Latin America: Enduring Less Drastic Declines in Remittances than Predicted

By Gabriel Cabañas*

Ria Money Transfer/ Adam Fagen/ Flickr/ Creative Commons License

The decline in remittances during the COVID-19 pandemic has been less severe than predicted for Latin American and Caribbean countries because many migrants are in essential jobs and industries benefitting from generous U.S. income-protection measures, and a good U.S. recovery suggests positive trends will continue.

  • In April 2020, a month after the World Health Organization declared the pandemic, the World Bank estimated the resulting economic shock would cause remittances globally to drop by around 20 percent over the year – the greatest single year drop ever recorded. The Bank said the decline hinged on the fall of wages and employment of migrant workers. Other factors loomed large, such as China’s announcement that its economy had contracted 6.8 percent in the first quarter of 2020, and Europe, especially Italy, faced growing cases of the coronavirus.

More recent data tell a different story. The pandemic reduced global economic growth to -4.5 percent to -6 percent, which, while devastating, was cushioned by good performance in numerous sectors and industries. Contrary to the prediction of a 20 percent decline in 2020, remittances experienced only a 7 percent drop. Some remittance-receiving countries, including Mexico, actually reported growth in remittances from 2019 to 2020.

  • Generous stimulus programs, which the World Bank could not have predicted, preserved an income flow for companies in “essential” industries employing migrant workers, and those losing jobs received generous unemployment benefits.
  • A shift to digital remittances also made it easier and less costly for migrant workers to send money to their families. Western Union, which is the largest single remittance handler (with 10 to 20 percent of the market), reported that revenues increased 16 to 20 percent in 2020. Other channels appear to be growing even faster. The impact of remittances from migrant workers in the United States was further increased by currency devaluations in emerging economies hit hard by COVID.

Policymakers and academics have traditionally viewed remittances as having marginal positive impact on the economies of recipient countries – judging that foreign direct investment (FDI) has a much deeper impact – but that assessment is changing. A report published last year examined 538 estimates of the impact and found that 40 percent showed a positive correlation, 20 percent showed a negative correlation, and the remaining 40 percent were neutral. Observers increasingly think that remittances used by recipient families for consumption are often their optimal use. During periods of income shock, such as environmental catastrophe, increases in remittances replace roughly 60 percent of lost income, according to some estimates. During the Great Recession (2008-09) FDI dropped 39.7 percent, but remittances only dropped 5.2 percent. For a select group of remittance-receiving countries, including El Salvador, remittances have grown to provide more than 20 percent of GDP.

  • In 1970 remittances worldwide totaled less than $50 billion (in 2018 dollars), and in 2018 they exceeded $600 billion – surpassing all overseas development assistance and, in 2019, all FDI (except Chinese investment). Some experts claim much of this growth is a function of measurement error – caused by how banks track remittances – but the fact that remittances have been steadily growing since the 1970s is no illusion.
  • The hemisphere’s continuing challenges emerging from the pandemic raises questions about the future, but – as long as generous stimulus plans, essential work protection, and a strong dollar continue – remittances to Latin America and the Caribbean appear likely to allow recipient countries some continued reprieve from the economic devastation caused by COVID-19 and help them achieve an earlier economic recovery.

September 3, 2021

* Gabriel Cabañas is studying international relations and economics in the School of International Service.

Latin America’s Head-First Dive Toward E-Commerce

By Alexander Borushek*

Left: Tech Park/ Sebastian Bassi/ Flickr/ Creative Commons License (modified)
Right: Informal work/ Alba Sud Fotografia/ Flickr/ Creative Commons License (modified)

The boom in e-commerce during the COVID‑19 pandemic has been stronger in Latin America than in most other regions, presenting profound consequences for traditional informal economies as well as for citizens previously disconnected from formalized economic and financial networks. Since March 2020, long-lasting and recurrent lockdowns have upended informal economies by forcing people away from face-to-face – and often cash-based – transactions. In response, retailers and consumers have been pivoting toward new online alternatives.

  • The growth in e‑commerce has also been a bright spot in an overall bleak economic landscape, with sales growing by an astonishing 63 percent in 2020, topping $100 billion. Not only did this far exceed estimates from prior to the pandemic (12.5 percent projected in November 2019) or in its early days (19.4 percent in June 2020); it was the largest percentage increase of any region in the world.
  • Latin American consumers appear quite content with the shift. More than 80 percent of the region’s first-time online shoppers say they plan on continuing to do so after the pandemic. This is good news for established entities like Argentina’s e-commerce giant MercadoLibre – which already accounted for about half of all online sales in Latin America and saw 2020 revenues double – and international competitors such as U.S.-based Amazon, Singaporean conglomerate Shopee, and China’s Alibaba subsidiary AliExpress, which are looking to make inroads in the region.

