ECON 1 - Cuba: Economic Transition and US Embargo Effects

This economics assignment analyzes the Cuban economy, focusing on the government's control over businesses and labor. It explores the ethical implications of non-Cuban businesses partnering with the Cuban government, examining the command economy and potential transition to a market economy. The assignment compares Cuba's potential transition to the experiences of Russia and China, considering the impact of the US embargo and the Helms-Burton Act on Canadian companies. It also addresses the question of whether a Canadian company could be sanctioned for honoring the US embargo to protect its US investments. The assignment uses references to support the analysis.

Running head: ECONOMICS
Economics
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Answer 1
Cuban economy is a centrally planned one and hence, the government controls the
finances and labor. The structure is such that the international businesses are exploited at the cost
of their own workers, can the Cuban government can control the flow of the economy (Hartlyn,
2019). The non-Cuban businesses are required to pay or hire the Cuban workers through the
government as it is one method of earning money for the government. In other words, the
government takes money from the non-Cuban businesses for labor supply and then pays a small
fraction of the money to the employees and keeps the rest of the money (Walsh, 2019).
It is unethical for non-Cuban businesses to go for partnerships with the Cuban
governments as the universal labor laws are violated by the Cuban government by denying the
minimum wages to the labor.
Answer 2
The current regime of Cuban economy is the command economy. If it’s current regime
collapses, then the economy would make a transition to market economy. In the command
economy, the government takes all the decisions regarding businesses, investments, resource
allocation and quantity and types of production (Schutz, 2016). Few economic situations can
lead to collapse of a command economy, such as, increasing interest rates, sovereign debt crisis,
local currency crisis and global currency crisis (Gabrisch & Laski, 2019). In case of Cuba, as the
prices of the goods and services are revenue based to meet the revenue needs of the government,
hence, the increase in the interest rate can lead to a collapse of the economy. As the government
controls the finances, too much increase in interest rate would reduce the money supply in the

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economy and that would hamper the production and GDP growth of the economy. In such a
scenario, Cuba’s economy might become a market economy.
China succeeded and Russia failed while making transition to market economy.
Transition of the planned economy of China to market economy started in 1978 and initially,
China experienced a massive GDP growth marking a success of the transition (Douarin &
Mickiewicz, 2017). On the other hand, Russia experienced the greatest reduction in the GDP
than any other country during the transition process. After 1991, Russia took measures to
become a market economy and establish market determined prices, however, due to
hyperinflation, the Soviet price controls were removed and Russian financial crisis followed in
1998. During this time, Russian GDP shrank by more than 40% and the Russian ruble faced
massive devaluation (Korhonen, 2019). In case of Cuba, the transition to market economy might
face failure due to the US embargo on the Cuban economy. The weak domestic market,
continuous depreciation of Cuban peso, balance and budget deficit, poor infrastructure and
incompetent monetary and fiscal policies would not be able to support the independent
movement of the market. Thus, the transition would fail.
Answer 3
The United States has imposed an embargo on commercial, financial and economic
transactions against Cuba in 1958. The Trump administration announced that lawsuits would be
enabled against the foreign companies using Cuban nationalized properties as the US wants
Havana to stop supporting Venezuela’s socialist government (Smith, 2019). Numerous Canadian
companies have major investments in Cuba’s economy in the hospitality sector, tobacco
factories, distilleries and various other properties. The US anti-Cuba Act, that is, the Helms-

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Burton Act, would strain relations of Canada with Cuba, as that is a legal threat by the US to the
Canadian investors for doing investment in Cuba (opencanada.org, 2019). A Canadian company
and its shareholders might face lawsuits against them imposed by the US for doing business with
Cuba due to the Helms-Burton Act.
Answer 4
As the US is the largest trading partner of Canada, it is essential to maintain a good
economic relationship between the two countries. Sanction refers to the penalty imposed by a
country on another to abolish or reduce their volume of trade (Kohl & Reesink, 2019). If a
Canadian company honors the US embargo on Cuba to protect their US investments, it is
expected that the company would not be sanctioned by the United States. The embargo on Cuba
was imposed by the US to isolate the nation under Fidel Castro’s leadership from all types of
investment and capital inflows and that also led to development of legal actions against nations
who would enter into trade relations with Cuba. However, protests came from the EU, Canada
and some other countries against the embargo. Therefore, if a Canadian company does not go
into trade relationship with Cuba following the US embargo, then there is no reason for the US to
impose sanction on that company.

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References
Douarin, E., & Mickiewicz, T. (2017). Moving Away from the Command Economy in Central
and Eastern Europe and the Former Soviet Union. In Economics of Institutional
Change (pp. 1-17). Palgrave Macmillan, Cham.
Gabrisch, H., & Laski, K. (2019). Transition from command to market economies.
In Dismantling the Command Economy in Eastern Europe (pp. 11-29). Routledge.
Hartlyn, J. (2019). Latin American political economy: financial crisis and political change.
Routledge.
Kohl, T., & Reesink, C. K. (2019). Sticks and Stones: Sanction Threats, Impositions, and Their
Effect on International Trade. MIT Press.
Korhonen, I. (2019). Differences in Transition Paths: Russia Versus China. Forthcoming in ifo
DICE Report.
opencanada.org. (2019). Dark days for Canada-Cuba relations. OpenCanada. Retrieved 2 March
2020, from https://www.opencanada.org/features/dark-days-canada-cuba-relations/.
Schutz, E. A. (2016). Markets and power: The 21st century command economy. Routledge.
Smith, D. (2019). Trump's new Cuba crackdown puts US at odds with Canada and Europe. the
Guardian. Retrieved 2 March 2020, from
https://www.theguardian.com/us-news/2019/apr/17/cuba-trump-new-restrictions-canada-
europe.

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Walsh, J. L. (2019). Success Characteristics of Market Entry in Cuban Tourism. The Cuba-US
Bilateral Relationship: New Pathways and Policy Choices, 155.