Why American trade is no panacea for Cuba's economy

When Barack Obama landed in Havana on Sunday, becoming the first sitting U.S. president to visit Cuba in 88 years, he probably didn't have Richard Nixon far from his mind.

Back in 1972, President Nixon remade the geopolitical map with a historic visit to China. And while the relationship between America and China remains fraught and complex, one legacy of the visit was a remarkable boom in economic trade between the two nations. This week, Obama is attempting a similar political gambit in Cuba, and it's fair to say a similar blossoming for economic trade is one of the hoped-for results.

But it will take more than just that to lift Cuba's economy — currently a measly $6,789.80 per person — out of the hole it's in.

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For half a century America has kept Cuba under economic embargo as punishment for its communist government. Recently we've begun poking holes in that wall: Congress authorized more trade in agricultural products, pharmaceuticals, and medical devices trade in 2000. The arrival of the Obama administration eased travel restrictions; commercial airlines should begin scheduling flights later this year. And earlier in 2016, restrictions that required Cuba's state-run enterprises to buy imports with cash on hand rather than with credit (which effectively shut down trade in things like rice, wheat, and corn) were eased as well. More American cellular and satellite services are now permitted to operate in Cuba by the U.S. government, and bans for lots of other items are being eased on a case-by-case basis.

Obviously, the potential end goal is lifting all U.S. restrictions on businesses and companies trading with Cuba. Chicken exports to Cuba, of all things, are instructive: The trade thrives despite the hurdles because Cuba is close, and shipments can arrive quickly. All told, America could be supplying half of Cuba's food imports under normal conditions.

And while Cuba's market is far too small to make much of a difference for American economic growth, the Cuban government estimates the embargo has cost their economy a cumulative $116.8 billion in economic output, measured in constant dollars. Since all Cuban economic output since 1970 adds up to roughly $1.3 trillion, we're probably talking a loss of 5 to 7 percent for Cuba's economy over the last half century.

That's not nothing. On the other hand, it's not enormous either. And that brings us to Cuba's side of things.

International trade is not some magic elixir that's absolutely crucial for a country to concoct. Countries can build up their economies with the resources they already have on hand; they just need international trade to get the things they can't make themselves yet, or the natural resources they just don't have. And Cuba has plenty of natural resources: mineral and energy deposits, along with land and labor for crops. Really, Cuba shouldn't be importing food at all. It could arguably be a net exporter of agricultural products like fruits and vegetables, and probably hogs, beef, and those aforementioned chickens as well.

The American trade embargo, while destructive, can't shoulder primary blame for Cuba's failure to make use of its own internal resources. American capitalism suffers from myriad stupidities, injustices, and general destructiveness. But Cuban communism is crushingly terrible.

To President Raul Castro's credit, the government began liberalizing once he took power in 2008. They've decentralized agriculture, allowing many small private farms to spring up and private business to sell the produce. The economy has opened up to other small businesses like taxis and hair stylists and the like. (Though onerous quotas and regulations and taxes often remain.) Buying and selling real estate property in Cuba became legal in 2011, and Cubans can now own TVs, electronics, kitchen appliances, microwaves, and more.

But it's not enough. For instance, many of the new private farms are failing because Cubans can't get the automobiles and other equipment they need to create a fully functioning agricultural market. (Cubans can buy cars, but only at a steep markup through government-run entities.) This gets to the point that an economy is a holistic ecosystem: Freeing up bits and pieces here and there isn't going to cut it. The Cuban people must have the freedom to buy and sell the resources they all need to experiment, and then trade those solutions when they succeed.

So Cuba needs to spread the liberalization across as many activities as it can. It needs to reform its banks and finance system so Cubans can get the credit they need to start businesses; it needs to allow Cubans to both buy and sell the goods and services they need with one another and with companies elsewhere; and it needs to allow Cuban enterprises to pay people directly rather than running everyone's income through a central government ministry.

That said, there's plenty for the government to be doing. It still does a fine job running Cuba's universal health care system. The country's infrastructure is badly in need of an update, and that's often a public good government is best situated to provide. The government can use the provision of those public goods to serve as the employer of last resort, and it should also bulk up its welfare aid for the poor, the disabled, the unemployed, the retired, students, etc, to keep demand for goods and services and jobs in its new liberalized economy as robust as possible.

Right now the government owns a controlling stake in all major Cuban companies; it could shift from that to something like sovereign wealth funds that own a piece of all major enterprises — with limited corporate voting rights or none — and use the revenue to fund the government budget. And it should reform its monetary system, so it can use its control of its currency to properly backstop its spending.

In short, the Cuban government doesn't need to throw open its borders and allow international corporations to come pouring into the breach. It does need to free the economic potential of its own citizens from the bottom up.