Closer than Puerto Rico, or even the states of Hawaii and Alaska, Cuba is by far the largest Caribbean island and is a mere 90 miles off the coast of Florida. Heck, it almost became a U.S. state, back in the early 1900s, when it was a U.S. territory.
After 54 years of frozen relations between Cuba and the U.S., there are finally signs of a thaw. President Obama last month announced plans to normalize U.S. relations with Cuba and finally end the U.S. embargo on Cuba. Travel restrictions have been lifted and travel to Cuba will no doubt increase.
It’s about time – the embargo has caused great suffering among most of the population of the island, and yet has done nothing to dislodge the Castro Communist regime.
It’s also cost the U.S. in terms of lost opportunities (estimates range from $1.2 -$3.6 billion annually in potential exports), as well as tens of thousands of man-hours at the 10 U.S. agencies that enforce the embargo.
Not to mention a constant source of embarrassment: the United Nations publicly condemns the U.S. annually for the embargo, and has done so for 23 consecutive years.
But many question whether Obama’s unilateral actions will be enough. Most articles focus on the actual lifting of the embargo, which Congress has to do. But the real open question is how much of the impact will really trickle down to the Cuban people, and how quickly.
Besides Great Cigars, What Should I Know About Cuba?
Cuba has a stable population of just over 11 million, about the same as the state of Georgia, or the combined population of Louisiana, Mississippi, and Arkansas. Its population is extremely well-educated, with nearly 100% literacy.
Cuba was actually a U.S. possession following the Spanish-American War around 1900, and nearly became a U.S. state but for resistance from U.S. sugar beet farmers who didn’t want the competition from Cuban sugar.
The U.S. granted Cuba its independence in 1902, but Cuba and the U.S. remained closely tied. By 1914, nearly half of all of Cuba’s foreign aid came from the U.S. Although hard to believe now, the island had a very large population of U.S. immigrants.
Even as of 1959, U.S. capital investment in Cuba was more than 3 times its investment in the rest of Latin America combined. The U.S. owned most of the sugar refineries, railroads, and utilities, as well as a lot of the cattle, tobacco, timber, banking, oil, and mining industries.
Things began to go south when Fidel Castro came to power in 1959, and shortly after nationalized the U.S.-owned assets. The U.S. embargo of Cuba went into effect in 1961, and has been in effect ever since – 54 long years of isolation.
During the embargo, sugar and other items were massively subsidized by the Soviet Union, and Cuba has suffered terribly since the collapse of the Soviet block.
Will Obama’s Actions Matter? And If So, How Much?
The “embargo” is not a simple law, but rather a mash of a specific law passed by Congress blocking Cuban goods, along with a number of administrative and executive branch proclamations. The President can unilaterally lift travel restrictions (which just happened). The President can also remove Cuba from the list of terrorist-supporting nations, and also establish diplomatic relations with Cuba — and there are signs these are in the offing. The Executive Branch can also lift export restrictions from the U.S. to Cuba.
As an official of the U.S.-Cuba Trade and Economic Council says, “President Obama is … going to leave a shell, but it’s going to be a proverbial Easter egg – it’s going to be hollow.”
True, but until Congress actually lifts the embargo, there’s a cloud. Opening trade is not as exciting if it can only flow from the U.S. to Cuba. And if Congress doesn’t support opening the door to Cuba, it also can make things difficult from a budget perspective. The President might be able to open an embassy, but if Congress refuses to fund it, what then? And what if the next administration feels like reversing these changes?
Still, there are signs that a thaw is inevitable — but it may take a couple of years for everything related to the embargo to resolve itself.
Will Cuba Really Change? If So, When?
The biggest issue, though, isn’t the U.S. President or Congress: unless the Castro regime really makes substantial changes to make life easier for its people, even lifting the embargo won’t change things much for the average Cuban.
The current Cuban regime needs to make changes to ensure that the opportunities actually trickle down from the ruling elite to the rest of the population. Today, the ruling elite and those associated with tourism live well — the other 98% of Cubans — not so much.
The government provides (or fails to provide) and controls virtually everything on the island. Housing is free, but much of it in terrible disrepair. Water, electricity, and transportation are unreliable. Tlephone service is circa the 1950s, and the internet almost unheard of.
