Posted February 14, 2005 by publisher in Cuba Business.
by Christina D. McIntosh and Grant M. Nülle | Mises Institute
“The destiny of this country was decided long ago and nothing and no one can intimidate or threaten us.” Fidel Castro’ remarks last year leave little doubt that he is willing to go any length to preserve the socialist ideology of Cuba’s 1959 revolution.
The latest evidence of Castro’s firm approach to maintaining the island’s revolutionary credo was evident in his Oct. 25, 2004 announcement that officially proscribed circulation of the U.S. dollar on the island. As of Nov. 8, 2004 only “convertible pesos,” equal in value to the dollar by fiat, would be accepted. Additionally, a 10% fee would apply for converting dollars into the local currency after that date.
Although the Cuban decree bars use of the greenback in the Cuban economy, it does not re-criminalize possession of dollars, as was the case just over a decade ago. In fact, existing dollar bank accounts are “fully guaranteed” and their funds can be withdrawn in the form of greenbacks or the local currency at any date without charge. However, new accounts opened in dollars are assessed the commission if the funds are withdrawn as convertible pesos. Moreover, foreign companies operating in Cuba and Cuban state enterprises are no longer be permitted to make dollar bank deposits in cash and must instead use the convertible peso to conduct business. The government also announced that Cuban state companies would have to sell the central bank any hard currency received from exports or domestic sales.
The currency ban affects cash remittances, local businesses, and tourism-all of which comprises most of Cuba’s monetary wealth. An estimated $1bn per annum is sent to Cuba from the U.S. via remittances. The 10% commission fee assessed for converting dollars into the local currency presents Cuban-Americans with the option of either sending dollars and the recipients pocketing .90 pesos for every one dollar, or converting the greenbacks into euros, pounds, Swiss francs or Canadian dollars (all of which can be changed without commission) before remitting cash to their relatives in Cuba.
As with all government decrees, the impetus for Castro’s dollar demotion boils down to money and power. By reasserting centralized control over the economy, compelling Cubans to dump the contemptible U.S. dollar and inviting sounder currencies, the Cuban government is attempting to maximize its accumulation of convertible currencies, enriching government officials and damning ordinary Cubans in the process.
Requiring Cubans to make all purchases in dodgy domestic fiat moneys (explained below) merely affords government officials another opportunity to pocket extra hard currency at the expense of Cuban citizens and take a swipe at the American government. Put simply, Castro’s initial courting and now spurning of the dollar is simply a self-aggrandizing hard currency grab, notwithstanding the spurious socialist lines about equality and solidarity.
Castro’s shameful intent is evident in the manner in which the handover succeeded. Given the large queues of Cubans to exchange dollars for pesos, the country’s central bank authorized an extension of the commission-free period by almost a week. The bank’s president, Francisco Soberon, expressed surprise at the amount of dollars being hoarded by his compatriots. Some Cuba specialists estimate that there is roundabout $500m stashed under Cuban mattresses.
Dollars dollars everywhere
The greenback was legalized 11 years ago for a very specific reason - to acquire the hard currency lost when Cuba’s benefactor, the Soviet Union, collapsed. Moscow and the Eastern bloc provided subsidies, oil and medicines, among other imports, and were the primary markets that Cuba could export its staple commodity, sugar. Desperate for international reserves, Castro was compelled to legalize the dollar in July 1993, permitting Cubans and tourists alike to purchase goods and services from government shops that accepted dollars.
By 2002, the thousands of “dollar shops” netted nearly half of the $5bn of foreign exchange reserves annually accumulated by the island.
Alongside dollar legalization, the ailing Cuban government authorized citizens to establish private business in 157 fields of commerce. Additionally, limited foreign investment was permitted in the tourism sector, via joint ventures, and internal and foreign trade was partially liberalized.
Providentially, the so-called “special period” of modest economic autonomy significantly improved the Cuban people’s meager lot. It is a testament to increased personal control and responsibility as well as limited government that prosperity comes when individuals are afforded the ability to take control over their own lives.
