What Can We Do with More Family Remittances?
By Miguel Alejandro Hayes Martinez (El Toque)
HAVANA TIMES – In November 2020, Donald Trump decided to shut down the money transfer service for remittances from the US to Cuba via Western Union. The service was then later reactivated under Joe Biden in January 2023, on a trial basis from Florida. In March 2023, the trial phase gave way to normal operations. You can now send money to the island from every US state (with a daily limit of 2000 USD, although this isn’t important).
The new measure indicates a surge in remittances to Cuba, which would be great for increasing some families’ income and for the Cuban Government’s foreign currency collection policy. However, what are the possible effects of this measure, especially for citizens’ purchasing power, beyond surface-level benefits?
Don’t bathe twice in the same water
A surge in remittances today won’t have the same impact it might have done in 2017 or 2018, because Cuba today isn’t the same as it was then. Not in a poetic/philosophical/existential sense, but in terms of its economic/production conditions and its demographic. Using the same policy or shock in different landscapes only brings about a different result depending on each situation.
In 2018, when the country was still receiving remittances via Western Union, it was a lot easier for a Cuban citizen to buy at the agro-market or CUC stores (the predecessor of MLC stores). Back then, even though supply fell short, these stores were stocked to a certain extent because of national production in agriculture and livestock, as well as imported consumer goods, especially of food products.
And today? In 2023, increasing shortages can be seen in high prices and inflation, as well as in the long lines to buy these products and widespread rationing of sales, which is the best economic evidence that there is a lot less available to buy, or in other words, supply is less now than it was in the years abovementioned.
Statistics also indicate this: agricultural production fell by an average rate of 7.7% per year between 2016 and 2021. There is so little to sell, that there’s the illusion/nostalgia that we had enough (supply) before. We are experiencing a crisis that is reflected in growing inequality, social unrest (with its climax on July 11, 2021), the migration wave and even the political situation on the island. Within this context, a surge in remittances being sent to Cuba will have special results.
Remittances act as a boost, an injection, a shock (if the push is a good shove, and if you want to give it a more technical name) for the people receiving them. Nevertheless, in situations where supply is insufficient, higher revenue for some groups of individuals will have the immediate result of increasing the number of people wanting the good in shortage.
For example, if only 1,000 families in a certain geographical area had enough money to buy meat in MLC up until now, and with greater remittances coming in there are now 1300 families, demand in this area will go up by at least 30%. Thus, the social struggle to get this food product will make lines longer or drive up the prices of these goods on the illicit market. Both alternatives are the two faces of the same shortage.
The positive effect of a family receiving remittances and having higher revenue will be counteracted by the effect shortages have on prices (given the shock in demand created by remittances). This doesn’t mean to say that more remittances won’t be beneficial on an individual or family basis, but the benefits will be less than expected. Remittances try to improve the economy and increase citizens’ purchasing power but having money when there is very little to buy on the market isn’t half of the solution.
Meanwhile, driving up the final prices of consumer goods will reinforce the “gentrification” of basic essentials; that is to say, the process in which more and more basic products are available to people with higher revenue takes a firmer root (thus, a packet of sausages ends up being an almost luxury item). As a result, the accessibility gap grows, affecting lower-income citizens, thereby strengthening inequality. (A phenomenon of the Cuban economy for years now, given the absence of supply for lower-income households).
This leads us to the conclusion that where there is a shortage of supply, increasing the income of a social group reduces the purchasing power of those with a medium income (and even some high-income individuals, in some cases) and harms those with low incomes. Higher income social classes will have to compete with new beneficiaries of remittances, and the poor will lose even more purchasing power. It’s almost impossible for a different allowance of revenue not to have a significant impact on the fabric of society, in terms of inequality.
What’s important to import
The negative impact on growth of demand is resolved by expanding the latter, to prevent the same thing happening to supply. Therefore, a surge in remittances might seem like a good mechanism to reduce shortages, because if the Government were to receive more foreign currency, it would import more to supply stores where beneficiaries of remittances would go. Great! But…
Hypothetically-speaking, let’s say 10,000 USD are sent from the US to Cuba via WU on the first day of this policy. To make it easier, we can forget WU’s commission, so we’ll say the Cuban Government receives 10,000 USD.
