Failing to generate much in the way of merchandise exports, Cuba is chronically short of hard currency. The island economy must import everything from poultry and rice to gasoline, automobiles, and train engines—and there is never enough cash to go around.
Meanwhile, the inherited capital stock deteriorates: houses crumble, tractors sit idle for lack of spare parts, aging sewage pipes and power lines leak water and electricity.
Standing on the sidelines, waiting to provide badly needed relief, are the international financial institutions (IFIs). The International Monetary Fund (IMF), the World Bank Group, the Inter-American Development Bank (IDB), and two sub-regional banks—the Andean Development Corporation (CAF), and the Central American Bank for Economic Integration (CABEI)—routinely assist member countries struggling under foreign exchange constraints. Cuba was a charter member of the IMF and World Bank, but in the wake of the 1959 Revolution and conflicts with the United States, Cuba withdrew from both entities.
The good news is that this August Cuba officially became a member of CABEI. The challenge going forward: Approving and executing a pipeline of development projects, enough to begin to address Cuba’s profound economic crisis, and to establish solid precedents for other international financial institutions to follow.
Mired in a prolonged stagnation, it is hard to see how the Cuban economy can gain momentum without such multilateral financial assistance. Cuba’s poor country credit rating deters private lenders. With the disappearance of the Soviet Union, the collapse of the Venezuelan economy, and the apparent hesitancy of China and Russia to close financial gaps, Cuba has run out of open spigots of easy money.
Another selling point for these five multilateral financial agencies is the valuable technical assistance—expert advice, in-depth studies, and technical training—provided to their members. Over the years, some Cuban economists and business executives have received overseas training and experience; however, most have fallen behind global trends in corporate organization, technological innovation, and international market transactions. Embedded in IFI lending programs are knowledge in each of these critical spheres of economic development.
Let’s take a closer look at the key functions of the five IFIs, their history with Cuba, and what it will take for Cuba to become a member in good standing.
The International Monetary Fund
With nearly one trillion dollars in available resources, the IMF’s core responsibility is to ensure the stability of the international monetary system. With 189 member nations, the IMF fulfills its missions in three ways: Country surveillance, lending to countries with balance of payments difficulties, and giving practical help including technical training to strengthen institutional capacities and skills.
The most controversial of these functions is surveillance. Each year IMF staff engage in intense discussions with senior officials of member governments. These consultations—really negotiations—delve into sensitive policy matters, including exchange rates and monetary, fiscal, and regulatory policies. The agenda may also include longer-term reforms, ranging from social safety nets and pensions to agricultural pricing and labor market policies (the hiring and firing of workers).
Based on the staff evaluations, the IMF provides medium-term loans to countries experiencing balance of payments problems. According to the Fund, “This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth….” Does this not sound like a good prescription for Cuba’s headaches?
There is also nothing to compel IMF member states to borrow nor to accept IMF advice and technical assistance. Countries that are not borrowing IMF funds can ignore staff advice. But members in good standing are expected to undergo periodic consultations, and to share internal data with IMF staff. That is the rub for Cuba—that IMF staff evaluations are available to its 24-member executive board, which includes the United States.
Nonetheless, Cuba was an original member of the IMF but withdrew in 1964 and repaid their one outstanding loan. Thus, there are no outstanding legal claims between the IMF and Cuba. The slate is clean and the contentiousness of the 1960s need not present an obstacle when Cuba seeks readmission.
The World Bank
With over 10,000 employees, the World Bank is especially well equipped to help alleviate the most pressing needs of the ailing Cuban economy. In 2016 alone the Bank’s worldwide lending commitments totaled $46 billion, supporting investments in such diverse areas as agriculture, infrastructure, private sector development, and health and education. In addition to financing projects, the Bank can provide quick-disbursing balance of payments monies (“development policy financing”) to help finance ambitious policy reform programs such as diversifying exports, improving the private sector investment climate, or reforming the state sector.
Such programs also assess prospective impacts on the natural environment and on income distribution, and come with detailed monitoring and evaluation. In general, Bank financing requires that the borrowing nation be in good standing with the IMF.
