Jump to ContentJump to Main Navigation
The Cuba-U.S. Bilateral RelationshipNew Pathways and Policy Choices$

Michael J. Kelly, Erika Moreno, and Richard C. Witmer

Print publication date: 2019

Print ISBN-13: 9780190687366

Published to Oxford Scholarship Online: October 2019

DOI: 10.1093/oso/9780190687366.001.0001

Show Summary Details
Page of

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 02 April 2020

A Political Economy Approach to U.S. Normalization Policy Toward Cuba

A Political Economy Approach to U.S. Normalization Policy Toward Cuba

Obama and Trump

Chapter:
(p.177) 8 A Political Economy Approach to U.S. Normalization Policy Toward Cuba
Source:
The Cuba-U.S. Bilateral Relationship
Author(s):

Roger R. Betancourt

Publisher:
Oxford University Press
DOI:10.1093/oso/9780190687366.003.0008

Abstract and Keywords

In this chapter, five contributions are made to advance understanding of U.S.-Cuba relations. First, empirical evidence is provided on outcomes with respect to the flows of persons, goods and services, and capital between Cuba and the United States. While the evidence stresses the last decade, it goes back to the 1990s when feasible and relevant. Second, policies and their implementation by both the U.S. and Cuban governments are viewed as the actions of political agents that provide opportunities and challenges for these outcomes to fluctuate over time in pursuit of a variety of goals. Third, these outcomes are treated as responses of U.S. and Cuban entities and residents as economic agents to the policies and their implementations by the two governments. Fourth, throughout the chapter, interactions between different policies within each country as well as between the two countries are analyzed in terms of their impact on actual outcomes. Finally, in the last substantive section the role of political factors in the two recent U.S. administrations is highlighted to bring out interactions between political and economic dimensions and to illustrate the policies explicitly or implicitly adopted by the Donald Trump administration.

Keywords:   U.S.-Cuba relations, U.S.-Cuba economic policies, Barack Obama, Donald Trump, U.S. embargo on Cuba

In this chapter, five contributions are made to advance understanding of U.S.-Cuba relations. First, empirical evidence is provided on outcomes with respect to the flows of persons, goods and services, and capital between Cuba and the United States. While the evidence stresses the last decade, it goes back to the 1990s when feasible and relevant. Second, policies and their implementation by both the U.S. and Cuban governments are viewed as the actions of political agents that provide opportunities and challenges for these outcomes to fluctuate over time in pursuit of a variety of goals. Third, these outcomes are treated as responses of U.S. and Cuban entities and residents as economic agents to the policies and their implementations by the two governments. Fourth, throughout the chapter, interactions between different policies within each country as well as between the two countries are analyzed in terms of their impact on actual outcomes. Finally, in the last substantive section the role of political factors in the two recent U.S. administrations is highlighted to bring out interactions between political and economic dimensions and to illustrate the policies explicitly or implicitly adopted by the Donald Trump administration.

Before starting on the individual sections, some general comments on the approach taken will help the exposition. A political economy approach is characterized by including in the analysis two features of government actors as decision makers affecting the economy. First, government actors as (p.178) economic agents have self-interests that may or may not coincide with those of the governed. This is true in both democracies and nondemocracies. Hence, in the context of U.S.-Cuba relations, it applies to both governments. Second, even in cases where the interests of government actors and of those they govern coincide perfectly, there are potential deviations between announced policies and the actual outcomes of those policies as a result of implementation issues. Once again, in the context of U.S.-Cuba relations, this gap between objectives and realizations applies to both countries. I will emphasize throughout the deviations between announced policy and its implementation while mentioning convergence of government and citizens’ interests far more sparingly and only when appropriate in the context of a particular discussion.

Economists’ analysis of the gap between announced policy and implemented policy at the micro level has been characterized as requiring the adoption of three different roles in these evaluations: scientists, engineers, and plumbers, in Duflo’s (2017) terminology. The scientific role relies on economic theory or on a specific model to derive a logically expected outcome of a policy at an abstract level; the engineering role introduces additional aspects that may affect outcomes upon implementation with varying degrees of rigor; and the plumbing role introduces idiosyncrasies and behavioral patterns arising at the implementation level that are difficult to describe rigorously in general terms but that can determine whether expected outcomes reflect those intended by the policy. While the policies considered here are macro policies, they can be evaluated in similar terms.

Just as indicated previously, we concentrate on the gap between announced policies and their implementations, that is, on engineering and plumbing aspects that lead to actual outcomes differing from expected ones. For instance, with respect to macro policies, the engineering issues often arise from general equilibrium and strategic interaction effects that are ignored at the scientific level often on the grounds of simplicity. Similarly, these engineering aspects require a number of adaptations for implementation as a result of idiosyncrasies or of behavioral patterns of economic or political agents that can be characterized as plumbing needs. These idiosyncrasies and/or behavioral patterns are the same as what existing literature in politics and economics characterizes as principal-agent problems, for example, between any ruler and any bureaucracy that implements his (p.179) or her policies. This chapter attempts to incorporate these engineering and plumbing issues throughout the chapter.

Facts on the ground are a useful starting point for policy analysis in general because to understand where we are going, it is useful to know where we are coming from. For instance, evidence and perspective on Barack Obama’s policy and its effects can provide insights on Trump’s announced policy (The White House Press Office, June 16, 2017), as well as on its implementation both with respect to what changed and what did not change. In the context of U.S.-Cuba relations, however, Obama’s Cuba normalization policy is also useful because it was focused primarily on the embargo either explicitly or implicitly.2 The latter has three dimensions from an economic “scientific” viewpoint: flows of persons, flows of goods and services, and flows of capital across the two countries. I consider each dimension separately in the next three sections.

Notwithstanding the prior discussion, the embargo has important non-economic but equally “scientific” aspects in terms of political interests of policymakers that affect and interact with the economic dimensions in determining outcomes. The discussion of these issues occupies a single section that also serves to illustrate the actual policies adopted by the Trump administration explicitly or implicitly. A succinct conclusion highlights the two main explicit changes between Obama’s and Trump’s normalization policy for the reader’s convenience.

