A change of leadership within the forecast period is highly likely. Although we expect the transfer of power to be relatively smooth, there is no obvious candidate for the presidency among the younger generation of politicians.

Economic policy in 2011-15 will be focused on efforts to improve productivity by expanding the role of markets and enhancing accountability. However, this will be led by the state, and a full transition to a market economy is unlikely.

After GDP growth of 2.1% in 2010, the Economist Intelligence Unit expects the pace of expansion to pick up in 2011-15, with rising productivity lifting real annual GDP growth to an average of around 4%.

Inflation will rise to close to 6% in 2012-13 as price subsidies continue to be scaled back, but intensifying competition and rising output should help to keep market prices in check in 2014-15, with inflation falling below 5%.

Following moves to increase usage of the "unofficial" (but legal) exchange rate in late 2010, the process of closing the gap with the official rate is forecast to begin in 2013, as part of a strategy to unify the two currencies.

The current account is expected to slip marginally into deficit in 2011-15, but at an annual average of 0.6% of GDP it will remain manageable, even taking into account limited capital inflows.

Reflecting efforts to tackle public-sector inefficiency, the minister of domestic trade became the latest in a steady stream of dismissals that have included all but a handful of the ministers in office when Raúl became president in 2008.

On May 22nd, details of a relaxation of travel restrictions to Cuba for US citizens were announced. This is still limited to "purposeful" travel–excluding tourist travel–but approval from the US authorities will be easier to secure.

A visit to Europe by the deputy foreign minister in June seems to confirm Cuban interest in exploring possibilities for improving relations with EU members.

The government has continued to shed public-sector jobs. The total number of people working in the health sector fell by 14% in 2010. The job losses were almost entirely among technicians and auxiliary staff.

In an attempt to bolster the newly-emerging private sector, the authorities announced tax concessions for new businesses in late May.

Although there has been no official data or monthly indicators relating to trends in 2011, there are signs that fixed investment growth is accelerating.

The government's short-term focus will be on the economic reform measures discussed at the sixth congress of the ruling Partido Comunista de Cuba (PCC) in mid-April, but significant political changes are also likely later in the forecast period. Although the government has sought to build a political consensus for these changes through extensive consultation, ultimately the reforms raise uncertainty about the political outlook.

An increasing role for private enterprise, and free markets for goods and non-essential services, implies major adjustments to the country's institutional structure, while at the same time political power will be shifting to a younger generation of political leaders (the president, Raúl Castro, is 80).

A change of leadership within the forecast period is highly likely. The Economist Intelligence Unit's forecast is based on the assumption that the transfer of power will be relatively smooth, as was the handover from the former president, Fidel Castro, to his younger brother Raúl in February 2008.

However, with no obvious candidate for the presidency among the younger generation of politicians, political institutions will be more important than they have been under the unchallenged authority of the Castro brothers. With a less centralised power structure and system of government, there will be greater potential for factionalism in the longer term.

Elections for the national and provincial assemblies are held every five years, and the next are due in 2013. Up to eight candidates are nominated for each seat but only one is chosen, through a system of nominations and meetings.

Rather than choosing between candidates, voters either accept the official candidate list (a "united vote"), select some candidates and not others (a "selective vote"), post a spoiled or blank ballot, or abstain.

The turnout, and the proportion choosing a “united vote”, are regarded as signs of confidence in the electoral process, and as a result the authorities devote a great deal of effort to persuading people to vote, both before elections and on the day. In the most recent election in 2008 turnout was 97% and the proportion of voters selecting the "united vote" in 2008 was 91%.

Prospects for an easing of bilateral tensions between Cuba and the US were set back by the sentencing of a US citizen, Alan Gross, in March. Lawyers for Mr Gross, who was sentenced to 15 years in prison for illegally distributing telecommunications equipment, have lodged an appeal.

The Cuban authorities, meanwhile, are continuing to call for the release of five Cubans who are serving long sentences in the US on charges that include conspiracy to commit espionage.