While these allowances of freedom were worth commending, the problem here is the word ‘limited.’ The infringements placed upon these liberties over the past few years have culminated in a virtual dissolution of all such freedoms. In effect, self-employed and self-motivated Cubans could utilize their talents and resources nominally to benefit themselves while the state confiscated a big chunk for itself.
Take for example the most prevalent forms of private enterprise in Cuba, casa particluares, houses that rent out rooms to paying guests, and paladares, restaurants run out of houses. Though entrepreneurial start-up costs can be high and earning revenues takes time, would-be entrepreneurs pay the government a tax up-front monthly, regardless of income. Specific codes for paladares, for instance, stipulate that owners may serve only certain types of foods and can seat no more than a dozen diners. Even room lighting–in terms of wattage- is meticulously policed[ii].
Now, because of the attempt to annihilate incrementally such individual freedoms, no new paladares are allowed to open; moreover, these home-based restaurants will have to endure greater restrictions in what they can serve. Indeed, the gradual tightening of regulations on private enterprise in Cuba has caused the total number of businesses to decline every year since 2001. Castro never regarded these small businesses as anything other than a necessary evil; in fact, Castro’s notion of private enterprise is a privilege granted by him alone.
At least, entrepreneurs say, their extensively regulated and taxed businesses gave them something to keep them busy.
Still irked by the need to grudgingly welcome the greenback and tolerate trappings of a free market, the Cuban government has steadily clawed back control of economic decision-making. Since 2001, American coins have been withdrawn from circulation. In 2003, state companies were relieved of their limited independence, their ability to compete commercially against each other, and the privilege of obtaining credit. Furthermore, hard currency transactions require central bank approval; the Foreign Trade Ministry makes decision on imports and exports; and bureaucrats again determine prices for internally traded goods in Cuba.[iii]
The Cuban government has also moved in recent months to recentralize administration of tourism, the “cash cow” and beacon of a decentralized industry. Most of the relatively liberal members of the tourism ministry were sacked last year and replaced by members of the armed forces. Subsidiaries of one of the main state hotel companies, Horizontes, have been absorbed by the military. Bringing in round about $2m annually, tourism has contributed the most to the economy’s scant prosperity[iv].
Fidel’s brother, Raúl, claims that a “lack of respect” for the government and the Communist Party permeates the tourism industry. A recently inaugurated anti-corruption drive is meant to snuff out behaviors that deviate from the government line, namely entrepreneurial activities, capitalist methods and the apparently repellent notion that individuals are entitled to keep what they earn, rather than involuntarily sharing it with the state. Not only that, but the recentralization of tourism is also seen as a maneuver to consolidate Raúl’s position has his brother’s heir apparent, to the detriment of Carlos Lage, the official who presided over the country’s “special period.”
In brief, legalizing the dollar, opening up foreign markets, providing freedoms to private businesses and tourism partially freed Cuba’s economy and its citizens. Even though these tentative steps toward liberalization proved successful, Castro tolerated the measures insofar as they padded his bank accounts and no alternatives were available.
No milk, no honey
Now that Castro has barred use of the dollar in domestic exchanges, Cubans must contend with a precarious dual-currency system. Though the dollar’s successor, the convertible peso, or “chavito,” (introduced in 1994) has no value outside the country, it is presently the currency of survival for most Cubans. In a country where the average government salary is less than the equivalent of $15 per month and government rations provide about a third of the food Cubans eat, basic, though expensive, consumer goods -namely canned goods, detergent, cooking oil and perhaps a refrigerator- are purchased with chavitos, formerly greenbacks. Verily, some everyday products fetch a price equivalent to a day or even a week’s pay packet.
The other currency on the island, the standard or Cuban peso, is of little value to the island’s inhabitants, save the purchases it can make in the farmer’s market or for admission to the cinema and state museums[v]. The paradox of having a convertible peso of no value outside the country and a standard peso of little value inside the country is what makes the plight of ordinary Cubans all the more ironic.
What is more, the country’s decrepit utilities are becoming even less reliable. Bereft of investment, the electricity system is prone to blackouts, prompting Castro to admit to “errors” on more than one occasion[vi]. The water supply system is so pitiful that not all parts of the island even receive it. With respect to Cuba’s vaunted health care system, the reviews are harsh.
