What the tourist industry reveals about Cuba
The revolutionary economy is neither efficient nor fun
Apr 1st 2017 | HAVANA
TOURISTS whizz along the Malecón, Havana's grand seaside boulevard, in
bright-red open-topped 1950s cars. Their selfie sticks wobble as they
try to film themselves. They move fast, for there are no traffic jams.
Cars are costly in Cuba ($50,000 for a low-range Chinese import) and
most people are poor (a typical state employee makes $25 a month). So
hardly anyone can afford wheels, except the tourists who hire them. And
there are far fewer tourists than there ought to be.
Few places are as naturally alluring as Cuba. The island is bathed in
sunlight and lapped by warm blue waters. The people are friendly; the
rum is light and crisp; the music is a delicious blend of African and
Latin rhythms. And the biggest pool of free-spending holidaymakers in
the western hemisphere is just a hop away. As Lucky Luciano, an American
gangster, observed in 1946, "The water was just as pretty as the Bay of
Naples, but it was only 90 miles from the United States."
There is just one problem today: Cuba is a communist dictatorship in a
time warp. For some, that lends it a rebellious allure. They talk of
seeing old Havana before its charm is "spoiled" by visible signs of
prosperity, such as Nike and Starbucks. But for other tourists, Cuba's
revolutionary economy is a drag. The big hotels, majority-owned by the
state and often managed by companies controlled by the army, charge
five-star prices for mediocre service. Showers are unreliable. Wi-Fi is
atrocious. Lifts and rooms are ill-maintained.
Despite this, the number of visitors from the United States has jumped
since Barack Obama restored diplomatic ties in 2015. So many airlines
started flying to Havana that supply outstripped demand; this year some
have cut back. Overall, arrivals have soared since the 1990s, when Fidel
Castro, faced with the loss of subsidies from the Soviet Union, decided
to spruce up some beach resorts for foreigners (see chart). But Cuba
still earns less than half as many tourist dollars as the Dominican
Republic, a similar-sized but less famous tropical neighbour.
With better policies, Cuba could attract three times as many tourists by
2030, estimates the Brookings Institution, a think-tank. That would
generate $10bn a year in foreign exchange, twice as much as the island
earns now from merchandise exports. Given its colossal budget deficit,
expected to hit 12% of GDP this year, that would come in handy. Whether
it will happen depends on two embargoes: the one the United States
imposes on Cuba and the one the Castro regime (now under Fidel's
brother, Raúl) imposes on its own people.
The United States embargo is a nuisance. American credit cards don't
work in Cuba, and Americans are not technically allowed to visit the
island as tourists. (They have to pretend they are going for a family
visit or a "people-to-people exchange".) Mr Obama allowed American hotel
chains to dip a toe into Cuba; one, Starwood, has signed an agreement to
manage three state-owned properties.
Pearl of the Antilles, meet swine
But investment in new rooms has been slow. Cuba is cash-strapped, and
foreign hotel bosses are reluctant to risk big bucks because they have
no idea whether Donald Trump will try to tighten the embargo, lift it or
do nothing. On the one hand, he is a protectionist, so few Cubans are
optimistic about his intentions. On the other, pre-revolutionary Havana
was a playground where American casino moguls hobnobbed with celebrities
in raunchy nightclubs. Making Cuba glitzy again might appeal to the
former casino mogul in the White House.
The other embargo is the many ways in which the Cuban state shackles
entrepreneurs. The owner of a small private hotel complains of an
inspector who told him to cut his sign in half because it was too big.
He can't get good furniture and fixtures in Cuba, and is not allowed to
import them because imports are a state monopoly. So he makes creative
use of rules that allow families who say they are returning from abroad
to repatriate their personal effects (he has a lot of expat friends).
"We try to fly low under the radar, and make money without making
noise," he sighs.
Cubans with spare cash (typically those who have relatives in Miami or
do business with tourists) are rushing to revamp rooms and rent them
out. But no one is allowed to own more than two properties, so ambitious
hoteliers register extra ones in the names of relatives. This works only
if there is trust. "One of my places is in my sister-in-law's name,"
says a speculator. "I'm worried about that one."
Taxes are confiscatory. Turnover above $2,000 a year is taxed at 50%,
with only some expenses deductible. A beer sold at a 100% markup
therefore yields no profit. Almost no one can afford to follow the
letter of the law. For many entrepreneurs, "the effective tax burden is
very much a function of the veracity of their reporting of revenues,"
observes Brookings, tactfully.
The currency system is, to use a technical term, bonkers. One American
dollar is worth one convertible peso (CUC), which is worth 24 ordinary
pesos (CUP). But in transactions involving the government, the two kinds
of peso are often valued equally. Government accounts are therefore
nonsensical. A few officials with access to ultra-cheap hard currency
make a killing. Inefficient state firms appear to be profitable when
they are not. Local workers are stiffed. Foreign firms pay an employment
agency, in CUC, for the services of Cuban staff. Those workers are then
paid in CUP at one to one. That is, the agency and the government take
95% of their wages. Fortunately, tourists tip in cash.
The government says it wants to promote small private businesses. The
number of Cubans registered as self-employed has jumped from 144,000 in
2009 to 535,000 in 2016. Legally, all must fit into one of 201 official
categories. Doctors and lawyers who offer private services do so
illegally, just like hustlers selling black-market lobsters or potatoes.
The largest private venture is also illicit (but tolerated): an
estimated 40,000 people copy and distribute flash drives containing El
Paquete, a weekly collection of films, television shows, software
updates and video games pirated from the outside world. Others operate
in a grey zone. One entrepreneur says she has a licence as a messenger
but wants to deliver vegetables ordered online. "Is that legal?" she
asks. "I don't know."
Cubans doubt that there will be any big reforms before February 2018,
when Raúl Castro, who is 86, is expected to hand over power to Miguel
Díaz-Canel, his much younger vice-president. Mr Díaz-Canel is said to
favour better internet access and a bit more openness. But the kind of
economic reform that Cuba needs would hurt a lot of people, both the
powerful and ordinary folk. Suddenly scrapping the artificial exchange
rate, for example, would make 60-70% of state-owned firms go bust,
destroying 2m jobs, estimates Juan Triana, an economist. Politically,
that is almost impossible. Yet without accurate price signals, Cuba
cannot allocate resources efficiently. And unless the country reduces
the obstacles to private investment in hotels, services and supply
chains, it will struggle to provide tourists with the value for money
that will keep them coming back. Unlike Cubans, they have a lot of choices.
Source: Sun, sand and socialism: What the tourist industry reveals about
Cuba | The Economist -