Although greater numbers of Americans are travelling to Cuba following the relaxation of some travel restrictions, the US president, Barack Obama, is unlikely to soften his line on Cuba any further. Even beyond the next US presidential election in 2012, reconciliation will be a slow and halting process.

Following the April 2011 PCC Congress, a major process of economic restructuring has begun and will continue in 2011-15. The government has a clear idea of the main aims of the process, which include a reduction of the state payroll by more than 1m workers, expansion of the private sector, the gradual elimination of the ration system and the eventual unification of the dual exchange rate.

However, the government has remained vague on how it plans to deal with the dislocations that these measures will bring, as well as the planned timescale for introducing reforms. The government is seeking to keep any increase in wages in line with improvements in productivity, but this will prove difficult as goods are removed from the ration—which will raise the cost of living—and could require sharp increases in nominal wages. To prevent inflation from spiralling, the pace of change is likely to be slow.

Nevertheless, we expect an expanded scope for private enterprise and foreign investment. Despite the costs of making the adjustment and the continued dominance of the state in terms of economic activity, the changes should improve average productivity and stimulate economic growth.

Although there is huge scope for catch-up, our forecast envisages that the gradual pace of economic reform will result in only a moderate acceleration in GDP growth, from an estimated 2.1% in 2010 to an annual average of 3.9% in 2011-15.

Private consumption growth will be subdued in 2011-12 as rising nominal incomes in the dominant public sector will be offset by the removal of price subsidies.

The transfer of economic activity from the state to the private sector will have a positive impact on disposable incomes, but increased competition and rising unemployment will restrain this growth. Reducing informality will help to boost fiscal income and lift productivity. Alongside a rise in remittances, this will lead to stronger growth in private consumption in 2012-15 and increase the resources available for capital spending.

The gradual liberalisation of the economy will also result in a surge in private fixed investment from a very low base. Growth in nickel export volumes (thanks mainly to the initiation of production from the Camariocas plant in 2013) and an increase in tourist arrivals will underpin solid growth in exports, while an improving foreign exchange position will allow steady growth in imports.

The government will continue to influence inflation directly (by using price controls and regulating the limited areas of free-market activity) and indirectly (by controlling monetary emission), but as goods are removed from the ration, inflation will rise.

The creation of new small businesses will exert downward pressure on market prices, but at the same time as the gradual removal of price subsidies increases the average cost of basic goods.

The official inflation index, which registered an end-2010 rate of 1.4% year on year, fails to reflect fully the rise in the cost of living arising from the shift away from rationed supplies to a greater reliance on markets.

For 2011-15, our forecast of an average inflation rate of 5% is based on the assumption that price subsidies continue to be scaled back, while intensifying competition and output expansion will help to keep market prices in check.

Prices will rise sharply in 2013, on the assumption that the process of currency adjustment starts. This benign scenario, which is based on the assumption that the authorities will react quickly to any sign of an inflationary spiral, could be threatened if competitive markets fail to emerge, or if the government is forced to raise sales taxes in order to compensate for a shortfall in direct taxes.

Efforts have been under way for some time to improve integration between the hard-currency (CUC) and domestic-currency (CUP) areas of economic activity, as part of a strategy to unify the two Cuban currencies. The announcement in March that the CUC:US$1 rate had been changed has no direct impact on the goal of unifying the two domestic currencies (the CUP:CUC rate is unchanged) but with one currency fixed at parity with the US dollar, it will make the process simpler.

Our forecast assumes that the realignment of the official and unofficial CUP:CUC exchange rates will begin in early 2013. Currently, the CUP can only be exchanged for the CUC at the unofficial, or "Cadeca", rate for personal transactions, and neither unofficial nor official exchange rates, which are widely divergent, are close to purchasing power parity (PPP) level. This distorts the labour market and creates an obstacle to the integration of the domestic and external economies, acting as a barrier to the growth of the Cuban economy.

Our forecast assumes that the revaluation process will occur in stages, but sudden unification is also possible. This would create adjustment difficulties in the short term, but would improve dynamism in the domestic economy in the long term.

