Monday, August 28, 2006

Cuba's economic fate up in air

Cuba's economic fate up in air
Updated 8/27/2006 11:05 PM ET
By Edward Iwata, USA TODAY

Millions of visitors to Havana have been entranced by the Cuban
capital's resorts and restaurants, its centuries-old baroque and
colonial architecture, its malecon seawall and promenade.

Behind the tourists' facade, though, the Castro regime and military and
government officials control nearly all of Cuba's multibillion-dollar
economy, including tourism, finance, retail, agriculture and energy.

Now, with 80-year-old Fidel Castro ailing after surgery, speculation is
rising over the future of Cuba's economy and the anticipated rule of
brother Raul Castro, the military strongman who lords over hundreds of
state-run businesses.

Despite the hope of U.S. companies that Cuba might welcome capitalism
and that the U.S. might lift its long-running embargo, dramatic change
probably won't happen soon. Raul Castro is unlikely to anger Cuba's
ruling elite by launching major economic reforms, economists and Cuba
scholars predict.

"If Fidel dies, the grip of the military would be even greater than
now," says Antonio Jorge, an economist at Florida International
University. "Raul would buy the loyalty of generals and high-ranking
officials by showering them with more privileges and economic benefits."

Talk of Cuba's economic fate comes amid reports of Fidel Castro's
intestinal surgery earlier this month and the transfer of power to his
brother. The news fueled speculation that Castro might die, setting off
street celebrations among Miami's large Cuban population.

The stakes remain high: billions of dollars in future trade and
investments and 11 million potential Cuban consumers only 90 miles from
Florida. Economists say that U.S. failure to tap into the Cuban economy
will benefit only leftist Venezuela and communist China, Cuba's biggest
trade partners.

"Cuba is an evolving and dramatic new market," says Ruben Bonilla,
chairman of the Port of Corpus Christi in Texas. "We don't want to miss
the party because of an embargo begun 10 U.S. presidents ago."

Venezuela supplies Cuba with half of its oil, shipping 78,000 barrels of
crude oil daily at subsidized prizes. China imports nickel from Cuba and
has signed a spate of business deals with the Castros.

Both countries are likely to grow closer to Cuba. It has potential crude
oil reserves of up to 9 billion barrels and vast natural gas reserves,
reports the U.S. Geological Survey. Already, Cuba has signed lease
agreements with China, India, Canada and Spain.

U.S.-Cuba relations have been rocky since the 1962 Cuban missile crisis.
A 44-year U.S. trade embargo bans nearly all exports to Cuba except
agricultural and medical goods. Anti-communists say the Castro regime
must fall before the embargo is lifted, while pro-trade forces say
impoverished Cuba needs capitalism.

In spite of the embargo, U.S. businesses — especially in agriculture,
shipping, oil and energy, tourism, retail, finance and construction —
hope a new ruler might lead to a new Cuban economy.

After the Soviet Union collapsed in 1991, U.S. companies wanted to rush
into Cuba, thinking it would be the next Soviet bloc country to fall,
says Jaime Suchlicki, director of the University of Miami's Institute
for Cuban and Cuban-American Studies. That didn't happen.

"Now," says Suchlicki, "it's beginning to pick up again because it looks
like there might be change."

A new Cuba?

Kirby Jones, president of the U.S.-Cuba Trade Association, says Canada
and European nations have more than 300 joint ventures with Cuba in
telecommunications, oil and energy, mining, port management and other
sectors. "This is not the Cuba of old, when everything was under Soviet
Union domination," he says. "This is a brand new version, a mixture of
capitalism and socialism."

Raul Castro could continue in that direction, some economists and
scholars say. Initially, he might unveil small, cosmetic reforms to
polish Cuba's image and win over his people. He might let Cubans start
thousands of small businesses in trade, agriculture and tourism, as the
Castros allowed in the mid-1990s.

One scenario: Cuba copies China, a blend of authoritarian state control,
manufacturing, mass-market consumerism and high-tech development.

"At best, Raul will try the mini-China model," says Antonio Gayoso of
the Association for the Study of the Cuban Economy and a former
economist in Cuba's finance ministry. "At worst, he and the military
will continue the repressive control they have now."

Cuba's economy was stronger in the 1950s, when it was one of Latin
America's top trade powers. Havana was a hot tourist site, and the U.S.
and Great Britain were Cuba's largest trading partners.

After Fidel Castro's guerrilla war ousted dictator Fulgencio Batista in
1959, much of the economy fell apart. Cuba became a kind of welfare
nation, with the old Soviet Union pouring $65 billion in aid and loans
into Cuba from 1960 to 1990.

Behind the times

Economists say much of Cuba remains frozen in the past and lacks the
modern ports, airports, business facilities and power grid needed to
grow global trade. More than half of Cubans live in poverty, and the
United Nations runs an emergency food program for 700,000. The country
also is saddled by heavy debt, owing Venezuela, Russia and European
nations $40 billion, Suchlicki says.

Even joint ventures between Cuba and other countries have dwindled. The
State Department says they are down to 300 from 540 in 1982, and
majority ownership by foreign partners does not really exist.