Record sales also highlight the region’s urgent need to address the deficiencies that separate its e-commerce sector from the larger and more sophisticated ones in the United States, Western Europe, and the Asia-Pacific.

  • Of particular importance is infrastructure. Beyond underinvestment in bridges, ports, and highways, the region suffers from significant bottlenecks in the logistics planning processes that affect how and at what speed products are delivered.
  • Larger crossborder synergies are hampered in part by a lack of uniform importing schemes, in contrast to the ease with which products pass through borders of the European Union or into the United States. Another obstacle is the chronically low quality, reliability, and “relevance” of the region’s postal services, according to the Universal Postal Union. In its report last October, the UPU concluded that “compared with its level of economic development, the region has the worst relative [postal] performance worldwide.” Moreover, 60 percent of the “last-mile” delivery industry is made up of either small, often informal, businesses or independently contracted drivers who use their own vehicles. This results in a huge lack of cohesive route optimization. MercadoLibre and other big players are trying to build out independent fulfillment networks, but a lot of work remains.

The e-commerce ecosystem is giving other investors, retailers, and consumers a general sense of optimism that positive change can occur.

  • Millions of citizens have been brought into the banking system since the pandemic, often through nimble fintech platforms like MercadoPago or Brazil’s NuBank (the latter having seen record numbers of new users). Coupled with widespread smartphone ownership and the already-high penetration of mobile internet and data, more people than ever are shopping and will be able to purchase items online.
  • International investor interest in the sector is also high. Recently the U.S. e-commerce firm Etsy announced that it had acquired its Brazilian counterpart Elo7 in a $217 million deal. Additionally, SoftBank’s Latin America Fund has at present five e-commerce ventures in its portfolio, including the Colombian super-app Rappi.

While Latin America’s e-commerce sector has yet to display the speed of Amazon Prime or offer the panoply of services available in China, it is highly unlikely to be just a temporary byproduct of the pandemic. Recurring pandemic scares might just provide the momentum the e-commerce industry needs to consolidate its role as an integral piece of the post-COVID economic equation – helping societies address deep-rooted problems that plagued the people simultaneously dependent on the informal economy and most likely to benefit from increased access to banks and other formalized financial networks.

August 10, 2021

* Alexander Borushek is a graduate of American University’s School of International Service and currently a Business Development Representative for Envoy Global, a tech firm that works in immigration and global mobility.

South America: Reality Check on Lithium Fantasies

By Thomas Andrew O’Keefe*

Lithium mine at Salinas Grandes salt desert Jujuy province, Argentina/ EARTHWORKS/ Flickr/ Creative Commons License

The urgent need to reduce global greenhouse gas emissions and transition to an energy matrix centered on renewable energy guarantees a steady demand for lithium, but speculation that South America is on the cusp of a lithium boom is premature. The chemical is critical in the production of rechargeable batteries for mobile devices, electric vehicles, and, increasingly, renewable energy storage systems. The so-called Lithium Triangle of Argentina, Bolivia, and Chile holds just over half the world’s currently known lithium deposits, while Brazil and Peru have large amounts of spodumene hard rock that contains lithium.

  • Lithium in its natural form is part of a chemical compound that requires a complex re-composition process to make, among other things, lithium‑ion battery cells. How it is mined entails significant cost differences. Lithium from the brine below salt flats in Argentina and Chile is currently the most cost-competitive. While Bolivia also has brine deposits, the lithium is less concentrated, contains more impurities, and is found at more difficult-to-access lower depths in the Uyuni salt flats. Accessing lithium in spodumene hard rock pegmatites is even more complicated and hence costlier. The advantage, though, is that this type of lithium synthesizes better with the higher nickel content required to improve electric vehicle performance and range.

The region’s largest producers adopted different approaches to capitalizing on lithium reserves.

  • In 2008, then-President Evo Morales of Bolivia restricted extraction to the state-owned Corporación Minera de Bolivia (COMIBOL) because past commodity boom and bust cycles profited foreigners and left little wealth but plenty of environmental catastrophes and other social ills in their wake. In 2017, lithium extraction was transferred to the newly created Yacimientos de Litio Bolivianos (YLB).  Morales also promoted public-private partnerships to jointly produce batteries and even electric vehicles in Bolivia. The latter echoes a failed Andean Pact initiative during the 1970s in which aspects of automobile production were to be distributed among different member states. The scheme failed because, among other reasons, manufacturing anything in isolated Bolivia was cost prohibitive due to poor infrastructure. Several decades later, logistical realities still make exporting a Bolivian-produced electric vehicle, let alone lithium‑ion batteries, economically unfeasible.
  • Chile, which also deems lithium to be a strategic mineral, imposes onerous production quotas on private-sector producers and requires that they sell 25 percent of their output at preferential rates to domestic downstream buyers. The set-aside provision is designed to encourage manufacturing in Chile of lithium‑ion battery components such as cathodes, hydroxide, and electrolytes. While Argentina is more accepting of private investment in its lithium industry, the country is notorious for recurring economic crises and erratic oscillation in economic policy that make investing in the country a high-risk proposition.

