Cuba's Latest Challenge: 'Updating' the Socialist Model
Cuba, the socialist country in the Caribbean, has a population of barely 11 million people. This year will be an historic one for Cuba from both an economic and social point of view. The island will witness the launch of a new economic market that will involve the gradual introduction of private enterprise -- or “cuentapropismo,” a Cuban term for self-employment -- as well as new taxes and the elimination of ration cards. Over the past 48 years, the latter have provided Cuba’s population with products and supplies at subsidized prices. Going forward, they could be available only for a smaller group of lower-income people.
In the coming months, 500,000 public-sector workers will be dismissed and will have to be absorbed by the private sector. This figure could rise as high as 1,300,000 over the next three years -- or 40% of public sector employees -- in order to reduce governmental expenditures, and to improve the efficiency and productivity of the deteriorating Cuban economy. The country suffers significant structural weaknesses, such as a shortage of intermediate goods for manufacturing processes and distortions in pricing systems that result from an over-valued official exchange rate. There are also external factors, such as the damage done by three hurricanes in 2008, which left losses valued at US$10 billion, and a global recession that had a very negative impact on two of Cuba’s main sources of revenue: the tourism sector and exports of nickel. According to ECLA (the Economic Commission for Latin America), Cuba’s GDP grew by 1.4% in 2009 and 1.9% in 2010, compared with 4.1% in 2008.
The reform of the Cuban economic model does not formally represent a break with the Revolution that began in 1959 but is only intended to rectify "errors." The most important mistake was “to believe that someone knew about socialism or that someone knew how to construct socialism,” ex-president Fidel Castro said last November. He was recalling a historic speech he gave at the University of Havana in 2005. A year later in 2006, Castro ceded the presidency to his brother, Raul, because of health factors, thus turning Raul into the chief proponent of the island’s economic reforms.
Since assuming power, Raul Castro has made several speeches in which he complained about the low productivity of Cuban workers and the government’s tight fiscal constraints. “We cannot continue to spend more than we are taking in, since that would mean devouring the future and putting the very survival of the Revolution at risk,” he said.
Among the novelties of the reform is the authorization for Cubans to choose among 178 different self-employment activities -- from becoming taxi drivers or running small restaurants to opening barber shops. For example, citizens will be able to sell their products and services to state enterprises; market their food products that were previously prohibited; open bank accounts, and have access to bank loans. There will be more freedom for food production, along with a market aimed at addressing the challenge of importing 80% of the products consumed on the island. Private property will be introduced. In the construction sector, housing construction will also be permitted, which will help to alleviate the shortage and scarcity of construction.
Meanwhile, the Cuban Communist Party (PCC) introduced last November a 32-page document that will be the subject of a national debate among managers of the new economic model, who will meet at the Sixth Party Congress this April. Rafael Pampillón, professor of economics at the IE Business School in Madrid, notes that the meeting will promote these measures as being similar to the Special Period of the 1990s, a period of crisis that followed the fall of the Soviet Union which ended Soviet aid to the island.
“Those measures were more about permitting foreign investment,” says Pampillón. “Now, they are more about stimulating private sector initiative.” On the other hand, the reforms of the 1990s had a temporary character, since they immediately imposed obstacles on the private-sector, “especially because of the suspicions of authorities who believed they might lead to social inequalities and distort the Orthodox nature of the Revolution,” adds Carlos Malamud, chief researcher for Latin America at the Real Instituto Elcano in Spain.
Another important difference, adds Malamud, is that Fidel Castro was at the peak of his powers then, “and he had a future. Now, there is widespread conviction that there is no time left, and that it is all over. Fidel is totally out of the game and his brother Raul has little time remaining in power [since he is 80 years old].”
From an economic viewpoint, he adds, there is also the feeling that time has run out. During the 1990s, people believed that they could use the reforms to gradually emerge from the condition of economic stagnation. Today, he notes, “Raul Castro and his closest associates are certain that the country is on the verge of an abyss, so these reforms must be definitive if they are going to take hold.”
Pampillón adds that the idea of the reforms is to enable, as in the case of China and Vietnam, two different economies to co-exist: “One would be a planned economy, and the other a market economy in which they will have to establish monetary policy, create a system for tax collection and so forth.”
The Problem of Financing
Nevertheless, experts believe that the new plan involves enormous challenges. To start with, it will be very hard to acquire the financing needed for creating these businesses. Without financing, Raul Castro’s plan is impossible or at least very hard to carry out, according to Agustin Ulied, professor of economics at ESADE in Barcelona. “One out of every four public employees is going to disappear in the medium term, and [the government] will be compensating unemployed workers with one month [of wages] for every ten years of work. If the average salary in Cuba is 14 euros a month and they have worked for 20 years, for example, what kind of businesses are they going to create with 28 euros? Even worse, there are no guarantees that the reforms will be sound,” he adds.
In his view, the only way out for Cuba is for international organizations to provide aid, or for the U.S. government to change its attitude. “The U.S. can be the last resort for Cuba if there is a significant ideological change on the island.” At the moment, the announcement of reforms in Cuba has led to gestures in the U.S., such as those announced at the beginning of this year. The U.S. announced then that it will temper its restrictions on travel and on sending remittances to Cubans who are not family members.
