A few years ago I ran into a fellow watcher of Cuba’s economy in my favorite local New York coffee shop. It was just after the publication of my own recent book on the emergent Cuban private sector, which I co-wrote with the Canadian economist Archibald Ritter. Keen on announcing my good fortune (and great timing!) to my colleague, I whipped the book out and proudly presented it to her. However, when she saw the title, Entrepreneurial Cuba, she looked up at me with a skeptical grin and said: “Well, aren’t you the optimistic one?!” I laughed, quickly assuring her that while the title was indeed up-beat, the contents of the book were a decidedly more complex, critical, and ambivalent affair, filled with equal parts new opportunities, old obstacles, significant reforms, and frightful omens.
Similarly, the title of Richard Feinberg’s own eminently readable and richly informative new book, Open for Business: Building the New Cuban Economy, slyly posits a reality of economic “openness” that is aspirational. The author himself admits that this position is still as much a government slogan for the future as it is an achieved present-day reality. While Feinberg tells his readers that Cuba is indeed “open for business” on the book’s eye-catching cover, the actual contents of the book’s wide-ranging eight chapters highlight aspects of Cuba’s new post-Fidel economy that place an emphatic and well deserved question mark (?) after this claim.
Far from falling prey to the “irrational exuberance” of facile boosterism or blatant apologetics that tend to characterize much business-oriented writing about Cuba these days, Feinberg’s book is a critical-minded and deeply informed evaluation of the pro-market experiments undertaken by the Cuban government over the past two decades with a special emphasis on Raúl Castro’s economic reforms between 2010-2016. Thankfully, Feinberg goes beyond an exclusive focus on the top-down administrative efforts on the part of the government to solve its chronic economic problems (chapter 2). Feinberg does consider the so-called “update” of Cuba’s state socialist economic model that is often in league with sympathetic foreign governments like China, Brazil, and Venezuela (Chapter 3) and pioneering foreign firms including Sherritt, Meliá, and Unilever (chapters 4-5).
Notably, chapter 6 on entrepreneurial Cuba tells the fascinating story of Cuba’s emerging private entrepreneurs and middle classes. According to Feinberg, now this new economic class includes as many as two million people and makes up 40% of the island’s workforce (a well-sourced if questionable claim). This is followed by a wonderfully original chapter that profiles a dozen Cuban “millennial voices”; youthful, and quite hopeful, pioneers in fields as diverse as business, art, media, academics, and technology. These innovative sections of the book allow the author to offer his readers a refreshingly rich and diverse portrait of the grass-roots efforts of everyday citizens to “open Cuba for business” from the inside and for the benefit of Cubans themselves.
The Tragedy of the Cuban Revolution
Not one to mince words, Feinberg declares early on that from economic perspective “the tragedy of the Cuban Revolution is [that] it endowed its citizens with abundant human capital, while it sadly left them bereft of the tools or incentives to gainfully employ their acquired talents” (p. 23). It is worth noting that the Revolution also eliminated most forms of private property and left its citizens bereft of a broad range of economic and labor rights, not to mention fundamental political freedoms and civil liberties. These are key elements of the “Cuban tragedy” never explicitly addressed in the book. Still, Feinberg’s point is that Cuba’s well-known and laudable achievements in human development and social justice sharply contrast with its utter failure at providing its citizens with access to much of any disposable income or modern consumer goods (such as cars, household appliances, personal computers and cell phones, and Internet access). This is combined with the alarming loss of many of the island’s best-educated youth – whom Feinberg considers “the rising stars of the millennial generation” (p. 132) – to emigration.
According to Feinberg, this contradiction between social achievements and economic failures has made the Cuban economic “model” unsustainable, vulnerable to over-dependency on foreign largess and prone to cyclical crises. Moreover, the island’s (1) lack of industrial or agricultural productivity, (2) over-reliance on the service sector (especially the export of medical professionals), (3) extremely low rates of domestic savings or investment (springing from what Feinberg perceptively calls Cuba’s “low-wage, low-productivity trap” (p. 77)), (4) its “balance of payments tourniquet” (i.e., importing far more than it exports leaving it chronically indebted), and its (5) inability to access international capital markets due both to its failure to repay past debts and to the U.S. embargo, all point to a future of tough but necessary “structural adjustments” that the government has so far avoided (pp. 36-44). Instead, it has preferred to buy time with symbolic if significant measures aimed at “updating” the economy and making it marginally more productive and efficient.
