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