What If America Engaged With Cuba?

Summary

The logic and practical impact of U.S. policy toward Cuba are the focus of growing debate. As Americans consider ways to increase contact with Cuba and weigh the effects of different types of engagement, this paper examines the modest economic reforms that Cuba implemented in 1993 and 1994, describes the new economic sector that resulted from these reforms, and describes how two measures – eliminating the travel ban and allowing trade and investment in the food and agricultural sector – would affect Cubans involved in the market-based sector of their economy.

Steady Policy, Meager Results

American policy toward Cuba has remained consistent during and since the Cold War. None of the new factors of the 1990’s – the end of the Soviet Union, the disappearance of Soviet subsidies, Cuba’s economic crisis followed by economic reform, the end of Cuba’s aid to insurgents in the Americas, the Pope’s exhortation for the world to open up to Cuba – have changed the 1960’s-vintage core of the policy, which seeks to isolate Cuba through a trade embargo, a ban on U.S. citizen travel, and by withholding full diplomatic relations. Rather, Washington reaffirmed the essence of this approach by enacting new laws in 1992 and 1996 to tighten economic sanctions. (Other elements of the policy allow a flow of resources to Cuba in the form of humanitarian donations, family remittances, and payments for direct phone service.)

The policy’s central Cold War purposes – forcing Moscow to bankroll Havana and punishing Cuba for its intervention abroad – are no longer relevant. While the policy effectively voices U.S. opposition to Cuba’s form of government and its human rights practices, it has no significant support in Cuba (the Church and dissidents oppose it) or in the international community, and its Goliath-vs.-David quality has vastly increased the Cuban government’s notoriety, if not its political support. It has not changed Cuba’s form of government or its conduct. It has added to Cuba’s economic troubles but not provoked a political crisis.

This policy carries costs: it denies American citizens freedom to travel and trade with Cuba. Sanctions against third countries cause friction with major trading partners. Limitations on bilateral relations prevent U.S. officials even from exploring potential ways to work with Cuba to combat international drug trafficking.

Re-examination

As Cuba’s socialist government proceeds into its fifth decade, Americans are showing increasing signs of inconformity with U.S. policy. A May 1999 Gallup poll found that even as three in four Americans view Cuba’s government unfavorably, 51 percent want the trade embargo dropped and 71 percent – the highest level in 25 years of polling – want diplomatic relations re-established.

Led by Senator John Warner of Virginia, twenty-four U.S. Senators last year signed a letter asking President Clinton to name a bipartisan commission to review Cuba policy. (Most who signed were Republican, and many of these had voted in favor of the 1992 and 1996 embargo-tightening laws.) Farmers and other major U.S. exporters are questioning the embargo as never before. A Council on Foreign Relations task force recommended significant policy changes in January 1999 and continues to examine the issue.

The Cuba debate is frequently framed in stark pro- or anti-embargo terms. However, between the alternatives of maintaining current policy and lifting all sanctions all at once, there lie a full spectrum of policy options that would allow Americans to engage in myriad ways with Cuban citizens and institutions.

Cuba’s New Economy

This paper sketches the likely impact of only two of these options: lifting the ban on U.S. citizen travel to Cuba, and permitting food and agricultural commerce. Both measures would have an impact on Cuba’s “new economy,” the market-based sector that has grown in response to the limited economic reforms of 1993 and 1994. These reforms were adopted after Cuba lost economic ties to the Soviet bloc that had provided a subsidy equal to about one fourth of Cuba’s GDP and accounted for three fourths of its trade relationships.

Small enterprise, or self-employment, was legalized in 1993 in selected occupations. About 150,000 Cubans, or three percent of the labor force, work as licensed enterpreneurs. About a third are in small restaurants and lunch stands, while others constitute a small service economy — taxi drivers, messengers, repairmen, seamstresses. As these entrepreneurs cope with tax and regulatory burdens that can be heavy and at times arbitrarily applied, they have an important impact. They have created a new supply of services, they brought commerce back to streets that were devoid of it for three decades, and they have allowed tens of thousands of Cubans to learn the skills of small enterprise. They relish their autonomy and want more of it. In a survey conducted by the author last year, their average income was three and one half times the average Cuban salary.

