Easing of US Restrictions Promises Better Lives for Cubans

Beginning with a trickle and then growing rapidly, a steady flow of money into Cuba will be the first tangible effect of normalized US-Cuban relations. With more cash reaching the island’s impoverished citizens comes hope for a better life, something all Cubans desperately want.

Cubans typically earn only $20 per month so that tips from visitors rank just below remittances as a financial lifeline.

Like the communists in China, the overriding objective of Cuba’s communist party is retaining power. But unlike the Chinese who have concluded that higher living standards derived from economic freedom is the recipe for preserving one party rule, Cuba’s leaders haven’t made that determination.

“Cuba’s communists are going through an identity crisis, not knowing what they want,” says John Kavulich of the US-Cuba Trade and Economic Council.  He says the ruling party views itself as still under US attack and fears the income inequality that would result from a freer market.

Kavulich says it was economic desperation that led Raul Castro to agree to the normalization with the US that was announced in mid-December. Cuba, he says, is essentially bankrupt with huge debts that it can’t pay. With the collapse of oil prices, Venezuela has cut back on transfers, aggravating Cuba’s financial distress.

While US companies can now sell to Cuba, the ban on financing for Cuban importers remains. Most business transactions will be cash only, a significant impediment particularly to US food and agricultural firms eager to expand in the Cuban market.

Trade lawyer Robert Muse doubts that congress will repeal the 55-year-old trade embargo this year. He concedes that President Obama has wide authority to use executive action to resume trade and travel but says the ban on financing is a huge constraint. 

Kavulich, a frequent visitor to Havana, believes  “Cuba will allow in only what it thinks it can control.”  Permitting travel and lifting of the ban on credit card use are positive moves but the island is not being thrown open to US trade and investment. US Visitors still have to obtain visas to enter Cuba and normal tourism is still banned under terms of the embargo that only congress can lift. Havana has a limited tourist infrastructure with few restaurants and hotels that meet western standards.

Before there can be widespread investment American firms have $5 billion of outstanding claims that have to be resolved.

Since Raul Castro succeeded his brother Fidel as president in 2008 Cuba has initiated modest economic reforms.  Cubans can now buy and sell their cars, homes and apartments. During a visit to Havana this month I was surprised to see occasional “for sale” and “for rent” signs.  Small-scale entrepreneurship is beginning to take hold.  

Rental apartments in Old Town Havana

While the charm of once grand but decaying buildings, 1950’s automobiles, the absence of advertising and US-style fast food may be compelling, prospective visitors should scale back their expectations. Internet service is spotty. English-language newspapers aren’t available. Those vintage cars can’t be exported.

What visitors will find is a vibrant Cuban culture, great music, friendly people and a receptivity to Americans.

Marco Rubio, the Cuban-American senator from Florida, believes the loosening of  US travel and trade restrictions creates “a windfall for the Castro regime that will be used to fund its repression against Cubans.”  Short-term there may be truth in his assertion but long-term Rubio is certainly wrong.

Like people everywhere Cubans crave freedom and that quest will not endear them to the Cuban communist party. Equally Cubans value their independence and are proud of their revolution’s accomplishments.    

But the risks of normalization rest primarily with Cuba’s rulers. Their country is changing and the lifting of US trade restrictions deprives the communists of a powerful weapon, that the embargo is the cause of all of Cuba’s problems.   

A Look at Cuba Before Normalization Takes Hold

HAVANA, CUBA: In light of the historic thaw in US Cuban relations announced on December 17^th, three items stand out from a four-day visit to Havana:  1/ Cuba’s economy is a disaster in desperate need of reform. 2/ The communist party retains its tight grip and political change is a long way off. 3/It is likely to be months before normalized bi-lateral relations produce real change.

The Economy

 Havana is a ruin, a surreal time warp, exemplified by ancient cars and trucks from before the 1959 revolution. For 50 years there’s been no imports of cars for private use.  Houses and apartment buildings are run down with their occupants not having cash for needed repairs. 

