President Obama arrived in Panama for the seventh Summit of the Americas with a clear mission: restore the feel-good atmosphere of his first regional summit in Trinidad. There he received plaudits as the first African-American president, a post-unilateralist leader for a more multipolar world. Six years later, and with a complicated record to defend, he had to work harder for the ovations. But his administration’s efforts paid off, and he left Panama a winner. The President’s decision to remove Cuba from the dreaded U.S. list of state sponsors of terrorism is further demonstration that Obama is convinced that U.S. interests in Cuba are best served through constructive engagement and not onerous sanctions. Now he must persuade Congress.

First and foremost, the Panama Summit will be remembered for cementing the historic process of normalization of ties between the United States and Cuba launched by Presidents Obama and Raúl Castro on December 17. The Panama meeting offered a chance not only for the rest of the region to ratify Obama’s overture to Castro, but to close the books on the Cold War and open a new chapter in inter-American relations. Bill Clinton led the way on this track in the 1990s, but the train got derailed in the 2000s under George W. Bush. The ghosts of Washington’s heavy-handed past, on matters such as the war on drugs, immigration, counter-terrorism, and the hangover of the “Washington consensus,” returned to haunt Obama’s second summit in Cartagena in 2012. The White House was determined to re-set course before sitting through another series of harangues against the sins of the past by delivering important progress on several policy fronts in the months leading up to Panama. 

No issue was more representative of U.S. bullying in the region than the decades-old embargo against Cuba. When the region’s presidents said they would not come to Panama unless Cuba was invited as a full participant, the White House was forced to fish or cut bait. Correctly, President Obama chose to fish. The breakthrough of December 17 was rewarded with widespread praise by his counterparts and by publics in both the United States and Cuba. The president’s main task for Panama, then, was to deliver a winning message for the first face-to-face meeting in over five decades of hostilities.

Source: REUTERS/Jonathan Ernst

No image better captures the competing narratives of the deep historical differences between the United States and Cuba than the one above. The elder Raúl Castro, who does not have to worry about his state-controlled media, plugs his ears to drown out the clamor of journalists asking questions after the two leaders’ first meeting, while the younger Obama is ready to engage the press, a customary stance for leaders in a democracy.

The contrast between old and new continued in the plenary where Obama gave a focused presentation  about moving beyond “the old grievances that had too often trapped us in the past” to a future based on shared responsibility and mutual respect. “We’re looking to the future and to policies that improve the lives of the Cuban people.”

Castro, on the other hand, multiplied his allotted eight minutes of remarks to 48 (to make up for the six summits Cuba was not invited to, he joked) to recount a long litany of transgressions by previous U.S. governments dating back to 1800. He reminded the audience of Washington’s overthrow of the democratically-elected government of Guatemala in 1954 as the precursor to Cuba’s own popular revolution and invoked his brother Fidel in blaming global poverty on the aggressions of colonial and imperialist powers. Remarkably, however, Castro specifically absolved President Obama from any responsibility for such actions, an important gesture that opens the door for more progress. “President Obama is an honest man…I admire his humble origins,” Castro said, and urged others to support his efforts to eliminate the embargo. Castro also said Cuba was prepared to work with the United States on such issues as climate change, terrorism, drug trafficking, organized crime, and poverty eradication.

With the removal of Cuba from the U.S. list of state sponsors of terrorism, and the last-minute softening of U.S. rhetoric toward Cuba’s chief ally, Venezuela, the Americas may be entering an unprecedented era of peace and cooperation. That leaves respect for democracy and human rights as the chief area of conflict between the United States and Cuba (and a few other countries).

Here again, the contrast between the behavior of pro- and anti-government Cuban activists emerged in sharp relief in Panama. Highly aggressive actions by “official” Cuban nongovernmental organizationss against dissidents from Cuba and Miami, including physical and verbal insults and attacks, were completely out of tune with the modern era of inclusion and respect of independent civil society voices at such meetings. Their orchestrated disruptions of what should have been a robust but civil debate laid bare the real threat Cuba’s rulers face—from its own public tired of the regime’s broken economic system and closed politics—and the heavy challenge they face in opening economically while maintaining political control. President Obama spoke to this issue when he told the press: “On Cuba, we are not in the business of regime change. We are in the business of making sure the Cuban people have freedom and the ability to…shape their own destiny.” The primary way to do this, Obama added, is through “persuasion” and not sanctions. Cuba’s behavior “does not implicate our national security in a direct way,” foreshadowing this week’s decision to de-list Cuba from the terrorism sponsor category.

Cuban officials claim they are practicing a form of popular democracy that is just as legitimate as representative democracy. But few honestly believe this can be squared with core universal norms like free speech and association. For his part, Castro acknowledged that “[w]e could be persuaded of some things; of others we might not be persuaded.” Patience, he added, is needed, signaling yet again that progress toward normalizing relations will be slow. He then proceeded to instruct his closest assistants to “follow the instructions of both Presidents,” a telling reminder of the continued resistance to change from his own bureaucracy. Obama will now have to persuade his colleagues in Congress that Cuba is no longer the threat it was in the past.