Complicating resource extractive activities in South America are heightened environmental sensitivities. Indigenous communities are well versed in the prior consultation obligation of ILO Convention 169 as well the free, prior, and informed consent requirements of the 2007 UN Declaration on the Rights of Indigenous Peoples. For over a decade now, the continent has seen numerous energy and mining projects blocked and even abandoned because of an actual or perceived failure to adequately consult with detrimentally impacted Indigenous communities. Lithium brine deposits in the Lithium Triangle countries are found in some of the most arid spots on the planet, raising concerns that the water-intensive lithium brine extraction process directly competes with subsistence agricultural activities in nearby communities. This has sparked major road blockades protesting mining projects in Argentina’s Jujuy province and in southwestern Bolivia, as well as court litigation in both Argentina and Chile.

The panorama for the lithium industry in South America is subject to new social and political realities that were not true of past commodity booms. There is little tolerance today for extractive investment projects that are not environmentally sustainable and do not benefit local communities. This trend will accelerate with efforts to turn the voluntary United Nations Guiding Principles on Business and Human Rights into a binding legal treaty. In addition, Environmental, Social, and Corporate Governance (ESG) principles emanating from the UN’s Principles for Responsible Development now make it very difficult for corporate management to push through projects that result in serious environmental damage and human rights abuses.

  • An example of this trend was the announcement last month that Daimler AG, Volkswagen AG, and BASF would join Dutch smartphone manufacturer Fairphone to launch the Responsible Lithium Partnership so that extraction in northern Chile will not negatively affect the sensitive ecosystem or the people who live in the surrounding areas.

July 14, 2021

* Thomas Andrew O’Keefe is President of Mercosur Consulting Group, Ltd. and a lecturer with the International Relations Program at Stanford University.

Cuba: Communists Convene

By William M. LeoGrande*

(From left to right) Miguel Díaz-Canel, Homero Acosta, Salvador Valdés, Ramiro Valdés, and Roberto Morales Ojeda/ Cubadebate/ Flickr/ Creative Commons License

The Cuban Communist Party (PCC) will convene its Eighth Congress on April 16‑19 to choose new leadership and assess policies intended to address longstanding economic and political challenges – with no indication of bold new departures. After all, Raúl Castro’s heir apparent as party leader, Miguel Díaz-Canel, has adopted as his favorite hashtag #SomosContinuidad. The meeting will have three major agenda items: selection of a new First Secretary to replace 89-year-old Raúl Castro and – perhaps – the replacement of other elderly party leaders; an assessment of progress implementing economic policies adopted at the Sixth Congress in 2011; and a review of the party’s political work, as mandated by the First National Party Conference in January 2012.

  • The Cuban leadership is undergoing a generational transition from “los históricos,” who founded the revolutionary regime, to a new generation born after 1959. Castro has affirmed his intention to step down as First Secretary in favor of Díaz-Canel, who succeeded him as President in 2018. However, Castro has not publicly ruled out remaining a member of the Political Bureau, and neither have the four other veterans of the struggle against Batista on the 17-member body – including reputed conservatives Second Secretary José Machado Ventura and Ramiro Valdés. The generational transition will not be complete until they depart; it’s hard to imagine Díaz-Canel would truly be in charge if he is still surrounded by these powerful old-timers.

Pummeled by President Trump’s tightened sanctions and the COVID-19 pandemic that closed the tourist industry, Cuba is suffering the worst economic crisis since the “Special Period” of the 1990s after the Soviet Union collapsed. The central theme of the Party Congress will be an exhortation to the party faithful to go full speed ahead on economic reforms, overcoming the bureaucratic resistance that has impeded them until recently.

  • When Raúl Castro introduced the reforms in 2011, he said it would take a decade to put them in place. Ten years later, they are far from finished, although the pace of reform has accelerated over the past nine months. The number of permitted private-sector occupations has increased from just over a hundred to more than 2,000. The dual currency and exchange rate system that created crippling distortions in the economy has been scrapped. And state enterprises have been put on notice that they have 12 months to become profitable or close their doors. In the short term, however, the economy remains hobbled by inefficiencies and unable to satisfy many basic needs.