Amazingly, most Cubans subsist on salaries of $20 per month.  Those with more are communist bureaucrats, workers in tourism with access to hard currency, and those receiving remittances from abroad.

Cuba’s economy is dead in the water with barely any advance in gdp. The country is nearly bankrupt with no access to credit. There are frequent power outages. Unemployment is kept low because jobs are provided in a bloated and inefficient public sector where four out of five Cubans work. Inflation is suppressed. There are chronic shortages. Basic foodstuffs are rationed. Ninety percent of Cubans don’t own a car.

Despite the negatives, reforms unveiled in 2011 by President Raul Castro have allowed a small but growing private sector to take hold. The reforms permit Cubans to buy and sell their apartments, 84% of which are privately owned. But while an incipient real estate market exists, it is stymied by an absence of mortgage credit.

Similarly, Cubans can buy and sell their privately owned vehicles. But contrary to expectations liberalization has boosted car prices. Unbelievably, the asking price on the refurbished 1956 Chevrolet pictured below is well over $100,000. Classic cars can’t be exported, meaning that US-based collectors won’t be able to import these treasures anytime soon.

Restored 1956 Chevrolet on Havana’s Prado

Cuba’s economy is further distorted by there being two currencies, both of which circulate. The government says unifying the exchange rate is a priority but that is unlikely to occur until Cuba obtains access to hard currency. Look for early moves for Havana to rejoin the International Monetary Fund.

A Closed Political System

Cuba remains a one-party communist state with little prospect of liberalization. The media is tightly controlled and state-owned newspapers are mostly propaganda. English language newspapers from abroad are banned.

This past week Cuba released more of the 53 political prisoners it promised to liberate as part of the December accord between presidents Obama and Castro. Thirty-six are now free, a move the White House calls “a tangible sign that Cuba is keeping its word.”

As part of the 2011 reforms Cubans can have cell phones, stay in hotels previously reserved for tourists, use the internet, and travel abroad. But because most people don’t have disposable income, the new freedoms mainly help the better off.

Contrary to what many outsiders want to believe, Fidel, his brother Raul and the revolution remain popular, although independent surveys don’t exist. Cubans are proud of their country’s achievements in education and health care, which is free to all.

Change from Normalization May be Slow

 Every Cuban of the two-dozen or so I spoke with favors normalization. Some were deeply emotional, saying they can’t wait for Americans to arrive in significant numbers. The lives of ordinary people are bound to improve with the lifting of the embargo.

But while Cubans and Americans are eager for visits, important restrictions remain. Despite President Obama’s announcement, it is still not possible to use US-issued credit cards in Cuba. Likewise getting email on dial up internet servers can be difficult.  I was unable to access my Google and Yahoo email accounts, getting instead a prompt saying, “access is denied in the country you’re in.” There is disagreement whether these measures can be lifted by executive order or must await congressional action.

Bob Corker, the new chairman of the Senate Foreign Relations Committee, said last week that the embargo has been ineffective, a clear sign that he may favor its repeal. Both the Chamber of Commerce and leading agricultural organizations favor normalization. Congressional hearings are already planned and a top state department official is visiting Havana this month to advance the normalization process.

A Cuban businessman, who declines being identified, told me that Cuba urgently requires reform.  “We’ve created a system,” he said, “that we can’t control.”  The only way for us to have any prospect of economic improvement, he continued, is to open up and build a market economy.

Last May Washington’s Peterson Institute for International Economics released a study on the Cuban economy.  In it researcher Gary Hufbauer concluded “that once the tectonic plates shift” there will clear benefits for both Cuba and the United States.  The tectonic plates have shifted and from my perspective Hufbauer is spot on.#

Barry D. Wood writes often about economic transitions. He last visited Cuba 11 years ago. This piece appeared first on market watch.com.

Cuba's Dual Currency System Complicates Needed Reforms

Che Guevara, the global icon whose revolutionary image adorns millions of tee shirts, was governor of the Cuban central bank from 1959 to 1961. While stopping short of his fanciful notion of abolishing money, the Argentine-born communist did nationalize all farms and industries, a measure that bedevils the island 55 years later.