Change is a complicated thing in Cuba. On the one hand, many Cubans remain frustrated with limits on economic and political opportunity, and millennials are emigrating in ever rising numbers. On the other, there is more space for entrepreneurship, and Havana is full of energy and promise today.

The island’s emerging private sector is growing—and along with it, start-up investment costs. Three years ago, Yamina Vicente opened her events planning firm, Decorazón, with a mere $500 in cash. Today she estimates she would need $5,000 to compete. New upscale restaurants are opening: Mery Cabrera returned from Ecuador to invest her savings in Café Presidente, a sleek bistro located on the busy Avenue of the Presidents. And lively bars at establishments like 304 O’Reilly feature bright mixologists doing brisk business.

Photo credit: Richard Feinberg.

Havana’s hotels are fully booked through the current high season. The overflow of tourists is welcome news for the thousands of bed-and-breakfasts flowering throughout the city (many of which are now networked through AirBnB). While most bed-and-breakfasts used to be one or two rooms rented out of people’s homes, Cubans today are renovating entire buildings to rent out. These are the green shoots of what will become boutique hotels, and Cubans are quitting their low-paying jobs in the public sector to become managers of their family’s rental offerings.

Another new sign: real estate agencies! Most Cubans own their own homes—really own them, mortgage-free. But only recently did President Raúl Castro authorize the sales of homes, suddenly giving Cubans a valuable financial asset. Many sell them to get cash to open a new business. Others, to immigrate to Miami.

WiFi hot spots are also growing in number. Rejecting an offer from Google to provide Internet access to the entire island, the Cuban government instead set up some 700 public access locations. This includes 65 WiFi hot spots in parks, hotels, or major thoroughfares, where mostly young Cubans gather to message friends or chat with relatives overseas.

Economic swings

2015 was a good year for the Cuban economy, relatively speaking. Growth rose from the disappointing 2 percent in recent years to (by official measures) 4 percent. The Brazilian joint venture cigarette company, Brascuba, reported a 17 percent jump in sales, and announced a new $120 million investment in the Mariel Economic Development Zone. Shoppers crowded state-run malls over the holiday season, too. 

Photo credit: Richard Feinberg.

Consumers still report chronic shortages in many commodities, ranging from beer to soap, and complain of inflation in food prices. Alarmed by the chronic crisis of low productivity in agriculture, the government announced tax breaks for farmers in 2016. The government is already forecasting a slower growth rate for 2016, attributed to lower commodity prices and a faltering Venezuelan economy. It’s likely to fall back to the average 2 percent rate that has characterized the past decade.

Pick up the pace

Cuban officials are looking forward to the 7th Conference of the Cuban Communist Party (CCP) in mid-April. There is little public discussion of the agenda, however. Potential initiatives include a new electoral law permitting direct election of members of the national assembly (who are currently chosen indirectly by regional assemblies or by CCP-related mass organizations); a timetable for unification of the currency (Cubans today must deal with two forms of money); some measures to empower provincial governments; and the development of a more coherent, forward-looking economic development strategy.

[T]here are now two brain drains: an internal brain drain, as government officials abandon the public sector for higher incomes in the growing private sector; and emigration overseas.

But for many younger Cubans, the pace of change is way too slow. The talk of the town remains the exit option. Converse with any well-educated millennial and they’ll tell you that half or more of their classmates are now living abroad. Indeed, there are now two brain drains: an internal brain drain, as government officials abandon the public sector for higher incomes in the growing private sector; and emigration overseas to the United States, but also to Spain, Canada, Mexico.

The challenge for the governing CCP is to give young people hope in the future. The White House has signaled that President Obama may visit Cuba this year. Such a visit by Obama—who is immensely popular on the island—could help. But the main task is essentially a Cuban one.

Richard Feinberg’s forthcoming book, “Open for Business: Building the New Cuban Economy,” will be published by Brookings Press later this year.

INTRODUCTION

U.S. public diplomacy with Cuba — or the United States engaging with Cuban public opinion — is an intriguing subject. The principal reason for this is because it has never been tried. There was no attempt before the 1959 Revolution because the United States had no need to convince the Cuban government and people of why the United States mattered to them. In almost every aspect of life it was impossible to conceive of Cuba without the United States. Fidel Castro’s Revolution changed that. And since the Revolution, the Castro regime has carefully molded the United States as the arch enemy of the Cuban people. Successive U.S. administrations have made little effort to banish that impression while U.S. public diplomacy has been largely aimed at the Cuban-American exile community.

The public diplomacy challenge for the United States with Cuba is exciting but also formidable. The Cuban Government has had many years experience of controlling access to information and shackling freedom of expression. The public diplomacy messages that the United States will send will be distorted and blocked. Nevertheless there are growing signs that Cubans on the island are accessing new technologies so information does get through, particularly to residents of the major cities. Expansion of people-to-people exchanges and a lifting of the travel ban on ordinary Americans would greatly assist any public diplomacy campaign. But public diplomacy can start without this and the Cuban government’s capacity to block messages is no argument for not transmitting them.

