While American tourists begin to flock in, Cuba's economy still sputters

By day, gray-haired Americans trundle through the streets of Havana in pink 1957 Chevy convertibles, klaxons blaring. By night they recline over rum and cigars, tipping generously and reminiscing about the Cold War.

Many of the new American visitors to Cuba, whose numbers have surged since a diplomatic detente in December, are old enough to remember life before the Internet and relish a few days in one of the world's last Facebook-unfriendly bastions.

What tourists find quaint seems stifling to many Cubans themselves.

For a lucky minority, life has improved since President Obama and his Cuban counterpart, Raúl Castro, announced last Dec. 17 that they would seek to end five decades of hostility.

Obama's decision to relax some restrictions on American visitors is expected to push tourism to Cuba up by 17 percent this year, bolstering foreign exchange by around $500 million, or 1 percent of GDP, estimates Emily Morris, an economist at the Inter-American Development Bank.

Visitors spend CUCs, Cuba's dollar-equivalent hard currency, at a few swanky private restaurants where the quality and prices have reached fashionable Florida standards. (The Minnesota Orchestra last week became the first American orchestra to visit Cuba since the Dec. 17 announcement.)

Cubans are borrowing whatever they can to spruce up accommodation in a city where hotels are now booked up weeks in advance. According to Omar Everleny, a Cuban economist, 18,000 private rooms have become available. That is the equivalent of 31 new hotels the size of the 25-story Habana Libre.

This activity is expected to boost economic growth from last year's meager 1.3 percent. But there is little sign as yet of the $2.5 billion a year in investment that the government hoped to woo with a new foreign-investment law last year, mostly because it sends mixed signals.

All this creates a headache for Castro. He has less than a year before a Communist Party congress in April. There he will have to defend reforms launched at the previous congress in 2011, including a planned unification of Cuba's two currencies, despite their disappointing results. Castro must also worry that a Republican will succeed Obama, who will leave office in early 2017. To forestall a renewed tightening of the American embargo, he will want to show that Cuba is making economic progress.

Next April's congress could also mark the start of a generational change in Cuba's leadership. Castro, who took over from his brother, Fidel, in 2008, is expected to step down as president in 2018. He has said he is keen to promote younger leaders, replacing the "historic generation" who fought under Fidel in the 1959 revolution.

He is grooming Miguel Diaz-Canel, the 55-year-old first vice president, to replace him. There is a possibility that Castro could step down as head of the party next year. Economists working for the government say some of Diáz-Canel's peers are receptive to reformist ideas. They are often seen carrying PCs or tablets, suggesting an interest in bringing more Internet to Cuba. But they are reluctant to defend reform publicly, so it is hard to know what they stand for.

Many in the establishment are terrified that change will jeopardize what they see as the main gains of the revolution, such as free education, health care and welfare. "The economy has to become more efficient, but you can't ignore our principles or you'll get a tsunami of capitalism washing over the whole island," says Luis René Fernández of the University of Havana.

Castro may be preparing to take on Communist Party conservatives. The party's central committee said in February that it would discuss a new electoral law at next year's congress. It gave no details; no one expects anything like political freedom. The aim may be to pressure mid-level bureaucrats to stop paralyzing reform. "Change starts from the top and those at the bottom want it, but it gets stuck in the middle," says Rafael Hernández, editor of Temas, a social sciences journal.

Hernández believes a priority for the government will be a stronger National Assembly that can approve laws to underpin economic liberalization, such as the right to own a business. He also argues that professionals such as lawyers, teachers and doctors should be able to moonlight from their state jobs in private consultancies, consolidating a "socialist middle class" that pushes for further reform. However, he frets that hardship has made ordinary Cubans apathetic about greater political representation. For them, "the glass is always half empty."

Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.