The Heritage Foundation

Backgrounder #1029 on Latin America

March 23, 1995

March 23, 1995 | Backgrounder on Latin America

A Blueprint for a Free Cuba

(Archived document, may contain errors)

1029 March 23, 1995 A BLUEPRINT FORA FREE CUBA I NTRODUCTION congress is considering legislation to help end President Fidel Castros stranglehold on the Cuban people. The Cuban Liberty and Democratic Solidarity Act, sponsored by Senator Jesse Helms (R-N.C and Representative Dan Burton R-IN) would tighte n the U.S. economic embargo on Cuba, penalize buyers of illegally confiscated American property in Cuba, and withhold economic assistance until Cuba establishes a transitional government.

This legislation is intended to finish something begun decades ago: the liberation of Cuba, once and for all, from Castro and communism. Castro has ruined Cubas econ omy, oppressed its people, and been a persistent security problem for the United States In a very real sense, he is the problem in Cuba. Ridding Cuba of Cast ro and his cronies is a first step toward freedom and prosperity. It is good not only for U.S. and hemispheric security, but for the Cuban people as well.

Life in Cuba is so miserable and repressive that an estimated 40,000 Cubans tried to flee in August 1994 alone. U.S. Coast Guard and Navy ships rescued 32,000 of these refugees, but thousands of others perished at sea. Why is this happening? Because Cas t r os communist system is collapsing. With the end of communism in Eastern Europe Castro lost both his ideological base and billions of dollars in Soviet subsidies. Unable to provide the public services and well-being at the core of the social pact between t he peo ple and the communist state, Castro has lost legitimacy and credibility in the eyes of mil lions of Cubans.

One can only speculate as to how long this collapse will take, but it is certain to be fol lowed by a period of confusion that, properly expl oited, can lead to a free-market democ racy. For this to happen, a post-Castro Cuban government would have to: d Dedicate itself to the principle of democratic pluralism d Support a general amnesty for all members of the former communist regime d Draft a n ew constitution and abolish all legislation which bars free enterprise d Cut the Cuban Army by at least 50 percent and dismantle Castros police state d Ask the Organization of American States to help build democratic institutions d Quickly privatize state -owned enterprises and eliminate all state monopolies.

When Castros regime does fall, the U.S. government should have an action planto help rebuild Cubas economy and civil society. To return to normalcy, a post-Castro gov ernment will need to enact sweepin g economic and political reforms. It also will need help from the U.S. and other countries. If this new government is democratic and refor mist, the U.S. should move quickly to welcome a free Cuba into the fold of democratic nations. Under these circumsta n ces, the U.S. should d Abolish the trade embargo. This would be contingent upon Castros fall from and democratic political freedoms power and the establishment of a mechanism for building a democratic political struc ture and free-market economy for Cuban exports at lower tariff rates would give Cuba long-term access to the U.S. market while ensuring U.S. investors and exporters access to the Cuban market d Restore Cubas share of U.S. sugar imports to its 1958 level. This would allow Cubas largest export i m mediate access to the U.S. market d Provide humanitarian aid to relieve immediate suffering, but avoid the eco nomic aid trap. Only aid aimed at stopping immediate human suffering like food shelter, clothing, and medicine should be given. Economic aid wil l harm Cubas long-term prospects for economic reform d Restore Cubas most favored nation trade status. This would provide markets d Negotiate a free trade area agreement with Cuba as soon as possible. This BLUEPRINT FOR A FREE CUBA What should the Cubans d o after Castro? Although the Cuban dictator shows no signs of stepping down, the severity of the Cuban crisis suggests the need to begin planning for when he does. The most immediate task would be for the Cubans themselves to devise some form of successor g overnment. Assuming that Castros successors wanted to im prove conditions and reach out to the outside world, this government would have to em bark on a reform program. To build democracy and a market economy, a post-Castro gov ernment would have to d Ded i cate itself to the principle of democratic pluralism. A transition period of between six and twelve months may be necessary to establish the basis for a demo cratic government in Cuba. Since the Cuban armed forces and communist party are 2 so strong, they may be represented in a post-Castro government. Reformist elements within the Army and communist party could form a provisional governing commit tee with representatives of Cuban exile communities, leaders of the islands organ ized dissident groups, and p o ssibly officials of the Cuban Catholic Church. Achiev ing an ideologically balanced committee would be a challenge, but the process can be facilitated if members are committed to free-market reforms and creating a politi cally pluralist democracy. This tr ansition government committee should be set up to exist for no more than twelve months d Support a general amnesty for all members of the former communist regime.

