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Friday, November 30, 2012

Free Havana (Club) – and Santiago de Cuba, Too!

By Jeffrey W. Stempel and Ann C. McGinley

As readers of last week's New York Times (see Damien Cave, Easing in Cuba Renews Debate on U.S. Embargo, N.Y. Times, Nov. 20, 2012, at A1, col. 2) have been reminded, the United States government's embargo of Cuba, long subject to question, has increasingly become viewed as wasteful and foolish, a relic of the Cold War era – and probably an unwise overreaction to Castro even then.1 But supporters of the embargo (described as a "blockade" by the Cubans themselves) remain sufficiently numerous and politically powerful that change seems unlikely, notwithstanding changes in the Cuban government’s attitude toward private enterprise and the looming exit of the Castro brothers from political leadership.2

Based on what we saw during a recent visit to Cuba with a group of American lawyers and law professors, the continuing U.S. support for the embargo is indeed unfortunate, unwise, and unnecessary. We are old enough to remember a time when a U.S. "hard line" toward Cuba may have made sense in light of the risks posed to the U.S. by an aggressive Soviet Union looking for satellite states during the Cold War. But the Soviet Union has been "dead" for more than 20 years and the time for either worrying about Soviet/Cuba military aggression or thinking that economic sanctions will bring a massive shift in Cuban government is long past.

We have no illusions regarding the Realpolitik of the Cuban Revolution or the occasional (perhaps even frequent) ruthlessness of the post-Revolution government. Too many alleged "counter-revolutionaries" died at the hands of firing squads to hold such illusions. But however blameworthy some of its methods may have been, the Revolution appears to remain strongly popular with the populace, even as that populace seeks greater economic prosperity, making now the ideal time for U.S. business to have greater access to Cuba (more on that in a minute). The Revolution appears to have delivered on its promises of providing universal education and health care to a country previously ignored and exploited by the elite. Although Cuba is poor, the vast majority of Cubans seems to see itself as better off than in the pre-Castro days when there was rampant corruption and wealth at the top of the socioeconomic scale but only a subsistence level existence for the bulk of the people.

More important, as noted in the Times article, the Cuban government and the Cuban people have warmed to the private sector and free market economics in a way that was unimaginable 50 years ago. Although the lawyers, academics, and government officials with whom we met were careful not to criticize the original premises of the Revolution or question the government’s continuing commitment to socialist principles, one need not read much between the lines to see that Cuba now not only tolerates market-based economics but is willing to embrace it in many areas in the pursuit of prosperity. To be sure, Cuba will not be a de-regulatory haven anytime soon. But all signs seem to point to a hunger for increased foreign investment and reasonable access to the U.S. export market.

Increasingly, there are signs that Cuba will be the type of economic actor that can fully participate in modern commerce. Although it remains committed to Revolutionary ideals of equality and a substantial public sector, the Cuban establishment has recognized that market-based policies and solutions have role to play even in a government that continues to assert (at least for public consumption) that it remains committed to socialism as part of its progression to communism. More important than rhetoric are the facts. Twenty years ago, nearly all economic activity in Cuba was state-controlled.

For example, today, the public sector accounts for "only" 81 percent of the economy (it was essentially a hundred percent 15 years ago). The government is creating incentives for farmers to return to the land by leasing property to them and allowing them to keep a substantial portion of their profit. Government officials described this initiative to us as crucial to "national security." We understood this to mean that if there is insufficient agricultural production and Cubans go hungry, there will be political unrest that the government may not survive.

After the Soviet collapse, Cubans suffered during the "Special Period" in the early 1990’s when people went hungry and were limited to only a few hours a day of electricity. In response to this period, the government has instituted market-driven solutions not only in the rural areas but also in cities, where there are a large number of "self-employed" individuals who sell items to tourists. The government supports these enterprises. These small business owners employ up to five employees per business, and the legislature is re-writing its labor code to assure that both owners and their employees have rights protected by the law. The trend toward a greater role for private industry, markets, and individual initiative in Cuba is now well on its way. Without the burdens of the embargo, Cuba could experience a torrent of economic growth with attendant benefits all around.

The case for ending the embargo is more economic than political and rational Americans across the political spectrum should support a lifting of the embargo. The embargo is simply bad business for America as well as for Cuba. Sure, arch-conservatives and the anti-Castro crowd in Miami get some psychological benefit from the embargo. But American businesses – and American consumers – are denied the benefit of open trade with Cuba. For example, as a result of the embargo, Cuban money changers commonly assess a 13 percent currency exchange fee when dealing with U.S. dollars, a fee not imposed on Canadian dollars, Euros, or other common currencies. Eliminating this tax of sorts would likely further expand U.S. tourism and its economic benefits to Cuba. A few additional examples illustrate the potential for economic growth post-embargo.

