When on February 24th, 2008, Raúl Castro formally followed in the footsteps of his brother Fidel to govern Cuba (Raúl effectively was already in charge since 2006), he promised to step down in 10 years’ time. He kept his word, sort of. Mr. Castro has made place for Miguel Díaz-Canel, who will be Cuba’s next president. It will be the first time since the toppling of the U.S.-backed Batista dictatorship in 1959, that the island will not be ruled by a Castro, even though Raúl, 86 years old, will remain head of the Politburo of the Partido Comunista and the armed forces until 2021.

Adiós Raúl…?

The question on everybody’s mind, especially Cuban ones, is whether Mr. Díaz-Canel will allow further reforms to shore up Cuba’s impoverished economy. Reforms are certainly needed to bring in much-needed cash. After the collapse of oil prices in 2014, Venezuela’s government, Cuba’s main benefactor, ran out of money and had to scale back its support for the Caribbean island (by sending less oil and hiring fewer Cuban doctors). Mr. Castro, reluctantly, already implemented modest reforms, for example, allowing self-employed Cubans (so-called cuentapropistas) to work in private (small) tourist businesses and farming but these reforms, that in any case have stalled, have not really changed the odds of Cuba’s economy. Initially, a détente with the country’s archenemy, the United States, seemed on the cards when, in 2015, diplomatic relations between the two countries were restored and Americans were permitted to visit Cuba. However, alleged sonic attacks on diplomats and a new president in the Oval Office led to a turn in policy. Mr. Trump all but torpedoed the deal as soon as he came to office, thereby reducing the Big Mac-loving tourist flow to a trickle. Damage done by Hurricane Irma, of course, also didn’t help. Cuba’s economy is in a similar state as Venezuela’s, i.e. totally bust. It does not have sufficient foreign exchange to pay for essential imports, like rice and medicines. Cuba’s well-educated youth is fleeing the island in droves. For example, asylum requests in the Netherlands shot up last year as Cubans traveling visa-free to Moscow left the plane during a stop-over at Schiphol airport.

Will Mr. Díaz-Canel restructure the economy? One potential problem is that economic reforms may (or rather, most likely, will) increase income inequality. In a country where people have to wait hours for a bus to take them to work and where food and fuel is rationed, it is easy to see how a more liberalized market could stoke tension between haves (e.g. cuentapropistas with access to diaspora capital) and have-nots (nearly everybody else, especially in the countryside). Another issue is the existence of a dual currency system. State-owned companies have to use the convertible peso (CUC), which is equal to one U.S. dollar, whereas the real exchange rate is more like 26.5 pesos for a dollar. Thus, exporting state-owned companies are not competitive whereas importers are effectively subsidized. No wonder that about 80% of food is imported, even though it is perfectly possible to develop efficient agricultural businesses on the island. Likewise, Cuba could be largely self-sufficient in energy (solar, wind), reducing the dependence on oil from Venezuela. Clearly, abandoning the dual currency system will be painful as many companies will go bankrupt. Moreover, Cuba cannot receive aid from IMF or World Bank to soften the transition, by courtesy of an U.S. veto to access these institutions. For now, total collapse is only avoided by remittances from Cubans living across the Florida Straits, ironically the very same people who long for a regime change (i.e. Marco Rubio’s friends and family).

Miguelito receives advice…

Even though Mr. Díaz-Canel is seen as reform-minded, we think it is not likely that he will materially speed up reforms and break with the past. Firstly, because his actions will be controlled by the Party bureaucracy (including Messrs. Castro, Ventura and other comrades) and military, who remain skeptical about liberalizing markets, and because he is “one of them” (loyal to the Party). Secondly, because sudden change will be deemed too risky for reasons mentioned above (maintaining social unity is deemed important). Thirdly, because Cubans, if they are not singing and dancing salsa or son cubano, generally are a quite dispirited lot after 60 years of socialism, more akin to Eastern Europeans after the fall of the Soviet Union than to the more vibrant Chinese or Vietnamese: it will take years to change this culture. The best we can hope for is that Mr. Díaz-Canel gains more power over time and revives economic reforms. It is a delicate balance between politics and economics, the latter being predominant in the longer term. At the end of the day, the Cuban leadership has to choose between shared poverty or unequal prosperity. We hope they choose the latter…