Then, the Government takes this money and spends it on importing… chicken? or whatever it wants to sell to citizens. If it sells goods for their purchase price, GAESA wouldn’t make a profit. As this is a company seeking a profit, and not a non-profit, the Socialist military company applies a profit margin of up to 240%; that is to say, almost 3.5 times the original price.
Suppose the percentage was “only” 200%, the total value of selling this product would be 30,000 MLC. The fact is that the retail price of every product will be three times what GAESA paid for it. In this case, in order for recipients of remittances to be able to buy the supply created with the 10,000 USD, people sending remittances need to give three times more (30,000 USD).
Another possible situation is that the Cuban Government only invests 3333.33 USD (a random number to give you an example) and applies a 200% profit margin again, to get a total value of sales of 10,000 USD. But in this case or the above (when the Government invests the full 10,000), every time somebody sends 100 USD from the U.S. to the recipient in Cuba, even if they receive 100 nominally, they will only be able to enjoy 33.33 USD for every 100 USD they receive. In other words, recipients of remittances will only enjoy the money they receive in an inverse relationship to the profit margin applied by the Government to sell imported MLC products. That’s because people sending remittances will have to pay the Government for production costs or to provide a supply (import) plus their profit margin, if they want their friend or relative receiving the remittance to be able to buy anything.
If you take the above into account when assessing lower shortages because money as remittances is being spent on imports (and it’s insignificant if it’s being purchased by a state-led, military or private company), the alternative isn’t any good. For example, if an additional investment of 10 million USD is needed per month to elimiate food shortages by importing them instead, and recipients of remittances can consume them, people sending remittances will need to transfer three times as much (30 million USD). Financing the struggle against shortages with remittances would be great business, enviable even.
This suggests that while remittances can theoretically be a driving force for the economy (as it encourages growth of demand), remittances play a dual role in Cuba: financing consumption and financing the creation of (new) supply. In this situation, remittances are a lot less efficient way to finance development than in other places where shortages aren’t widespread.
It’s a matter of there being a different situation in Cuba, even in material terms, to other countries receiving remittances in the rest of Latin America. For example, if there is an adequate supply of most basic goods and services in these socio-economic spaces, remittances would only feed growth of demand, because supply is being created by private producers and sellers.
In short, using remittances as a driving force in Cuba is a utopia or scam – depending on the level of awareness those who have chosen this path have – exactly because of how the Cuban economy works. The Government comes out winning, they bleed people sending remittances dry and recipients of remittances have a Pyrrhic and temporary victory.
Conclusion? You need an economy that is able to produce in order for remittances to be effective.
Much-needed foreign currency
The alternative left for managing remittances to try and resolve shortages is for the profit margin the Government takes (up to 240%) with its import policy is then used to fund industry (if it exists) and national production, so that it doesn’t have to act as a reseller that is charging in advance.
In this case, if remittances increase, the Cuban Government will have foreign currency to pay off its debt, subsidize the inefficient State apparatus, finance the repressive apparatus, fund some hotel projects if it needs to, but not to develop agriculture and livestock (thinking about industry is dreaming a little too big, especially because it’s in ruins). Production problems will be put off because there is no proof in reality that it will be priority, until they need to talk about it again. The Revolution will be rentier and parasitic, or it won’t be. Long live the remittance/importing form of production!
But you can always give benefit of the doubt to the country’s leadership. The thing is though, even if they decide to fund development with remittances, it’s too late. This money won’t be enough to pick up an infrastructure that has been neglected for decades, just like our industry proves, which has shrunk by 45% in just over 30 years, a shameful sugar harvest, housing situation… and especially the very dependence on remittances – as if it were oxygen – is an undeniable sign of domestic destruction in terms of generating wealth.
What the country needs right now is a great investment plan to reverse the effect of continuity in power. As a result, even well-managed remittances won’t be a significant driving force for the Cuban economy. This measure gifted to us by the Biden Administration will just be the umpteenth economic quick-fix, even if it works. Another one, until the hole gives in.