In Cuba, History's Joy -- and Curse

Beyond the beauty of Old Havana, tourists can't escape Castro's central planning -- or the ongoing impact of U.S. sanctions

By Sucharita Mulpuru

Continental Flight 4880, the 8 a.m. departure from Miami for Havana, has an unorthodox check-in. The flight isn't listed on any of the departure screens. Passengers must report to a makeshift desk run by the charter travel company that sells the tickets. There, downstairs by the baggage carousels starting three hours before takeoff, boarding passes are distributed on a first-come, first-served basis. It all seems a metaphor for under-the-radar relations between America and Cuba.

Despite travel restrictions on U.S. citizens and other hassles, tourism is growing -- albeit more slowly than Cuban officials had hoped. Every year, more than 200,000 Americans -- politicians, businessmen, artists, journalists, academics, and legions of Cuban Americans visiting relatives -- manage the trip, 90% with the approval of U.S. authorities. The rest enter illegally via places like Canada and Mexico.

I became part of that 90% when I toured Cuba for 10 days in December with 28 classmates from Stanford Business School. Every year, MBA students propose visits to foreign countries, and when Cuba was approved as 2002's destination, I found the prospect of visiting the Western hemisphere's last communist bastion in the company of my B-school's card-carrying capitalists to be irresistible.

SALSA, CIGARS, RUM.

  We ended up seeing the island and meeting with officials from various government ministries involved with tourism, as well as foreign hotel owners, beach-resort developers, and former CIA agent Philip Agee, now operating a Havana travel agency for Americans. Unfortunately, Fidel Castro was ill and couldn't meet with us.

Americans represent only a small part of the nearly 1.2 million visitors who come to Cuba every year, mainly from Canada, Spain, France, Germany, and Britain. They pour nearly $2 billion into the economy, outstripping revenues from sugar and other core crops such as tobacco. Despite U.S. travel restrictions, Cuba's tourism receipts are comparable to other popular Caribbean destinations like Jamaica and Costa Rica. "Until September 11, tourism grew at a compound annual rate of an astounding 25%," explains leading Cuban economist Omar Everleny. All this would seem to put tourism on a path to dominate the island's economy.

Cuba's appeal is evident as the plane descends on Havana and a vista of stunning countryside and sweeping beaches that cover the longest coastline in the Caribbean fills the window. On the ground, the weather is almost always balmy, and you can't help being entranced by the infectious musical rhythms on every street corner, constant salsa dancing, and seductive aromas of the island's legendary cigars and superb rum.

Given Cuba's physical and cultural attractions, it's not surprising that in the late 1950s more than 30 flights a day made the 90-mile hop from Miami. Americans by the thousands tanned themselves on the beaches and gambled in the notorious casinos of its capital city.

FAREWELL, COMRADE.

  The Castro regime quashed all that on January 1, 1959, when mobs stormed the gambling palaces, smashing roulette wheels and craps tables. But many years later, the desperate need for dollars after the fall of the Soviet Union made attracting tourists an imperative. When Soviet support ended, what Cubans know as the island's "special period" from 1990 to 1993 saw a 35% decline in gross domestic product -- a decline that Mark Frank, editor of the Economic Eye on Cuba newsletter, says "could only be comparable to a country after war."

To rescue the economy, Castro decided to accept the U.S. dollar as legal tender, privatize small businesses, court foreign investment from countries like Spain and Canada, and boost tourism, which was generating a mere $250 million in 1990.

Perhaps the most prominent sign of tourism's revival is Habana Vieja (Old Havana), the proud project of Eusebio Leal, an architect-historian who 10 years ago reinvigorated efforts to preserve the district, which was declared a UNESCO World Heritage Site in the early 1980s. Once a grand and stately neighborhood, the quarter-mile-square district fell into disrepair after Castro took power.

Leon talked Castro into allowing him to run a company, Habanaguanex, which raises funds -- mostly foreign ones -- to renovate buildings, generate cash from tourists, and pour profits into more rebuilding. More than $200 million has been raised since 1994, with the current goal being to renovate 25 hotels by 2005. The new Old Havana already has scores of recently refurbished stores, cobblestone streets, piazzas, and restaurants, all attracting the musicians and entertainers who bring the neighborhood alive. By Sucharita Mulpuru

SNOWBIRD DESTINATION?

  Critics of Leal's project abound. The most charitable dismiss it as a façade thrown up for the cruise-ship crowd (Havana is a significant port for European ships). Others say the project's greatest strength is its continued ability to bamboozle foreign investors, who have yet to see any profits and must cede 51% ownership to Cuba's government. "I don't know why the Europeans keep investing," marvels Teddy Taylor, the Consul General of the U.S. Interests Section in Havana, the closest thing the U.S. has to an embassy on the island.

While foreign investors aren't seeing profits, they're at least gaining market share. Spanish chain Sol Melia now manages 23 properties that account for almost 25% of the island's 36,000 hotel rooms. Enrique Arias, a banker with BBVA, a European group whose holdings are primarily in Latin America, believes investments could pay off -- eventually. "With the high doctor-patient ratio, inexpensive and nice beaches, and warm climates, Cuban real estate has real potential for American retirees," he notes.

U.S. travel restrictions remain the most daunting challenge facing Cuba's tourism industry. Old Havana's renovation and the construction of beach resorts at places like Varadero were undertaken in anticipation of an influx of Americans. But the Helms-Burton law passed by the U.S. Congress in 1996 not only crimped the flow of U.S. visitors but also continues to curtail foreign investment by penalizing in the U.S. any outfit also doing business in Cuba. Sol Melia had to relinquish its U.S. holdings to become a player in Cuba.

$50 SPAM.

  U.S. policy affects tourism in other ways as well. Much to the surprise of many first-time visitors, Cuba isn't cheap. American staples -- things like steak and shampoo, for example -- are scarce, and imported substitutes expensive. Additionally, prices are regulated and taxes high. It's not uncommon to pay $10 for a cocktail, a small bottle of water costs $2, and seats at the Tropicana nightclub start at $70. Author Isadora Tattlin, who spent four years in Cuba and recounted her experiences in Cuba Diaries: An American Housewife in Havana, tells of Spam going for $50 a can.

With the government collecting most of the profits, the few private Cuban-owned tourism companies have dwindled. Paladares, the tiny restaurants operated by Cuban citizens in their homes, once numbered some 1,500. Now a mere 200 remain. And despite high prices, heavy taxes have forced many of the remaining small businesses into the red.

Still, given that the Castro regime exerts an iron grip on the rest of Cuba's economy, many Cubanos are rushing into tourism -- a trend that has caused a brain drain in high-skill professions. Thanks to hard-currency tips, educated Cubans can multiply their incomes by switching to tourist-industry service jobs. For example, the taxi driver who brought me from the airport was an aeronautical engineer, and one of our hotel's bartenders was a doctor.

Tourism continues to inspire high hopes among some investors. "I believe that Cuba could be to America like Hong Kong is to Asia," says Enzo Alberto, the Canadian-Italian CEO of ICC, a major investor in the island's Internet infrastructure. Perhaps. But not until the U.S. trade embargo ends and the Cuban government loosens its stranglehold on the economy.

Mulpuru is a B-Schools Journal writer for BusinessWeek Online

Edited by Thane Peterson

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