Efforts to seek revenge for past human rights abuses and crimes could create much unnecessary social and political conflict, slowing the reconstruction process. One of the first tasks of any government responsible for guiding Cubas difficult transition to democracy should be amnesty for all members of the former communist regime who commit themse l ves to working peacefully and democratically for the islands economic and political reconstruction. Cubas first democratically elected Congress should incorporate the transition governments amnesty into binding legislation d Draft a new constitution and a b olish all legislation which bars free enterprise and democratic political freedoms. The transitional government should issue a de cree permitting dissident groups to form political parties. It also should set a date for an internationally supervised refer e ndum to elect a Constitutional Assembly to draft a new constitution The referendum should empower the Assembly to abolish all laws which prohibit or restrict private enterprise and private ownership of property, and the Assembly should set a date for inte r nationally supervised democratic elections. Ideally, drafting a new constitution and holding democratic elections should take from six to twelve months. The first tasks of the democratically elected Congress would be to ratify the new constitution and rev i ew all decrees or resolutions issued by the transition govern ment state. In a democratic Cuba, there will be no need for the huge military and state se curity apparatus that today forms the core of Castros repressive communist govern ment. Resources now a llocated to maintaining Castros police state can be freed to help dismantle it tions. Some Cubans may still distrust the United States and its efforts to build de mocracy in Cuba. Therefore, it would be wise for the OAS to step in during the tran sition p e riod. The OAS is composed of other Latin American countries that have worked to establish democratic, free-market societies and could provide valuable ad vice to a post-Castro government d Quickly privatize state-owned enterprises and eliminate all state monopolies.

Cuba must move quickly to transfer ownership of productive assets from the state to individuals. This is crucial because the sooner individual owners can benefit directly from privatization, the more quickly the production of goods for consumpt ion or trade will grow. Privatization in other ex-communist countries often has been de layed as policymakers have sought to determine the value of state-owned assets be d Cut the Cuban Army by at least 50 percent and dismantle Castros police d Ask the Or g anization of American States to help build democratic institu 3 fore selling them to private investors. But viewing privatization as a source of reve nue for the state merely slows the process as government bureaucrats hold out for higher bids. Moreover, i t is an unethical practice because the assets being sold are property the state has stolen from private individuals A new Cuban government will have at its disposal a wide range of options in trans ferring government property to private hands quickly and e fficiently. Smaller busi nesses could be sold directly to their employees. Larger enterprises might be reorgan ized and sold to workers under employee stock ownership plans. The experiences of the Czech Republic, the Baltic States, and even Russia offer a variety of examples of what to do and what to avoid. Cuba need not reinvent what has been discovered else where The Role of Foreign Investment. Foreign investors could be allowed to purchase shares in Cuban firms after the U.S. embargo has been lifted. Ho w ever, any business that existed before the Cuban revolution and still survives after Castros departure should first be offered to its original owners. For example, Chrysler Corporation Johnson and Johnson, Inc., Texaco Corporation, and a host of other com panies had their property confiscated by Castro. These factories and businesses were pillaged by the communist bureaucrats who seized control of them.

Investors from Canada, Mexico, Germany, and other countries have bought these confiscated properties from the Castro government. However, by doing this, they es sentially have bought stolen property which the Cuban government had no right to sell. These properties should be returned to their rightful owners by the post-Castro government Reviewing Property Cl a ims. In order to privatize state-owned assets and to make certain that previous owners recover their property or receive compensation, the new Cuban government should establish a privatization oversight agency and a property claims court. The oversight ag e ncy would coordinate and implement the privatization program. It also would process claims for confiscated assets. The independent prop erty claims court would review cases in which there are several claimants or other complications. In such cases, the pr i vatization agency would act in accordance with the claims court decision. If cases cannot be decided within a certain length of time the agency would proceed with its plans to dispose of the assets, and privatization would not be delayed. When the court f inally reached a decision, the winners would receive compensation.

