Modest Growth in the Near Term. On the basis of our analysis, we believe that GDP growth of 2% to 4% is most likely over the next five years. Enough changes are under way, across a variety of political and economic areas, that Cuba should be able to maintain that trajectory, with the potential for accelerated growth in the longer term.
This projection assumes that the state continues to manage the economy tightly and retain control over most markets while also introducing additional reforms. In terms of investment, we see the easing of restrictions on the ownership of private property over time, leading to the development of new markets such as real estate. Since 2008, the number of private and cooperative businesses in Cuba has tripled. Management of some state lands has been handed over to farmers, and Cubans can now buy and sell vehicles and houses.
Our model also assumes that remittances from US citizens will continue to increase, to a potential $6 billion by 2018. (Notably, remittances and private enterprise are not evenly distributed across the population. Both are concentrated in wealthier areas in the North, primarily Havana.)
Finally, the model assumes that the US government will continue to ease restrictions on Cuba, such as making individual travel easier and allowing more US companies to operate there. Such moves would send a positive signal to non-US companies that may have been hesitant about investing in Cuba, creating a cumulative boost. (For example, Unilever recently announced that it would open a factory in Cuba.)
In the aggregate, these factors will all lead to greater capital flows into Cuba and allow more people to earn income beyond the low government salary.
Although our prognosis is modestly positive, it also recognizes that Cuba’s economic growth will likely be slowed because of several structural limitations. First, the country has minimal activity in sectors, such as manufacturing, that typically drive growth in economies that are opening up. Similarly, decades of underinvestment have led to decayed infrastructure, which will hinder productivity and require significant capital to upgrade. The country has limited information and communications technology (though the government could address that deficiency through regulation and incentives for private investment).
Cuba’s aging population is another factor. Low birthrates and increased emigration to the US and other countries have left Cuba with distinct “holes” in its young and middle-aged populations. This challenge is growing. More people left Cuba in 2015 than in any year since the mass emigrations of the Mariel boatlift in 1980.
Perhaps the most critical limitation is the government’s timid transition to a market economy. Former Communist countries like the Czech Republic that started with swift political change saw very rapid economic growth almost immediately. And countries like Vietnam that have had solid growth without such political change have implemented sweeping market-liberalization reforms far bolder than anything being contemplated in Cuba.
Accelerated Growth in the Longer Term? Looking beyond the next five years, accelerated economic growth is a real possibility, assuming that the US continues to ease trade restrictions and that Cuba addresses the structural limitations discussed above. Several factors will determine whether Cuba is likely to make decisive progress in opening its markets.
- The Seventh Congress of the Communist Party recently took place. Reforms announced at and following the event could signal the government’s stance on continued liberalization.
- Cuentapropistas may see some regulatory relief. After a steep increase in the number of Cuban entrepreneurs in recent years, rigid reporting requirements and predatory taxation have hampered their growth. Increasing the number of industries and professions open to private ownership, and reducing the regulatory burden on them, would be positive signs.
- The government could make more explicit overtures to international financial institutions. Although the path to Cuban membership at institutions like the IMF, the World Bank, and the Inter-American Development Bank is currently blocked by the US, Cuba has thus far hesitated even to push for membership. Access to capital from these institutions was an important factor in the transition and growth of many former Communist countries, including Vietnam.
- The government could be more transparent about political succession plans. President Raúl Castro has stated that he will hand over the reins of power in 2018. How that process happens, and how ambitiously the next president pursues market liberalization, will matter greatly.