After registering a small estimated surplus of 0.4% of GDP in 2010, the current account is expected to slip into deficit in 2011-15, but this will remain manageable (at less than 1% of GDP). The merchandise trade deficit is forecast to widen in 2011, reflecting an increase in import prices, but thereafter it is expected to fall as a share of GDP, from 14.1% in 2011 to 10.9% in 2015, as rising domestic productivity reduces demand for imports.

The services surplus will remain large, reflecting the large tourism sector and sustained earnings from the export of medical services to Venezuela. The current transfers surplus is forecast to rise steadily, following the easing of US restrictions on remittances in 2009 (for Cuban-Americans) and early 2011 (for US citizens). This will compensate for a widening income deficit, related to profit repatriation from a rise in nickel exports from 2013.

Multiple factors will support an increase in inward foreign direct investment, from an estimated US$585m in 2010 to US$700m-800m in 2011-15. These include future Venezuelan projects, a positive economic outlook for China and Brazil--two other key investors--and an easing of property ownership rules.

There are no official data on international reserves, but our forecast assumes that they will rise slowly, as some of the balance-of-payments surplus is used to pay overdue payments accumulated during foreign exchange shortages in 2008-09.

The business environment rankings show that Cuba was one of the world's least attractive investment destinations in the historical period (2005-09), and that its relative position will improve only slightly in the forecast period (2010-14), when the country is placed 78th out of 82 countries in the Economist Intelligence Unit's global model and near bottom (11th of 12) in Latin America. The main reason for the low overall ranking is the domination of the Cuban economy by the state, leaving only restricted space for private business; other factors are political uncertainty, US sanctions and monetary imbalances.

Cuba's ranking for its political environment is set to improve. Its score for this variable improves only marginally, but the improved ranking is largely owing to falling scores for other Latin American countries, where minority governments will struggle to pass legislation. Cuba's score for institutional effectiveness is underpinned by effective institutions but the lack of transparency and hostility towards private enterprise are negative factors. Cuba will continue to rank poorly on political stability, as a high degree of uncertainty about the post-Castro succession outweighs the benefit of reduced tensions with the US.

Cuba's policy scores for 2010-14 are particularly weak, owing to tight state control and restrictions on private business. The scope for private ownership of enterprises by Cubans is restricted to small-scale agriculture, self-employment and micro-enterprises. Foreign investors are allowed but their entry is closely controlled.

The dual exchange-rate system presents a barrier to integration of the domestic and external sectors. We expect that the government will introduce some liberalising measures during the forecast period to widen the scope for private enterprise and allow market prices to play a greater role in resource allocation, but it will continue to regulate strictly and restrict the activities of private businesses, including foreign investors. Those businesses that manage to overcome the obstacles to enter Cuba will benefit from a clear tax framework, low levels of crime and a large pool of highly educated labour.

An assessment of the size of the Cuban market is difficult, because the valuation of Cuban GDP in US-dollar terms is problematic. There is no market exchange rate: the rate of exchange between the convertible peso (CUC) and the US dollar is now CUC1:US$1, but there are two rates of exchange between the domestic currency, the Cuban peso (CUP) and the convertible peso. The "official" rate, which gives the Cuban peso equal value to the convertible peso, is used for aggregating accounts. The "unofficial" rate is available only for personal transactions and currently stands at CUP24:CUC1 (or CUP24:US$1).

Using this rate to calculate household consumption would give a total of only around US$80 per head—well below the US-dollar value of spending, as the US-dollar value of imported consumer goods alone (which account for a relatively small proportion of total consumption) is around US$2bn, equivalent to US$200 per head.

Because neither the official nor the unofficial exchange rate can be used to derive US dollar GDP, the Economist Intelligence Unit's estimates of the value of GDP in US-dollar terms is not consistent with the nominal GDP and exchange rate. It is a best estimate, based only on the limited information available.

