http://www.emergingmarkets.org/Article/2996974/Economics-and-Policy/CUBA-One-step-forward.htmlCUBA: One step forward
19/03/2012 | Andrea Armeni
Recent reforms have offered some hope for the island nation. But without
US engagement, its propects will remain dim
After several tough years, the Cuban economy in 2011 started to show
signs of recovery. Following a wave of reforms seeking a mild opening of
the economy, and renewed, if limited, attention from international
partners, some took this as cause for hope that things might be looking
up for the island nation.
Yet the challenges for the small and isolated enclave of socialism in
the Americas remain daunting.
Faced with crippling foreign debt following the liquidity crisis of 2008
and 2009, Cuba found itself in need of a drastic overhaul. Already
bare-bone, imports were slashed a further 38%, and government spending
was cut back.
But this last crisis finally prompted the state to enact its first
series of serious economic reforms in six decades. As Cuba's outdated
economic model is generally considered to be the real reason of its
economic ills, any kind of progress in the model is an improvement.
Observers had anticipated that Raúl Castro, after taking over the reins
from his brother Fidel in 2006, would herald a period of transition. But
early attempts at reform were stymied, and Raúl did not prove to be a
stalwart of change. His early criticisms of the Cuban economy did not
materialize into effective policy. Moves towards openness and away from
the almost absolute control by the state of economic activity didn't happen.
Real change started to take place in 2011, when Raúl pushed for the
long-delayed Sixth Congress to adopt a series of economic action points
ranging from a slashing of the bloated state payroll and a sliver of
openness to private enterprise, to private ownership of real estate and
greater freedoms in agricultural production.
The reforms are moving Cuba in the right direction – and, as compared to
previous measures, they are concrete measures. According to Armando
Linde, former president of the Association for the Study of the Cuban
Economy (ASCE), unlike in the past: "the current reforms are not merely
to appease possible Castro-fatigue in Cuba. They are doing it because
they feel that their model has been exhausted."
Richard Feinberg, a non-resident senior fellow of the Brookings
Institution and author of a recent major report on Cuba, notes that "the
reform process, which is still cautious, is accelerating."
This positive impression of the state's intentions is accompanied by a
widespread sentiment that the reforms still do not go far – or fast –
enough. Others, such as Arch Ritter, a Canadian academic at Carleton
University and an expert on the Cuban economy, voice concerns over the
feasibility and the implementation of the 300-odd "main lines" of reform.
Cuban economist Oscar Espinosa Chepe, a frequent critic of the state,
welcomes the reforms but also notes that the government has already
fallen short on its proposed implementation timetable.
Omar Everleny, a professor as well as director of the prominent Center
for the Study of the Cuban Economy in Havana, sounds a more positive
note: "The option given by the government is a good one: a gradual
approach, that is to say, every few months a new measure is implemented."
A case in point is the reduction of the state employee rolls: the plan
called for the dismissal of half a million workers in the state's employ
by the end of 2011. According to Carmelo Mesa-Lago, a respected scholar
of the Cuban economy, only some 100,000 have been dismissed so far.
Without the sudden creation of jobs in the private sector, the firing of
so many state employees would have resulted in an unemployment rate of
22%, says Mesa-Lago.
With significant limitations on alternative employment for a population
used to monopolistic state employment, change has to be gradual.
INITIAL CHANGES
But the resurgence of economic activity is evident, particularly in the
capital, and there is little doubt that Cuba's internal economy has
received a positive push by allowing private micro-enterprise.
Real GDP growth is expected to reach 2.5% in 2012.
But limitations remain in terms of the scarcity of productive inputs,
from flour to fertilizer, an uncertain new taxation scheme, and the
strangulation of any enterprise that goes beyond a handful of employees.
Agriculture, another sector that has suffered tremendously in the last
years, is showing signs of recovery in the official figures. This should
be spurred further by easing restrictions on independent agricultural
production and sale of farm produce. There is talk of making
agricultural credits available as well as providing raw materials, such
as seeds and fertilizers, that were previously accessible only to state
producers.
But national production across the board remains dismal. Cuba manages
its trade deficit in goods only by exporting services, principally in
the form of doctors and nurses, to Venezuela and other friendly countries.
Cuba's dependency on Venezuela creates problems of its own. Venezuela
now counts for 40% of Cuba's hard currency from trade, and its share in
Cuba's total trade deficit has risen to 42%, according to Mesa-Lago.
Cuba is still reeling from the impact of the end of Soviet subsidies and
many believe that if Venezuela's policies vis-à-vis Cuba were to change,
the island would likely suffer another tremendous crisis.
Venezuela's elections, scheduled for October, have raised the
possibility, however slim, that Chávez could be unseated, not least
following his diagnosis with cancer.
"Cuba is going to be in trouble if there is a change of regime in
Venezuela," says Ritter. "With a regime change in Venezuela, which looks
like a possibility, Cuba may lose its massive indirect
quasi-subsidization through the purchase of these medical services."
Nor is there any imminent rescue from other parties in sight. China's
credits are reportedly limited to commercial purchases of Chinese goods
(Cuba does not officially publish such figures). Foreign direct
investment is still low after the scare from the 2008–09 liquidity
crisis, which caused investors to flee as the government froze foreign
companies' bank accounts and limitations emerged on the repatriation of
proceeds.