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Introduction:  The sinking of the Deepwater Horizon drilling platform and the resulting discharge of millions of gallons of crude oil into the sea demonstrated graphically the challenge of environmental protection in the ocean waters shared by Cuba and the United States.

While the quest for deepwater drilling of oil and gas may slow as a result of the latest calamity, it is unlikely to stop. It came as little surprise, for example, that Repsol recently announced plans to move forward with exploratory oil drilling in Cuban territorial waters later this year.

As Cuba continues to develop its deepwater oil and natural gas reserves, the consequence to the United States of a similar mishap occurring in Cuban waters moves from the theoretical to the actual. The sobering fact that a Cuban spill could foul hundreds of miles of American coastline and do profound harm to important marine habitats demands cooperative and proactive planning by Washington and Havana to minimize or avoid such a calamity. Also important is the planning necessary to prevent and, if necessary, respond to incidents arising from this country’s oil industry that, through the action of currents and wind, threaten Cuban waters and shorelines.

While Washington is working to prevent future disasters in U.S. waters like the Deepwater Horizon, its current policies foreclose the ability to respond effectively to future oil disasters—whether that disaster is caused by companies at work in Cuban waters, or is the result of companies operating in U.S. waters.

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INTRODUCTION 

Last year, President Obama delivered the first step in his promise to reach out to the Cuban people and support their desire for freedom and self-determination. Premised on the belief that Cuban Americans are our best ambassadors for freedom in Cuba, the Obama administration lifted restrictions on travel and remittances by Cuban Americans. The pent-up demand for Cuban American contact with the island revealed itself: within three months of the new policy, 300,000 Cuban Americans traveled to Havana -- 50,000 more than for all of the previous year.  Experts estimate that over $600 million in annual remittances has flowed from the United States to Cuba in 2008 and 2009 and informal flows of consumer goods is expanding rapidly.

The administration’s new policy has the potential to create new conditions for change in Cuba. However, if U.S. policy is to be truly forward looking it must further expand its focus from the Castro government to the well-being of the Cuban people. Recent developments on the island, including the ongoing release of dozens of political prisoners, have helped create the right political moment to take action.  The administration should institute a cultural diplomacy strategy that authorizes a broad cross-section of American private citizens and civil society to travel to the island to engage Cuban society and share their experiences as citizens of a democratic country.  Reducing restrictions on people-to-people contact is not a “concession,” but a strategic tool to advance U.S. policy objectives to support the emergence of a Cuban nation in which the Cuban people determine their political and economic future.

The President has the authority to reinstate a wide range of “purposeful,” non-touristic travel to Cuba in order to implement a cultural diplomacy strategy. Under President Clinton, the Baltimore Orioles played baseball in Havana and in return the Cuban national team was invited to Baltimore. U.S. students studied abroad in Cuba and engaged in lively discussions with their fellow students and host families. U.S. religious groups provided food and medicines to community organizations, helping them assist their membership.  However, in 2004, such travel was curtailed, severely limiting U.S. insights about the needs, interests and organizational capacities of community groups and grassroots organizations. Today, visitors traveling under an educational license, for example, number a meager 2,000 annually.

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Last week’s Seventh Summit of the Americas in Panama will be remembered for the historic handshakes and broad smiles shared by Presidents Barack Obama and Raúl Castro—the first sit-down meeting of leaders from the two nations since Fidel Castro marched triumphantly into Havana in early 1959. But this memorable encounter was merely the most visible piece of a much broader Cuban strategy at the Panama Summit.

The large Cuban delegation took full advantage of the several forums that comprise the complex Summit process. These periodic inter-American conclaves feature meetings among heads of state and foreign ministers, a CEO Summit for corporate executives, and a Civil Society Forum for representatives of nongovernmental organizations (NGOs). The Cubans seized all three opportunities and fielded strong teams to advance their interests: to engage with the multi-level inter-American system, and to send clear signals back home of where government policy is headed.

Face-to-face diplomacy

In addition to the Obama-Castro encounter, foreign ministers John Kerry and Bruno Rodriguez held a lengthy bilateral. Since Obama and Castro publicly announced their intention to renew relations on December 17 of last year, negotiations have dragged on. Cuba is reluctant to grant American diplomats unrestricted travel throughout the island to engage with Cuban citizens, including political dissidents. This is the norm in international diplomacy, the United States argues, whereas the Cubans remain fearful that U.S. diplomats will provide encouragement and assistance to activists advocating for political pluralism. The Cubans want to be removed from the U.S. list of state sponsors of terrorism, a designation which automatically invokes economic sanctions. The White House is withholding that relief as a bargaining chip in the negotiations.

In his opening plenary remarks, President Castro spoke passionately and at length, impressing the audience with his heartfelt remarks even as he came across as an elder statesman indulging in the memories and glories of his youth. Yet, Castro was also sending signals to the stalwarts in the Communist Party back home that he had not forgotten their sacrifices and was not abandoning their values. His engagement with the United States would not be allowed to endanger their tight control of Cuban society. Still, most significantly, Castro kept the door open to engagement with the United States by dramatically addressing President Obama, tossing him compliments: “President Obama is an honest man…I have read his two memoirs and I believe he is a man who has remained faithful to his humble origins.”

