Cuba Comes in From the Cold

Now that the United States plans to re-establish diplomatic ties with Cuba, there is much speculation as to what kinds of changes we can expect to see, and …

The iconic sights of Havana will soon draw millions of US tourists. Photo by Duncan Tucker

Now that the United States plans to re-establish diplomatic ties with Cuba, there is much speculation as to what kinds of changes we can expect to see, and how fast. The short answer: Cuba’s economic and political structure will be transformed, but it won’t happen overnight.

As it stands, President Obama’s executive order only eases restrictions for groups that have already been approved for travel to Cuba. These US visitors are engaged in highly organized visits in specialized areas of interests. They aren’t lying on the beach, because tourism is specifically excluded.

But with a handful of bipartisan United States’ senators now proposing legislation to end the travel ban entirely, the doors could soon be open to US tourists. If that happens, Cuba will be cautious and limit the number of travel visas. This in and of itself is not so unusual: Costa Rica, for example, controls the number of landing permits it issues to airlines.

Many experts have observed that limiting the flow of American tourists will be necessary to ease the impact on the country’s infrastructure. That is certainly true, but there is another factor as well: culture shock. Though Cuba has now had years of exposure to tourists from Europe and Canada, the United States is another matter altogether.

This clash could be significant. All Cubans are given a thorough education on the relations between their island nation and the United States. They know that after the Spanish-American war in 1902 Cuba gained only nominal independence, with the United States exerting considerable political and economic influence until the Communist Revolution in 1959. By comparison, a typical American tourist might know very little about Cuba, other than that it is a Communist country that, historically, has been at odds with the United States.

One area where the culture shock could be greatest is in business. Other than tourism, Cuba has had limited exposure to Western business concepts. The buzzwords of mature capitalist economies may fall on deaf ears. That said, the Cuban tourist economy is clearly the launch pad for other business models. After all, tourism is the one area where there has been significant capital investment, and where Cubans have had exposure to foreigners expecting service similar to that provided in other Caribbean nations.

In this regard Cuba has been competing in the larger capitalist economy. And it has been a success. When looking at Canadians travelling abroad, for example, Cuba is the third most popular destination – over a million Canadians go to Cuba every year, leaving behind about $748 million in on-island spending.

That Canadian influence has not rocked the Communist Party. But Canada is not the United States – which is only 90 miles away, has ten times Canada’s population, and a significant population of ex-patriot Cubans, not to mention a tense history. There is a business community in the United States that is eager to invest in Cuba’s untapped market, but it may find it challenging to deal with a culture that has had little to no exposure to Western capitalism other than through state-sponsored propaganda, all of it negative.

Nonetheless the tourist boom will be real, and positive experiences can cut through propaganda. The boom will result in spin-offs to other industries. American Express and Master Card, for example, have been early out the gate announcing their cards can be used in Cuba. At the same time, travel organizations like Kayak are now adding search capabilities for hotel and flight information in Cuba, and even Netflix has announced it will be available – though at present only 26% of the Cuban population has (often slow) access to the Internet.

The curiosity effect will fuel the initial growth. Steve Hafner, chief executive officer and co-founder, Kayak, has already stated that Kayak has “seen significant interest in travel to Cuba.” That makes sense given that, according to the Caribbean Tourism Organization (CTO), the Caribbean had a record 26.3 million tourists in 2014, 5.3% more than in 2013. Those visitors spent a record amount of money, too: US$29.2 billion.

That number could get a real boost with US tourists going to Cuba. The US, after all, is the region’s primary source of visitors. Nearly 13 million Americans visited the Caribbean last year – about one half of the total. Given how close Cuba is to the US, air and cruise ship travel is convenient, which could put a dent in competing markets such as Jamaica and the Dominican Republic.

Strategically, of course, this is about much more than tourism. Gary Clyde Hufbauer of the Peterson Institute for International Economics – and co-author of the book Economic Normalization with Cuba – has said publicly that “the U.S. strategic goal should be trade and investment agreements with Cuba.”

That could happen. It would certainly help give US investors some peace of mind, and it would be an important step in Cuba’s political and economic maturation. It would also open the door to other industries that could leverage off of tourism. Building out the infrastructure – Cuba will require significant investments to add hotel, transportation, and restaurant capacity, and to handle the expected boom in cruise ship traffic – will require skilled workers, better technology, and a more open financial system.

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So far, Cuba has taken some important steps in this direction. American businesspeople may be surprised to see the sophistication and depth of the investments already made by large hotel providers like Melia, Iberostar, and Riu, which have substantial stock already in place in Cayo Coco, Santa Maria Key, and Varadero.

At present 400,000 Americans visit Cuba annually, some of them on controlled visits, and some of them illegally. With the restrictions pulled, that number could rise dramatically. It will be a slow process – this is not the Berlin wall crashing down – but it will be irreversible. And that’s a good thing; it’s about time Cuba came in from the cold.

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