At the institutional level, Brazil is a potential partner for Cuba in
the coming years. Lula's seminal visit in 2010 was followed by a
three-day visit from president Dilma Rousseff early this year. The
economy featured at the core of the discussions, reinforcing Brazil's
presence on the island, with interests that range from a successful
tobacco joint venture, Brascuba, to Brazil's $640 million contribution
to the renovation of one of Cuba's main harbours.
Brazil's interests in Cuba are far less ideological than those of
Venezuela. Brazil's knowledge and investments in sugar cane and its
derivative ethanol could revive Cuba's sugar industry, for example. But
the interest is also geopolitical, as Brazil aims to assert its
diplomatic influence over the continent.
The prospect of oil revenues is another reason for hope that Cuba can
earn much-needed hard currency. Exploration began earlier this year for
offshore oil extraction in Cuba's waters. While the discovery of
drillable reserves would be a godsend to the Cuban economy, any
financial rewards would not come for another four or five years.
Cuba can't afford to wait that long on the economic sidelines – the
reforms will have to prove effective in spurring internal growth quickly
if Cuba is to avert another major crisis.
NOT SO SPLENDID ISOLATION
Beyond all this lies the fact that Cuba is still cut off from all
international financial institutions (IFIs). "Cuba can't be the only
country out of some 200 that doesn't belong to any of these
institutions," says Everleny. "To the extent that Cuba is changing its
economy and is establishing better relations with other countries in
Latin America, why should Venezuela be a part of these international
institutions but not Cuba? Why Ecuador, Bolivia, Nicaragua?"
The notion that Cuba should become a member in IFIs is gaining traction.
Feinberg's recent seminal paper, published by the Brookings Institution,
analyses the feasibility of Cuba joining the IFIs, and was read with
interest in Cuba.
Feinberg outlines the complicated interplay between the morass of US
legislation surrounding Cuba's isolation from the rest of the world and
the island's real chances for establishing relations with the IFIs and,
perhaps more plausibly, with Andean Development Bank Comunidad Andina de
Fomento (CAF), which has already invested beyond its member countries.
"One would imagine that influential CAF shareholders (including
Venezuela, Brazil and Argentina) would be supportive, and would agree
that the goals of a Cuba fund could be made consistent with overall CAF
policies," says Feinberg's paper.
For a long time the socialist state scoffed at the idea of dealing with
such imperialist institutions as the World Bank and the IMF, but Cuba
under Raúl has toned down its rhetoric against the IFIs. A recent visit
to Cuba by several World Bank economists – though in their personal
capacities – was mentioned positively by several observers.
Everleny, who met officials from the Washington multilaterals visiting
Havana, says: "The spirit is to try to initiate an exchange from a
technical standpoint – information, publication, access for them to see
what is happening in Cuba."
Officially, the World Bank, the IMF and the IDB will not comment on
anything concerning Cuba, but these informal gestures have been welcome
– even on the part of the Cuban government. "There has to be a dialogue
already, even though officially there has not been a proposal to join
any of the IFIs," says Everleny. "But at the same time – the state has
not blocked it either."
Peter Hakim, president emeritus of the Inter-American Dialogue, echoes
the voices that would welcome more involvement by the IFIs in Cuba, even
if just at the consultative level. "The World Bank and the IMF have very
talented people who know a lot about developing economies; they could be
very helpful," he says, "and even more helpful if they could put some
money behind the reform process."
Linde, the ASCE economist who retired as deputy secretary of the IMF,
agrees, but he sees little chance of any significant steps happening
quickly. While it is doubtful that any steps towards openness will come
from the Obama administration before the 2012 elections, he says: "The
Cuban community in the US is becoming more open to a rapprochement with
the Castro regime. This younger generation is more amenable to looking
ahead rather than looking back to the past."
But the fact remains that until the US – for whatever reason –
demonstrates a willingness to engage with Cuba, there is little prospect
for any international action that could do much to improve the lot of
the Cuban people.
Hakim calls this a "terrible mistake" that has effectively stopped the
IFIs from meaningfully approaching Cuba.
One good chance for openness to a dialogue in recognition of Cuba's
reforms should be the Summit of the Americas in April. Despite its lack
of participation in the OAS (Organization of American States), Cuba has
signalled its willingness to participate in the summit if invited, a
position backed by the ALBA (Bolivarian Alliance for the Americas)
countries. This is seen by some as a good opportunity for the US and
Cuba to greet a new era where the two can sit at the same table.
Uninspiringly, US hardliners such as chairman of the House Foreign
Affairs Committee Ileana Ros-Lehtinen are vehemently opposed to Cuba's
presence at the Colombia Summit: "Allowing the Cuban tyranny to
participate would fly in the face of everything the Charter and the OAS
is supposed to stand for," she says.
The isolationist stance has fewer and fewer supporters outside a
narrowing cluster of Miami Cubans. The overwhelming majority of
non-political observers say the US should recognize the steps taken by
Cuba and help push them along.
It is 2012, not 1962, after all.
