Cuba and the USD

From: michael a. lebowitz (mlebowit@SFU.CA)
Date: Tue Oct 26 2004 - 21:38:11 EDT

Points concerning the Cuban measures in relation to the US dollar
Michael A. Lebowitz (26 October 2004)

    * The measures announced by the Cuban government yesterday in relation
to the use and circulation of the USD in Cuba are the latest in a series
attempting to deal with the serious problems the Cuban economy faces.
Previous measures related to the USD include (a) the removal of US coins
from currency two years ago, (b) the removal of the USD last year for
inter-firm transactions and restriction of these to the convertible Cuban
peso (set = to the USD), and (c) the temporary closure in May of stores and
the raising of prices in USD by 10-30% for consumer items. The latest
decision removes the USD for use now in consumer purchases from businesses
beginning 8 November and mandates that subsequent conversion from the USD
(but no other currencies) into the convertible peso will carry a 10% tax
(thus effectively lowering the value in Cuba of the USD relative to other
hard currencies); this tax reflects the risk to Cuba of USD conversion in
international transactions.
    * The basic economic factors underlying these measures include the
increased cost of importing oil (which presumably is significantly higher
than projected in the Cuban national budget), the decline in the USD
relative to the Euro and other hard currencies, the continuing problems in
production and export prices for sugar and the significant damage done to
the Cuban economy as the result of hurricanes. These specifically-economic
factors create a major problem in terms of the Cuban ability to import
necessities. The immediate and most serious problem, however, is the effect
of the Bush government measures to destroy the Cuban economy.
    * No actions undertaken by the Cuban government can be understood
outside the context of the efforts of the US government to put an end once
and for all to the Cuban Revolution. While the attempt to do away with this
'affront' to US hegemony in the hemisphere has been a continuing policy of
US governments since the Revolution, no US government has pursued this goal
in as unrelenting a manner (regardless of the effects upon ordinary Cubans)
and has declared publicly its intention to succeed as has the Bush
government.  In the context of the continuing US blockade, the Helms-Burton
Act, etc, last April the US government announced restrictions on visits by
Cuban-Americans to their families in Cuba and restrictions on remittances
to family members sent from the US. Both threatened significant reductions
in the flow of USD to Cuba (and to Cuban family members), and these
measures were the context for the Cuban response in May which increased the
prices of imports. While these U.S. restrictions now in effect have been
well-publicised (and are the source of discontent among some
Cuban-Americans), they are part of a larger package which includes the fine
of $100 million by the U.S. Federal Reserve in May of the largest bank in
Switzerland (USB) for transferring US dollar notes to Cuba, establishment
of a task force to restrict the flow of foreign currencies to Cuba and this
week's crackdown (including the freezing of its US assets) on SERCUBA, a
company that has facilitated the electronic transfer of funds by US
residents to Cubans. The purpose of the Bush government in all this is
clear: 'We are financially isolating SERCUBA to make it more difficult for
the Cuban regime to obtain the hard currency it uses to oppress its own
people and to prop up its government,' explained Juan Carlos Zarate, a US
Treasury Department official on Monday.
    * Cuba's new response is dramatic: it will have far-reaching effects on
daily life in Cuba, and the decision to pursue it now reveals how seriously
the Cuban government views the situation. Removing the USD from use in
consumer transactions with enterprises is consistent with the pattern of
its previous measures--- the need to economise on the USD and to channel
the USD money supply exclusively to use in international transactions; it
is very rational in this respect to substitute the convertible peso (which
already has been serving as a substitute in internal transactions alongside
the USD) but which has no value externally. Most likely, the USD will
continue to circulate within the domestic economy among individuals but the
10% tax on conversions to the convertible peso after 8 November (and the
possibility that this tax could be increased at a later date) should lead
to a significant displacement of the USD from domestic circulation and its
replacement by the convertible peso. Thus, the concentration of US dollars
where they are most important to the Cuban economy will be the result of
this response, and this shift should be concentrated in the period before 8
    * What will be the effect of the new Cuban measures upon Cubans? At
this point we can only attempt to make some reasonable inferences. So long
as issue of the convertible peso reflects foreign exchange supplies,
insofar as the convertible peso is required for all purchases from Cuban
state enterprises the convertible peso should substitute increasingly for
the dollar in transactions and as a store of value. Although the dollar is
not banned and, as noted, is likely to remain to some extent in circulation
in personal transactions and in illegal exchanges (e.g., involving stolen
supplies), to the extent that confidence in the convertible peso grows, a
stable relationship in terms of its use should emerge. (The effective tax
on the USD would encourage this.) Thus, all other things equal, the measure
should be successful in establishing a new balance over time. However, the
immediate effect of this transition from the USD to the convertible peso
may be uncertainty and confusion--- which will be limited to the extent
that the Cuban government is successful in assuring the Cuban people that
the convertible peso will function as a secure store of value.
    * For most Cubans, demonstration that they can convert the national
peso to the convertible peso as in the past (and at comparable rates) at
the exchanges outside the agricultural markets will provide important
assurance over time. For those Cubans fortunate enough to receive regular
remittances from relatives abroad, it is likely that the combination of the
US restrictions and the new Cuban government measures to restrict and tax
the USD (and the encouragement that remittances be sent in other than USD)
ultimately will lead to a significant shift to remittances in other hard
currencies (e.g. Canadian dollars) which will increase the difficulty of US
government monitoring. Those Cubans who will be most negatively affected
will be people with large stocks of USD that they are hesitant to declare
for fear that they will call attention to illegal activities; where they
are unprepared to bring their supplies of USD to the banks for
conversion--- and unable to quickly launder those supplies, they will
suffer a 10% loss in USD wealth on 8 November. In this respect, the
opportunity that the new measures provide for monitoring illegal activity
(both in terms of second economy commodity chains which involve stolen
state property and also foreign government interference) is obvious.
    * The transition to a new stable situation may not come easily, and
there are many opportunities for disruption and uncertainty---both internal
and external--- because of the particular impact of the new measures. For
this reason, it is worth stressing the matter of timing. The acceleration
of measures by the Bush government against Cuba reflects, in part, its
attempt to win the electoral votes of Florida. The timing of the
counter-measures by Cuba (and the short-run effects of these) may similarly
reflect its way of communicating the destructive effects of the Bush
policies to all US citizens (but especially Cuban-Americans).
    * Finally, although the new Cuban monetary measures may solve the
immediate economic crisis that Cuba faces, so long as US policy continues
as it is, these new measures in themselves do little to solve the serious
economic problems noted above. Further, every Cuban knows that the
re-election of Bush will encourage a further acceleration of the attack on
the Cuban Revolution.

Michael A. Lebowitz
Professor Emeritus
Economics Department
Simon Fraser University
Burnaby, B.C., Canada V5A 1S6

Currently based in Venezuela. Can be reached at
Residencias Anauco Suites
Departamento 601
Parque Central, Zona Postal 1010, Oficina 1
Caracas, Venezuela
(58-212) 573-4111
fax: (58-212) 573-7724

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