Amy Gillett is vice president of education at the William Davidson Institute. Her article was originally published on the WDI affiliated site, NextBillion, on June 9, 2016. To read more her recent trip to Cuba and the potential for economic development there, please click here.
Ernesto and Yudiel operate a “Cool Coconut Water” stand in Havana. My colleague at the William Davidson Institute, Diana Paez-Cook, and I met them recently on our trip to Cuba to assess the entrepreneurial landscape there. I work on designing and delivering entrepreneurship programs in emerging markets, and Diana directs global grant projects. We sampled their refreshing coconut water on a very warm day in May. Just as we thought our fieldwork couldn’t get any better, Ernesto took our empty shells, freed up the delicious meat, and handed the coconuts back to us with a smile.
The coconut entrepreneurs – like many private business people we would encounter on our four-day trip – displayed some of the traits that explain why, despite resource constraints, entrepreneurship is booming in Cuba. Raw materials are hard to find on the island. The government allows entrepreneurs only limited access to government-run wholesale stores (prior to April 2016, they had no access). The solution for Ernesto and Yudiel was therefore to build a business with what is available on the island. They source their coconuts from trees three blocks away. Their stand is adorned with a large tile rooster provided by the artist José Fuster – so local that he lives right across the street (more on him in a bit).
Ernesto and Yudiel are part of a growing class of Cubans forgoing the traditional route of government employment – and its average monthly salary of just $25 – and striking out on their own. There are some 500,000 entrepreneurs today in Cuba, up from 150,000 in 2010. President Raúl Castro has called the huge state sector “bloated” and has declared private business a key part of Cuba’s new economic model. In May, the communist government passed legislation allowing small businesses to become legal entities, thus making the private sector official. Previously, entrepreneurs were classified as “self-employed.” The state recognizes 201 job categories for private business. Taxes on these businesses are very high, often claiming more than half of earnings.
Ernesto and Yudiel had the savvy to position their coconut water cart right across the street from the home of Fuster, known as the “Picasso of the Caribbean.” Over three decades ago, Fuster had a vision of transforming his home in a fishing village into a tiled wonderland. Undaunted by the absence of tile on the island, he managed to get tiles – thousands of them – hand-carried in from the United States. He not only turned his home into the fantastical “Fusterlandia” but he also decorated his neighbors’ houses. Now tourists flock to Fusterlandia and the surrounding 100-plus houses bedecked by his tiles. Fuster is one of the many registered – and thus government-approved – “independent artists” in Cuba. Everything on the walls of Fuster’s house is for sale, and he does a brisk trade selling his tiles for $30 each directly from his workshop. The tourist traffic has spawned other businesses in the neighborhood, including the coconut stand and several souvenir shops.
Another venture we visited was Clandestina, a charming boutique selling hand-printed T-shirts and notebooks in Havana. Although the store does not have a lot of inventory, it’s beautifully displayed. Here again we were reminded of the resourcefulness of the Cuban entrepreneurs. The perky green “Clandestina” sign on the outside of the shop, which wouldn’t attract a second glance in most other emerging markets, really stood out there. The vast majority of the advertising in the city comes courtesy of the government, with rather somber billboards reading “Patria o Muerte” (Homeland or Death) and “Bloqueo: el genocidio más largo de la historia” (The Embargo: the longest genocide in history). The clerk at Clandestina was friendly, saying she really enjoyed working at the shop. She told us the store has been there for about a year and that the two owners were currently in the United States buying supplies. This is how many Cuban entrepreneurs get their raw materials.
When Diana and I were in Miami awaiting our flight to Havana, we were surrounded by travelers checking in massive plastic-wrapped boxes of goods. These so-called “mules” help alleviate the shortage of goods in Cuba by transporting a huge variety of goods – from toilet paper and ibuprofen and spices to the raw materials needed by the island’s entrepreneurs. FedEx recently filed with the U.S. Department of Transportation to start cargo flights to Cuba and UPS is also exploring opportunities. Soon, we should see more efficient transfer of raw materials into Cuba.
The entrepreneur we got to know best during our visit was Raquel, the owner of our “casa particular,” or B&B. The Cuban government started allowing Cubans to rent out their homes and apartments in 1997. Last year, Airbnb started offering listings in Cuba. Tourism is a huge business in Cuba, with many tourists coming from Canada and Europe and an increasing number coming on people-to-people tours from the United States. Obama authorized such tours in March 2016 just prior to his own visit to the island.
While the outside of Raquel’s building bears the same signs of government neglect as most others in Havana, she has done a wonderful job of decorating the inside. Raquel’s hospitality seemed to know no limits. When she found out it was my birthday, she threw me a surprise party complete with mojitos, cake and “son” cubano music.
With seven women occupying Raquel’s three rooms, we apparently taxed the building’s infrastructure. We ran out of water and the toilet and air-conditioning gave out on day three of our visit, but Raquel’s service made our stay great. As we were leaving, she handed us “L’Auberge de Raquel” business cards and asked us to go on TripAdvisor to rate her “casa.” Raquel has no internet access (only a tiny percentage of the population does and the government monitors its usage), but still she understands the importance of this online service to drive future business.
Cuban entrepreneurs today still face many hurdles – lack of raw materials, high taxes, bureaucratic rules that are not always clear. But we raise our mint-stuffed mojito glasses and say “salud” to the entrepreneurs of Cuba for their resourcefulness and positive spirit. Further access to raw materials at wholesale prices will provide a huge lift. Another boost will be provided when the U.S. lifts the trade embargo against Cuba, which has been in effect since 1960 but has started to loosen. Cuba will have a new leader in 2018 when Raul Castro steps down. The prospects for better U.S.-Cuban relations are strong and would engender the opening of trade between the two countries. This would provide a huge boon to the island’s entrepreneurs.
