Economic Normalization with Cuba

A Roadmap for US Policymakers

Gary Clyde Hufbauer, Barbara Kotschwar, Cathleen Cimino-Isaacs

• Publisher: Peterson Institute for International Economics
• Year: 2013
• ISBN:
  9780881326833
• Topic: Politics & International Relations
• Subtopic: Global Politics
• Index: Politics & International Relations

Will the Obama administration's decision to normalize relations with Cuba usher in a new era of economic cooperation, trade, and investment between the two countries? This prescient book, published only eight months before President Obama's historic announcement at the end of 2014, provides answers to that question and offers a roadmap for a sequenced lifting of the Cold War era economic sanctions against Cuba.

Gary Clyde Hufbauer and Barbara Kotschwar lay out the difficulties of achieving a dynamic economic relationship. They caution that a unilateral dismantling of US sanctions without insuring that proper institutions are in place in Cuba could squander this golden opportunity for US companies and hurt Cubans. They argue that US policies should encourage Cuba to liberalize its economy and adopt democratic institutions, so that it does not transition from a Communist dictatorship to a corrupt and authoritarian oligarchy. This farsighted book, produced in anticipation of an opening with Cuba that seemed impossible to some skeptics, is a must-read for anyone interested in the evolution of a historically contentious relationship that promises to evolve productively if the right policies are pursued.

1

A Half Century of Separation

For more than 50 years the United States has opposed the Castro regime in Cuba, deploying both trade and financial sanctions. While this policy has not destabilized the Cuban government, the regime is showing signs of fatigue, and the sands of time may accomplish what economic sanctions did not. Fidel Castro, born in 1926, turned 87 on August 13, 2013, and actuarial tables give him a remaining life expectancy of 5 years.1 Raúl Castro, born in 1931, now the president of Cuba, is 82 years old with a life expectancy of 7.5 years. Yet the Castro brothers are nothing if not durable, making the circumstances and timing of political normalization hard to forecast, but relations could be restored between the United States and Cuba within the space of years. In fact, on February 24, 2013, Raúl Castro announced he would step down as president, following a last five-year term ending in 2018.2 Meanwhile, the regime is grooming Miguel Díaz-Canel, at 53 a relatively young first vice president, as a prospective new leader. Foretelling a new day, in his first term, President Barack Obama took small steps to relax the US embargo and permit more travel and remittances to Cuba.3 In 2013, Cuba relaxed its exit permit system, permitting more Cubans to travel abroad.

Once political normalization is in sight, forces will emerge to urge instant economic normalization. But rushing to dismantle US sanctions and unilaterally opening US markets to Cuban goods and services, without proper institutions in place in Cuba and without dramatic liberalization of its own barriers to trade and investment, risks the loss of a golden moment to help US companies and their workers get a fair shake in the new Cuban economy. In our opinion, Cuba’s full embrace of the tenets of a market economy and democratic institutions offers the best path forward for rapid Cuban economic growth. But this Policy Analysis is written foremost with an eye on US interests.

Much is at stake. The world has already witnessed Russia’s headlong rush into capitalism, and the terrible consequences when an economy is captured by oligarchs and overrun by corruption, with only a veneer of democratic institutions.4 For many Russians, the transition from communism to capitalism was a disaster. Without a proper institutional framework, much the same could happen in Cuba, given its huge portfolio of state-run companies closely tied to the military and its entrenched bureaucracy. US companies and workers have a legitimate interest in ensuring market access, respect for intellectual property, and investment opportunities in Cuba once Cuban firms are allowed to enjoy equivalent rights in the US market and access to US financial markets. Reciprocity of rights between Cuba and the United States is especially important since Cuba has already established trade and investment relations with Canadian, European, and, increasingly, Chinese firms. Without reciprocity, US companies and workers will continue to be disadvantaged, perhaps for several years.

This Policy Analysis is not about how the United States ought to rebuild Cuba or about the relative merits of the sanctions—two standard topics in this area—but rather a roadmap for how US businesses and policymakers could pursue US economic interests under the assumption that Cuba becomes a market economy—and perhaps adopts democratic institutions. We suggest markers for the path to restoring normal economic relations between the United States and Cuba, once a greater degree of political normalization is under way between the two countries.5

This Policy Analysis focuses on the microeconomic grist of trade and investment relations between Cuba and the United States. To avoid utter chaos, Cuba will face severe macroeconomic challenges, whatever the transition scenario between an autocratic state-centered economy and a democratic market-centered economy. Cuba needs to establish a normal system of taxation and public expenditures and keep internal debt within reasonable bounds; it must unify its exchange rate, while managing the risk of hyperinflation; and it must settle its external debts, including claims arising from expropriated property, without landing in the impossible position Germany was in after the First World War. We touch only lightly on these challenges. The macroeconomic challenges are real, but overwhelmingly they will be the responsibility of Cuban officials.