The government completely controls information, and there harsh and unpredictable consequences for those trying to make any changes. The maximum daily wage is $20 for everyone outside the power circle, and since the government controls everything anyone can spend wages on, it eventually goes back to the government as well.
There is no private sector (other than prostitution and a very active black-market). Things like cooking oil and milk are rare luxuries. Until recently, Cubans could not own property.
To its credit, Cuba has undertaken more than 300 local economic reforms since Fidel Castro left power. Foreign investment is now encouraged, and some private-sector jobs are permitted. In April of this year, Cuba began negotiating a cooperation agreement with the European Union, knowing full-well they would be heavily pressured to make human rights reforms.
But…Cuba is still one of the most repressive governments on earth. It tolerates no political dissent. Most Cuban-Americans personally know people who have permanently disappeared. Journalism really isn’t a profession in Cuba. Tales of terrible prison brutality and even biological experimentation are common.
So where are the best opportunities in Cuba in the short to mid-term?
Despite this, there is still likely to be an upswing shortly in exports of certain basic foodstuffs between the 2 countries. Cuban exports of cigars, citrus, sugar, seafood, tobacco, cotton, and coffee to the U.S. will likely increase, and that the U.S. will export of beef, wheat, and corn to Cuba.
Here are some other segments that will surely benefit:
- Agriculture – machinery, equipment, fertilizer – all sadly lacking in Cuba and desperately needed to help the island grow more. There will be near-term opportunities for U.S. companies in all areas of crop production and processing.
- Travel & tourism – before the embargo, Cuba with its abundant beaches was a very popular U.S. tourist destination. During the embargo, Americans could not travel directly there. Now, they can book airline tickets for travel direct to the island. Everything related to tourism will probably increase, including travel agency and cruise ship bookings, hotel accommodations, Western-style food and amenities.
- Construction – the opportunity for U.S. companies to build major infrastructure projects, instead of the new seaport that is currently being built with Brazilian money, or the underwater communications link that is being built by Venezuelan companies.
- Banking – currently, all transactions with Cuban must involve intermediary banks, since U.S. and Cuban banks cannot interact directly, adding significantly to the costs of all these transactions and make them very difficult for smaller businesses.
- Automotive — vehicles, parts, and just about everything related to transportation. These will most likely be for public transportation (should the government choose to make this investment) and even more likely to provide nicer vehicles to the ruling elite, however. There is no sign the average Cuban will be able to afford a car anytime soon, much less be allowed to own one.
Mid-Term Opportunities
The Cuban government remains extremely protective of any outside influences that could create unrest in the population. Mid-term opportunities in Cuba will probably include:
- Scientific, athletic, and cultural items – Cuba’s highly-educated population loves music, and to the extent Cubans can afford them, opportunities to export musical instruments, books, movies, CDs, artistic performances. Scientific equipment is badly outdated or in disrepair, and depending on the Cuban government’s priorities for spending, could be a great opportunity as well.
- Health and beauty products – Cuba’s population is rapidly aging with a very low birth rate (currently negative), and like the U.S. and other mature economies, it will need eldercare, pharmaceuticals, prosthetics, wheelchairs, etc. The market here may be for “B” grade medical supplies and equipment, at least in the short term. The market for other health and beauty products looks promising as well.
- Services – Cuba has been so isolated that it is decades behind in nearly every area. It desperately needs the entire range of professional services, includes engineering, medical, construction, banking, finance, insurance, logistics, and general business innovation and consulting. However, these services will need to be provided – if at all in the short term – in settings that keep these professionals isolated from the masses.
- Telecommunications – Cuba’s telecommunications system is ridiculously out of date. It still has about the same number of phone lines that it had in the 1950s. The island nation needs to be completely modernized; the question here is not the need, but what the Castro regime will permit. Good internet connections and freer international flow of communication, however, are often a significant threat to those in power.
Conclusion?
There are many opportunities in Cuba, but significant changes need to happen in Cuba first, which are likely to come slowly. In addition, Congress still needs to formally end the embargo, and there are no signs from either party that this is likely to happen soon.
There will be major opportunities in the short-term for construction companies and things related to banking and tourism, and quite possibly the agricultural segment, but real opportunities in other areas may come more slowly.
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