Our estimate of GDP at purchasing power parity (PPP) is based on Penn World Tables, published by the University of Pennsylvania's Center for International Comparisons of Production, Income and Prices.

Over the forecast period, we expect steady growth in consumer spending. Having suppressed household spending through its control of wages and the use of a dual exchange-rate system since the economic crisis of the early 1990s, the government is focused on raising living standards over the medium term.

We expect that by the end of the forecast period, rises in nominal wages, the increased use of incentive payments, expanding domestic supply and some convergence between the official and unofficial exchange rates will have lifted household consumption from the equivalent of US$22.1bn in 2011 to US$28.5bn in 2015.

Growth will be more rapid in the second half of the forecast period, as reforms designed to lift productivity and address distortions arising from the dual exchange-rate system take effect.

There is little information available on consumer spending patterns. Currently, domestic retail trade is dominated by the state: a network of state-owned shops sell in foreign currency to both Cubans and foreigners (many tourists), and separate outlets owned by the state sell in Cuban pesos.

The peso outlets have traditionally sold basic rationed goods at heavily subsidised prices, as well as other items at prices closer to their market level. However, the number of goods available at subsidised prices will fall in 2011-15, as part of a process to cut fiscal expenditure.

Personal hygiene products were removed from the ration book at the beginning of 2011, and consumers now have to buy soap, toothpaste and liquid detergent in state shops at unsubsidised prices. This follows the removal of potatoes from the ration book in late 2009 and cigarettes in September 2010.

The government will continue to remove items from the ration book gradually, as they try to ensure that domestic supply is sufficient to meet demand and adequate compensatory support for vulnerable households is in place. Currently, the only free markets are those for domestically produced agricultural goods, a much smaller trade in crafts, and informal markets.

For foreign businesses, market opportunities at present are limited to sales to state importers (either within ministries or state-owned enterprises) or joint-venture companies operating in Cuba.

According to the most recent data available, spending on consumer goods imports in 2009 was US$1.8bn, of which food accounted for 90%. The state food importer, Alimport, is responsible for food purchases, and a group of state retail corporations account for other consumer imports.

Cuba's mainly urban-based and highly educated population, which has strong links to more consumer-driven societies through family members living abroad (mainly in the US) and through tourism, has an enormous unmet appetite for consumer goods. Although official policy aims to expand domestic manufacturing capacity to reduce import propensity as household spending rises, there will be a strong preference for imported branded goods, particularly clothing and footwear, among those with higher disposable incomes.

The long-term outlook is highly uncertain. There is huge potential for catch-up and the reform process currently under way suggests that the authorities are trying to tackle the structural constraints that have traditionally held back growth.

The reform process is similar to the initial measures introduced in China in the late 1970s and in Vietnam a decade later, when both economies began to open up to private-sector investment. In both cases, reforms stimulated firm GDP growth in the years that followed. These experiences point to the likelihood of sharply higher average growth rates in Cuba in the medium to long term.

However, long-term growth will hinge on three factors: whether current reforms pave the way for a second round of more extensive economic liberalisation (as has been the case in China and Vietnam); the question of whether or not Cuba's one-party political system will survive; and whether US trade sanctions remain in place.

The Economist Intelligence Unit's central forecast assumes that the president, Raúl Castro, remains in good health and can manage the difficulties arising from the initial reforms (which will include higher unemployment and rising prices), meaning that he should be able to smooth the transition to a new generation of leaders.

In this scenario, with Raúl Castro remaining in the background, a new government would gain legitimacy and the one-party state would stand a firm chance of surviving. More extensive economic liberalisation would also be likely, which would lift growth significantly later in the forecast period.

If, however, the Castro brothers die before a full transition has been made to a new leadership, significant internal tensions over policy could emerge. If the new authorities failed to respond to public frustrations and the economic reform process was mismanaged (or failed to bring about long-awaited improvements), there is a possibility that dissent could strengthen sufficiently to present a significant threat to the political system.