The Congress will also review the party’s “political work” the task of building public support for the government. In 2012, Raúl Castro criticized the party’s poor performance. Endless meetings degenerated into “formalism,” in which no real criticism was ever voiced and little was accomplished, thereby “spreading dissatisfaction and apathy” among the membership. These failings weakened the party’s ties to the broader public, for whom it seemed remote and inaccessible. Another indicator of the party’s tenuous standing was an 18 percent decline in membership from 2011 to 2016 – the first decline since the party was founded in 1965.

Cuba’s party congresses always convene on the anniversary of the Bay of Pigs invasion – 60 years ago this April –  to commemorate Cuba’s successful defeat of Washington’s imperial designs. The focus of the upcoming Congress, however, will be on how the party can steer its way past the shoals of Cuba’s internal challenges and “update” its economic model of socialism through reforms that it nominally embraced years ago but has failed to fully carry out. With popular discontent at a peak because of the desperate economic situation and with critics mobilizing through social media to challenge state policy, the party has its work cut out for it.

April 5, 2021

* William M. LeoGrande is Professor of Government at American University. 

Cuba: Private Sector Gets a (Tentative) Boost

By Ricardo Torres*

Morning Street Market in Trinidad, Cuba/ Bud Ellison/ Flickr/ Creative Commons License

The Cuban government has announced measures that represent a significant shift in its treatment of the private sector, but the reforms will not have the desired impact without supporting legislation and other steps. In one of its more important announcements on reform, authorities abandoned their focus on listing permitted categories of work, and instead issued a list of prohibited activities – leaving open the rest of the economy for private individuals.

  • On February 11, the Labor Ministry issued for public discussion a list of 124 activities, based on an international classification of job categories, that will remain off-limits for cuentapropismo (self-employment). Among the most prominent professions that will remain under state control are journalists, lawyers, accountants, architects, and engineers – as well as some positions in the value chain in tourism.
  • The reasons for these restrictions range from political and social sensitivity; poor coordination and improvisation among various agencies that were working on the initial drafting of the list; and the protection of the narrow interests of various industries, such as in some parts of tourism.

The benefit of these prohibitions is questionable from the perspective of national economic development. The Cuban economy appears likely to continue shifting toward specialization in services, but the next stage in that process will require expansion into areas that are more complex, more deeply integrated into the productive system, and more focused on foreign markets. This stage will require the skills of Cuban professionals, many of whom today, seeing few good prospects at home, are leaving the country frustrated in search of opportunities to use their talents and build a good life for themselves elsewhere. For a country with a demographic profile that’s already adverse, the brain drain will be even more damaging.

  • The International Labor Organization (ILO) reports that, in medium- and high-income countries, companies with up to nine workers represent 32‑38 percent of all employed persons, while another 42 percent work in entities that have between 10 and 49 employees. Cuban labor, in sharp contrast, is divided into state enterprises (with an average of 800 workers); agricultural cooperatives (94 workers); urban cooperatives (typically 39 workers); and cuentapropistas working alone or with one partner. This labor structure is simply not adequate for future needs.

The new measures raise other questions about the objectives of the reforms. Of the 600,000-plus cuentapropistas, some 100,000 are de facto companies – without full legal personality and its protections. Cuba lacks a solid framework for the development of the private sector. Consideration of the small and medium enterprise law promised by the government years ago is still in limbo, with no clear date. Cuban law also does not clearly distinguish between subsistence production and dynamic undertakings, nor between owners and workers. It does not establish the formal channels necessary for communication with the sector, nor how to apply laws dealing with social rights, environmental protection, and similar requirements. There is also no sign of specific legislation permitting work by truly independent workers and cooperatives.

The challenge ahead lies in the fact that the political documents for these and other reforms over the years – such as Conceptualización (during the 7th Party Congress in 2017) and “Plan 2030” present only a narrow, schematic concept of private-sector development. The omissions and ambiguities in them are huge. Without effective follow-up, the full intent of even these new steps will not be realized – and progress will yet again be delayed. A holistic vision of reform and its objectives is necessary now more than ever. No one knows, however, if the Cuban leadership has the appetite and political space within the party and government bureaucracy to make it happen.

March 15, 2021

* Ricardo Torres is a Professor at El Centro de Estudios de la Economía Cubana at the University of Havana and a former CLALS Research Fellow.

Dominican Republic: Remittances Showing Strong Rebound Despite COVID-19

By Gerelyn Terzo*

Tower and Auditorium of the Central Bank of the Dominican Republic/ Rafael Calventi/ Wikimedia Commons/ Creative Commons License

The Dominican Republic’s economy has not escaped the slowdown caused by coronavirus, but one of its most important engines of growth – remittances from expatriates – has shown a strong resurgence in recent months.