By lauding Obama, holding a private bilateral, and appearing with a broad smile at a press opportunity, Castro reaffirmed his commitment to improving relations with the United States. He also may have been nudging his negotiators to wrap up the talks to allow the mutual re-opening of embassies. The Cubans are aware that not all of Washington favors improved relations, and that they must consolidate the process of diplomatic normalization while Obama commands the White House.

The CEO and Civil Society Forums

Presumably, the main Cuban motivation for engaging the United States is economic: to attract more tourists, financial remittances, and eventually productive investments from the United States and the rest of the world, and to extract a relaxation of sanctions, particularly those impeding international financial transactions. Cuban Minister of Trade and Investment Rodrigo Malmierca led a commercial delegation that included top executives from state-owned enterprises, as well as leadership from the new Mariel Development Zone. At the CEO Summit, Malmierca was granted one of the few time slots for a keynote address. But rather than take advantage of this unique opportunity, the Cuban minister rushed through an uninspired text, offering nothing that could not be found in previous government press releases and official documents. More than two years after the passage of a much-heralded foreign investment law and over a year after the official opening of the Mariel Development Zone, very few new investments have earned official authorization.  

While potentially interested in Cuban markets, executives I spoke with remain cautious, skeptical that the government has yet created a sufficiently business-friendly environment to warrant the risk. They speculate as to why so few new foreign ventures are underway: is it opposition from well-placed hard-liners, bureaucratic inertia, or lack of financing or other necessary business inputs? In private conversations, Malmierca hinted at a political obstacle: many Cubans identify the revolution with nationalizations of private property, so it will be difficult to explain to them why foreign investment is now so welcome.

The Cubans also fielded a significant presence at the Civil Society Forum. The dominant group represented government-affiliated “non-governmental” organizations (GONGOS) such as the official trade union or Confederation of Cuban Women, while opposition NGOs marshalled about a dozen persons. At a pre-Summit speech in Caracas, Castro had ominously labelled these opposition NGOs “mercenaries” in the pay of foreign intelligence services. Following that lead, the government-affiliated group staged aggressive, noisy demonstrations denouncing the opposition representatives and accusing them of harboring infamous terrorists. The GONGOS threatened to boycott the Forum (although some did eventually participate), and disrupted the Forum’s working group on democratic governance. Here again, the message being telegraphed back home was clear: the Cuban government does not consider these opposition voices to be legitimate actors and loyal Cuban citizens should not associate with them.

Discernable signals

Altogether, at the three forums the Cubans demonstrated their strong interest in participating actively in hemispheric affairs and institutions. The Cubans are capable of fielding smart, disciplined delegations with well-scripted strategies and messages. Once again, the high-quality Cuban diplomacy demonstrated that it has few peers in Latin America and the Caribbean.

The messages transmitted at the Panama Summit were subtle but decodable. In the diplomatic sphere, Castro wants to move forward, to take advantage of Obama’s tenure to relax U.S.-Cuban tensions and gain some economic advantages. In the business sphere, Malmierca reaffirmed Castro’s oft-repeated admonitions that economic change on the island will be very gradual and socialist planning will not be discarded under his watch. In the political sphere, the Cuban Communist Party intends to maintain its absolute hegemony—political pluralism outside the Party is definitely not yet on the policy agenda.

Read more about the Summit with Richard Feinberg's post on how the United States came out of the Panama Summit of the Americas.

Event Information

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On December 17, 2014, President Barack Obama and President Raúl Castro announced that the United States and Cuba would seek to reestablish diplomatic relations. Since then, the two countries have engaged in bilateral negotiations in Havana and Washington, the United States has made several unilateral policy changes to facilitate greater trade and travel between the two countries, and bipartisan legislation has been introduced in the U.S. Congress to lift the travel ban. Meanwhile, conversations are ongoing about ending the 50-plus-year embargo and Cuba has continued the process of updating its economic system, including establishing new rules for foreign investment and the emerging private sector.

In light of the significant shifts underway in the U.S.-Cuba relationship, new questions arise about Cuba’s development model, and its economic relations with the region and the world. On Tuesday, June 2, the Latin America Initiative at Brookings hosted a series of panel discussions with various experts including economists, lawyers, academics, and practitioners to examine opportunities and challenges facing Cuba in this new context. Panels examined macroeconomic changes underway in Cuba, how to finance Cuba’s growth, the emerging private sector, and themes related to much-needed foreign investment.

