Cuba: potential or potential threat

Cuba: potential or potential threat

Hilary M. Becker

ABSTRACT

Cuba has undergone major changes over the past decade, both socially and economically, and to some extent politically following the demise of the Soviet Union and the decline of soviet monies and support. Within this framework of change exists opportunities to restructure the interwoven social and economic structures. Cuba is indeed making many of these changes and providing economic opportunities for those willing to do commercial business with Cuba. For the United States, the U.S. Embargo with Cuba prevents direct investment and limits this opportunity; however, this same embargo provides benefits to the interests of some commercial enterprises in the United States. Recently, the United States has engaged in limited normalization of relations with Cuba leading many to believe the embargo will be rifted in the near future. This paper will investigate some of the issues of doing business in Cuba, and provide viewpoints on the potential advantages and threats of the normalization of relations between the United States and Cuba and its implications in international markets. Specifically, this paper will discuss the U.S. Embargo, potential changes to fiscal and monetary policy being considered in Cuba, accounting and performance measurement systems, and changes in the business environment in the tourism, fisheries and agriculture sectors.

1. INTRODUCTION

The Cuban economy has undergone major changes in the past decade following the collapse of the Soviet Union in 1988. The period immediately following the demise of the Soviet Union, known as the “Special Period” saw major upheavals in the Cuban way of life after a decline of between five and six billion dollars annually of Soviet support. Scarcity of food and necessities, increases in inflationary pressures and a rise in the black market saw a backlash against the Cuban government. The Cuban government in turn responded to the challenges by turning toward a more capitalistic approach in their business dealings, moving towards a more open-market economy, and instituting economic and fiscal changes as well as making changes in the primary focus of economic development for the island. Primarily, the changes came in the form of decriminalization of the U.S. dollar and a switch from sugarcane production to tourism, agriculture and health care sectors.

The Cuban government has contemplated and instigated many changes to fiscal and monetary policies including an overhaul of the taxation system, consideration of a movement to the Euro versus the U.S. dollar and introduction of Law 77, the “Foreign Investment Act”. This paper will examine many of these issues in the context of the changes that have been put in place and its potential impact on foreign enterprises doing business with Cuba. The paper will also deal with the impact of the U.S. embargo and the potential advantages and disadvantages of normalization of relations with Cuba for U.S. business enterprises following the potential lifting of the embargo.

1.1 The Embargo

The U.S. embargo with Cuba, instituted in 1963, and further tightened by the Cuba Democracy Act of 1992 created a situation where U.S. businesses were prevented from carrying on economic trade with Cuba or permitted to invest foreign capital in Cuba. This also included a ban on trade in medicine and food shipments to Cuba, which has created a potential health risk to Cuban citizens, as there has been limited access to pharmaceuticals within Cuba. Further, cargo ships visiting Cuban ports would not be provided access to collect or deliver cargo to U.S. ports for a period of 180 following the delivery of cargo to Cuba (American Association for World Heath Report, 1997). Recently, normalization of relations between Cuba and the U.S. exists in the areas of foods and pharmaceuticals, however Cuba is limited in the amounts that it can obtain in that the U.S. government will not allow credits to be used for payment of goods by Cuba, and the Cuban government is in short supply of hard currency. Many individuals believe that the U.S. embargo will be lifted quickly, such as House Majority Leader, Texas Republican Dick Armey who indicated congressional support for the U.S. embargo is fading (Caribbean Export News, 2002), while other individuals believe that as long as Fidel Castro is alive, the U.S. will not permit the embargo to be lifted.

2. POTENTIAL

There exist within Cuba now a tremendous opportunity for growth and expansion in certain underdeveloped and developing markets such as the tourism, technology and agriculture sectors. Currently, enterprises wishing to do business in Cuba must adhere to Law 77, “Foreign Investment Act” which outlines the manner in which foreign investment can exist with Cuban entities.

2.1 Law 77

On September 4, 1995, law 77 was instituted. Law 77 was preceded by Decree-Law 50, in 1982, which set the stage for foreign investment, and saw the first foreign investment occur in tourism in 1988. Following this, economic associations were formed in many areas including citrus markets, mining, oil exploration and manufacturing in 1991, and by 1995, 34 economic sectors, including agriculture, mining, manufacturing, construction, tourism, transportation and the communications sectors each saw the development of foreign investment associations. The purpose of law 77 is outlined below:

“This Act has the purpose of promoting and encouraging foreign investment in the territory of the Republic of Cuba in order to carry out profitable activities that contribute to the country’s economic capacity and sustainable development, on the basis of respect for the country’s sovereignty and independence and the protection and rational use of natural resources, and of establishing, for that purpose, the basic legal regulations under which this should be realized.”, (Draft of a Cuban Law on Foreign Investment, Law 77, article 1).

Law 77 provides for foreign investment in one of three manners; a) Joint venture; b) International economic-association contract; or, c) Company with foreign capital, however, the majority of foreign investment be currently set up in the form of joint ventures or economic associations. In 2000, the major forms of economic associations were in the areas of basic industry (92), tourism (70), construction (33) and to lesser extents in other areas, with the major principles being Spain (97), Canada (75), Italy (55), expanding from 50 in 1991, to a total of 392 in 2000 (Perez 2002).

2.2 Tourism

Doing business in Cuba is a difficult process, but most would agree that the opportunities for substantially profitable business endeavors do exist. Current countries doing business in Cuba have the advantage, with the elimination of competition from the U.S. enterprises of gaining first mover advantage in the Cuban markets for businesses from Europe, Canada, Latin America and the Asia. Most foreign enterprises are attempting to become as deeply entrenched in Cuba and the minds of Cuban consumers as they can before, what many believe is the eventual normalization of relations with the U.S and the flood of U.S. enterprises into Cuba.