Cuba’s economy is a wreck. Most of the island’s 13 million inhabitants are impoverished, earning the equivalent of $20 a month. Food is in short supply with rice, beans and coffee rationed. Meat is a rarity for many. Cuba is broke, with foreign debts it is unable to repay.

Living standards according to researchers at Washington’s Brookings Institution have stagnated for two decades.  Even Fidel Castro admits the failure of socialism, declaring in 2010, “the Cuban model doesn’t even work for us any more.”

The 2014 Index of Economic Freedom from the Wall Street Journal and Heritage Foundation ranks Cuba as second to last in its assessment of 178 countries.  The three lowest ranked countries are Zimbabwe, Cuba and North Korea.

When the Soviet Union collapsed in 1991 Cuba lost its financial benefactor.  Desperate for foreign exchange, Fidel Castro opened Cuba to tourism, an industry he had denounced as parasitic during the previous three decades. Sun-seeking European, Latin American and Canadian tourists flocked to the island bringing with them the hard currency Cuba so badly needed.  Cuba today couldn’t survive without tourism.

In 1994 Cuba unveiled a two-tier currency system that remains operational. Tourists are compelled to convert their money at the artificial rate of one dollar to one convertible peso. Ordinary Cubans meanwhile use the national peso whose exchange rate is not 1:1 but a more realistic 25:1.  Two legal currencies, the convertible peso and national peso, freely circulate.

The dual currency system has led to immense distortions. Since remittances from abroad total $2 billion annually, if you’re getting dollars from relatives in Miami you can live well because that cash becomes convertible pesos. In a form of economic apartheid, shops with the scarce consumer goods that people want accept only convertible pesos.

As was the case in communist Eastern Europe, those with access to foreign currency—hotel maids, bellboys, drivers-- do well while the masses suffer with national pesos. A common complaint is the absurdity of being paid in national pesos while needing convertible pesos to buy goods you need.

During a seven-day visit to Cuba some years back, I experienced the anomalies of the two-currency system. Using public transport to travel the ten miles from downtown Havana to Ernest Hemingway’s home in San Francisco de Paula, I paid the bus fare in national pesos, less than one US cent.  At the Hemingway museum the $3 entrance fee had to be paid in convertible pesos.  Inside staff furtively cajoled visitors to buy with dollars Che Guevara commemorative coins. Later dining in a private home permitted to serve tourists, the owner disclosed that he earned more in one night than he did in a month in his job as a veterinarian.   

Not surprisingly the dual currency system is deeply unpopular and Raul Castro, who succeeded his brother in 2006, promises to phase it out. But how can this be done without triggering social unrest? No one knows what the Cuban peso is really worth.

Two bicyclists I met on the Havana waterfront who had grown up in communist East Germany had an insightful perspective on the Cuban revolution.  They had traveled three weeks cycling the entire circumference of the island.  They were shocked at the poverty they witnessed but said that everywhere people retained pride in the long ago revolution. Cubans, they said, were justifiably proud of their achievements in health care and education.

I think the normalization of US Cuban relations poses significant risks for the island’s communist rulers.  For decades they pointed to the US economic embargo as the reason living standards remain low. That argument will fall away and the authorities will be left with the dysfunctional system they created.

Can Raul Castro manage the kinds of market-based reforms essential for Cuban economic growth? His record thus far suggests he can’t.  Since taking power he has zigged and zagged, trying one thing, then another, never following through.

In 2011 Raul Castro said half a million workers would be dismissed from money losing state enterprises. It hasn’t happened. Cubans can now own cell phones and use the tourist hotels that were previously off limits. So what, if the police state apparatus remains intact?  The media is still tightly controlled.  Promised moves on property rights and private business have been tentative.

 Cuba is a big deal in the Caribbean and Latin America. With 11 million people and a landmass greater than the other Caribbean islands combined, Cuba could be a regional powerhouse.

As Canadian Prime Minister Stephen Harper observes, normalization of US Cuban relations is long overdue. Fundamental change at last appears to be underway but Cuba’s future is very uncertain.