Doing Business With Socialists

The U.S. maintains an official trade embargo with Cuba

, a relic of a time before the United States embraced socialism. Europe and Canada do not have this embargo, and they have been forced to re-learn the risks of doing business with socialists.

Earlier this year, the Cuban government blocked withdrawals from Cuban bank accounts owned by foreign firms, effectively defaulting on payments to exporters.

It appears that the Cuban government did this because they ran out of cash for their "managed" economy and prioritized making payments to their fellow socialists in Venezuela and China. To make those payments, the Cuban government used all of the cash in the Cuban banking system - leaving none to be withdrawn by the private businesses working in Cuba.

The European and Canadian firms whose funds have been frozen are not publicly speaking about the losses, out of fears that the Cuban government will nationalize their accounts and their local businesses.

The Cuban government has recently offered to release some funds, on special request, to firms that promise to continue to do business in Cuba. This is necessary because Cuba's foreign trade has fallen 36% in the last year.

It seems like a simple case of cause and effect to the capitalist mind, the Cuban government stopped paying exporters and the exporters were no longer able to work. The Cuban government never saw it that way. It saw that is was making payments to the exporters bank accounts, it was only not letting the exporters withdraw money from those accounts. To the enlightened mind, the error here is obvious. It is impossible to fund business operations without capital. If your business capital can't be spent, you cannot continue to do business.

Businesses in Spain are calling on the Spanish government to provide emergency credit to replace the seized funds. This would be a mistake. Businesses must learn the dangers of doing business with socialist governments. Government bailouts only create long-term moral hazards.

It often appears easy and profitable to do business with socialist regimes. You don't have to worry about changing tasks and what consumers want, you can plan years in advance based upon keeping just one bureaucrat happy. Decisions are usually made slowly and quantities are always high. Quality concerns are nearly non-existent and support costs are nil.

However, these advantages should be weighed against the natural risks of doing business with socialists, such as periodic nationalization of assets. Businesses which choose to do business with socialist governments (including our own) should insure themselves against losses from arbitrary and capricious decisions by socialist governments. That is part of the cost of doing business, and that cost should be borne by those businesses which choose to do business with socialists. These costs should not be borne by the taxpayers or by businesses which are smart enough to avoid doing business with socialist governments.

by: Brian Jones

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