Foreign Relations of the United States, 1958–1960, Cuba, Volume VI

409. Memorandum From the Chairman of the Working Group on the Cuban Economic Situation (Young) to the Assistant Secretary of State for Economic Affairs (Mann)¹

Washington, December 14, 1959.

SUBJECT

• Estimate of Economic Outlook for Cuba

At the suggestion of Mr. Dillon a working group within the Department considered the economic position of Cuba. This group came to two conclusions:

Conclusions:

1. Although it is possible that economic pressures will build up in the near future which would be sufficient to endanger the Castro government, it is not probable that such will be the case. Despite the substantial decline in Cuban foreign exchange earnings, the extremely low level of official dollar reserves, and the internal economic frictions resulting from government policies aimed at increased state direction of and participation in the economy, the indications are that the Castro government will be able to maintain a viable economy for an indefinite period. This conclusion assumes that the government will be technically competent to deal with its intensified economic problems, and that it will not adopt measures which result in civil unrest of substantial proportions, assumptions which may or may not be valid.

2. Any economic sanctions which are feasible would not have a very serious impact, but would be an irritant and probably counterproductive. A partial reduction of the Cuban sugar quota would be annoying to the Castro government but would have only a slight injurious effect on the Cuban economy. Even the total exclusion of Cuban sugar from the U.S. market—not considered feasible—would reduce Cuban national income by only about 5 per cent.

Discussion:

The Cuban national income for the foreseeable future is likely to decline moderately, or, at best, remain at about the present level. This will result mainly from a reduction in export earnings because of lower sugar prices, the loss of tourist earnings, and the virtual disappearance of foreign capital inflows. It is estimated that for the foreign sector alone Cuba will suffer a decline of about $195 million in total income in 1959 as compared with 1958.

On the other hand, the Cuban government is taking strenuous measures to live within this reduced income. The expected reduction in imports will offset almost all of the above decline of $195 million in foreign exchange receipts. In addition, the government is curtailing foreign payments for services, capital, and financial transactions. It is possible that Cuba can balance its external accounts at a lower level largely by reducing imports from the abnormally high levels of 1956 through 1958. For 1960 and beyond it may be expected that export earnings will be somewhat lower than for 1959. Cuban imports might be reduced even further if necessary to create external balance without an unbearably depressive effect on the economy.

The Cuban government’s plans for ambitious public works programs indicate strongly that inflationary potentials will be generated if the announced plans are implemented by deficit-financing. However, the government has so far evidenced appreciation of the dangers of inflation and of the importance which Cubans of all classes attach to the stability of the Cuban peso. It is therefore probable that serious inflation will not occur in Cuba during the short-run period of a year to 18 months which is considered in this paper.

Cuban national income in 1959 is expected to be about $2 billion, a decline of about 6 per cent from 1958 and 13 per cent below 1957. Over the short run it is probable that there will be further reductions in national income as the disorganizing impact of government policies takes effect. It is not believed, however, that these declines will be of any great magnitude; there may even be some economic expansion later as government spending gets underway, and if the government directs sufficient energies toward agricultural production (to implement the agrarian reform program), and does not starve the agricultural sector in order to promote forced-draft industrialization. In any case, it is estimated that the Cuban national income will fall by perhaps another 5 per cent in 1960 as compared with 1959.

In view of the government’s policy of redistributing income away from foreigners and upper-income groups to the lowest-income groups and the lower middle classes, it is anticipated that the standard of living of the great majority of the population will show no serious decline and may even improve. By such measures as price freezing, arbitrary reductions in rents and utilities, forced wage increases, forced maintenance of employment, transfers of unutilized urban land, agrarian reform, and other pressures on foreign and domestic companies, basic steps in the direction of a redistribution of income have already been taken. In the eleven months that Castro has been in power the standard of living of low-income groups appears, on the basis of available statistics, to have improved. Although such apparent increases in incomes cannot be indefinitely maintained by purely redistributional measures not accompanied by increased overall output, income disparities in Cuba are very wide, and the present trend can probably be maintained for an appreciable period of time.

By the time the Castro government came into power Cuban official dollar reserves had fallen to $111 million net, the lowest level in recent times; in the five years since 1953 Cuba lost gold and dollar reserves amounting to about $379 million. By the end of 1959 it is expected that official reserves will decline to about $75 million or less. This low level of reserves is likely to force the Cuban government to maintain an extremely cautious policy with regard to imports and external payments. While this low level of reserves reduces significantly the Cuban government’s room for maneuver, it is not believed that it will lead to such a large reduction in imports as to further depress the level of economic activity.

Any likely reduction in the Cuban sugar quota to the U.S. would not significantly alter the above analysis. In view of U.S. dependence on Cuban sugar, as well as other considerations, the total cutting off of the Cuban quota is not feasible; if so drastic a sanction were possible, it would result in a significant but tolerable loss to Cuba of around $120 million, or between 4 and 5 per cent of the 1959 national income. Any partial reduction in the sugar quota would, of course, have a proportionately smaller economic impact. A partial reduction would be irritating, rather than materially injurious, to Castro.

The above conclusions assume that the Cuban government will show a reasonable amount of technical competence in handling its economic and financial problems. The recent dismissal of high-ranking relatively moderate Cuban officials and their replacement by technically less competent left-wing officials tend to weaken somewhat an assumption that Cuba’s economic programs will in fact be implemented effeiciently. In addition, the possibility cannot be ruled out that civil unrest could occur to an extent sufficient to upset any economic estimates.²

1. Source: Department of State, ARA Special Assistant Files: Lot 62 D 24, Cuba 1959. Confidential. Drafted by Albert Post (ARA/REA) and Benjamin R. Moser (OFD/FN) and cleared with Stevenson, Carl F. Norden (OT/TA), and John P. Rourk (OR/CSD). Also addressed to Rubottom. A handwritten note on the source text by Devine indicates that Rubottom had a copy of the memorandum.
2. A copy of this memorandum was sent by Post under cover of a letter of December 16 to Eugene A. Gilmore, Jr., Counselor for Economic Affairs at the Embassy in Havana. Post, noting that Gilmore had seen a preliminary draft of the memorandum while he was in Washington and that Ambassador Bonsal had also seen a draft more recently, asked for Gilmore’s and Braddock’s evaluation of it. (Washington National Records Center RG 84, Habana Embassy Files: FRC 67 A 677, Economic—Cuba) Since Gilmore was not expected to return to Havana until mid-February, Commercial Attaché Leonard Price replied on December 23 that Braddock and Agricultural Attaché Chester Davis thought the general approach was sound, but offered a number of specific suggestions to correct statements that appeared to have been overtaken by recent events. (Ibid.)