Join the conversation on Twitter using #CubaGrowth

Video

• Panel 1: Trends in the Cuban economy in light of the new U.S.-Cuba context
• Panel 2: Financing Cuba’s growth, development, and trade
• Panel 3: Next steps for Cuba’s emerging private Sector–Cuentapropistas and cooperatives
• Panel 4: A New stage in foreign direct investment

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• Rethinking Cuba: New opportunities for development - Part 1 (English)
• Rethinking Cuba: New opportunities for development - Part 2 (English)
• Rethinking Cuba: New opportunities for development - Part 1 (español)
• Rethinking Cuba: New opportunities for development - Part 2 (español)

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20150602_rethinking_cuba_transcript

Today’s announcement of the restoration of diplomatic relations between Washington and Havana replaces over five decades of mutual hostility and aggressive name-calling with a new atmosphere of diplomatic civility. The re-opening of embassies in both capitals establishes platforms upon which to build more normal working relations. Now, the hard work begins, as the two nations gradually dismantle the comprehensive wall of restrictions separating them for two generations.

Expectations are running high, especially in Cuba, that diplomatic engagement will catalyze economic betterment on the island. To stimulate more travel and trade, the U.S. government needs to clarify rules for engaging with the emerging Cuban private sector, and make it clear to U.S. banks that they are permitted to support the use of credit cards by U.S. visitors in Cuba. The administration should also begin to consider another round of liberalizing initiatives, some under consideration in the U.S. Congress, to further relax travel restrictions, and to enable more U.S. firms—beyond agriculture and medicines—to assist the Cuban people.

For its part, the Cuban government should open efficient channels to facilitate the commercial exchanges now authorized by the Obama administration. Cuban entrepreneurs should be permitted ready access to U.S. firms wishing to sell building equipment for construction cooperatives, restaurant supplies for private-owned restaurants, and automotive spare parts for private taxis. Micro-enterprise lending should be authorized to support these emerging non-state enterprises.

If both nations build upon today’s welcome announcement by further opening these channels to travel and commerce, Presidents Barack Obama and Raúl Castro can help to safeguard their joint legacy. By fortifying and expanding constituencies on both sides of the Florida Straits, immersed in daily exchanges to mutual benefit, the two governments can render their diplomatic accomplishment politically irreversible in both capitals.

As the United States and Cuba rebuild formal relations, certain challenging topics remain to be addressed. Among these are outstanding U.S. property claims in Cuba. In this report, Richard E. Feinberg argues that it is in both countries’ interests to tackle this thorny issue expeditiously, and that the trauma of property seizures in the twentieth century could be transformed into an economic opportunity now.

The report looks closely at the nearly 6,000 certified U.S. claims, disaggregating them by corporate and individual, large and small. To settle the U.S. claims, Feinberg suggests a hybrid formula, whereby smaller claimants receive financial compensation while larger corporate claimants can select an “opt-out” option whereby they pursue their claims directly with Cuban authorities, perhaps facilitated by an umbrella bilateral claims resolution committee. In this scenario, the larger corporate claimants (which account for nearly $1.7 billion of the $1.9 billion in total U.S. claims, excluding interest) could select from a menu of business development rights, including vouchers applicable to tax liabilities or equity investments, and preferred acquisition rights. Participating U.S. firms could also agree to inject additional capital and modern technology, to ensure benefits to the Cuban economy.

Though it is often argued that Cuba is too poor to pay some $2 billion of claims, the paper finds that Cuba can in fact manage payments if they are stretched out over a reasonable period of time and exclude interest. The paper also suggests a number of mechanisms whereby the Cuban government could secure funds to pay compensation, including revenues on normalization-related activities.

The Cuban government does not dispute the principle of compensation for properties nationalized in the public interest; the two governments agree on this. Cuba also asserts a set of counter-claim that allege damages from the embargo and other punitive actions against it. But a grand bargain with claims settlement as the centerpiece would require important changes in U.S. sanctions laws and regulations that restrict U.S. investments in Cuba. The United States could also offer to work with Cuba and other creditors to renegotiate Cuba’s outstanding official and commercial debts, taking into account Cuba’s capacity to pay, and allow Cuba to enter the international financial institutions.

Feinberg ultimately argues that both nations should make claims resolution the centerpiece of a grand bargain that would advance the resolution of a number of other remaining points of tension between the two nations. This paves the way for Cuba to embrace an ambitious-forward-looking development strategy and for real, notable progress in normalizing relations with the United States.

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Change is a complicated thing in Cuba. On the one hand, many Cubans remain frustrated with limits on economic and political opportunity, and millennials are emigrating in ever rising numbers. On the other, there is more space for entrepreneurship, and Havana is full of energy and promise today.

The island’s emerging private sector is growing—and along with it, start-up investment costs. Three years ago, Yamina Vicente opened her events planning firm, Decorazón, with a mere $500 in cash. Today she estimates she would need $5,000 to compete. New upscale restaurants are opening: Mery Cabrera returned from Ecuador to invest her savings in Café Presidente, a sleek bistro located on the busy Avenue of the Presidents. And lively bars at establishments like 304 O’Reilly feature bright mixologists doing brisk business.

Photo credit: Richard Feinberg.

Havana’s hotels are fully booked through the current high season. The overflow of tourists is welcome news for the thousands of bed-and-breakfasts flowering throughout the city (many of which are now networked through AirBnB). While most bed-and-breakfasts used to be one or two rooms rented out of people’s homes, Cubans today are renovating entire buildings to rent out. These are the green shoots of what will become boutique hotels, and Cubans are quitting their low-paying jobs in the public sector to become managers of their family’s rental offerings.