However, Feinberg argues that this cautious approach has sent many erstwhile private investors and foreign governments – even those that share the Cuban government’s ideological proclivities – packing. In fact, Feinberg claims that it is not only the Venezuelan “slump” that has caused the Cuban government to pivot toward better relations with the United States, but also the exhaustion of its entire “South-South” strategy of courting investments from emerging market economies in the global south between 2000 and 2015. The often opaque and arbitrary rules of doing business in Cuba with notoriously risk-averse and inefficient state-owned enterprises have caused great anxiety and frustration among many foreign enterprises. This is exacerbated by the fact that Cuba’s cuentapropistas are still prohibited from receiving foreign investment. For example, Feinberg says that even after the revamping of Cuba’s foreign investment law in 2015 there remain only six wholly owned foreign firms operating on the island. Foreign investment deals that are signed expire in a relatively short time period and renewal is far from automatic. Worse still, he characterizes the foreign business and diplomatic community as abuzz with cautionary tales of international investors being forced out with other executives jailed on charges of corruption.
Moreover, though the Canadian mining company Sherritt continues to be one of Cuba’s most successful and long-term foreign partners, Sherritt has often learned the hard way that forgiving the debts that its state enterprise counterpart is unable to repay is the cost of doing business in the country. Likewise, Unilever has had to accept a 5-6% rate of pilferage in its Cuban operations (twice the global average) as “the unfortunate consequence of very low wages, severe shortages of consumer goods, and a deepening national culture of cutting corners and petty theft” (p. 119). Additionally, the Spanish hospitality multinational Meliá has learned that MINTUR (through its four national hospitality chains Cubanacán, Gran Caribe, Gaviota, and Islazul) prefers to retain ownership and control over the island’s lucrative tourism industry. As a result, it has 65 hotel administration contracts (making up half of all hotel rooms on the island) but equity stakes in only 14 hotels operating as joint ventures (p. 111).
A final major concern for foreign firms contemplating doing business in Cuba is what Feinberg calls “the world’s heaviest tax on labor” (p. 77). That is, foreign entities must use a state employment agency to hire its workers and pays that agency in hard currency. The agency turns around and pays the worker in Cuban pesos, amounting to a loss of over 90% of the original wage (at the 24 to 1 exchange rate). In other words, according to Feinberg, a typical $500 monthly wage for a Cuban worker in a joint venture is converted to CUP 500 (the equivalent of just $21). The author reports that this phenomenon frustrates the foreign employer’s efforts to properly reward and incentivize their workers and leads to standard under-the-table payments. It also infuriates the Cuban workers themselves, one of whom wryly told Feinberg: “In Cuba, it’s a great myth that we live off the state. In fact, it’s the state that lives off of us” (p. 77).
According to Feinberg, “Cuba could not generate the exports required for balanced trading relationships, and its emerging market partners tired of extending credits that Cuba proved unable to repay” (p. 49). Over time, many of Cuba’s international economic partnerships soured establishing a disturbing pattern whereby private investors and foreign governments alike found “doing business with the Cuban state tiresome and excessively costly” (p. 64). Despite government sloganeering that Cuba is “open for business,” many global concerns have found that foreign investment remains “under a cloud of nationalist suspicion and bureaucratic discretion” (p. 75). The main lesson in all of this for Feinberg is that Cuba can no longer expect to remedy the weaknesses of its domestic economic model with foreign lifesavers, nor can it replace economic efficiency and reliable ground rules for potential foreign investors with nationalist rhetoric or political ideology. “No international strategy will work,” Feinberg concludes, “unless Cuba can transform itself into a more efficient and reliable business partner. No set of geopolitical alliances will provide Cuba with the capital and technology it needs unless it creates a more welcoming investment climate” (p. 65).
“The bird that flies above the trees is the first one to get shot down”
For this reviewer, the book’s most richly detailed and original chapters are those (6 and 7) where the author turns his gaze away from the Cuban government’s often frustrated efforts to court foreign partners and reform its underperforming state-owned enterprises (SOEs). Feinberg trains his focus on the often frustrating if always innovative efforts of a broad array of Cuban citizens to stake their own claim to Cuba’s economic future. Indeed, Feinberg himself declares that “the emerging private sector […] offers the best hope for a more dynamic and efficient Cuban economy, especially if it is permitted to partner with foreign investment and with the more efficient SOEs” (p. 132). According to him, over one million workers out of Cuba’s total 5.1 million workforce are “wholly within the private sector” (p. 132).
This estimate combines the 504,000 licensed cuentapropistas with the 575,000 farmers who own or lease private plots. (I would quibble with this number since it conflates the private and non-state sectors, by including the 353,000 members of Cuba’s service and credit cooperatives, which function under different, less autonomous conditions than does the private sector strictly speaking.) To this, Feinberg adds another 600,000 to one million workers who labor in the private sector informally, either part- or full-time, without the benefit of a license. The bulk of this estimate (400,000-800,000) is made up of a quite imaginative category, richly and convincingly illustrated by Feinberg: “government employees with significant private income” or GESPI (p. 132-136). These are people who “moonlight” in the private sector at odd hours while holding down a government job, perhaps due to the burden of registering or because their trade does not fall within the rigidly drawn and frankly medieval list of 201 legal private occupations. These creative caveats make Feinberg’s estimate of a Cuban “private sector” with as many as 2.1 million workers, or a full 40% of the Cuban workforce, significantly larger than the more common estimates from other economists of between 20-33%.
