How much economic potential does Cuba have?

I’m not one of those who thinks Cuba is the next Singapore or even the next Puerto Rico.  Why not?

I’m willing to assume that the end of the American embargo will mean some kind of economic liberalization over the next ten years.  But how much good will that bring?

We could start by looking for relevant comparisons.  We could ask how well have non-British-ruled, non-Dutch-ruled, non-American-ruled Spanish-speaking Caribbean islands done?  There is a fairly clear example of such a country with some ethnic, cultural, historic, and linguistic similarities to Cuba, namely the Dominican Republic.  For non-PPP-adjusted gdp per capita, the D.R. clocks in at about $5800 per year.  And that is about where I think Cuba will end up, after a good bit of turmoil.

Now various official sources put Cuban per capita gdp (again, non-PPP-adjusted) at about that same level.  That is highly misleading, and yes I have been to both countries.  (Other countries at that level don’t have so many hungry people or so many women selling their bodies to tourists.)  In any case I expect Cuban reforms, along with a good bit of additional deindustrialization from U.S. competition, to bring a short-run gdp dip, with an eventual climb into a D.R.-like economy, albeit with big bumps along the way.

Here are a few additional points:

1. The Caribbean in general has done very poorly since the economic crisis of 2008.  Most of it does not show signs of bouncing back.

2. The short-run trends for foodstuffs are not so great.  The major agricultural exports are sugar, citrus, fish, cigars, and coffee.  Sugar is by far the most important of those, and right now the sugar price is well below half of its 2011 level.

3. Cuban industrial production is below half of its 1989 level (pdf, p.8).

4. National savings and investment rates are at about ten percent, well below Latin American averages (pdf, p.8).

5. I don’t in general buy “brain drain” arguments, but they do sometimes apply to islands and for historical reasons they are especially likely to apply to Cuba.  Many of the most talented Cubans were encouraged to leave, or managed to leave, and staying in Miami will be better than going back for a long time to come.

6. Cuba has some of the best beaches in the Caribbean, but I expect most of those returns to accrue to land and capital, not labor.

7. Cuba already imports 30% of its food from America.  Note that sum has been falling lately, as Cuba seeks cheaper alternatives, such as food from Vietnam.  Post-liberalization, trade with America will go up a good deal but we are not starting from zero under the status quo.

8. Cuba is inheriting some very serious problems with institutions, and that is assuming they manage to move away from communism.  In my admittedly limited experience, a fair number of Cubans still believe in communism, while also thinking the revolution somehow went astray.  Emmanuel Todd has argued that Cuban family structures make the country susceptible to authoritarian rule.  I consider that speculative, but still communism has had a long shelf life there, well past the fall of the Soviet Union, so let’s not dismiss it out of hand.  The country also had a notable history of instability well before the Castro revolution.  It is hard to be optimistic on this front.

9. Cuba seems to depend a good deal upon…Venezuela.  Is that an asset you wish to hold in your portfolio?

10. Foreign investors can hire Cuban labor only through a state employment agency, and no this has not led to a form of efficient offsetting power, rather it has kept productivity low.  More generally, this long Brookings study of FDI in Cuba (pdf) shows how difficult the environment is for foreign capital.

11. Costa Rica has far, far better institutions than Cuba and still it is relying on agriculture and tourism.

On the bright side:

12. The island has significant reserves of nickel and cobalt, top five in the world for nickel by many estimates.

13. Literacy is high, probably higher than in the United States, and there is a functioning social health infrastructure which reaches a high percentage of Cubans.

14. Circa 1959, the book value of U.S. capital in Cuba was three times higher than in the rest of Latin America combined (pdf).

15. The Cuban diaspora may nonetheless kick in as a source of talent and investment.

I’m not a super pessimist on Cuba, I just think they will need a long time to get to the point the Dominican Republic is at today.  Being “the next Costa Rica” seems for them impossibly far off.


Comments for this post are closed