Latin America at a turning point with thaw in Cuba-US relations

Cuba’s pivot to the US is a signal to the region that its experiment with old-fashioned socialism will come to an end. EPA/Alejandro Ernesto

Latin Americans tend to argue that the United States’ embargo against Cuba was engineered to cripple it. However, it has also been a source of invaluable political cover for Fidel and Raul Castro, Cuba’s revolutionary leaders. As long as the embargo remained in place, any economic problem ordinarily attributed to poor management of a centralised economy could readily be blamed on US foreign policy.

But the historic warming of relations between the US and Cuba may signal the beginning of the end of Latin America’s experiment with old-fashioned socialism.

Opportunities for the US

US President Barack Obama’s legacy in Latin America will be to set the stage for the lifting of sanctions against Cuba. This will do away with much of the arsenal of excuses the Castro regime currently uses to defend itself when the problems of running a centralised system become more palpable. It will also allow American entrepreneurs to enter Cuba in search of new opportunities.

Investment inflows from entrepreneurs will, most likely, require the regime to grant international firms similar conditions as in other successful Latin American nations, such as Costa Rica. In essence, Obama’s policies are likely to create incentives for the Cuban regime to embrace economic reform.

Cuba is famous in Latin America for having an exceptional education system that not only lowered illiteracy, but increased tertiary enrolment rates from 4% in 1971 to 80% in 2011. This is double the regional average.

With such a skilled workforce and proximity to the US, American entrepreneurs ought to be rubbing their hands in anticipation. They’re probably wondering how they can invest, and what manufacturing or services industries they can set up.

Economic turmoil in Latin America

New opportunities will be open not only to North Americans, but also increasingly to other Latin Americans. The fast pace of development of countries such as Chile, Brazil, Mexico, Peru and Colombia means that their average labour costs ought to be increasing.

As this occurs, entrepreneurs within these countries will do what they always do – shift labour offshore. And what better place than a country that is close to the US and full of educated workers.

However, not all countries in Latin America are likely to benefit from Cuba opening its doors. Venezuela’s leader Hugo Chavez (and now Nicolás Maduro), Ecuador’s Rafael Correa, Bolivia’s Evo Morales and Nicaragua’s Daniel Ortega have together created a Bolivarian Alliance, named after Simon Bolivar, that aims to push forward a Cuban-inspired neo-socialist revolution in their countries and the region.

This new strand of socialism encompasses a series of old-fashioned policies such as restrictions on imports and raiding government coffers to create jobs, schools and infrastructure.

These policies are a bad idea. They are not sustainable. Import restrictions tend to lower the supply and variety of goods available domestically, which leads to very high prices for a limited range of products. This hurts the poor.

Similarly, high levels of government expenditure are unsustainable when spending cannot keep up with the pace at which governments can collect money. So while schools, hospitals and roads are great, governments that overspend cannot pay teachers and doctors or maintain roads in the future.

This also hurts the poor, who are more likely to access public schools and hospitals while more heavily relying on infrastructure to access markets.

How can the region deal with Cuba?

On top of this growing economic turmoil, Venezuela, Ecuador, Bolivia and Nicaragua now have to deal with the added problem of Cuba.

In their long-winded speeches, radio shows and TV campaigns, Chavez, Maduro, Correa, Morales and Ortega often pointed to Cuba as a crucial source of ideological inspiration. Moreover, these populist masters often found themselves publicly turning to Castro (more Fidel than Raul) for political advice.

The dissolution of the Venezuelan, Ecuadorian and Bolivian Congress and the creation of Constituent Assemblies – a policy that weakened political opposition by dissolving congress and delegitimising older political parties – is widely speculated to be the brainchild of Fidel Castro.

Policies in these countries aimed at silencing free speech in order to further weaken opposition movements are reminiscent of the old Latin American dictatorships of yesteryear, or the Castro dictatorship of now.

However, the second that Cuba began to look toward the US is the second Cuba signalled to the region that its experiment with old-fashioned socialism was coming to an end. Reform is the order of the day and the thawing of diplomatic relations highlights that Cuba is seeking change.

The new socialist republics and their supporters will have to come to terms with this. If Cuba changes, then logically so should they.