Following the collapse of the Soviet Union, the Cuban government provided an official push towards allowing international investment in many sectors of the economy including tourism. Previously, Cuba was focused in the areas of Tobacco and Sugar production to sustain the economic development of the country, however, faced with decreasing tobacco sales as the health conscious world evolves, declining sales among the world’s most wealthy in light of recent stock market turmoil and the subsequent loss of wealth, and declining worldwide sugar prices have created a situation where the Cuban government was forced to make adjustments in their long-term economic strategic focus. Looking to many of their island neighbours in the Caribbean, tourism was a natural area of interest for the Cuban government to develop. Cuba certainly has an attractive climate, with average temperatures of 24 degrees Celsius in January to 32 in summer, and some of the best white sand beaches in the Caribbean, which can easily rival those of Cancun or Antigua.

Historically, Cuba’s stages of tourism development can be broken into four stages. Initially, in 1915-1930 Cuba’s tourism grew out of its proximity to the United States, the sanitary conditions which were present as one of the wealthiest Latin countries and the prohibition act instituted in the 1920’s in the United States. The 1950-1958 phase of development in tourism in Cuba came about in relation to the Mafia. During this phase, there were many senate hearings into the gambling problems and Mafia connections to Las Vegas in the Southwestern United States. The Mafia, fearing reprisals and a potential shutdown of Las Vegas turned to Cuba as a back-up plan and spearheaded development within the island nation (Figueras, 2003). This was obviously shutdown following the Cuban Revolution in 1959. Domestic tourism was developed during the third phase from 1960-1985, and the fourth phase, which we are currently in has seen the introduction of foreign capital resulting from the introduction of Levy 77 in Cuba.

The 1997 Cuban Economic Resolution indicated a need for hard currency in sectors to finance the economy beyond sugar and tobacco sectors. This has led to the Cuban government investing approximately 25% of total investments in tourism sector, which in 2000, contributed as much of 43% of the balance of payments, while 10 years prior, the sugar industry contributed between 70 and 75% of the balance of payments, and tourism only 6%. The Cuban government has also identified a need to have highly skilled and specially trained workers in the area of tourism. In 1994, several independent education centers were consolidated under FORMATUR to make 22 teaching centers across Cuba, which annually graduate 16,000 new workers in the tourism sector. (Guitierrez and Gancedo, 2002).

Cuba has officially identified eight main regional poles for tourism, with primary thrusts in Varadero, Cayo Coco, Cayo Largo, Holguin/Guardalavaca, Santiago de Cuba, Havana, Jardines del Rey and Pinar del Rio, however, currently 70% of the tourism revenue is generated between Havana and Varadero (Guitierrez and Gancedo, 2002). Some within the Cuban government find this concentration in Havana and Varadero to be a problem, however, the formation of these “clusters” around primary tourist areas, creates economies in the management of the tourism industry for purchasing, education, infrastructure, marketing and supporting tourist destinations or “tourist traps”. This is very much the same model employed successfully in tourist destinations such as Niagra Falls or Las Vegas. However, as with Las Vegas, and their water crisis situation, care must be taken to make sure that the clusters are managed properly and do not negatively impact on the environment and that development strategies are in place to make sure adequate resources are available to maintain these clusters.

Opportunities abound in the area of tourism, although primary beachfront is dwindling in the key resort areas. Despite the size of the beach in Varadero (more than 20 kilometers), there are only so much available beachside resort possibilities and most of these have been captured through existing and developing hotels with 17 international chains operating through international joint ventures including Sol Melia, the largest hotel resort operator in the world, SuperClubs, Sandals, Breezes, Club Med and Iberostar. Despite having a ministry which approximates such land valuations, concerns persist as to whether Cuba is acquiring the appropriate prices in negotiations for these property’s as Cuba has no current land ownership valuations to base upon and would have to look to other islands to determine if the prices received are adequate,. In the absence of a true open market economy for land acquisition, and the absence of U.S. bidders, it is difficult to make such judgements. Further, some hotel managers have indicated that initial negotiations with international joint venture partners were not always successful and far from fruitful. It is evident, through discussions with international joint-venture partners, that they are trying to secure as much property as possible before the U.S. embargo is lifted, as there exists a common belief that prices will skyrocket upon the lifting of the embargo and subsequent influx of billions of U.S. dollars, with a fear that these international enterprises may not be able to compete with the influx of U.S. capital.

The majority of international operations operating in Cuba currently are through joint ventures. The typical method of entry in the joint venture is for the Cuban enterprise to put up the land, building supplies and labor, while the foreign joint-venture partner contributes cash and provides management expertise to the joint venture. You will typically find both Cuban and foreign management operating in these enterprises. This has had a significant impact on the way that Cuba operates its business. The influx of foreign partners, have increased the operational use of international performance measurement systems and current business practices and methods in managing these enterprises. Many of the current methods used in North American enterprises are finding there way into these joint venture projects such as the use of Balanced Scorecards and Activity Based Costing systems. These have led to many of the Cuban enterprises operating at increasing levels of effectiveness and efficiency.

The tourism industry in Cuba is divided into four enterprises. Since the Cuban government operates as a socialist entity, they have the ability to segregate the business entities into specific markets. Gran Caribe, is the islands top chain dealing exclusively with four and five star hotels, and operates 11,000 rooms across the country in 41 hotels. Cubanacan, by far the largest representing forty percent of all international tourists, operates approximately 39,500 rooms across the island and deals mainly with three and four star hotels, in 266 hotels. Horizontes, operates approximately 7,000 rooms in 44 hotels, and is primarily responsible for hotels with ratings of two and three star hotels. The fourth chain, known as Islazul that operates one and two star hotels, is essentially used for Cubans traveling within the island. Each of Gran Caribe, Cubanacan and Horizontes has collaborated internationally with individual foreign hotel chains. In 1980, Cuba had 8% of the available rooms in the Caribbean, doubling that in the past decade to 16%, including 2/3 of them are four and five star hotels. In 1989, there were 17 hotels in the four and five star range, today there are 89 hotels, representing 22,736 rooms, (Figueras, 2003).

