News and Facts about Cuba

How to bring capital to Cuba

How to bring capital to Cuba
By: Michael W. Klein and Pavel Vidal-Alejandro

Obama’s recent trip to Cuba has highlighted both the ongoing
tensions between Havana and Washington and the potential for an improved
relationship. The tensions were most evident in the
president’s contentious discussions with Cuban President
about and political openness. On the other hand, the
landmark baseball game between the Tampa Bay Rays and the Cuban National
Team was a particularly colorful example of the potential of closer
ties. But far more consequential for the Cuban people would be a
transformation of Cuba’s sputtering state-dominated — which the
U.S. can help make a reality.

It is well understood that lifting the U.S. trade would be a
game-changer. But this depends on Congress, and, at least for now,
appears unlikely. But another set of key (and underappreciated) reforms
looks much more feasible: the United States could take practical and
essential steps to help Cuba develop a fully functioning financial
system. The future of its economy depends on it.

The Cuban revolution is well regarded for its accomplishments in raising
levels of and medical care. But the revolution has failed to
deliver along other economic dimensions, and has depended on assistance
from the Soviet Union and, later, . The very difficult “special
period” of the 1990s, after the fall of the Soviet Union led to a steep
reduction of foreign aid, threatens to be repeated in this era as
Venezuela’s economy collapses.

In response to this new reality, Cuba needs to grow its private sector,
which now employs nearly 28 percent of the workforce. Given the state of
government finances and the loss of Venezuelan sponsorship, the state
needs to make further serious cuts in government payrolls. During the
president’s trip we heard that the island’s privately-run small
businesses, or cuentapropistas, are the most vibrant sector of the
economy. Cuentapropistas are only allowed to operate within a narrow
government-approved list of categories, including hair salons,
restaurants, and tour guides. In an effort to expand the private sector,
employ more people, and grow the economy, the Cuban government has been
gradually expanding this list of permitted areas.

But small businesses need more than the legal permission to operate. As
in any other country, building a business in Cuba will require access to
capital. Today, many Cubans who start such endeavors get seed money in
the form of remittances from relatives in the United States. But if
overseas financing of this type remains the main source of capital for
cuentapropistas, they will only contribute to the creation of a
stratified class of have and have-nots — if you have family in South
Florida, you’re set. If not, you’re out of luck.

The United States should take several steps to help catalyze the nascent
Cuban private sector, helping the Cuban economy grow in a way that is
more independent of the central government. The Treasury
Department stated in January 2015 that a limited range of U.S. projects
that support microfinancing (small loans for entrepreneurs) in Cuba will
be allowed, although none have yet emerged. While there has been an
easing of restrictions on banking, a range of U.S. banking services
are still prohibited for Cubans. These prohibitions should also be
eliminated, although, even if they are, the Cuban’s government’s
willingness to allow the presence of U.S. banks in the country is uncertain.

President Obama should lift the remaining restrictions on banks
operating in Cuba, and make clear to banks and microfinance
organizations that such work in Cuba is viable and would be welcomed. Of
course, this can only happen if the Cuban government allows foreign
banks to service the Cuban people for both retail banking and to serve
the nascent cuentapropistas.

But serious growth cannot occur through small business expansion alone.
Foreign and the business of major foreign corporations will
be essential for adding jobs and injecting capital into the Cuban
economy. U.S. businesses remain largely barred from doing business with
Cuba — and will remain severely restricted as long as the
congress-mandated embargo remains in place — but other nations have long
been able to trade and invest in the island. As U.S. restrictions have
eased, such as with the May 2015 removal of Cuba from the list of
countries that sponsor terrorism, it has become easier for foreign
companies to work in Cuba. But there are still a host of transactions,
particularly those denominated in dollars, engaging in which risks
severe penalties from the U.S. Treasury. President Obama should use his
presidential discretion to ease such policies.

Of course, much of the necessary changes must come from actions of the
Cuban government, not from the United States. Foreign capital will not
come to Cuba until the country addresses its lack of a sound financial
infrastructure, transparent accounting, and legal assurances. Currently,
Cuba has too few banks to serve its population.

But a big problem facing Cuba is that, while it has too few banks, it
has too many currencies: two, to be precise. While most Cubans are paid
in Cuban pesos (CUP) and can buy basic goods in this currency, luxury
goods are mostly priced in Cuban convertible pesos (CUC), a much more
valuable currency which is pegged to the dollar and most easily
obtainable from tourists. The two-currency arrangement leads to serious
pricing distortions and economic inefficiencies, not least by
segregating the economy into CUP and CUC sectors.

The Cuban government has said that it is committed to eliminating this
confusing system, unifying the two currencies on a day declared dia cero
(“day zero”). But this will be a challenging task, rife with
implications for monetary stability, fiscal balances, and inequality. To
accomplish it, Havana would do well to seek technical assistance from
international financial institutions, starting with the Inter-American
Development Bank (IDB). And the United States can help Cuba in this
regard by facilitating its relationship with the IDB, as well as
allowing it to become a member country of the IMF and the World Bank.
President Obama should make it clear that the United States will not
stand in the way of this technical assistance and of closer
relationships between Cuba and international financial institutions.

While in Cuba, President Obama rightly took a clear stand in advocating
for the expansion of political and civil liberties. Economic freedoms,
and the opportunity to better one’s station in life, is likewise an
important right, especially since Cuba’s standard of living is
relatively low. The Cuban government needs to enable its people to
realize their economic dreams and aspirations by allowing the private
sector to expand and encouraging foreign firms to aid the country’s
development. And it’s time for the United States to do what it can to
make this possible.

Editor’s note: This piece originally appeared in Foreign Policy.

Source: How to bring capital to Cuba | Brookings Institution –

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