Jun 07 2007

Would trade with the US make Cuba rich? Probably not

Cuba libre | Free exchange | Economist.com

Here’s a piece from the Economist’s blog about whether America removing its embargoes on trade with Cuba would have all that big an impact on the lives of the average Cuban.CUBA LIBRE!!

Trade is, it goes without saying, wonderful stuff. But trade with America isn’t that marvelous. Cuba is, right now, free to trade with just about every other country in the world, yet it’s still a pit of economic misery for most of its citizens. Yes, shipping costs would be higher, stopping some trade from happening. But China is much farther from America than Cuba is from Europe; it still manages to run an enormous trade surplus with that country.

According to the CIA World Factbook, Cuba exports roughly $3 billion a year. Even assuming that the American embargo is so effective that it has slashed Cuba’s exports in half, that would give Cuba new gains from trade of only another $3 billion, or $272 for each of its 11 million citizens. (We assume for the sake of argument that Cuba is so true to the Socialist Revolution that elites will not appropriate a single extra dollar of the surplus to themselves, or to wastefully showy political projects.) It should be obvious from descriptions of Cuba that this will not be enough to lift Cubans out of the grinding poverty in which they currently live.

Trade can only make countries better off if they make something worth selling; Cuba largely doesn’t. Opening up trade with America, but not opening up the sclerotic state owned economy to internal change, would result i a little extra income on the margin, but it has no prospect of transforming the economy. Without little things like relative changes in price signals to allow inputs to flow to their highest valued uses, free movement of capital to profit opportunity, and incentives for higher quality work, trade cannot work any economic miracles.

Discussion Questions:

  1. Based on what you read above, how much freedom do you think exists in Cuba’s economy? What type of economic system does Cuba have?
  2. Besides free trade, what else must Cuba do to help its citizens to escape poverty?
  3. Explain and discuss the following passage: “Without little things like relative changes in price signals to allow inputs to flow to their highest valued uses, free movement of capital to profit opportunity, and incentives for higher quality work, trade cannot work any economic miracles.”

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

One response so far

One Response to “Would trade with the US make Cuba rich? Probably not”

  1. Robert Wangon 26 Jun 2007 at 11:05 am

    I don't believe there is too much freedom in Cuba's economy for the people as then nation is a communist nation in which the government generally runs the show. The people do not have much say at all.

    Besides free trade, the Cuban government needs to provide employment opportunities, education, and provide public facilities/social work that will help Cubans escape poverty.

    I think the passage means without the constant changes in prices of products and economic freedom, trade cannot work any "economic miracles," which could be becoming ridiculously rich or surfacing above the poverty line. Personally, I'd agree with this statement. If everything stayed the same, trade would not be able to create a drastic difference in anyone's life unless a drastic fall in supply or a huge increase in demand occurs. This may be a stretch, but I think the passage could be hinting at competition.