The tourism industry has been dominated, in recent years by visitors from Canada, followed by Germany, Italy and Spain; however, there are estimates that if the U.S. embargo is lifted, there could be as many as three million additional U.S. tourists visiting Cuba with a combined impact of upwards of a $5 billion infusion into the Cuban economy. During the 1990’s, American tourists visiting Cuba has grown from 10,000 to just over 77,000 in 2002. The Cuban government has estimated that the impact of the U.S. embargo has inhibited in excess of 25 million total tourists from visiting the island, with a cost of $15.7 billion (Figueras, 2003). Normalization of relations would also see Cuban tourists visiting the U.S. representing approximately $450 million of revenue to the U.S. while within 5 years; this figure would be expected to grow to $1.9 billion. The Cuban government further estimates that for every 1 million U.S. tourists prohibited from visiting the island the economic loss totals $490 million USD, with losses of $300 million to the airlines, $160 million to travel agencies, and an additional $30 million to advertising and media agencies (Figueras, 2003).

The impact of September 11, 2001 has also been felt in the tourism industry in Cuba, as it has in tourist destinations around the world. In the period prior to September 11, from January to August, tourism was up 8.7%. Immediately following the terrorist attacks on the U.S., tourist travel to Cuba declined, although the impact was not severe as in other parts of the world. A decline of 10% was immediately noted in the September to December period, and a 21% decline during the January to February period, but an increase to only 6.3% was felt in the following March to October period in 2002, (Figueras, 2003), while estimates of a 10% growth during this period had been expected. In response to this decline in tourism and in an effort to cut costs, the Cuban government closed some 20 hotels and closed floors or sections of many other hotels, rather using this time to perform repairs and upgrades. (Coyula, 2002).

The achievement of the tourism sector in Cuba has been indeed impressive during the 1990’s. Cuba has increased their tourism income eight-fold during the 1990’s, increased arrivals five-fold, added 3 times the number of rooms, doubled direct employment to an estimated 100,000 employees directly in the tourism industry, 21,000 with University degrees, and increased production of supplies grown domestically for the tourism market 35-40 fold, now supplying 67% of total supplies to the tourist market domestically. They have increased their rank in the number of tourist visits (including North America) from 23rd position among the top 25 tourist destinations in the Americas (North and South, including Caribbean) to ninth position (Figueras, 2003). During the 1990’s, the tourism industry contributed just 4% to the Balance of Payments, while today contributing in excess of 41% of the Balance of Payments.

Another tremendous and virtually untapped area in tourism exists in the possibility for additional Cruise ships to visit Cuba. Of the nearly 2 million tourists visiting Cuba, only 200,000 came via cruise ships, mostly operated by European cruise lines into Havana. It is estimated that each tourist visiting via cruise ships will spend an estimated $150US while visiting the island. Cuba has, in response-invested money to upgrade the port facilities in Havana in conjunction with Costa Crociere, the fifth largest cruise line in the world. Comparatively, Puerto Rico had approximately 4.2 million visitors with 1.2 million visiting via cruise lines, and of those, 80% were American, while the Bahamas, received 4.14 million tourists of which 2.5 million arriving via cruise ships. This creates a scenario were there is large room for expansion in tourism in the cruise lines, especially if American tourists were able to visit Cuba. (Barberia, 2002)

Further prospects in the area of tourism lies off the shores surrounding Cuba and in its mainland in the development of sports fisheries. The flats off Jardines de la Reina has over 150square kilometers resembling the fisheries off of the keys of the Bahamas and contain many of the same species of fish that has made the Bahamas an anglers dream, namely Bone Fish and Tarpon. Further, the Marlin fishing throughout the year, fostered by the Ernest Hemingway novel “The Old Man and the Sea”, and the Ernest Hemingway Fishing Tournament, create further opportunities for the expansion of this island as a sports fishery holiday. One of the biggest tourist attractions for nearby Bahamas is the sport fishing in the keys surrounding the Bahamas. Cuba has the same conditions, but the waters have been relatively under fished compared to the Bahamas. In addition, the most commercially lucrative freshwater sports fish in America is the Largemouth Bass. Lake Hanabanilla, in Central Cuba, offers 32 sq. km of fishing with bass weighing up to 17.5 lbs., with similar catches in Lake Zaza and La Redonda Lake are known locally as largemouth bass hotspots. La Redonda Lake became renowned for its quantities of largemouth bass, when a group of U.S. sportsmen caught over 5,000 bass in only five days. It is thought that one of these lakes could one day hold the next world record for this species of fish due to ideal growing season, climate, water quality and most importantly, the lack of fishing pressure. In addition, these lakes are regularly rested and restocked.

It should be noted, that although the fisheries internal to the island are monitored and managed, over fishing off the coastal waters has been a problem as it has in many parts of the world including the grand banks off Canada. This is an area of concern as the 90-mile stretch between Cuba and the U.S. would have to be actively managed between the two countries as most countries impose a typical 200-mile barrier of protection.

In addition to the tremendous opportunities afforded by sport fishing, scuba diving is another water sport, which could potentially draw large numbers of tourists to the island. Excellent diving opportunities exist off the coast of Cayo Largo and the Isle of Youth. To a lesser extent, diving also is available in Varadero, Holguin/Guardalevaca, and other resort areas and among the many keys off the coast of Cuba.

2.3 Sugar

The Sugar industry has historically played a major part of the economic strategy of Cuba. This was largely due to the special arrangement that Cuba held with the former Soviet Union, and before that with the U.S. In exchange for sugar, Cuba would receive artificially inflated prices from the Soviet Union through supplements over and above the world prices. These supplements would traditionally be received in the form of trade credits, which were used to purchase much needed oil and other necessities to support, among other things Cuban industries such as the fleet of Cuban ships in the fisheries industry. The need for this fuel came about because of the Cuban fisheries being required to go to deep-sea fisheries and the Canadian banks to fish, following installments of 200 mile fishing limits surrounding most countries, and over fishing of local waters. Following the collapse of the Soviet Union, these subsidies evaporated and the sugar industry found itself in a slump with deflated world prices, while at the same time, immense inefficiencies in the production of sugar became self evident as deficits mounted in operations.