Another new sign: real estate agencies! Most Cubans own their own homes—really own them, mortgage-free. But only recently did President Raúl Castro authorize the sales of homes, suddenly giving Cubans a valuable financial asset. Many sell them to get cash to open a new business. Others, to immigrate to Miami.

WiFi hot spots are also growing in number. Rejecting an offer from Google to provide Internet access to the entire island, the Cuban government instead set up some 700 public access locations. This includes 65 WiFi hot spots in parks, hotels, or major thoroughfares, where mostly young Cubans gather to message friends or chat with relatives overseas.

Economic swings

2015 was a good year for the Cuban economy, relatively speaking. Growth rose from the disappointing 2 percent in recent years to (by official measures) 4 percent. The Brazilian joint venture cigarette company, Brascuba, reported a 17 percent jump in sales, and announced a new $120 million investment in the Mariel Economic Development Zone. Shoppers crowded state-run malls over the holiday season, too. 

Photo credit: Richard Feinberg.

Consumers still report chronic shortages in many commodities, ranging from beer to soap, and complain of inflation in food prices. Alarmed by the chronic crisis of low productivity in agriculture, the government announced tax breaks for farmers in 2016. The government is already forecasting a slower growth rate for 2016, attributed to lower commodity prices and a faltering Venezuelan economy. It’s likely to fall back to the average 2 percent rate that has characterized the past decade.

Pick up the pace

Cuban officials are looking forward to the 7th Conference of the Cuban Communist Party (CCP) in mid-April. There is little public discussion of the agenda, however. Potential initiatives include a new electoral law permitting direct election of members of the national assembly (who are currently chosen indirectly by regional assemblies or by CCP-related mass organizations); a timetable for unification of the currency (Cubans today must deal with two forms of money); some measures to empower provincial governments; and the development of a more coherent, forward-looking economic development strategy.

[T]here are now two brain drains: an internal brain drain, as government officials abandon the public sector for higher incomes in the growing private sector; and emigration overseas.

But for many younger Cubans, the pace of change is way too slow. The talk of the town remains the exit option. Converse with any well-educated millennial and they’ll tell you that half or more of their classmates are now living abroad. Indeed, there are now two brain drains: an internal brain drain, as government officials abandon the public sector for higher incomes in the growing private sector; and emigration overseas to the United States, but also to Spain, Canada, Mexico.

The challenge for the governing CCP is to give young people hope in the future. The White House has signaled that President Obama may visit Cuba this year. Such a visit by Obama—who is immensely popular on the island—could help. But the main task is essentially a Cuban one.

Richard Feinberg’s forthcoming book, “Open for Business: Building the New Cuban Economy,” will be published by Brookings Press later this year.

The global consumer products company Unilever Plc announced on Monday a $35 million investment in Cuba’s Special Development Zone at Mariel. Late last year, Brascuba, a joint venture with a Brazilian firm, Souza Cruz, owned by the mega-conglomerate British American Tobacco (BAT), confirmed it would built a $120 million facility in the same location.

So far, these are the two biggest investments in the much-trumpeted Cuban effort to attract foreign investment, outside of traditional tourism. Yet, neither investment is really new. Unilever had been operating in Cuba since the mid-1990s, only to exit a few years ago in a contract dispute with the Cuban authorities. Brascuba will be moving its operations from an existing factory to the ZED Mariel site.

What is new is the willingness of Cuban authorities to accede to the corporate requirements of foreign investors. Finally, the Cubans appear to grasp that Cuba is a price-taker, and that it must fit into the global strategies of their international business partners. Certainly, Cuban negotiators can strike smart deals, but they cannot dictate the over-arching rules of the game.

Cuba still has a long way to go before it reaches the officially proclaimed goal of $2.5 billion in foreign investment inflows per year. Total approvals last year for ZED Mariel reached only some $200 million, and this year are officially projected to reach about $400 million. For many potential investors, the business climate remains too uncertain, and the project approval process too opaque and cumbersome. But the Brascuba and Unilever projects are definitely movements in the right direction.

But Unilever feared that granting its Cuban partner 51% would yield too much management control and could jeopardize brand quality. Unilever also balked at exporting products made in Cuba, where product costs were as much as one-third higher than in bigger Unilever plants in other Latin American countries.

The 2012 collapse of the Unilever contract renewal negotiations adversely affected investor perceptions of the business climate. If the Cuban government could not sustain a good working relationship with Unilever—a highly regarded, marquée multinational corporation with a global footprint—what international investor (at least one operating in the domestic consumer goods markets) could be confident of its ability to sustain a profitable long-term operation in Cuba?

In the design of the new joint venture, Cuba has allowed Unilever a majority 60% stake. Furthermore, in the old joint venture, Unilever executives complained that low salaries, as set by the government, contributed to low labor productivity. In ZED Mariel, worker salaries will be significantly higher: firms like Unilever will continue to pay the same wages to the government employment entity, but the entity’s tax will be significantly smaller, leaving a higher take-home pay for the workers. Hiring and firing will remain the domain of the official entity, however, not the joint venture.

