Cuba's Industries In Waiting – ValueWalk Premium
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Cuba's Industries In Waiting

This piece’s source, Professor Kislaya Prasad at the University of Maryland, recently traveled to Cuba and assessed its business climate in preparation for leading a group of U.S. scholars there in late May 2016. Contact him at [email protected]

Cuba's Industries In Waiting

SMITH BRAIN TRUST – Businesses flourish in the right climate, President Obama told entrepreneurs last week during his visit to Cuba. But despite 15 months of re-established U.S.-Cuba ties, a culture gap and lingering embargo impede trade with the island nation 90 miles from Florida. “Cuba is a small country and in dismal economic shape,” says research professor Kislaya Prasad in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert H. Smith School of Business.

Despite the obstacles and still heavy restrictions, he says it’s significant that U.S. travel to Cuba is booming. Commercial flights could resume soon, and Starwood Resorts just became the first U.S. hospitality company to enter the country since the Cuban Revolution. “The loosening of restrictions will continue to add to this trend,” says Prasad, who recently visited Cuba to assess the business climate.

“Restrictions on Airbnb also have just been relaxed,” he adds. “Hospitality, one of the sectors in which the Europeans had been investing heavily already, will see some influx of capital. These are all significant developments.”

Though the business climate isn’t conducive to large-scale investments, signs point to a change. “Much of the activity is happening at the level of really small enterprises — like homestays or paladares (restaurants),” Prasad says. “Visiting Cuba, I learned that many of the paladares had foreign partners and that relatives overseas have been investing in the refurbishing of homes of Cubans to make them fit for homestays.”

“Such investments might seem small, but they have the potential to make a difference,” he says. “Moreover, they contribute to the creation of the post-revolutionary middle classes, who will in the long run become agents of change.”

Market-based Reforms

In a post-Castro Cuba the Communist Party and its younger leadership will still be a significant force. “But the hope is that as free enterprise — if not political openness — takes root, and reforms deepen, we will be on an irreversible course,” Prasad says.

Change will occur relatively quickly for a number of reasons. “The fall in oil prices has significantly weakened Venezuela, which has been one of the main financial supporters of the Cuban government,” Prasad says. “So the leaders are faced with the stark reality of a failed economic system, and realization that market-based reforms are the only way out.”

Industries in the Wings

Beyond hospitality and tourism, “the reality of Cuba is one of crumbling infrastructure, which could be an opportunity for many companies,” Prasad says. “Internet penetration is very low, so there also will be investments in that area.” Automobile and farm machinery manufacturing also could take off.

“The country also has a very educated work force and health care is relatively advanced,” Prasad says. “U.S. companies could locate there or through subsidiaries to take advantage of this talent — but much farther down the road.”

Impact on U.S. Economy

Cuba, with a population of only 11 million, will never be a major U.S. trade partner. “Despite its proximity to the U.S., even a reforming Cuba will not have the level of trade that we have, for instance, with Vietnam,” Prasad says. But Cuba’s economic impact can still be important locally to South Florida, which has a large Cuban-American community. “The opposition to any kind of engagement with the Castro regime was firmly entrenched within this community,” he says. “There now appears to be a generational divide — with younger Cubans and more recent arrivals actually favoring greater engagement.”

Prasad says the Cuban-American community has an important voice in Florida and national politics, and the U.S. embargo has been unpopular in most of Latin America. “I think it helps U.S. foreign policy in the region to improve ties with Cuba,” he says.

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