(Bloomberg Opinion) -- To judge by the hype in Havana, capitalism is flourishing in the new Cuba. At this week’s Havana International Trade Fair, delegations from some 60 nations gathered to flaunt wonders from prime cigars and designer rum to Canadian chemicals. Not to mention the requisite jabs at the enduring U.S. economic embargo, which has dampened the enthusiasm by potential investors from El Norte.
Look beyond the fairgrounds, however, and the billboard isn’t so encouraging. Even as it expands, Cuba’s emerging private sector is struggling against red tape, monetary incontinence, official ambivalence over economic reforms, and ideological barricades left over from the Cold War. The innovation and enterprise the island so badly needs to spark economic recovery and rescue the revolution from itself are still wanting.
True, privately run companies are leading a revival of travel, leisure and entertainment, and have created half a million jobs in the past five years, according to Pavel Vidal, a Cuban economist who teaches at Pontificia Javeriana University in Cali, Colombia.
Yet that’s only about half the jobs eliminated from downsizing bloated and profligate state-owned companies since 2009. Far more pain is in store as Cuba struggles with falling export revenues and state-run behemoths that thrive on wildly overvalued “socialist pesos.”
President Miguel Diaz-Canel, the first leader revolutionary Cuba has known who is not a Castro, was tasked with kick-starting reforms enshrined in a new constitution. And yet Diaz-Canel’s first 100 days have been underwhelming.
Two vice presidents and six ministers from Raul Castro’s days were cashiered, but three of his vice presidents and 16 holdovers from the old regime kept their seats. And don’t confuse cabinet shuffles with renewal: Although the powerful Jose Ramon Machado Ventura, a Stalinist old-timer, stepped down from his vice presidency, he remains in charge of “cadre policies,” an aerie from which he controls who’s in and who’s out in the bureaucracy.
Unsurprisingly, the lack of government transparency is also at issue. Start with the official claim that the economy grew by 1.1 percent in the first half of 2018, even though production of the island’s signature export, sugar, is down 40 percent from the 2016-2017 harvest and tourist arrivals are slowing, writes Vidal in the most recent Cuba Standard Economic Trend report. Throw in the public deficit: Although it has narrowed slightly, it still hit an alarming 9 percent of gross domestic product last year, and is reckoned to worsen this year.
Cuba’s investment rate, at 10-15 percent of gross domestic product, “is one of the lowest in Latin America and doesn’t even cover the cost of capital depreciation,” Vidal told me.
Compounding Cuba’s travails is Venezuela’s collapse, which has staggered trade and deprived the island economy of cheap oil and credit. “Cuba no longer has the leeway to learn from crisis and adapt,” John Kavulich, president of the U.S.-Cuba Trade and Economic Council, said in an interview. “It’s now in constant crisis.”
This is where more capitalism could help. Raul Castro’s reforms eased some restrictions on external capital: Foreign investors no longer need submit environmental impact studies or show that their projects would not infringe upon national defense. Native enterprise hasn’t been so blessed. “The government has opened the economy mostly for low value-added companies in which professional opportunities are limited,” said Vidal. “If I were still in Cuba I’d be working in a restaurant or driving a taxi.”
Even modernizing policies fall short. Consider the forward-looking move to curb tax evasion and off-book dealings by requiring businesses to move their money through the banking system. Yet that initiative collides with Cuba’s failure to allow businesses to use electronic payments, incorporate or import supplies legally — so ensuring a flourishing black market.
Then there’s the absence of national wholesale markets that forces business owners to travel abroad for merchandise, services and parts. It’s a convolution that costs Cubans a fortune while enriching countries such as Panama, Mexico and the U.S.
Driving the disconnect is a red book of official misgivings about the reforms and the markets that they are meant to foster. Private enterprise has increased wealth, the logic goes, but also inequality, and that thwarts revolutionary ideals and chafes on Cubans excluded from the winnings. “A government hotline shows that most people are upset by inequality and blame the reforms,” said Vidal. “In fact inequality is a pretext for government hardliners who don’t like reform in the first place.”
Another obstacle: Cuba’s commitment to preserving the military’s lock on the most lucrative economic sectors. The U.S. took that predilection into account late last year when it slapped sanctions on dozens of hotels, travel agencies, consumer shops and consultancies controlled by or serving the Cuban armed forces and intelligence — and National Security Adviser John Bolton just announced a few more for good measure.
Hence Havana’s head fake to change while mostly preserving the status quo. “Allowing the self-employed to travel gives the impression of liberty and freedom of movement, even if it doesn’t make sense in terms of money,” says Kavulich. “The message is, we’re willing to give up $250 million or more a year so we won’t have the optics of a revolutionary government supporting the rehabilitation of the private sector.”
It’s part of the price Cuba pays for keeping an ideology way past its sell-by date.
To contact the editor responsible for this story: James Gibney at jgibney5@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
©2018 Bloomberg L.P.