The remainder of this chapter sets the context of Cuba’s economy and outlines three stylized but plausible scenarios under which economic normalization could take place. Chapter 2 describes recent economic reforms in Cuba. Chapter 3 describes Cuba’s extensive network of international economic agreements. Chapter 4 sketches the history and legislation of US economic sanctions against Cuba. Chapter 5 outlines potential initial steps toward the normalization of bilateral economic relations. Chapter 6 uses a gravity model and other tools to estimate potential trade and investment between Cuba and the United States. Chapter 7 describes additional agreements that would lead to deeper integration between the United States and Cuba. Chapter 8 concludes by recounting US “offensive” and “defensive” economic interests.

Cuban Fundamentals

For the past 50 years and counting, the Cuban economy has operated predominantly under a centrally planned system, controlled by the single-party communist government. Domestic production of goods is dominated by state-owned enterprises, while international trade and domestic consumption are tightly regulated by government institutions. The Cuban military, the Revolutionary Armed Forces, plays a major role in both the agricultural and service sectors. The Cuban economy has been shaped by the long-standing US commercial, economic, and financial embargo, initially imposed in 1960, strengthened in 1962, and reinforced by the Helms-Burton Act of 1996.

The dissolution in 1991 of the Council for Mutual Economic Assistance (CMEA), the Soviet trading bloc that Cuba joined in 1970, led to a sharp decline in Cuban output in the late 1980s and early 1990s. To arrest the sharp decline in GDP and personal income, the government took emergency economic measures, including liberalizing some activities, thus ushering in the “special period in peace time.” However, many of the liberalization measures were rolled back, at least partially, in the early 2000s.

Since 2000, Venezuela has stepped in to help Cuba with significant economic assistance. Through a so-called Convenio Integral de Cooperación, or comprehensive cooperation agreement, Venezuela provides Cuba with a significant amount of oil (between 90,000 and 130,000 barrels per day), at a 40 percent discount supplemented by a subsidized loan, the value of which is estimated at about $1.5 billion per year and covers about half of Cuba’s energy needs (see, for example, Moody’s Investor Service 2011). Cuba also receives payments for the export of medical personnel to serve in Venezuela’s misiones; these payments are often estimated to be at a highly inflated value.6 Venezuela has reportedly provided investment and development assistance as well, but the value of Venezuelan aid to Cuba is not transparently documented. Estimates range between $10 billion and $13 billion annually, or around 20 percent of Cuba’s GDP during the past three years (Hernández-Catá 2013).7

In 2010 the government announced that it would be “updating” its economic model, encapsulated in the Draft Guidelines for Economic and Social Policy announced at the Sixth Cuban Communist Party Congress in October 2010. The new model contemplates incremental steps toward a market-oriented economy. These are detailed in chapter 2.

The Cuban economy is now largely a service economy. Services account for nearly three-quarters of the economy, while manufacturing accounts for 21 percent and agriculture just 5 percent (see table 1.1). Government services (e.g., education, health, and social services), coupled with nickel and cobalt mining and tourism, are the main contributors to GDP, which the Economist Intelligence Unit (EIU 2013) estimates at about $63 billion, or $71 billion at the official Cuban peso rate.8 With a population of just over 11 million, the figures work out to a GDP of roughly $6,000 per capita. Because of massive distortions in the Cuban economy, including the highly distortive dual currency system, these GDP and per capita income figures must be taken with a tablespoon of salt.

Cuba ranks well on social indicators. Cubans are relatively well educated: Cuba has the highest literacy levels in Latin America. Some 90 percent of school-aged children are enrolled in secondary education, and 80 percent of the relevant cohort is enrolled in tertiary education. Cuba reports very low levels of unemployment, just 3.8 percent in 2012. However, this statistic reflects the fact that 78 percent of the labor force is employed by the government at very low wages.9 It also ignores the skills mismatch in the labor force: It is not unusual to find Cuban taxi drivers or waiters with advanced degrees in medicine or engineering. Cuba also faces a demographic challenge with an aging population. The over-65 population accounts for 13 percent of the total, while the under-14 population accounts for only 17 percent. This contrasts with the rest of Latin America, which is poised to collect a demographic dividend, since only 7 percent of the population is above 65, while 28 percent is 14 or younger.

A long life expectancy for Cubans (80 years for women, 76 for men), together with low birth rates and the outward migratio...

Table of contents

• Cover
• Title page
• Copyright
• Table of Contents
• Preface
• Board of Directors
• Acknowledgments
• Map
• Chapter 1
• Chapter 2
• Chapter 3
• Chapter 4
• Chapter 5
• Chapter 6
• Chapter 7
• Chapter 8
• References
• Index
• Back cover