Discovered by Christopher Columbus in the 15th century, Cuba and the Dominican Republic (DR) share a history unlike any other in the world – and the similarities extend into common economic characteristics that today make them the topic of much discussion about how the future will unfold as Cuba’s re-integration into the global economy gathers momentum.
With a certainty you will find with the weight of an anchor, two of Cuba’s most important near-term economic drivers are hurtling towards an impact with the DR. These are: tourism and cigars (and baseball players to some degree). Today, the DR dominates in each of these arenas. She is first in tourism in the Caribbean (5.6 million overnight visitors in 2015), first in cigars (at $500 million in annual sales) and first in baseball players in the US. The question is what impact Cuba can have should forces unleash the yokes of ideology and embargo.
Recent history offers some insight. According to Ornaldo Gutiérrez Castillo and Nélida Gancedo Gaspar, in the context of an economic crisis, decisive Cuban government policy already “bet on” tourism after the fall of the Soviet Union. Between 1990 and 1999, the Cubans invested more than $3.5 billion in the tourist industry. The number of rooms available to tourists grew from 12,000 to 35,000. Significant resources were also devoted to infrastructure such as airports, causeways connecting the keys, and other tourist facilities. The shift from an emphasis on goods and productivity to that of services has made tourism the “locomotive” of the Cuban economy.
This dramatic growth seems not to have diminished the DR’s recent economic performance. Furthermore, while US citizens have been largely restricted from traveling to Cuba, the DR and Cuba have always competed for tourists from Canada and Europe.
Cuba’s central planners are undoubtedly looking at the DR’s economy for a roadmap as to the potential for hospitality and tourism to be a key driver of growth and transition to an economy powered by the private sector.
What’s most compelling for Cuban planners is the dynamic link between the DR’s growth in tourists arrivals and GDP growth – a feature that is presently absent in Cuba’s economy. According to Smith Travel Research, the DR logged 2014 occupancy of 71% for reporting hotels, up 0.56% from the prior year. The reported ADR was $124 (up 10.76%), leading to RevPar of $88.31 (up 11.63%). The bottom line for the DR economy was 7.5% top line growth in 2014, driven mostly by the hospitality and tourism industry.
Cuba, with a similar number of rooms and 40% fewer arrivals compared to the DR, logged virtually no top line economic growth in 2014 despite double-digit growth in hospitality and tourism.
Economist Rafael Romeu, who has assessed the possible impact on the Caribbean of liberalization of U.S. travel to Cuba, says that current U.S. travel restrictions have effectively acted as trade protection for the rest of the Caribbean—particularly Puerto Rico and the U.S. Virgin Islands—because of their open borders with the mainland. Romeu, a former IMF economist, uses an economic model that captures the U.S.–Cuba restrictions and also controls for natural disasters and other factors. The so-called gravity model Romeu uses estimates the specific costs to U.S. tourists caused by the bilateral restriction in terms of nautical miles and finds that the total cost for Americans visiting Cuba is the equivalent of going to the South Pacific, or even Antarctica, for a holiday (see quote). This suggests that distant tourist destinations may have received more U.S. visitors than they would have without U.S. restrictions on Cuban travel.
Gravity trade theory accounts for the amount of trade or tourism between countries on the basis of the size of the country and its trade costs. Commonly the model uses the geographic distance between countries as a proxy for the costs of trade. Rafael Romeu models a counterfactual situation that isolates the effect of the bilateral tourism restrictions between the United States and Cuba, then controls for their removal. The model’s estimations control for distance, language, income, trade agreements, and other things—like market concentration. Romeu estimates that the restrictions raise the cost of travel for a U.S. tourist beyond what someone from Asia would pay to go to Cuba. Removing the barrier would be equivalent to a sharp drop in the cost of travel between the United States and Cuba.
In tourism, Cuba’s growth will have an impact on the region. Cuba’s Q1-2016 hotel pipeline shows that Cuba’s development policy favors affluent travelers. Urban hotels and upgrades to existing all-inclusive resorts and marinas are meant to meet the demands of travelers with $1,000/day footprint.
Tourism impacts will be complementary to the region, and in some cases substitution will become a challenge for some destinations. Those travelers priced out of Cuba will likely go elsewhere in the region, lifting all boats. Some of the regions’ affluent travelers will switch to Cuba (substitution) in response to Cuba’s unique culture, terrain and the presence of reverse nostalgia.
In an early sign of possible things to come, Aruba and Cuba have signed a tourism agreement. The topics of interest they will focus on include a dual destination program and the strengthening of knowledge in the fields of managing cruise facilities and marketing strategies to attract visitors. These initiatives will be driven through job platforms between the two countries. There is interest on Cuba’s part to exchange knowledge with Aruba based on Aruba’s storied success in the field of managing strategies and cruise facilities.
Cuba is also interested in Aruba’s experiences in the field of timeshare as well as new law proposals in respect to the management of accommodation. Aside from the topics of tourism and transportation, agriculture and culture were high on the agenda during recent meetings in Havana.
As for cigars, Cuba’s strong brand awareness will give it a natural lift once it becomes legal for Cuba to sell cigars in the US. A premium entry point and long lead time prior to market (at scale) means it will take years for Cuban cigars to impact the DR’s market in the US.