Still, it is unlikely that the U.S. trade embargo on Cuba, which has been in effect since the 1960s, will be ended soon, notes Malamud. “That would require intervention by Congress, which is now controlled by the Republicans, who are opposed to eliminating it. So it would be very hard to do. It will depend on how much room President Obama has for maneuvering.”
Lourdes Casanova, professor of strategy at INSEAD in France, believes that “lifting the embargo would help accelerate economic change in Cuba, and the Cuban regime would lose its ‘excuse’ for maintaining a closed attitude.” However, experts expect that in coming months there will be only gestures from both parties. “What the Cuban people need now,” says Pampillón, “is to reach agreements with the U.S., in which the U.S. also makes some concessions.”
At the moment, Pampillón believes that the only financing that the island is going to get will come from abroad through remittances from immigrants and from direct investments, which is what happened during the Special Period in sectors such as tourism, cement, construction and others. “I don’t believe that anyone will dare to give them loans at this time,” Pampillón says.
Property Rights and Other Obstacles
Along with financing, experts consider it fundamental to establish and respect property rights. Pampillón notes, “It remains to be seen how [the government is] going to guarantee to people that their businesses will truly belong to them; that they are never going to expropriate them. They’ll need to have laws that gather information for a property registry that provides legal security to everyone who starts his or her own business.” There are also doubts about how far the government will want to formalize business initiatives if this means people pay “taxes that are big and unfair,” notes Pampillón. As if that weren’t enough, the existence of permits and bureaucrats will, in his view, slow down the way applications for business activities are handled. “Cubans are not used to formalities that help support business initiatives,” he says.
Malamud adds that the country also lacks an internal market that functions efficiently -- one in which private-sector workers can supply their needs by themselves. “For example, in Havana, there has recently been a blossoming of outdoor shops where people can eat, as well as cafes and new [food] varieties. All of that requires inputs -- foods, drinks and more -- so there needs to be a market that works [efficiently].”
Another challenge in bringing socialism up to date will be to train unemployed public-sector workers to take on trades such as construction work and plumbing, which require skills that are rare in Cuba. There is an abundance of engineers and doctors whose education was outstanding in past generations “but who have become obsolete now,” notes Ulied.
Cubans will also have to change their mentality about the role that small businesspeople play in the economy of the island. “Professionals such as doctors, bureaucrats, and so forth may look down on these initiatives because these people are not going to enjoy the benefits that [these reforms] bring,” notes Pampillón. These were exactly the sorts of roadblocks that put an end to the reforms during the 1990s, he adds.
It goes without saying that these reforms will bring about a certain degree of social distress. Malamud notes that this could come from two different sources: First, from the withdrawal of the subsidies for consumers through the elimination of ration cards; and second, through the aggressive plan to cut public-sector jobs. The magnitude of these initiatives and their impact will depend “on those sectors of the establishment that begin to perceive themselves as damaged by the reforms.” He adds, “Social distress and opposition from within [the party] could wind up gaining strength.”
The Ideological Opening
Cubahas few aces up its sleeve. For one thing, the economic aid that Venezuela has been offering Cuba in the form of petroleum could soon come to an end if leftist president Hugo Chavez does not remain in power after the presidential elections of 2012.
Brazilhas also expressed its desire to support the island by giving advice to future businesses and cooperatives. However, the Brazilians have their doubts about whether the Castro regime can be sustained. Documents released by WikiLeaks also reveal that the Brazilians doubt Cuba can undergo a transformation similar to what happened in China. That’s because “China is a civilization, but Cuba is not,” said Marco Aurelio Garcia, an international advisor of ex-president Lula and current president Dilma Rousseff, at a meeting with U.S. diplomats that was exposed by WikiLeaks. “The Cubans don’t have the patience, the resources, or the organizations to pursue the Chinese model.” Beyond that, Garcia asserted that Brazil was prepared to help Cuba only “so long as it is the Cubans themselves who define the road that they want to follow.”
For all of these reasons, Ulied believes that a powerful human drama could soon be taking place on the island. Cuba lost two or three precious years after Raul Castro definitively took over the country in 2008. When Raul assumed power in 2006 -- on a "temporary" basis because of his brother’s health – the economy was not all that bad. If he had committed himself to making needed reforms at that time, believes Ulied, Cuba could have followed in the footsteps of Vietnam. But Ulied agrees that Cuba has neither the resources nor the population to make China their real model. A few years ago, in any case, doing so might have enabled Cuba “to maintain the ideology and the [Communist] Party, and to go on opening the economy little by little. But they have waited so long to make the reforms, and things are now so bad, the change has to be so deep now that they cannot maintain their ideology,” he says.
At first, he adds, “the Cubans will want to try out the [new] reforms internally, and if the results are not very good, they will go on to open up the country [to other countries].” Although he believes Cuba continues to believe in Fidel, and that there is still a strong ideological base, “this can change overnight.” In his view, even the Communist Party believes that these reforms will be followed by a change in ideology. “At this time, that is the only possibility left. They have waited a long time to realize that they have been left all alone in the world. This is a problem when it comes to their role in the business world and for internationalizing their companies, which they talk so much about. It is going to cost them a great deal to get up to speed with the latest trends,” he notes.