By Emilio Morales

In the current scenario of the Cuban economy, remittances are one of the most important sources of income in the country. They are not income obtained from the work of the Cuban labor force, but from the effort and sacrifice of hundreds of thousands of Cubans living abroad, the most important asset of the country today. The 6.6 billion dollars the island received in the form of cash and merchandise remittances in 2018 imply zero costs of production for Cuba; all costs of sending money and merchandise are borne by the people who send them. No other undertaking in the Cuban economy is as profitable as remittances[i]. The reduction of Venezuelan financial support, the decline in exports of products and services and in tourism[ii], have converted remittances into the financial lung that keeps the dying Cuban economy alive.

If we compare over the last 11 years the value of remittances received by Cuba with the export value of seven of the country's most important exportable items  -- tourism, mining products, sugar and its derivatives, medicines, frozen seafood, tobacco and agricultural products -- the data shows that cash remittances exceed the value of the aforementioned exports.

These results clearly show the high dependence that the Cuban economy currently has on its diaspora, and at the same time the poor performance of the productive sector of the Cuban economy. The combined growth of Cuban exports in the seven export items mentioned above in the last 11 years was 310 million dollars, while cash remittances grew 2,244 million dollars and total remittances (cash + merchandise) was 4,619 million, a growth 14.9 times higher than that of exports. See Figure 1.

Figure 1. Comparison of remittances in cash and total remittances with the 7 main export sectors of the Cuban economy (in millions of dollars), 2008-2018

Source: Havana Consulting Group based on the data published by the National Office of Statistics and Information ONEI and on own sources.

Over the period 2008-2018, cash remittances to Cuba grew steadily, from 1,447.06 million dollars in 2008 to 3,691.68 million dollars in 2018, for an average annual growth of 236.47 million dollars. See Figure 2.

Figure 2. Remittances in cash to Cuba, (in millions of dollars), 2008-2018.

Source: Havana Consulting Group.

No other item in the Cuban economy experienced such spectacular growth during the period of time analyzed. Remittances to the island had as their main engine the massive Cuban emigration of the last 15 years, motivated by the lack of economic opportunities and the restrictions the system places on its citizens[iii]. The policy changes implemented by former US President Barack Obama that removed restrictions on remittances and travel by Cubans residing in the US coupled with the small opening to the private sector implemented by the Cuban government beginning in 2010, opened a window that allowed the establishment of thousands of private businesses in the island's private sector[iv].

In the last 10 years, the Cuban population has received 29,948 million dollars in cash remittances. 90% of this money came from the US.  In 2018, the amount of cash remittances to Cuba was estimated at 3,691 million dollars, a growth of 3.6% compared to 2017.

Remittances constitute the main source of income for the Cuban population, currently representing 50.81% of the population's income. Other sources of income are the salaries earned by the self-employed, which constitute 33.57% of the population's income, and the salaries paid by the state to the workers, which represent 15.37% of the total income[v]. See Figure 3.

Figure 3. Annual salary of state workers and non-state workers and remittance income, 2017 (in dollars and percentages)

Source: Havana Consulting Group based on data published by the National Office of Statistics and Information and its own sources.

After six decades of a centralized economy, Cubans today depend more on the diaspora than on the remuneration offered by the state. Under the current conception of the Cuban economic system, this situation will continue unless structural economic changes are made that allow opportunities for better employment and remuneration for the workforce. This translates into an urgent need for the freeing of productive forces. Cuba's average salary of $29 per month, very low compared to the regional average of more than $379 per month.

Hindrances to the investment role of remittances

As we have already seen in this article, remittances themselves have an important weight currently in the economy of the country, as it constitutes the main source of income for Cubans. This reality not only shows the abyss that separates the prosperity of those who live abroad and send and the misery in which those who receive them live.  It also shows, on the one hand, the opportunity for wealth generation of Cubans who emigrate, and on the other, the reality that Cubans who remain on the island have to face in a system that prevents them from generating wealth and advancing in their chosen professions and forces them to have to live a miserable life, unable to meet needs that cannot be fulfilled with the low salaries paid by the state.

Remittances have played a fundamental role in the government's opening of the economy since 2010. They financed informally, but directly, the repair and purchase of thousands of homes to be converted into private businesses (restaurants, coffee shops, hostels, beauty salons, etc.). Remittances also financed the purchase and repair of thousands of cars that became taxis. Thus, informally, remittances became the main source of financing that helped start thousands of small businesses of different types. In addition, they served to finance and provide many businesses with the supplies, furnishings, tools and other miscellaneous items necessary to start to operate.

The reforms undertaken in 2010 provided a good trial run to understand the role that remittances play as investment capital. As we have shown in previous articles in our THCG Business Report, remittances have played an important role in the rapid growth of the private sector in the last 9 years. Tens of thousands of entrepreneurs received investment capital from their family and friends -- using remittances as a vehicle - to start their businesses.

