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You probably know that Fidel Castro has died.
And with his death, a communist icon goes away.
He ruled over Cuba with an iron fist, for more than 50 years.
Now many people wonder whether Fidel´s death will be the first step in a transition for
Cuba.
A transition from a communist dictatorship to a liberal democracy.
But the reality is that Fidel retired from poltics in 2008, handing power over to his
little brother, Raul Castro.
Keeping Cuba in the family business.
The truth is Raul had found himself forced to apply several reforms.
Reforms that, not so long time ago, would have been impossible to imagine in a regime
that touted itself as the paragon of a traditional communist system.
Clearly, Castro-ism is done, at least the way we know it.
No one knows what will it become of Cuba.
But one thing it for sure: it´s changing.
Well you all asked for a video about Cuba, and, as you know, here in VisualPolitik, we
like to think outside the box.
So were answering what we think is a very important question that hasn’t yet been
answered:
Is now a good moment to invest in Cuba?
Can you make money out of the political changes expected on the island?
Today we will answer that question.
History shows that when a country goes from a planned economy to a free market one, there
is a window of opportunity where you can make a fortune.
A good example is the building I’m in right now.
I British, but I live in Prague in the Czech Republic.
Now at the beginning of the 1990s the Czech Republic was opening their economy after decades
of communism.
This means that, for the first time in years, you could buy and sell houses.
But not only that!
Since the country was relatively poor, prices where insanely cheap.
This attracted a lot of foreign investors, specifically from the north of Italy, they
bought properties for almost no money.
Years later, the Czech economy started growing fast.
Foreign companies settled down here, tourists came, locals created companies, etc…
So, in a short time, houses doubled their prices and made owners into millionaires.
A very similar thing might happen in Cuba.
But hold on a second!
This is not quite as simple as it sounds.
Other former communist countries like Ukraine didn’t have the same luck and more than
one investor in that country has gone bankrupt because of poor investments.
Before considering investing in Cuba, it’s important to understand what´s going on in
the country and the reforms they are implementing.
But, before we get into that, let´s take a look at the countries history.
TITLE: THE SITUATION IN CUBA, TODAY
Cuba is a communist country.
This means their whole economy is directed by the government.
For some clarity, in the “good times”, the Cuban government employed 92% of the nations
workforce.
This means almost everyone was working in the public sector.
Those where the 80s, when Cuba exported sugar, tobacco, and all kinds of fruits to Soviet
Union.
But in 1989 the Berlin Wall fell and Fidel Castro lost his main trade partner.
Add to this the US embargo, which forbids American companies to do any kind of business
with the island, and Cuba was practically isolated from the rest of the world.
This resulted in a brutal economic crisis that lasted until the year 2000, when Hugo
Chavez came to power in Venezuela.
As we will see in another video, Venezuela used to be an oil-rich country, and since
Chavez and Castro were such good buddies, Cuba got plenty of this oil-money from Caracas
government.
This was a life raft for Castro´s revolución.
Nevertheless, in the year 2013, oil prices collapsed and so did Venezuela’s economy.
And, of course, Cuba followed suit.
Now, at this time, Fidel was already retired and his brother, Raúl, had taken the reins
of the country.
Raúl Castro realized that Cuba was once again isolated, and he needed to change a lot of
things… otherwise his country was going to get a lot worse.
TITLE: RAUL CASTRO´S CHINESE REFORMS
By the way, the music in todays video is from Rik, a singer, composer and guitar player
from Medellin, Colombia.
If you like him, you will find his channel on the links I put on you on the description.
Okay, back to 2013, and Raul Castro is announcing a package of small, but meaningful reforms.
The first one, was the legalization of the so called, “CUENTAPROPISTAS”, something
similar to what we would call “freelancers.”
For the first time, Cubans could start small businesses.
Now there were still a lot of restrictions.
For example, they couldn’t hire anyone and they could only start a business in one of
the industries permitted by the government.
However, in the 3 years since, this “CUENTAPROPISTAS” have grown to represent 10% of the Cuban workforce.
“Before people weren’t doing anything private because government would take it away
from them… but now, the government trusts the cuentapropistas because they are the future”.
But hold on just a moment because there is more!
In fact, Raul Castro seems to be following Chinese Communist Party´s playbook (which,
by the way, will be the topic of another video we’re launching soon.)
Actually, in a very DEN XIAOPING style, Raul has created his own “Special Economic Zone”,
the so called “MARIEL Development Zone”.
What does this mean?
Well… inside of this zone, foreign companies are allowed to start businesses, as well as
hire local people, and trade with less restrictions than in the rest of Cuba
“Five foreign companies, two Cuban and a multi-country one, are the first eight companies
in the Mariel Development Zone, which is to become the main economic center of Cuba”
Now you might be wondering: How is that possible that an international company, like the Spanish
based Barcelo Hotels is already in Cuba if, apparently, there is a ban for foreign companies
to set up there?
If you’re watching this video from somewhere outside of US, you might have travelled to
Havana in some point in your life.
If that´s the case, you probably were staying in a Barcelo or a Melia hotel.
These are Spanish companies and they have been operating in the Cuban market since the
year 2000.
But the truth is, in order to establish themselves on the island, both firms needed to partner
with Castro´s government.
This means, the hotels are owned by the government and the companies have a licence to manage
them and get a share of the profit.
So, until now, it was impossible to start any kind of business in Cuba.
