The Awakening of an Island Frozen in Time Could Cuba’s new economic development affect neighboring economies in the long term?

Cuba is poised to rapidly expand its economy once diplomatic relations have been restored with the United States.  How should its neighbors react?

by Francisco Jose Robles Cedeno, MBA ‘15

Decades after political and military standoff, there is a rumbling of a new challenge in the Caribbean. After the baton was passed between the Castro brothers in 2008, more economic policies have been enacted, creating momentum for Cuba to emerge as an economic powerhouse. The rapprochement among the United States, European Union, and Cuba has provided the headway for greater momentum. Through its disadvantages, its people, and potential future foreign direct investments, Cuba could improve its national competitiveness, destabilizing the regional economic development of countries such as Costa Rica, Dominican Republic, and Mexico; countries that share economic climate shocks and trade ties.

Cuba Has Significant Advantages in the Region

Using classical economics, the resource and purchasing power parity advantages made available with the recent relaxation of the economic embargo and trade normalization with the United States will cease to exist in the long term. As the Cuban market synchronizes with the rest of the developed world, any cost benefits out of Cuban ties will cease to exist. Thus, a wider strategy to develop a sustainable national advantage is needed. Under the lens of Porter’s national advantage diamond [1], Cuba has some of the required elements to establish itself as a Caribbean economic power. The largest island in the Caribbean boasts the highest human development index in the region [2], a composite measure that considers educational achievements and standard of living, for the last 5 reported years. Cuba also features the second highest percentage of tertiary school-age population [3], which is the percentage of the population having completed some Bachelor’s up to Doctoral level, as established by the International Standard for Classification of Education (ISCED). Although having an educated workforce by itself does not lead to a competitive advantage, Cuba has spent an average of 0.6% of its GDP [4] on average between the years 2005 to 2012 on research and development, the highest of such expenditure in the region. This type of expenditure is more difficult to replicate and sustain, creating advantages to competitiveness. The island also ranks third [5] in the region for the headcount of researchers per million inhabitants after Costa Rica and Trinidad and Tobago. Cuba published close to 245 scientific and technical journal articles [6] on average between the years 2001 to 2011 (ranking fourth in the region after Mexico, Venezuela, and Colombia). These accomplishments show the knowledge impact and its diffusion on specialized fields that could create a competitive advantage.

Cuban Government is Seeking to Improve Its Economy

In recent years, the Cuban government has started to catalyze the competitive performance of its economy by deregulating state-run companies [7]. These policies show the makings of strong governmental industrial policy, allowing for the “cuentapropistas” (as entrepreneurs are called in Cuba) and medium-sized businesses to operate based on supply, demand, and recapitalization in a wider sense. As Porter highlighted for the creation of national competitiveness, the market-oriented policies show a focus on the creation of factors of production by further modernizing and allowing greater access to its telecommunications infrastructure [8], and inviting foreign direct investments [9][10], among other developments. Although it is still early to tell how these policies will engender a strong domestic rivalry, or how the home-market demand will develop, it would be expected that incomes of Cubans will increase, making for a stronger home-market demand and requiring companies to innovate faster.

Although the Cuban economy has the potential for a strong domestic rivalry, coupled with its geographic concentration, the market-related polices must be enacted at a faster rate and succeeded by sustainable economic policies that do not favor any individual company or particular industries. Any government protection or involvement would not allow market efficiencies to take effect, affecting how skills and advancements are accumulated and the establishment of a Cuban competitive advantage. Furthermore, any sustainable policy should go beyond the short-term cash flow expectations and aim for long-term incentives for investment and capital gains to further develop human skills, infrastructure, and technology. In turn, this will enable companies that develop sustained investment strategies that will outlive any economic policies. Lastly, it is arguable that a country waking up from its frozen past may benefit from currency controls to tip scales to its favor as it starts to compete internationally.Pegging the current Cuban convertible peso to the US dollar and the dual currency system will inhibit the economic development of the island in the long term. The Cuban government and companies would develop a myopia for cash flows while depleting the potential energy from economic advantages or disadvantages created by previous investments. The fear that “undermining state controls as well as endangering the profitability of state-owned enterprises” [10] leads to a lower economic efficiency curve and a less dynamic economy prolongs market inefficiencies and endangers its own future.

Recommendations for Cuba’s Government and its Neighbors in the Caribbean

Caribbean economies must develop their own “early-warning systems” as Porter called it; they must determine those critical points that send messages about emerging trends and policies that will lead to a Cuban competitive advantage. For example, if the views of those that want to integrate the Cuban economy into the global markets continue to replace those of the communist regime, the Caribbean economies must act before their economies start to lag. Another signal would be policies implemented by other Caribbean or non-Caribbean economies in reaction to changes in Cuban economic policies.

Although the complete lift of the United States economic embargo would help the Cuban economy, it is up to the government to launch rapidly sustainable economic policies in order to develop those national advantages in the long term. Thus, a critical point for any economic development is to provide for the infrastructure and education, among other things, and challenge companies to improve and innovate for longer-term growth. Could Cuba become a regional power economy? It is up to the Cuban government to recognize and act on the opportunities and educated labor force at hand in a reasonable amount of time.

[1] Porter, Michael E. The Competitive Advantage of Nations. Harvard Business Review. March – April 1990

[2] United Nations Development Programme Human Development Reports Table 2: Human Development Index trends, 1980-2013. http://hdr.undp.org/en/data. Last accessed on 05/13/2015

[3] 2013 United Nations Development Programme Human Development Reports Table 9: Education. http://hdr.undp.org/en/data. Last accessed on 05/13/2015

[4] 2013 United Nations Development Programme Human Development Reports Table 10: Command over and allocation of resources. http://hdr.undp.org/en/data. Last accessed on 05/13/2015

[5] UNESCO Institute for Statistics. Global Rankings: Latin America and the Caribbean. http://www.uis.unesco.org/DataCentre/Pages/global-ranking.aspx. Last accessed on 05/13/2015

[6] World Bank. Data: Scientific and technical journal articles.http://data.worldbank.org/indicator/IP.JRN.ARTC.SC/countries. Last accessed on 05/13/2015

[7] Frank, Mark. Cuba to embark on deregulation of state companies.http://www.reuters.com/article/2013/07/08/us-cuba-reform-companies-idUSBRE9670WV20130708. Last accessed on 05/13/2015

[8] Adams, David. Cuba aims to ramp up Internet access: U.S. State Department official. http://www.reuters.com/article/2015/03/30/us-cuba-usa-telecommunications-idUSKBN0MQ2BV20150330. Last accessed on 05/13/2015

[9] Cuban Ministry of Foreign Trade and Investment. Cartera de Oportunidades de Inversion Extranjera. http://www.granma.cu/file/sp/cartera-de-inversion-14/datos/documentos/Cuba_cartera-de-oportunidades_2014_ESP.pdf. Last accessed on 05/13/2015

[10] Feinberg, Richard. Cuba’s Foreign Investment Invitation: Insights into Internal Struggles. http://www.brookings.edu/blogs/up-front/posts/2014/11/21-cuba-foreign-investment-feinberg. Last accessed on 05/13/2015