  • The DR’s economy has been on a rollercoaster since the onset of the pandemic. The World Bank projects it contracted 4.3 percent in 2020, with the fallout continuing to reverberate throughout the country this year and next. This comes after decades of expansion, including annual growth of 6.1 percent between 2015 and 2019. Much of the country’s growth for decades has been fueled by personal remittances, hovering around 8.3 percent of GDP as of 2019.

Remittances plummeted more than 20 percent in March 2020, when the shock of the pandemic first hit, but they rebounded soon after, and a broader turnaround in the second half of 2020 appears to be helping the Dominican Republic toward a course of recovery. Families depend on funds from family members abroad for consumption, savings and investing.

  • By May, money transfers into the country from the United States rebounded nearly 18 percent, thanks to a Dominican diaspora that sent approximately $638.7 million home to their families. That was close to double the amount sent the previous month. Remittances have shown particularly strong growth since July, when transfers surpassed $827 million, 29.3 percent over July 2019.
  • Since then, the Dominican migrant community has not disappointed – more than compensating for the dip in remittances during the early COVID period. The Central Bank announced in December that “the flow of foreign currency continues to improve.” It pointed to a 27 percent year-on-year increase in remittances in November 2020, when they reached $707.5 million. For the January-November 2020 period, remittances climbed to nearly $7.4 billion compared to roughly $7.1 billion for all of 2019.
  • Nearly 85 percent of the flows over the past eight months originated from the diaspora in the United States, where unemployment among Latinos dropped about a half percent per month in late 2020. Other major sources are Spain and Italy, where Dominican migrants number 158,000 and 43,000, respectively.

Lockdowns and travel bans have ravaged the tourism industry, which customarily accounts for another 7‑8 percent of GPD. The number of visitors in November was one quarter that of the same month a year ago – making remittances an even more important input for the DR economy. Migrants living in the United States are likely working jobs that are considered essential during COVID in sectors of the economy such as healthcare. Regardless of how tough times get abroad, moreover, migrants from the Caribbean and Central America know that conditions are likely to be even more difficult back home – and these expatriates are more prone to sacrificing meals for themselves to ensure families back home can survive. A Santo Domingo local on social media suggested constructing a statue – similar to one in San Salvador in honor of Salvadoran expatriates – to honor the Dominican diaspora, who “against all odds” got the money through. The trajectory of COVID is still unknowable, but migrants’ commitment to helping family back home is already clear.

February 18, 2021

* Gerelyn Terzo is an analyst and writer on remittance flows and cryptocurrencies. This article is adapted from one she wrote for Sharemoney.

Biden’s North American Reset?

By Tom Long and Eric Hershberg*

Map of North America/ Public Domain/ Creative Commons License

A North American approach to regional cooperation could make a comeback under the administration of U.S. President Joe Biden. Though promoted with little enthusiasm by President Obama and derided by the Trump administration, the utility of North American cooperation is suggested by a combination of factors: the desire to turn the page on Trump’s transactional approach to neighbors, interest in “near-shoring” as a result of the pandemic and frictions with China, and the growing salience of shared transnational challenges.

  • Trump played on anti-NAFTA and anti-Mexican sentiments in his rise to power. He followed his divisive campaign with dramatic standoffs over the border wall, tariffs on Canada and Mexico, and nativist immigration and asylum policies. Policy statements from the Biden campaign, Democratic Party platform, and transition team suggest the new president will be eager to signal his rejection of such policies, making a pro-North American stance attractive in the broader context of a return to multilateralism. To be sure, elements of the Democratic Party long harbored skeptical views of North American cooperation (especially NAFTA), but the anti-North American stance is now thoroughly associated with Trump, and Democrats have found themselves defending the concept during the last four years.
  • The pandemic and rising tensions with China have raised questions about the desirability of far-flung supply chains, at least for sensitive products like medical and telecommunications equipment. Revelations about forced-labor practices in China have also put human rights back on the trade agenda. This is an issue for Canada, too, given its tensions with China over electronics giant Huawei. At the same time, it presents an opportunity for Mexico.
  • Transnational challenges including public health, migration, and security have long provided a rationale for greater policy coordination in North America. Many of these issues have grown from irritants to major problems given the neglect and perverse U.S. policies of the last four years.

Under President Biden, these factors may give North American cooperation a new lease on life. As a regional policy framework, “North America” could give renewed stimulus to North American economic integration, which had stagnated due to China’s rise, increased border controls after September 11, 2001, limited investment in coordination or infrastructure, and various migration and security crises along the U.S.-Mexico border. Trump’s rhetorical and policy barrage has awakened powerful interests to defend economic integration at the same time that it has motivated civil society organizations to defend North America’s integrated transnational communities.

