Welfare Effects of Embargoes of the USA. Economic Affects and Social Development in the Republic of Cuba

How does the embargo of the United States affect economic and social development in the Republic of Cuba?

Term Paper (Advanced seminar), 2015

37 Pages, Grade: 1,7


Table of Content


Table of Figures

List of Acronyms

1.0 Introduction

2.0 Literature Review
2.1 Streams of literature
2.2 General academic discussion
2.3 Deficiencies of the findings - Ricardo and political ideologies
2.4 Twofold discussion about trade diversity at times of the embargo
2.4.1 Positive effects on trade diversity
2.4.2 Negative effects on trade diversity
2.5 Evaluation of the literature

3.0 Conceptual Model

4.0 Methodology

5.0 Findings
5.1 Country comparison about welfare indicators
5.2 Total trade flows and balance
5.3 Cuba’s main trade partners

6.0 Analysis and Discussion

7.0 Conclusion

8.0 References

9.0 Appendix
9.1 Appendix 1: Overview of US unilateral economic sanctions against Cuba
9.2 Appendix 2: CUC and CUP exchange rate development
9.3 Appendix 3: Positive and negative effects on trade diversity
9.4 Appendix 4: Evaluation from literature review


This paper investigates welfare effects of embargoes based on the following research question: How does the embargo of the United States affect economic and social development in the Republic of Cuba?

Firstly, a general introduction and historic outline about the development of the US embargo imposed on the centrally planned island Cuba will be provided, especially focussing on the post-Soviet Union era. Secondly, a research gap has been investigated by compiling international scholars and their findings. However, recent developments are not yet addressed adequately in academic research papers, namely the re-establishment of diplomatic ties between the USA and Cuba. Further, based on Ricardo’s model of comparative advantages, the existence of a twofold discussion about trade diversity in Cuba has been identified. Thirdly, two hypotheses are raised:

The embargo imposed on Cuba has more positive than negative effects on trade diversification (H1) and the embargo imposed on Cuba has negative social welfare effects (H2).

In order to answer the initial research question, two conceptual models are developed about trade and welfare effects of embargoes. The latter compares GDP and GDP per capita data as measurements for selected welfare indicators for Cuba and its neighbouring countries, whereas the former compiles the country’s trade partners and trade balance. The following discussion suggests a lifting of the embargo including political concerns on both sides, negative impacts on people and economy as well as the influence of the stakeholders. Finally, future political recommendations for welfare improvements in Cuba are suggested.

Key Words: Cuba, USA, embargo, welfare effects, unilateral sanctions, Ricardo, comparative advantages, trade diversity

Table of Figures

Diagram 1 Groupings of economic sanctions (Prepared by the author)

Diagram 2 Conceptual model about trade effects of embargoes (Prepared by the author)

Diagram 3 Conceptual model about welfare effects of embargoes (Prepared by the author)

Diagram 4 Country comparison about life expectancy and GDP per capita (McEniry, 2014)

Diagram 5 Cuba’s trade flows and balance (European Commission, 2014)

Diagram 6 Cuba’s main trade partner for export and import (2013) (Prepared by the author)


Table 1 Country comparison about welfare indicators (World Bank, 2015; Felipe et.al, 2012)

List of Acronyms

Abbildung in dieser Leseprobe nicht enthalten.

1.0 Introduction

On December 18th 2014, historic news regarding the initial attempted to re-establish diplomatic ties between current US President Barack Obama and Cuban President Raúl Castro Ruz, President of the solely ruling Cuban Communist Party, surfaced. (CIA, 2015; Corrales, 2014) Therefore, this paper fills the existing research gap by considering recent developments.

Historically, the economic and political relationship between the USA and Cuba has been very close. Prior to the embargo, mutual exchange of goods and services was common practise, and the United States was considered Cuba’s largest investor and trading partner. (Golliard, 2013)

However, the United States broke diplomatic relations with Cuba and imposed an embargo in response to Cuba’s newly established socialist ideology and subsequent expropriation of US property in the aftermath of the Cuban Revolution of 1959. US President John F. Kennedy justified the imposition of the full trade and travel embargo in 1962 as a “means to advance national security concerns“. (Eckstein, 2009, p.119) The embargo is effective for over half a century and has frequently been eased and tightened by succeeding US presidents. (Borer and Bowen, 2007)

In consequence, Cuba has since been isolated from most of its trading partners and international actors (e.g. the IMF). (IMF, 2015; Mesa-Lago and Vidal-Alejandro, 2010; Van Bergeijk, 1995) Although it remains one of the founding members of GATT and WTO, after 1959 Cuba rarely attended WTO meetings or participated in trade negotiations. (Borer and Bowen, 2007)

Further, it is important to mention that once the USA justified the policy against Cuba, as seen in the UN General Assembly or the WTO, the embargo is classified as a “political issue, not an economic one” meaning it is out of the jurisdiction of international actors to intervene. (Borer and Bowen, 2007, p. 137) (Appendix 1)

Generally speaking, economic sanctions is a foreign policy instrument imposed by governments or international organisations - either unilateral or multilateral - that aims to influence another state’s behaviour or policy without military intervention. (Van Bergeijk, 1995) In case of Cuba, US President Kennedy imposed an unilateral full trade embargo against Cuba which also cut Cuba from existing trade partners, investors and political influence in international organisations. (Appendix 1)

Abbildung in dieser Leseprobe nicht enthalten.