Flow of Persons between Cuba and the United States in Recent Years

The flow of persons between countries takes two main forms: migration and tourism. In the case of U.S.-Cuba relations, migration was for many years mainly a one-way flow from Cuba to the United States, while tourism has become a two-way flow in recent years. Hence, I begin by providing evidence on the nature of these flows as well as brief commentary on accompanying events associated with these flows and interactions between different types of flows. Six types of flows are explicitly discussed: three types of immigration flows into the United States, that is, as formal permanent residents, as informal visa-less aliens, and as a special category of political refugees; emigration flows out of Cuba; and two types of “tourists” (p.180) or temporary flows, that is, Cuban “tourists” to the United States and U.S. “tourists” to Cuba.

Data on a numerically and politically important type of migration flow from Cuba to the United States that are captured in U.S. immigration statistics provide a useful starting point. Table 8.1 presents data on the number of Cubans admitted to the U.S. as lawful permanent residents between 1998 and 2016. These numbers reflect two entirely different types of influences. The first influence reflects the decisions of Cubans in the United States at a particular time to become U.S. permanent residents. These individuals could have come in originally as refugees, or under a wide variety of nonimmigrant visas (B-1 or B-2, for example), or illegally as visa-less aliens. If at some point in their lives they decided to apply for permanent U.S. residence, they would show up in Table 8.1 in the year in which the status was granted.

A second influence reflects Cubans admitted to the United States directly as lawful permanent residents. These individuals would include those claimed by their relatives in the United States, for example, granted U.S. permanent resident status while in Cuba, as well as those admitted under the U.S.- Cuba Migration Accord of 1994–1995. This Accord required the United States to take in a minimum of 20,000 Cuban immigrants a year as lawful permanent residents. U.S. immigration officers select these immigrants by lottery from a pool of participants. The last lottery, held in 1998, identified about 500,000 Cubans potentially eligible to come.

Table 8.1 Cubans Admitted to the United States as Lawful Permanent Residents, 1998–2016

Year

Number Admitted

1998

17,750

2000

20,831

2002

28,272

2004

20,481

2006

45,614

2008

49,500

2010

33,573

2012

32,820

2014

46,679

2015

54,396

2016

66,156

Source: Department of Homeland Security, Yearbook of Immigration Statistics.

The data in Table 8.1 have two characteristics: a high degree of variability, reflecting numerous influences determining Cubans becoming permanent residents, as well as a trend. The average of the numbers between 1998 and 2006 is much lower than the average between 2008 and 2016. The Accord and policy factors affecting its implementation are the main determinants of the trend. More specifically, the arrival of the Obama administration in 2008 is associated with the higher average of lawful permanent residents over the 2008–2016 period. It also generates increases for each ten-year period between 1998 and 2006.

While association does not mean causation, there is no doubt that the flow of Cuban lawful permanent residents into the United States increased substantially during the Obama years. Institutional analysis suggests that policy outcomes depend on formal rules as well as on informal ones prevailing at the time of implementation. Hence, Obama’s well-known views on Cuba policy before his own election are likely to have had an impact (p.181) on these numbers, including those generated by the consequences of the Migration Accord as well as those generated by the more recent granting of B-1 and B-2 visas associated with Cuba’s liberalization of its migration law on January 13, 2013.

One of the reasons for the variability in the number of Cuban immigrants becoming lawful permanent residents is the result of individuals arriving at different times deciding to change their status in any one year. We also have data on the number of arrivals of visa-less Cuban immigrants in each of the last twelve years from the work of the Center for Immigration Studies (Luna 2016; Krogstad 2017). These visa-less Cuban immigrants are those admitted into the United States under the policy popularly known as “wet foot, dry foot,” which is associated with the implementation of the Migration Accord. They are not to be confused with those admitted into the United States directly as part of the category of refugees.

Table 8.2 provides the numbers of visa-less Cuban aliens admitted yearly during the period 2005–2016. Interestingly, this table has the same features as the previous one: substantial variability as well as a trend. Nonetheless, there are significant differences. First, these characteristics occur over an annual period rather than a biennial one. Second, the trend is very marked toward the end of the period. While the variability depends on many factors, (p.182) including individual decisions to migrate through risky mechanisms, for example, homemade rafts (balseros), the trend is easier to explain and associate with one specific policy. The year 2013 is the beginning of secret negotiations between Cuba and the United States on normalization of relations.

Among the reasons the Cuban leadership began negotiations with the Obama administration were the deterioration of the economic situation despite their reforms, officially approved in 2011, fears of Venezuela imploding after Hugo Chávez’s death in March 2013, and a failure to find oil through deep-sea exploration drilling of four zones in the Gulf of Mexico by the end of 2012 (Betancourt 2016). While there can be arguments as to the extent of awareness by the Cuban population of the last two issues, the population was certainly aware of the first one. Indeed, experientially it would have been even more aware than the Cuban leadership. The Cuban Standard Economic Trend Index (CSETI), an indicator of the performance of the Cuban economy, reveals a negative trend starting in August 2013 and continuing throughout 2014 (Vidal Alejandro and Hernández Catá 2016, Figure 1).

(p.183)

Table 8.2 Visa-less Cuban Aliens Admitted to the United States, 2005–2016

Year

Number Admitted

(at all U.S. entry points)

2005

9,064

2006

10,431

2007

13,064

2008

14,276

2009

7,504

2010

7,487

2011

7,821

2012

12,240

2013

17,696

2014

24,279

2015

43,154

2016

56,406

Source: Luna (May 2016) and Krogstad (January 2017) for 2016.

Official announcement to seek normalization of relations took place on December 17, 2014. Table 8.2 reveals a doubling of visa-less Cuban immigrants in the two-year period 2014–2016. Hence, its association with normalization policy is extremely strong. This effect is a striking (probably unintended) general equilibrium and interaction effect of Obama’s normalization policy. Indeed, if the objective of Obama’s normalization policy had been to increase Cuban migration into the United States, one could not ask for a more resounding success based on Tables 8.1 and 8.2. The year 2016 saw more than 66,000 Cubans become U.S. lawful permanent residents and more than 56,000 Cubans admitted into the United States as visa-less aliens. These figures represented a 42 percent and a 31 percent increase, respectively, over the previous year.