Unilever is also looking forward to currency unification, widely anticipated for 2016. Previously, Unilever had enjoyed comfortable market shares in the hard-currency Cuban convertible currency (CUC) market, but had been largely excluded from the national currency markets, which state-owned firms had reserved for themselves. With currency unification, Unilever will be able to compete head-to-head with state-owned enterprises in a single national market.

Similarly, Brascuba will benefit from the new wage regime at Mariel and, as a consumer products firm, from currency unification. At its old location, Brascuba considered motivating and retaining talent to be among the firm’s key challenges; the higher wages in ZED Mariel will help to attract and retain high-quality labor.

Brascuba believes this is a good time for expansion. Better-paid workers at Mariel will be well motivated, and the expansion of the private sector is putting more money into consumer pockets. The joint venture will close its old facility in downtown Havana, in favor of the new facility at Mariel, sharply expanding production for both the domestic and international markets (primarily, Brazil).

A further incentive for investment today is the prospect of the lifting of U.S. economic sanctions, even if the precise timing is impossible to predict. Brascuba estimated that U.S. economic sanctions have raised its costs of doing business by some 20%. Inputs such as cigarette filters, manufacturing equipment and spare parts, and infrastructure such as information technology, must be sourced from more distant and often less cost-efficient sources.

Another sign of enhanced Cuban flexibility: neither investment is in a high technology sector, the loudly touted goal of ZED Mariel. A manufacturer of personal hygiene and home care product lines, Unilever will churn out toothpaste and soap, among other items. Brascuba will produce cigarettes. Cuban authorities now seem to accept that basic consumer products remain the bread-and-butter of any modern economy. An added benefit: international visitors will find a more ready supply of shampoo!

The Unilever and Brascuba renewals suggest a new realism in the Cuban camp. At ZED Mariel, Cuba is allowing their foreign partners to exert management control, to hire a higher-paid, better motivated workforce, and it is anticipated, to compete in a single currency market. And thanks to the forward-looking diplomacy of Raúl Castro and Barack Obama, international investors are also looking forward to the eventual lifting of U.S. economic sanctions.

This piece was originally published in Cuba Standard.

In advance of President Obama’s historic trip to Cuba and Argentina, three Brookings scholars participated in a media roundtable to offer context and outline their expectations for the outcomes of the trip. Richard Feinberg and Ted Piccone discussed Cuba–including developments in the U.S.-Cuba relationship, the Cuban economy, and human rights on the island–and Harold Trinkunas offered insight on Argentina, inter-American relations, and the timing of the visit.

Read the transcript (PDF) »

Richard Feinberg:

The idea is to promote a gradual incremental transition to a more open, pluralistic and prosperous Cuba integrated into global markets of goods, capital, and ideas. It is a long-term strategy. It cannot be measured by quarterly reports.

Ted Piccone:

...the key [is] to unlock a whole set of future changes that I think will be net positive for the United States, but it is going to take time, and it is not going to happen overnight.

Harold Trinkunas:

Cuba is really about moving, among other things, a stumbling block to better relations with Latin America, and Argentina is about restoring a positive relationship with a key swing state in the region that was once one of our most important allies in the region.

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Editors’ Note: The odds of wringing short-term concessions from Cuba's proud and nationalist leaders are stacked against Obama, Richard Feinberg and Ted Piccone believe. They argue the trip should be judged by its ability to expand constituencies in both countries who want a more open and prosperous Cuba. This post originally appeared on Huffington Post.

President Obama's decision to make a historic visit to Cuba later this month is about more than U.S. politics or business opportunities on the island. It's a bold bet that

presidential diplomacy can secure a new normal in U.S.-Cuba relations after over five decades of hostilities, embargoes and gridlock.

Based on our years of analysis and policymaking in and out of government, we believe the odds of wringing short-term concessions from Cuba's proud and nationalist leaders are stacked against Obama. We also believe, however, that that is the wrong metric. Rather, this trip should be judged by its ability to expand constituencies in both countries who want a more open and prosperous Cuba.

To that end, Obama should draw on his extraordinary rhetorical skills to paint a vision for both Cubans and Americans of a future attractive enough to persuade the island's citizens, especially its ambitious and talented millennials to remain on the island and for the resourceful Cuban American diaspora to invest in that vision. This promise of a Cuban renaissance should include one where citizens freely exercise their chosen professions, engage directly with a transparent and accountable government, have access to the global internet, and travel abroad routinely for family and business purposes.

To help shape such a future, the U.S. delegation should engage not only with Cuba's historic revolutionaries but also with its next generations of public and private leaders from across Cuban society. The White House can also use the visit to leverage Obama's immense popularity on the island to speak directly to the Cuban people about their aspirations for a brighter future.

Given the longstanding feuds between our two countries, however, it will take longer than a year or two to unwind the accumulated distrust and build support for this new normalcy. On the U.S. side, major sectors have swung clearly in favor of normalization - business and agricultural interests, human rights and religious groups, and the broad swath of U.S. citizens keen to know Cuba after decades of isolation. Even majorities of Cuban-Americans and Hispanic voters favor engagement over the embargo.