Diagram 1: Groupings of economic sanctions

Source: Prepared by the author and adopted from Barber (1979) and Caruso (2003)

This paper investigates welfare effects of embargoes based on the following research question:

How does the embargo of the United States affect economic and social development in the Republic of Cuba?

The research of this paper is focused on unilateral sanctions imposed by one sender country (USA) and is particularly analysing welfare effects caused in the target country (Cuba). (Caruso, 2003) In the Cuban case, so-called “negative” sanctions have been imposed by the USA because it is the aim of the sender country to punish and change the target country’s objectionable policy behaviour. (Golliard, 2013) Therefore, the contribution of this paper is a detailed analysis linking both, the economic as well as the social dimension, for the target country.

The embargo against the centrally planned state Cuba, also referred to as „blockade“ by Cuban politicians, is a unique case, which is the reason why other comparative studies about historical or current sanctions have been left out deliberately. (Ludlam, 2012) (Rodríguez-Parrilla, 2009)

It follows the literature review about the general academic discussion and a twofold discussion about trade diversification.

2.0 Literature Review

2.1 Streams of literature

The studied research papers are predominantly written from American, German, and Cuban scholars. (Appendix 4) Hence, emphasis is laid on the timeframe after the collapse of Cuba’s former main trading partner and financier the Soviet Union in 1989 and the subsequent Cuban economic downturn, also called “Special Period”. The latter is closely linked with economic reforms implemented by Fidel’s younger brother Raúl who took over power in 2008. (Borer and Bowen, 2007; Corrales, 2005)

2.2 General academic discussion

A publication from 2010 written by Mesa-Lago and Vidal-Alejandro, one with American and the other with Cuban origin, cites evidence for negative trade effects caused by the embargo in the aftermath of the global economic crisis in 2008. Due to the fact that Cuba is denied access to most international markets and financial organisations, the country faces severe liquidity shortages. Mesa-Lago and Vidal-Alejandro show that the Cuban Central Bank has to finance public debt directly, meaning that Cuba has no “international/ regional lender of last resort” for public debt [like the ECB for the Eurozone; E.K.]. Therefore, the money supply growth equals the monetisation of the fiscal deficit, which cumulated to 40.6% of GDP in 2008. In times of a global economic crisis, Cuba has had no other option but to implement belt-tightening measures, hindering short-term economic growth leading to further reduced economic productivity. (Mankiw and Taylor, 2008; Mesa-Lago and Vidal-Alejandro, 2010)

According to the two authors, the problem with the dual currency system in Cuba is twofold: A “home grown” problem and a consequence of the embargo causing enormous costs for businesses and the currency market. The former addresses the introduction of a dual currency system, co-existing to the national CUP, in the early 1990s as a tool to overcome the liquidity gap and the severe economic crisis at that time followed by the collapse of the Soviet Union. The main argument is the existence of additional costs for dual exchange rates which “distort economic measurement and decisions on allocations of resources, reduce the potential of the domestic market, provoke adverse segmentation and diminish economic linkages, thus weakening the economy.” (Mesa-Lago and Vidal-Alejandro, 2010, p. 3)

Further, the Cuban economic model suffers from a lack of incentives and productivity caused by excessive concentration in state-ownership and on central decision-making. Cuba is heavily relying on its service sector leading to an import dependency, especially from Venezuela.

Askari et.al criticize that by denying access to Cuba’s natural market the USA

sanctions effectively limit the ability of Cuban producers to operate at the efficient scale that only access to a large market like the United States can justify. Thus, the cost of goods produced for export by Cuba are higher than those produced elsewhere in the region by firms that can enjoy scale economies by selling to the United States. Similarly, since the U.S. consumers are not competing to purchase Cuban-made goods, there is likely a dampening of prices for Cuban exports to other markets. “ (2003, p.145)

The authors argue that it is due to the government restrictions on domestic consumption that production and export levels are decreasing. This source raises awareness for inconsistent data and carefully concludes that the impact of the sanctions, in dollar terms, is extreme on the Cuban economy and negligible on the US side. The authors emphasize the importance of remittances from Cuban exiles to relatives and friends as the main source for liquidity, which explains the survival of the system. (Askari et.al, 2003)

