Cuba for Realists

Not going anywhere fast.

Photographer: Joe Raedle/Getty Images

This has been a year of new possibilities for Cuba. Even with the U.S. embargo still in place, the restoration of diplomatic ties has injected the socialist redoubt of Fidel and Raul Castro with energy and hope -- not to mention tourists bearing dollars and euros. As things stand, though, hopes for a Cuban economic miracle are likely to remain just that.

True, the economy grew by almost 5 percent in the first half of this year, a big improvement over last year's 1.3 percent. Meanwhile, U.S. companies are prospecting. As the shadow of U.S. sanctions recedes, investors from Asia, Latin America, and old and new Europe are looking, too.

The trouble is, here's what they find: a state that ring-fences the choicest investment opportunities; frowns on majority ownership; is slow to approve new ventures; controls the hiring, firing, and payment of workers and the distribution of agricultural and other goods; and reserves the right to expropriate businesses as it sees fit. Recent reforms have allowed some Cubans to start certain kinds of small businesses -- a dramatic change by the island's impressive standards of economic repression. But the Cuban state has hardly gone pro-enterprise. Or pro-freedom, for that matter: Its political repression continues mostly unchecked.

QuickTake Cuba-U.S. Reboot

Could there be such a thing as "capitalism with Cuban characteristics"? That might be the hope of Luis Alberto Rodriguez, the Cuban army general who runs the state-owned conglomerate controlling more than half of Cuba's economy, from hotels and gas stations to rental car fleets and container ports. If you're hoping to do business in Cuba, he's likely to be your partner, as an article in this month's Bloomberg Markets makes clear. Yet the general is mistaken. In the end, you can have capitalism or Cuban characteristics, but not both.

No doubt, the lifting of the U.S. embargo would help to liberalize the economy, partly by making the gains of liberalization bigger, and faster to arrive. But real change depends on a sudden access of wisdom on the part of a vacillating and sclerotic one-party state facing a major leadership transition when Raul Castro steps down in 2018.

Without radical reform, Cuba will struggle to avoid further stagnation. Its state-owned enterprises are uncompetitive and burdened with bloated payrolls. To make things worse, a demographic challenge looms: Cuba's population is the second-oldest in the hemisphere. Cigars, beaches, and charming old Chevrolets won't suffice to lure $2.5 billion a year in foreign investment -- Cuba's stated goal, and a small fraction, by the way, of what it really needs.

The full reform agenda is daunting, but Cuba could do one smart thing quickly. The government should finally abandon the country's dual currency system, which forces its best and brightest to moonlight as taxi drivers to earn hard currency, cloaks the inefficiency of state enterprises, and makes it harder for foreign investors to do business. The regime has repeatedly punted on its time frame for unifying the peso. Will Raul Castro fulfill a pledge to do so before next spring's big party congress? If he does, a tentative Cuba libre would be in order.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.