Global Business 3rd Edition by Mike Peng

Exercise 1

Cuba is the only practitioner of communism in the Western Hemisphere. Five decades of communism have delivered some accomplishments. Life expectancy (at 79 years) is on par with that of the United States, and Cuba has more doctors per person than Britain and France. Social benefits cover everyone from cradle to grave, providing free world-class health care and education in addition to free pensions and funerals. However, people are poor and income is low. The average monthly wage is only $19. Food is often in shortage, forcing the government to ration food. Cuba's 11 million people enjoy only 600,000 cars that have an average age of 15 years. Half of them belong to the state.
Raúl Castro, the younger brother of the 85-year-old leader Fidel Castro, took over as Cuba's president in 2008 and as first secretary of the Communist Party in 2011. (For compositional simplicity, this case will refer to each Castro brother by his first name.) Raúl has been busy, transferring a substantial chunk of the state-owned enterprises (SOEs) to private hands, freeing about 130 political prisoners, and signing the UN convention on human rights, something that Fidel had refused to do. While change seems to be in the air, there are limits-after all, Raúl is also a Castro. Neither "reform" nor "transition" is allowed to be mentioned. These words immediately bring back the painful memory of the collapse of the Soviet Union, which overnight withdrew subsidies and traumatized Cuba's leaders. Instead, the changes are labeled "updating," in which "non-state actors" and "co-operatives" will be tolerated. "But," noted the Economist, "whatever the language, this means an emerging private sector."
Thanks to the Soviet collapse, the Cuban economy shrank by a painful 35% between 1989 and 1993. In desperation, Fidel declared a national emergency, opened Cuba for foreign direct investment (FDI) and mass tourism, and legalized small family businesses and the use of the dollar. He also found a new benefactor, Venezuela president Hugo Chávez, who provided Cuba with cheap oil. In exchange, Fidel sent 20,000 doctors and professionals to work in Venezuela. As a result, the regime's demise, widely predicted by the anti-Castro Cuban American community, did not materialize. After surviving the emergency, Fidel went back to the old ways. Many family businesses and foreign ventures were shut down, and the dollar ceased to be legal tender in 2004.
This time, Raúl has proclaimed that changes are here to stay. While Fidel has a massive ego and is famously ideological, Raúl is more modest and more pragmatic. Raúl seems to realize that Cuban communism lives on borrowed time. The economy is terribly unproductive. Cuba has a legendary agricultural past- think of its world-famous cigars and sugar. However, state ownership of farms has been disastrous. Output per head of sugar in 2012 has dropped to an eighth of its level in 1958. State farms control 75% of arable land, but 45% of this lies idle. Raúl has allowed private farmers and co-ops to lease idle state land. Yet, private farmers have a hard time scraping a living off the land. This is not because the land is not fertile; it is. It is because of the grip of Acopio, the state-owned monopoly supplier of seeds, fertilizer, and equipment as well as the monopoly purchaser of farm produce. There is hardly a market to motivate farmers to try harder.
In manufacturing and services, SOEs are also notorious for shoddy quality and low pay. But there is one advantage in working for SOEs: plenty of opportunities to pilfer (steal) supplies from the workplace. Employees' justification goes like this: The SOE belongs to the state, which belongs to the people-that is, us. Since our wages are so low, we should feel free to take home the stuff that, after all, belongs to us anyway (!). Experimenting on a limited scale, Raúl has allowed private entrepreneurs to own and operate small shops such as barber shops, beauty parlors, and restaurants, as well as private taxis. Although by global standards, these entrepreneurial opportunities are extremely limited, they nevertheless have attracted well-educated (but starving) professionals, such as teachers, doctors, and accountants, to join the private sector. For example, a doctor who used to make $23 per month can now take home $40 in an improvised craft shop.
Slowly but surely, outside influence has arrived. While US firms cannot do business in Cuba, multinationals from Brazil, Canada, China, and Spain have no such institution-based barriers. In 2012, 2.7 million tourists (a record) visited Cuba. While the US embargo is still technically in effect, from Miami, eight flights-technically labeled "charter" (not regularly scheduled) flights-go to Havana every day. Although still healthy, Raúl is already 80. The days of the Castros running the show in Cuba are clearly numbered. What does the future hold for Cuba? Case Discussion Questions :
The Economist predicted that "whatever the intentions of Cuba's communist leaders, they will find it impossible to prevent the island from moving to some form of capitalism." Do you agree or disagree?