The economic opening launched by Raúl Castro allowed the expansion of the private sector to 201 occupations, in an environment of more flexible laws, such as allowing recruitment of employees, expanding the capacity of restaurants with respect to the number of customers, the possibility of renting buildings from the state, the sale of houses and cars, the creation of cooperatives, the possibility of traveling abroad, and the development of a group of activities that were previously not allowed.

Available figures show that this opening allowed hundreds of thousands of Cubans to start a new life. At the end of 2016, about 535,000 Cubans were reported to work in the private sector legally through a license. In 2010 there were 157,371 private sector workers, so in 6 years the number of such workers grew 3.4 times. See Figure 4.

Figure 4. Number of self-employed workers, 1993-2016

Sources: Havana Consulting Group based on statistics of the Oficina Nacional de Estadística e Información (ONEI) and other sources.

In 2016, the activities with the highest number of licensed workers were: food processing and sale, with some 59,700 licenses; freight and passenger transport, 54,350; the rent of homes, rooms and spaces, 35,066; and telecommunications, 24,440 private workers. These workers on average received a salary at least 10 times higher than the average salary received by state workers[vi].

Most of these entrepreneurs benefited from the rapprochement policy implemented by then-US President Barack Obama, which lifted restrictions on remittances and travel by Cuban-Americans to the island, thus promoting informal -- but very efficient -- channels for financing thousands of businesses that were started in the island. Today many of these businesses have become successful small and medium enterprises although they have not yet been legally recognized as such[vii].

The period 2010-2016 saw a boom in the Cuban private sector. Cuban entrepreneurs developed very successful and lucrative business models. The most economically important businesses were private restaurants, popularly called “paladares”, hostels for room rentals, beauty salons, workshops for the repair of cellular phones, production and sale of footwear, transportation, and wholesale of products. The latter is an activity that was not specifically authorized but was developed to fill the void generated by the absence of a wholesale market to meet the input needs of entrepreneurs. This activity has been “moderately tolerated by the government”, but it has never been approved as such in the list of modalities allowed to perform self-employment[viii].

An important segment of the population has managed to become economically independent of the state and create a successful business network that has brought together thousands of private businesses. The economic aid of Cuban living abroad, through remittances they send, has been a key factor in the development of this nascent private sector, which has created a market of goods and services that is estimated at between 2.5 and 3.8 billion dollars annually. The purchasing power of this segment of the population managed to grow at least 10 times over the purchasing power of workers in the state sector.

However, the conservative wing of the Cuban Communist Party (PCC) did not like the boom that this successful entrepreneurial movement was enjoying, and the government quickly froze the reforms. The encirclement of the private sector escalated thereafter, suffocating this rapidly expanding feverish movement: taxes were increased, modalities for exercising private work were reduced, and licensing for the most lucrative modalities was halted. More recently, prices in the private sector were capped and the authorization for the creation of non-agricultural cooperatives (CNA) was frozen. These measures increasingly cornered the private sector, to the point that many entrepreneurs began to export abroad the capital their companies had created due to the lack of opportunities to invest in their own country.

Thus, the flow of remittances used by the Cuban private sector as investment capital has stopped: the lack of opportunities to invest, and the barriers imposed on the private sector to prevent its growth and expansion put a definitive brake on the flow of foreign funds dedicated to these purposes.

In order for remittances to be a significant factor within the investments that the country needs, an environment and a legal framework that justifies and promotes such actions -- which are now absent from the Cuban market -- are required.

In that sense, the first thing that the Cuban government would have to do is to implement laws that allow companies of Cuban citizens residing on the island or residents abroad to have legal personality; create a free market system; and totally free up productive forces. These three conditions are essential to stimulate the flow of remittances to the island that could provide capital for investment.

The Cuban market has a tremendous need for investment; however, its rigid laws prevent these needs from becoming opportunities. It is inconceivable that in the 21st century, Cuban citizens cannot invest in their own country, nor can they own companies with legal personality. Current laws prevent Cubans the freedom to generate wealth, instead paradoxically favoring foreign investment. This economic apartheid that Cubans suffer is the first barrier that has to be demolished. When that happens, remittances will then become a source of capital to invest. Capital will enter Cuba freely and spontaneously, and it will not be only liquid capital: there is a huge capital of Cuban human resources, highly trained, with know-how and experience, established in the diaspora who are ready to help in the reconstruction of the country.

New Trump Administration regulations will not affect remittances to Cuba

The new measures announced by the Trump Administration limit the sending of remittances to the island as of October 9, 2019, to 1,000 dollars quarterly. This cap will not really affect remittances shipments to the country, since the current average amount remitted is around USD 180-220 per transaction. Around 95% of Cubans who send remittances to their relatives on the island do so once a month. It must be remembered that around 45% of remittances to Cuba arrive by informal means.