Nevertheless, a dramatic change in policy took place on January 12, 2017: namely, the Obama administration eliminated the wet foot, dry foot policy.3 A plausible explanation for this new policy is that these substantial increases in migration were unattractive to the Obama administration and its perception of the interests of the Democratic Party. In the short run, changing an international treaty was difficult, and it would have been ineffective in controlling the outcome. On the other hand, the wet foot, dry foot policy could be changed by executive order and its effect would be immediate in reducing new flows to almost zero. Furthermore, exposés of abuses of the policy had already led to denunciations by a Cuban-American Republican senator from Florida who was seeking changes in implementation. He was praised by the Sun Sentinel in an editorial for this activity (January 8, 2016). Republican opposition to the policy change, if any, was unlikely to be uniform.

While those admitted as visa-less aliens could continue to apply for the category of refugees immediately, having it granted at the discretion of the immigration officer working their case was a low probability event. The numbers in Table 8.3, below, suggest, when compared to those in Table 8.2, that there was a far higher level of difficulty for Cubans to be directly admitted into the United States with the status of refugees. Table 8.3 provides the figures for Cubans admitted into the United States directly as refugees during the period 2004–2016.

Table 8.3 Cubans Admitted to the United States as Refugees, 2004–2016

Year

Number

2004

2,980

2005

6,360

2006

3,143

2007

2,922

2008

4,177

2009

4,800

2010

4,818

2011

2,920

2012

1,948

2013

4,205

2014

4,062

2015

1,527

2016

354

Source: Department of Homeland Security, Yearbook of Immigration Statistics.

One subtle aspect of the wet foot, dry foot policy change of 2017 is as an illustration of the strategic interaction effects of policy changes. One would expect the numbers of visa-less migrants coming from Cuba to the United States to be substantially reduced from 2017 onward, since the (p.184) Trump administration’s normalization policy officially maintains this policy change, and its enforcement efforts in this general area have been more Draconian than the Obama ones were. As mentioned in connection with Table 8.2, above, undertaking the uncertain act of migrating by Cubans was made much easier by a change in Cuba’s migration policies in 2013. Yet elimination of the wet foot, dry foot policy meant that doing so after January 2017 would lead to migrants ending up in detention centers with low probabilities of being admitted to the United States as refugees. This is likely to reduce the number of Cubans that will end as visa-less aliens in Table 8.2, and the Trump implementation policies are unlikely to increase substantially the numbers observed in Table 8.3. Of course, this assertion assumes other factors underlying the data in Table 8.3 remain stable without major changes in 2017 and in future years.

An interesting coupling of strategic interaction and general equilibrium effects arises as a result of Cuba’s own policy changes with respect to migration in January of 2013 coupled with its announced reforms in the spring of 2011. Table 8.4 presents net migration data from Cuba’s statistical agency. Several observers writing in the ASCE blog (Ernesto Hernández-Catá, February 2016; Luis R. Luis, February 2017) have pointed to a change from net emigration to (p.185) net immigration in 2013 and 2014 and speculated on its causes: methodology, coverage, demographic revolution, statistical blip, or mystery.

Table 8.4 Cuba’s Net Migration Flows, 2011–2016

Year

Number

2011

–39,263

2012

–46,662

2013

3,302

2014

1,922

2015

–24,684

2016

–17,251

Source: Oficina Nacional de Estadística e Información (2016, Table 3.21).

Simpler economic explanations are available. Cuba’s migration decree of January 2013 lowered the costs of emigrating substantially, directly and indirectly. Anyone who left in 2012 could take advantage of the lower indirect cost by returning and leaving again with permission to stay abroad without loss of citizenship privileges for two years (renewable twice) instead of one year. The internal economic reforms were starting to be implemented, and those returning could leave again at lower direct and indirect costs if unhappy with the situation. By 2015, it was clear to many observers inside and outside the island that despite the process of normalization of relations with the United States, the reforms were proceeding very slowly. Indeed, even Raúl Castro characterized the process as “slowly but surely” (sin prisa, pero sin pausa). Thus, it is neither mysterious nor surprising that in 2015 emigration out of Cuba once again dominated immigration into Cuba by a substantial margin. Either emigrants viewed the “slowly” as a contradiction of the “surely,” or their rate of time preference was inconsistent with the pace implied by the “slowly.” The numbers for 2016 support this view.

Migration flows are not the only person flows among countries. There are also nonimmigrant flows arising due to a variety of reasons. The two best-known reasons are tourists and “temporary” workers of one kind or another. These reasons fall in the category of B-2 nonimmigrant visas in the United States. Moreover, in the case of Cuba-U.S. flows, nonimmigrant visas are primarily tourist visas. Table 8.5 provides information on the number of Cuban nonimmigrants admitted to the United States with B-2 visas (p.186) between 2007 and 2016. In contrast to Tables 8.1–8.3, Table 8.5 exhibits less variability across the years and a steadier upward trend. In similarity with Tables 8.1 and 8.2, however, there is a substantial jump in the last three years, and the largest numbers were recorded in the last two years reported in the table—that is, during two full years of implementation of normalization policy under the Obama administration.

Table 8.5 Cuban Nonimmigrants Admitted to the United States with B-2 Visas, 2007–2016

Year

Number Admitted

2007

11,237

2008

15,130

2009

17,047

2010

23,745

2011

18,593

2012

21,197

2013

34,615

2014

43,737

2015

52,215

2016

52,735

Source: Department of Homeland Security, Yearbook of Immigration Statistics (Table 26, various years).

Incidentally, some of these B-2 visa holders might also be counted in Table 8.2 under three circumstances: if they chose to overstay their B-2 visa, if they lied about having one in order to stay in the United States, or if they claimed political persecution. A noteworthy feature underlying the numbers in Table 8.5 is that the recent increase in the number of tourists, which resulted from Cuba’s immigration reform in January 2013 together with normalization of relations by President Obama in December 2014, includes very different types of tourists. Some tourists are individuals who come to visit family members residing in the United States. Other tourists are cuentapropistas (small business owners) or their agents, who come to purchase goods and materials for their businesses on the island. Still others are “undercover” immigrants who come to stay permanently, taking advantage of the wet foot, dry foot policy and the benefits afforded by the Cuban Adjustment Act. Finally, the remainder come for diverse reasons associated (p.187) with their roles in Cuba’s society, for example, dissidents, artists, and well-to-do members of the nomenclature.

