A Political Economy Approach to the Cuban Embargo

The Cuban embargo is a highly politicized and controversial topic that leads to a great deal of misinformation by those who want to keep it and by those who want to lift it.  At the same time there are legitimate issues associated with both positions that should be considered by any observer or policy maker who wants to make an informed decision on whether to pursue its lifting or its retention.  Taking advantage of a paper now available on the web, I want to highlight important substantive features worth recognizing in serious discussions of the topic. All embargoes are restrictions on economic activity for political or policy purposes imposed by one country on another in a unilateral fashion.  It is not, nor is it supposed to be a friendly action.  The Cuban one, which has lasted for over 50 years, is no exception.   Nonetheless, a significant shift in its avowed purpose took place in the early 1990’s.  From primarily signaling displeasure with expropriation of US property and national security concerns, it switched to primarily signaling support for democracy although without reneging on some of the earlier objectives. In addition to its duration the Cuban embargo is also unique due to the extent of the restrictions on economic activities that it entails.  It restricts trade in goods and services with the exception of food and medicines.  It has done so since its initial imposition by the Kennedy administration in 1962.  It also restricts the flow of persons across borders, including tourism and migration, and the flow of capital across borders in the form of trade credit, remittances, FDI and grants and loans from International Financial Intermediaries (IFI’s). These restrictions on the flow of persons and capital, however, went through a major transformation in the 1990’s that still exist for the most part.  The first transformation took place with respect to the flows of persons.  Cuba and The US signed in 1994 an important Migration Accord that allows a minimum of 20,000 Cubans to migrate permanently and legally to the US every year.  In ten years there will be over 600,000 Cubans in the US as a result of the Accord if only the minimum number of visas had been granted and more than half of those are already here.  This minimum under the Accord allowed more migrants per capita (0.18) from Cuba than from Mexico (.17), for example, in 2006.  The latter country is the number one source of legal permanent migrants to the US in absolute terms. A related issue is the liberalization of travel and remittances to Cuba by Cuban-Americans.  The Obama administration has lifted all restrictions on both.  Hence, with respect to the embargo restrictions on the flows of persons there has been a major lifting of the embargo.  They have been lifted for Cubans from the island and for Cuban-Americans in the US.   What remains are restrictions on US citizens who are not Cuban-Americans.  Even those have been considerably relaxed under the Obama administration. For instance, the average yearly rate of growth of US visitors to the island between 2007 and 2012 was 12.02% for those who are not Cuban-American and 11.41% for those who are. Restrictions on trade and on the flows of capital also underwent a major transformation in the 1990’s, but in the opposite direction. They were increased, tightened and codified into law with the passage of the Helms-Burton Act in 1996 as a result of Cuba’s downing of two unarmed planes, which led to four deaths.  Interestingly, the additional restrictions in the law on labor flows (Title I, Section 112) were included as”...the sense of Congress…” but not codified into law.  The increased sanctions and penalties involved in title III and IV left room for discretion by Presidents, who have been waiving Title III every six months since 1996 and rarely applying Title IV.  The most binding restrictions are in title I, which include, for example, the requirement of all US directors at IFI’s to vote against the admission of Cuba as a member until a democratically elected government of Cuba is in power. Undoing this part of the embargo will be the more difficult one as it would require substantial amendments to the law approved by Congress.  Yet at this time, it makes sense to consider whether or not this should happen for two reasons.  The recent informal softening of parts of the embargo by the Obama administration, mentioned above, as well as resumption of talks on implementation as part of the Migration Accord is one.  Cuba’s recent reforms on migration and the economy highly publicized in the US and the international press over the last year is another. Modifications are more likely to happen with respect to trade on goods and services than with respect to financial flows.  Lobbying by those who would benefit from the lifting in the form of additional exports and those who might benefit from additional imports could have substantial effects on obtaining the necessary votes.  The situation is more complicated with respect to capital flows in general because Cuba has repeatedly failed to pay its financial debts in the past.  Nonetheless, Cuba has embarked on a recent course of arriving at individual agreements with selected creditors such as Japan, Germany and Russia, which suggests that a bargaining approach on the financial aspects might work. Considering the recent fiasco brought on by a democratically elected government in Egypt violating human rights or civil liberties, it might be feasible to attract support in the US for a strategy that promotes verifiable human rights guarantees in exchange for the lifting of embargo provisions on capital flows rather than insisting on a democratically elected government as required by Helms-Burton.  The latter type of government could subsequently proceed to violate human rights using its election as a sorry excuse. This unhappy practice seems to have become common in many areas of the world, including some countries in Latin America dear to Cuba, i.e., Venezuela. If these human rights guarantees were to include property rights, as they should in any sensible definition of the term human rights, as well as substantial debt forgiveness as agreements with the three debtors mentioned above included, the possibilities of a successful bargain increase substantially.  The former addresses fundamental legitimate issues, including associated legal issues, on the part of those who oppose the lifting in the US as well as some dissidents in Cuba; the latter addresses fundamental legitimate issues that are of benefit to Cuba and that have been addressed by other creditor countries. Needless to say, the above possibilities are just that and face obstacles and difficulties on both sides.  In the US politicians can try to use selectively aspects of these issues to promote their election campaigns opposing the lifting and these issues may be more or less successful in that role.  On Cuba’s side some beneficiaries of the now ancient revolutionary regime have vested interest in blocking a lifting of the embargo.  While a dramatic event such as downing unarmed airplanes seems unlikely, the shipping of arms to North Korea, even if obsolescent, is a reminder of other less dramatic possibilities.