Rekindling old friendships
Cuba is once again resorting to geopolitics to support a failing economy
The Economist
August 9, 2014

CARLITO, a wiry man with greying hair, sits under a palm tree in Mariel, a town on a bay 40km (25 miles) west of Havana, sipping rum and watching a container ship edge out towards the Caribbean. He recalls seeing a flotilla of smaller boats leaving from this same spot in 1980, carrying thousands of opponents of the Castro regime to Florida in the “Mariel boatlift”.

Those were politically charged times. Government trucks would come to his school to deliver eggs for him and his friends to throw at the people fleeing. About a decade and a half later, after the collapse of the Soviet Union in 1989 plunged Cuba’s economy into crisis, sources of protein were so scarce that Carlito recalled those wasted eggs with bitter regret. Some “Marielitos”, as those who fled are known, returned recently and Carlito was stunned at how prosperous they had become. “We used to call them traidores (traitors),” he chuckles. “Now we call them traedolares (bring dollars).”

Across the bay from where Carlito sits is a $900m container port, which was built with Brazilian money and inaugurated in January. There are plans to develop a special economic zone alongside it, modelled on the thriving export hubs, such as Shenzhen, that China developed from 1980 onwards. The port is part of a vision for Cuba that relies less on Cuban-American gusanos (worms) sending remittances to prop up the local economy, and more on an inflow of foreign investors.

But Carlito is keeping his excitement in check. Construction workers building the container terminal were paid a mere 250 pesos ($10) a month, he says, so the ramshackle town has yet to benefit from the development. None of the 23 firms who have sought licences to operate in the special economic zone has yet been granted one. Even Joaquín Infante, the 88-year-old vice-president of the slow-moving National Association of Cuban Economists and Accountants, urges speedier authorisation of investment. “We need to be more flexible and take more risks,” he says.

Despite reforms that have brought some big changes to Cuba in the form of private restaurants, bed-and-breakfasts and new co-operatives, the economy has virtually ground to a halt. In the first half of the year GDP grew by just 0.6%, leading the government to reduce its estimate for full-year growth to 1.4%. That is lower than the 2.7% annual average figure since Raúl Castro (pictured on the right, with Vladimir Putin) became president in 2008.

Investment is the root of the problem. In a report in July, two Cuban economists, Omar Everleny and Ricardo Torres, estimated that the growth in Cuba’s capital stock, such as machinery and buildings, fell to 7.8% of GDP last year, close to its level of 5.4% in 1993 when the economy was in serious trouble. (In Latin America as a whole the figure is above 20%.) From the 20th floor of the Habana Libre, a run-down hotel, not one crane can be seen on the skyline. “The economy is screwed,” says a Havana-based diplomat.

Supporters of the regime argue that the reforms simply need more time. A profit-oriented reorganisation of state-owned behemoths, such as the sugar monopoly, could be promising; it is just that the bureaucrats who run them are slow to change. Critics, however, see a fundamental flaw in the reform model. Although it has sought to give some people more freedom in what they make and sell, the state keeps a stranglehold on the inputs they need for those businesses, such as seeds for growing crops, or sauces and spices for restaurants, or spare parts for taxis. It has cracked down on “mules” bringing in such goods on passenger planes from abroad.

Bad pennies

Diplomats say such counter-measures will make it harder for Cuba to attract the $2.5 billion in annual foreign investment that the regime aims for. Some also reckon the financial squeeze on the island has tightened this year in the wake of the case against BNP Paribas, a French bank, for evading American sanctions on doing business with Cuba, among other places.

That is why Cuba-watchers have paid close attention to the visits of Russia’s president, Vladimir Putin, and China’s leader, Xi Jinping, in recent weeks. Though both men offered few concrete investments in Cuba, they provide an opportunity for the Castro regime to start reducing its dependence on its closest ally, Venezuela, whose pro-Cuba government has been rocked by instability this year. Says Mr Infante: “We have to diversify and not depend on just one partner.” He hopes that means more Chinese and Russian investment in Mariel.

One envoy says the regime also prefers such investments to Western capital because it sees neither China nor Russia as a “Trojan horse” working towards regime change. A Cuban economist sees uncanny parallels with the special terms offered to the Soviet Union in the cold war. “The mentality of the decision-makers is to talk to Russia, talk to China, and make them offers based on politics,” he says. “But this is the same mentality we had in the past…and it didn’t do much for productivity.”

Cuba’s courtship of Russia is particularly striking: a day after Malaysian Airlines flight MH17 was shot down, Fidel Castro publicly blamed Ukraine’s government. Such an overtly pro-Russian stance on Ukraine may hinder political negotiations that started this year between Cuba and the EU, diplomats say. It also makes it harder for Barack Obama to improve America’s relations with Cuba, let alone consider an end to the counter-productive 54-year-old embargo. Back in Mariel, Carlito wants good relations with everyone, especially America. “Luckily we Cubans have a lot of patience and patience is good,” he says. “Without it there’s just frustration.”

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