Role of Remittances in the Region
Remittances have major macro and microeconomic impacts on economies around the world. Historically, they have enhanced the GDP of the receiving country and helped fill the gap between a family’s income and its necessary expenditures, such as healthcare and education. The Latin America and the Caribbean (LAC) region is no exception to these observable benefits. The main source of remittances to the LAC region is the United States and recent data suggests that remittances to this region are increasing. In 2011, the U.S. sent an estimated $44.3 billion in remittances to the LAC region, with Mexico receiving the largest portion. In 2015, global remittances to the LAC totaled more than $65 billion, representing a growth of 6% from the previous year.
Cuba has been a bit of an enigma in the study of remittances to the LAC. Since the Cold War, both Cuban and U.S. foreign policy restricted, and even prohibited, the transfer of money between the two countries. While these restrictions and prohibitions were often circumvented, such policies inhibited the collection of accurate economic data. However, the recent restoration of diplomatic relations between the two countries has relaxed these onerous regulations, increased Cuban immigration to the United States, and contributed to an increase in U.S. remittances to Cuba. Evidence now suggests that the increased remittances are already making an impact on the Cuban economy.
A Cold Shoulder Towards Remittances
In 1959, the Cuban Revolution and the ascendance of the Castro regime created an ideological rift between the United States and Cuba. In 1960, the U.S. ceased diplomatic relations with the island nation and imposed a trade embargo. In return, Cuba allied itself with the Soviet Union. Rocked by events such as the U.S. orchestrated invasion of the Bay of Pigs and the Cuban Missile Crisis in 1962, the neighboring countries have had a turbulent past. Their political differences and tempestuous history led to a series of economic policies by which each government tried to control their flow of capital, particularly in the form of remittances.
From 1960 to 1979, the Cuban government actively discouraged the receipt of remittances, particularly from the United States. Cuba desired to break free of what it referred to as the United States’ imperialistic hold over Latin America and the Caribbean. After the revolution in 1959, “visits by Cuban émigrés, a common channel for unofficial remittance transfers, were prohibited. Thus, state-sanctioned remittances were restricted to in-kind transfers of small-scale packages that contained clothing, medicines, food, and other consumer goods.” In light of improved relations with the U.S. in the late 1970s, the Cuban government moved away from its prohibitive stance on remittances. Starting in 1978, Cuban emigrants were allowed to reenter the country to visit their families, often bringing small amounts of currency with them. Since U.S. currency was illegal on the island, however, remittances were limited. In 1991, the collapse of the Soviet Union, Cuba’s biggest trading partner and ally, forced the island’s government to rethink its economic policies and its relationship with the United States. Facing economic turmoil, Cuba allowed and even encouraged the transfer of remittances through official channels to help boost its economy. In 1993, Cuba legalized the use of the U.S. dollar on the island. Additionally, the Cuban government reformed its banking system to encourage remittances through official transfer methods “by diversifying financial banking instruments and improving trans-national transfer mechanisms” to make receiving remittances faster and easier. In short, economic challenges forced Cuba to become more open to its emigrant networks and remittances.
The United States also tried to control economic flows to Cuba. Beginning in 1963, the Kennedy administration enforced strict prohibitions on remittances and travel to Cuba. Along with the trade embargo, the U.S. hoped that, by restricting remittances and travel, it could limit the flow of dollars into the Cuban economy thereby inhibiting the island’s growth and, ultimately, undermining the power of Castro’s regime. However, in 1978, President Carter’s administration marked the beginning of a new policy towards Cuba. The U.S. removed its remittance ban for the first time since diplomatic ties were severed in 1963. Remittances were, however, quickly subjected to regulation and control, making it difficult to transfer money. Cubans could only send a maximum of $500 home to their families, and those funds were to be used solely to assist relatives with the cost of emigration. In 1994, the U.S. once again banned all remittances to Cuba. Even after remittances were allowed again in 1998, U.S. economic regulations stifled the Cuban remittance market. As diplomatic relations have normalized in the last five decades, the U.S. and Cuba have similarly relaxed economic restrictions on the transfer of remittances.
