(This essay was published in Hong Kong Economic Journal on 7 December 2016.)
The Cuban Revolution was an armed revolt by Fidel Castro’s 26th of July Movement and its allies against the authoritarian government of Cuban President Fulgencio Batista. The revolution began in July 1953, and continued sporadically until the rebels finally ousted Batista on 1 January 1959. The 26th of July Movement later reformed along communist lines, becoming the Communist Party in October 1965.
These events reshaped Cuba’s relationship with the U.S. Before the revolution of 1959, Cuba was one of the United States’ strongest allies and had a special economic relationship with the U.S. What happened to the singular ties that united Cuban interests with the U.S.? The search for the origins of the Cuban Revolution is divided into two types of scholarly interpretations.
Before the revolution, key Cuban industrial sectors were under the private control of U.S. capital and agriculture was dominated by sugar production exported to the U.S. market. Large agricultural land estates were owned by an exploitative landed oligarchy, known as latifundismo (a system from the Roman times commonly found in Latin America and the Philippines). Left-wing scholars blame the widespread economic inequality, exploitation, and dependence on the U.S. as the underlying economic cause that invited revolution.
But most leading scholars of the Cuban Revolution outwardly reject the proposition that economic conditions contributed to the downfall of Batista or the rise of Fidel Castro. The fact that Cuba was not suffering from economic recession in the months before the rise of Castro’s July 26th Movement has led many to downplay the importance of economic causes and to emphasize, instead, the crisis in Cuban politics caused by the constitutional illegitimacy of the Batista dictatorship, a popular demand to restore democracy, and a loss of faith in a corrupt and sterile politicalsystem.
A major oversight in both scholarly interpretations is the neglect of the effects of increased trade protection in the U.S. against Cuban sugar. Interestingly, contemporaries were gravely concerned about the shrinking market for sugar caused by downward revisions to Cuba’s sugar import quota in the U.S. market.
Cuba’s economic relationship with the United States was alwaysdominated by, and sensitive to, the sugar trade. Eighty percent or more of Cuba’s exports consisted of sugar and more than half of it was exported to the U.S. In the 1950s, about 15 percent of Cuba’s national income was represented by its gross earnings from sugar exports to the U.S. Cuba’s access to other major sugarconsuming countries was restricted by protectionism, so Cuba’s ability to substitute out of the U.S. sugar market was very limited.
Cuba’s dependence on the U.S. market meant dependence on its import quota. From 1934, the U.S. sugar market was quantity controlled, a relief measure initially adopted during the Great Depression. U.S. sugar laws restricted both domestic production and imports by placing quotas on all suppliers, domestic and foreign.
In the postwar period, Congress restored the Sugar Act in 1948 and revised it on two occasions, in 1951 and 1956. Both times Cuba’s quota was revised downward in response to demands by domestic sugar producers for increased quotas. As a result, Cuba’s quota fell in the 1950s from about 40 to 35 percent of the U.S. sugar market.
The regulations on sugar imports in the United States defined eight sugar supplier areas by geographical and political boundaries. These areas included five domestic areas for mainland beet and cane sugar producers, Hawaii, Puerto Rico, and the Virgin Islands; and two main foreign suppliers, Cuba and the Philippines. Domestic producers and the Philippines were assigned fixed quotas in 1948 and 1951. The remainder, or residual share, went to Cuba.
Before 1956, Cuba was assigned almost all the growth and variability in the market. Cuba’s sugar-production capacity was more than double its quota inthe U.S. market, and the price Cuban producers received for sales in the U.S. market between 1948 and 1955 exceeded the price on the world market on average by 25 percent.
Cuban sugar producers, therefore, had the ability and incentive to assist the US sugar price stabilization effort by absorbing most of the variability in world demand and supply. Cuban sugar policymakers cooperatively absorbed most variation in the size of the U.S. market and, in return, received nominal quota rights for most of the future growth of the U.S. market.
