Why Opening Up To Cuba Is A Good Thing, For Them And Us

REUTERS/Carlos Barria

Kent A. Jones Professor, Babson College
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During his historic trip to Havana, President Obama is attempting to continue the normalization of U.S.-Cuba relations. He still faces a lot of work. But Cuba has even more to do.

Since December 2014 Obama has chipped away at the restrictions on U.S.-Cuba relations with executive orders that get around the Trade Embargo enacted by Congress, which only it can repeal. Meanwhile a bipartisan effort has set out to repeal the embargo itself.

Ending the embargo still represents the most effective way forward.  It has been an unmitigated failure, unable to topple Castro or isolate his Communist dictatorship. Meanwhile it has provided the Castro’s with a scapegoat for their disastrous economic policies.

Economists estimate that post-embargo U.S. trade with Cuba could be proportionate to that of Canada and Mexico. But let’s be realistic. An end to the embargo, when it comes, will not lead immediately to an El Dorado of booming trade and investment. U.S.-Cuba merchandise trade actually declined in 2015, although U.S. tourism in Cuba increased. This is because the Cuban regime has continued to cling desperately to its “revolutionary” planned economy.

Changing a communist country into a market economy is difficult. One post-Soviet finance minister compared it to bringing an aquarium back to life after communist policies had heated its contents to a boil. The temperature came back down, but in the meantime nothing survived.

The Cuban economy thus remains woefully inefficient, corrupt, and lacking in market incentives, despite recent attempts at reforms. About 70 percent of the Cuban economy is in the hands of state-owned companies. Reforms in agriculture and its ridiculous central planning should get top priority. Introducing market incentives in the rest of the economy would improve Cuba’s attractiveness for foreign investment.

Spain and Canada have in fact been investing in Cuba, especially in hotel facilities and mining. It has been possible for these investments to make money, based on good relations with the government. But it is still risky.

Most investment opportunities in Cuba still require a joint venture with the government, which also insists on controlling the employment of Cuban employees involved in them. In the absence of an independent judiciary and arbitration, protection against arbitrary expropriation and even arrest of foreign executives is still a major concern.

There is a small but growing entrepreneurial sector that would also theoretically be open to US investment and trade. However, small businesses are subject to taxes of up to 50 percent of profits, along with a distorting dual exchange rate system. Inputs of materials and supplies are often unavailable, forcing them to resort to the black market.

During his upcoming visit President Obama therefore needs to push hard for more fundamental economic reforms, especially among the younger generation of Cuban party officials. The Castro era is ending; post-Castro Cuba is close at hand.

Yet for now, a grass-roots “velvet revolution” among the Cuban population does not appear to be in the offing. The Castros have secured the loyalty of party elites with comfortable jobs and living conditions, who have an incentive to keep things the way they are. For the rest of Cuba, open protest will still land you in jail.

Many others who might push for change are leaving: emigration to the U.S. has spiked sharply since Obama’s December 2014 announcement. Discouraged over prospects for true reform at home, many Cubans have decided to leave now, anticipating an end to generous U.S. rules on Cuban refugees.

In the meantime the Cuban economy with its half-baked reforms is not sustainable. It cannot feed itself, finance its external debt and suffer the continuing brain drain of U.S.-bound refugees. The most subversive practical measure that the U.S. can take under these circumstances is to end the embargo.

This may allow a reformer along the lines of a Cuban Gorbachev to emerge. Otherwise, a taste of forbidden fruits after the embargo may cause popular support for more economic and democratic reforms to gain resonance with younger Communist party officials.  Economic openness can let the light in. With internal reforms, trade, investment and economic growth can then begin in earnest.”