The Times They Are A Changin’
Between 2008 and 2014, remittances to Cuba experienced a growth of $1.7 billion, causing Cuba to become the seventh largest remittance market in the region, totaling $3.1 billion. This increase is the highest in the LAC region remittance market, with a growth rate of 116.2% between 2008 and 2014. According to one report, Cuba received $3.4 billion in remittances in 2015. Another report estimated that Cuba received $1.4 billion from the U.S. in 2015, almost double the 2014 remittance figure. With these numbers, it is clear that Cuba is continuing its tremendous growth pattern, making remittances more profitable than some of Cuba’s biggest industries, including sugar, tobacco, medicine, and tourism. This growth can be attributed to several factors, as both U.S. and Cuban economic policies have transitioned to encouraging the transfer of remittances between the two countries. Furthermore, as official transfer methods become more transparent and easier to use, Cuban emigrants in the U.S. are able to send remittances home instead of using unofficial and unrecorded money transfers, which do not contribute to official remittance data.
In 2009, President Obama ended restrictions on family remittances. In 2011, restrictions were further loosened, allowing anyone in the US to send remittances to Cuba. In 2015, transfer limitations were lifted, increasing the permitted amount of remittances that could be sent for non-family members, humanitarian projects, and private sector growth. The revised 2015 policy also increased the maximum amount of remittances that could be sent per quarter from $500 to $2000. Additionally, those sending remittances no longer needed a specific permit, meaning that more people could send larger sums of money. The Obama Administration has largely led this easing of regulations on travel and remittances through the OFAC, Department of State, Treasury, and Homeland Security. There have been several attempts by Congress to either enhance or to prevent the easing of regulations, but Congress has not passed or taken action on these proposed legislations.
Cuba has faced economic hardships, largely due to the U.S. embargo, since the Revolution in 1959, but its economy has recently experienced another decline. In the post-Soviet era, Cuba turned to Venezuela as a main trading partner. Cuba and Venezuela had a successful arrangement in which Venezuelan oil was traded for Cuban professionals, especially doctors. However, declining oil prices triggered an unprecedented collapse of the Venezuelan economy, which, in turn, has caused economic turmoil in Cuba. The economic depression in Venezuela and the ensuing depression in Cuba have forced the Castro government to impose new austerity measures. Even with these measures in place, however, the Cuban economy has continued to decline. In a drastic attempt to address this economic turmoil, Raúl Castro has “allowed entrepreneurs to start small businesses, cut the state workforce by 11% and opened a free-trade zone for foreign firms at the port of Mariel.” The expansion of the private sector links the reception of remittances with the emerging entrepreneurship on the island in a way that gives the Cuban people a bigger role in the development of their own economy. In fact, in the wake of this rise of small businesses, Cubans are more likely to use money from remittances establish small business and entrepreneurship than spend those funds on household expenditures, a trend not seen in many other LAC countries. The economic downturn, in addition to these new opportunities for private-sector growth, may encourage Cubans abroad to send more money back home.
In addition to Cubans sending more money home and doing so through official means, there has also been an increase in Cubans living abroad. Beginning in 2013, Cuba eased travel restrictions for its citizens, allowing them to more easily obtain exit visas. More recently, there has been another increase in Cuban emigration to the U.S., which some argue, is due to fears that the normalization of relations will lead to changes to or the termination of the Cuban Adjustment Act of 1966. The Cuban Adjustment Act (CAA) currently offers U.S. citizenship to Cubans who enter the United States (after a brief inspection) and establish residence for at least one year. Many Cubans speculate that normalizing relations and travel will give the U.S. reason to end this policy. This sense of urgency can explain a large part of the recent surge in Cuban immigration to the United States. Since immigration is expensive, the threat of the CAA’s termination is encouraging Cubans living abroad to send more money home so that their families can also leave the country.
Since the normalization of diplomatic relations, migration to the U.S. from Cuba has increased along with remittances sent from the U.S. to Cuba. It is likely that U.S. remittances to Cuba will continue to grow in the coming years as other restrictions are gradually removed. Thanks to the thaw in Cuban and US relations, foreign investment from other countries, hesitant to provide economic aid in the past, has also started to flow into the country. Economic growth and normalized U.S. relations could make Cuba a bigger player in Latin America and the world.
Looking forward, there are still many unknown variables that could impact the normalization of relations between Cuba and the US, and, more specifically, the flow of U.S. remittances to Cuba. One immediate factor is the upcoming U.S. presidential election. With immigration and the U.S. economy significant issue areas in this election cycle, the new President may decide to continue with normalization or regress from open relations with Cuba. Regime changes in embattled Venezuela and Cuba could also accelerate or hinder normalization. In the case of Venezuela, further economic decline could push Cuba to accelerate private sector growth and normalize relations with the United States. On the other hand, economic improvement, rising oil prices, and new leadership in Venezuela could allow Cuba to once again rely on it as a trading partner, reducing the urgency to normalize relations with the United States.