These constituencies, however, are not yet strong enough to persuade Congress to lift the embargo. And Havana has done little so far to address the major sticking points in Washington's list of legitimate grievances, particularly in the key areas of human rights and economic reforms.

On the Cuban side, Raúl Castro recognizes that Cuba's ability to protect the social gains of the revolution depends on normalizing its participation in the global economy. Its economy badly needs the injection of U.S. commerce, professional exchanges and tourism that would flow readily once the embargo is lifted. Family-run businesses, farmers, young people and professionals in sectors like software and biotechnology also stand to gain from these changes.

Notably, many of those fighting for a more pluralistic Cuba applaud Obama's decision to declaw the embargo as a political shield for government hard-liners; it helps their cause for a more honest debate at home about how to reform Cuba's outdated model of state-centric development and to make government more accountable to its citizens.

The visit offers both presidents a rare opportunity to demonstrate to these various stakeholders that change is not one-sided but a mutual accommodation. There is nothing like a presidential visit to move bureaucracies and catalyze action.

For example, the visit could accelerate progress toward easing the embargo. Already, new rules encourage trade with the emerging private sector and with some state-owned enterprises. Cuba should now take steps to facilitate such commerce and stop insisting that all sanctions be lifted first.

As important, the two sides should expedite resolution of outstanding U.S. property claims dating back to the early 1960s, a key congressional condition for lifting sanctions. Prompt resolution of these cases would automatically create powerful constituencies in the United States for repealing the embargo and signal to foreign investors that Cuba is prepared to respect property rights and the rule of law. They could also demonstrate a willingness to resolve longstanding claims for compensation for citizens killed in hostilities during the Cold War.

In anticipation of next month's Cuban Communist Party Congress, President Castro can detail his plans to decentralize power, empower the legislature and reform the electoral system.

The precise timing of Obama's visit - just one month before the Party Congress - may signal that Raúl Castro and his pragmatic followers welcome a friendly nudge to recharge the reform process they launched in 2008. It also underscores how little time remains before Americans elect a new president who could reverse steps taken so far with the stroke of a pen. That is the kind of marriage of short and long-term interests that allow wise presidents to make history, and the ultimate test for assessing whether the Obamas' trip is serious business, or just family fun.

Richard Feinberg, a nonresident senior fellow in the Latin America Initiative and author of the forthcoming book, “Open for Business: Building a New Cuban Economy” (Brookings, 2016), discusses current U.S. and Cuba relations after President Obama's visit and looks ahead to Cuba's increasing engagement with the global economy.

“The younger generation does have a respect for Fidel Castro and what the older generation accomplished,” Feinberg says. “They want to see a fresh generation of leadership, they want to see a more relaxed political atmosphere, they want more opportunities economically to exercise their own profession and exercise their own talents. They want and fully expect normal relations between Cuba and the United States.”  In this podcast, Feinberg explains how Cuba can reintegrate itself into global economy while encouraging a gradual opening of economic relations with the U.S.

Also in this podcast, meet new scholar Susan Hennessey, fellow in National Security in Governance Studies; and stay tuned for our presidential election update with John Hudak.

Show Notes

Open for Business: Building the New Cuban Economy

Obama scores a triple in Havana

In Cuba, Obama looks to the post-Castro era

Subscribe to the Brookings Cafeteria on iTunes, listen in all the usual places, and send feedback email to BCP@Brookings.edu.

Also, check our our new podcast, Intersections, where two experts discuss angles on policy issues, hosted by Adrianna Pita.

Thanks to audio engineer and producer Zack Kulzer, with editing help from Mark Hoelscher, plus thanks to Carissa Nietsche, Bill Finan, Jessica Pavone, Eric Abalahin, Rebecca Viser, and our intern Sarah AbdelRahim.

Event Information

For Cubans, “D17”—December 17, 2014—changed everything. On that day, the United States and Cuba announced that the two countries would renew diplomatic relations nearly 60 years after Fidel Castro came to power. For both countries, a new transformation has begun—but this time, it is the promise of Cuba’s insertion in the globalized economy and the crumbling U.S. embargo that is catalyzing change on the island.

On May 31, the Brookings Book Club hosted Nonresident Senior Fellow Richard E. Feinberg and NPR Correspondent Tom Gjelten for a discussion of Feinberg’s new book, “Open for Business: Building the New Cuban Economy” (Brookings Institution Press, 2016). The discussion focused on the factors that guided this monumental decision: international diplomacy; changes already underway in Cuba; successful Cuban entrepreneurs and foreign investments; and scenarios for Cuba’s future development path.

Three young Cuban leaders, including two whose vignettes appear in the book, “Open for Business,” joined the discussion and shared their personal experiences with the economic realities in Cuba today, as well as the opportunities created by the shift in Cuban-American relations.

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• Open for business: Building the new Cuban economy

Audio

• Open for business: Building the new Cuban economy

Transcript

• Transcript (.pdf)

Event Materials

• 20160531_cuba_economy_transcript