The recent legal rules announced by the Cuban government to regulate the performance of self-employed workers (TCP) have a high probability of becoming a catalyst for the emigration of entrepreneurs and the flight of capital to other markets. This phenomenon began discreetly a few years ago and has increased dramatically in the last two years, as a response to the lack of opportunities that the TCPs have to invest capital and expand their business in their own country.
Not even the announcement that the new Constitution - which is to be approved in the coming months - will recognize private property and the market economy, will act to stop the outflow of entrepreneurs and capital. Only a radical change of mentality and of laws that allow and stimulate the development of the private sector, with all the prerogatives and conditions that are required, will be able to stop this exodus of talent and capital.
One of the big flaws in the reform plan designed by the government's economic strategists to update the Cuban economic model, has been the lack of engagement of the entrepreneurs that have been created on the island, which already add up to 591,456 TCP and currently constitute 12% of the country's active labor force.
Failure to consider the TCP as a force of change that can contribute to the economic development of the country, is one of the political taboos that is doing damage to the island's economy. Most worrisome is that the state is not taking advantage of the capacity of this emerging force to generate financial capital, to a degree that it can generate more capital than the foreign investment that the government has managed to attract to the Mariel Special Development Zone (ZEDM). Likewise, it also fails to take advantage of the large liquidity in convertible currencies that this entrepreneurial force generates, in contrast with the shortage of hard currencies suffered by state companies which has drastically reduced the purchase of raw materials abroad, and resulted in noncompliance with the payments of many suppliers, in addition to a drop in production and exports, which has further aggravated the country's already tense and complicated financial situation.
Genesis and beginning of capital exports by entrepreneurs
Investment activity abroad by Cuban entrepreneurs began several years ago after the government implemented reforms in 2011 that allowed self-employment in 201 modalities. From then on, the private sector grew at a dizzying pace, generating thousands of jobs and displacing state-owned companies in some segments of the economy because of better offers and quality in services.
Most of these entrepreneurs benefited from the policies implemented by then-President Barack Obama, which freed the sending of remittances and trips by Cuban-Americans to the island, thus promoting informal but very efficient channels for financing thousands of businesses that over the years started and were consolidated in the market. Today many of these businesses have become successful small and medium enterprises, although they have not yet been legally recognized as such.
From the time the new migration law was implemented in 2013 by the Cuban government, trips of Cubans abroad for many purposes began. The opening of this door has allowed hundreds of thousands of Cubans to travel to other countries for different reasons: migration, visits to relatives, work, tourism, business and investments.
In 2017, Cubans who traveled for business, work and investment purposes accounted for 47.04% of all travelers, while tourism and migration accounted for 52.96%. See Figure 1.
Figure 1. Graphic representation of the travel motive of Cubans who traveled abroad, 2017
Source: Havana Consulting Group
In 2017, 201,719 Cubans traveled abroad, making a total of 711,197 trips. In that year, the US Department of State granted 29,453 immigrant visas and 16,335 travel visas to Cubans, for a total of 45,788 visas. Chile granted 1,603 permanent residence permits to Cubans in 2017, while it granted 3,865 residence permits in 2015 and 2016 combined. Meanwhile, 4,368 Cubans moved to Uruguay in 2017.
Cubans who have traveled for business reasons have done so mainly to the US, Panama, Mexico, Guyana, Haiti, the Dominican Republic, Ecuador and Russia. Initially, many entrepreneurs traveled abroad to buy goods that they needed in their businesses but were not available in the Cuban market, either because they were not present at all or because they were very expensive. Others made the trips to buy a wide variety of goods and then resell them in the informal market. There was also another group of entrepreneurs, mostly holding a Spanish passport or who with a five-year US visa, who traveled to the US to work for short periods of two or three months, and then return to the country with the money saved. This work excursion was done twice a year on average. But the most sui generis group was the one that traveled abroad to invest the profits that their businesses on the island generated.
This latter group of entrepreneurs with a more strategic vision has been growing over time, as the Cuban government has been tightening the screws on the TCP. At first, the investments were concentrated in real estate, mainly in Miami. Later it extended to markets such as Panama and the Dominican Republic, where thousands of Cubans travel to make wholesale purchases that they send to the island through shipping agencies. Many Cubans have bought apartments, houses and vehicles abroad to provide accommodation and transportation services to Cubans on their "shopping trips". Other entrepreneurs also began to invest in small businesses such as beauty salons, barbershops, small clothing and footwear stores, coffee shops or franchises for the sale of cellular services and accessories. Others, with larger volumes of capital, created agencies for the transport of merchandise and the packing of products and others bought trucks for the transport of merchandise.