As with the IMF, Cuba was an original member of the World Bank but never borrowed from it. Fidel Castro rejected the World Bank early on in the Revolution, withdrawing Cuba’s membership in 1960. The Bank returned Cuba’s capital subscription, clearing all accounts. Membership in the World Bank would be contingent upon Cuba joining the IMF.
The Inter-American Development Bank
In 1959, the IDB was founded in response to Brazilian interest in focusing on inter-American cooperation for economic progress, and, from the U.S. perspective, to prevent “another Cuba.” Cuba never joined. There is a common misperception that Cuba’s non-participation in the Organization of American States (OAS) is an obstacle to IDB membership. In fact, Cuba has always remained a member of the OAS—the requirement for IDB membership—even though it has been denied a seat at the table.
In the early 1960s, the OAS responded to the Cuban Revolution by revoking the country’s right to vote. In 2009 the OAS established a procedure for reinstating Cuban participation, but Cuba has chosen not to engage.
Like the World Bank, the IDB both provides general balance of payments as well as project financing. While it is the largest shareholder, the U.S. does not exercise a formal veto power over most IDB loans or membership decisions. Rather, Latin American and Caribbean nations control the majority of voting shares.
The Sub-Regional Banks: CAF and CABEI
Both CAF and CABEI provide members with financing for a wide assortment of development projects. The Latin American and Caribbean members control both banks. The U.S. is not a member of either entity, although both borrow on U.S. capital markets.
In February 2017, then-CAF President Enrique Garcia announced in Havana that the Caracas-based CAF would provide technical assistance to the University of Havana, and help design a new Center of Innovation and Entrepreneurship. CAF may also support the training of Cuban business executives at Latin American business schools. As mentioned earlier, Cuba has just joined Tegucigalpa-based CABEI.
The Path Ahead
Marriages between the international financial institutions and Cuba would seem desirable and inevitable, and in the interests of all parties. The IFIs offer the products, money and ideas that Cuba so obviously needs to break out of its prolonged economic stagnation and accelerate sustainable development.
But first the Cuban government must initiate the membership application process at each IFI. So far, Cuba has felt more comfortable approaching the Latin American-dominated, sub-regional banks. Cuba has tread more cautiously with the leading IFIs (IMF, World Bank, IDB).
Why? Probably the number one reason for Cuban reticence is IFI transparency requirements. The hermetic Cuban government shares information only very selectively. State-owned enterprises do not publish financial reports. The government has not released detailed data on its international capital accounts in years.
Cuban authorities, so insistent upon national sovereignty and state autonomy, are not accustomed to having personnel from multilateral organizations combing over their internal accounts, no less offering advice on a broad range of delicate issues.
Then there is ideological reluctance. Fidel Castro regularly railed against exploitative global capitalism, allegedly embodied in the IMF and World Bank. Any Cuban leadership will have some public explaining to do were it to invite in these two leading IFIs. Furthermore, many Cuban officials worry that IFI-advocated market-oriented economic reforms could weaken their political power.
In addition, the Cuban government fears U.S. influence in the IMF and World Bank. Most immediately, various pieces of U.S. legislation, including the Helms-Burton Act, require that U.S. representatives oppose Cuban membership in the IFIs. The U.S. voting share in the IMF and World Bank executive boards is only 17 percent, well short of a veto power over membership decisions, which require only a majority vote. Nevertheless, the IFIs look to the U.S. for financial support, through Congressional appropriations and capital market borrowings. Hence, IFI executive boards are generally reluctant to irritate Washington.
One path open to Cuba would be to first pursue its relations with the CAF and CABEI with greater vigor, where U.S. influence is less significant, and then turn to the IDB, where Latin American members predominate. In the end, however, it’s the IMF and World Bank where the lion’s share of resources awaits.
Perhaps the new government that takes power in Havana next February will decide that it wants to accelerate domestic economic reform, and execute market-oriented changes. In that case, the political environment in the United States might turn more sympathetic toward Cuba—and toward Cuban accession to the international financial institutions, whose purposes would dovetail so beautifully with evident Cuban aspirations and needs.
Richard E. Feinberg is professor at UC San Diego, a non-resident senior fellow at the Brookings Institution, and author of Open for Business: Building the New Cuban Economy (2016). He has worked at the U.S. Treasury and Department of State, as well as for the National Security Council.