The remittances cap in the new regulation was criticized by Carlos Fernández de Cossío, Director for  North America of the Cuban Foreign Ministry. This official said in a tweet that the new rules limited the amount that a person in the United States could send to relatives or friends in Cuba to 11.11 dollars a day, adding "do they believe that this will make us give up?" ...

Once again, the political awkwardness of Cuban officials is reflected in their participation in social media. Anyone who sends 11 dollars a day to a Cuban relative on the island would be sending him 11 times what a Cuban earns on the island, which is currently an average of 1 dollar a day.

Mr. Fernández de Cossío's diatribe received a shower of tweets reminding him that it is the Cuban government who puts up obstacles for their citizens generating wealth.

The new regulations do not affect remittances that are aimed at fostering the growth of the private sector. However, they do affect remittances to Cuban officials, their close relatives and members of the Communist Party of Cuba, which will be illegal. In addition, they will prohibit US financial institutions from conducting transactions with institutions on the Island through third nations, one of the measures that had been authorized by the Obama Administration.

These transactions, known as U-Turn, allowed US companies to bring in and take out money from Cuba for their operations. Henceforth, this measure could affect US companies such as airlines in their aspirations to continue operating on the Island.

CONCLUSIONS

Unlike most Latin American countries, the Cuban government does not take advantage of the potential of remittances as a way to attract investment capital to the country.

The aspirations of the entrepreneurial movement that emerged on the island in the heat of the economic reforms that began in 2010 to fully develop as a source of wealth, employment and economic and social development in the country have fizzled. The Cuban government has chosen to crush the entrepreneurs by implementing policies that slow down and discourage their development. This has generated three very negative aspects for the Cuban economy: a brake on investment capital that was reaching the island through remittances, a considerable flight of capital abroad, and an environment of distrust for foreign investment.

If the Cuban government continues with its clumsy strategy of decapitalizing the country by putting obstacles to entrepreneurs and closing opportunities for citizens to generate wealth, the exodus of the young, trained and enterprising workforce abroad will continue and foreign investors will put their resources in other markets with more attractive conditions and lower risk for their investments.

What options could stimulate the sending of remittances as investment capital to Cuba in the current scenario?

There are five areas with respect to which the appropriate actions could rapidly increase the flow of remittances to the island as investment capital. See Figure 5.

Figure 5. Areas and possible actions that would stimulate remittance shipments to the island as investment capital

 Source:  Havana Consulting Group.

These five areas currently are very restricted in their development, except for Internet access, which has grown in the last 18 months through cell phone and Internet access in homes. However, both services still have a high price to users if we take as reference the low wages paid by the state to workers; thus, reducing prices to levels that correspond more closely with the real purchasing power of the population, could bring multiple benefits to the economy, particularly if it creates an environment that stimulates the implementation of actions related to the other four areas mentioned in Figure 5.

If restrictions on these five areas were lifted, the effect would be immediate, with remittances skyrocketing in a dynamic never seen in 60 years. It would have a multiplier effect, as it would generate hundreds of thousands of new jobs, inject investment capital into the economy, improve the living conditions of hundreds of thousands of Cubans, reduce the level of risk for foreign investment, and create a more competitive market. Such scenario would stimulate the entry of external capital and without a doubt the economy would take a great leap.

However, as long as there is no political will on the part of the Cuban government to eliminate the taboos that impede the economic development of the country and open the floodgates of business freedom, remittances will continue to just provide relief to the Cuban families that receive them, deepening the abyss that separates the prosperity of those who leave and the misery of those who remain.

REFERENCES

[i] Morales. Emilio. “Remittances to Cuba: the financial support that prevents the collapse of the Cuban economy”. THCG BUSINESS REPORT FEBRUARY 2019 No.1. Havana Consulting Group.

[ii] HCG business Intelligence Unit. “Cuban tourism industry plummets”. THCG BUSINESS REPORT AUGUST 2019 No.3. Havana Consulting Group.

[iii] Morales. Emilio. “The importance of remittances in the Cuban economy”. THCG BUSINESS REPORT FEBRUARY 2018 No.2. Havana Consulting Group.

[iv] Morales. Emilio. “Will eliminating "dry foot, wet foot" policy affect remittances to Cuba?”. THCG BUSINESS REPORT FEBRUARY 2017 No.2. Havana Consulting Group.

[v] Morales. Emilio. “Remittances to Cuba reveal where the purchasing power of the Cuban population is concentrated”. THCG BUSINESS REPORT October-December 2018 No.5. Havana Consulting Group.

[vi] Mesa-Lago Carmelo. “Self-employed workers: force for change?”. THCG Business Report October 2016 Nº 5

[vii] Morales. Emilio. “Entrepreneurs exported 9 times more capital than that was invested by foreigners in the ZEDM in 2017”. THCG BUSINESS REPORT AUGUST 2018 No.4. Havana Consulting Group.

[viii] Morales. Emilio. “Thaw and reforms create a middle class and new balance of power in Cuban economy”. THCG BUSINESS REPORT JUNE 2017 No.3. Havana Consulting Group.