Near the "five-star" hotel (everything is relative) where our group stayed, on a hill in a middle-to-upper middle class neighborhood, are several other "upscale" hotels on the water. Thinking we were missing something due to our location, several of us strolled to the coast only to be shocked at the lack of upkeep and development of the area, as well as the downtrodden conditions of even these tourist-oriented buildings (the office plaza nearby was in better shape but clearly no Century City). Many of us had the same thought: imagine what Sheraton or Marriott or Omni could do with this location.

In a Cuba thirsting for tourist dollars, U.S. hospitality companies would likely have vast opportunities to improve upon the third-world quality of much of the Cuban tourist industry and reap profits accordingly. Symbolically, the land behind our hotel showed signs of once containing a golf course, since abandoned and now used by area residents for dog walking and impromptu soccer games. Not to wish upon them any reduction in public space, but the land would still make a great layout for a golf course – and we can think of any number of U.S. companies that could make this happen as a paying venture for investors, tourists, and area residents seeking employment.

Similarly, ending the embargo would open up the Cuban market for technology companies, computer hardware and software, consumer goods, and the like. Cubans are famous for continuing to drive their pre-Revolutionary U.S.-made automobiles despite having to use replacement parts from Russia and former Eastern Bloc countries. Although affordability will be an initial problem in a post-embargo world, ultimately these consumers will want the "real deal" in cars once again. Agricultural products companies will similarly have vast "fields" of commerce open in post-embargo world. A trip through rural Cuba shows continued dependence on oxen and horses for agricultural use. The Cuban government, anxious to improve the country’s food production, will probably be in the market for more than a few John Deere tractors in a post-embargo world.

Although Cuba will take a long time to rival Germany and the U.S. regarding quality manufactured goods, some Cuban items (e.g., cigars) are already state of the art. Most memorable for us was the amazingly high caliber of Cuban rum (examined for research purposes only, of course). Despite free-spending efforts on our return to the U.S. in sampling the products of the Dominican Republic, Jamaica, Barbados, and Puerto Rico, we can safely say than none measure up to the two leading Cuban brands: Havana Club and Santiago de Cuba (there are other Cuban-made rums as well). Both are "proof" of a sort that a public sector manufacturer can do as well or better than the private sector at least some of the time.3 Each of these labels offers very inexpensive rum aged for but one-to-three years as well as progressively more aged and more expensive rums, largely topping out at 20 years (although there is a 50-year old variety favored by Russian oligarchs that costs close to $2,000 per bottle, a figure that probably makes Karl Marx spin in his grave).

Even the three-year old rums can be consumed straight without that annoying "why am I gargling with razorblades?" feeling one gets when drinking similar product in the U.S. The very tasty Havana Club Siete Anos (aged seven years) can be had for about $10/bottle in the local convenience store catering to tourists and diplomats, and for much less in "real" Cuban neighborhoods where prices are marked in the Cuban Pesos used by the populace rather than the "convertible" pesos used by tourists as part of the government’s effort to capture more hard currency from the tourist trade. And as for the 20-year-old rums? There is nothing comparable available in the U.S. The Cuban product is not cheap but it would surely sell like hotcakes in alcohol-friendly America, providing Cuba with export income that could in turn be used to buy U.S. products needed for development and prosperity.

Although the story of most wealthy Cubans who exited during the Revolution for Miami, Puerto Rico, or other points is well-known, less understood is the significant number of Cubans of means who stayed on after the Revolution and continue to stay on. The 25 year old tour guide for our group, Juan (a pseudonym), provided a window onto this demographic group. His parents (a lawyer and a professor) were from well-off families of elite Spanish lineage (as in much of Latin America, there is a class structure in which the old line Spanish families have more prestige than those who mixed bloodlines with African slaves or indigenous peoples). They supported the Revolution as a result of witnessing the rampaging inequality between haves and have-nots in the Cuba of pre-Castro dictator Batista, as well as his torture and other abuses of political opponents.4 When the Revolution succeeded, families like Juan’s with more than one house were required to give up their second (or third or fourth) home. Juan’s grandmother gave up her second and third home. Fifty years later, Juan’s family seems to have no regrets.5

Unfortunately, too much of U.S. policy toward Cuba has been influenced by those who fled after the Revolution, contending that it was unfair that they should be deprived of wealth their ancestors acquired on the backs of slaves and oppressed workers, often with the help of pre-Revolution governments that engaged in crony capitalism. Trained in American law, we cannot help but recoil when seeing private property taken without just compensation – an unfortunate feature of some leftist governments. But conservative critics all-too-conveniently gloss over the extent to which the holdings of the displaced wealthy may have been ill-gotten gains as well as the degree to which conservative governments such as Pinochet’s Chile and the military juntas in Argentina have engaged in similar behavior, even to the point of confiscating not just property but the infant children of their political opponents.

