Cuba’s Primed Post-Sanctions Postulation

The 60-year US embargo against Cuba featured in Florida elections as bipartisan groups called for a rethink of the approach in view of post-2008 reforms introduced by President Raul Castro which were explored in a lengthy Brookings Institution study in partnership with a Havana think tank. It noted “important progress” since new policies were formalized in 2011 including small-business opening and internet access, bilateral debt renegotiation, and pilot state enterprise restructuring to allow price and operating flexibility. This year the foreign investment code was revamped and currency and monetary adjustment joined the agenda, but the economy has been “in stagnation” for over two decades with annual average growth under 2 percent. Capital formation was 10 percent of GDP, half the hemispheric average, as a chronic housing shortage was worsened by non-functioning financial markets. The 2011 guidelines detail 300 steps to update the development model which still prioritize socialist planning, according to the authors. They point out that exports to Latin American neighbors beyond the scope of Washington sanctions are also low and that multinational firms’ local presence is minimal. Less rigid labor rules could spur a diaspora Cuban influx, and even informal engagement with the Bretton Woods institutions could inject confidence and transparency. The reform process remain at “early stage” and has yet to validate profit and industry-specific supervision or mirror China-Vietnam “socialist market” precedents. Agriculture in particular suffers from undue restrictions which prevent food self-sufficiency and export capacity. Currently 500,000 citizens work in private micro-enterprise, one quarter the initial goal, but lack of credit and heavy taxes are outstanding obstacles. In China and Vietnam bureaucracy is not as intrusive and decisions are decentralized, and Cuba’s free trade zone regime around Mariel differs from nearby practice as in Costa Rica where FDI is systematically welcome and subject to predictable law-based approvals. The dual currency arrangement with the convertible and normal peso creates “huge distortions” and unification is set for 2016 despite the absence of a roadmap. Loss-making firms would be bankrupt under market exchange rates and the shift must be gradual to avert general economic collapse, the report observes. A devalued level has been introduced in the hotel and sugar sectors, but alternatives could still be considered including dollarization and “big bang” realignment which would allow fiscal support as a cushion. Non-participation in international financial institutions exacerbates potential hard currency crunch, and the island may have to turn to other sources during the transition.

Pension and subsidy cuts have begun and education and health coverage remains comprehensive with capability offered abroad as in the dispatch of medical professionals to combat Africa’s Ebola epidemic. Creditworthiness could be enhanced by resolving unpaid official obligations, and travel and remittances would increase with further Obama Administration liberalization steps. Old Havana will only stay an attractive destination with development protections in place, and President Castro’s intention to retire in 2018 with a “soft landing” may otherwise be subject to hard realities without an economic revolutionary march, Brookings concludes.