The flow of persons moving in the other direction, that is, from the United States to Cuba, consists of two types: Cuban-Americans and non-Cuban-American (NCA) U.S. citizens. On the U.S. side, restrictions on Cuban-Americans traveling to the island were lifted systematically by the Obama administration since 2009. Restrictions on NCA U.S. citizens were lifted informally but more systematically during Obama’s second term and especially after the normalization process started in December 2014. On the Cuban side, their statistical office provides information on arrivals for two categories of persons from the United States: members of the Cuban diaspora (Comunidad Cubana en el Exterior) and U.S. citizens. The former is composed mainly of Cuban-Americans: Cuba does not classify Cuban-Americans as U.S. citizens even if they have proof of citizenship through a U.S. passport. Perelló (2016) reports the number to have been 292,692 in 2015. That is 75 percent of the Cuban diaspora total for that year reported in Table 8.6, below, together with the numbers for NCA U.S. citizens.

Table 8.6 Tourist Arrivals in Cuba by Country of Origin, 2008–2016

Year

Cuban Diaspora

U.S.

2008

n.a.1

41,904

2009

n.a.1

52,455

2010

375,431

63,046

2011

397,873

73,566

2012

384,181

99,052

2013

373,371

93,420

2014

361,210

92,325

2015

390,111

162,972

2016

427,477

284,252

(1) Not available.

Source: Oficina Nacional de Estadística e Información (2014; 2015; 2016), Anuario Estadístico de Cuba, Table 15.3; years 2012–2016, Table 15.6.

Increases in tourist visits during the two years of full normalization under Obama were far higher for NCAs than for the mainly Cuban-American diaspora. For instance, the change for the 2014–2016 full normalization period was about 68 percent of the number of U.S. citizen tourists in 2016. By contrast, the change for the Cuban diaspora during the same period was (p.188) about 16 percent of the total number in 2016. Assuming that the proportion of Cuban-Americans in the diaspora remain the same as it was in 2015 during the 2014–2016 period, one can derive a plausible expectation of the impact of Trump’s normalization policy on tourists visits. While the impact will be negative for both types of tourist visits, one would expect the biggest impact on tourist flows to fall on NCA U.S. citizens for several reasons.

First, at the formal level Trump’s normalization policy remains the same for Cuban-Americans, but it became more restrictive for NCA U.S. citizens. The latter must now provide evidence of belonging to one of the twelve allowed categories of visitors rather than self-declaring that they do belong to these categories. Second, at the implementation level, the new climate in the United States created by the Trump policy (discouraging individual visitors) interacting with its requirements to ensure that tourist dollars do not flow to companies associated with the Cuban military or party hierarchy (which are difficult to enforce and avoid) will be deterrents for both NCA U.S. visitors and Cuban-American ones. Since the former grew far more rapidly during Obama’s normalization (four times as fast, according to our estimates mentioned previously), they are also likely to decline more rapidly in the absence of family or affective motivations for the visits. Finally, implementation could be tightened informally through plumbing effects in the form of barriers through the Treasury Department licensing, which would affect mainly NCA U.S. citizens, and immigration officers’ attitudes toward returning visitors, which would affect both.

Incentives for a decrease in both types of tourist visits as well as in Cuban tourists to the United States are magnified by a recent event. Namely, the withdrawal of a substantial number of U.S. personnel from the embassy in Cuba for medical reasons of a somewhat mysterious origin. It was officially ordered in September 2017 (https://cu.usembassy.gov/end-ordered-departure-u-s-embassy-havana/). While the ordered withdrawal was ended in March 2018, the U.S. embassy in Cuba continues to operate with a restricted number of personnel. This affects the issuing of visas to Cuban tourists and less directly the encouragement to all tourists from the United State through the security and convenience provided by a fully operating embassy. With respect to tourism from Cuba to the United States, there is likely to be a decrease in numbers for two additional reasons. First, tourists coming in as undercover immigrants have their path legally blocked by the abolition of the wet foot, dry foot policy. Second, the financial costs of visits to the United States are high, especially relative to Cuba’s official average (p.189) income, and less likely to be affordable unless current economic conditions in Cuba improve substantially.

Summing up, the various types of person flows between Cuba and the United States have exhibited significant oscillations in response to a variety of policy changes and their implementations in both countries despite the embargo. For the immediate future, however, one would expect these oscillations, except perhaps for the refugee category, to be on the downward side. In the long term, it would not be surprising if all the other types of person flows were to resume an upward course with one exception: visa-less Cuban aliens. The end of the wet foot, dry foot policy has become a bipartisan American policy.

Flow of Goods and Services between Cuba and the United States

Most of the statements by proponents and opponents of the embargo can find some support and relevance with respect to the flows of goods and services. Proponents can point to the limitations of Cuba’s economic system, and opponents can point to areas where the system has either overcome its limitations or the effects of the embargo have been so extreme that it is difficult to attribute them to any economic system. The first exception is with respect to the flow of “export” services to tourists in Cuba and of professional services of various types—for example, medical experts, sport trainers, and military personnel—to the rest of the world.4 The second exception is with respect to the exports of goods to the United States. We discuss first the flow of goods between the two countries and subsequently the flow of services.

One of these prominent exceptions highlighting the effect of the embargo is Cuba’s exports of goods to the United States. It provides a useful starting point to a discussion of the flow of goods between the two countries due to its simplicity. These exports have remained at zero in each of the last twenty years (US Census, 2017 Trade in Goods with Cuba). This fact experienced a change in January 2017 (Delgado 2017; Vinik 2017) when a shipment of Cuban marabú charcoal made by a private cooperative was allowed to enter the United States as a result of Obama’s normalization policy. Coabana Trading/Holdings LLC is the U.S. company that imported the marabú into the United States (Alonso 2017) and to whom the grandfathering provision (p.190) of Trump’s normalization policy would apply. It confirms the difficulty in arguing that Cuba has no comparative advantage in any good that could be imported by the United States no matter how inefficient its economic system.

