Rolando H. Castañeda and George Plinio Montalván[1]
Inter-American Development Bank
Part II
E. Recent Policy Changes and Reforms
The continued and major decline of GSP since 1989 and the increasingly competitive world economy have forced the introduction in Cuba of some ground-breaking but cautious and modest elements of a market economy: joint ventures with previously banned foreign private investors; partial price adjustment in agricultural products, medicines, oil and public services; decentralization of some foreign trade operations; a few corporate businesses; legalization of possession of foreign exchange ("dollarization"); cooperativization of state farms; and limited steps toward private sector activity in the services sector with own-account work in 135 trades, crafts and services, from taxi drivers to hairdressers and computer programmers. Own-account private workers must receive official authorization and pay a presumptive income tax. In May 1994, some long overdue stabilization measures were announced to reduce existing internal and external imbalances.
These measures and reforms are incomplete in scope, imperfect in execution and inadequate in impact. They are still too little, and come too late to alleviate the overall crisis of the Cuban economy, and unless they are simply the first small measures that presage a vast transformation process, are unlikely to have much effect because most of the features of the command economy are still retained and impede the revitalization of the long-moribund economy.
The Communist Party --which is the sole party authorized, as provided in Article 5 of the Constitution of 1976-- thus far has not favored making major macroeconomic adjustments (in monetary, fiscal and exchange rate policies) or systemic institutional changes because it considers that they can erode its firm political control as happened in the former USSR and Eastern Europe. The price level, the official exchange rate and interest rates continue to be largely dissociated from the real money supply and the real value of domestic currency and capital. There are not enough and proper incentives to work and increase aggregate production.
The strict curbs on private enterprise are still in force are intended to prevent the emergence of autonomous internal economic power --to reduce and control the booming black market by legalizing and suffocating it, and merely to take in dollars rather than to unleash productive forces. The most successful privately-run restaurants and taxi activities are stridently curbed. Marked economic success, that is to say, any accumulation of riches is illicit. The improvements in incentives for agricultural enterprises, own-account workers and the legalization of dollarization are insufficient and have not been complemented by the development of sufficient instruments for reducing excess demand or stimulating aggregate supply to adjust to the new situation. For example, the authorities still do not allow the private commercialization of agricultural goods; nor own-account work by university-trained professionals or management personnel; nor the hiring of non-family workers or other types of contractual arrangements. Ultimately, the recent partial reforms are modifying incentives, but in a limited and sometimes in a perverse way, because they are increasing the macroeconomic imbalances and enhancing the duality and disintegration of the economy, making the system more macroeconomically unstable and socially explosive. The "hard heart" in this case also has the "soft head."
Two features of the recent reforms toward "market socialism" are bound to end in failure. First, the communist "reformers" do not really believe in competition and intermediation, so the new measures will not lead to well-functioning markets. Prices and wages remain controlled. International trade continues to be restricted so that the international market provides no real competition for domestic production. Entry by new firms into existing markets really does not exist; chronic shortages and excess demand means that new enterprises cannot get started or cannot survive because they cannot obtain necessary inputs, especially those of foreign origin. Second, the communist "reformers" have no interest in privatizing enterprises. They completely neglect or misjudge the enormous inefficiencies that come from lack of proper ownership of enterprises. They fail to realize that the "insiders" of the enterprises, managers and workers, could seriously distort enterprise behavior to their advantage. Perhaps, encouraged by the very low wages being paid, workers and managers extract "presents" from the firms and "bribes "outside the firms, stripping the enterprises of income and assets. The current system is an arrangement that inhibits work incentives and invites irresponsible economic behavior. It is impossible to fully integrate Cuba to very competitive world markets unless free competitive markets and private ownership are allowed.
Moreover, since indecision and reversals in basic economic policy-making have been a constant throughout the Castro period, this further diminished the credibility of recent changes, especially in view of Castro's strident anti-capitalism speeches at the special sessions of the National Assembly in late December 1993 (when no agreement was reached on further adjustment and reform measures) and in early May 1994 (when agreement was reached on further adjustment and reform measures), as well as on January 1, 1994 in celebrating his 35 years in power. When announcing most of the recent changes, he made clear that the moves were in direct response to Cuba's severe economic crisis; he also stressed his commitment to maintaining the essence of the socialist system, as had been evident in the changes made to the Constitution in 1992 and 1993. Hence, there is reasonable doubt about how long these measures will remain in effect.
