The Fight for Cuba’s Future

by: Cliff Waldman, Chief Economist

The great British economist Joan Robinson once noted about India that whatever you can rightly say about it, the opposite is also true. These days, the same observation about the considerably smaller, but nonetheless very consequential, country of Cuba holds true. This large island nation, once the site of a near nuclear disaster, has captured global attention with a swirl of often contradictory domestic and international disruptions that are rapidly shaping its future.

Charting a New Path on Cuba

In December 2014, President Obama stunned the world by announcing a new day in U.S.-Cuba relations. Persuaded that further economic isolation from the U.S. would serve no beneficial purpose, the President announced that, subject to congressional approval, there would be a fully functioning U.S. embassy in Havana for the first time in more than 50 years. Restrictions on remittances, travel, and banking were, to some extent, eased. The administration relaxed controls of sales to private Cubans on a range of important goods. And more Americans were allowed to travel to Cuba. As I noted in a paper that I wrote right after the December 2014 announcement, the stage had been set for a very different day in the life of a small but potentially dynamic economy.

In the years that followed, the debate about Cuba has played out on some levels that have been difficult to reconcile. Political analysis of the reengagement with Cuba led to one set of views, while economic thinking gave rise to a very different perspective. Many who took the political view felt strongly that U.S. reengagement was a validation of a Castro regime that remained politically repressive and weak on human rights. The economic lens viewed the Obama initiative as part of a response to the gradual unleashing of market forces that began in 2008. Such market reforms, many argue, planted the seeds for a new Cuba that will continue to take shape well after the Castro era. As has happened in a number of developing economies, economic reforms and political stasis are currently coexisting in a tense disequilibrium.

Reversing the Course

President Trump's announcement on June 16 was, in some respects, a consequence of this political/economic dissonance. However, by only being a partial reversal of the Obama opening, it was also a recognition of the market changes that are underway in Cuba. These changes have potential implications for the U.S. as well as a Western Hemisphere economy that has been experiencing growth-killing political turmoil. While Brazil's deep recession has seemingly abated, its ongoing political crises still cast a cloud over its economic prospects. There is broad economic weakness throughout Latin America, a region that very much needs a new growth model. While Mexico and Canada are beginning to show signs of improvement from the slow recovery of the post-financial crisis era, NAFTA is now under the political and economic spotlight.

The President is appeasing those who saw the Cuba opening as a de facto political capitulation to the still repressive Castro regime. However, for the sake of the Cuban people’s future prosperity as well as a much-needed strengthening of a troubled Western Hemisphere supply chain, full engagement by the U.S. is needed for the emerging Cuban economy.

Cuba’s Future

What exactly is Cuba's economic potential? An aging population along with weak investments and exports continue to challenge the country. By contrast, Cuba has a broadly educated population, beneficial proximity to the U.S., and proven innovation capability (notably in its pharmaceutical industry). Further, the smart unleashing of a small business sector, as well as greater autonomy for firms to retain earnings and make investments, employment, and pricing decisions over time will strengthen capital spending. The development of a viable manufacturing base will require a focused policy program, but the potential is certainly there.

With smart and effective engagement by the U.S. and other potential trading partners, Cuba's future will be shaped by the liberation of markets that is well underway, not by shortsighted political restraint. Disengagement by key Western Hemisphere players will only serve to strengthen the latter at the expense of the former.

CubaErin Graziani