The opportunities that exist in the sugar markets are in the area of exporting technology to Cuba to enhance sugarcane production and a subsequent supply of sugar to the U.S. markets, resulting in lower consumer prices. Prior to the revolution, the U.S. was Cuba’s largest sugar buyer, on average buying as much as 33% of the total U.S. sugar needs. Following the revolution, the Soviet Union provided the demand for Cuban sugar, thus providing Cuba with guaranteed markets and inflated prices. With these conditions in place, there has never been incentive for Cuban sugar mills to improve their efficiency in production. Current Cuban production has typically been refined in countries where the sugar industry has joint ventures such as with France and Canada. Much of the problems with the sugar industry in Cuba are with production, with many of the sugar mills built in the early part of the century (90% before 1925), and production costs averaging 90% above world market prices in 1986-90 and 50-70% by 199697 (Kost, 1998). Further, the lack of fertilizer, pesticides and oil, following the breakup of the Soviet Union, as well as problems with energy, equipment and technology have also been culprits in the demise of this industry, and offer opportunities for further joint venture and economic associations to be formed with the much needed technology and training.

To combat these inefficiencies, Cuba has revamped the industry by first forming cooperatives–the basic unit of Cooperative Production (UBPC), which broke up the large state run farms. These UBPC are required to meet certain government minimum quotas, but are allowed to sell excess quantities beyond the quotas in specialized local farmers markets supplying between 25-30% of the Cuban domestic produce available to Cubans (Kost, 1998). Cuba is also currently looking at alternative methods to try to resurrect the sugarcane industry with the possibilities of rotating crops, to different timing of growth seasons and harvesting, genetic engineering, switching or supplementing production from Sugarcane to other agricultural products, and increase the use of byproducts of the sugarcane process that includes energy, fabric and alcohol production. On the world scale, however, Cuba only represents a small portion of total sugarcane production and thus is not a major player.

2.4 Citrus

The Cuban citrus acreage currently represents only a small fraction of the available agricultural land in Cuba. There has been movement among current joint venture partners to change the types of citrus and agricultural products being produced to meet the demands in the world market. Available opportunities in this area would be aid in increasing levels of production through new technologies used in the production processes and the supply of pesticides and fertilizers to increase production. Currently, Cuba citrus production farms average about 100 citrus trees per acre, while counterparts in Southern Florida average about 145 trees per acre (Muraro and Spreen, 1999). The increased use of technology and farming techniques would be allow Cuba to expand this production, and increase trees per acre allowing total output to increase. I will discuss more about the Citrus markets later in the paper.

2.5 Livestock, Grains, Rice

There are many opportunities for commercialization of operations within other areas of farming. In fact, in the U.S., much of the pressure in support of lifting the embargo comes from farming states along the Mississippi river. Others who see Cuba as a potential for export of products such as livestock, grains and rice which are being imported at a high cost from France and China. In July 2000, the House of Representatives cut funding for the enforcement of the ban on travel and for enforcement of the ban on the sale of food and medicine to currently embargoed nations, including Cuba, (Latin American Working Group) essentially lifting restrictions on these measures. In addition, many of the U.S. senators from these, and other states have been visiting Cuba in the past two years. The consensus indicates that American exports of agriculture to Cuba could be as high as $1 billion annually (Kost, 2002).

2.6 Biotechnology

One of the major thrusts of the Cuban government to revamp the Cuban economy is in the area of biotechnology. Cuba has developed many new technologies in this area with no manner of being able to market these products internationally. Currently, pushes within Cuba have not been fruitful in finding outside companies for joint ventures and economic associations to aid in production and marketing of products developed in Cuba into the world markets.

Cuba’s biotechnology market is currently estimated to be fairly small as far as economic associations and joint ventures with only 5 economic associations in place at the end of 2000.(Perez, 2002), but the Cuban government is actively seeking additional associations and joint ventures.

2.7 Mining, Transportation, Telecommunications and Petroleum and Gas

There also exists opportunities for increased levels of technology in each of the areas of mining, transportation and telecommunications. Current international agreements with joint venture and economic association partners, in each of these areas are bringing Cuba up to world levels of production, but more capital, technology transfers and access to international markets are necessary.

In the mining area, Cuba is rich in nickel and cobalt. Its importance to Cuba is evidenced by La Virgin de la Caridad, the patron saint of Cuba, whose statue can be found at el cobre, outside a copper mine on the outskirts of Santiago de Cuba. The statue was brought to the mine by Cuban miners following a miracle in which the statue at el cobre saved miners drowning off the north shore of Cuba, and is marked by a national day honoring the saint. In 2000, Cuba produced a record of 71 400 tones of nickel. Currently, more than 37 prospective areas are being explored over an area of 40,000 [km.sup.2], with other exploration going on around the island for deposits of gold, copper, zinc, copper, silver, lead, magnesium. (Perez, 2002)

In transportation, the need for infrastructure to accommodate growth is essential for the strategic plans of the Cuban government. Current roads are insufficient, and are in need of constant repairs, especially with the areas such as the Malecon in Havana, a seven-mile stretch bordering the sea, and roads throughout the center of the country. Single lane highways connect most of the island making it inefficient to travel any great distance. New trucks, buses and cars are an ever-increasing problem for business growth within Cuba, as well as access to a spare parts market. Cubans of all occupations are adept at car repair, a necessity with the shape of the average car in Cuba. Mechanics are not in short supply, but adequate supply of workspace, and tools is a problem. Further, as business expands, there is currently and will continue to be problems with parking spaces, and a need for parking lots and parking garages.