More generally, it is useful to look at Cuba-U.S. trade in terms of its aggregate pattern with respect to imports. Cuban imports of manufactured and agricultural goods peaked in 2008 and had not recovered by 2014. Cuba’s imports from the United States were mainly agricultural products, amounting to 95 percent to 99 percent of total imports during the period 2005–2014 (Colby-Oizumi 2016, 19). The general pattern of aggregate imports during the period was similar for the United States as for Cuba’s other main trading partners, regardless of composition (Colby-Oizumi 2016, Figure 1). Table 8.7, below, provides details for the period 1998–2016 on Cuban imports of U.S. goods. Succinctly put, the table shows a great deal of variability with no trend evident. Just as indicated earlier, exports of goods remained constant at zero until 2017. Under Trump’s normalization policy there is no reason to expect significant deviations since embargo provisions on goods and services have not changed much except for a hard-to-enforce list of enterprises that American visitors should not patronize and American firms should not transact with.

Table 8.7 U.S. Trade in Goods with Cuba (Cuban Imports from the United States), 1998–2016 (Million USD)

Year

Value of Imports

1998

3.6

2000

7.0

2002

145.9

2004

404.1

2006

340.5

2008

711.5

2010

363.1

2012

464.5

2014

299.1

2016

247.2

Source: U.S. Census Bureau, International Trade Statistics, Trade in Goods with Cuba.

Cuba’s trade in general has been characterized by a predominance of service exports relative to goods and a predominance of goods imports relative (p.191) to services. The two main components of service “exports” have been professional services and tourist services. Revenues from professional services such as doctors and others are difficult to estimate as they involve a variety of essentially barter agreements linking exports of professionals by Cuba and imports of oil in the case of Venezuela and/or payments for the professional services partially to the Cuban government and partially to the individual whose services are exported. Moreover, these professional services exports do not involve the United States in any significant fashion. Cuba’s data on tourist revenues, however, are easily available. Table 8.8, below, presents the figures for the period 2012–2016.

Table 8.8 Cuba’s International Tourism Revenues, 2012–2015 (Billion Cuban Pesos (CUC))

Year

Revenue

2012

2.613

2013

2.608

2014

2.546

2015

2.819

2016

3.069

Source: Oficina Nacional de Estadística e Información, Anuario Estadístico de Cuba (2016, Table 15.15).

While these tourist revenues include income generated by all visitors classified as tourists, U.S. citizens plus Cuban-Americans represented 13 percent of all visitors in 2015. Moreover, they probably represented a substantially higher percentage of the tourist revenues as their expenditures would include what Cuban-Americans purchase for family members and friends while in Cuba. This interpretation is supported by the declining trend between 2012 and 2014 and its reversal for the period 2015–2016 when relations were restored and normalization was at its most extensive level. A detailed chronology of the relaxation of restrictions is available (Sullivan 2017). One would expect tourist revenues from the United States to decrease as a result of Trump’s normalization policy and its reversal of travel relaxations.

Summing up, the flows of goods and services between Cuba and the United States have been limited both by the embargo restrictions (as well as the inability to obtain trade financing which will be discussed in the next section) in the case of goods and by the nature of the economic system in (p.192) the case of services where the barter system employed by Cuba with respect to professional services is a far greater hindrance in trading with the United States and other liberal democracies than with nondemocracies or illiberal ones. In the short term, no change in the situation is likely to occur; in the long term, changes with respect to goods seem more likely than with respect to services other than tourism, at least in the absence of far more profound reforms in Cuba than what has taken place in the last seven years.

Flows of Capital between Cuba and the United States

It is in terms of restricting a variety of capital flows that the U.S. embargo has been most effective in terms of impacting the Cuban economy directly and indirectly. Not surprisingly, in this area of capital flows, Trump’s normalization policy has been to maintain the restrictions that prevailed during the Obama administration before restoring relations, while grandfathering the minor relaxations that took place in this area after restoring relations to prevent injuring business interests created during that two-year period. For expositional purposes, it is helpful to review the variety of items encompassed by the term “capital flows.”

Financial flows between countries involve a variety of different mechanisms: short-term arrangements, such as trade credits and short-term loans secured in various ways; long-term ones, such as foreign direct investment and development loans and grants from countries or international financial institutions; and mixtures of short- and long-term items, such as repatriation of profits, interest payments, and remittances. On the one hand, in the case of some of the items listed, embargo restrictions have been as effective as the trade embargo on export of goods from Cuba to the United States we discussed in the previous section. On the other hand, at least in the case of remittances, these limits were systematically relaxed during Obama’s first term and eliminated during the second one as a result of normalization policy. Trump’s announced normalization policy has continued this practice, at least formally. We will consider each type of mechanism separately.

Many countries, if not most, subsidize exports in various forms, and the provision of trade credit to institutions in other countries to finance their imports of a country’s goods has become commonplace. In the United States, imports from other countries without developed legal and financial (p.193) institutions were normally financed through the Export-Import Bank of the United States (EXIM). Of course, without loans from EXIM, exporters from these countries would have to find other alternatives. In Cuba’s case, the direct impact of the embargo is that Cuban institutions have to pay for U.S. imports with cash or use private finance rather than pay with loans guaranteed by EXIM. One could argue that the inability to rely on trade credit from the United States could be a potential reason for the variability of Cuba’s imports from the United States observed in Table 8.7. It must be noted, however, that the embargo restriction on private sector finance was relaxed by the Obama administration in January 2016 (Hirschfield Davis 2016) with not much of an effect visible in Table 8.7. Ability to pay and credit worthiness are also important in obtaining trade credit.

Among the long term mechanisms that have impacted Cuba the most with respect to capital flows is the inability to obtain loans or grants from the international financial institutions (IFIs) in which the United States plays an important role in terms of substantial voting power, namely, the International Monetary Fund, the World Bank, and the Inter-American Development Bank. The Helms-Burton Act, which was passed in 1996, requires the U.S. directors at these institutions to vote against any loans or grants to Cuba. Even if the United States would not provide capital flows directly to Cuba, it could do so indirectly through these institutions, but this option is closed to the U.S. government. To provide some perspective on what Cuba forgoes in terms of capital flows from IFIs: the Dominican Republic, with 10.6 million inhabitants, obtained $5.957 billion in disbursements from the Inter-American Development Bank in 2016 (Inter-American Development Bank Annual Report 2016, Table 1); Cuba with 11.1 million inhabitants obtained zero.