Unless you made a partnership with the authorities.
So the creation of the Special Economic Zone shows a clear trend.
A trend that we also saw in China in the 90s.
Further to this, there is the freeing up of the housing market.
In just two years, over 40,000 houses have been sold in Cuba.
Now this doesn’t exactly mean that Cubans have private property and, the transactions
come with a thousand different restrictions, but it does highlight the fact that there
is a trend occurring in the country.
The most important news in recent times of course, was Obama´s announcement that the
trade embargo with Cuba was coming to an end.
The problem?
It still needs to be passed by the American congress.
And, with Donald Trump as the new president, it is hard to predict what´s going to happen
next.
If Trump were to keep the trade block with Cuba, this would be bad news for many investors
in the United States.
They would lose out on business opportunities in Cuba to investors from other nations without
such trade restrictions, for example, British, Canadian or Australian investors.
But hold on a moment!
There is no guarantee that Cuba will become a free market paradise overnight.
It´s not even clear that investing in the country right now is a good idea.
In fact, there are two potential scenarios that could play our here.
One would be that Cuba follows the example of Czechoslovakia (now two nations, the Czech
Republic and Slovakia), or they follow example of the Ukraine.
Now let’s have a look at these two very different examples:
TITLE: CZECHOSLOVAKIA VERSUS UKRAINE
In 1990, both Czecoslovakia and Ukraine abandoned a communism based system.
But there is a big difference here.
The Czechs had a revolution, named the “velvet revolution”, in order to overthrow their
dictator.
And the new government, led by this guy you see on the screen, whose name is VACLAV HAVEL,
sent home the old guard who were ruling the country.
Meanwhile over in Ukraine, despite the fact they had gotten their independence from Soviet
Union they kept the same political elite…
Their new president, LEONID KRAVCHUK, came from the Old Soviet Communist Party.
But this is not the end of the story!
Just like Cuba, Ukraine and Czechoslovakia had planned economies where all the companies
belonged to the government.
The first step in opening up their economies was privatization.
But importantly, not all privatizations are equal!
The Czechs took their biggest companies and made a calculation of their economic value.
Then, they divided the economic value of these companies into “vouchers”.
If you were a Czech citizen, you had the right to buy one of these vouchers by a reasonable
price - something equal to a week of the average salary.
This is why 80% of the eligible population bought a voucher.
With this paper in your hand, you had the right to bid for some shares in the company.
In order to help those who didn’t know how to bid for shares the Czech government encouraged
the creation of hedge funds.
Those hedge funds advised common citizens on how to invest intelligently.
A Czech citizen could go to one of these hedge funds and ask: “I want to get some shares
of this company, and that one, etc”.
Now, as you can probably imagine, there was a lot of corruption here…
But it also had a really positive outcome.
It helped the majority of the Czechs to benefit from the privatization of the nations companies.
And the proof is in the pudding.
Today, 25 years later, the Czech Republic is as egalitarian as Germany and has a quality
of life as good as anywhere else in Europe.
But, the story in Ukraine is very very different.
Now Ukraine did also sell these vouchers to their citizens: If you were a Ukrainian citizen,
you could buy a voucher and, eventually, bid for some shares.
But the reality is the government never got around to arranging those biddings.
It only happened in the case of the smallest and worse companies.
Ukrainians were left waiting for years, with their vouchers in hand, waiting for the moment
to exchange them for something valuable.
And during this time, Ukraine was also suffering from an all-time-high inflation rate.
When purchased, the vouchers were worth about 1,500 USD…
Some years later, they were being exchanged on the black market for as little as 10 USD.
So the average Ukrainian would be sitting at home, and an oligarch would come knocking.
And he’d say something like “Woah, what you going to do with that voucher?
It’s never going to be worth anything to you.
Tell you what: You give it to me, and I’ll give you some money that you can actually
use!”
And surprise surprise soon enough all the vouchers were on the hands of these oligarchs
(and, no prizes for guessing this one, but those oligarchs were pretty closely tied to
the government, who then decided it was time to auction off some of those companies)!
The outcome?
Only those companies which were interesting for the oligarchs where sold.
This is why Ukraine is still to make some privatizations today.
But the most important thing is that 85% of Ukraine´s wealth is now in the hands of its
50 wealthiest oligarchs.
This results in no political stability and a horrific climate for investment.
(Oh, and not to mention that war with Russia).
So if an investor had bought property in Kiev 10 years ago, they might be hitting their
head against a wall right about now…
Alright, let´s go back to Cuba!
Here we have some things that resemble Ukraine and others that reminds us of Czechoslovakia.
On the one hand, Cuba has a family, the Castro family, who controls everything and won´t
leave power easily.
Plus, there are no charismatic alternatives (someone like Vaclav Havel in Czechoslovakia,
who had enough support from the people to overthrow a dictator without violence.)
On the other hand, Cuba has a big and influential geographically scattered population.
For example, in US you have more than 2 million Cubans living, which represents 20% of the
entire Cuban population.
These Cuban Americans have been educated in a democratic system and could help to build
good democratic institutions in Cuba.
If this was the case, Cuba might become a place with the rule of law, civil rights,
and many opportunities to help Cubans make money and lift themselves out of poverty.
This is our opinion, now we want to hear yours.
What do you think it is going to happen in Cuba?
Will they follow the path of the Czech Republic or the path of Ukraine?
Please, let us know in the comments below.
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