The publication “Rethinking the Cuban Embargo” by Borer and Bowen from 2007 is very valuable and agrees with the argumentation presented above by making use of an inductive method. Thereby, they take the political complexity and certain impartiality into account. This means that observations made are generalized to explain certain patterns. On the contrary, the two parties of interest USA and Cuba constantly scapegoat each other and thereby apply deductive logic from Ricardo’s comparative advantages that prohibiting international trade affects the target country negatively. Evidence is given by analysing Cuba’s reserved involvement in international organisations such as UN or WTO. In fact, since 2005 Cuba has annually put forward an anti-embargo resolution at the UN General Assembly, however it is not successful. The votes show that despite a few exceptions most countries condemn the embargo. One reaction is that „ The United States refuses to recognize the UN ’ s jurisdiction over the issue, and without U.S. support in the Security Council, the UN General Assembly lacks the enforcement capability to makes its judgment effective. Despite this reality, Cuba remains committed to using the UN as the primary international forum to express it underdog status and denounce the United States. “ (2007, p.33)

Secondly, although being one of the founding members of GATT and later replaced by WTO in 1995, Cuba decided not to participate in activities after the Cuban Revolution and change of political dogma in 1959. (WTO Legal Texts, 1995) Borer and Bowen claim that Cuba did not approach the organisation’s dispute resolution system because the US makes use of the national security clause stating that the embargo is political, not economic and also threatens to boycott other WTO proceedings. This indicates the dilemma that it is beyond the WTO’s competence to intervene U.S. foreign policy and the authors provocatively summarize “the WTO is simply a puppet of U.S. imperialism”. (Borer and Bowen, 2007, p. 138; Bluestein and Swardson, 1997)

Yet, Amnesty International supports the anti-embargo resolution and supports the claim to lift the embargo with the argument that the international community (above all the USA) violates “international law, including human rights law” which should obey limits to the imposition of sanctions. (Amnesty International, 2009, p.5) Amnesty International is a good example for describing the difficulty to gather reliable information from Cuban authorities. In fact, the report from 2009 is based on information gathered by UN agencies and programmes operating in Cuba because admittance for the NGOs has been refused. Cuba is blamed for undermining key civil and political rights.

On the one hand, emphasis is laid on the responsibility of the Cuban government to protect its people “as far as available resources allow”. (Amnesty International, 2009, p.6) On the other hand, the USA is blamed for restricting direct imports and influencing trade with third countries, e.g. to supply medical equipment and medicine. Consequently, they found that vulnerable people are affected most by the embargo in Cuba.

Fontaine and Ratliff (2000) support the negative social welfare consequences and point out that Castro is in a good strategic position with respect to the US foreign policy against Cuba. Either Castro uses the embargo as an excuse to blame hostile and passive neighbours for Cuba’s poor economic performance or he deflects criticism from “home grown” problems onto the US saying that humanitarian problems are caused because of the embargo. Both ways are beneficial for Castro and even with respect to the annual resolution put forward at the UN General Assembly and with respect to the latest political development in December 2014, recent newspaper articles proof that “he gains if it is lifted, though he also benefits in important ways from its continuation.” (Fontaine and Ratliff, 2000, p.18; Corrales, 2014; Coy, 2014; Godard, 2014; Hoffmann, 2015)

2.3 Deficiencies of the findings - Ricardo and political ideologies

The selected streams of literature presented above built on the assumptions identified by Ricardo about comparative advantages that free trade between two countries leads to specialisation, reduces opportunity costs and increases welfare. (Mankiw and Taylor, 2008; Wall et.al, 2010)

However, only very few scholars take into account that the US embargo is addressing a socialist regime which lacks many democratic principles like free market competition and pricing, freedom of association, expression and assembly. (Amnesty International, 2009) A centrally planned economy is further characterized with the government’s power over all means of production and with the socialist ideal that each person should act according to the principle “from each according to his/her capacity to each according to his/her contribution” resulting in lower productivity and efficiency overall. (Cuba.cu, 2011; Granma Internacional, 2015; Spaulding, 2014)

Pape for example stresses that punitive sanctions against authoritarian regimes show only little effect. (Drury and Li, 2006; Pape, 1997) Furthermore, Van Bergeijk shows that there is less specialisation in centrally planned economies per se. In times of a globalised world economy, he claims that despite the regime’s political and economic isolated position, the country’s economy is still affected by network effects of sanctions, including the international diplomatic climate and economic cycle. (Van Bergeijk, 1994; 1995)

2.4 Twofold discussion about trade diversity at times of the embargo

Contrasting streams of discussion is found upon the existence of diversified trade at times of the embargo. Askari et.al, Borer and Bowen and Hufbauer et.al are selected as proponents for trade diversity in Cuba.

