U.S. Travel Ban Is No Blessing in Disguise for Cuba

(Bloomberg View) -- Andrea Jones-Rooy recently made a very interesting economic argument in the pages of FiveThirtyEight. She claimed that President Donald Trump's proposal to reinstate a ban on Americans traveling to Cuba might actually help that island nation's economy:

Cuba is showing few signs of economic diversification: It is already suffering a domestic brain drain. … The government also still manages most of the economy. … Given the lack of diversification, the increasing gap between rich and poor, and the fact that the government will be tempted to capitalize on the growing tourist trade through state-sponsored hotels, all signs point to tourism becoming a curse.

Jones-Rooy argues that opening up Cuba to tourism will simply make the country dependent on that low-productivity sector, and will hold it back from developing the export industries that it would need to attain rich-country status. The short-term pain of a travel ban, she argues, would be more than balanced by long-term gain from developing a healthier industrial mix.

Cuba-U.S. Reboot

As odd as it may sound, there actually is some evidence that a tourism boom is bad for a nation's economy. Economists Taotao Deng, Mulan Ma and Jianhua Cao showed in 2014 that Chinese provinces that experienced tourism booms tended to have less physical investment, leading to worse economic outcomes in the future. Other researchers have found similar results for other regions. These results are consistent with the well-known idea of the so-called resource curse, in which countries with generous endowments of natural resources end up performing worse economically over the long term due to their failure to develop more advanced industries.

Of course, correlation doesn't necessary equal causation -- it might be that people simply like taking trips to places that have lots of nature and not a lot of dense urbanization, making them unsuitable for industry. But this evidence is at least suggestive that tourism, as Jones-Rooy claims, might be more bane than boon.

Does that mean that Trump's Cuba travel ban might be a blessing in disguise, though? Almost certainly not.

First of all, a travel ban wouldn't just halt tourism. It would also apply to business travel. No business travel means that Cuba would essentially be unable to take in foreign direct investment from the U.S., its richest and closest neighbor. It's practically impossible to build a factory or an office in a country if you can't send people there from the home office.

Foreign direct investment is highly correlated with export growth. Studies in China show that FDI promotes more export growth than domestic capital does. The reason, in the case of China at least, is fairly clear -- multinational companies based in developed countries use cheaper countries as manufacturing bases, then import the resulting products and sell them to wealthy customers.

FDI is also important because it acts as a conduit for transfer of technology and management practices from rich countries to poor ones. Studies regularly find that foreign-owned plants in developing countries are more productive than native-owned plants. And there is clear evidence that FDI transfers technology to locals in places like Vietnam and Kenya. A Cuba travel ban would cut off much of this beneficial flow, dooming Cuba to rely on outdated technology for longer than it otherwise would.

Even if Cuban companies could export without FDI, a travel ban would still stop technology and management practices from spreading from the U.S. to its island neighbor. If Cuban managers and engineers can't travel to the U.S., they can't learn how American companies do things. If Americans can't travel to Cuba, they can't teach what they know. Ultimately, better technology and management are necessary for Cuba to develop into a wealthy nation, so a travel ban would be devastating.

There's one more big hole in Jones-Rooy's argument. She mentions that the Cuban government still dominates most non-tourism-related industries in Cuba. There's no reason to think that a travel embargo would change that fact. Political-economic dysfunction in a closed-off economy is likely to be even worse than in an open one, as evidenced by the histories of countries like Vietnam, Myanmar and North Korea, as well as Cuba's own recent history.

In order for Trump's travel ban to help Cuba's economy, a number of highly improbable things would have to happen. The ban would have to somehow prod Cuba's government into changing its whole approach to the economy and giving up much of its power. Cuba would then have to build a high-tech export economy largely from scratch, without the benefit of American know-how or American money. And the U.S. would have to open itself to Cuban-made goods despite closing itself off to Cuban people.

To put it bluntly, nothing of the sort will happen. A reinstated travel ban would push Cuba back toward the closed, inward-looking stagnation that it suffered during the reign of Fidel Castro. There is no silver lining here.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

To contact the author of this story: Noah Smith at nsmith150@bloomberg.net.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.

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