Publish in Special Reports - Wednesday, March 4, 2015
Roughly one in 10 Cubans regularly use mobile phones. (Photo: Wharton)
Tech sector draws US interest, but hampered by current Cuban restrictions.
Growing up in Cuba, Jose Pimienta didn’t see the Internet until 2006. He and his friends taught themselves computer programming with a Russian textbook on the Pascal programming language that had been translated into Spanish. Even in university, when he finally had access to the Internet, Pimienta, now 27, was limited to 20 megabytes per month of data — a small fraction of what fits on a thumb drive today. Yet, in 2013 when PayPal hosted its first-ever global hackathon competition in San Jose, Calif., with a $100,000 purse, Pimienta and two partners placed third for developing a peer-to-peer lending app called LoanPal.
“In Cuba, you have a lot of people who have done things with limited resources and no real access to knowledge,” Pimienta, who emigrated to Miami in 2009, says. “You have a lot of talent there.” Pimienta is proof of the level of talent Cuban universities are producing. He and his Cuban partner won the regional PayPal hackathon in Miami two years running, and he’s now working with clients in the United States, Europe and Cuba, building websites and brands from the ground up, while employing former Cuban classmates.
Presidents Barack Obama and Raul Castro on December 17
made an historic announcement that the adversaries, separated only by 90 miles,
would work to reopen diplomatic channels, ease travel and trade restrictions,
and allow for U.S. banks to start processing transactions on the island. But
even before the announced thawing of relations, Cuba was developing
sought-after computer programmers and a tech start-up community that has drawn
interest from entrepreneurs and industry giants like Google.
“You have a highly educated workforce, excellent programming talent and a huge amount of opportunity for companies that want to invest in the knowledge economy,” notes Faquiry Diaz Cala, CEO of Tres Mares Group, a private equity investment firm in Miami that has partnered with Pimienta. “There’s already demand for these programmers. There are full-blown projects that are being done in Cuba by guys who are working underground because they haven’t really opened up the sector yet.”
There is no official number for the size of the information technology sector in Cuba or the number of trained professionals. But Diaz says Cuban universities are churning out large numbers of graduates who have learned to program with limited resources
“These guys are sought after because their programming is so tight,” Diaz notes. “And their programming is so tight because they have learned with limited access to time on computers and limited access to the Internet.”
That could change. New regulations announced by the U.S. Treasury Department allow for the export of technologies to Cuba that were previously banned under economic restrictions against the island. That, coupled with economic reforms slowly rolled out by the Castro government, has positioned the Cuban technology and start-up sector as one of few areas of the Cuban economy truly poised for growth. Before the island can transition into a tech hub, however, it has to overcome serious hurdles including a lack of critical infrastructure, laws that limit foreign investment and government control of access to the Internet.
NOT AN OVERNIGHT PROCESS
While the joint announcements made by Obama and Castro were met with much enthusiasm, analysts warn that the outcome of the thaw between the two countries will largely rely on a long, arduous process of negotiations, which began in January when assistant secretary of state for western hemisphere affairs Roberta Jacobson traveled to Havana for two days of discussions with the Cuban government. “The fact that they were meeting at all is hugely significant,” says Cynthia Arnson, director of the Latin America program at the Washington-based Wilson Center, a think tank. “But this is going to be a process, and it’s not going to happen overnight.”
Even if the negotiations are successful, fully opening the Cuban economy will take time, notes Wharton management professor Mauro Guillen, who is also director of The Lauder Institute. “That process of transition from all points of view — the legal, the economic, the financial, the monetary, the regulatory — is going to be very complicated. It cannot happen all at once. It cannot happen overnight,” he says. “We know from previous transitions that a gradual transition — such as the ones staged in China or Vietnam — were better than those that followed the so-called shock-therapy recipes.”
Standing in the way of fully normalized economic relations between the U.S. and Cuba is the economic embargo first instituted by John F. Kennedy in 1962 and then later strengthened by Congress. There is a near-zero chance of it being lifted. The U.S.Treasury has exercised its limited ability to make exceptions to the embargo, but removing the embargo completely needs Congressional approval. Republican lawmakers are mostly opposed to loosening restrictions against Cuba. The Republican-controlled Senate may even block Obama’s nominee for the ambassadorship.
“All of the economic bottlenecks that existed before still exist, despite [the] much-lauded FDI [foreign direct investment] law,” says Christopher Sabatini, former senior director of policy at the Americas Society and Council of the Americas (AS/COA). “It’s not going to be a windfall that will save and shore up [the] economy.”
To be sure, full normalization of the economy has the potential to bring an enormous windfall. The Peterson Institute for International Economics estimated in a 2014 paper that Cuba, which currently attracts about $500 million in FDI, could lure as much as its Caribbean neighbor the Dominican Republic, which has $17 billion in FDI, including $2 billion from the U.S.
