The U.S.-Cuba Rapprochement

Despite excitement surrounding expanded U.S. economic involvement in Cuba, the effort will most likely fail to bring about the economic and government-related changes that many hope to see. As has been the case with other nations’ previous forays into the Island, U.S. tourism is poised to primarily benefit government-owned businesses and black market activities, not the privately run microenterprises that make-up roughly one-third of Cuban businesses. Despite the United States’ emphasis on investing in these legal microenterprises, known as “cuentapropista” activities, most will miss out on foreign investment in part due to the expectation of low rates of return on investment. The reality of American economic involvement will serve to reinforce income distribution on the island by leaving out the majority of the labor force.

Meanwhile, re-establishing ties between the two nations will facilitate greater emigration of younger Cubans, further increasing income inequality on the island as more remittances flow to the families of the country’s most highly educated emigrants. In effect, the United States’ attempts to help modernize the Cuban economy and government via foreign investment will likely fail and poses the risk of bringing about undesirable changes for everyday Cubans.

The Island did not always face such dire economic hardships. In the 1950s, Cuba was on a sustained path of economic growth, which translated into rising wages, high levels of education, a robust financial system, and a vibrant business community. This trajectory changed dramatically in 1959 when the progressive collectivization of the economy transformed the government into an overarching monopoly. The incentives present in its previous market system disappeared, and traditional production methods were replaced with an inefficient planning system that impacted Cuba’s cattle, tobacco, and sugar industries.

The Cuban economy underwent another set of dramatic changes in the 1990s as a result of reforms in the Soviet Bloc. The end of Communism greatly curtailed aid to Cuba, leading European countries to provide loans to the Cuban government with the expectation that the Island’s economy would open up to the rest of the world. Castro’s administration promised to European lenders that the industrial sector would expand, exports would see a boost, and enough revenue would be generated for the country to repay its foreign debts. Simultaneously, Cuba began exporting the services of its most skilled health and educational personnel. Unfortunately, the country’s promised industrial export growth never materialized and its export of human capital was not enough to pay the interest on its foreign debt. Cuba ultimately defaulted on its foreign obligations in 1996.

The current U.S.-Cuba rapprochement is likely to see the same disappointing results as other nations’ previous efforts with Cuba. Renewed ties with European nations resulted in Cuba taking on additional debt to foreign nations, as well as foreign ownership in the country’s key businesses maxed out at 49%. Major multinational corporations, such as Pernod-Ricard, Sherritt Corporation, and Nestle, now operate subsidiaries on the Island, of which Cuba’s government holds 51% ownership. Indirect investments became direct investments when these companies acquired Cuban foreign debt at a deep discount and purchased minority stakes in key Cuban companies.

The International Labor Organization (ILO) has condemned Cuba over the last two decades for, among other violations of the U.N Convention on Economic, Social, and Cultural Rights, paying Cuban workers in these foreign minority owned companies a fraction of their guaranteed salaries. The Cuban government funnels workers through an entity called ACOREC. This agency selects members of the Communist Party to work for foreign-owned companies that then pay ACOREC in hard currency (Cuban convertible pesos). In turn, ACOREC pays workers in inconvertible Cuban pesos. Because 25 Cuban pesos equal one convertible Cuban peso, the workers actually only receive 4% of their salaries in hard currency.

Any American company established in Cuba will face the same predicament – unless it is organized in the Brazilian-financed Mariel Free Custom Zone, which establishes more lenient conditions for workers and foreign investors. For workers, this means that the conversion rate from hard currency to Cuban pesos would be more favorable; instead of receiving 4% of their salaries, they would keep about 10%. New U.S. involvement with Cuba, however, does not address this wage disparity. Although the United States will not directly invest in microenterprises, the U.S. government has emphasized the issue of Cuba’s informal businesses operating in the black market. Official Cuban statistics indicate that there are about 425,000 of these businesses in the country. Research also indicates that the number of informal businesses is slowly diminishing as they integrate into the formal economy.

However, Cubans with university backgrounds are banned from “cuentapropista” activities, because the State – which invested in their education – wants to utilize their professional skills in the public sector. Furthermore, these businesses are limited in the number of workers they can hire (usually fewer than ten) and are heavily taxed. It remains unclear just how U.S. investment could flow to these small enterprises, as the returns on investment are clearly quite limited. For this reason, Cuba’s foreign sector, populated mostly by European and Canadian companies, never considers investing in small enterprises.

For all of Cuba’s economic woes, its black market thrives. Although some of these underground activities, like taxis, tourist provisions, and services, migrated to “cuentapropismo,” many did not. In the milieu of corruption that pervades Cuba’s economic system, the country’s black and gray markets are the country’s most successful economic initiatives – just as it was in the old Soviet Bloc. These markets generate some $6.6 billion a year in remittances from the Cuban diaspora that fuels the black market. For years, Americans and a minority of Europeans have also contributed to the black market, without progressing Cuba’s economic conditions forward even an inch.

The impact of black market dealings on economic disparity in Cuba is notable. Approximately 90% of the 2.5 million Cubans that fled the Island are white, which has greatly changed the country’s demographic structure. The Cuban population is now a majority Afro-Cuban, who receive a minuscule part of the yearly remittances, only further contributing to the economic inequality on the Island. As they are not part of the “new class,” the Afro-Cuban population now faces an increasingly worsening economic lot, making Cuba one of the world’s worst in terms of income distribution. With an average salary of just over $22 per month, Cuban workers earn well below what the United Nations defines as extreme poverty ($38 per month).

By exporting its best-trained citizens to Venezuela, Brazil, and other countries, and by neglecting the country’s quality of education and health, Cuba’s limited economic interaction with the United States is not poised to meaningfully improve the poor conditions under which Cuba’s population lives. Cuban-Americans in the United States focus more on Cuba’s microenterprises, which are unlikely to lead to widespread development.

An important first step would be to break the barrier that the Cuban government imposes on foreign investment, in which it reserves for itself at least a 51% participation in the capital of these firms. Greater autonomy for foreign investors will boost confidence and stimulate foreign direct investment from the United States and other nations. Without such developments, Cuba faces little prospect of further progress. For this to be accomplished, the Cuban government must allow foreign investment in Cuba to establish wholly owned enterprises, and to expedite and make transparent the initiatives of foreign investors to participate in the Cuban market, or as exporters. This would necessitate their capability of conducting foreign trade, independently of the government.

Ultimately, the only route to sustained economic growth and increased American involvement in Cuba is rapid political and economic reforms directed towards democratization and market liberalization. But should these reforms fail to be implemented, the United States is likely to find its experience just as underwhelming and, as evidenced by other countries’ past economic involvement with the Island, could ultimately be ineffectual in changing the country’s development trajectory.