In telecommunications, ETECSA was established in 1994 as a joint venture with the Mexican firm CITEL, in an agreement to invest $1 500 million to modernize telephone operations in Cuba, with the total deal lasting for 55 years. Subsequently, in 1995, CITEL sold 25% of its stake to STET International of Italy. In 1997, Sherritt International of Canada acquired part of CUBACEL and is currently in discussions to buy ETECSA (Perez, 2002). It is not uncommon theses days to see young people on the streets of Havana speaking on cellular phones, as Cuba is in the process of introducing mobile telephone service. With these expansions and upgrades, Cuba is in the process of laying optical cable lines to improve service. Expansion has been so intense in the communications markets that Havana and several other cities are currently in the process of expanding phone numbers from six to seven digits.

In Petroleum and gas industry, more than 20 firms including Canada, France, United Kingdom, Switzerland, Brazil and Spain have agreements to search for oil and gas. World-class technologies are being brought in to search for and produce crude oil. Since the introduction of foreign investment with Law 77, Cuba’s production of crude petroleum has increased from 527 MT. in 1991 to 2,800 MT. in 2000. Companies such as Sherritt International of Canada have also invested heavily in gas production to the tune of more that $150 million to build a plant capable of producing 210 MW of electricity, (Perez, 2002).

2.8 Consumers

Lifting the U.S. embargo, would have definite impacts to consumers in the U.S. markets. The overall cost of many consumer products including citrus products, fish, lobster, and sugar would be lower. This is due not only to the influx of Cuban products and produce, increasing supply in the U.S. markets, but also from decreased shipping costs of goods currently imported from other Caribbean, Central and South American countries. There are also other advantages, as with citrus products, where Cuba’s harvest season starts earlier than Florida for such items as grapefruit and would displace higher costs imports during these times.

Consumers would have an opportunity to travel cheaply to Cuba, as the proximity to the U.S. would make this an ideal getaway, even for the weekend getaways for sun or fishing holidays for those in the U.S. southwest. An increased craving for Latin culture evident by the explosion of the Latin music scene would make Cuba an ideal travel location to take in the Cuban culture and famed nightlife. In traveling to Cuba, hotel and food costs are still reasonably cheap with meals costing in the $4-10 US range, a 26 oz. Bottle of Havana Club rum costing $3US, and while you wait, you can have a hand-rolled Cuban cigar for $2 US. Hotels are also cheap, with a week travel including air travel to an all-inclusive hotel in Varadero averaging about $600-$1,000 US from Toronto, and presumably cheaper from U.S. destinations. Currently, however, U.S. issued credit cards and travelers checks are not permitted in Cuba, but assumedly, this would change following a lift of the embargo.

There exists a great deal of opportunities for commercial enterprise within Cuba and the needs will only grow over the coming years under the current market conditions. If and when the U.S. Embargo against Cuba is lifted, these needs will only escalate. Change, however will have to occur to allow these opportunities to be fully realized, including changes in the banking system, infrastructure, technology, capital infusion and an even faster move to an open economy, however with these in place, business should be able to move forward rapidly. The Cuban people are very capable and knowledgeable, with a very good work ethic among those in the business community. There is a willingness to learn, with many managers at lower, middle and senior levels continually updating skills through courses, masters programs, and workshops offered by the government, universities and university related centers such as the Center for the Studies of the Cuban Economy (CEEC). The Cubans tend to have a very good grasp on theoretical knowledge, but the problem faced is a lack of experience in international markets. With time and through the evolution of joint ventures and economic associations, the Cuban managers are quickly coming up to speed with world scale operations.

3. THREAT

The prevailing mood among U.S. businesses has been to speed up the normalization of relations with Cuba. Many recent developments in this normalization process, which seems to be happening in stages, have included direct flights from Miami, New York and Los Angeles to Cuba, the ability of foreigners, mostly Cuban-Americans to send money to Cuban families, U.S. businesses traveling to meet with Cuban companies in what is now the 4th U.S.–Cuba business meetings which initiated in Cancun, Mexico and are now being concluded in Havana and the ability to sell food and pharmaceuticals to Cuba and mail service. Further, increased travel by U.S. government representatives to Cuba have included former president Jimmy Carter to many U.S. state governors traveling to Cuba to meet with Fidel Castro, and a number of well-known actors,/actresses, and musicians are increasingly visiting the island. Additionally, there has been an increase in travel by Cuban government, academics and Musicians and others to the U.S. suggesting relations are softening in both directions. Suggestions within the Cuban government indicate that in excess of one thousand U.S. companies have their trademarks registered in Cuba, awaiting the end of the embargo.

Despite the many opportunities that do exist within Cuba for business, the U.S. embargo against Cuba also provides some level of shelter and protection of the potential competition that could exist from the lifting of the embargo, not only for America, but also for many of Cuba’s neighbors in the Caribbean, Mexico, South and Central America.

3.1 Caribbean, Central, and South America

The U.S. embargo prevents U.S. companies from doing direct business with Cuba or allowing direct investment in Cuba, although as discussed, there are certain areas where this has being diminished. Cuba has definite advantages versus other countries in the Caribbean, Central and South America when doing business with the U.S. due to its proximity to the U.S. The decreased shipping charges afforded Cuba would make Cuban manufactured goods and produce less expensive to transport to the U.S. than from other countries in the Caribbean or Central and South America. Additionally, Cuba has a large size advantage over all of the Caribbean countries, which should allow Cuba to produce goods in higher volumes and thus decrease the cost of production.

Many of the same products and produce produced in other Caribbean, Central and South American countries are currently being produced in Cuba, thus providing for a situation where, more than likely, Cuba with its reduced cost structure would be in a position to displace the exports to the U.S. from these other markets. The impact on the U.S. for these displaced goods would be a decreased price to consumers as mentioned earlier. Further, as Cuba currently exports many of their products such as citrus, sugar, mining output, lobsters, fish and other products to markets in Europe and Asia, it would be quite feasible that these other Caribbean, Central and South American countries would in fact replace the Cuban exports currently going to these markets, although, due to higher shipping costs to Europe and Asian markets versus the U.S., the profitability to these countries would be diminished for the displaced products currently shipped and sold to the U.S.