Just as Juan reflected a different perspective on reactions of the economic elite toward the Revolution, he also provided rather shocking evidence of the failures of socialism. Twenty-five years old, he graduated near the top of his class in architectural school at the university but has chosen to become a tour guide because the type of work available to young architects is uninteresting, uncreative and not remunerative. He can make more money as a tour guide because of that field’s access to foreigners and their payments in convertible pesos. Likewise, cab drivers in Havana make more than medical doctors, lawyers, or accountants. Something is gravely wrong with an economy in which people who carry passengers for hire (usually without seat belts in junky cars) do better than people who save lives, design buildings, audit financial institutions, or set public policy.

At some point, there has to be a serious internal brain drain as society's most talented eschew the most cerebral callings in favor of huckstering tips. Of course, we make this point with an understanding that unregulated capitalism has also failed many educated young people in the United States as well. Certainly, governments need to combine both market and regulatory elements to encourage growth of the economy and to assure that there is a safety net for those who do not thrive. The mix of capitalist and government elements will differ in Cuba from that in the United States, but there is no question that lifting the embargo and putting Cuba on the road to a more vibrant, normal economy cannot help but enhance Cuba’s deployment of its indigenous talent.

Even without speaking to anyone in Cuba, one can literally see the shortcomings of the country’s past 50 years of centralized economic planning. Cuba’s physical structure is extraordinarily run-down, a consequence of its economic failures, poverty, and lack of building materials. With the influx of U.S. commercial activity, this would surely change fast due to increasing wealth and an acceleration of the already existing efforts to spruce up Havana and the country as a whole for the purpose of attracting tourists.

Looking around Havana, one is reminded of the appearance of former socialist countries such as Czechoslovakia and Yugoslavia prior to the fall of the Soviet Union. The general lack of productivity, prosperity, and efficient deployment of resources provided pretty strong evidence that capitalism (even if heavily regulated) is a lot more wealth-creating than socialism. After the fall of the Iron Curtain, these countries burst forth with pent-up potential and experienced dramatic economic growth that can be witnessed easily today with a trip to places like Ljubljana, Slovenia or Talinn, Estonia. Cuba can experience a similar sort of economic miracle, but only if the embargo is removed and Cuba is brought into the international economic community. All that remains is for U.S. political leaders to recognize reality and to have the courage to take on the remnants of the reactionary forces that would rather punish Cubans and Americans as a whole out of spite for Castro and family estates taken three generations ago.


1. Cuba was, after all, willing to be a staging area for Soviet missiles that could attack the U.S. at close range. According to some accounts, Fidel Castro was willing to cross over the threshold to war over these missiles and was annoyed with his Soviet patrons for backing down during the famous Cuban Missile Crisis of the Kennedy Administration. Castro also provided troops to further Soviet interests in Angola during the 1970s when the Soviets were seeking to expand their influence in Africa.

2. Fidel, 86, is formally retired. Raul, 81, is the current leader but will obviously not hold the position for a great deal longer, simply based on the actuarial tables. Although one of Fidel’s five children is in government, he is not regarded as a likely successor. Neither are any of Raul’s children. Whatever other legitimate criticisms may be leveled at the Castros for autocratic rule, it appears than neither has attempted to establish a political dynasty or make the country a family political fiefdom. Americans quick to criticize the Castros might want to consider the extent to which family empires dominate the political scene in the United States.

3. Havana Club is owned jointly by Corporacion Cuba Ron, S.A., a government-owned entity, and Richard Pernod, the French liquor company. The name is subject to dispute over the company’s continuing prerogative to use the label in the United States, where rival Baccardi (originally a Cuban company with assets seized after the Revolution, prompting its relocation to Puerto Rico and other areas) on which we take no position. The Santiago de Cuba label is produced, bottled, marketed and exported (to places other than the U.S.) by Cuban Ron.

4. As previously noted, we have no illusions that Fidel Castro was a warm, fuzzy, cuddly dictator. But, unlike Batista, it appears that when Castro eliminated political opponents, he had least has the relative decency to do so without the preliminaries of torture. More recently, the current imprisonment of American contractor Alan Gross (now in its third year) on charges of alleged espionage, raises concerns about the conduct of the Cuban government. See Damien Cave, American Held in Cuba Takes Aim At Impasse, N.Y. Times, Nov. 29, 2012, at A6, col. 5. But the lifting the embargo is unlikely to make his situation worse and may make it better through more normalized government relations. As his attorney has noted, "If we can negotiate the release of people in Iran, Burma and North Korea, surely we can find a way to get someone released from Cuba." Id. at A9, col. 4. But perhaps not -- if the embargo remains and the U.S continues to treat Cuba as though the Cold War were still raging.

5. In the same way, Juan seemed to have no regrets about sharing his tips from our group (which were substantial in light of the average Cuban’s income) with others working in the back office of his state-run travel company. That struck many of us capitalists on the trip as unfair. After all, he was working exhausting 16-hour days with us that included translating (extremely well) the bulk of our conversations with Cuban lawyers, academics, and government officials. His response was that his job (and the opportunity to receive tips) existed because of the hard work of others and it was only fair to share. Perhaps we could get this kid a seat on some corporate boards assessing CEO compensation.