Monday, February 22, 2016

A long weekend in Cuba...

Under the current embargo, you are not allowed to visit Cuba as a tourist. However, if you make a trip for “educational purposes” you are allowed to visit the island and pretty much do whatever you want while there. There is a very small distinction between being a tourist and being a visitor. Americans are considered visitors on the island and are required to attend an educational seminar to qualify for entry. Visiting the island before it becomes the next “Miami Beach” was something I had wanted to do for many, many years. With the new open visitation rules, I jumped at the opportunity to spend four days there and enjoy the sights.

By all definitions, Havana must have been a great city in its day. In reading the background of Cuba, they defined Havana as a “glittering and dynamic city”. It seems prior to 1959, that many Cubans had accumulated vast wealth by selling sugar to the United States, and operating the many famous casinos on the islands. This is also when the Mafia controlled much of the gambling on the island. This was long before Las Vegas was famous, and it was an even easier opportunity for the Mafia as bribes were commonplace and Cuban officials would pretty much do anything if given enough money. Cuba, in fact, ranked fifth in the hemisphere in per capita income, life expectancy and second in per capita ownership of automobiles and telephones. Interestingly, it was also first in the number of television sets per inhabitant.

The evidence of that former wealth in Havana is clear. When you ride down the main streets of Havana, you see huge estates that at one time must have been glimmering and spectacular for those days. Today, virtually every other house is completely abandoned.

In order to understand Cuba, you have to understand the political atmosphere that created the island as we know it today. In 1959, Fidel Castro assumed power over the island. At that time, he gave anyone who wanted to leave the island the opportunity to do so, but they were not allowed to take anything with them. As history has shown, the vast exodus of Cubans from the island to Miami was completed relatively quickly. These former Cuban citizens left everything and came to the United States with only the clothes on their backs. The Cuban state confiscated everything from them when they left. Obviously, the end result was people with superior intellectual ability, skills or wealth left in masses during this period of time.

The once fabulous homes of Cuba have not been updated or kept up since people left in 1959. According to the official publication, 93% of Cubans own their homes. However, if you look deeper into that analysis, you’ll find that they are not allowed to buy or sell the houses; they are only allowed to live there. Although the state has approved permission for Cubans to build their own houses, few have the means to do so and the homes are just sitting in total disrepair after decades. It is quite sad to see these glorious, tropical mansions covered in moss with their windows broken out. It is reported that four buildings fall per day due to neglect.

Cuba is a stereotypical socialist economy. There are very few wealthy people and very few poor people. Virtually everyone works for the government in one form or another. It is estimated now that 80% of the population works directly for the government. While there have been some attempts to privatize industries, the government maintains strict control since all employees actually work for the Cuban government. Therefore, private enterprises would pay the government for the employees and the Cuban government would in turn pay them. However, as the middleman, the government takes its cut keeping wages the same for all classes of citizens. The average Cuban makes roughly $30 a month in U.S. currency. If you are highly educated and become a doctor, you make roughly $70 per month. Sadly education, innovation and the desire to move up do not get you much higher wages in Cuba.

It is true, however, that education is free, citizens are given an allowance for food and all medical care is provided. Surprisingly, the children are extraordinarily well dressed, highly educated, and the people as a whole were very friendly and eager to hear about America.

My wife, Dakota, and I stayed in one of the “finer” hotels in Havana. It was in fact the very hotel that Fidel Castro used as his headquarters during the 1959 revolution. I cannot speak for the other hotels on the island, but this was a typical government-run hotel. Of the six elevators in the hotel, only two worked consistently. The bathroom facilities were sketchy at best, and wallpaper was peeling off the walls in most rooms. And while the internet is virtually non-existent on the island, you could purchase shoddy service from the hotel for $9/hour. The employees, while pleasant, certainly had no incentive to be helpful, since they are employed by the government and have no opportunity to move up.

We attended the famous Tropicana show which featured dancing girls and performers. Since it was all in Spanish, I am unsure what was being said, but it was all very colorful to say the least. If you remember back on the old “I Love Lucy” TV series, any time Ricky Ricardo performed, they had the dancing girls in tall headdresses. This is exactly what the Tropicana show was.

Since private industry is frowned upon by the government, the only private industry we really encountered while there were restaurants. Restaurants can avoid the rules for the most part by employing family members as their employees. Although the menus all seemed to be the same with a very limited number of entrée items, the food was quite good.

It is sad to think that at one time Cuba was an agricultural giant, producing sugar cane for the world. Today, virtually no food is grown in Cuba. In fact, 80% of all the food consumed in Cuba is imported into the country. At the time of the revolution in 1959, it is estimated there were 6 million cows on the island, which equaled the number of inhabitants on the island at that time. Today, with 11 million inhabitants on the island, cows are so scarce that you have to have a permit to kill one, and virtually no agricultural crops are grown on the island. Given its vast agricultural capabilities, it just seems a shame that they are not put to good use for the benefit of the inhabitants.