Progress is likely even if the phrase “North America” is slow to return. NAFTA was officially replaced in July 2020 by a new pact that preserved most of its features but stripped “North America” from its name. (The three signatories have named the deal differently – USMCA in the U.S., TMEC in Mexico, and CUSMA/ACEUM in Canada – but none includes “North America.”) The separation of “North America” from the pact creates, counterintuitively, an opportunity to expand the understanding of the region and related policy frameworks.

  • Politically, “North America” could provide a useful space for Mexican President Andrés Manuel López Obrador, who has shown little interest in Biden’s initiatives for bilateral cooperation and has provoked tensions with Washington through his handling of the Cienfuegos case, to provide leadership.
  • Practically, many deeply “North American” issues, particularly migration, suggest a wider understanding of the region to include parts of Central America and the Caribbean. Tensions about Central American migration will be high on the new administration’s agenda, but addressing these challenges through a North American lens offers a constructive contrast to Trump’s narrow nationalism.
  • Economically, given the contrast between countries of South America that have been more deeply reliant on exports to China versus those that are still most closely linked to the U.S. market, a broadened North America could provide a forum – larger and more diverse than NAFTA but smaller and more focused than the Summit of the Americas – to address regional policy challenges.

President Biden inherits an old trilateral region that seemingly has no name and a badly damaged economic partnership, but the gravitational pull of the U.S. market, new rhetoric and policies from Washington, and other underlying drivers should restore the economic and political importance of the region, offering an opportunity to rethink the boundaries and purpose of North America.

January 21, 2021

* Tom Long is Associate Professor at the University of Warwick and Chair of the Robert A. Pastor North American Research Initiative at American University. Eric Hershberg is Director of the Center for Latin American and Latino Studies and Professor of Government at American University.

Cuba: Pursuing Halfway Economic Reforms

By Ricardo Torres*

A sample of the 10 or 20 staples available in a “Bodega” depending on the weekday in Havana, Cuba./ Jorge Royan/ Wikimedia Commons/ Creative Commons License

The Cuban government is once again introducing only partial economic reforms – while preparing for the total reform of the monetary system – but its fear of the impact of these and other changes continues to prompt a rhythm of transformation that can actually worsen the contradictions that plague the economy.

  • Officials last July announced a strategy to deal with the current crisis, including reform measures that had long been postponed as well as new initiatives. Since then, the government has authorized the private sector to carry out certain foreign trade operations; introduced 15 adjustments to rules governing state enterprises; loosened regulations governing the distribution of agricultural products to incorporate new actors; and announced that currency reform was imminent. These steps all were taken in the context of deepening shortages and expansion of the use of the dollar in retail sales.
  • COVID‑19 and other exogenous factors have further fueled the deterioration of the Cuban economy, magnifying the need for reforms, but implementation of promised measures has fallen short of expectations, and the structural measures needed to lift the economy from its decades-long lethargy remain undone. Deeper changes, such as the flexibilization of cuentapropismo (self-employment) and approval of private small and medium enterprises remain mired in technicalities and interminable bureaucratic delays.

Overhaul of the monetary system is, without doubt, the measure of greatest potential impact in the short term – and the most complex. Cuban authorities grasp that it is an essential step needed to maximize the power of other changes, but – from a purely technical perspective – Cuba has a lot of work to do before monetary reform will work. After postponing this major change for two decades, only a minimum of the right conditions have been met.

  • When it takes the plunge, the government’s continued control over the productive sectors and distribution of most essential products will give it some ability to control inflation. But it won’t be able to ignore the real costs. People without stable incomes will face the most severe adjustment as higher prices and more widespread shortages will deepen economic uncertainty. That will be a challenge for a government that already faces political discontent, as exemplified by the recent protest in front of the Ministry of Culture. The emphasis on a careful communications strategy regarding impending economic changes is prudent, but delaying implementation of reforms once announced only worsens things. Indeed, as a direct result of perceptions mismanagement, prices are already going up, even before the monetary reform takes off. Lacking the appropriate instruments to manage inflation, authorities are responding by capping prices, which in turn exacerbates scarcity and threatens a vicious cycle.

As always, the Cuban government is giving priority to caution and stability over bold options – working hard to project legitimacy and self-confidence at home and internationally. Lacking direct external support, such as from the international financial institutions, Cuba has few options for reviving its moribund economy without radical changes. It is well established that partial reforms in centrally planned economies only lead to stagnation, external imbalances, and deterioration of macroeconomic indicators. Cuba suffers from all of these at this moment. But less ambitious and carefully managed reform reduces the risks of losing control, of fueling instability, and of diminishing the government’s ability to deal with the certain unforeseen consequences of the changes.