The incompetent rigidity of economic policy and defiance of pragmatic measures mean that the socialist regime stands arrogantly and defiantly alone as an isolated and besieged anomaly and a vestige of the Cold War, with no feasible and comprehensive strategy to reverse the process of decline, with negative consequences concerning efficiency and productivity, thus compromising its own survival. "Socialism or Death" has an ominous ring; the end will come sooner rather than later. Cuba needs to overcome deep and intrinsic severe institutional and systemic flaws and barriers to economic growth and requires more precise, broad, and coherent actions before stabilization, economic recovery and growth can begin in earnest.
F. Progressive Violation of Human and Labor Rights and Plundering of National Assets and Natural Resources
Due to the extremely difficult economic situation and due to its ineptitude and endemic corruption, the Cuban authorities are not forcing foreign investors to compete adequately for national assets and concessions, and they are getting extremely good and unwarranted deals. The communist "reformers" who have ruined the economy over the past 35-plus years are now about to encourage further plundering of enterprise assets and granting concessions over national assets and natural resources to foreigners at liquidation terms in a vain attempt to ensure the regime's long-term survival and for political acceptance and economic assistance. Furthermore, these foreign firms are engaged jointly with the Cuban authorities in violating basic labor rights of workers in particular, and the human rights of the population in general. This "final" economic solution has serious ethical and efficiency shortcomings. A hands-off approach by Cubans and the international community is not appropriate. It is neither morally acceptable nor economically desirable.
Anarchic foreign investment deals and concessions by which communist "reformers" grant part of the nation's wealth to foreign investors and appropriate the other part for themselves should be abrogated on fairness and efficiency grounds. On fairness and moral grounds, economic power should not be given to those responsible for creating the current chaotic economic situation and crushing democracy, nor to those foreign investors who by violating basic human and labor rights are able to reap unacceptable gains. On efficiency grounds, they are unjust deals that set a terrible precedent and discourage political support for needed impending privatizations and foreign investments. Of course, it is even less justifiable ethically to give sizeable proportion of ownership of assets and concessions of natural resources directly to foreigners who are violating basic human rights. Cuba is very likely to attract massive foreign investment from Cuban expatriates and U.S. investors in the future. Therefore, a future Cuban government should place heavy fines on foreign investors who have been violating basic rights and abrogate one-sided and unfair concessions.
II. Key Issues
A. The U.S. Embargo
It will be impossible to begin meaningful stabilization and recovery in Cuba unless the U.S. trade embargo is removed. Moreover, maintenance of the embargo will needlessly prolong the hardship suffered by the Cuban people, encourage further chaos and potential bloodshed, and will surely exacerbate attempts by Cubans to flee to the United States.[23] However, there are two aspects of concern relevant to lifting of the embargo: one, originating in the Foreign Assistance Act of 1961 (Section 620a), is related to the expropriated property of U.S. citizens; the other is a political requirement of the Cuban Democracy Act of 1992 that infringes on Cuba's sovereignty and cannot be met until some time has transpired while reconciliation and peacekeeping efforts are underway.