A significant point is that many of these entrepreneurs have become residents in third countries, such as USA, Panama, Dominican Republic, Ecuador, Spain, etc. This has allowed them to establish a legal base in those markets, where they can have a legally-established business, a bank account and access to credit, especially those who have obtained residence in the US, who rely heavily on credit to finance their purchases. For example, the purchase of furniture, appliances, cell phones, computers and flat-screen televisions, to name a few, are financed by credit cards that offer financing for 12, 18, 24 or 36 months. The most frequently used stores for these purchases are BRANDSMART, BESTBUY, EL DORADO, ROOMS TO GO and WALMART. The availability of credit allows these buyers to have more liquidity and make the purchase-sale cycles shorter.
Achieving the status of resident abroad has allowed thousands of entrepreneurs to export their capital and safeguard it in case of unforeseen events or contingencies that might occur in the Cuban market, either because the government makes currency changes, eliminates private work, clamps down on having a business, or simply does not allow new investments to diversify and expand current businesses.
In the last two years, there has been a boom in this model of survival among Cuban entrepreneurs, who have been forced to export their capital to other markets, due to strict restrictions imposed by the Cuban government that prevent the expansion of business in the island.
Factors such as a high tax burden, the lack of opportunities for growth and investment, the weak support of the government to stimulate the development of the private sector, the poor conditions to exercise private work and the distrust that entrepreneurs have of the government have led a large mass of successful entrepreneurs to export their capital to other markets, where investment restrictions do not exist and where the generation of wealth is not combatted.
How much is the capital that leaves the island annually?
It is difficult to quantify how much money leaves the Cuban economy annually related to the movement of entrepreneurs on the island. However, monitoring of a few indicators and activities performed by TCP carried out by Havana Consulting Group (HCG) has allowed us to estimate the amount of capital leaving the country annually.
Thus, the intelligence unit of HCG for several years has monitored the departure of Cubans traveling abroad, the number of flights between Cuba and the US, between Cuba and Panama, as well as other routes that are used by Cuban entrepreneurs on their trips to other destinations where they do business, such as Ecuador, Mexico, and more recently Guyana and Haiti. We also have conducted field studies on the most lucrative activities for private work on the island and published those results in past editions of our THCG Business Report.
Figure 2. Estimation of the annual revenue of the most lucrative modalities of the non-state sector, 2017
Source: Havana Consulting Group
In addition, other HCG studies on TCP that have allowed us to know the degree of success of entrepreneurs, their level of income, their ability to reinvest and the difficulties they have had to develop their businesses. In one of these studies it was found that 96% of the interviewees made profits, 47% recovered the investment in less than two years, and 92% planned to expand their business.
Other HCG studies include research on remittances to the island both in cash and in kind (merchandise). These investigations, carried out over many years, have allowed us to know and value the purchasing power of the Cuban population and the volume of business transacted today in the so-called parallel economy (black market) that we have estimated at about 3,000 million dollars. We have also taken as reference countless articles from the specialized foreign press and from the official Cuban press. In this longitudinal research, we have conducted hundreds of interviews with Cuban entrepreneurs who work in different modalities and dozens of experts who experience it day by day, being direct protagonists in what transpires in the economic and commercial field on the island.
Taking all these elements into account, we estimate that around 2.39 billion dollars leave the country each year. One portion goes to pay the airlines that transport Cubans to the aforementioned destinations ($426 million). Another is in the hands of the owners of the stores and warehouses where Cubans purchase goods to send them to the island ($1,008 million). Yet another part is in the hands of the agencies that pack the products ($58 million) and take care of the logistics ($52 million) for the shipment of the merchandise to the island. Yet another part goes to hotels, apartment and house owners, restaurants and taxis ($472 million) that provide lodging, food and transportation to Cubans during their stay in these countries to make their purchases. Finally, we estimate that an approximate amount of $366 million dollars is invested abroad in small businesses and real estate by Cubans, which we have calculated using three methods described later in this article. See Figure 3.
Figure 3. Estimation of the use of the financial resources generated by Cuban entrepreneurs, 2017
Source: Havana Consulting Group from its own sources and reports from different international press agencies and the Cuban press.
Note: * Purchase in stores and warehouses in the US, Panama, Mexico, Guyana, Haiti, Dominican Republic, Ecuador, Russia, etc.
The surprising thing about these results is that the volume of capital generated by entrepreneurs that flowed outside of Cuban borders in 2017, was estimated at 2.344 billion dollars, 9 times higher than the capital invested in the ZEDM by foreign companies in that year (about $265 million), and 2 times higher than all the capital invested in the ZEDM in the five years that it has been in operation. See Figure 4.
Figure 4. Comparison of the capital that Cuban entrepreneurs take abroad vs. foreign investment in the Mariel Special Development Zone (ZEDM), 2017
Source: Elaborated by Havana Consulting Group from its own sources and reports from different international press agencies and the Cuban press.