The privatization agency might avoid court delays and conflicts by giving vouch ers to legitimate claimants reflecting the value of their claims. They could be used to bid on the assets tha t are for sale. Thus, former owners would be compensated for their loss of property.

The agency should establish a time limit within which all claims must be made. In addition, a certain percentage of the proceeds generated from asset sales could be set 1 1 Telephone interview with Thomas E. Cox, Executive Director, U.S.-Cuba Business Council, Washington, D.C March 1995 4 aside to compensate people with legitimate claims who were unable to win back their property through the bidding process. While compens a ting former owners of private property is important, the overriding goal of privatization should be to return govern ment-owned enterprises to the private sector as quickly as possible d Eliminate abusive government regulations and establish a quick proce s s for obtaining a business license. In many less-developed countries, obtaining a busi ness license is very complicated and time-consuming, sometimes requiring bribes and kickbacks. Even after businesses are granted a license, the huge costs of comply ing with the haphazard application of numerous regulations may nearly bankrupt them A post-Castro government will be tempted to impose many regulations to man age the transition to a free-market economy. This would be a mistake. Instead of im posing oppressiv e regulations, the new Cuban government should consider self regulation regimes like those that exist in the United Kingdom: voluntary associa tions of businesses that produce similar products and establish their own product safety, health, and other stand a rds. Each association has a label or trademark that ap pears on the product produced. It is up to the consumer to decide for himself or her self which standards justify the cost of the product. Companies that do not participate in the self-regulating regi me are unable to use the trademark and thus unable to claim that their product meets the industry-set standards.

In addition, the new government should establish a one-stop shop for business li censes and even offer them through the mail. Such a system wil l allow potential busi ness owners to set up shop quickly without the delays that exist today in many other developing countries d Establish a stable, convertible currency. To facilitate economic activity, interna tional trade, and privatization, the new g overnment of Cuba should move quickly to establish a stable, convertible currency. A growing, advanced economy cannot exist without a sound currency as a store of value-something people can save to use for purchases or investments. A sound currency also s e rves as a medium of exchange, al lowing businesses and individuals to trade with one another, while saving the ex penses and eliminating the inefficiencies of a barter economy. To perform these func tions, a currency must keep its value over time. Thus, i t must not become inflated.

Some reformers may suggest that Cubas central bank should be given the task of making Cubas peso a stable currency. This also would be a mistake. It was this bank that ran the printing press to fund the Cuban budget deficit and provide massive sub sidies to the public sector, inflating the Cuban currency and making it worthless Currency Board. Rather than work through the central bank, the new Cuban gov ernment should abolish it and establish a system in which the currency canno t be ma nipulated easily by the government. The government could use the U.S. dollar for its currency, but this might create political problems, with national pride leading the Cu ban people to reject the U.S. dollar.

Johns Hopkins University economist Ste ve Hanke and George Mason University economist Kurt Schuler suggest that ex-communist countries set up independent cur rency boards to establish a convertible domestic currency.2 The same could be done 5 for a post-Castro Cuba. A currency board issues not e s and coins that are backed di rectly by a foreign currency, such as the U.S. dollar. Citizens and businesses could exchange these notes and coins for dollars or for any other established currency, bas ket of currencies, or commodities at a fixed rate. Ma rket forces, not a central bank would determine the money supply. Over 60 countries have instituted currency boards since 19

00. Hong Kong and Singapore are notable examples of economies with very stable currencies overseen by currency boards. Hong Kong, for example has had an average inflation rate of about 7 percent since 19

80. Singapores average inflation rate between 1980 and 1991 was only 1.9 percent d Establish a legal and institutional framework to protect private property. The core of the free-mar ket system, from which all other principles derive, is the right to own and dispose of private property as one sees fit. Proclaiming this right is rela tively easy. Guaranteeing it, especially against government expropriation and abuse is far more difficu lt. Privatization and a stable currency will bring prosperity only if the right to own property is fully protected.

