James McCusker

James McCusker

Don’t expect a business boom from Cuba

  • By James McCusker
  • Thursday, April 7, 2016 2:11pm
  • Business

For most Americans, the Cuban Missile Crisis began with a presidential address. Later, there was a most unusual television appearance by then-Secretary of Defense Robert McNamara. He provided what was nothing less than an intelligence briefing on the situation, complete with overhead photography of the ballistic missile installations that the Soviet Union had built, armed, and readied for use.

The medium and intermediate range missiles were capable of hitting targets in the U. S., including cities like New York, Chicago, and Washington, D.C., which brought a new element to the Cold War. It also brought new energy to the so-called “hawks” in government, still smarting from the humiliating failure of the ill-starred Bay of Pigs invasion, who wished to invade Cuba, destroy the missiles, and overthrow the communist Castro regime.

A non-public briefing by the military gave the hawks’ misconceptions a dose of cold reality. It started with a lesson in geography: a map of the United States with the outline of Cuba superimposed. The island’s length reached from Washington, D.C. almost to the banks of the Mississippi. Cuba was no tiny Caribbean atoll with an unpopular dictator defended by a disillusioned, dispirited Army. The briefing officer stated the military leadership’s estimate that we would suffer over 18,000 casualties in the first 10 days of an invasion…and the room went silent. And that number did not consider any Cuban retaliatory use of the nuclear missiles.

Misconceptions like the vision of a piece-of-cake invasion have dogged our relationship with Cuba over the past 70 years, and the recent restoration of diplomatic recognition continues the process. Chief among the current crop is that the lifting of the trade barriers erected by the U.S. after the Communist takeover will transform the Cuban economy and beautify Cuban views of democracy, capitalism, and the United States. While that is a possibility, of course, it is little more than wishful thinking at this point. One of the few reasons why it is a possibility at all is that it is a popular idea in Cuba as well as here. For generations the Cuban people have been told by their government that it was the U.S. trade embargo that was sabotaging their economy. Naturally, then, they might assume that the lifting of the embargo would free up the economy and let the good times roll.

The reality of the Cuban economy, though, is that it wasn’t the US trade embargo holding back their economic growth; it was their own government. During the 56 years of that embargo the number of countries in our world grew from 163 to 193 … and Cuba was free to trade with any of them except us.

The problem was that as a Communist, state-run economy, Cuba had neither the cash nor a decent credit rating. This stifled normal international trade and for decades the Cuban economy lived on leftist jive talk, Soviet aid, and trade agreements with other Communist states that were essentially barter agreements.

Cuba is not impoverished in comparison to some parts of the world, but its economy is not a stellar performer, either. The World Bank calculates that per capita income for Cuba is approximately $5,880, about the same as India’s and roughly equal to a third of Mexico’s and a tenth of what residents of the U.S. enjoy. This puts severe limitations on the amount of disposable income available to purchase imports, even if Cubans were free to buy them without restrictions — which they are not.

There is no doubt that many American products are attractive to Cubans but they will have trouble fitting them into their budgets, even in the unlikely event that the Cuban government takes itself out of the equation.

One of the things that economics students are asked to learn is the distinction between “demand” and “effective demand.” The difference is simple: money. Demand is what we want; effective demand is what we can actually pay for.

Economists are so used to the distinction that they leave out “effective” in their discussions. When John Maynard Keynes talked about “inadequate aggregate demand” during the Great Depression, for example, he meant inadequate effective aggregate demand. During the Depression people didn’t stop wanting to buy food, or warm clothing; they just didn’t have the money to do so.

It doesn’t seem likely that we are looking at a bonanza for American businesses. U.S.-Cuba trade will be limited in the short run by Cuban consumers’ effective demand. American producers will enjoy a comparative advantage over their European competition because of lower transportation costs but Cuban imports will still be a small pie to be divided up … unless someone steps in to finance an expansion. Let’s hope that someone doesn’t turn out to be the American taxpayer.

James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.

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