328. Memorandum by the Director of the Office of Inter-American Regional Economic Affairs (Turkel)1
CUBAN ECONOMIC PROSPECTS, 1959 AND PROPOSED U.S. ACTION
Cuban Economic Prospects, 1959
Castro is finishing the first six months since his accession to power with the Cuban economy in relatively fair shape. The important questions are: What will be the course of the economy under Castro in the next six months and what should the U.S. do about it?
Castro has made a great many promises and threats in his first six months in office but took only two important actions in that period. At the beginning of the period he signed the rent law, which resulted in a standstill of the construction industry. Toward the end of the period he signed the Agrarian Reform Law which has not had immediate effects, but which will have serious adverse effects on production in the sugar industry a year or two hence, and on cattle and possibly tobacco production as well.
I have said on earlier occasions that the second half of this year will be the crucial period for Castro. The dead season, which starts about now, is the period when the sugar grinding season terminates and the foreign exchange receipts slacken off greatly. For the rest of the year Cuba must live largely on its $80–85 million of reserves.
The Cuban balance of payments deficit has been running at about $100 million per annum for some years. (Last year it was $180 million which included $80 million of flight capital which is not likely to be repeated.)
To this $100 million deficit must be added a loss of $50 million in sugar income owing to lower prices and also $25 million each for the loss of tourist income and foreign capital investment. Thus, it may be expected that the Cuban balance of payments deficit for 1959, which accumulates in the second half of the year, will be of the order of $200 [Page 547] million. This estimate is very conservative. Castro may, of course decide to finance part of this deficit by throwing in his $80 million of reserves, but if he does this he will be left with a completely empty till.
There are some factors working to reduce the amount of the deficit, but more powerful factors will work to increase it. On the positive side, we find that imports into Cuba have dropped by about ⅓ in the first months of this year. Cuba is living on its inventories and this is a temporary factor working to reduce the deficit. On the other hand, Castro has made many commitments, which if carried out even partially, will tend heavily to increase the deficit. He has promised wage increases; he has promised equipment and credit to small land owners; he has promised $120 million of public works in the second semester.
The time of Castro’s vulnerability this coming semester will depend on the speed with which he acts on these promises. Surprisingly, thus far the budget is being balanced, the public debt presents no problem, and reserves are not too bad. The Batista public works have been stopped and no new ones actually started.
In my view, Castro will begin performing on some of his promises soon and his real difficulties will start in August and increase possibly to a pitch in November. He will not ask for U.S. financial assistance. Even if he asks for IMF assistance and if he could satisfy the Fund, he could get only $25 million on the basis of the present quota.
Castro will probably devalue early in this August–November period and the sharpness of the devaluation will depend largely on his public works policy. He may try to stave this off for a while by adopting exchange and import controls but I do not believe he can avoid the necessity for devaluation. Castro cannot be pressed in the matter of public debt because practically the entire $160 million of debt service owing this year is covered by collateral, as is the smaller amount owing for 1960.
I predict that Castro, in order to survive, will take over the direction of all elements of the national economy, as did Peron. If he does this (and avoids assassination and war) he may survive this year. Unlike Peron, however, he has had the bad luck to take over when: (1) the monetary reserves are exhausted, and (2) the price of the country’s major export is very low.
Accordingly, he will not be able to increase the real wages of labor. Indeed, as unemployment spreads and real wages decline, his popularity will continue to decline. Castro will, I believe, establish all the elements of a police state but that will not save him.[Page 548]
What Should the U.S. Do?
Should the U.S. make a balance of payments loan to Castro? Answer: No. I interpret our policy during the first six months of the Castro regime as being one of giving him a chance to succeed and in the meantime working to strengthen the moderates around him in the hope that the extreme leftists would be discredited or shoved aside. With the signature of the Agrarian Reform Law, it seems clear that our original hope was a vain one; Castro’s Government is not the kind worth saving.
A balance of payments loan could have been considered only while there was still hope of putting the moderates in the ascendancy. That hope is gone. Moreover, considering Castro’s domestic policies, a balance of payments loan would be money lost and the beginning of a never-ending drain.
Should the U.S. seek means of financial pressure? Answer: No, not for the time being. Castro has ample collateral in 1959 and 1960 to cover maturities on pre-existing obligations, hence he will have no trouble in meeting current debts. There are many other weapons in the arsenal of economic warfare: prohibition against public and private loans, discriminatory trade treatment, discouragement of investment and impeding of financial transactions. Some of these are double-edged weapons, others are unnecessary or too harsh. I believe that the use of any of these at this time would be counter-productive.
Should the U.S. seek to withdraw trade agreement concessions and particularly the historic Cuban preference? Answer: No. Late in April the Cubans handed us a list of commodities2 on which they wished to modify or withdraw concessions. We are going to enter into negotiations this fall and will propose withdrawing corresponding concessions to Cuba. We ought not to do this in a punitive spirit. U.S. exports to Cuba will be hurt far more than Cuban exports to the U.S. Our effort should be to limit the withdrawals on both sides.[Page 549]
Should the U.S. cut the Cuban sugar quota? Answer: This cannot be given a simple “yes” or “no”. Cutting the sugar quota is the ultimate weapon in relations with Cuba. The U.S. takes 3 million tons or ½ of Cuban production. The U.S. price, however, is extremely profitable and permits a high average price for the whole Cuban crop. This explains, in part, the intense eagerness of other supplying areas to get part of the Cuban quota. To make a quota cut, there would have to be legislative authority and it is not likely that sugar legislation will be passed in this session.
First let me list the general arguments against seeking authority to cut the Cuban quota, and use them to support the firm recommendation that we seek no such authority this year.
- It will rally nearly all Cubans behind Castro. Our experience in 1947 with the Sugar Act of 1948 [Sec. 202(e)]3 proves this point.