Two other areas where I would quibble with Feinberg’s characterization of Cuba’s emergent entrepreneurial sector are in his discussion of the most important constraints that hold entrepreneurs back and in his definition of “middle classes” as it applies to Cuba. Based on his interviews with more than two dozen entrepreneurs, Feinberg concludes that their four biggest obstacles are (1) an inadequate national banking system, (2) a lack of access to inputs (either through a network of wholesale markets or through imports, which continue to be a state monopoly), (3) the scarcity of commercial rental space, and (4) a discouraging overarching business climate where most consumers lack purchasing power and the government has so far failed to clearly define the role of what it euphemistically calls “the non-state sector.” On the one hand, the government calls on entrepreneurs to play a legitimate, complementary role to the state sector in providing gainful employment and necessary goods and services to the population. On the other hand, it continues to restrict capital accumulation and business growth by outlawing private concentrations of both wealth and property and preventing professionals from plying their trades privately.
While the above discussion of constraints on Cuban entrepreneurs is both accurate and exhaustive, it misses the forest for the trees. In other words, Feinberg’s detailed and nuanced catalogue of woes fails to explicitly name the two underlying causes that make Cuban entrepreneurs powerless against arbitrary state power: their lack of clear and defensible rights to private property and the fact that while Cuba’s cuentapropistas may be individually licensed to operate, their businesses lack any recognized “legal personality” (personalidad jurídica). This brings to mind a recent ASCE (Association for the Study of the Cuban Economy) panel on Cuba’s private sector, on which I served as a discussant that included the participation of the cuentapropista Ramón Bedias, a multi-talented pastry chef and nursery operator. When asked what his secret to success was operating in such a tenuous and unpredictable business climate, he used two vivid metaphors in his response: la escalera (the staircase) and la línea roja (the red line).
For Bedias, the strategy of la escalera meant that he should allow his business to grow only at the same rate that the government’s reforms moved forward, but no faster. If his own growth and economic success outpaced that of the economic reforms, he risked calling too much unwanted attention to himself, inadvertently crossing over some arbitrary but all important línea roja. Then, to be sure we got his point, he added the following powerful proverb: “The bird that flies above the trees is the first one to get shot down.” Indeed, in his own discussion of the many constraints on Cuban entrepreneurs, Feinberg says much the same thing: “Fearing retribution, some TCPs purposely restrain their growth so as not to capture the attention of the authorities” (p. 158). However, this accurate observation of cuentapropista vulnerability exposes the same deeper issue revealed by Bedias’s pair of metaphors: without defensible rights to private property and a recognized business with legal standing, Cuba’s cuentapropista’s are – as their quirky name implies – “on their own.”
In Feinberg’s section on Cuba’s “post-revolutionary middle classes” (pp. 166-171), he convincingly argues that in recent years Cuban society has become more heterogeneous and complex, with a middle class emerging from within the country. While not coterminous with the private sector, Feinberg says that the two groups overlap considerably. Moreover, for him the emergence of such a group within a “post-revolutionary society” is a “seismic socio-economic development.” He then reviews various criteria scholars have used to define or measure the middle class in different national contexts including income (absolute, relative, and adjusted for purchasing power parity), occupation, social achievements and values (such as education, female participation in the labor force, fertility rates, home ownership, and enrollment in social security programs), and access to individual consumer items. Feinberg concludes that “Cuba looks very much like a middle-class society” based on all but the last measure.
However, this is a highly dubious claim given Cubans’ extremely low incomes, even when adjusted to reflect their purchasing power parity. Feinberg reports a range of $10 to $13 of personal income per day as a commonly accepted international threshold for middle class status, adding that the Cuban government reports an income of $20 per day, based on an aggregated GNI per capita of $7,176. However, this is nearly 30 times greater than the $24 that Feinberg reports as the average income per month elsewhere in the book. He does, however, grant in a footnote that the Cuban data on per capita income are “not without controversy,” since they “include government provided services such as health care, education, and culture” (p. 250).
