By Cristobal Vasquez
Since 1960, the U.S. embargo on Cuba has crippled the island nation in more ways than one. However, the embargo is not the only reason for Cuba’s economic tribulations. Internal politics and economic barriers have led to significant challenges for the country.
For more than 50 years, the U.S. has imposed a financial and trade embargo on Cuba, prohibiting persons, goods, and money to travel in and out the island. Today, the consequences of the isolation are unsustainable. In fact, more than 70 percent of Cubans were born under the U.S. economic embargo, and the costs associated with the blockage are approximately $117,000 million, according to the Cuban government.
In order to build a sustainable government and avoid a situation similar to the U.S.S.R. Perestroika, Raul Castro is forced to adopt different economic approaches from Fidel’s socialist model. However, despite the embargo and its deleterious consequences, internal conditions threaten Cuba’s initiative to liberalize its economy and achieve sustainable economic growth.
The modernization of Cuban socialism has included elements of market economies. This includes downsizing the state workforce, lifting the restrictions on property use, and decentralizing powers. Cubans are now allowed to travel abroad and have access to electronics. Subsidies and freebies were eliminated, and the credit policy was eased to support and encourage private activity. In fact, some 450,000 Cubans now work as self-employed entrepreneurs, according to The Financial Times.
Additionally, the government allowed companies to take their revenue from the island and created the Mariel Export Processing Zone (a customs area where imported machinery and technology are used to manufacture export goods with tax benefits) to generate jobs, income, and foreign exchange earnings.
Unit: US billions
“In the next five years, we have to devise a new credit and monetary policy, to update the Cuban tax code, reform the salaries and eliminate the dual currency system, which is a headache for every economist and enterprise in Cuba,” said Josefina Vidal Ferreiro, General Director of the United States Division of the Ministry of Foreign Affairs of Cuba, in a presentation at Columbia University. She added that the goal is to attain a sustainable and prosperous model for the country, but says that the U.S. is ignoring these transformations. “These changes we are implementing were years ago preconditions to eliminate the U.S. embargo to Cuba,” she added.
However, the transformation that Cuba is trying to achieve and the new market incentives that are being offered to foreign investors do not seem to be working. “No additional company has invested in Cuba as a result of these reforms,” says Christopher Sabatini, senior director of policy at the Americas Society and Council of the Americas. The country faces internal barriers that go beyond the embargo and threaten the viability of the government and its financial sustainability.
Among this list of challenges, the government oversees hiring and firing of employees, eliminating meritocracy and replacing it with old school cronyism. This consequently negatively impacts the overall productivity of the country. “This is a way the government keeps control of its population,” added Sabatini.
Another barrier involves the export processing zones. According to Sabatini, two things need to exist for these zones to operate efficiently: a cheap labor force and a market to export the processed goods. Without the ability to export to the United States, one of the largest markets in the world, the effectiveness of the zone is irrelevant and has very low impact on productivity.
Moreover, the Cuban domestic market is very poor, which does not attract foreign investors either. The capacity of expenditure of an average Cuban is very limited despite the increasing remittances sent from the United States, estimated between $1.4 to $2 billions per year.
Cuba’s economy is largely based on the export of sugar, tobacco, petroleum, and nickel; raw materials that do not trigger other industries to develop, nor expand the growth of processed goods. Consequently, there are limited opportunities for foreign companies to invest in the country.
One of the most important challenges may be the lack infrastructure to help develop industries, generate jobs, and activate the economy. This problem clearly impacts the tourism sector, which is considered the economic engine of the country, with over three million visitors last year. Everything from transport capacity, ports of entry, water and sanitation, electric supply, and telecommunications affect the tourism industry. These factors also influence the rate of return of tourists to Cuba, which is very low when compared to countries such as Mexico, Panama, and Costa Rica.
The turning point for the Cuban economy would a lifting of the embargo, which is unlikely to happen in the next few years, given the strong influence senators like Marco Rubio and Roberto Menendez (Cuban immigrants who strongly oppose the Castro regime) have in the foreign affairs commission of the U.S. Congress.
Despite this list of challenges, the United States should make an effort to not squander the $1.2 billion worth of business U.S. firms lose every year by not engaging in the Cuban economy. Profits go to Canadian, Asian, Latin American, and European firms involved in Cuba’s socialism modernization and market liberalization.
“Creating economic space therefore creates freedom. At the same time, engagement does not mean ending support for human rights or political liberalization. Rather it provides a more credible context for criticism,” said a Financial Times editorial. Lifting the embargo is a good deal for both countries, as it will allow the U.S. to profit from foreign investments, while forcing the Cuban government to focus on solving its internal issues.
Cristobal Vasquez is the economic and finance reporter at World Policy Journal.