What's next for Cuba?

Now that the decision has been made in Washington to reset Cuban-American relations, it's a good time for an outside perspective on where things may go from here. Bottom line: Cuba may well become a rising star in the region and an attractive economic partner for the U.S. if things are managed well. In financial terms, Cuba will be a "buy" when the time comes. A recent visit revealed some impressive strengths buried not far below the surface.



The promenade in Havana, Cuba.
Justin Solomon | CNBC
The promenade in Havana, Cuba.

The Cuban experiment with Socialism was doomed from the start. It assured Cuba's position at the nadir among the world's economic underperformers. Cuba's form of collectivism was abandoned long ago by almost all who attempted it – the attempt to improve social welfare by working against human nature rather than with it. You can push water uphill, but only by wasting enormous amounts of human and physical capital. And even people who are true believers will still try to do what's best for themselves in their daily lives, regardless of any economic command and control structure.

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Eleven million people, comparatively well educated, with unusually strong extended family ties and sufficient entrepreneurial vigor to be explosive once preoccupation with working around the "dead hand" of the state gradually fades away. The few sectors already liberalized show plenty of sprouts, like a long-vacant lot after a spring rain, suggesting the latent power of lifting price and wage controls sometime down the road – there's a reason farmers, budding restauranteurs and taxi drivers are among the best-off Cubans today.

Capital formation, too, is constipated by an archaic banking system that executes transactions at a tenth the efficiency one might see in Botswana, and fails totally as a source of credit to incipient businesses and households. Cuban cooperatives and lending among family and friends are among the few forms of financial intermediation. Like everyone else, Cubans will borrow and lend, save and invest once the bottle is uncorked. Future tourists will be amazed how fast the overcrowded wrecks of old Havana buildings get restored or repurposed stretching far beyond the Old Havana tourist zone.

If labor and capital get moved closer to their growth potential, there's also plenty of foreign and local knowhow to work with. State-of-the-art technology will find its way into Cuba quickly through licensing or foreign direct investment once international companies decide government is serious about sensible development, just as it has in many other successful developing countries. And there will be plenty to draw on locally, notably a decent educational and health-care infrastructure and an impressive cohort of talented and motivated professionals.

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Zeroing-in on the economist's usual sources of potential growth — labor, capital and productivity — suggests that a bet on Cuba's economic performance under market liberalization is low hanging fruit. The catalyst will be a fair and transparent institutional and legal framework, notably property rights, and there are plenty of good models available in the developing world.

Russian warship docks in Cuba before US talks
Russian warship docks in Cuba before US talks   

But some growth factors are uniquely Cuban, and could turbocharge the positives. The Cuban diaspora is a unique asset if and when legacy issues are resolved (as they have been in Europe). Cuban immigrants to the U.S. during the decades of hostility have done uncommonly well in the professions, skilled trades and other pursuits. They and their progeny exist in large numbers, and as they say "… you can't take the Cuba out of a Cuban." Entrepreneurship is the secret sauce of development, and Cuba may be able to draw on more than its fair share once the playing field is laid out right.

Politics, notably in the U.S., can easily put a damper on Cuba's potential. "Human rights" are on the front burner, as shown by last week's high-level U.S. official visit to Havana. Defining the term isn't easy, despite the degree of consensus anchored in the 1948 Universal Declaration on Human Rights. Even within that consensus, engaging with human rights violators today ranges from U.S. "sound and fury" to Chinese "when in Rome." With China among the three largest U.S. trade partners, there is no shortage of cynicism.

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Even with agreement on political substance and alignment of policies, there's always the issue of how to move the needle. Do trade and financial sanctions help modify national policies or harden them? The decades-old American Cuba embargo has been called both an abject failure and the key blocker of an even worse outcome. Who knows? It's a reasonable guess, though, that the time has come for something new – something that can work its magic though the power of human nature, the invisible hand of the market, and sound economic development.

Commentary by Ingo Walter, a Seymour Milstein professor of finance, corporate governance and ethics at New York University Stern School of Business.