To achieve this goal, a new Cuban government should re-establish the commercial code of business that existed before Castro. A commercial code sets the rules for all free-market activities and transactions. It defines what a contract is, what constitutes a buyer and a seller, and how disputes should be arbitrated. But enforcing contracts and arbitrating disputes also requires an institutional framework. This means estab lishing a judicial system with its own binding, independent powers to protect the in te g rity of private property and the right to contract, which in turn may well mean abolishing all existing communist courts and appointing a completely new judiciary d Liberalize trade and eliminate restrictions on foreign investment. Free trade is necessary for countries attempting to overcome decades of economic decay under communism. High tariff and non-tariff barriers add to the costs of machinery, equip ment, and other goods needed to increase productive economic activity. Trade barri ers also price cons umer goods out of reach of many workers and lower the living standards of others, removing incentives to work hard and to be productive.

Trade was very important to Cubas economy before Castro, accounting for 57 per cent of gross national product. Before t he revolution, the U.S. was Cubas principal trading partner. Reestablishing trade ties with the U.S. and the rest of the world is cru cial to Cubas economic recovery.

The trade practices of a free-market Cuba should conform to those outlined in the Genera l Agreement on Tariffs and Trade (GATT). Though Cuba signed GATT in 1947 and remains a participating member to this day, it has drifted from the Agree ments free-market principles. Cuba should start by complying with the Harmonized Tariff Classification a nd Coding System to bring its trade accounting methods in line with the rest of the world. It also should amend and clarify its customs laws to harmo nize them with international trade standards 3 2 3 Ibid.

Steven H. Hanke and Kurt Schuler, Currency Boards for Eastern Europe, Heritage Lecture No. 355, December 12,1991 6 While some claim that it has made some progress in opening its economy to for eign investments and imports, Castros Cuba remains anything but a free and open market. Customs officials are n o torious for their corruption, often requiring bribes kickbacks, and other special favors to release imported goods held at the border In other cases, the scarcity of goods has provided incentives for corrupt border officials to steal imported goods and ke ep them for their own use. Cubas customs system will need to be entirely overhauled to root out these border bandits.

By removing restrictions on legal foreign investment, a free Cuba could receive as much as $3 billion in foreign investments from Cubans n ow living in exile-an infu sion of capital not available to most ex-communist countries A post-Castro govern ment should make it easy for foreigners to invest An especially promising source of capital might be joint ventures and strategic alliances that a l low foreign companies to manufacture products jointly with private Cuban companies. Because both partners gain by sharing costs and information, newly privatized Cuban companies could greatly expand their access to new technologies, management techniques, distribu tion channels, and capital. To make joint ventures attractive, Cuba should avoid strict antitrust laws that discourage such alliances d Promote rapid development of competitive and efficient financial institutions including stock and bond markets . A new Cuban government should move quickly to establish a free banking system. In doing so, it should take a lesson from the United States on what not to do. The U.S. separates investment banking from sav ings and loan banking. But making banks less dive r sified often makes them less able to deal with economic hard times that might reduce profits for one banking activity like savings and loans, but not for another, like investment banking. A post-Castro government should allow its banks to engage in all fo r ms of banking activity. It should not separate investment banking from savings and loan banking Fostering Small Banks. A new Cuban government also should create cooperative banks. These are small banks, operated locally by individuals that lend mainly to other individuals. These banks provide small lenders immediate access to credit that might be denied by larger banks, which have a tendency to lend to businesses and corporations rather than to individuals.

Cuba should avoid Americas banking insurance mist akes. The U.S. government in sures banking deposits and charges the same rate regardless of whether a banks lend ing policies are reckless or sound. This is like charging the driver who has had many accidents the same price for auto insurance as those who have never had an accident.

Banning market pricing of insurance in banking has removed the market incentive of high insurance rates that would discourage irresponsible or risky lending. This was a major cause of Americas savings and loan crisis during the early 1990s To avoid this problem, a new Cuban government at a minimum should charge banks market rates insurance. Better still, in the long term, Cuba should allow private insurance companies to underwrite its banks Competing Currencies. After Cuba. has established a currency board to stabilize its monetary policy, it should consider. developing a banking system in which all cur rencies are legal tender, including those issued by private institutions. Such a finan cial system would be analogous to a bank i ng system in which individual banks issue 7 a variety of instruments such as checks or credit cards, depending on consumer pref erence. Similarly, the Cuban government should permit Cubans to determine what currency best suits their needs, whether for tra d e transactions, investment, or individ ual consumption. Such a system would foster maximum competition among banks and minimize the possibility of government manipulation of the currency. Moreover it would set an example of a free-market monetary and bank ing system that could be come the model for other countries, including the U.S.