Production of sugar, citrus fruits, fertilizer and other goods has
fallen since the early 1990s, after Soviet aid stopped.

Only oil, gas and nickel have seen growth in that period because of
Venezuelan and Chinese investments, says Carmelo Mesa-Lago, an economics
professor at the University of Pittsburgh. Other bright lights in Cuba's
$39 billion economy: tourism and nascent bioscience and pharmaceutical
industries, economists say.

In recent years, Cuba has claimed nearly full employment for its workers
and annual economic growth ranging from 5% to 12% — even with droughts,
hurricanes, blackouts and disastrous sugar harvests.

Some economists say the figures are fabricated. "It is economic
propaganda," Mesa-Lago says. "Data is manipulated to show that Cuba's
economic policies are paying off, when the standard of living for Cubans
has declined."

Other obstacles to more open markets in Cuba and trade with the U.S.:

•Hardcore Stalinism. Since the 1950s, Fidel and Raul Castro have ruled
the economy with iron fists, say Cuba experts. Outspoken political and
economic reformers have been shunned or imprisoned.

In the 2006 Index of Economic Freedom by the Heritage Foundation, Cuba
ranks as one of the world's least-free nations, with Libya, Iran and
North Korea.

"Fidel and Raul said many times, 'No, we will never open the door to
capitalists,' " says Jesus Marzo Fernandez, a former Cuban finance
official and defector who lives in Miami. "They will never change."

Over the years, Fidel Castro allowed six major shifts in economic
policy, according to Mesa-Lago. But as the economy improved, he pulled
back, fearing the growing power of business leaders.

Mesa-Lago likens Fidel Castro to Mao Zedong, the late Chinese dictator.
Mao also was a charismatic Communist revolutionary who forced turbulent
economic changes on his nation. And he had a youthful cadre of
government officials eager to embrace global trade.

"But not until Mao died," says Mesa-Lago, "were reformers able to push
through changes."

•Fidel Castro Inc. For four decades, Fidel Castro has controlled nearly
all of Cuba's financial resources, according to Maria Werlau, a Cuba
expert and president of the Free Society Project in Summit, N.J., and
congressional testimony by former Cuban finance and military officials.

Forbes has estimated Fidel Castro's wealth at $900 million, which Castro
has vehemently denied.

Werlau and other Cuba experts say the figure is low. They say the
Castros and loyalists control several billions of dollars in real
estate, bank accounts, private estates, yachts and other assets — called
"the Comandante's Reserves" — in Europe, Latin America and Asia.

"The best estimates appear to be well shy of the vast wealth under his
command," Werlau says.

Jorge Sanguinetty,CEO of DevTech Systems, an economics consulting firm
in Washington, D.C., writes in a report that Cuba's economy is "a
gigantic privatization process with one and only one owner: Castro himself."

•Trade embargo. Given lingering anti-communist sentiment in Congress,
the embargo probably won't vanish soon. Moreover, the 1996 Helms-Burton
Act bars U.S. political and business ties with Cuba unless democracy
arises there.

Pro-trade forces plan to raise the embargo issue with lawmakers this
fall. Agribusiness persuaded Congress in 2000 to allow U.S. businesses
to export some agricultural goods to Cuba. Since then, farmers have
signed deals to ship $2 billion in cattle, poultry, grain, rice, beans,
apples and cotton to Cuba, says the U.S.-Cuba Trade Association.

Food exports' potential

State Department officials recently said the U.S. might open political
and economic ties to Cuba — if Cuba were to transition into a democracy.

With no embargo, agricultural officials say, U.S. food exports could
grow tenfold. Jim Sumner, president of the USA Poultry & Egg Export
Council, says ranchers last year shipped Cuba 78,000 metric tons of
chicken. That's 3,500 truckloads of refrigerated containers.

"The opportunities in Cuba are tremendous, due to the proximity to the
U.S.," says Sumner, who has dined with Fidel Castro in his Havana palace
during agricultural trade missions.

Ralph Kaehler, a rancher in St. Charles, Minn., has been enthused about
Cuba trade ever since he flew to Havana on a trade mission with former
Minnesota governor Jesse Ventura three years ago. Since that trip,
Kaehler has brokered several million dollars in deals for companies to
sell agricultural goods to Cuba.

"Our government talks about free trade with China, Vietnam — every
country except Cuba," says Kaehler, whose German ancestors started the
family farm in 1881. "Whether you like or dislike the Castro government,
if we had more trade with them, our influence and impact there would be
much greater."

Agribusiness isn't alone in desiring more business with Cuba. At
JetBlue, spokeswoman Jenny Dervinsays there would be "great demand for
non-stop travel between New York and Havana," and flights between Cuba
and Florida, where JetBlue serves six cities.

Despite the Cold War politics between the U.S. and Cuban governments,
pro-trade advocates say many of the Cuban people seem open to economic

Says Kaehler: "Cubans may not want wholehearted democracy like in the
U.S., but they do want basic food and medicine and a few more freedoms."
Posted 8/27/2006 10:29 PM ET

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