The Cuban Democracy Act of 1992 is an extremely controversial piece of legislation that violates principles of international law. Our purpose is to address only those aspects of this law that would affect policies undertaken during the Emergency Period. The sanctions specified include: a prohibition on "certain transactions between certain U.S. firms and Cuba," meaning specifically subsidiaries of U.S. firms in other countries; prohibitions on vessels engaging in trade with Cuba, or carrying goods or passengers to or from Cuba, from loading or unloading, or entering, a United States port; and limits on remittances to Cuba. According to Section 1708 of this law, the President of the United States may waive the sanctions upon determination that the government of Cuba --
"(1) has held free and fair elections conducted under internationally recognized observers;
(2) has permitted opposition parties ample time to organize and campaign for such elections, and has permitted full access to the media to all candidates in the elections;
(3) is showing respect for the basic civil liberties and human rights of the citizens of Cuba;
(4) is moving toward establishing a free market economic system; and
(5) has committed itself to constitutional change that would ensure regular free and fair elections that meet the requirements of paragraph (2)."[24] (Italics ours)
Without disputing these goals, as a matter of principle, we feel compelled to state our conviction that these conditions infringe upon Cuba's independence, much as the Platt Amendment limited Cuba's independence in 1902 and bred hostility between the U.S. and Cuba. However, more to the point of this paper, since complying with points (1) and (2) above will inevitably take longer than six months, the Cuban Democracy Act will constitute a significant obstacle to reconciliation and starting the process of stabilization. There seems to be no logical justification for the United States to prolong a policy of economic warfare against Cuba by continuing it into the Emergency Period following a fundamental change in government.[25] Our understanding is that repeal of the Cuban Democracy Act would not terminate the embargo.
Obviously, for Cuba to shake off the disastrous effects of the past 35-plus years, it will be necessary for it to develop friendly relations with the United States. Similarly, it will be in the U.S.'s national interest to assist in creating the conditions under which the Cuban people may peacefully rebuild their shattered country, thus lessening the pressure for people to migrate massively to the United States as well as an eventual need for even larger amounts of financial assistance.
We concur fully with the Inter-American Dialogue's Task Force on Cuba that "the goal of policy should be to make possible a Cuba that remains sovereign, that is free from violence, that ends repression and fosters democracy, and that regains its economic health."[26] However, an important caveat is that the concept of sovereignty is based on the sovereign will of the people to freely choose their system of government and their governmental officials; it does not mean the sovereignty of the Communist Party.
As humanitarian act the United States should immediately and unconditionally lift the embargo on trade of food, medicines and medical instruments. Also, the United States should lift all aspects of the embargo immediately upon a fundamental change of government in Cuba, trusting that a policy of constructive and compassionate engagement, at the very outset, with a National Reconciliation Council or provisional government committed to respecting human rights and to the holding of free multi-party general elections, and then with an eventual democratic government of Cuba, will result in an acceptable resolution of issues pending between the two countries.[27]
B. Claims Against the State
While one might argue that consideration of claims against the government of Cuba should not be addressed during an initial Emergency Period, three elements have combined to make this a major issue even prior to a change of government: (a) policy statements by the U.S. government indicating that the trade embargo on Cuba will not be lifted until there has been satisfactory resolution of claims on the part of U.S. citizens;[28] (b) statements and activities by Cuban expatriates and U.S. claim-holders ranging from demands for restitution of lost properties to full compensation; and (c) use of these statements or activities by the Castro government to encourage fear of mass evictions or relegation to second-class status that would result from a change in government. In addition, future external financing from multilateral financial agencies will be blocked by the U.S. pending resolution of claims.[29] Clearly policy regarding claims against the state constitutes a key issue for achieving a meaningful national reconciliation, without which it will not be possible to terminate the Emergency Period, reduce the possibility of bloodshed and get on with the task of rebuilding a shattered economy.
Economic stabilization, law and order, food, medicines, the establishment of workable institutions for policy implementation, and establishment of property rights are critical to Cuba's reconstruction and without doubt will have to be addressed immediately. Privatization has proceeded at a disappointingly slow pace in some Eastern Europe countries, in part due to delays in resolving the property rights issue. Travieso-Díaz has pointed out that based on the widely differing experiences in Czechoslovakia, Hungary and Poland,
"whatever process is followed . . . must provide an unequivocal adjudication of property rights so that no legal obstacles to the privatization of enterprises are interposed by the existence of unresolved property claims against them."[30]
Therefore, while there is general agreement on the need to privatize state-owned enterprises and attract foreign investment to Cuba as rapidly as possible, there must first be a determination regarding the issue of property rights. Moreover, unless clear and transparent "rules of the game" are set and implemented, the amount and quality of investment taking place will be less than what is needed to put Cuba on a sustainable and high growth rate.