  • U.S. policies have steadily hardened in recent years, feeding Cuban policymakers’ perception of operating under a state of siege and giving them an excuse to divert attention from internal shortcomings while delegitimizing groups that demand political change. The U.S. pressure also harms the private sector, which is very dependent on foreign clients. The cuentapropistas and entrepreneurs can play a central role in the event of serious economic restructuring by creating jobs and forming a new productive fabric that is necessary for the future. Instead of accompanying these private players on their journey toward a potentially genuine transformation, Washington has taken its cue from immigrants of Cuban origin in suffocating the private alternative as well as the state-dominated economy.

December 9, 2020

*Ricardo Torres is a Professor at the Centro de Estudios de la Economía Cubana at the University of Havana and a former CLALS Research Fellow.

Cuba: Getting Serious about Reform?

By Ricardo Torres*

Miguel Diaz Canel_Cuba

Cuban President, Miguel Díaz-Canel Bermúdez/ Cubadebate/ Flickr/ Creative Commons License (not modified)

The economic reform proposals that the Cuban government announced on July 16 sound promising, but they feel very similar to past efforts, and authorities have yet to demonstrate commitment to implement them in a manner that matches today’s serious global and national conditions. The measures come at a time that Cuba is experiencing its worst economic crisis in 30 years. According to the Economic Commission for Latin America and the Caribbean (CEPAL), the country’s imports fell 41 percent in the first five months of 2020 – more than any other country in the region except Venezuela. The commission predicts the island’s gross domestic product will decline 8 percent this year – a conservative estimate in view of its dependence on tourism, remittances (almost all from the United States), and distant trading partners.

  • The announced measures are too general to permit a detailed analysis of their potential impact, but a substantial number of them represent a more flexible interpretation of policies agreed upon during the Seventh Party Congress in 2016. They feature a 180-degree shift of focus on the private sector and cooperatives, which just two years ago the government was taking steps to severely limit. The greater use of the U.S. dollar – an inevitable consequence of the severe balance-of-payments crisis – is also noteworthy.

The political and economic moment calls for measures that are bold enough to change expectations – reduced because of past non-performance – and produce real results. After years of false starts, the government’s willingness to make the reforms a reality remains in question. The biggest doubts deal with how far the authorities will go toward restructuring state enterprises – an unavoidable step for any true transformation. The government faces five immediate challenges to managing the current crisis and ensuring a positive impact from the package of reforms.

  • Convincing domestic and foreign public opinion that this time reform is for real and will be sufficient and permanent. Decisions over the past four years have been erratic, undermining the conceptualización that then-President Raúl Castro announced in 2016 as an “updating” of “the theoretical bases and essential characteristics of the economic and social model.”
  • Creating and consolidating new, agile, and effective mechanisms for decision-making. The country lacks a system for guaranteeing that the best ideas for transformation reach the highest levels of government, are examined, and are adopted in a timely fashion. Ensuring that bureaucrats do not distort the policies is also essential.
  • Avoiding the hidden traps of some measures that have already been tried, which will remind Cubans of the worst moments of the Special Period in the 1990s. The dollarization scheme implemented back then, for example, was complicated by rule changes the government made midstream. Authorities also rejected the necessary restructuring of the enterprise system and public sector. Cuba survived – collapse was avoided – but emerged without a sustainable economic model. Genuine development was not achievable.
  • Achieving a critical mass of changes that become self-reinforcing and overcome trenchant ideological resistance and create enough momentum to refloat the economy. In the 1990s, Cuba benefited from a world economy that was growing – radically different from today. The current situation requires much greater internal efforts.
  • Adding social justice as a priority in the reform package. Although a central talking point in official discourse, it is either totally missing from the new strategy or implemented in ways that are not relevant to the new social structure of the island. Cuba needs a debate about modern social policies to address its multidimensional inequalities.

So far, the big winners in this new scenario are the private sector and cooperatives as well as people who have access to U.S. dollars. But the entrepreneurs face obstacles, such as the requirement that they use government-controlled enterprises in all foreign trade. The idea that the state intends to create its own micro, small, and medium enterprises also detracts from the reform message.

  • Expanded dollarization will further segment the productive sectors, but this time it probably will allow producers to purchase capital goods – an essential step in any process of stimulating production over the long term. The potential impact will be greater if combined with the promised, but often delayed, move toward a sustainable monetary and exchange scheme. The big question remains, however, if the government is serious about making it happen this time.

