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New U.S. Sanctions on Cuba Have a Silver Lining

Outside pressure could end up driving needed economic reforms.

Cuban socialism has survived exploding cigarsKeystone counterrevolutionaries and the collapse of the Soviet Union. So however much pain the Trump administration means to exact upon the island economy through a new bout of sanctions, the imminent demise of the autocrats in Havana seems unlikely.

No doubt, the recent U.S.-imposed measures, including a ban on cruises, restrictions on remittances and a green light for aggrieved former Cuban businesses to sue for reparations over seized property, will hurt. Tourism, Cuba’s second biggest source of foreign exchange, is expected to drop 8.5% this year, with international arrivals down 12% in the first quarter of 2019. The growth in licensed businesses is at a decade low.

That’s a blow for a country already reeling from the crisis in Venezuela, which has provided cut-rate oil that would otherwise eat up even more foreign exchange. Yet if Havana takes the right cues, the U.S.-enhanced crisis could spur a makeover that the island economy sorely needs to unleash growth and shed decades of deadbeat dirigisme.

True, Cuba’s autocratic gerontocracy is practiced at shuffling furniture and calling it renovation. Yet grounds exist for hope. The end of Soviet largesse in the early 1990s, which sent Cuban gross domestic tumbling by a third, led Fidel Castro to grant more autonomy to government enterprise, encourage self-employment and slash lavish state subsidies. The problem is, once Cuba started to recover, that window of disruptive liberty during the so-called Special Period was closed.

Raul Castro carried on the tradition with a decade of reform that promoted decentralization while retaining control of the command economy. Now President Miguel Diaz-Canel has his own emergency to manage, and his first instincts were to look in the rearview with a call to “strengthen the socialist state enterprise, which is our biggest productive force.” He has granted an increase of state sector wages and vowed to introduce some 22 unspecified measures to bolster government enterprise.

Cuba arguably is much better placed to manage the current downturn. Its emerging private sector in tourism has shown vibrant growth. Foreign investment has gained a foothold, thanks in part to new regulations. Domestic oil production has tripled since 1989, so slashing by half Cuba’s nearly total dependence on imported Venezuelan crude, reported economist Pavel Vidal, in a first quarter assessment for Cuba Standard.

Banking is on more solid footing, communications have improved and a steady flow of remittances irrigates the economy. Constitutional reforms have lifted the taboo on non-state property, putting more businesses and land into private hands. “Getting private property into the constitution was a huge achievement,” said William LeoGrande, a Cuba scholar at American University. “A small degree of political pressure from society is also emerging, with the private sector quietly raising objections to restraints and getting the government to partially respond to their demands.”

And while Chinese aid cannot match the old Soviet indulgences, Beijing helpfully has restructured or forgiven some $6 billion in Cuban debt, easing the pressure on Havana’s external obligations. Yet solving the current economic crisis demands much more. “If this were a moderate crisis, gradualism  might be enough, but the situation now is much more dire,” said Vidal, who teaches at Pontificia Universidad Javeriana in Cali, Colombia. “Unfortunately, the measures taken till now have not achieved a transformation capable of sustaining economic growth.”

Cuba can do little about Venezuela’s collapse or tighter U.S. sanctions. “But the impact of these shocks has been heightened by Cuba’s own weaknesses,” argues Ricardo Torres, an economist at the University of Havana. “If we had done our job years ago we would be in much stronger position by now. Cuba should focus on domestic policies.”

Two domestic measures Cuba could embrace are the restructuring of the bloated state sector and a monetary reform to get rid of the dual currency system – one dollar-pegged peso for Cubans, another overvalued peso for public sector business – which distorts prices and props up inefficient state companies.  Both reforms require courage and cash: up to a third of state sector companies would probably fold because they are not profitable, said Vidal.

The best way to soften the inevitable blow of monetary reform would be to expand the private sector. “If you rationalize the state sector and lay off tens of thousands, you need to find them jobs,” says LeoGrande. “A vibrant private sector is a survival tool.”

First, however, the government has to make up its mind it wants one.  Cuba has gone part of the way, licensing tens of thousands of private business, including restaurants, stores and inns, and allowed foreign providers such as European hotel operators and Airbnb. But it virtually halted new licenses last year.  The number of authorized businesses in Cuba fell to 584,477 in the first quarter, down 1.5 percent from last August,  Cuba Standard reported.

Red tape still waylays entrepreneurs. Transportation providers must file 26 separate documents to secure a license. Other private services require 29. Businesses taxes can run to 50%, with minimal deductions. Bosses pay a labor tax on each employee, so discouraging hiring. Retailers must buy their wares from state suppliers, often at a premium. A thicket of 22 government agencies oversee business affairs. No wonder private sector tourist revenues have tumbled from $706 million in 2017 to $474 million in 2018, with more pain in store this year, Vidal reckons.

Cubans are not wrong to blame external conditions for part of their woes. And never mind the contradiction that the weight of U.S. sanctions will fall heaviest not on the Cuban state but the struggling private sector, exactly the folks one would think Yankee capitalists want to encourage. But Cuba has its own predators to blame.

Ride-hailing and Airbnb may not be what Cuba’s rebels had in mind when they claimed the Pearl of the Antilles for socialism. Given the chance, however, the island’s new enterprising disruptors offer a chance to save the revolution from itself.


Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.




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