How many Cubans travel and how many travels more than once annually?
In the period 2013-2017, 819,749 Cubans traveled outside the island; of them 670,957 did it for the first time. During this four-year period, these travelers made 2,656,111 trips abroad. This level of travel meant an expense of 1.59 trillion dollars just for the concept of air ticket purchase.
According to the official Cuban press, in 2016 there were 723,844 Cuban exited the island traveling abroad, as shown in Figure 7. It is remarkable how repeat travelers increase year after year, confirming the sustained growth of the number of entrepreneurs traveling repeatedly abroad to engage in the purchase of goods for resale. In 2017, 24% of travelers repeated trips on average 11.5 times in the year. See Figure 5.
In investigations underlying previous reports we have verified that the Cuban entrepreneurs who dedicate themselves to this activity travel on average twice a month to make their purchases. A group of them do it up to 3 times a month. Even President Raúl Castro questioned in a speech before the National Assembly of Popular Power, the number of trips that Cubans take abroad and the source of the money to finance these trips, giving the example of an individual who had traveled more than 30 times in the same year.
Figure 5. Cubans who traveled abroad in the period 2013-2017.
Source: Elaborated by Havana Consulting Group from its own sources and reports from different international press agencies and the Cuban press.
In the five years 2013-2017, 11% of the almost 819,749 Cubans who traveled outside the island, or some 90,172 persons, established their permanent residence in another country and went on to have emigrant status.
The total purchase of merchandise carried out by the Cuban entrepreneurs in 2017 is estimated at 1,008 million dollars. The US is the main market, with 61.5%, followed by Panama (14.9%), Mexico (8.4%), the Dominican Republic (4.9%) and Guyana (4.5%). See Figure 6.
Figure 6. Estimate of purchases of products abroad by Cuban entrepreneurs, 2017
Source: Havana Consulting Group
As shown in Figure 6, Cuban entrepreneurs travel to different countries to make their purchases. Of these destinations, seven are relatively close to the island. In the last two years, Guyana has become one of the main markets for shopping, since it does not require a visa for Cuban citizens to travel. It is estimated that Cubans inject $85 million annually into the Guyanese economy combining purchases of goods and lodging expenses.
It is striking that a little more than 48,000 Cubans went abroad on average 11.5 times in 2017 to make purchases for resale, which shows a commercial activity with high dynamism and rapid merchandise turnover. Without a doubt, the merchandise sold has a high demand and acceptance in the market.
To understand this phenomenon, remember that the routine of operation of these entrepreneurs is based on a travel scheme that lasts 5 days. See Figure 7. This mode of operation applies currently to the markets of Panama, Miami, Mexico, the Dominican Republic, Haiti and Guyana; in the past it also applied to Ecuador, Suriname and Trinidad and Tobago.
Figure 7. Logistic scheme of the wholesale long-distance market created by Cuban entrepreneurs
Source: Havana Consulting Group
It is impossible for the commercial departments of the large Cuban chain stores that operate in the dollar market (TRD Caribe, Pan American Stores and Caracol), which each have a team of perhaps 10 specialists responsible for making purchases abroad, to compete with an army of buyers consisting of more than 48,000 people that cover a significant portion of the demand of the entire country for a considerable group of products and exceed the products that the official stores can supply with respect to quality, variety and price.
Entrepreneurs investing capital abroad
As mentioned earlier, 3.16% of Cubans who traveled abroad invested in real estate and other businesses (see Figure 1). The volume of capital invested by this group was estimated at 366.3 million dollars. To make this estimate we used three methods, each based on a statistical database: a. the current number of TCPs that have more than one license; b. the number of travelers who repeat their trips; and c. the seven most lucrative modalities of TPC.
To each of these databases was applied a minimum percentage of the people who would actually be investing abroad. For this, in-depth interviews were conducted with a sample of 25 TCPs and several experts, with the aim of developing the appropriate share of investors within each one of the aforementioned databases. In addition, we established a maximum level ($70,000) and minimum level ($45,000) for investments per entrepreneur. See Figure 8.
Figure 8. Estimation of the volume of investment of Cuban entrepreneurs abroad, 2017
Source: Havana Consulting Group
After applying the three methods, we obtained an average estimate of 6,370 foreign investor-entrepreneurs and a total investment volume of 366.3 million dollars.