A sound stock and bond market is necessary to attract domestic and foreign invest ments. It also can assist government privatization efforts: a functioning Cuban stock market w ould be an ideal place to sell off large state-owned enterprises. The stock and bond market is a fundamental function of a free market It allows buyers and sell ers to establish the conditions for purchasing and disposing of property. A private stock and b ond market will be essential in a post-Castro Cuba d Establish a tax structure that promotes economic growth. The new Cuban gov ernment would do well to design a tax structure that balances the need to generate revenue with the disincentives inherent in a n y tax scheme. Taxes, by their nature, dis courage individuals from engaging in the activities that are being taxed. Thus, Cuba should avoid income and business taxes altogether. These taxes penalize the very ac tivities that should be least burdened-worki ng and starting businesses-by remov ing assets from the hands of the most productive forces in the economy.

A post-Castro Cuba would be better off with a system that taxes consumption, like a national sales tax, which affects all individuals equally becaus e they pay only on what they consume. Taxing consumption penalizes individual productivity less than taxing income or business does. Less desirable-but still better than an income or business tax with progressive rates-is a flat tax imposed equally on all income lev els. For example, a 15 percent flat tax applies to the person who makes $5,000 a year as well as to the person who makes $50,000 a year. Thus, people are not punished for being productive.

Finally, the new Cuba would do well to pass a constitut ional requirement that lim its the size of its budget to a percentage share of gross domestic product. By holding down spending, the government would help assure that taxes remain low while the economy continues to expand AMERICAS ROLE IN A FREE CUBA The U nited States should help a reformist Cuba make its way toward democracy and a free-market economy. To prepare for the day when Castro is no longer in power, the U.S should have a plan ready to deal with the post-Castro era. A freely elected government in t he view of many economists, will make Cuba once again one of Americas most im portant trading partners in the hemisphere. It therefore is in Americas interest to help Cuba change from communist totalitarianism to democracy and a market economy. To do this , the U.S. should d Abolish the trade embargo. When Castro is gone, and immediately following free elections in Cuba (but not before), the U.S. should eliminate the trade embargo.

American businesses should be given the chance to trade and invest in Cuba a s 8 quickly as possible. Abolishing the embargo will encourage further economic reform and the elimination of restrictions that hinder investment by and trade with the U.S d Restore Cubas most favored nation trade status. Cuba was one of the original sign atories of the General Agreement onTariffs and Trade in 19

47. Since Castros takeover in 1959, however, Cuba has not conformed to GAlT rules and procedures.

In 1962, because of Castros anti-Americanism, the U.S. revoked Cubas most fa vored nation status, which normally provides each GAlT member with equal trade treatment! Also in 1962, the U.S. imposed a trade embargo which, for the most part remains in effect. Renewing Cubas most favored nation status would ensure that Cu ban exports to the U.S. are trea t ed as fairly as those from the rest of the 112 GATT member countries with which the U.S. trades. It also would help Cuba, in the short run, to attract investment capital d Negotiate a free trade area agreement with Cuba. As Cuba overcomes the diffi cultie s of reorganizing its ruined economy, the U.S. should be prepared to start nego tiating a free trade agreement with Cuba that removes all tariff and non-tariff barriers to trade between the two countries. In the long term, the U.S. should help negotiate Cu b as entry into the North American Free Trade Area with Mexico and Canada Framework Agreements. U.S. trade negotiators first should work with a free Cuba to establish the framework agreements necessary to bring Cuba into the North American Free Trade Area. T hese agreements, which already exist for most Western Hemisphere countries, establish the basis for free trade negotiations, often setting tar get dates for negotiations, topics of discussion, and the objectives of such discus sions. The U.S. then should n egotiate a bilateral free trade agreement with Cuba as quickly as possible. This would avoid the delays that would result if the U.S. tried to bring Canada and Mexico into the negotiating process from the start largest export commodity. The U.S. governmen t established a quota system in 1934 that restricts sugar imports. The U.S. sugar quota for Cuba in 1958, for example, was 3.2 million metric tons a year. Since then, the embargo has barred all Cuban sugar ex ports to the United States. As a result, the Am erican sugar industry remains highly protected from Cuban competition.