2.4.1 Positive effects on trade diversity

Firstly, Hufbauer et.al claim that Cuba is successful to fill the gaps in its domestic production that were previously filled by US firms. The tightening of the embargo was another time enforced upon the Helms-Burton law from 1996. (Appendix 1) According to them, even under the threat of punishment for third-countries trading with or conducting business in Cuba, this would not stop them to do so. (Hufbauer et.al, 1997)

Secondly, Borer and Bowen (2007) support Castro’s success in diversifying trade partners as a way to fill the investment and trade gap after the collapse of the Soviet Union. In fact, from 1989 to 1993, Cuba’s GDP plunged by almost 40%, sugar production declined by 50% and in one year Soviet aid plunged from $3 billion to $50 million. (Banco Nacional de Cuba, 1995; ECLAC, 1997)

Thirdly, Askari et.al found that “the Castro regime has made it clear that it is willing to pay a higher price for imports (and/or earn a lower price for exports) in pursuit of this trade diversification dictum.“ (2003, p.150)

2.4.2 Negative effects on trade diversity

In contrast to that, streams of literature arguing against trade diversity are also taken into consideration.

Cuban Foreign Minister Bruno Rodríguez-Parrilla acknowledged economic shortages and restricted development potential. Hereby, he points out examples where access to foreign investments and markets has been denied. However, he is of the opinion that the “blockade” is not a unilateral policy from the United States but rather a multilateral one, which violates the international law of trade and navigation. (Rodríguez-Parrilla, 2009)

In an analysis about the impact of negative economic sanctions against G7 countries on bilateral trade, Caruso investigated that unilateral extensive sanctions have a “significant negative impact on U.S. bilateral trade, exports, and imports with target countries subject to these sanctions”. (Caruso, 2003, p.19) Thereby, his analysis takes into account the consequences for the sender country. Caruso’s findings proof welfare losses on both sides and evidence is given by applying the gravity model for formerly planned economies. Further, negative network effects, as an indicator for a country’s trade relations and geographic proximity, are identified. (Caruso, 2003; Van Bergeijk, 1995)

Mesa-Lago and Vidal-Alejandro analysed Cuba’s current major trading partner Venezuela and described the trade agreements as significant and risky. Cuba relies heavily on the tertiary sector with up to 80% of its GDP resulting in dependency on imports, increased external debt and a low multiplier effect. The system caused structural weaknesses with ever-decreasing efficiency and low incentives for growth. (Mesa-Lago and Vidal-Alejandro, 2010)

2.5 Evaluation of the literature

Due to the fact that all media in Cuba is state-owned and Internet access is insufficient, only few Cuban sources are published. Yet, he state-owned newspaper Granma Internacional, publications from the UN or the WTO is detected in the general academic discussion. The sources need to be evaluated critically with regard to opposing interest groups on both sides. Further, many scholars deliberately leave out Cuba in their research papers because of a lack of reliable data.

3.0 Conceptual Model

Hence the paper is analysing both, economic and social impacts caused by the embargo imposed on Cuba, it is reasonable to divide the conceptual model into two parts. The first conceptual model underlying this paper is defined as follows:

Abbildung in dieser Leseprobe nicht enthalten.

Diagram 2: Conceptual model about trade effects of embargoes

Source: Prepared by the author

The subject for the first part of the analysis is about ‘trade effects of embargoes’. Assumptions have been made based on David Ricardo’s two-product and two-country model on comparative advantages that free trade between two countries leads to specialisation, reduces opportunity costs and increases welfare. (Wall et.al, 2010) The independent variables are analysed from a corporate view and a macro-economic view. The two perspectives are assumed to conclude with different results when it comes to trade agreements, diversification and policies.

One example for the diverse perspectives is the codifications of the US sanction Helms-Burton Act in 1996 (Helms- Burton Act, Pub.L. 104-114, 110 Stat. 785, 22 U.S.C. §§ 6021-6091), which at its core, prohibits and punishes third countries to trade with and invest in Cuba. (Haney and Vanderbush, 2005; U.S. Department of the Treasury, 1996)

In a globalised world, different interest groups have to be taken into account. In this case the domestic consequences for the target country are, among others, a lack of


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Welfare Effects of Embargoes of the USA. Economic Affects and Social Development in the Republic of Cuba
How does the embargo of the United States affect economic and social development in the Republic of Cuba?
Berlin School of Economics and Law
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welfare, effects, embargoes, economic, affects, social, development, republic, cuba, united, states
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Elena Kühnapfel (Author), 2015, Welfare Effects of Embargoes of the USA. Economic Affects and Social Development in the Republic of Cuba, Munich, GRIN Verlag, https://www.grin.com/document/296313


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