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Brooks Wilson's Economics Blog: Economic Reform in Cuba and Sanctions

Friday, October 1, 2010

Economic Reform in Cuba and Sanctions

The Cuban government continues to announce market reforms one drop at a time.  Breitbart reports in “Cuba to allow first US dollar home rentals in 50 years.”
Cuba is to allow some houses to be rented in US dollars for the first time in 50 years as well as the opening up of small businesses as it seeks to shed 500,000 public jobs, state media said Friday.
As central planning unwinds in Cuba, it is worthwhile reviewing the impact of our main policy for dealing with our totalitarian communist neighbor, sanctions.  Sanctions are the restriction of normal trade and financial relations between countries with the intent of changing some political or economic behavior of the target country by inflicting economic pain.  The U.S. government imposed sanctions on Cuba after the Castro regime nationalized American assets in Cuba in 1960.  Hufbauer, Schott, and Elliott whose work, Economic Sanctions Reconsidered (1990) summarized the sanction’s impact.
The US imposed significant costs on the Cuban economy with its trade and financial embargo.  Yet because the USSR was willing to assume a large portion of those costs, the embargo may have exerted a counterproductive effect on Castro, and may have helped consolidate his position in Cuba. 
The standard literature attempts to measure the economic pain inflicted by the sanctions, counter measures taken by the target country or those who oppose the sanctioning country, and they measure the policy change in the sanctioned country.  This literature does not seem to ask if the offending policy implemented by the sanctioning country is sustainable in the absence of sanctions.  The literature does not set up a control variable: the longevity of offending policy in the absence of sanctions.

The Castro regime imposed communism on the people of Cuba.  Communism replaces market generated prices and the information that those prices convey with central planning.  Central planners are unable to replicate the information conveyed in prices and therefore they fail to produce wealth (See Arch Ritter’s “Fidel’s Phenomenal Economic Fiascoes: the Top Ten” for examples of the failure of central planning).  The inability to generate wealth means that communist countries fall behind their neighbors economically and militarily.  To survive, communist countries must allow economic agents to operate in markets to grow.  Communism sows the seeds of its own destruction.  As the old saw states, “communism is the slowest, most painful road to capitalism.”  Sanctions may mask that failure.      >

Hufbauer, Schott, and Elliott wisely observe,

Sanctions also serve important domestic political purposes in addition to sometimes changing the behavior of foreign states.  As David Lloyd George, then a leader of the British political opposition, remarked of the celebrated League of Nations sanctions against Italy in 1935, “They came too late to save Abyssinia, but they are just in the nick of time to same the Government.”  The same is true today.  What president—or Kremlin leader for that matter—has not been obsessed with the need to demonstrate leadership, to take initiatives to shape world affairs, or at least to react forcefully to adverse developments?  And what president—or Kremlin leader—is eager to go to war to make his point?  The desire to be seen acting forcefully, but not to precipitate bloodshed, can easily overshadow specific foreign policy goals.
Are sanctions a peaceful road to impose change on other countries, at least peaceful in the sense that they avoid open warfare?  Are they political cover to do nothing?  Let me suggest an alternative hypothesis.  Sanctions commit sanctioning countries to a policy of confrontation.  If sanctions don’t work, perhaps sanctioning countries will be compelled to war.

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