Working Paper # 15 Remittances To Cuba: An Evaluation of Cuban and us government Policy Measures Lorena Barberia September 2002 Abstract

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Since the commencement of hostilities between Cuba and the US in the early 1960s, both governments have repeatedly attempted to influence private family transfers. Initially, both governments tightly controlled these transactions, implementing restrictive policies primarily directed at domestic monetary policy, in the case of Cuba, and bilateral financial transactions, in the case of the US. However, as economic and political dynamics evolved, Cuba's policy shifted more radically from overall prohibition to leveraging remittances. The US, on the other hand, has largely continued its initial policy approach of limiting remittance flows, although there has been a loosening relative to earlier regulations governing the amounts and channels that could be used by Cuban émigrés to send funds to their families.

This paper has attempted to show that Cuba has been partially successful in attracting and channeling remittances toward the State-controlled economy. The aggregate flow of remittances and their uses are highly sensitive to macroeconomic, political, and institutional factors. In terms of the political context, remittances remained at minimal levels during periods when the Cuban government actively discouraged contact with the Cuban émigré community. In macroeconomic terms, dollar legalization in 1993 was a critical first step in shifting remittance patterns. Institutional factors were decisive in ensuring that a significant majority of the resources flowed through official channels, both directly, through development of a dollarized financial architecture and indirectly, through the creation of consumer dollar stores.
However, not all policy tools utilized by Cuba to encourage remittance flows through official channels have been effective. Only a small proportion of net transfers have been channeled to interest-bearing dollar checking and saving accounts or currency exchange bureaus. In contrast, the government has been largely successful in two areas: official transfer mechanisms and consumer spending. The opening of State-run consumer markets for food and other goods has proven to be an effective means of attracting remittance flows to the official economy. In terms of magnitude, annual dollar sales have surpassed official remittance flows. Based on official data, a higher proportion of remittances are being sent through official channels, reaching at least 40% of total officially reported flows.
Nearly a decade after reforms were initiated, however, a sizable portion of remittances are still sent through non-official channels and circulate in the extra-official economy. Based on the Cuban government’s own reporting of the amount of net transfers, more than half of these total flows are still being sent through unofficial channels. Similarly, significant flows are not being spent in the State-run economy. Finally, once these resources enter the domestic economy they create impacts, many of which are unanticipated or exert countervailing pressures to the policy goals targeted by the government. A case in point is Cuba’s extra-official exchange rate with the convertible peso. As Cuba moves toward a unified exchange rate, the appreciation pressures exerted by remittance flows run counter to the country’s export and tourist-oriented development strategy.
US policy toward private family transfers to Cuban relatives on the island has shifted from prohibition of these transactions to capped allowances under tightly regulated procedures. Since the early 1960s, US policy has continued to maintain Cuba's international economic isolation, but it has become less effective over time. Because Cuba has expanded its trade and monetary relations with Western and Latin American countries, it has developed direct financial transactions mechanisms that provide viable third country channels for émigrés in the US to send funds. In light of the crisis sparked by the collapse of the Soviet Union, tightening measures instituted by the US have been largely ineffective in limiting the flow of remittances to Cuba. Indeed, during the US ban on remittances from 1994 to 1998, such flows continued and even grew.
While this paper has provided evidence and assessed the effectiveness of Cuban and US government policies on the pattern of remittance flows to Cuba, there remains a need for further analysis. First, this analysis is based largely on official estimates of the volume of remittance flows to Cuba. Yet, given the significant portion of family transfers that are sent through unofficial channels, further studies need to be undertaken on the overall magnitudes and the share transmitted through unofficial channels. Second, the evaluation of the effectiveness of Cuban government policy would be improved with a cost benefit analysis examining whether the gains in official remittance flows and uses outweigh the administrative and potential political costs for the Cuban government. Finally, further research needs to be conducted on understanding the motivations of Cuban émigré senders as well as the uses of remittances at the household level within Cuba.

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1 The Rosemary Rogers Working Paper Series, and the research upon which they are based, are supported by a generous grant from the Andrew W. Mellon Foundation.

2 Lorena Barberia is the Cuba Program Associate at the David Rockefeller Center for Latin American Studies (DRCLAS), Harvard University. The author wishes to thank the Mellon-MIT Inter-University Program on Non-Governmental Organizations and Forced Migration for funding a 1998 grant for “The Uses of Remittances and Their Effects on Informal Economic Activity in Cuba” and a 2001 grant for “The Ties That Bind: the Role of Refugees in Building Trans-National Family and Bilateral Relations” (the latter received with Professor Susan Eckstein) as well as NGO sponsorship from Jeff Crisp, Head Evaluation and Policy Analysis Unit at UNHCR, and Ana Julia Jatar Hausmann,, Senior Fellow at the Inter-American Dialogue. This paper is based on lectures presented by the author at MIT and DRCLAS in 2001. The author is indebted to Sharon Stanton Russell for comments on the manuscript.

3 Based on a survey of Latinos on Latino Television Portrayals, DeSipio (2000) reports that 40.4% of Cuban émigrés reported sending remittances to their homeland, an average higher than Mexicans, Puerto Ricans and South Americans and below rates reported for the highest groups in Central America and the Dominican Republic. These probability ratios were further confirmed by logistic regression analysis.

4 The author conducted these interviews as part of joint research project with Susan Eckstein aimed at examining social and economic transnational ties. For more information about other aspects of these ties, see Eckstein and Barberia (2001).

5 In her extensive review of remittance research, Russell (1986) points out that policy measures by European labor-sending governments aimed at affecting migrant decisions to maximize the flow of remittances back home have been relatively well documented and evaluated.

6 Foreign currency-denominated bonds allow migrants to invest in their home country using their labor earnings without losses due to foreign exchange differentials.

7 Most mandatory schemes have been unsuccessful; the exception is South Korea (Puris and Ritzema 1999).

8 Using data from 1962 to 1979, Swamy (1981) found that the number of migrant workers abroad and their wages together explained over 90% of the variation in the flow of remittances. Neither the relative rates of return on savings in the host or home countries, nor incentive schemes, had a significant impact on total flows.

9 A wider body of research has examined the effects of indirect determinants such as the political, economic, and institutional environment in the homeland country on remittance flows. Researchers have argued that government policies in the sending country, which affect political and economic conditions in the homeland, may alter a migrant’s propensity to remit. For example, Elbadawi and Rocha (1992) and Wahba (1991) argue that government macroeconomic policies that stimulate foreign direct investment flows, such as low black market exchange rate premiums and low rates of inflation, also lead to an increase in remittances.

10 Most of the literature aimed at examining private family income transfers in the context of developing countries has been limited to examining interactions that take place between families within a country without reference to their immigrant status. For more work in this area, see Cox and Jimenez (1990); Cox, Eser, and Jimenez (1998); Jensen (1998); and Barberia, Johnson, and Kaufmann (1997). Taylor (2000) provides an overview and assessment of the impact of this research on the role of transnational remittances.

11 As Jorge I. Domínguez states, “Cuban entrepreneurs had close connections with the United States and because by this time they could certainly be presumed to oppose government policies, the survival of the revolutionary government required that the management of Cuban enterprises be passed to loyal revolutionaries, however bureaucratically incompetent (1978:147).”

12 The total amount of money in circulation in August 1961 was 1,187 million pesos. A total of 497.6 million pesos or 42% was confiscated (Domínguez 1978:229).

13 According to Mesa-Lago (1981:47), “the monetary surplus steadily increased in the 1960s and in 1970 reached a peak of 86% over the population income; in other words, the total income of the population exceeded by almost twofold the value of available supply.”

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