Cuban economy

Stratfor’s Global Market Brief assesses Cuba’s future economic reforms, which will be slow paced.

Some snippets of the brief:

Meanwhile, the Cuban economy faces significant problems. Its black market is growing significantly. Inequality is on the rise, along with corruption and crime. Its agricultural output is in decline and its industry inefficient. Though Cuba is unlikely to address these problems by embarking upon an openly free-market, capitalist course, it is no secret that Raul has been looking to China and Vietnam as candidates for economic emulation.

Raul Castro clearly would prefer to model any economic reforms on China, which has maintained state control along with its rapid gross domestic product growth. China is approximately 86 times larger in population than Cuba, but with a much larger proportional rural population — something that helped fuel China’s industrialization. In contrast, Cuba’s economy is more similar to those of the former Eastern Bloc nations, which experienced economic havoc in the 1990s after moving quickly from command-and-control economies toward liberalization.

To avoid such an outcome, Cuba will proceed slowly. Raul cannot make radical changes, and he knows it. Drastic changes reinventing Cuba’s capital structure could prove disruptive, possibly even undermining the island nation’s military. While he must implement reforms to maintain economic growth and prevent Cuba’s standard of living from worsening, continued assistance from Venezuela and China — Cuba’s two largest trading partners — will allow Raul and whoever takes his place to proceed with reforms at a slow pace for quite some time.

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Cuban market reforms similarly could pave the way for significant foreign investment in the agriculture, service and technology sectors. Raul Castro is less opposed to ethanol than his predecessor was, and Cuba has the capacity to manufacture as much as 3.2 billion gallons of ethanol annually from its sugar crop. This could serve as a huge source of capital, particularly as demand for the fuel rises worldwide. Cuba’s well-educated population also could provide an ideal labor pool for outsourcing in a variety of areas in the service sector, as well as in technology and biotechnology firms.

For any real economic takeoff to occur, however, Cuba’s leaders will have to promote an entrepreneurial ethos among its people and businesses. (Such an ethos already exists in the black market.) Cuba will have to invent a business culture mostly from scratch, though it already has instituted programs that support (albeit heavily taxed) small businesses that serve the tourist industry. The regime also will have to balance any economic reforms with its propaganda of economic egalitarianism, though this already is being undermined by rising inequality. A successful model for maintaining communist rhetoric in support of the party while simultaneously pushing through capitalist reforms exists in China, and Cuba has been watching.

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Wired explores Cuba’s potential as an ethanol player post-Fidel:

Fidel Castro hates ethanol. He thinks it punishes the poor by driving up food prices. But Cuba produces a lot of sugar, and with Fidel’s brother Raul — a fan of biofuels — calling the shots (at least for the time being), Cuba could become a key player in the global ethanol game.

It wouldn’t happen overnight, and it would take a huge investment in the country’s rickety sugar industry, but Cuba has the potential to produce 3.2 billion gallons of ethanol annually, according to an analysis (.pdf) by Juan Tomas Sanchez of the Association for the Study of the Cuban Economy. Another Cuba expert, Jorge Hernandez Fonseca, puts the figure (.pdf) closer to 2 billion gallons but even that figure would place Cuba third — behind Brazil and the United States — in worldwide production.

Of course, reaching either of those numbers would require Raul Castro to open the door to foreign investment, but that may not be as unlikely as it sounds. The Washington Post notes there’s speculation that Fidel’s exit opens the door to economic reform like we’ve seen in China, and it’s worth noting Cuba is quietly modernizing its ethanol infrastructure.

Raul Castro is seen as a pragmatist who is more concerned with improving Cubans’ daily lives than spreading la revolución, and according to Reuters he is believed to favor loosening state control on Cuba’s economy. The country has said it would allow foreign investment in its tourism industry.

Whether that means he’ll allow foreign investment in the sugar and ethanol industries remains to be seen (Cuba produces about 1.2 million tons of sugar annually, but was the world’s leading producer before Castro took over in 1959). Cuba started overhauling 11 of its 17 ethanol refineries last year. That’s an expensive proposition, and the money will have to come from somewhere. And its not as if agribusiness wouldn’t love to have a piece of that pie. The Wall Street Journal notes that Archer Daniels Midland tried to get in on the Cuban ethanol game in the 1990s but was rebuffed by Fidel. Perhaps Raul will be more welcoming.

Cuba doesn’t have much need for ethanol, Sanchez writes, and could export as much as 3 billion gallons a year — worth about $7 billion at today’s prices. Don’t look for any of that ethanol to flow in America though. The State Department says it won’t lift the trade embargo on Cuba any time soon.

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