By contrast, the 1956 revisionintroduced major changes in the assignment rules. Domestic producers, for the first time, were awarded an explicit share of the increase in the U.S. market and were given priority in reallocations of excess demand. These were at the expense of market rights formerly assigned to Cuba.
The bigger consequence was the negative effect on the expected increase in Cuba’s quota in the long term. Furthermore, after 1956 Cuban sugar producers had to sell a larger proportion oftheir sugar on the more volatile (non-U.S.) world market, increasing risks and sugar earnings volatility.
Cuban officials complained that Cuba’s political loyalty to the U. S. during the two world wars, and its cooperation with the U.S. sugar price stabilization program, were being punished rather than rewarded.
An important fact that impinged on the political economy of the revision was that the fixed quotas for mainland US sugar were deliberately set in the original 1948 act beyond current production capacities, so that mainland producers did not face crop restrictions within 5 years (i.e., during 1948-1953). Political demands for increased mainland quotas emerged when the threat of binding crop restrictions approached in late 1953.
Facing more immediate crop restrictions, cane sugar producers called for an immediate revision, rather than wait until the current law expired on 31 December 1956. The Eisenhower administration opposed accelerating the revision in 1954 because of the ramifications for its Cold War policy in Central America. A cut in Cuba’s quota might weaken Batista, who had seized control in a coup d’état on 10 March 1952.
Cane sugar interests alone were insufficient to pressure Congress to go against the administration’s Cold War policy.The bill submitted by the mainland sugar alliance was blocked by the State Department in 1954. But the political climate changed in 1955 after the Republicans lost control of both the Senate and the House.
Democrat Senator Allen Ellender from Louisiana (a major sugar producing state), who now chaired the Senate Committee on Agriculture, became the self-appointed leading advocate of domestic sugar interests in Congress.On 1 April 1955, Ellender introduced a bill that gave Cuba 29.6 percent of future market growth (30.8 percent of its former 96-percent share) and was co-sponsored by 49 senators (over half the Senate). An identical bill was submitted in the House of Representatives on 31 March.The revision was finally passed 17 May 1956.
The news was received with alarm in Cuba.On Wall Street, the share prices of nine publicly listed sugar companies supplied from Cuba had corrected earlier in anticipation of the passing of the bill relative to U.S. supplied sugar companies.
From Wall Street’s perspective, investment in Cuban sugar companies was highly speculative and dependent on world political conditions. By contrast, investment in U.S. mainland sugar was considered less risky because it was insulated from world shocks.
Cuba’s loss of quota access to the U.S. market forced it to rely more on the world market. Producers were concerned mainly with two types of risk: price risk and cost risk. Price risk was higher on the non-U.S. world market.Cost risk was sensitive to capacity utilization because sugar processing involved substantial fixed costs in milling and transportation equipment, and Cuba had considerable excess capacity now.
It was not feasible for Cuba to compensate for its losses in the protected U.S. market by shifting sales to the rest of the world. The nonU.S. world market was segmented into several preferential markets which, like the United States, protected domestic (and in the case of Europe, former colonial production). Besides the U. S., Cuba had no other preferential access.
The Batista regime collapsed with the revision in the U.S. sugar quota. The sugar quota was widely seen as a device that strengthened Cuba’s sugar oligarchy and reinforced Cuba’s dependence on the U.S.
Batista’s closest economic advisers were private sugar representatives with vested interests in the quota system, and domestic and foreign bankers and merchant houses whose enterprises held liens on most of the sugar crop. Other political support for the regime was built upon deals with select leaders of organized labor. His ties to sugar, at the time of the 1952 coup, were seen as consistent with business’s outlook for economic growth in Cuba, but that outlook changed with rising U.S. sugar protectionism.
The post-1956 climate demanded new policy ideas about how to make the shift toward diversification, which seemed a necessary step for a healthy economy, but Batista’s cronies could not credibly be expected to veer much from the sugar program status quo in the medium run. Thus, the adverse sugar legislation blew things wide open and caused the downfall of not only the pro-sugar members of Batista’s cabinet, but the Batista Government itself.