Chapter 7 highlights the ambitions and visions of a dozen of Cuba’s most pioneering “millennial voices,” all of whom were interviewed by Feinberg in December 2015. The profiles vividly capture the talent, intelligence, and ambition of a group of young Cubans between 20-35 years old (born between 1981 and 1994). Feinberg posed the same ten questions to each person, seeking to probe their hopes, expectations, and fears for themselves and for Cuba in the coming 15 years (until 2030). Specifically, he asked them to share their visions of the new Cuban economy and society they sought to build in the coming years together, with a list of the major obstacles that had to be overcome to achieve their visions. He also queried them on their chances of emigrating, and sought to know their initial and long-term evaluation of Cuba’s new relationship with the U.S.
To his credit, Feinberg recognizes that there are barriers to speaking freely about such controversial topics in Cuba – especially to a foreigner for attribution. Still, the responses to his queries are refreshingly candid and only one person asked to use a pseudonym. Feinberg also freely admits that his sample was anything but random. Instead, he specifically sought out articulate, forward-looking personalities; young people he considers the “rising stars of the next generation.” All live in Havana, are well educated, and are involved in innovative personal and professional projects that explicitly push old boundaries, challenge antiquated orthodoxies, and aim to lay the groundwork for Cuba’s future. However, while a rich diversity of professions is included among the 12, together with a mix of government “insiders” and “outsiders,” three groups conspicuously absent from the chapter are: (1) those who have given up on such ambitious hopes of shaping the future (either their own or their nation’s) and resigned themselves to mere survival, (2) those who have emigrated abroad in search of the ambitious futures that were impossible for them to achieve at home, and (3) those who have chosen to stay and fight to effect a fundamental change in their country’s political and economic system (either as declared dissidents, independent journalists, or civil society activists). Such omission on Feinberg’s part makes his sample less representative of Cuban reality and more optimistic than is perhaps warranted.
Authoritarian inertia, bureaucratic decay, or a sunny soft landing?
Feinberg’s comparative, international, and political economy approach is successful in part because it dispenses with the naval gazing and exceptionalism all too common among full-time cubanólogos. His relative new-comer status to the sometimes incestuous world of cubanología allows him to evaluate the current challenges and possible future scenarios (chapter 8) of the new Cuban economy in relation to other transition economies across the globe. The cases of the former Soviet Union, Argentina, East Germany, Vietnam, Costa Rica, and Nicaragua are all specifically mentioned. These scenarios look toward the year 2030 and include:
- A stalled reform process where inertia (pausa) dominates on the economic front and authoritarianism, national security, and regime stability trump the need for renewal leading Cuba’s millennials throw in the towel and look abroad to fulfill their promise,
- A botched transition leading to movement (prisa), but in a cynical direction where the party bureaucracy decays and former officials use their power to selectively privatize parts of the economy that they control and benefit from at the expense of the nation, and
- A sunny soft landing where comprehensive economic reform firmly integrates Cuba into the global economy, yielding higher incomes and greater levels of consumption for the population.
Feinberg himself holds that the third “sunny” scenario is most probable, but recognizes that this may be “confusing preferences for predictions” (p. 222). Indeed, his richly drawn, deeply informative, and unflinching analysis of Cuba’s exceedingly cautious, stop-and-go reform process to date under Raúl would indicate that authoritarian inertia or bureaucratic decay are more likely than a much preferable soft landing. This eventuality is even more pronounced given the Cuban Communist Party’s vociferous push-back against President Obama’s charm offensive following his historic visit in March (after more than a year of good-faith efforts at rapprochement and reengagement on the U.S. side). Moreover, Feinberg’s preferences, probabilities, and predictions about these competing future scenarios are even more uncertain given the Party’s recent refusal during its seventh Congress in April to signal any meaningful expansion of economic rights or opportunities for Cuba’s entrepreneurs, along with its failure to begin a much-anticipated and sorely needed generational transition to younger leadership within the Party itself.
Conclusion
Not a typical academic monograph focused on a single aspect of the Cuban economy, Feinberg’s “Open for Business” is instead a globally-informed analysis of what are arguably the three most important and dynamic aspects of Cuba’s new economy: International trade, foreign investment, and the island’s emerging domestic entrepreneurs. His wide-ranging yet richly detailed focus – enhanced by multiple foreign investor case studies and vivid profiles of Cuba’s emerging entrepreneurs and pioneering millennials – makes this book required reading not just for professional economists and other academics, but also – and perhaps especially – for the growing ranks of potential foreign investors looking for independent, hard-nosed, and practical advice about Cuba’s unique business environment as they contemplate their own entreé into the Cuban market. It will also be useful and revelatory tool for U.S. policymakers as they gauge how best to “engage” the Cuban government over questions of trade and investment and “empower” the Cuban people, especially the emerging Cuban entrepreneurial middle classes.
Richard E. Feinberg
Open for Business: Building The New Cuban Economy
August 30, 2016
Washington, D.C.Brookings Institution Press
264 pages
$22.00
ISBN-10: 0815727674
ISBN-13: 978-0815727675