There is a final ingredient needed for Cuba’s economic transformation: business training. Business education in Cuba has traditionally focused on economics – and the economics of running a centrally planned economy. Training in topics such as marketing, finance, accounting and human resource management will help Cuba’s entrepreneurs launch or scale their businesses. We look forward to continuing our work in this fascinating country and to helping Cuba’s entrepreneurs access such training.
When the Berlin Wall fell in late 1989, taking with it communism in Eastern Europe, it triggered the region’s transition from a command economy to a market one. In what seemed like an instant, the way the Soviet bloc countries had operated for decades was changing.
“Things happened quite quickly,” said Paul Clyde, president of the William Davidson Institute (WDI) at the University of Michigan, who lived in Slovakia in 1993 and served as an economic adviser to the Czech and Slovak governments. “The structure that had been in place for all those years suddenly was not there anymore. It was sudden change.”
WDI got its start in the wake of the fall of communism and its primary mission in those early years was to help countries make the economic transition through a program of instruction, faculty and student development, and research. And while the communist economic system was undergoing earth shattering changes in Eastern Europe, the aftershocks were felt all the way across the Atlantic on the island nation of Cuba. Suddenly, Cuba lost its main trading partners (82 percent of Cuban exports went to Soviet bloc countries; 85 percent of its imports came from these same countries) and the financier of annual, multi-billion dollar subsidies ($6 billion in 1989 alone). Some pundits predicted Fidel Castro would follow the lead of his Soviet counterparts and embrace a capitalist economy, but the Cuban leader instead stuck to his Cold War ways.
Now several decades later, as the frosty relations between the U.S. and Cuba begin to thaw in the wake of President Obama’s historic visit to Havana in March, experts are once again speculating on how arguably the last vestige of the old Soviet communist system will react economically. Will Cuba be like the Soviet bloc transition of the early 1990s – rapid and at times disorderly? Or more like recent examples of China and Vietnam, with an open economy but a strong central government still playing an integral part?
Clyde said when the Soviet bloc countries collapsed and a free market system was introduced, there had been no experience like it before, nothing to refer to, no guide on how to go about transitioning from a command to a market economy. For Cuba there are guideposts, though no two experiences are going to be alike, Clyde warned. China’s transition was different than the Soviet Union, which was different from Vietnam.
“But at least you have something in the same ballpark to draw on, to have some idea of how it might go,” he said. “Cuba has a number of benefits too. Like the Soviet bloc countries, Cuba has infrastructure and a well-educated population. Unlike the Soviet bloc countries Cuba is very close to the U.S. as a major trading partner. And it’s far from a landlocked country. When you look at Eastern Europe back in the early 1990s, many countries did not have trading partners next to them that were potentially beneficial. Most of their neighbors were in the same boat.”
Soon after its founding, WDI concentrated on the economic transition in Central and Eastern Europe. The Institute focused on three major efforts: delivering annual, six-week seminars for senior business leaders, entrepreneurs and government officials from countries with economies in transition; providing internships that allowed U-M students to work in Poland and the former Soviet republics; and, funding fellowships that allowed U-M scholars to engage intensively on the ground.
In May, Amy Gillett, vice president of WDI’s Education Initiative, and Diana Paez-Cook, senior program manager of the institute’s Development Consulting Services, will travel to Cuba to explore entrepreneurship training opportunities.
Gillett, who has a master’s degree in Russian and Eastern European Studies and did government and business work on the ground in the region from 1991-1997, said she sees many parallels between the economic transition in the Soviet bloc countries and Cuba.
“Many of the skills required by those in the former Soviet Union to aid in their economic transition are the same as what will be required by those in Cuba,” Gillett said.
Eric Leenson, founder and president of California-based SOL2 Economics and coordinator of the international project, “Socially Responsible Enterprise and Local Development in Cuba,” said the economic transformation there “needs to be looked at as uniquely Cuban.”
Leenson said the process of economic change began years ago and won’t be driven by recent, renewed relations with the U.S. He said Cuba began about seven years ago altering its economic structure in a number of ways, including wanting to lower the percentage of employees of state-run enterprises from 95 percent to about 55 percent. The government also wants to attract more foreign investment. But it remains steadfast that any new economic system still be centralized.
“What is being talked about is prosperous, sustainable socialism,” Leenson said. “Cuba is not giving up on socialism, so that makes it different from Eastern Europe. They want to maintain a strong state. They will not open up their economy willy nilly. The state is quite competent and is looking out for its own interests.”
Already, 13 U.S. airlines have applied to provide direct flights to Havana, and U.S.-based Starwood Hotels announced it would manage several hotels owned by the Cuban government. Beginning in May, the cruise line Carnival will set sail for Cuba, and Google wants to expand internet access in the country.
While President Barack Obama was meeting with Cuban officials in Havana in March, PayPal executives were in discussions with government officials about an online remittance service for the island, and singer Jimmy Buffett mingled with U.S. representatives on the trip about bringing his Margaritaville restaurant chain there.
Mel Levitsky, professor of international policy and practice at the University of Michigan’s Ford School of Public Policy and a former U.S. ambassador to Bulgaria and Brazil, said Cuba’s transition will be quicker if the old leadership of Raul Castro leaves (Castro said he’ll hand over the presidency in 2018) and a young generation of entrepreneurs push for change. Still, he sees a slow, 10-year transition at least.
This would be similar to the transition in Central and Eastern Europe. In fact, citizens in the former Soviet Bloc were unhappy when their countries did not have GDPs similar to the U.S. after 12 months. Most were shocked to hear it could take a generation before the economic transition would take hold.