In an interview in 1957, Castro explained that the revolutionary forces did not expect to defeat Batista single-handedly; they aimed rather to produce a climate of collapse. The revision to Cuba’s sugar import quota provided the catalytic opportunity.
There was rising opposition in the military soon after the terms and political support for the Ellender bill were public knowledge. A plot to assassinate Batista was discovered and foiled in 1956. The event reflected a withdrawal of support in the middle-class ranks of the military, whose economic interests were sensitive to the downward revision of sugar’s prospects. The mutiny also had significant backing from the economic and political elite, including Felipe Pazos, former president of the central bank.
Unusually advantageous world sugar market conditions in 1957 diverted the effects of the quota revisions. But the Batista regime was politically weakened. To shore up support, he passed power to a handpicked successor in a 1958 presidential election widely considered as fraudulent. The popular withdrawal of support continued throughout the summer of 1958.Even the Cuban sugar interests were alienated by Batista’s ineffectiveness and one of them commented: “We didn’t care who overthrew Batista, so long as someone did.”
The collapse of the Batista regime and the popularity of the revolutionary movement led by Fidel Castro undoubtedly had multiple causes. Cronyism, the illegitimacy of the Batista government, and fraudulent elections explain why the regime failed to respond to popular demands for a change of government. Yet, the adverse shock from U.S. trade policy contributed to the demands for a change of government by imposing economic stresses that alienated Batista’s political and military support just as the popular cry for a restoration of constitutional government served as a focal point for the revolution.
Castro understood the Cuban revolution was made possible by a U.S. restriction on sugar trade.In October 1959, he explained Cuba’s troubles with U.S. protectionism, “We have to defend our sugar quota, … something that I think it is very just and very proper for our people to aspire to. Besides, we are not doing any harm to anyone; we are only defending ourselves.”
At the beginning, Castro did not express open hostility either to the U.S. government or to private business interests.
Consequently, during 1959, U.S. companies went ahead with their investment plans. During that year Americans made a net direct investment of $63 million in Cuba, which was more than had been invested in most of the years since World War II. But the sugar restrictions were strangling the Cuban economy.
As 1959 ended, Cuban leaders were determined to diversify their trade links. Che Guevara and his brother Raul nudged Castro to leantowards seeking Soviet economic support.
In February 1960, a Soviet trade delegation arrived in Havana and a Soviet – Cuban pact to purchase Cuban sugar was signed. In the U.S., the trade pact was viewed as an open invitation for the extension of Communist influence in an American sphere of influence.
An East German and Polish trade mission followed. The guarantee of alternative markets for sugar exports strengthened the Cuban government’s position against the U.S. American oil refinery facilities owned by Standard Oil, Texaco, and Shell were nationalized.
In retaliation, in July 1960, the U.S. Cuban sugar quota was cut by Eisenhower with future quotas set at zero. This move was devastating for Cuba. Four days later, the Soviet Union announced its decision to purchase the full quantity cut by the U.S. This was followed by Chinese purchase of Cuban sugar. After 1961, the Soviet Bloc and China absorbed the bulk of Cuba’s sugar harvests.
It is ironic that Fidel Castro died in the same year Donald Trump was elected U.S. President on a platform that promised trade restrictions. One worry is that renewed U.S. protectionism will lead to more international disasters. Sadly, the Cubans are not the only ones to have paid the price of U.S. sugar protectionism of 1956.
The sugar quotas Cuba lost were transferred to the Philippines with disastrous economic and political consequences. The latifundia in the Philippines reaped huge windfall profits from the additional quotas. It created powerful incentives for popularly-elected President Ferdinand Marcos, a middle-class lawyer and military hero from World War II, to extract a huge cut of all their gains and rule as a dictator for two decades. Meanwhile the economy suffered heavily. Corazon Aquino, interestingly also a descendant of the latifundia, finally took him down in the 1986 People Power Revolution.