by Simons Chase
According to economic development theory, technology transfer and deregulation hold great promise as a pathway for developing countries, like Cuba, to lift incomes, stimulate foreign direct investment and enhance quality of life. To date, the ligature between this type of neoclassical growth model and actual results has been government policy supported by programs made available through long-term structured finance from institutions like the International Monetary Fund (IMF) and the World Bank. In Cuba’s case, and perhaps for the first time, private technology companies may solve some key structural problems by deploying highly scalable market-based solutions in a fraction of the time it would typically take traditional bureaucratic methods to impact the average Cuban.
(Photo credit: Henryk Kotowski)
The ultimate goal of traditional economic development policies has been to create growth as measured by per capital GDP; also of equal importance is quality of life measures including such things as literacy, infant mortality and overall life expectancy. Unfortunately, the transmission mechanisms to bring about positive economic change are measured in years and perhaps decades depending on the severity of economic backwardness.
Leap-frogging the traditional routes and methods of economic development to produce quick economic growth has often involved harsh trade-offs such as environmental degradation, in China’s case, or severe economic imbalances like Mexico’s income inequality. The difference – and what is most exciting – is that Cuba could be paving a new road to economic prosperity without carrying many of the liabilities, or as economists might say the negative “externalities”, that so often scar (and potentially derail) a country’s economic development.
For example, the Cuban tourism industry, long neglected after the revolution in 1960, received special focus and experienced rapid development in the 1990s to become the most dynamic economic sector today. In fact, many of the island nation’s high paying jobs are in tourism. According to a recent Business Insider interview of native Cuban and renowned photographer Tony Mendoza, waiters and artists sit at the top of the socioeconomic ladder: “It’s a hilarious society because … these people are the classes that are the wealthiest individuals,” he explains.
Yet, despite tourism’s vital link to prosperity, there exists a massive shortage of hotel rooms that threatens the expansion of Cuba’s $1.7 billion tourism industry. According to the Cuban Tourism Ministry, there are about 61,000 hotel rooms in Cuba. Against the backdrop of this relatively small room inventory, Cuba drew more than 3 million visitors in 2014, when 3,002,745 arrivals were registered, up 5.3 percent from the previous year, making Cuba the #2 Caribbean destination. Eddie Lubbers, chief executive of the Havana-based Cuba Travel Network, which handled 74,000 visitors to Cuba last year, said he thinks that about 15 to 20 percent of hotel rooms are out of commission at any one time because of poor maintenance. In an odd twist of fate, Cuba’s net change in hotel room inventory could be declining due to the poor condition of the existing room inventory.
The traditional solution to hotel inventory constraints is for the government to attract investment from the global hotel chains by offering special waivers and tax exemptions. Years pass before construction begins – and after another few years, an international hotel will open for business. The construction jobs are relatively high paying yet temporary. What jobs remain in an operating hotel are mostly low wage – and the hotel’s profits are always exported for the benefit of investors.
Airbnb could be a game changer for Cuba – and the first of many tech companies to directly impact the course of Cuba’s economic trajectory. According to founder Brian Chesky, Airbnb’s fastest growing market is Cuba. The number of Airbnb guest homes in Cuba has more than doubled to over 2,000 since the service was launched in April of this year. In hotel terms, this is the equivalent of 5 or 6 major hotels coming on line within a few months. And this momentum is likely to increase as Cubans realize the economic potential in room renting.
In a traditional sense, Airbnb’s economic impact is relatively simple to measure. Everybody wins. What’s different about Airbnb in Cuba is the social impact. Every peso collected by a Cuban through Airbnb is also a deposit in the bank of that person’s emotional stability. What is such a simple concept – renting a room – contains transformative potential by exposing the homeowner to a rare phenomenon in low-income countries: the prompt seizure of economic opportunity. Inevitably, competition will drive homeowners to invest in their houses using local skilled laborers; employment will grow in diverse sectors as homeowners spend profits locally rather than the profits being remitted to the Cayman Islands-based LP investors of a traditional hotel project.
Now apply the Airbnb model in Cuba to cars (Uber), banking (Paypal), shopping (Amazon), education (Khan Academy), travel (Trip Advisor), boating (Boatbound), communication (WhatsApp), internet search (Google) and the menagerie of companies that make up the new shared economy. And then there are the entities making up the digital ecosystem like Startup Cuba.
There is no shortage of interest among US tech companies focusing on Cuba. Netflix Inc., the digital video-subscription service, began offering its services in February. And Google announced in May a Spanish-language toolbar for Cubans. The new toolbar, or barra de busqueda, streamlines Internet searching and bookmarking. In August of last year, Google made its Chrome web browser available in Cuba so people can search “faster and safer,” according to Pedro Less Andrade, the company’s director of public government and political affairs for Latin America. And just last week, the Cuban government announced the first open WiFi network in Havana.
The modest impact US tech companies are having in Cuba is an exciting new form of technology transfer. What’s different in Cuba’s case is the idea that, at scale, technology could lead to a highly developmental (broad-based) economic transformation unique in time and place. It intermediates the traditional mechanisms of foreign direct investment and directly impacts average Cubans by empowering entrepreneurs who themselves will likely retain domestically-derived profits for benefit of the whole economy.