After Castro falls, it will be necessary to stimulate Cubas economy by increasing Cuban sugar exports. To give Cuba an immediate market for its main crop, the US will need to restore a substantial portion of the 1958 3.2 million ton annual sugar quota. In the long term, Cuba must diversify its economy and increase foreign ex change earnings in tourism, manufacturing, and numerous agricultural goods, but in creasing sugar exports would allow it quickly to earn much-needed hard currency.

Higher sugar imports will mean lower prices for American consumers and for American enterprises that use sugar in their products. Studies have shown that sugar quotas cost Americans from $600 million to $3 billion a year in higher prices5 To d Restore Cubas share of U.S. sug ar imports to its 1958 level. Sugar is Cubas 4 5 SeeTariff Classification Act of 1962, Public Law No. 87-456 stat. 62 (1962).

See U.S. Department of Commerce, United States Sugar Policy, An Analysis (Washington, D.C U.S. Government 9 combat high costs to c onsumers, America should open its sugar market. The emer gence of a post-Castro Cuba would give policymakers an ideal opportunity to begin to scrap the U.S. sugar quota system trap. Cuba might well be the one country that emerges from communism without ev e n a pretense of needing foreign aid. The two million Cubans now living in exile in the U.S. are expected to provide as much as $3 billion a year in investments and assistance to a free Cuba. This infusion of private capital surely would dwarf any eco nomi c assistance from the U.S. government. Moreover, the failure of the U.S.

Agency for International Development (AID) over three decades to bring prosperity to less-developed countries suggests that little can be expected from bilateral foreign aid to Cuba. Experience in Eastern Europe following the collapse of the Soviet em pire demonstrates that massive amounts of foreign aid are of little use in developing free markets. Free and open enterprise and investment policies, on the other hand spontaneously have created economic growth in such former communist countries as the Czech Republic.

The new Cuban government might be tempted to take whatever foreign aid is of fered, ostensibly to pay for the transition to a market economy. The U.S. should hold out no suc h temptation. After a post-Castro Cuba has established guidelines for demo cratic elections, the U.S. should offer assistance, but only for emergency food or medical help. By using aid in this way, the U.S. can assure that its efforts truly help Cuba inst e ad of causing it to become addicted to foreign aid Finally, the U.S. should use its influence with such organizations as the Inter American Development Bank (IDB World Bank, and International Monetary Fund to discourage all types of loans and grants to Cu b a. These institutions have a long his tory of funding the very government-controlled economic policies that have main tained poverty and economic stagnation in most developing countries V Provide humanitarian aid to relieve suffering, but avoid the econom i c aid I CONCLUSION The question is not whether Castros bankrupt communist regime will collapse from its own weight, burying for good the failed utopian vision of Marxism in the Western Hemisphere, but when. Once it happens, a transition government will ha v e to take a num ber of immediate steps to help arrest political, economic, and social turmoil. These should include a commitment to democratic pluralism; a general amnesty for members of the former communist regime; a new constitution dedicated to limited self-government private property, and free enterprise; the dismantling of Castros police state; and a will ingness to work with international organizations to effect the transition to democratic capitalism.

Beyond that, there is much the United States can do to assist a free Cuba in its transi tion to independence and prosperity. The U.S. will have the chance to adopt a trade, not Printing Office, 1988 and International Trade Commission,The Economic Effects of Significant U.S. Import Restraints Publicatio n No. 2699, November 1993 10 aid" strategy so often avoided with other developing countries. Instead of making Cuba dependent on large levels of U.S. foreign assistance, the most important thing Washing ton could do would be to establish a free trade relat ionship once the post-Castro govern ment commits itself to democracy and a market economy.

The often difficult relationship between Cuba and the United States is about to take yet another turn. It will be up to both countries to see that this relationship avoids the pitfalls of the past.

Bryan T. Johnson Policy Analyst John P. Sweeney Policy Analyst 11

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