Foreign direct investment (FDI) is another important source of long-term capital flows for many countries. Direct and indirect embargo restrictions have impacted Cuba significantly. Once again, however, it is doubtful Cuba would have received substantial FDI flows from the United States under its current economic system even in the absence of the embargo. Indeed, an economist sympathetic to the lifting of the embargo has provided a thorough report on the challenges and opportunities facing foreign direct investment in Cuba in a monograph sponsored by the Brookings Institution (Feinberg 2012). More recently (2016), the same author quotes Everleny Pérez Villanueva, a highly regarded Cuban economist, as the source of an estimate for an accumulated amount of FDI over the period 1990–2009 (p.194) of $3.5 billion. He also provides estimates of FDI for other countries from various sources over the same period (Table 8.3) (https://nacla.org/article/foreign-investment-new-cuban-economy), which can be used to estimate the opportunity cost to Cuba of not being able to tap into FDI.

Briefly put, the Dominican Republic received $17 billion in FDI from all sources over the same period (1990–2009); Cuba has received zero from the United States even after normalization. Incidentally, the figure for the Dominican Republic includes U.S. FDI. In a recent year (2013), total FDI flow into the Dominican Republic was $1.991 billion, and the U.S. component was $0.3735 billion or about 19 percent. If we apply the same percentage to the cumulative $17 billion, it would be $3.73 billion, which implies non-U.S. FDI in the Dominican Republic of $13.77 billion. The latter figure is still almost four times as much from sources other than the United States as Cuba has received during the same period.

Lack of FDI in Cuba has happened for a variety of reasons, many if not most of which fall in the categories described by Feinberg in his 2012 piece and are largely unrelated to the U.S. embargo. Furthermore, the situation in terms of FDI flows has not changed that much in the more recent period despite the guidelines (lineamientos) or reforms, a new foreign investment law, and the creation of the Mariel Economic Development Zone (ZEDM). For instance, Luis (2016) has estimated FDI figures for Cuba during the 2009–2015 period. FDI was $0.438. billion in 2013, the largest annual amount during the period. It had decreased to $0.129 billion by 2015.

Similarly, a recent evaluation of the ZEDM by the Havana Consulting Group and Tech (Morales, June 2018) describes its five-year progress (since 2013) as a collapse because: only ten projects have become operational, with twenty-five in process; only $1.191 billion has been invested against an expected $12.5 billion; and only 4,888 jobs have been created directly by FDI as opposed to the hundreds of thousands created by self-employment. The reasons behind the poor performance put forth by Morales (2018) are similar to the ones emphasized by Feinberg (2012). Another factor, however, must be mentioned in this context. Namely, the most important private company expected to play a key role in ZEDM investments, a Brazilian construction and engineering company (Odebrecht), became limited in its ability to do so due to its getting caught in the Lava Jato corruption scandal in Brazil. The latter has led to indictments and convictions of former presidents in Brazil (“Lula” Da Silva, and Dilma Roussef, respectively) and the resignation of one (Pedro Kuczynski) in Peru.

(p.195) Most short-term and long-term capital flows into Cuba from the United States and aligned institutions have been restricted by the embargo. Normalization policy under Obama had a very limited impact on ameliorating their effects for a variety of reasons. For instance, many of these reasons in the case of FDI are related to the rigidity of Cuba’s bureaucracy in performing tasks required for approval or in providing ancillary operational services and are unrelated to the embargo. In the case of official long-term flows, for example, the legal restrictions are impossible to avoid and difficult to change for political reasons. Trump’s normalization policy does not change the formal embargo restrictions, has had a limited impact on implementation, and has had no impact on the ones stemming from the operation of Cuba’s bureaucracy. Nonetheless, an exception to all these limited impacts is provided by one type of capital flows: remittances. The latter are a substantial component of capital flows between countries. Indeed, they have become a main source of capital flows from high-income to low-income countries in the twenty-first century, and the U.S.-Cuba flows are no exception.

Perhaps the most important source of official data on remittances worldwide is the World Bank (Migration and Remittances Factbook 2016). Unfortunately, the country table for Cuba (p. 109) has no entry data on remittances. Nevertheless, a variety of sources have tried to construct estimates over various periods. One of the most often cited source of estimates is the Havana Consulting Group. In a recent analysis (April 2017) by its president, Emilio Morales, estimates for 2011–2016 are provided. Table 8.9 below reproduces them. An idea of the importance of these numbers for the Cuban economy can be gathered from the fact that revenues (p.196) from total exports between 2011 and 2015 ranged from 5.87 billion Cuban convertible pesos (CUC) to 3.35 billion CUC, according to the Oficina Nacional de Estadística e Información( ONEI 2016). Or, that remittances exceed tourist revenues in four of the five corresponding years in Tables 8.8 and 8.9. Moreover, in 2015, they do so by over half a billion CUC (http://www.cubatrademagazine.com/analysis-cuba-remittances-shifting-pattern-cuban-emigration/).

Table 8.9 Remittances to Cuba, 2011–2016 (Billion USD)

Year

Remittances

2011

2.295

2012

2.605

2013

2.834

2014

3.129

2015

3.354

2016

3.445

Source: The Havana Consulting Group. Cuba Trade, April 27, 2017: Figure 1.

Incidentally, the data given above only include cash remittances. Estimates by the Havana Consulting Group, cited in the previously mentioned analysis, adding the value of remittances in kind, led to a total value of $6.85 billion in 2015. The increase in remittances is also associated with the increase in Cuban migrants to the United States documented in Tables 8.1 and 8.2. Indeed, the Havana Consulting Group estimates a loss of about $1 billion in remittances during 2017 as a result of the reduced number of migrants due to the Obama administration’s elimination of the wet foot, dry foot policy in January 2017. On the other hand, they also estimate in a more recent study an increase in remittances due to the fact that the lack of banking facilities through U.S. institutions has led most commercial transactions through self-employment involving U.S. entities to rely on the same channels used for remittances (The Havana Consulting Group, March 3, 2018).

One consequence is an expected increase in the amounts of cash through these channels. Unfortunately, the numbers may now represent a totally different phenomenon that has little to do with traditional views of remittances and a lot to do with the lack of financial institutions in the United States willing and able to engage in financial transactions with Cuban institutions. Trump’s normalization policy prohibiting transactions with institutions associated with the Cuban military does not affect remittances directly, since the list of 180 explicitly forbidden entities includes hardly any Cuban financial institutions, as can be seen in this link: https://www.state.gov/e/eb/tfs/spi/cuba/cubarestrictedlist/275331.htm. But it does so indirectly because of the uncertainty it creates in the United States and the lack of Cuban financial institutions designed to engage in financial transactions with foreigners. Most relevant for the present discussion, it provides incentives for using traditional remittances channel for new modes of transactions, including some encouraged by the Trump policy, such as rentals in homes that are contracted through Airbnb.