In addition to the impact on lost imports, it is estimated that as many as 3 million tourists would visit Cuba annually should the Embargo be lifted. This would have a dramatic impact on the tourism industry in Mexico and the rest of the Caribbean. On the reverse, the additional 3 million tourists attracted to Cuba would reduce the number of foreign tourists able to visit Cuba from countries such as Canada, Europe, Mexico and South America. This displacement of tourists would be due to the inevitable price increase that would result from the additional demand to tourism by U.S. tourists and the limited hotel room availability on the island. Currently, Cuba is considered the cheapest holiday destination in the Caribbean by travelers from Canada and Europe.

For certain countries, there would be additional impacts. The cigar industry in the Dominican Republic, which uses Cuban seeds, would presumably be displaced as a pent up U.S. demand for Cuban cigars would be an inevitable draw for American consumers.

3.2 The U.S. and Florida

Does Cuba pose a threat to the U.S. and the U.S. markets? The U.S. has looked at Cuba as a historical threat with its ideological differences, the Cuba missile crisis and the bay of pigs incidents, but the opportunities, which abound in Cuba and the passage of time have softened some of these thoughts until recently. Many of these feelings resurfaced recently when a six-year-old Cuban boy named Elian Gonzalez was sent back to Cuba to live with his father in the town of Matanzas on the north coast of Cuba.

This incident was to have dramatic impact on the U.S. political scene. I believe it is quite evident that Florida has a great deal of political clout in the U.S. political system as seen by the recent U.S. elections in which George Bush narrowly came away victorious. The vote could easily have been swayed by the Elian Gonalez incident. In watching CNN and the subsequent protests, following the forceful taking of Elian Gonzalez, many Cuban-Americans within the Miami and Florida communities were visibly upset with the Clinton-Gore decision to send Elian back to Cuba. This occurred just prior to the U.S. elections, and it is possible that much of that sentiment spilled over into the close election results, favoring George Bush. Without this impact, it is quite conceivable that AI Gore would have easily won the presidential election.

3.3 Citrus

It is also interesting to note that Cuba and Florida share an important economic asset in citrus production. Florida is known as the Sunshine state and when we think of orange juice or citrus products, Florida is the first state, which would come to mind, but other U.S. states are also at risk of losing part of their citrus markets, to Cuban produce, should the embargo be lifted including California, Texas and Arizona, all large citrus producing states.

Cuba, has a land mass of 44,200 square miles. It is estimated that as much of 70% of the land mass in Cuba could be utilized for agriculture, although currently a very small part of the island is actually devoted to citrus and agricultural production. Cuba also has a very cheap labor source, with the current Cuban earning just 223 pesos per month, relatively equal to $11USD (Ritter and Rowe, 2001). With the decline of world sugar prices, and decline of tobacco usage, although assumable there would be an immediate surge of cigar sales into the U.S. following the lifting of the embargo for a period of three to five years, the potential of Cuba to move to increased citrus production would have a definite overall impact on the U.S. citrus markets. Acreage devoted to citrus production is approximately 20% as large as acreage in Florida, with yields equivalent to only 8% of Florida. These yields however are greater than the combined yields of both Texas and Arizona, and approximately 36% of the yields of California (Brown, 2000). Currently, Cuba averages 100 trees per acre, compared to Southern Florida, which achieves average density of 145 trees per acre. Citrus acreage in Cuba is concentrated in only a handful of areas. In 1993, these consisted mainly in the regions of Jaguey Grande and the Isle of Youth representing 137,000 of the 350,000 acres currently dedicated to citrus production (Muraro and Spreen, 1999). It is estimated that Cuban orange juice represents only a fraction of the world market, representing at current output levels, only 1-1.5% of the world orange juice market, but there is definite room for expansion in this area with increased U.S. involvement in technology, fertilizers, pesticides and capital input, as well as expansion of Cuban land to citrus production, with the decline of tobacco and sugar markets.

Cuba is the third largest producer of grapefruit in the world following the U.S. and Israel supplying approximately 8% of the world market, compared to the U.S. producing approximately 63% of the world market. The Cuban grapefruit season also differs from the U.S. That would provide a definite advantage to consumers as the harvest in Cuba is earlier than the U.S. With expansion in the citrus markets, increased technology and the increased availability of fertilizer and pesticides, higher yields of grapefruits could be achieved and thus have a definite impact on the U.S. grapefruit markets, both fresh and processed. Cuba’s production of grapefruits approximates 14% of Florida’s production, and of this approximately 75% of Cuban grapefruit, production is processed. This compares to about 60% of Florida’s grapefruit production, which is processed (Brown, 2000). This represents approximately 17.5% of Florida’s processed grapefruit production, given current Cuban output levels, which as mentioned is potentially lower than capable output.

Cuba also produces Persian limes, which is not widely grown in the U.S. markets. This provides a definite market within the U.S., which Cuba could dominate. The majority of limes consumed in the U.S. are currently imported from Mexico.

Current research about the impact of the embargo suggests that the impact on the U.S. citrus markets will be limited (Kost, 2002, Brown, 2000). I believe that this research underestimates the potential impact on the U.S. markets in that the research estimates made are based on current levels of production in Cuba and how these current levels of production would impact on the U.S. markets. With the elimination of the embargo, a flood of capital and technology into Cuba would ultimately bring Cuba up to similar levels of production as the U.S. This combined with the potential of Cuba to expand their agricultural land base toward citrus fruits as world sugar prices decline and cigar production falls, following a temporary increase, the levels of citrus production output in Cuba could increase dramatically, and have a much greater impact on the U.S. markets that the current research indicates.

