MAPI: Is Cuba open for business?

President Barack Obama’s announcement on December 17, 2014 that the icy relations between the U.S. and Cuba may begin to thaw was met with surprise and mixed reactions. What, many asked, will the future hold for tourism, a potential new economic paradigm, and manufacturing?

Cuba’s Moment, a report from the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation, concludes that a strong manufacturing sector is unlikely to develop without aggressive action on a number of fronts, including domestic investment, inward investment, trade, workforce development, and access to capital markets.

“Indicators of the current health and prospects for Cuban manufacturing are scarce but available data present a picture of weakness,” said Cliff Waldman, director of economic studies and report author. “But Cuba is so close to the U.S. that if it forms the political basis of a trading relationship it will benefit. If the country can make the right choices to attract investment it could become a player in Western trading circles.”

Cuba’s main problems, Waldman noted, are a rapidly aging population, which requires family planning and immigration programs, and weak investment, which calls for an effective banking system and capital market.

Population parameters, given their implications for household formation and workforce development, matter a great deal for the domestic investment and inward forward direct investment needed for Cuba to develop a viable manufacturing base and compete in the global trading system. Cuba transitioned from population growth to population contraction after 2005. The broad Latin American and Caribbean region, meanwhile, is not expected to experience depopulation until 2065. However, Cuba’s relatively strong investment in education spending is an important catalyst in training a qualified workforce.

A dramatic decrease in the share of Cuban GDP accounted for by exports and gross fixed capital formation since the late 1980s does not bode well for manufacturing strength, although the export share has risen since 2002. Manufacturing as a share of the Cuban economy fell from nearly 18% in 2000 to 10.7% by 2011.

Despite the challenges, Waldman sees potential.

“Cuba has assets that will serve it well in the years ahead,” he wrote. “As the largest island in the Caribbean (with an estimated population of 11.3 million) with proximity to the U.S., and more specifically to what could be an emerging U.S. Southeast manufacturing cluster, the country is well positioned for trade competitiveness if it leverages new relationships and develops a productive workforce.

“The manufacturing sector was nearly decimated with the implosion of the Soviet subsidy in the early 1990s, but there are specific strengths to leverage for broader industrial development,” he added. “The island’s notable pharmaceutical sector demonstrates its capacity to succeed in an innovation-driven area. If the country develops a much-needed energy independence policy, it could apply the same innovation prowess to develop a range of petrochemical products. Much is at stake and much can be gained with thoughtful and patient policies.”