1. General Considerations
We take the position that claims against the Cuban state should not be limited to property claims, but should include all manner of torts --involuntary or uncompensated work, unjust imprisonment, loss of life or limb, loss of loved ones, physical or psychological abuse and harassment by agents of the state, discontinuance of pension payments, etc.[31] --whose aggregate cost defies imagination.[32] Indeed, we doubt there is any legal or moral basis for assigning priority to settling claims against physical property over those claiming civil damages such as those suggested above. Moreover, precedents of various forms of compensation in ex-Socialist states such as East Germany, Czechoslovakia, Romania, and Hungary notwithstanding, the magnitude of the disaster in Cuba and the requirements to set the country back on track socially, politically and economically leads one to conclude that attempting to set up a process of claims adjudication in Cuba, at least during what will no doubt be an extremely difficult transition period, would be pure folly.
Interestingly, according to Section 503(b) of Title V of the International Claims Settlement Act of 1949,[33] claims of U.S. nationals were allowed "for disability or death resulting from actions taken by or under the authority of the government of Cuba..." In at least one case, that of Jenny M. Fuller, et. al. (Decision CU-6199), the Foreign Claims Settlement Commission of the U.S. (FCSC) made an award based on what it considered to be wrongful death, because it felt that Cuban authorities had discriminated against two U.S. citizens in executing them although they had admitted guilt to armed uprising. Loss of pension benefits were also allowed by the FCSC.
One essential question to be answered is whether attempting to arrange some form of non-cash compensation for property and tort claims will be more conducive to reconciliation than adopting a no-compensation policy. For example, in Romania it was felt that like many of its citizens, the country was suffering from post-traumatic stress syndrome, for which it had to undergo a difficult process of critical self-examination, healing, and reconstruction. Under a victim compensation law, more than 100,000 Romanians have claimed compensation which, aside from cash, has been granted in the form of benefits such as free public transportation and preservation of job seniority.[34]
2. U.S. Claims
The casus belli for the U.S. embargo on Cuba was the nationalization or confiscation of property owned by U.S. citizens and corporations in 1960. Following enactment by Congress of the Cuban Claims Act of 1964, the FCSC adjudicated close to 9,000 claims by U.S. citizens and firms, and certified awards in 5,911 cases totalling approximately $1.8 billion, of which $1.6 billion were corporate claims (see Table 4). The FCSC ruled that simple interest of 6 percent per annum should be charged from the date of the actual loss to the date of settlement, bringing the total value of U.S. claims to approximately US$5.4 billion at the end of 1993.[35]
The government of Cuba from time to time has floated suggestions that it would be willing to negotiate the compensation issue, although this may have been mainly a ploy to undermine support for the embargo. While the Cuban Democracy Act would appear to shift the conditionality for lifting the embargo to the holding of free elections and makes no mention of U.S. claims, the queue of claimants has been in existence for many years and is increasingly active and organized given the prospect of the demise of the communist party regime. Obviously, lifting the embargo is a necessary though not sufficient condition for Cuba to have the ability to service its obligations. Therefore, as a result of the combination of the Foreign Assistance Act of 1961 and the Cuban Democracy Act, only a transition government of Cuba, committed to holding free and fair elections, will be able to negotiate the issue of U.S. claims with the government of the United States in order to resolve this matter.
Since the lifting of the U.S. embargo is a priority, Cuba must indicate its agreement to enter into formal bilateral (government-to-government) good-faith negotiations regarding U.S. claims, but that the embargo must be lifted prior to concluding the negotiations. Some have indicated disingenuously that lifting the embargo prior to settling all claims would "compromise the entire U.S. Cuba claims issue" and that the United States "would lose any leverage it may otherwise have had with regard to the prompt resolution of the U.S. Cuba claims matter."[36] This argument is patently absurd, since Cuba's development hopes are inextricably tied to its relations with the United States. The challenge for both the U.S. and Cuba will be to build a relationship based on mutual respect and trust.