August 17, 2020

*Ricardo Torres is a Professor at the Centro de Estudios de la Economía Cubana at the University of Havana and a former CLALS Research Fellow.

Regionalism in the Time of Coronavirus: The Only Way Forward?

By Leslie Elliott Armijo*

Coronavirus Latin America

Map of the COVID-19 outbreak in Latin America as of 30 April 2020/ Pharexia/ Wikimedia Commons (modified)

To overcome the multiple challenges of the COVID‑19 crisis, Latin America’s leaders will need to build regional cooperation around pragmatic solutions – an elusive goal for countries with a legacy of disunity and weak collaboration. The coronavirus has hit at a moment of economic vulnerability. Regional growth averaged only 1.9 percent in 2010-19, worse than in the “lost decade” of the debt-crisis 1980s (2.2 percent). Labor productivity, which in 1960 was almost 250 percent of the world average, has fallen steadily in every subsequent decade, and in 2019 sat at a mere 90 percent of the global mean. Persistent squabbling among Latin countries has meant that major global trading states, including the United States and more recently China, could dictate the terms of bilateral trade and investment agreements in ways that favored these larger powers.

  • In negotiating global trade, Latin America and the Caribbean have shown little shared identity or cohesion, whether as a region or as sub-regions. As of late 2018, as global value chains coalesced around three regional hubs – China/East Asia, U.S./North America, and Germany/European Union – Mexico, Central America, and the Caribbean were linked to the U.S. but lacked bargaining power to seize more advantageous positions vis-à-vis the United States. South America has deindustrialized since the turn of the century, returning to its historic role of commodity exporter to all three hubs. Intra-regional trade as of 2017 was only 22 percent of all Latin American trade and had fallen since 2013.
  • This is a shaky foundation from which to face the health and economic challenges of COVID‑19. The IMF’s scenario, which assumes an optimistic return to business mostly-as-usual in the third quarter, predicts a contraction of GDP in 2020 of 5.2 percent in the region, driven by brutal collapses in the two largest economies, Brazil and Mexico, of -5.5 and -6.6 percent respectively. The extra-regional markets for Latin America’s exports certainly will shrink due to both short-term reasons of global depression and longer-term ones of enhanced economic nationalism abroad. Remittances and tourists from the U.S. and elsewhere will not return to their previous numbers for a long time.

A coronavirus-solidarity virtual summit last month showed that some regional leaders realize the need for joint action. Nine of 12 South American presidents participated, although Brazilian President Jair Bolsonaro – who has made intemperate and dismissive remarks about his fellow leaders – gave his seat at the video conference to his foreign minister, Ernesto Araújo.

  • Argentine President Alberto Fernández participated despite Bolsonaro’s snub (including on previous occasions) and his previously chilly relations with the sponsoring body, PROSUR, founded in 2019 by center-right Presidents Iván Duque of Colombia and Sebastián Piñera of Chile as an explicit counter to the pre-existing regional body, UNASUR, which leaned left during the presidency of Bolivia’s Evo Morales (now in exile in Argentina). In so doing, Fernández demonstrated the pragmatism and understanding that Latin American and Caribbean leaders often eschew: if you want to solve policy challenges, you must maintain dialogue with people with whom you disagree.

If there is any light at the end of this tunnel, it could be psychological, as crises tend to focus minds. The disruption in international relations beyond Latin America probably will accelerate the move away from the post-Cold War “unipolar moment” and fuel domestic economic nationalism that will shake up the three major global trading hubs – a reorganization in which the region could redefine its place. In this scenario the best defense for Latin America is a strong offense. As Alicia Bárcena, Executive Secretary of the UN’s Economic Commission on Latin America and the Caribbean (CEPAL), said recently, the region’s resilience likely depends on “investment in strengthening regional production chains” to create “complementarities in production structures and regional integration.”

  • Diplomacy enables states to share knowledge and engage in collective action to meet real cross-border challenges, including those of the current crisis. Regional solidarity does not require headquarters buildings, formal treaties, and summit pageantry, nor even similar domestic political systems. The considerable achievements of the loose, informal clubs known as the G7, the G20, and the BRICS prove the value of cooperative models that need not boast costly institutional scaffolding. The Association of Southeast Asian Nations (ASEAN), formed in 1967 by 10 countries that were at least as mutually suspicious of one another as they were of China, provides another lesson about somewhat effective regional cooperation that Latin America would do well to note.

April 30, 2020

* Leslie Elliott Armijo is an associate professor at the School for International Studies, Simon Fraser University, Vancouver. Her most recent book, coauthored with C. Roberts and S.A. Katada, is The BRICS and Collective Financial Statecraft (Oxford University Press, 2018).