Further arguments limiting the impact of the Cuban citrus markets on the U.S. indicate that Cuba is producing products that are not sought after in the U.S. markets. This is also not correct. Cuba has been changing production of the types of citrus produced toward the types grown and consumed in the U.S. for the past few years. Formerly, Cuba produced mostly white grapefruit, whereas the U.S. consumes more red seedless grapefruit. In response, about 5 years ago, Cuba switched most of its grapefruit production to the red seedless grapefruit variety consumed in the U.S. at the urging of joint-venture partners. Cuba also produces the same Valencia oranges grown in Florida, thus being able to compete directly in the fresh markets, but more likely, mass production plants and influx in technologies would make Cuba a much bigger threat to invade the lucrative frozen juice market for orange and grapefruits which does not require the same high grade level of oranges desired in the fresh markets. This lower grade orange market, would allow for a much wider use of soil conditions and offer further potential for expansion of agricultural markets in Cuba.

3.4 Sugar

Prior to 1960, the U.S. received 1/3 of their sugar needs from Cuba. Despite a major decline in Cuban sugar production in the early 1990’s, Cuba’s sugar problems are thought to lie with production problems, lack of fertilizers, oil, parts and equipment, and production facilities, not demand for sugar (Kost, 2002). Cuba currently produces about 2.8 million metric tones of sugar annually. With an influx of technology and capital into the Sugar sector, Cuba could potentially increase production back into the 7 – 8 million metric tones being produced in the 1980’s. Alternatively, Cuba may opt to maintain its current production levels of 2.8 million metric tones, brining in a mere $500 million due to a sharp decline in world sugar prices, which fell by 58% between 1995 and 2001 (Knapp, 2001). This compares with export revenues achieved in the late 1980’s of between $4-5 billion. It is possible, that if Cuba opts to maintain current levels of sugar production, due to low world prices, they could switch production to other citrus products or increase production of byproducts of the sugar process. Doing this would maintain Cuba’s current rank as the fourth largest exporter of sugar. Presumably, should the embargo be lifted, exports would flood into the U.S. from Cuba versus their current destinations of the Russian and Chinese markets due to reduced shipping costs to the U.S.

The Cuban sugar industry employs about 500,000 of the countries 11 million citizens. To be successful in this industry, there needs to be another overhaul in the sugar industry, with the closure of many of the under productive sugar mills, a ramping up of productive mills, and a view to expand the byproducts of the sugarcane harvest. The byproducts of the sugarcane process is said, at current levels, to be able to produce as much as 800 megawatts of energy, enough to meet the entire needs of the island, alcohol, pressboard, paper and rope fabric from the bagasse. This is exactly what is happening in Cuba today.

Recently, the Cuban government announced that as many as 70 of the 156 sugar mills will be closed, while others were to be modernized. Cuba hopes to maintain current levels of sugar production with the modernization of remaining mills. The reorganization plan calls for Cuba to replace about one-half of the 3.5 million acres of land once used for sugar cultivation with higher income crops, subsistence farming, or livestock (Marx, 2002). The hope is that current production costs of between $0.12 and $0.20 per pound will be reduced. Concerns in South Florida are that with an estimated 100,000 people losing their jobs resulting from the plant closures, there could be a big influx of Cubans trying to reach Florida (Babun, 2002).

3.5 Fruits and Vegetables

The Cuban fruits and vegetables markets, has had to rely heavily on organic farming as access to fertilizers, and pesticides have been diminished in Cuba since the early 1990’s. This creates a potential entry market into the U.S. for organic produce, which is a growing area in the health conscious U.S. market.

3.6 Fisheries

The fish stocks worldwide are being depleted and the same goes for the Caribbean basin and Cuba. Over fishing and lack of management is a serious concern, especially since Cuba and Florida share the waters within the 200-mile fishing limit. Proper management of this resource must be first and foremost a consideration.

The Cuban fisheries have produced at record levels, far surpassing all islands in the Caribbean for levels of output, only seconded to output levels by Mexico.

Cuban waters contain the third most diversified variety of species of aquatic life in the western hemisphere (Adams 1998). The fisheries of interest commercially are the same as those found off the coast of Florida, consisting of Spiny Lobster, pink shrimp and reef fish such as grouper and snapper. Cuba produced in 1996 19.7 million pounds of Spiny lobster compared to Florida’s 7.1 million pounds. Additionally, 40 percent of this is produced during the closed season in Florida. Cuba would compete directly also with pink shrimp which production of 4.2 million pounds compares to Florida’s 14.7 million pounds, although it is noted, Florida supplies much of the US market. Cuba also produces snapper in the same period of 7.9 million pounds compared to Florida’s 4.9 million pounds (Adams, 1998).

This evidence suggests that Cuba would indeed create a threat to Florida’s fisheries economy and have a definite impact on US market prices.

4. ECONOMICS

There exist other potential threats to U.S. businesses wishing to do business in Cuba following the elimination of the U.S. embargo with Cuba. The Cuban economy uses a dual monetary system, which is actually splintered into three with the U.S. dollar, the convertible Cuban Peso and the Cuban Peso with which Cuban citizens are paid. The convertible Cuban peso has a official rate of parity with the U.S. dollar while the Cuban Peso in which Cuban citizens are paid in, has an exchange rate which has ranged in the 20 to 22:1 ratio with the U.S. dollar. The Cuban government policy has been to use the U.S. dollar, which is the principle method of doing business in Cuba. Prior to the revolution in 1959, the U.S. dollar was the primary currency for business in Cuba. The result of the revolution created a situation in which the Cuban government outlawed the ownership or circulation of the U.S. dollar until 1993. Subsequently, in 1993, the U.S. dollar was officially decriminalized as the flood of U.S. dollars increased in large part to the increase of tourism in the early part of the 1990’s. Additionally, in August 1993, the Cuban government made it legal for family members abroad to provide financial support to Cuban citizens. (Ritter and Rowe, 2001).

