to Cuban subscribers every week. Airbnb has caught on, because Cubans
are happy to rent their homes to tourists for extra cash (arrangements
must be made over the phone rather than online). There are
Craigslist-type web sites catering to the tiny portion of the population
that does have Internet access, mostly near Havana. And American
companies that produce power equipment say they've had some success
selling Cuba gear needed to upgrade and expand the nation's electrical
grid, which only provides a few hours of power for most Cubans each day.

Most U.S. companies checking out Cuba, however, are small or mid-sized
firms willing to take risks for a bit of growth. The cream of the U.S.
economy, so far, seem to be taking a pass. "It's hard to find a big,
name-brand company going into Cuba in a big way," says trade expert Gary
Hufbauer of the Peterson Institute for International Economics."It's
just very difficult to do business there." Cuba attracts less than $500
million in foreign direct investment each year, which is tiny for a
nation of 11 million people. The Dominican Republic, with a similar
population, garners more than four times as much FDI.

Despite the political opening with the United States, Cuba's most
promising trade partner may be China. "They've studied the Chinese model
quite carefully and they have a lot of visits with the Chinese," says
Hufbauer. "That's the path they'd like to follow." The huge Chinese
telecom firm Huawei, in fact, might get a lot of the business Google
lost out on. Google's not complaining.

Rick Newman's latest book is Liberty for All: A Manifesto for Reclaiming
Financial and Political Freedom. Follow him on Twitter: @rickjnewman.

Source: Why Cuba's economy could stay trapped in the Stone Age - Yahoo
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