It is also true that the government owns everything. The government owns all of the fields, virtually all the houses and certainly controls all the businesses. I was surprised to see no military presence whatsoever during our trip. During my research, I found that the standing military force today is less than 50,000 members. In fact, there was not even any sign of a single police officer while we were visiting either.

We also had an opportunity to visit the home of Ernest Hemingway, supposedly in the house where he wrote “The Old Man in the Sea”. It is a beautiful, tropical building that clearly had not been touched since 1960. After the revolution, of course, Hemingway was required to leave the island, and in 1962 his widow graciously donated the house to the state for a museum. I rather suspect it was at the urging of the government and probably behind the barrel of a gun.

No one on the island is allowed to have firearms of any kind; while crime is present it is limited to petty crimes. I rather suspect the ban on firearms has more to do with preventing the populace from attacking the government rather than curtailing crime.

What is really interesting in Cuba is that the population is very well-educated and the children are very well taken care of by their families. Due to the free education from the university, Cuba is well known for producing excellent doctors. While the country has one of the highest literacy rates anywhere, many are left with nowhere to exercise their skills after graduation.

If you work really hard during your career in Cuba, you can retire on their social security system, which is pretty much a joke. The average monthly compensation for a retired person is roughly $11 per month with no increase in sight. The fertility rate is low, the population of the island is getting older and more people are leaving than are coming.

The island today is suffering from a serious brain drain, for lack of a better term. Educated people seeing no opportunity for advancement are leaving the island in record numbers. Many of them are coming to the United States, where the U.S. gives them eight months of subsidy and grants them citizenship after one year. Often times these now dual citizens of Cuba and the United States travel frequently between the island and the U.S., bringing money from the U.S. to relatives in Cuba. In fact, this is one of their highest sources of capital in the country.

The GDP in all of Cuba is less than $300 billion. The U.S. spends more than that on a daily basis. After Castro took over in 1959, 20% to 30% of the GDP of Cuba was furnished by Russia in exchange for Cuba allowing Russia to put offensive weapons on the island (less than 100 miles from the United States). With the implosion of Russia 1991, China moved in and provided the subsistence of the budget that Russia previously offered. Basically, the country could not provide for itself and used these foreign entities to subsidize a lack of productivity. After China determined that oil was not easily obtainable in Cuba, Venezuela moved in to furnish the subsidy of the budget. Now with the implosion of Russia, China and Venezuela, Cuba is suffering through a serious economic decline since no one is subsidizing their budget. It should not be surprising at this point that Cuba is now reaching out to the United States to subsidize its meager lifestyle.

A visit to Cuba is very interesting, enlightening, and certainly educational. It is clearly a beautiful island failed by socialism. I am very glad I went to Cuba, and I certainly see the potential, however, I really have no desire to go back. For those of you that think Cuba will be the next Miami Beach, I am of the opinion it will be years coming. At the current time, the only way you can invest capital in Cuba is if you agree to a 51% - 49% U.S. ownership. While that arrangement is not unusual (very common in Mexico and China), the problem is that after a stated period, the property reverts back to the Cuban government. I really cannot imagine many Americans investing in Cuba until that arrangement has changed.

The other major problem with investing in Cuba reverts back to everyone being employed by the government. As an example, if Hilton were to build a hotel in Cuba, all the employees would be employed by the government and not Hilton. Therefore, it would be impossible for Hilton to maintain its standards since it would have no control over the employees. The primary reason why the government does this is to control wages; therefore ensuring that one group of employees isn’t higher paid than the others, which in turn creates unrest among the residents.

Fidel Castro is now 89 years old, and his brother, Raul, is 87 years old. It is unlikely that anything positive will happen in Cuba until the deaths of both of them. My hope is that whoever takes over when the Castro brothers are no longer in power opens up the economy to allow free trade, free enterprise, and therefore outside capital investment. The country is extremely poor. Removing the sanctions from the United States is going to have limited desired results since they have almost no money and produce essentially nothing. In fact, today the annual exports are 2.9 billion and the imports are 6.9 billion.

There is not much reason for me to go back to Cuba other than curiosity. They do in fact have beautiful beaches, but so does Mexico which also has superior hotels. Until hospitality improves greatly, I do not see tourism as a major draw in Cuba.

While there we rode around in the famous 1950 vintage cars that were all over Havana. Most of these were left after 1959 and no cars could be imported after that date. And interestingly, since the people are so poor now, they cannot buy cars anyway. We were riding to dinner in a 1953 Mercury convertible and asked the driver how he kept the engine running in a car over 60 years old. He quickly explained that the engine was a new Hyundai engine and all the parts were Japanese. And why wouldn’t they be? You cannot import parts from the United States, so you just make them all Japanese or Korean.

As I promised, that is my report on Cuba. I have been there, done that, and have no desire to go back. Also, I have saved you a lot of money since this should tell you everything you need to know about Cuba and more.

Best Regards,
Joe Rollins