Its collapse or overthrow would be accompanied by a radical transformation of the structure and policy orientation of the Cuban economy. This would prompt much lower growth in the aftermath, although it might not prevent a resumption of strong growth in the long term, depending on the administration that eventually took power.

Despite a favourable geographical location and ample natural resources (including significant nickel and oil reserves), Cuba's lack of integration into the world economy constitutes a major barrier to growth. Its dual exchange-rate system and the persistence of US economic sanctions hamper integration.

The near-absence of a private sector has impaired dynamism. A high average level of education is Cuba's most important asset (UN figures show that Cuba has the highest literacy levels and the highest average levels of educational attainment in Latin America), and the stability and effectiveness of its institutional framework also contributes to its capacity for economic advancement.

Given the economy's scope for catch-up, a relatively unfavourable demographic profile is a key factor constraining potential GDP growth. We expect the population to decline slightly during the forecast period, reflecting continued emigration, which will be partly offset by a decline in the already very low birth and death rates. The old-age dependency ratio will continue to rise faster than the young-age dependency ratio, resulting in a progressive ageing of the population.

To some extent, an increase in labour participation rates arising from improved employment opportunities, together with productivity gains from the current low average level, will help to compensate for the decline in the number of people of working age. In addition, good health indicators will support the quality of the labour force—the emphasis of the government on the universal provision of basic needs and healthcare has made Cuba’s health statistics comparable with those of industrialised nations.

Improved labour incentives will encourage more people to continue to work after their retirement age and contribute to a fall in the proportion of adults attending full-time education from current historically high levels.

Cuba has traditionally been a highly export-oriented country. In 1990 exports (goods and services) were around 30% of GDP and imports 40% of GDP. During the crisis of the early 1990s, precipitated by the collapse of the Soviet bloc, these ratios fell to 12% and 15% respectively. A gradual restoration of export earnings has made an important contribution to the economic recovery since then, but external dependence is less than before: exports (goods and services) were around 19% of GDP in 2010 and imports 17% of GDP.

Cuba's traditional dependence on sugar has ended. Goods trade is now dominated by nickel, pharmaceuticals and oil products, and exports of services (mainly tourism and professional services) earn more than the total for goods.

Trade partner concentration is relatively pronounced, with Cuba's two main partners, Venezuela and China, accounting for 37% of goods export earnings and 42% of import spending in 2009. Although Cuba is less exposed than in the 1980s, when it was dependent on the Soviet Union for around 70% of total trade, it will still seek to diversify its trading partners in the long term.

A politically driven trade deal with Cuba's closest ally, Venezuela, which involves the sale of professional services in return for oil imports, leaves the Cuban economy particularly vulnerable to political upsets in that country. A relaxation of US economic sanctions should accelerate the process of trade diversification. Our forecast assumes that sanctions will ease gradually, but continually, with a clear probability of substantial and fundamental change by 2030.

Given that power has been concentrated in the executive for so long, the current state of institutions is weak and not supportive of growth, but a focus on reducing bureaucracy and raising efficiency, clamping down on low-level corruption and boosting the power of regulatory bodies is expected to reverse this trend in the long term.

Moreover, the record of the post-1990s period has shown that Cuba's economic system is capable of transformation, despite the ideological resistance to liberalisation. We envisage a substantial adjustment of prices towards market levels, an increase in the scope for small businesses, increased autonomy for state enterprises and the development of a domestic financial market and banking system.

Assuming that Raúl Castro lives sufficiently long to oversee a transition to a younger leadership and smooth the process of economic reforms, real GDP is forecast to grow by an average of 4.2% in 2011-30. Growth will be comparatively weaker in the first half of the forecast period (3.5% in 2011-20) as the economy adjusts to the significant changes currently under way, but this will lay the groundwork for stronger growth in 2021-30 (4.8%) and beyond that.

Given a slight fall in the population, this represents an even firmer rate of growth of real GDP per head. Drivers of growth will include the opening to private investment, a high level of education, the strength of state institutions and improvements in policymaking. Without Cuba's weak demographic profile, the pace of economic expansion could be significantly higher.