(p.197) Summing up, embargo restrictions on capital flows have been the most effective ones in terms affecting outcomes of U.S.-Cuba relations, with one exception: remittances. The main reason, of course, is that restrictions on the latter for Cuban-Americans were not applied as widely or were not tightly enforced during most of the Obama administration. Moreover, they were eliminated as a result of Obama’s normalization policy in the last two years of the administration. Trump’s normalization policy in this area has been a continuation of Obama’s with respect to Cuban-Americans but not with respect to NCA U.S. citizens.

Non-Economic Dimensions and Their Interactions with the Economic Dimension

Politicians have private interests which they often wrap up around lofty purposes. With respect to Cuba, President Obama’s normalization policy was driven or inspired by his desire for a lasting legacy resulting from his two terms as president, his vision of the embargo as a failure expressed during his 2008 campaign, and the curious claim that normalization as a prelude to lifting of the embargo would lead to regime change from authoritarian to democratic even with the same people in charge. This claim seemed to appeal to Obama’s liberal base despite the obvious evidence that it does not happen provided by the experiences of China and Vietnam over the last forty to fifty years.

What about normalization policy under Trump? The formal announcement appealed to Trump’s base as well as to broader themes selected by President Trump, which may or may not be connected to what is actually happening. Even within the conservative base, normalization policy accommodates a broad variety of perhaps conflicting interests. Moreover, the Cuban- American community, for whom this issue matters a great deal, is also heterogeneous with respect to different aspects of the policy, with well-defined patterns for some such as the wet foot, dry foot policy. For example, the pattern for the latter differs substantially by migration arrival date.5 In practice, normalization policy is also likely to incorporate Trump’s perceptions of himself as a master dealmaker, such as his expressed views during his presidential campaign that the United States got nothing or very little in return from the concessions already made to Cuba, and the somewhat curious claim that he would seek concessions that would protect (p.198) human rights. The latter is curious in terms of the logic in explaining why it makes sense to do so in Cuba but not in Saudi Arabia.

With the previous discussion as a background, Cuba’s normalization policy in the Trump administration follows along three major fault lines. First, a formal reversal of the Obama policy did not take place in two important areas. One, official relations and activities such as the opening of the U.S. embassy in Havana and visits by U.S. government officials for a wide variety of purposes. Of course, the purposes, for example, increasing the flow of goods and services, need not and most likely will not be the same as in the previous administration. Two, changes in the Helms-Burton Act that would require action in the form of new legislation by Congress. The costs of reversals in these two areas are high politically and in the time and resources that would need to be spent on the effort. In contrast, the benefits of doing so are low, perhaps even marginally negative economically and strategically relative to the status quo. Thus, the major economic “scientific” aspects of the embargo remain the same with respect to legislation or treaties affecting the three mainly economic outcome dimensions of the previous sections.

Second, many of the features of Obama’s normalization policy could be reversed at low cost, if desired, in a manner similar to how they were implemented, namely, through executive orders and implementation directives (administrative regulations). Hence, Cuba’s normalization policy in the Trump administration has developed following a piecemeal approach. The latter modifies, or not, any policy supported by an executive order or implementation directive based on the perspective of its impact on the interests and goals of the Trump administration, its supporters, and private interest groups lobbying the administration. Those areas selected for change have been announced with fanfare as validating the pursuits of laudable goals from some vantage point, for example, decreasing resources flowing to the military and the party elites and protecting human rights. Those areas selected to remain the same as in the Obama administration were announced with less fanfare, for example, wet foot, dry foot policy.

Third, many aspects of implementation of policy arising from explicit directives, executive orders, or legislation depend on the actions of agents in the bureaucracy. These officials may interpret the formal policies in ways consistent with the intentions of policymakers or deviating from them, wittingly or unwittingly, for a wide variety of reasons or circumstances. This is true of all policies in general. This behavior follows from the principal agent (p.199) problem, and it can also be described as a ubiquitous plumbing problem of policy advice which is usually ignored even in Duflo’s appeal to economists to become plumbers. In sum, at the macro policy level examined here, the main issues lie within the second fault line identified above and their interactions with the three economic dimensions of the policy discussed in earlier sections. That is, on what one might call consequences of the engineering aspects of the policies.

An illustration of a most interesting engineering aspect of Cuba’s normalization policy in the Trump administration is one that did not change from Obama’s: namely, their adoption of repeal of the wet foot, dry foot policy as their own. This policy associated with the implementation of the Migration Accord in 1995, was originally announced on January 12, 2017, effective immediately by the Obama administration (https://obamawhitehouse.archives.gov/the-press-office/2017/01/12/record-press-call-cuba-policy-announcement). It was reiterated as U.S. policy in the June 2017 announcement of the Trump administration. One reason given by the Obama administration in the announcement was the substantial increase in the number of visa-less aliens from Cuba admitted into the United States after the normalization announcement (which is documented in Table 8.2 and already discussed in the section, “Flow of Persons between Cuba and the United States in Recent Years”). The Obama announcement left in place other aspects of the Migration Accord, including the yearly minimum number of at least 20,000 permanent residents to be admitted into the United States from Cuba.

What the announcements did not mention, however, was the potential consequences for remittances over the next three or four years already discussed in the section, “Flows of Capital between Cuba and the United States.” Keeping the policy unchanged is consistent with the anti-immigrant stand adopted by the Trump administration. Moreover, the potential consequences of decreases in remittances to Cuba as a result of the well-known finding that the number of migrants sending remittances decline with distance from year of arrival was not highlighted either in the Obama administration announcement of change or in the Trump administration announcement of no change. Yet in the future, the role of a substantial decrease in the number of potential migrants and its effect on remittances might be important in negotiations with the Cuban government in a variety of settings, for example, with respect to accepting deportees trying to enter illegally that are also part of the Migration Accord and were left in place by (p.200) both announcements. While this policy could reduce the amount of money available to Cuba from migrants’ remittances, identifying these effects with the data currently gathered could be difficult given the changes in capital flows and their measurement discussed at the end of the previous section.