In agriculture, three reforms were made during this period. About two thirds of the state’s farmlands were redistributed by granting free perpetual leases to individual farmers and new cooperatives that have, at least on paper, managerial autonomy. All producers – state farms, large and small cooperatives, private farmers working alone or as part of a coopertative – were permitted, after they had delivered their contracted amounts to the state, to sell their surplus produce on the open market. Farmers’ markets were created to bring this surplus production to consumers. The result is that in addition to the state’s food distribution, a second legal source of food supply has been created, based on market incentives instead of state planning. About four dozen of these markets operate in Havana.

Foreign investment was also encouraged after three decades where Soviet bloc projects were welcomed but joint ventures with capitalist corporations were shunned. Cuban officials say about 360 joint ventures of varying sizes operate today, employing about 60,000 Cubans. While the amount of foreign capital invested is low by regional standards, this has helped to revive tourism, oil, gas, and mineral exploration, telecommunications, and other sectors. Interviews with workers indicate that in many cases their incomes are far above the earnings of Cubans in the state sector. Many speak of superior “conditions,” referring to modern equipment and training.

In addition to these changes, Cuba legalized the circulation of foreign currency in 1993 (thereby encouraging family remittances from Cubans abroad), downsized state agencies and enterprises, and began to cut subsidies to the state sector.

Taken together, these reforms have brought significant change to Cuba’s economy. They have not transformed it; the government’s commitment to socialism remains strong, and the state’s hand in the economy is dominant. But just as Cuba permits two currencies to circulate side by side, there are also two distinct kinds of economic activity. Some Cubans work in the kind of state sector jobs that have existed for forty years, while others are in more dynamic, market-based activities that have only taken hold in the 1990’s. In the small business, incentive-based agriculture, and foreign investment sectors, several changes are clear: compensation is tied to work, Cubans are gaining opportunities to work in market settings, and earnings are higher. Some of these changes are arriving in the state sector too, as state enterprises that earn hard currency (e.g. tobacco, tourism, mining) pay hard currency productivity bonuses to their workers.

A simple way to grasp the impact of these changes on the welfare of workers and their families is to compare monthly salaries to the cost of food in farmers’ markets. The following data are drawn from the author’s field research.

In February 1999, the cost of a market basket containing a pound of rice, a pound of black beans, a pound of pork chops, two pounds of tomatoes, three limes, and a head of garlic was 44.25 pesos in Havana. This would absorb one fifth of the monthly salary of a worker who earns the average Cuban salary of 217 pesos in a state sector job. It would absorb one third of a typical retiree’s pension income, and one tenth of an emergency room physician’s salary. For entrepreneurs and workers who earn all or part of their income in dollars, the market basket would take the following shares of monthly income:

State hotel construction worker 9%

Tourist hotel cleaning woman 8%

Average “cuentapropista” (entrepreneur) 6%

State nickel worker 5%

Varadero beach resort musician 4%

Produce vendor in Havana farmers’ market 4%

Nickel worker in joint venture 3%

Joint venture junior manager 2%

From any capitalist’s point of view, Cuba’s 1993-1994 reforms are a modest first step toward deeper reforms that would spur far greater increases in income and employment. New measures could include allowing entrepreneurs to work in partnerships and small firms; creating wholesale markets where entrepreneurs can buy supplies; refining the tax code to make effective tax rates less regressive; ending the state’s role as sole vendor of agricultural supplies and allowing a competitive market to emerge in this area. Officials in Cuba discuss these and other measures as possibilities, but since late 1995 there has been little expectation that new reforms would be adopted.

