19 December 2014

Three things to expect from lifting the trade embargo on Cuba


Economic development

As Venezuela, one of Cuba’s biggest allies and economic benefactors, struggles under continually falling oil prices, it is clear that Cuba’s agreement to a US trade deal was motivated primarily by economic pressure on Raul Castro’s regime. The embargo has cost the Cuban economy an estimated $1.1 trillion over the 54 years and has severely hampered development – there are 1.21 million landlines for a population of 11.25 million.

However, change will not happen overnight. Clifford Shults, a Loyola University Chicago business professor, compares Cuba’s situation to that of Vietnam’s in the 70s. Given its huge portfolio of state-run companies with close ties to the military and its entrenched bureaucracy, Cuba currently lacks the infrastructure to launch straight into full-on free-market capitalism. Perhaps, like Vietnam and China, it will migrate to a hybrid system (nominally Communist but that practises capitalism to a large extent) that allows Cuba to integrate more into the global economy first.

Additionally, the American embargo is not the only cause of Cuba’s economic problems, so we cannot expect everything to be solved by its removal alone. Cuba already trades with several countries, including some, like Brazil, Spain and Italy, which would consider themselves US allies – the cause of the island’s poverty lies within the country itself. Most tourist services and imported products in Cuba are priced in an artificial currency created by the regime: the so-called “convertible peso,” or CUC, which is pegged 1:1 to the US dollar. Local products use the regular peso, called the CUP, which is 1/25 the value of the tourist version. Though the government announced last year that it would scrap the CUC altogether, the process is moving slowly. Lifting the embargo will undoubtedly increase the number of tourists, but won’t automatically improve the economic situation of the local Cubans. Thus whilst the Castro dynasty remains, it seems unlikely there will be any dramatic changes.

Political reforms

Bigger changes could be seen politically though. The White House Press Office released a statement admitting that the decades of US isolation have “failed to accomplish our enduring objective of promoting the emergence of a democratic, prosperous, and stable [regime]”. (There is even the possibility that the embargo helped keep the Castro regime remain in power by providing a scapegoat for its political and economic failures.) In Taiwan and South Korea, decades of export-led growth created strong middle classes that demanded political rights to match their economic ones, and there is hope that Cuba will follow their model. While China is a strong counter example, this could still be the first step in creating a more accountable ruling class. The White House also commented that they would continue to provide support for increased human rights, “empowering civil society” and promoting the independence of the Cuban people so they do not need to rely on the Cuban state.

Changing relations with the US

American companies will, after 54 years, be allowed to export products such as computers, smartphones, and software to Cuba as well as basic goods like construction material and agricultural equipment to help Cuban companies and farmers to increase agricultural efficiency. But the US shouldn’t get too excited. They are the last ones on the scene – many other countries have already made large investments in Cuba, such as the recent deep-sea cable hooking the island up to more reliable internet access from Spanish telecoms giant Telefonica.

The acceptance of policy failure on this scale will surely have political repercussions in the US, particularly for the Democrats. Cuban-Americans have traditionally voted Republican,  but over the last decade  have shifted towards Democrats. It is not clear whether the new trade deal will accelerate this shift or reverse it. Given that Cuban-Americans represent a significant number of voters in a swing state (Florida), this could play an important role in the 2016 presidential election.

Having diplomatic relations with Cuba will additionally open up the US to more regional and international partners, but both Americans and Cubans should be cautious. The embargo didn’t work and needed to be dropped, but it will be a while before we see any dramatic economic improvements to life in Cuba.