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

A Review of the Literature on Government Policy Directed at Remittances

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A Review of the Literature on Government Policy Directed at Remittances

To date, most policy analysis studies on remittances have concentrated on what measures governments adopt to attract remittances in the home country (country of origin). Notable progress has been made in an important area of research—how effective “migrant-specific” schemes are in attracting remittance flows through official channels, such as the formal banking sector.5 European governments have concentrated their attempts to attract remittances on specific incentives, such as repatriable foreign currency accounts and foreign-currency denominated bonds. For example, Yugoslavia, Greece and Turkey all instituted foreign currency account schemes (Russell 1986). Governments in developing countries have also adopted measures aimed at maximizing remittance flows through official channels by means of repatriable foreign currency accounts and foreign-currency denominated bonds.6 In some cases, governments have also instituted mandatory remittance policies.7

Yet, studies aimed at evaluating such policy measures report weak evidence regarding their ability to attract remittances. In assessing the impact of Greek, Turkish and Yugoslav government schemes, Swamy (1981) reports that these policy measures had no significant impact on the total flow of remittances.8 Birks and Sinclair (1979) report similar findings with respect to Arab governments’ policy efforts. In his review of remittances in seven Asian economies, Athukorala (1993) found that migrant-specific incentive schemes to attract remittance flows through official channels were less successful when the fundamentals remained distorted and when institutional deficiencies remained unrectified. 9 Consequently, the two countries with the most distorted policy environments, Philippines and Pakistan, had the highest rates of remittances flowing through unofficial channels relative to the other five countries examined, India, Bangladesh, South Korea, Sri Lanka and Thailand. Moreover, as Russell (1986: 691) writes, “there is also a question as to whether or not the volume of remittances which can be influenced by policy measures warrants the administrative and political costs."
Fewer studies have examined how governments have attempted to channel the uses of remittances in the home country and the extent to which they are directed toward socially optimal ends. This lack of research results in part from the fact that governments, until recently, were less concerned with channeling the uses of remittances within the domestic economy. As Puri and Ritzema (1999:10) write of governments in Asian labor-exporting countries “despite a keen interest to develop policies to attract remittances, they have given much less attention to policies aimed at influencing the pattern of utilization of remittances." An alternate explanation for the lack of government policy on the uses of remittances is that, as they are private family transfers, it is difficult for government policy to mandate the uses of these resources and, since they are primarily spent by households on basic needs, housing and social protection, remittances are already channeled toward socially optimal ends. For example, DeSipio (2000) recounts that Mexican migrants report that nearly three-quarters of these funds will be used for health care.
Those studies that have begun to examine the impact of government policy on the uses of these flows have, thus far, concentrated their attention to the sub-national level. Torres (2001) traces a series of recent Latin American state government policy measures that were adopted in the late 1990s aimed at directing these flows toward productive investment. In cases, such as the state of Guanajuato in Mexico, Torres concludes that state governments have been partially successful in luring substantial flows of remittances toward small-scale entrepreneurial activity and local community development projects. Research on how national policies impact the uses of remittances, however, has remained limited.
In contrast to research on home country remittance policy, the impact of host government policy on remittance flows has been less studied. This is due in part to the fact that few host countries have implemented policies imposing restrictions on the monies that can be sent home by migrants. As a result, the majority of studies in this area have been directed at analyzing the impact of indirect host country policies on remittance flows. For example, there has been significant attention to analyzing the interaction between public transfers and private remittances.10 In the transnational sphere, Taylor’s (2000) work examining whether public transfers influence remittances from US households to Mexico is seminal, reporting that households’ remittance expenditures increase when they receive non-needs-tested income, such as unemployment insurance and social security.
This paper seeks to improve understanding of how national policies in both the migrant-sending and receiving countries impact the overall flows and uses of remittances by presenting a case study focused on how these flows to Cuba have responded over the last four decades.  In order to show how reactive remittances have been to government incentives and disincentives, it utilizes distinct historical periods in the last four decades where significant policy shifts can be observed.  Moreover, the study traces the broad range of policies adopted by the Cuban government in order to analyze the responsiveness remittance flows toward specific policies, whether directed at inducing investment or at consumption for recipients.

  1. Cuban Remittance Policy: From Prohibition to Leveraging

Over the last four decades, the Cuban government shifted its policy from tight control on remittance flows and their uses domestically in the early decades to the current policy, which attempts to attract and leverage remittances through official channels. The characteristics of Cuban remittance policy during the post-revolutionary period can be separated into three stages. In each stage, there has been a significant policy shift with respect to both monetary and migratory policy that translated into a shift in remittance flows over time. The first and most prohibitive stage transpired from 1959 to 1979; an intermediate stage took place between 1980 and 1992 with partial liberalization; and the third stage took place after the legalization of the dollar in 1993.

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