Tourists visit a museum in the Plaza de la Revolucion in Havana. The plaza often hosts political events and other public events.BRETT GUNDLOCK/BOREAL COLLECTIVE/The Globe and Mail
One of the positive world developments in 2015 was the restoration of more normal political relations between the United States and Cuba. After nearly six decades of fruitless stalemate, this change is one more step in clearing the way for the eventual transformation of Cuba's economy.
I have been to many Caribbean nations, but never Cuba, until recently. Earlier this month, I got to see Cuba, in what could be one last glimpse before it begins to really change. Canada can play an active role in the transformation.
Somewhat remarkably, Cuba remains a lonely island of communism in the Western hemisphere. After seizing power in the late 1950s, Fidel Castro imposed state ownership and control over the Cuban economy. The economy's infrastructure is creaky and underdeveloped, and incomes remain low. Most Cubans are engaged in the work force–with obvious overstaffing in many places and layoffs in prospect in some state sectors.
The Cuban leadership – first Fidel and now his brother, Raul – has largely resisted broad market-based economic reform until recently. The government has now permitted private enterprise in some pockets of the economy, notably hospitality, small businesses, and personal property like housing and vehicles.
The reopening of political relations with the United States, although it will be slowed by U.S. opposition in the Congress, helps to create the conditions for a more profound change in the Cuban economic model. What direction could Cuba take? We can imagine two possible scenarios.
One would be a deeper commitment to a step-by-step, market-based adjustment, similar to that adopted by China in the 1980s. This approach would gradually open up more segments of the economy to private ownership and initiative while progressively reducing state control.
Such a transformation would require policy clarity, fair and open competition, and access to capital that encourages a level playing field for all. Cubans would have to show initiative and entrepreneurship in order to seize the opportunities presented.
Another scenario would be to apply external shock therapy – making trade peace with the Americans and quickly opening the economy to private capital, notably foreign investment. Americans – including the many Cuban expats living in the United States –and Canada, the EU, and China are among the potential sources of investment. However, if foreign capital floods the Cuban market, it risks crowding out local economic activity and precluding Cubans themselves from taking a leading role in transforming their country.
Cuba has the weather, beaches and location for tourism, and some great resorts, but so do many other Caribbean countries. It has the right climate for tropical agriculture, but it's hard to create wealth growing pineapples.
In our view, Cuba's real competitive advantage today is the investment in its people under the Castros – notably, solid though underresourced education and health care systems compared with those of some of its regional neighbours. It also has low labour costs and should have a competitive exchange rate under more open market conditions.
With this human capital foundation already in place, Cuba could conceivably be a regional leader in many services – existing ones like education and health care, and maybe even areas like financial and professional services a generation from now, once it builds its human capital base. It could potentially act as a services bridge, helping to build value chains between Latin and North America (like a Singapore of the Americas), if it manages to get the positioning right.
Canada, of course, maintained political and trade relations with Cuba throughout the Castro era. Canada has a central role to play, if we choose to act. Having kept the political and trade doors open, Canadians are welcomed in Cuba. We could be trusted advisers in the coming transformation, as well as private investors and expanded trading partners. This would mean using the full array of policy and business tools at our disposal – political, developmental, and trade and investment – to assist Cuba in becoming a more open society and competitive economy, while advancing our own commercial interests.
Economic change is inevitably going to come to Cuba in some form, but there will be a lot of "ifs" on its policy path. Canada should be positioning itself today to play a prominent, constructive role as an adviser, investor and trader, in the interest of both countries.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.