Finally, the wet foot, dry foot policy allowed substantial and widespread fraud and abuse of the refugee provisions denounced by a broad segment of those who became aware, including Cuban-American legislators, as mentioned earlier. Hence, it was either low cost politically and most likely a benefit for the Trump administration to adopt repeal of the policy as their own. Ironically, an Obama administration argument for the abolition of the policy was that now Cubans were being treated like every other immigrant group. This argument was, of course, not mentioned by the Trump administration in its official announcement of normalization policy. A number of other less contentious policies were also left in place by the official Trump announcement. For instance, those related to cruises, to Cuban-American travel and remittances, and to limits on the value of tobacco and rum that could be brought into the United States from Cuba trips, as well as the grandfathering of contracts already signed, as mentioned before.

General equilibrium effects of policies and strategic interactions illustrated by migration and remittances in international settings are engineering considerations that often affect macroeconomic policies.6 For instance, they also arise with respect to restrictions on the use of trade credit to finance exports from the United States to Cuba and embargo compensation issues. For example, agricultural interests have been working on a bill that would allow financing by private sources in exchange for paying an excise tax on agricultural sales to fund payments of certified claims of expropriated property (Gámez-Torres 2017).

Since the Cuban government has tried to make compensation for costs of the embargo a required item in negotiations about compensation for expropriated properties, this potential bill would allow the Trump normalization policy to be tough on Cuba and at the same time permit an increase in U.S. agricultural exports to Cuba. Whether it would get enacted by Congress, however, is a different issue. At this point it just provides another illustration of how a policy change could generate general equilibrium effects between goods flows and capital flows as well as strategic interactions effects if non-economic considerations led to their enactment by Congress.

(p.201) Concluding Remarks

One of the main policy changes actually adopted by the Trump administration is limiting doing business with the Cuban military by both tourists and firms. It is an attractive policy goal for a variety of laudable reasons, especially signaling concerns about human rights. By the very nature of the Cuban economy, however, it is nearly impossible to do a substantial amount of tourism in Cuba’s hotels and resorts without doing business with the military. GAESA, a conglomerate controlled by the military, is heavily involved in domestic air travel and tourism enterprises, including hotels, restaurants, and stores. For instance, the Cuban military recently took over Habaguanex, which controls hotels, restaurants, and stores in Old Havana. The latter is one of the main tourist attractions in Cuba. Habaguanex has over 20 hotels in Havana in the list of 180 Cuban forbidden firms. This is good news for Airbnb and Cubans with rooms to rent but less so for tourists and the hotel industry in Cuba.

Another major policy change adopted by the Trump administration is that individual travel for American tourists who are not Cuban-Americans will be far more limited than under Obama’s normalization policy. A list of relaxations on travel and remittances for both types of tourists under Obama between January of 2015 and October of 2016 is available (Sullivan 2017, 26). Using Table 8.6 figures, these relaxations led to an increase in travel by NCAs during these two years of 104 percent per year. By contrast, the increase in travel by Cuban-Americans during these two years was 12 percent per year. This estimate generously assumes that all of the increase in travel came from Cuban-Americans, in contrast to the Perelló (2016) estimate of 75 percent of Cuban diaspora travelers being Cuban-Americans in 2015 reported earlier. Perhaps the most significant travel restriction reimposed by the Trump administration in the November 2017 implementation of normalization policy is the elimination of the individual people-to-people travel category under self-declaration (De Young 2017). It reintroduces licensing for this group category and the need for documentation for all travelers.

Succinctly put, over the next few years one should expect a significant reduction in travel to Cuba by NCA U.S. citizens and from Cuba by Cuban citizens as a result of the change in normalization policy from Obama to Trump. In addition, trade with and investments in Cuba by most U.S. firms will remain at low levels except for a few special cases, for example, Airbnb.

Notes:

(*) Roger R. Betancourt, University of Maryland, Betancou@econ.umd.edu.

(1.) This chapter significantly updates an earlier paper on the general topic of the Trump administration potential Cuba policy. Comments on the earlier paper by Luis R. Luis, John Devereux, and Jorge Perez-Lopez continue to benefit this chapter. Comments on the present version by Richard Witmer have substantially improved the exposition, especially for the benefit of nonspecialists. Any errors new or old are the sole responsibility of the author.

(2.) Background on embargoes, the history of Cuba’s embargo, and the positions taken by various economic agents and policymakers in Cuba and the United States are available in an earlier paper (Betancourt 2013). An important insight from that paper is that statements true about one economic dimension are often false or irrelevant about the other two. Thus, in general, it obscures rather than enhances our understanding to lump them together.

(3.) One interpretation of this policy change would be that it was intended to make it difficult for the incoming Trump administration to reverse normalization policy without clashing with its anti-immigrant position. An alternative one would be that it was a parting gift to the Cuban government, which had long argued that the wet foot, dry foot policy was a provocative incentive designed to stimulate Cubans to migrate to the United States. Both seem far-fetched.

(4.) The “export” services label is used to emphasize that tourist revenues play the same role as goods exports and exports of professional services in terms of providing foreign exchange to any economy.

(5.) The Cuban-American community is very heterogeneous in its attitude toward normalization and attitudes can be segmented by time of arrival of cohorts in the United States, according to a recent FIU Cuba Poll (conducted in October 2016). Recent arrivals (post-1995) are most favorably inclined toward Obama’s normalization policy, including the wet foot, dry foot policy prior to its abolition, but less likely to be able to vote because they have not become U.S. citizens. Prior arrivals (post-1982 and pre-1982) were unfavorably inclined toward Obama’s normalization policy and increasingly so the more distant in time their U.S. arrival date. Not surprisingly, they also were more likely to be U.S. citizens (https://cri.fiu.edu/research/cuba-poll/2016-cuba-poll.pdf).

(6.) Unforeseen factors also generate substantial effects of this type. For instance, the medical reasons leading to evacuation of U.S. embassy personnel mentioned earlier are now expected to prevent fulfillment of the Migration Accord annual commitment allowing a minimum of 20,000 Cubans as permanent residents due to the lack of processing capacity (Cancio Isla 2018).