Despite the U.S. dollar being the major currency of transaction in Cuba, there have been discussions in the late 1990’s to switch to the Euro instead of the U.S. dollar as the islands major currency for transacting business. There has been some support for this idea within the government and recently the central bank has also examined this issue for various reasons. Currently, the greatest percentage of tourists visiting Cuba, come from Europe, mainly from Switzerland, Germany and Spain. This would have some benefits in increasing the flow of tourists from Europe to Cuba if European tourists did not have to convert from Euros to U.S. dollars for vacation travel. The Euro is now freely accepted within the Cuban tourist districts such as Varadero (Cuba embraces the Euro, 2002).

In addition, much of the economic trade with Cuba comes from European nations, 36.3 percent in 1998, relative to only 30% from Canada and other western nations, with an additional 15.6% coming from Asian countries. A change to the euro would essentially create a decrease in foreign exchange risk with European countries versus the U.S. dollar, especially in light of recent fluctuations in the U.S. dollar against international currencies in 2002. In the tourism sector, approximately 41.2% comes from the Europe, while only 20.9% comes from Canada and the U.S. and 9.2% from Latin American countries. Further, a move to the Euro would also provide an ideological advantage to the Cuban government versus the U.S. (Ritter and Rowe, 2001).

The official move by the Cuban government to adopt the Euro would have a major impact on any business dealings with the U.S. following the normalization of relations, as the relative volumes of businesses between the U.S. and Europe with Cuba would be drastically altered. Additionally, Cuba currently does a significant amount of business with Mexico, Central and South American countries, and to a lesser extent with Canada and Asian countries. Although these amounts are smaller than with the European countries at the current time, a switch to the Euro would assumedly have a negative impact on trade between these countries and Cuba.

Further, a move to the Euro would negatively impact on family remittances from Cuban-American and other remittances to Cubans from foreigners. If Cuban-Americans had to change money to Euros to remit to Cuban families, transaction costs may limit the amount of foreign capital entering Cuba.

It would be in Cuba’s best long-term interest to avoid a move to the Euro and have the central bank hold a cache of Euros similar to the way Canada and the U.S. central banks would hold Euros.

4.1 Accounting

One of the key areas of concern for investors considering doing business with any, foreign country is the system of controls for accounting and auditing practices. This has become even more of a concern considering recent accounting scandals at major U.S. companies such as Enron, Tyco and AOL Time Warner, which have rocked the U.S. stock markets in 2002.

Cuba, currently has approximately 11,000 accountants, but does not have an official accounting designation, which would be recognized internationally. Currently, Cuban officials are in talks with various accounting organizations from Canada and the U.K.. The Cuban accounting bodies fall under the umbrella organization, Asociacion Nacional de Economistas y Contadores de Cuba (ANEC). The system of accounting had followed the Soviet model of accounting and is thus formulated around a centralized planned economy with tight controls on auditing. In theory, the auditing controls of Cuba are superior to those of North America, and heavily emphasized in the education system, however, in practice the Cuban accounting systems have historically had significant problems operationalizing the theory of accounting and auditing.

This system of accounting has been under review for many years and substantive changes have been occurring in the areas of financial accounting, with movements towards much more recognized standards of accounting such as the International Accounting Standards (IAS). Similarly, in managerial accounting, widespread internal accounting changes are occurring with implementations of current costing techniques such as Activity Based Costing systems and in the areas of performance evaluation with inclusions of the Balanced Scorecards, which has helped to improve management and enterprise performance. Changes are also occurring with regards to the Cuban taxation system. Much of this has come in relations to inter-government projects, such as with the Canadian International Development Agency (CIDA), which has sponsored many programs between Canadian universities and the University of Havana and with the Canada Customs and Revenue Agency (CCRA) matching off with the Cuban tax office Oficina Nacional de Administracion Tributaria (ONAT) and with the Ministry of Finance and Price.

Many changes in the Cuban accounting system have coincided with the introduction of Law 77, Foreign Investment Act. Many of the foreign and Cuban companies have consolidated accounting systems with their foreign counterparts and are thus using international accounting methods, practices and policies in conjunction with Cuban methods. These changes, which have been seen in the increased use of formalized systems of budgeting, performance measurement and control system have improved the performance of many of the Cuban enterprises in all sectors of the economy. Many of the foreign enterprises operating in Cuba use one of the Big 5 Accounting firms in perform their auditing function in conjunction with Cuban auditors such as Interaudit.

5. CONCLUSION

The Cuban economy is in a state of flux. Changes have been forced to occur rapidly in all sectors of the economy, following the collapse of the Soviet Union and the preferential treatment Cuba enjoyed through this relationship. Potential business dealings at this time are evident in all sectors of the economy from the growing tourism and biotechnology sectors to the reorganization of the sugar industry and expansion of the citrus markets. There are many in the U.S. government and U.S.

business community who would like to see an end to the U.S. embargo, as this would create a situation whereby farmers, and businesses could enjoy the market just 90 miles to the south, which is in need of foreign capital, technology, equipment and training, and offers a new market of over 11 million people, while at the same time providing U.S. consumers with cheaper imports.

At the same time, the U.S. embargo, which prevents U.S. companies from enjoying the benefits of commercial relations with Cuba also provide a level of protection to certain industries and sectors, especially in the agricultural sectors, which could see significant competition from Cuban produce, especially with potential changes in agricultural production toward citrus produce. This protection exists not only for U.S. businesses but for many of Cuba’s island neighbors throughout the Caribbean as well as in Mexico, South and Central America. These countries are afforded the opportunity of continuation of profitable export business to the U.S. markets as long as the U.S. embargo exists. If normalization of relations were to commence, the probable impact to these countries would be a displacement of goods and produce exported to the U.S. by Cuban goods and produce and a temporary shifting of price structures in world markets as these countries would fill voids of Cuban goods currently shipped into Europe and Asian markets.

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Hilary M. Becker, MBA, CGA, is an instructor of accounting at Carleton University, Canada. He is currently completing his Ph.D. studies at the University of Havana, Cuba.

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