Friday, October 30, 2015

Cuba’s semi-untouched markets offer rare opportunity for U.S. businesses

Cuba's semi-untouched markets offer rare opportunity for U.S. businesses
BY VIKRAM MANSHARAMANI October 29, 2015 at 5:50 PM EDT

With the recent thawing of relations between Cuba and the United States,
expectations are running high for political normalization between the
two countries and the promising economic opportunities that should come
with it. Photo by Frank Carlson/NewsHour

On Tuesday, the United Nations issued its 24th annual condemnation of
the American embargo of Cuba. There was a silver lining. With the recent
thawing of relations between Cuba and the United States, expectations
are running high for political normalization between the two countries
and the promising economic opportunities that should come with it. While
much of this hope is warranted, so is caution. There is still a long way
to go before investors and businesses can fully enter the markets of the
Caribbean's largest island.

Over the past year, diplomatic ties between the two countries have been
restored, and some trade and travel restrictions eased. What happened?
Might the oil downturn have played a role? In recent years, Venezuela
has supported the Cuban regime by supplying subsidized oil in return for
medical services. Cuba leases out 30,000 Cuban healthcare professionals
to Venezuela, along with a variety of other service workers. In addition
to cash compensation, subsidized Venezuelan oil provides much of the
island's oil supply in return.

But oil demand has decelerated, in large part due to a global economic
slowdown led by China at the same time that fracking has dramatically
increased supply. This combination pushed oil prices lower, reducing the
compensation Venezuela provided to Cuba. Might the loss of Cuba's
economic safety net have played a role in its desire to liberalize and
negotiate with its neighbor to the north? I think so.
As the Cuban market opens, there will be many opportunities, and none is
bigger, perhaps, than medical tourism. Cuba has one of the most
concentrated supplies of doctors in the world, with 6.7 for every 1000
citizens. On this metric it is behind only Monaco and
Qatar, according to the World Health Organization. But in Cuba, labor
costs are extremely low: general practitioners make $44 dollars per
month. Thousands of Canadians and Europeans already travel to Cuba every
year for its affordable healthcare, but this may be a drop in the bucket
compared to the opportunity.

Let's not forget that a nonstop flight between Havana and Miami would
take less than 30 minutes. And with almost 4 million senior citizens in
Florida alone, conditions are ripe for a boom in outbound American
patients heading to Cuba for medical care.

General tourism from global consumers is also starting to boom. While
travel for Americans is still restricted, tourism from the United States
rose by more than 50 percent in the first half of this year. Total
inbound international tourism to Cuba was up almost 20 percent last
year. Not surprisingly, Airbnb recently entered Cuba, and the island
became the fastest growing new market launch in the company's history.

Despite these areas of optimism, Cuba has a long way to go before its
economy can boom. The U.S. still imposes strong sanctions on
the country, although public opinion has turned sharply against it.
Cuban debt trades for pennies on the dollar. The country has significant
infrastructure problems, including subpar roads, financial services and
information technology.

Is Cuba focused on addressing these needs? It ranks 135th in Internet
penetration in the world, putting it between Syria and Swaziland. Only 5
to 25 percent of Cubans have any access to Internet, and those that do
can only reach a small, censored subset of the web. But the country
plans to get 50 percent of households connected to the Internet over the
next five years.

It will also need to build out its infrastructure to support the swarms
of inbound vacationers that might flock to the island. It
currently has 62,000 hotel rooms — roughly the same as Phoenix — but
already has plans to build 13,600 more by 2016. Cruises to the island
have quintupled over the past three years, but its ports need to be
upgraded to host the biggest ships. And indeed there are billion dollar
plans to upgrade the island's Port of Mariel and set up a special
economic zone there, with much of the funding coming from Brazil.

More problematic concerns persist. The country does not have the solid
rule of law needed to make investors confident. It's not clear how
contract disputes will be handled, or for that matter, how basic
regulations will be applied. Ultimately, it's impossible to truly know
today how far Cuban liberalization will go. While some property laws
have been relaxed, most industrial activity in the country is still
centrally controlled.

In today's highly interconnected global economy, Cuba offers a rare
opportunity for businesses and investors to enter semi-untouched
markets. There's plenty of hype and excitement, but let's not lose track
of reality. Risks abound, but rewards could be plentiful — for the
patient and long-term oriented. Sooner or later, we'll be toasting a
free Cuba with a cuba libre.

Vikram Mansharamani
Vikram Mansharamani is a lecturer in the Program on Ethics, Politics &
Economics at Yale University and a senior fellow at the Mossavar-Rahmani
Center for Business and Government at the Harvard Kennedy School. He is
also the author of "Boombustology: Spotting Financial Bubbles Before
They Burst" and is a regular commentator in the financial and business

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