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.

[…]

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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• Cuba’s economic growth in 2007 was 7% — as per the CIA’s estimate. (H/T: The Cuban Triangle)

• Mexico’s center-right president to improve relations with Cuba and shun Cuba’s opposition.

• Cuba and state sponsored terrorism.

• A dual-murder conspiracy against former prime minister Pierre Trudeau and Cuban President Fidel Castro?

• US hegemony over the Western hemisphere, a thing of the past?

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O Estado De S.Paulo reports Brazil’s President Lula da Silva will offer Cuba $1 billion dollars in credits to finance the purchase of aliments, housing construction, and exploration of nickel as well as other projects, affirm Brazilian diplomats. 

[Photo: Reuters — Cuban interim-President Raul Castro and Brazilian President Lula da Silva review FAR Honor Guards.]

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Brazil plans to offer $500 million in financing to Cuba.  Brazilian President Luiz Inacio Lula da Silva will be in Havana today, reports Valor Economico.  Lula is expected to announce agreements allowing Petroleo Brasileiro SA to explore oil in areas in the Gulf of Mexico that are controlled by Cuba, where Petrobras will build a lubricant factory.

Commentary on a new No. 2 in Cuba.

Carlos Lage, who has gained importance as a political actor in Cuba’s hierachy, evaluates housing construction in Villa Clara.

Cuban Government further lowers housing construction goals.

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According to AP via International Herald Tribune, trade between Cuba and China grew by 23 percent to more than US$2 billion (€1.4 billion) in 2007, solidifying China’s place as the communist-run island’s second-largest economic benefactor behind oil-rich Venezuela.  China is Cuba’s second-largest trading partner and the top importer of Cuban products, especially nickel and sugar.

China’s influence throughout Latin America is prevelant, and its strategic relationship (economic & military) with Cuba is evident. 

Read the prospect of China’s rise to superpower status for 2008.

Excerpt of article:

Here comes the world’s newest superpower. The rest of the world is gloomily contemplating economic slowdown and even recession. Not in Beijing. China is set to make 2008 the year it asserts its status as a global colossus by flexing frightening economic muscle on international markets, enjoying unprecedented levels of domestic consumption and showcasing itself to a watching world with a glittering £20bn Olympic Games.

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The president, Fidel Castro, is unlikely to return to office. Following the handover of power “temporarily” to his brother, Raul Castro, in July 2006, the succession has in effect already taken place. This reduces political risk in the event of Fidel Castro’s death. Raul’s leadership style is less centralised, and he is likely to introduce some liberalising economic measures in the coming year. Despite these changes, no improvement in Cuban-US relations is expected until 2009, when a new US president will take office. The Economist Intelligence Unit expects that US sanctions will be eased before the end of 2009, but our forecast does not anticipate normalisation of relations. Cuban economic reforms will be gradual, with an expansion in the role of markets and price, wage and exchange rate reforms. The GDP growth surge of 2005-06 will give way to lower, but still firm, expansion. Foreign investment and financing flows will be sufficient to cover a current-account deficit of 1-2% of GDP.

Key changes from last update

Political outlook

Within Cuba, a broad public debate has raised expectations that policy adjustments will increase living standards in the coming year. If the government fails to deliver, the level of frustration will grow. However, there is still no sign of revolt.

The US president, George W Bush, has confirmed that there will be no easing of hostility towards the Cuban government, despite the change in leadership and signs of economic liberalisation ahead.

Economic policy outlook

Following a public debate on economic policy that proved to be broad and challenging, we expect important economic policy initiatives in the coming months.

Economic forecast

In the absence of new data, our economic forecast is unchanged

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The Economist’s assessment of the World for 2008 has been published, and forecasts the following for Cuba:

GDP growth: 5.4%
GDP: $49bn (PPP: $134bn)
Inflation: 4.3%
Population: 11.2m
GDP per head: $4,350 (PPP: $11,970)

The country is changing, but at an evolutionary rather than a revolutionary pace. The coming year will see Fidel Castro (81) move upstairs—either to take on the role of elder statesman or to meet his maker. His brother, Raúl (76), will consolidate his power as acting president, but at the head of a government team rather than as undisputed leader. More open political debate will be tolerated.

To watch: Relations with the United States will rise a degree or two above absolute zero as reforms progress in Cuba and hardline Republicans lose influence in Washington.

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