The government-to-government negotiations aspect is also important. One could reasonably argue that in filing claims before the FCSC, U.S. citizens and corporations in fact requested the U.S. government to demand compensation, and the U.S. government did so by placing and maintaining an embargo on trade with Cuba. Furthermore, the U.S. government paid at least partial compensation to claimants through the tax system. In fact, the Internal Revenue Service implemented a program allowing individual and corporate taxpayers (i.e., including Cuban expatriates who were taxpayers and suffered losses) to take federal income tax deductions for losses of property confiscated by the Government of Cuba. This, however, is a double-edged sword in that the FCSC allowed losses by U.S. citizens, whereas the IRS program benefitted taxpayers, whether or not they were citizens; it is therefore probable that the tax revenues foregone by the U.S. government could significantly exceed the amount awarded by the FCSC.
Therefore, all U.S. claimants (citizen and non-citizen taxpayers) made their claims subject to international negotiation and, under the doctrine of espousal, must abide by the settlement made by the U.S. government. Rather than negotiating with each claimant, Cuba should indicate its readiness to negotiate this matter bilaterally with the U.S. government.
3. Restitution
Various arguments have been advanced in favor of the return of confiscated property to the former owners.[37] These arguments fall into the following categories:
* Property rights were protected against confiscation by the Cuban Constitution of 1940; they should therefore be returned.
* Since the government of Cuba does not have (and will not soon have) the means to compensate promptly, adequately and fairly, restitution is the best (only) workable alternative.
* Restitution is the best way to implement rapid privatization and encourage recapitalization of the economy.
* In the case of corporate claims, former owners have the managerial talent necessary for rapid development of the enterprise.
* Other formerly socialist countries (Eastern Europe, Nicaragua) have implemented restitution policies.
Table 4. U.S. Corporate Claims Against Cuba:
Awards Exceeding US$20 Million at Time of Loss
| Decision | Award, US$million | |
| Cuban Electric Company | CU-4122 | 267.6 |
| ITT, ITT as Trustee | CU-5013 | 130.7 |
| North American Sugar Industries | CU-3578 | 109.0 |
| Moa Bay Mining Company | CU-6049 | 88.3 |
| United Fruit Sugar Company | CU-3824 | 85.1 |
| West Indies Sugar Company | CU-5969 | 84.9 |
| American Sugar Company | CU-3969 | 81.0 |
| Standard Oil Company | CU-3838 | 71.6 |
| Bangor Punta Corporation | CU-6034 | 53.4 |
| Baraqua Industrial | ||
| Corporation Florida Industrial Corp. of NY | ||
| Macareno Industrial Corp. of NY | ||
| Francisco Sugar Company | CU-6066 | 52.6 |
| Texaco, Inc. | CU-4546 | 50.1 |
| Manatí Sugar Company | CU-6020 | 48.6 |
| Nicaro Nickel Company | CU-6247 | 33.0 |
| Coca-Cola Company | CU-6818 | 27.5 |
| Lone Star Cement Company | CU-6217 | 24.9 |
| New Tuinucú Sugar Company, Inc. | CU-6817 | 23.3 |
| Other Corporate Claimants (approx. 882) | 335.2 | |
| Individual and Other Claimants (5,013) | 221.0 | |
| Total Amount Awarded | 1,799.5 |
Source: United States Foreign Claims Settlement Commission, 1972.
Fortunately, most Cuban expatriate groups have recognized that restitution of dwellings or residential property is not advisable. The discussion can then be restricted to non-residential property.
Accepting the possibility of restitution in resolving claims also means accepting legal encumbrance on property. Lawyers representing claimants are being disingenuous in arguing that restitution could be accomplished quickly.[38] Ruling out restitution simply means that any litigation would be limited to challenges concerning the validity and quantification of the value of losses, and the compensation, if any. By ruling out restitution, a future government of Cuba could proceed immediately to privatize all small and medium-size businesses, corporatize large enterprises and take steps to improve their financial footing prior to privatization.
With respect to U.S. claims, in the first place, there is an assumption that simply because the FCSC established a procedure and adjudicated claims, these claims are automatically valid and there is no need to reopen the cases; therefore, restitution could be accomplished quickly. However, our examination of several claims leads us to conclude that many awards made by the FCSC are open to question, and thus validating even those claims could easily take several years, during which there would be a strong disincentive to invest.[39] For example, in the award of US$27.5 million made to the Coca-Cola Company, US$6.1 million was for an inventory of 1.5 million cases of soft drinks each valued at US$4.01 without evidence to sustain the claim;40 another US$8.2 million was the "going business value" which was added to the actual losses sustained by the company. (If claims awarded were inflated to a value of twice the actual loss, as in this case, at a marginal tax rate of 52 percent, the tax benefit would roughly compensate entirely for the loss.) Since the FCSC denied a number of claims and it can also be assumed that not all U.S. claims were filed, the entire process would have to be reopened.