A Venezuelan Professor of Politics in Caracas said via email that she had more medicines in her cabinet than her neighbour, a Cuban Doctor, had in his"dispensario”. “While our Venezuelan Doctors are up to date in relation to U.S. universities’ averages, Cuban doctors still live under Soviet standards,” she said.
Yuri Maltsev [vii]put it best when he told 2004 Austrian Scholars Conference attendees that the health services are great if you do not mind the lack of ambulances or medicines.
The timing of the dollar de-legalization comes in response to tighter U.S. sanctions that have recently bolstered the more than four-decade-old U.S. trade embargo against the Castro regime. In May, the White House further restricted the frequency of visits by Americans to see their relatives on the island and reduced the amount of money they can remit. Washington bars Americans from traveling to the Caribbean nation except with a government waiver.
Detailed regulations are found on the U.S. Treasury’s Office of Foreign Assets Control website.
Meanwhile, the U.S. Treasury has stepped up efforts to enforce the many monetary regulations that give teeth to the embargo. Consistent with the intent of the embargo to “isolate the Cuban government economically and deprive it of U.S. dollars,” the countless stipulations include prohibiting foreign commercial banks that deal in dollars to exchange Cuba’s old U.S. dollars for new ones. UBS, Switzerland’s largest bank, for instance, was fined $100m by the Federal Reserve for illegally transferring freshly printed dollar notes to Cuba, Libya, Iran and Yugoslavia-all of which are subject to U.S. sanctions. Exchanging worn dollars for crisp ones enables said countries to renew their stock of dollars in circulation, thus increasing the longevity of the dollar’s durability and the stability of their economies.
Treasury also declared sanctions against Sercuba, an electronic money transfer company that allows U.S. citizens to forward remittances to Cuban residents through its website. Juan Carlos Zarate, Treasury’s assistant secretary for terrorist financing and financial crime said, “We are financially isolating [the website] Sercuba to make it more difficult for the Cuban regime to obtain the hard currency it uses to oppress its own people and to prop up its government.”
Treasury even designated a travel agency, Tour & Marketing International Ltd., as a Cuban-linked enterprise. Such claims allowed the Treasury to bar persons subject to U.S. jurisdiction from conducting any transactions with that agency as it provides “a means by which U.S. persons could travel to Cuba via third countries” and evade U.S. sanctions.
These and other curtailments of travel options and cash flows to the island have left Castro with little alternative but to de-legalize the dollar, enforce a penalty for its use, and start accepting harder, more stable currencies without penalty.
New friends, new ventures
It is worth noting, however, that a falling dollar adds extra incentive to de-legalize the dollar, which has dipped substantially against the euro, yen and other major currencies since 2002. Given America’s colossal current account and budget deficits, rampant money creation, and the world’s increasing unwillingness to finance the country’s staggering profligacy, the ongoing dollar rout will only continue.
Using hard currencies such as euros, sterling, Canadian dollars, and Swiss francs in lieu of dollars is much more advantageous to the Cuban government; better time than any for Castro to accumulate as many dollars as possible and convert them into a more stable currency. Cuban authorities have reportedly been studying and coordinating with Cuba’s Central Bank to extend the acceptance of the euro throughout the country.[viii]
The Cuban government also realizes that its marriage of convenience with the greenback is no longer necessary since European patronage helps fill the void. This is especially true in the lucrative tourism sector -a pivotal source of hard currency needed to buy critical imports- that provides an economically and politically viable solution to Castro’s dollar headache. European and Canadian holidaymakers comprise 75% of the islands 2m annual visitors.
Havana’s relations with Europe improved markedly at the end of January when the European Union formally shelved an 18-month freeze of diplomatic contacts stemming from Castro’s incarceration of 75 dissidents in 2003. Spain, Cuba’s second biggest trading partner, broke ranks with community policy in October and the rest of the member states subsequently followed Madrid’s lead.