Impact of U.S. Policy Change

While Cuban law and regulations surely act as brakes on the growth of the new economy, external factors can stimulate it. Remittances from Cubans abroad are one example. Estimated at $500-$800 million annually, these remittances fuel demand for the goods and services of Cuban entrepreneurs and farmers, and at times provide seed capital for new entrepreneurs.

On May 23, the Clinton Administration issued new regulations that ease restrictions on U.S. academic and research travel, and open the door to possible food and agricultural sales to independent sectors in Cuba. As significant as these steps are, they remain within a policy framework that requires almost all contacts with Cuba to take place by license only. The regulations on agricultural sales have yet to be tested, but their terms and restricted scope – routine commercial credit is disallowed, and sales can only go to independent farmers — may make sales difficult to achieve for American vendors, Cuban buyers, or both.

An alternative is to carve out areas of activity where American citizens would be free to act without the burden of a federal licensing process. One example would be to drop the travel ban, which in fact is a legal prohibition on spending money in Cuba for unlicensed purposes. A second would be to allow trade and investment in the food and agricultural sectors.

What impact would these steps have in Cuba?

Tourism sector growth. In ten years, annual tourist visits to Cuba have increased sixfold, reaching 1.4 million visits in 1998, and growth continues. There is little doubt that hundreds of thousands of Americans would visit Cuba if prohibitions were lifted, leading to short-term revenue growth and long-term expansion of tourism infrastructure. Barring a miracle recovery of the sugar sector or a steep increase in world sugar prices, U.S. travelers would consolidate the travel/tourism sector’s position as Cuba’s top foreign exchange earner. Joint ventures with foreign investors and state enterprises would share in this growth, and large numbers of jobs would be created where Cuban workers would earn, through salaries, tips, and supplemental or bonus payments, far more than the average salary.

Expansion of small enterprise, farmers’ markets, and private farming. It is often said that tourism income goes almost entirely to the Cuban state because tourists go to enclave resorts and have no interaction with Cuban society. Some tourism is clearly of this type. However, while some tourists may remain in enclaves, workers’ earnings do not. For example, the author interviewed a musician at the Superclubs beach resort (a Cuban-Jamaican joint venture) who, like his colleagues, earns a $40 monthly pay supplement, bringing his earnings to a level four times the average salary. In addition to spending his pay in the local economy near Varadero, he sends dollars to his daughter across the island in Santiago.

Simple observations in Havana, Santiago, Pinar del Rio, and other areas show that vast numbers of visitors spend their time not in isolated resorts, but in cities and towns where they explore Cuban history and culture and interact more directly with Cuban citizens. These travelers leave tips, purchase goods from small entrepreneurs, and patronize taxis and private restaurants. Considering that the average Cuban monthly salary is about $11 and a Cuban physician earns about $23, relatively small purchases by foreign travelers can significantly increase the earnings of an entrepreneur, or make the difference between profit and loss.

There are also multiplier effects that connect this spending to parts of the economy that have no direct connection to tourism. When a hotel worker earns $25 in tips, a private restaurant earns a $100 profit from foreign customers, or an artist sells a $100 oil painting, these funds do not stagnate. They become disposable income that buys the goods and services of self-employed plumbers, tutors, repairmen, barbers, food vendors, and seamstresses. These earnings are also spent at farmers’ markets, increasing the income of market vendors and generating demand that permits greater numbers of farmers to profit from farmers’ market sales. (While these markets sell the produce of all producers, the bulk comes from private farmers.)

Stimulus to agriculture. Cuba’s agricultural sector could benefit in several ways from economic relations with the U.S.

Through its state trade agencies, Cuba imported $400 million in grains and nearly $300 million in other agricultural products in 1996, some from exporters in Europe and Asia. By replacing these imports with purchases from the U.S., millions in transportation cost savings would be realized. If passed to farmers and consumers, lower costs would result.

Cuban farmers, from large cooperatives to individual private farms, have a single legal source from which to buy inputs: the state. If Cuba purchased inputs such as equipment, fertilizer or seeds from the U.S. for distribution through this system, it is likely that lower costs and diversification of supply would lead to some level of increased productivity. If Cuba were to change this system, however – a step Cuban officials and analysts say is under consideration – a competitive market to supply farm inputs would better identify and meet farmers’ needs, further increasing productivity.

