Sending the Right Signals: Using Rent-Seeking Theory to Analyze the Cuban Central Bank

I. METHODOLOGICAL CONTRIBUTIONS TO LEGAL SCHOLARSHIP A. A Deflationary View of Central Bank Independence B. Using Rent-Seeking Analysis to Track Creditor Influence on Government Design C. The Implications of the Rent-Seeking Theory to the Central Bank II. CUBA'S FOREIGN FINANCING POSITION A. Foreign Direct Investment B. Cuban Credit Market C. Monetary Disincentives to Increased Foreign Investment 1. Dollarization 2. Dedollarization III. ANALYZING THE CUBAN CENTRAL BANK'S INDEPENDENCE A. Central Bank's Exposure to Deficit Financing B. Capitalization and Appointment Tenure IV. COLLATERALIZED GOVERNMENT BORROWING TO SIGNAL FISCAL SELF-BINDING V. RECOMMENDATIONS TO U.S. AUTHORITIES A. Repeal of the Johnson Act B. Facilitating Access to Foreign Exchange Swap Lines for Currency Stabilization VI. CONCLUSION A citadel of socialist values, the Cuban economy has resisted the global trend of neoliberal financial reform that has swept through other developing countries. As part of a modest liberalization of the finance sector during the 1990s, however, the Cuban government established the Cuban Central Bank in 1997. (1) In the context of central bank governance, the neoliberal trend in developing countries has been toward increased formal and substantive central bank independence from executive oversight. (2) The Cuban Central Bank bucks that trend. In the United States, academic interest in legal aspects of the Cuban economy is growing in tandem with its selective liberalization, despite onerous federal governmental constraints on these studies. This Article contributes to this literature by exploring the impact of financial signaling by the Cuban government on decisions by prospective foreign investors on whether to invest in Cuba. In doing so, this Article asserts that Cuba could rehabilitate its market credibility deficit and mitigate the effect of its legal disabilities under U.S. law through collateralized debt transactions in the open market and through monetary reforms. This Article considers how central bank governance structure operates as an investment signal to potential foreign investors with respect to the term of their potential investments. Although rejecting the conventional explanation that central bank independence signals low inflation, this discussion shows that central bank independence does send a favorable investment signal because independence shows official openness to opportunistic deal making (rent-seeking) (3) with financial firms for a longer term than deals possible with a dependent central bank. It further shows that the Cuban Central Bank is not independent and hence, does not send a favorable investment signal to financial firms considering investment with respect to term. Recognizing that proper financial signals induce foreign investment, this Article proposes that Cuba may replicate some of the signaling value of central bank independence through issuing collateralized government securities. This Article recommends complementary reforms to the Cuban and U.S. governments that would increase the Cuban Central Bank's financial signaling capabilities. Part I suggests that the signaling value of central bank independence in developing countries reflects the value of potential rent-seeking between foreign investors and officials, rather than expectations of low inflation. Part II describes Cuba's access to foreign financing in the form of foreign direct investment and credit flows and explains how Cuban monetary policy has inhibited increased foreign financing. Part III explains how the governance structure of the Cuban Central Bank signals that the institution is not formally or substantively independent of oversight from other governmental actors. Part IV urges the Central Bank to issue collateralized governmental debt to replicate--albeit only at the transactional level--some of the signaling benefits of central bank independence. …