Of course, Castro can continue to rely on political support and cheap petroleum from Venezuela. In exchange for 15,000 Cuban teachers, medical personnel and “advisors” that provide Castro-wannabe Hugo Chávez, counsel in waging a protracted campaign against private property, Caracas sells Havana about a quarter of its annual fuel requirements, at subsidized prices. Already Cuba’s largest trading partner, Chávez, has agreed to allow each other’s state companies to set up shop in both countries and pay for Castro’s agents in Caracas[ix].
Castro is also scouring for oil off his island’s coast, in conjunction with international oil companies. Annual production has grown four-fold since the 1990s and has even surpassed Chávez’s yearly gift. Word also has it that a substantial oil deposit traverses the territorial waters of both Cuba and Mexico’s Yucatán peninsula. Should that discovery bear fruit, the revolution will survive even longer, considering China is interested in buying oil from the Western Hemisphere. China wants to conduct business with Venezuela, America’s third-largest source of petroleum and a perennial foreign policy headache for Washington since Chávez came to power.
For geopolitical and commercial reasons, China is poised to forge a strategic partnership with its erstwhile adversary. Having originally sided with Moscow after the Sino-Soviet schism of the 1960s and later accepted significant Chinese aid after the Soviet Union collapsed, Castro has displayed uncanny tactical dexterity. In November Castro welcomed joint ventures on the island with Beijing, his third largest trading partner, accepted $400m in trade credits and inked 16 memorandums of understanding in mining, agriculture, telecoms and education.
China’s Minmetals agreed to resume construction of a $600m Ferro-nickel plant left unfinished by the Soviet Union, a symbolic sign of the times. Nickel is Cuba’s leading export-twice that of all other exports cumulatively-and China’s insatiable demand for primary commodities serves to garner Castro more hard currency and afford him the opportunity to jettison the dollar as Beijing makes inroads in America’s backyard.
Lost in all this, however, is that Castro’s restriction of private enterprise spells the destruction of ordinary Cubans’ limited ability to work, trade and in effect, control their own lives. Though the state contends its asphyxiating paternalism has been a grand success, its subjects are impoverished souls whom suffer the most from the jostling between Havana and Washington.
All things considered, Fidel Castro is simply using the tightening of the decades old trade embargo as a pretext to extinguish anything that smacks of the very capitalism, driven by individual freedom that impedes his revolution. A policy that stands the best chance of creating momentum for change would immediately establish free trade between Cuba and the US.
Arrington, Vanessa. U.S. dollar no longer accepted at Cuban businesses.” AP Worldstream 28 Oct. 2004.
[ii]“Small business just got smaller.” The Economist 14 Oct. 2004.
[iii]“Tourists: by the left, march.” The Economist 29 July 2004.
[vii]“Capitalism, Cuba and Castro: A Report from recent travels.”
[viii]Snow, Anita. “Cuba’s banks, exchange houses gear up for start of large scale conversions to dump US dollars.” AP Worldstream 28 Oct. 2004.
[ix]“With help from oil and friends.” The Economist 13 Jan. 2005.
On February 14, 2005, jesusp wrote:
“A policy that stands the best chance of creating momentum for change would immediately establish free trade between Cuba and the U.S.”
It would be nice if Ms. McIntosh and Mr. Nulle could persuade the policymakers in D.C. of the wisdom of their statement. Mr. Castro would have a hard time explaining to people why free trade between Cuba and the U.S. is not good for Cuba after 43 years of blaming, not without a great deal of validity, the U.S. economic embargo for all of Cuba’ ills. Ideological stupidity on both sides is keeping the Cuban people down.
On February 15, 2005, Dana Garrett wrote:
I believe people misunderstand the significance of the dedollarization of the Cuban economy. It was known for some time that Bush would significantly cut back on the remittances Cuban exiles could send to their relatives in Cuba and that he would reduce the amount of allowable travel to Cuba as well. So what was the Cuban government to do? Have its people depend on a currency that would be reduced to a trickle?
Now Cuban exiles can convert their dollars into Euros etc. and transfer/wire them to their relatives in Cuba, and no one is the wiser. And their relatives get full value for that currency.