A full lifting of U.S. economic restrictions on food and agricultural commerce would not necessarily lead to formation of joint ventures with U.S. companies. Only fourteen agricultural joint ventures exist in Cuba today; they range in size from a few acres to a twelve-million-tree citrus farm. Joint ventures in any sector are only formed when the Cuban government has an interest in developing them, and interest has developed relatively slowly in this sector. Should U.S. firms become investors in Cuban operations, they would find potential rewards; but they would also encounter the bureaucratic difficulties faced by other foreign investors, they would find that labor costs are not low, and they would face questions about the kind of corporate citizens they are, and about the ways they would hire, treat, and compensate Cuban workers.

Other impacts. While these measures would stimulate market-based economic activity in Cuba, they would also be beneficial for other reasons.

By ending a ban on food sales, the United States would end an aspect of its policy that draws strong opposition from dissidents and the Church, and that seems to be based on the goal of promoting economic hardship to force political change.

Allowing travel and limited commerce would restore a freedom that American citizens have enjoyed routinely in policies toward other socialist countries. Indeed, in Eastern Europe and the Soviet Union, American citizen travel was permitted not simply to promote the pleasure of tourism, but because broad, unregulated contact with American society was seen as a means to advance American values and influence.

Free travel would greatly expand contact between the American and Cuban peoples as American private citizens travel to Cuba, get to know the society, build personal links, and propose exchanges and similar activities. Americans would be less inhibited in traveling to Cuba, contacts would be more spontaneous, and their breadth would be far greater than under the government licensing program.

Conclusion

Would a limited U.S. opening spur further reform in Cuba? Many observers in and out of Cuba speculate that reduced tensions with the United States would create a political climate in Havana that is more conducive to reform. This is conceivable, but its likelihood is impossible to gauge. Recent experience seems to indicate that internal reasons, not foreign actors’ actions, determine how and when Cuban reforms are implemented or stalled.

Would these measures act to preserve socialist government in Cuba? Clearly, they would generate revenue for the Cuban government and state enterprises, and they would contribute to a healthy diversification of the Cuban economy. To this extent there would be benefits for the Cuban government, in addition to those that would go to the Cuban people.

Yet the question’s premise seems to be that if the U.S. continues to bar economic ties, there is a reasonable probability that an economic crisis would soon threaten the government’s political survival. Leaving aside the issue of whether American interests would be served by an economic calamity in Cuba, this premise is difficult to sustain. Contrary to expectations, Cuba’s political system survived the economic crash of 1992 and 1993, when the sudden loss of Soviet support caused national income to contract by over one third, and acute fuel shortages caused extensive blackouts and a near-stoppage of normal vehicular traffic. While Cuba’s recovery is far from complete, the dire crisis conditions of 1992-1993 have long passed, and a process of adaptation to new economic conditions is underway.

While it is impossible to measure the degree of impact, it is clear that if Americans were free to travel to Cuba and to conduct food and agricultural commerce, there would be an expansion in the areas of Cuba’s economy that have incorporated elements of markets and capitalism. This sector is already beneficial to U.S. interests: it raises incomes and allows Cuban workers to better provide for their families, and it provides experience and training that prepare Cuban workers and managers better to function in market settings. It also decreases the pressures that could make the one remaining Cuban security threat materialize: a wave of uncontrolled migration sparked by widespread economic deprivation.

Hence by this yardstick there seems to be little if any “opportunity cost” in ending restrictions on travel and agricultural trade. In fact, by maintaining sharp limits on contact with American society, current U.S. policy misses opportunities to advance U.S. interests and extend American influence in Cuba.

Peters is vice president of the Lexington Institutue in Arlington.Virginia. A State Department official during the Reagan and Bush Administrations, he publishes studies on the Cuban economy and U.S. policy.