A nd the Cuban government has identified information technology as one of the sectors it is seeking to develop under the reforms to its economy that President Raul Castro began to roll out in 2008. “Today’s situation does not allow computer activity to address many of the needs required by the population,” deputy minister of communications Wilfredo Gonzalez Vidal said in an interview with Granma, the official newspaper of the Cuban Communist Party. The government sees technology as “an industry of strategic development for the nation, strengthening the economy and providing broad access to contents of digital services,” he said.
The government has a multi-part plan to develop the industry that includes promoting training, focusing on government and electronic commerce, allowing for new business models, and cooperating with international actors to improve content and infrastructure and the availability of equipment.
Perhaps the most significant sign of both the Cuban government’s approach and the international interest in the island came on February 9, when Netflix said it would immediately begin offering streaming service to the island.
Netflix’s announcement drew headlines, but also exposed the severe limitations that pose a threat to the development of the information technology sector. Penetration rates for cellular telephone usage and Internet connectivity remain uncommonly low: Only 5,360 home and business broadband Internet connections exist in Cuba, according to the International Telecommunications Union. Roughly one in 10 Cubans regularly use mobile phones, according to Freedom House, citing 2011 figures.
Among the country’s largest investments in telecommunications infrastructure came in 2013 when it activated a $70 million undersea cable laid by the Venezuelan government, giving the country a dependable link to the Internet.
Still, most Cubans won’t be able to afford to access the Internet or buy a cell phone in the short term. An hour of access to the web eats up roughly almost one fourth of the average Cuban’s monthly salary. And most Cubans can only check e-mail or visit government-approved sites through a domestic intranet.
Pimienta knows the government-imposed obstacles well. He is currently partnering with Cuba-based designers on jobs from international clients. Due to restrictions on file sizes, his partner has to send large files broken up into as many as 30 e-mails, which are then pieced back together. Beyond that, he is not legally permitted to pay his Cuba-based employees. “I supply them with equipment and technology instead,” he says.
Pimienta hopes new regulations will make it easier to work with Cuba-based designers. To that end, he and several partners have launched a website that highlights the work of Cuban designers and programmers. He hopes to bring together dozens of professionals from across the island, showcasing their work. “We want people to know about the talent that exists in Cuba,” he says. “With these regulations changing, we want to be able to provide companies with access to Cuba. You’re an American firm and you want to go to Cuba? We know the market both in the U.S. and in Cuba. And we can help you build a brand.”
CHANGING THE IMAGE
The popular image of Cuba, at least in the United States, is that of a closed-off, tightly controlled island where the Castro regime has a hand in nearly every facet of life. Miami-based entrepreneur Hugo Cancio sees the potential of the Caribbean island, where he was born, beyond its appeal as a tourist destination full of the robust cigars, vintage cars and aged rum for which it has become associated. “Cuba is more than that. You’re talking about a country of 11.2 million highly educated people. It’s about more than just the Castros,” he says.
An understanding of Cuba is the message Cancio tries to relay to readers of his magazines and websites, including the flagship OnCuba publication. The magazine informs readers about Cuba’s cultural uniqueness, its history and current events. “There was a Cuba here before 1959, and it’s a Cuba that is still here today,” he says. Yet, perhaps more revealing than Cancio’s message is how he built the magazine and website with homegrown Cuban talent.
Cancio plucked some of the island’s best and brightest, trained them to produce a bilingual publication, and hired a handful of programmers to maintain the website. “The talent here is extremely highly trained,” he notes.
Cancio says he has worked with U.S. companies that have expressed willingness to get into the Cuban market when it opens. “It’s amazing to see how interested American businesses are in Cuba,” he notes. “We believe there is going to be hundreds of millions of dollars flowing from the U.S. to Cuba and Cuba back to the United States, eventually.”
The potential is so large that it could attract major U.S. companies, such as AT&T, Verizon and Google, the latter of which has already said it is interested in expanding its reach on the island.
How quickly investments proceed likely depends less on U.S. regulators and more on the rules that Cuba sets for investment. The state-controlled ETECSA (Empresa de Telecomunicaciones de Cuba S.A.) and its subsidiary Cubacel (Telefonos Celulares de Cuba S.A.) currently have a monopoly on the telephony sector.
However, the early signs in the negotiations between the U.S. and Cuba are welcomed news for entrepreneurs. “I think that you’ll see a lot more direct assistance to the private sector … in the form of technical assistance so that they can grow and prosper and perform at a high level. That’s what’s happening on the black market already anyway,” notes Ted Piccone, a senior fellow at the Brookings Institution who follows Cuba. “Creating institutions that respect property rights — this kind of thing is a whole new concept in Cuba. A major transformation is underway.”
Regardless of how quickly reforms take place, Pimienta says there is already buzz around the potential for change in Cuba. Greater access to knowledge from U.S. companies and the ability to import needed technology and equipment can only benefit the start-up industry in Cuba, he adds.
“The reality is that there are people hungry to work. They’re creative and they are just waiting to show what they can do,” he says. “If this happens, it would be wonderful for the people of Cuba.”
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.