Secondly, if we were to take only the fifteen largest U.S. claims (totalling US$1.2 billion, which is equivalent to 67% of total U.S. claims), we would find that U.S. nationals owned:
* 90% of all electricity generated on the island (Cuban Electric Co.)
* The entire telephone system (ITT)
* Most of the mining industry (Moa Bay Mining Co. & Nicaro Nickel Co.)
* Significant tracts of some of the best land in Cuba (between 1.5 and 2 million acres)[41]
Returning these properties, ipso facto, to U.S. ownership, even if it were feasible to do so, would be tantamount to insisting that nationalistic feelings in Cuba due to foreign ownership of the country's principal assets never had a basis in fact. Moreover, it would tend to lock the country back into a sugar-dominated structure of production, precisely at a time when an unintended benefit of Cuba's economic collapse is having the opportunity to diversify away from a declining industry (see Section II.F below). In the case of public utilities, the value of a concession to provide electric power or telephone service to a country of 11 million is significantly greater than for a country of 6.5 million, which Cuba was in 1959. We consider that Cuba must have a very competitive and dynamic economy and such monopolistic concessions would be totally incompatible with this objective.
The issue of modifications to property making restitution impractical is not trivial.[42] As a result of modifications, some former owners would receive nothing while others could receive more than they lost. In the case of small business owners (there were 855 corporate awards totalling US$123.3 million), the likelihood of physical disappearance and/or substantial modification is extremely high.
4. Compensation
As pointed out above, to be fair any consideration of compensation for property loss in Cuba must be matched by arrangements to compensate for tort claims.
While conceding that great damage has been done to many by the communist party regime (and probably more to those living in Cuba than abroad), we take the position that the cost in disruption from trying to adjudicate tort and property claims --let alone finance them-- would greatly exceed the benefits, and that sound, stable and transparent policies, together with a safety net, ultimately will be the best way to turn the country around and avoid a long-term legal confrontation with a resulting investment paralysis. Therefore, regrettably, for the reasons indicated above, no claims against the State for confiscations or damages to persons or property should be considered. No damages should be paid for loss of life or limb, unjust incarceration, etc.; properties confiscated should not be returned to their former owners nor should the State pay compensation for those losses.[43] In order to implement this policy and minimize the likelihood of future challenges, a constitutional provision or amendment should be adopted to the effect that no government tort or property claims resulting from actions occurring between January 1, 1959 and a date to be specified prior to assumption of power by a new governmental authority will be considered.
However, an important issue to be considered is the negative impact a no-compensation policy might have on the government's credibility in reestablishing private property rights. It is also felt that future investment will be discouraged unless there is some form of official recognition of past losses, for which special consideration might be given during the process of privatization. In Section II.C below, we suggest the corporatization of certain large military bases in Cuba and their conversion to free trade zones, with labor being provided by the deactivated military. In a NAFTA world, free trade zones may be less attractive possibilities. Nevertheless, as an example of one possible alternative to a no-compensation policy, a compensation scheme might be built into the corporatization of military bases. In this regard, a future government of Cuba might negotiate the termination of U.S. rights to Guantánamo Bay, an obsolete naval base of 117 Km2, which occupies one of the three best Cuban ports, corporatize all or part of the area, and use a share of the income from the sale of shares, leases or profits from that property to compensate the government of the United States for U.S. claims. We also suggest that consideration be given to making a good-faith gesture by way of a pro-forma compensation using Cuban government assets currently frozen by the United States (US$65 million in 1961).
Obviously, there is no reasonable way for a future government of Cuba to justify compensating the U.S. and not its own citizens. Compensation of Cuban and other claimants who did not receive tax benefits from the U.S. could take the form of issuance of shares or discount coupons to be used to purchase shares in selected corporations.
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