- The step is probably irreversible. If a cut in the Cuban quota is made, it will probably be divided in this order: domestic industry, Philippines, Mexico, Peru and Central America. We must not forget that 6 million Cubans must make a living even after Castro is gone.
- The U.S. ought not to be in the position of using the quota systems for economic sanctions; indeed, Article 16 of the OAS Charter4 provides that no State may use “coercive measures of an economic character to force the sovereign will of another State”.
Suppose, however, that the political situation continues to deteriorate, and that next year we find the Castro Government even more communist-influenced or intolerably anti-American, what should be the position of the Department with respect to sugar legislation? (The time for legislation will be January or at latest, February 1960.)
There are two possible methods indicated below to accomplish the cut, neither of which ostensibly bases the grounds for action on the communist or anti-American bias of the Cuban Government. The first one, 4A, should be considered, but I do not recommend it because it appears on its face to be coercive.
This method gears the reduction or suspension of the Cuban quota to failure to pay prompt, adequate and effective compensation for expropriated property. It would be pleasing to the interests expropriated, [Page 550] and would appeal to the Congress generally. Adapting somewhat the Wayne Hays proposal in the Mutual Security Act of 1959, HR 7500 (Sec. 503(b)) the language might be:
“In any case in which the Government of any country expropriates or confiscates the property of any U.S. citizen and fails within 6 months of such expropriation or confiscation to take steps determined by the Secretary of State to be appropriate to discharge its obligations under international law, the Secretary of Agriculture may reduce or suspend the quota for such country and the quantities so reduced or suspended shall be allocated to other foreign supplying areas.”
In addition to the arguments stated earlier against any cut in the Cuban quota, the foregoing provisions may be open to two additional objections: (1) the obligations of an expropriating government under international law are subject to dispute, and (2) action designed to enforce the payment of prompt, adequate and effective compensation is offensive to Latin Americans generally. A second method of cutting the Cuban quota would relate the Secretary’s authority to his finding that structural changes in a country’s sugar industry tend to make it possible for that country to fail to fill its quota. This puts the Secretary’s action on grounds which may appeal to the other Latin Americans. Castro has set in motion an unwise kind of land reform, which will injure production. To assure a steady source of supply, particularly since it takes time to develop alternative sources, the Cuban quota is reduced and shifted elsewhere.
A proposed provision is as follows:
“Whenever the Secretary of Agriculture finds as a fact that changes have occurred in the structure of the sugar industry of any foreign supplying area which may impair production and thereby jeopardize supplies from that area, he may reduce or suspend the quota for such foreign area and allocate the quantities so reduced or suspended to other foreign supplying areas.“5
Suppose, however, that when we get to January, Cuban relations with the U.S. have deteriorated further, but not to the point where we want to use the sledge hammer of seeking authority to cut the Cuban quota. Sugar legislation must be passed in 1960 and it is generally for [Page 551] 4 years. We would not want an extension for 4 years which would guarantee Castro’s U.S. market for that period; it would be rewarding delinquency. On the other hand, the domestic industry will not go along with a 1 year’s extension. In these circumstances, what we might do next January is to seek to extend the domestic sugar quotas for 4 years and the foreign quotas for 1 year.
- Note 1. In connection with cutting the Cuban quota it should be realized that we probably cannot cut the quota more than 500,000 tons the first year since there may not be more than that available elsewhere. By the second year, when other producing countries have had an opportunity to increase production, we ought to be able to cut the Cuban quota a million tons or more and obtain the supply elsewhere.
- Note 2. I have given thought to increase in customs duty and increase in the compensatory duty (compensatory for the domestic excise tax on sugar), but these are so bound up with GATT and other treaty provisions that efforts along this line will generate more problems than they can solve.
Does the fact that Soviet Russia is in a position to profit by strained relations between the U.S. and Cuba in any way vary the foregoing recommendations? Answer: No. The Soviets can always choose the initiative and select their target. If Russia actually does take action by way of supporting Castro which we consider intolerable, the U.S. should apply the sanction envisaged for a communist-influenced Cuba in point 4B.
If the Russian action takes place after the passage of sugar legislation in 1960, the sanction envisaged would have to be taken through special legislation.
- Source: Department of State, REA Files: Lot 61 D 248, Cuba 1959. Confidential. Drafted by Turkel. Attached to a brief covering memorandum of July 1 from Turkel to Rubottom, in which Turkel wrote that whether or not Rubottom approved the memorandum as representing ARA’s position, he recommended sending it to the Embassy in Havana to obtain its views. Also attached was a note from Devine to Turkel, August 28, in which Devine said that the memorandum had been kept in Rubottom’s in-basket since July 2. Devine said he was returning it to Turkel “for your reconsideration as to whether it is still current and correct. You are the best judge as to whether resubmission is or is not appropriate.”↩
- Not further identified.↩
- Brackets in the source text. For text of the Sugar Act of 1948 (P.L. 388), approved August 8, 1947, see 61 Stat. 922.↩
- For text of the Charter of the Organization of American States, signed at Bogota on April 30, 1948, see A Decade of American Foreign Policy: Basic Documents, 1941–1949 (rev. ed.) (Washington: U.S. Government Printing Office, 1985), pp. 230–242.↩
- After reading a draft of the memorandum, in which Section 4B was essentially the same as in the final version, Dreier sent a memorandum of July 1 to Turkel expressing his own view that the proposal in Section 4B was “by far the best” and that “the situation in Cuba has got to the point where we should definitely plan on the necessity for some step or steps of this kind.” The draft, dated June 30, as well as Dreier’s memorandum of July 1 to Turkel, are in Department of State, ARA Files: Lot 61 D 248, Cuba 1959.↩