METHOD I
This method was based on the current number of TCPs that have more than one license, since they are the ones with the greatest potential to generate capital that would be available to invest. The fact that they have more than one license means that they have been able to expand and diversify their businesses. According to the Cuban authorities, 1.6% of current entrepreneurs (after the integration of some modalities) hold more than one license. Taking this fact into account, we elaborated the hypothesis that there are 9,463 entrepreneurs who could potentially be investors abroad. According to interviews conducted with experts and the aforementioned TCP sample, it is estimated that 65% of these entrepreneurs have made investments abroad. So, based on this first method, the estimated number of investors obtained was 6,151 entrepreneurs. See Figure 9.
Figure 9. Estimation of the investment volume of Cuban entrepreneurs abroad. METHOD I.
Source: Havana Consulting Group
It should be noted that this number is obtained after the Cuban government integrated several modalities into one, as was the case, for example, of the license of beauty services which unified seven activities, among them masseur, hairdresser, braid hairstylist, and traditional hairdresser; repairer of various articles, just to mention another case, brought together ten individual trades.
Obviously, the actual number of investors could be higher. However, we prefer to be conservative and use the obtained figure. In this case, the average total investment volume was $353.7 million dollars.
METHOD II
This method was based on the number of entrepreneurs who repeat their trips abroad. As we had already seen in Figure 5, the number of entrepreneurs who repeated trips abroad in 2017 was 48,844, with a frequency of 11.52 trips per year. Of this amount, we estimate that 15% make investments abroad, which gave a figure of 7,266 entrepreneurs. See Figure 10.
Figure 10. Estimation of the investment volume of Cuban entrepreneurs abroad. METHOD II.
Source: Havana Consulting Group
In this case, the estimated average total investment volume was $417.8 million dollars.
METHOD III
This method was based on the seven most lucrative TCP modalities. In this group we include the entrepreneurs that go to another country to buy merchandise and then market it in informal channels. It must be remembered that although this activity is not authorized, it has a great weight in the informal goods trade, due to its high turnover and the large number of people involved in this activity.
In this method, we estimate the number of active licenses for each modality by applying a weight of 3% to each one, which obtained the figure of 5,692 investors. See Figure 11.
Figure 11. Estimation of the investment volume of Cuban entrepreneurs abroad. METHOD II.
Source: Havana Consulting Group
It should be noted that the number of investors obtained by this method is very conservative considering that the annual billing levels of these modalities are high. For example, the activity of paladares has an average annual turnover of around 370,000 dollars. A group of them invoice between 1 and 2 million dollars a year. This is also the case for some beauty salons, whose annual turnover is around 160,000 dollars per year, just to mention a couple of examples.
CONCLUSIONS
Cuban entrepreneurs in 2017 took abroad around 2,390 million dollars, almost the same amount of 2,500 million dollars that the government has expressed needs in the form of foreign capital annually to revitalize the economy of the country and that so far has not been able to attract.
Of that amount, 1,008 million dollars were invested in the purchase of merchandise, which represented 42.3% of the total capital that left the country, while 366.3 million dollars were invested in real estate and other businesses, which represented 15.4% of the total.
The lack of free enterprises, the non-recognition of private property, the prevalence of the monopoly established by the state for 60 years and the lack of opportunities to invest and market goods and services that Cubans demand in their own country, are the main causes of this phenomenon.
After 8 years of reforms, the results are clear: the model does not advance. Not even with the boom that represented the thaw of relations with the US and its positive domino effect that overnight catapulted Cuba as a fashionable investment destination in the Caribbean region. This phenomenon attracted the attention of thousands of businessmen from the United States and other countries and generated the visit of more than two dozen heads of state from countries on all continents, who traveled to the island with massive delegations of executives and businessmen.
During the thaw, the Cuban government was more concerned about control and avoidance of the birth of a middle class, and counteracted the impact of President Obama's visit to the Cuban population -- which aroused large levels of sympathy and affection for the reconciliation he proposed, bringing down the ideological wall built over six decades in a 35-minute speech -- failing to take advantage of the push to inject entrepreneurship into the economy in a scenario unprecedented in the history of the country.
Of all the regulations implemented to regulate the TPC, there is not a single one that seeks to stimulate the private sector, and many aimed at the opposite. Meanwhile, state enterprises continue to be entrenched in bankruptcy, low productivity, immobility and bureaucracy, increasingly burdening the country's economic and social development. Unlike China and Viet Nam, the old Cuban leadership opted to maintain the centralization of the economy and not to give opportunity for the development of a market economy and the liberation of productive forces.
Will this situation change with the new Constitution that is supposed to be approved soon and that will recognize the role of the market and private enterprise? Is this the beginning of a deep structural change in the economy or will it be political camouflage to maintain the current status quo? The truth is that great uncertainty clouds the economic and social future of the island. Foreign investors are aware that the current scenario far from attracting trust, generates distrust. A market that does not attract foreign investment and discriminates against domestic investment is not an attractive market. Turning around this reality 180 degrees is the only way to get ahead.
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