Cuba's Future Economic Model

OPINION
JANUARY 2006

Cuba's Future Economic Model

BY DANIEL P. ERIKSON
Daniel P.Erikson is director of Caribbean programs at the Inter-American
Dialogue. This column is an excerpt of a briefing published by the
Canadian Foundation for the Americas (FOCAL).

There is no one formula that will guarantee a successful transition for
Cuba. But significant market-oriented reforms are required to enable
centrally planned economies to recover and grow.

In January 2006, the government of President Fidel Castro marked its
forty-seventh anniversary at the helm of Cuba. As the only surviving
communist regime outside of East Asia, the Cuban system has withstood
the collapse of the Soviet Union and resisted the sweeping transition
from socialism experienced by the countries of Eastern Europe. Although
Cuba today exhibits a commitment to Marxist economics that is nearly
unrivalled in the world, in the future the island is likely to grapple
with the challenges of market-oriented reform that have been faced by a
range of socialist and post-communist countries. Of course, the shape of
Cuba’s post-Castro politics will have an important impact on the
willingness of new leaders to embrace a more open economic system. It is
certainly possible that a dramatically different Cuban political regime
will attempt a comprehensive transition away from communism, as occurred
in Russia and many countries in Eastern Europe, but the island’s future
decision-makers may also choose a more gradual approach

In all transition countries, economic policy decisions have had
important political consequences. While democracy does not automatically
generate prosperity, economic isolation definitively breeds poverty. If
Cuba achieves economic growth that is broadly equitable, this will
generate political support for any government in power. Conversely,
economic stagnation or deterioration will undermine the legitimacy of
any future political regime, irrespective of whether it is democratic or
authoritarian in nature. Although there is no single country or region
that provides a precise model for Cuba’s eventual economic transition,
the experiences of the former Soviet bloc and China and Vietnam offer
important perspectives.

+++ While it is tempting to argue that Cuba must choose between the
“shock therapy” of Russia and Eastern Europe or the "market socialism"
practiced by China and Vietnam, the reality is that economic transition
has proved to be a complicated process with contradictory lessons for
post-Castro Cuba. +++

Russia had deep ties to Cuba for the three decades prior to the collapse
of the Soviet Union, and this partnership profoundly shaped Cuban
economic management. The demise of Soviet communism dealt a deep
economic and psychological blow to Cuba from which the island still has
not fully recovered. The Central Asian Republics similarly suffered
after the end of the Cold War, and none has yet achieved full market
liberalization. While the countries of Eastern Europe have fundamentally
broken with their communist past, the reform process was often difficult
and uncertain. In East Asia, China and Vietnam remain governed by
variants of the Communist Party, even though they have significantly
opened their economies and incorporated market forces. While it is
tempting to argue that Cuba must choose between the “shock therapy” of
Russia and Eastern Europe or the “market socialism” practiced by China
and Vietnam, the reality is that economic transition has proved to be a
complicated process with contradictory lessons for post-Castro Cuba.

This review of market reform in a range of socialist and post-communist
countries reveals that there is no one formula that will guarantee a
successful transition for Cuba. However, while each has established a
unique path towards reform, several common lessons also emerge that will
be useful to Cuba’s future.

Without question, significant market-oriented reforms are required to
enable centrally planned economies to recover and grow. This is a clear
lesson from China and Vietnam, which remain communist states while
achieving rates of economic growth that range from good to excellent.
These growth rates did not take off until each country liberalized its
economy in important ways. Even in Russia and Eastern Europe, the
initial precipitous decline was followed by stabilization and a more
recent return to growth, which would have been impossible under central
planning. By contrast, Turkmenistan’s poor performance illustrates the
opposite end of the range, where resistance to capitalism – and
reluctance to diminish state control – has kept the country’s economy
constrained by Soviet-era policies and practices.

+++ Countries with weak governments have typically not fared well during
the transition period, allowing for the rise of corruption and political
instability. +++

While expanding the space for entrepreneurial activities, the central
government must remain competent and powerful to design and implement
economic policy. Countries with weak governments have typically not
fared well during the transition period, allowing for the rise of
corruption and political instability. In the case of Russia, for
example, the temporary withering away of the state during much of the
1990s contributed significantly to the country’s poor economic
performance. In extreme cases, severe political unrest or even state
failure can have a devastating impact on the economic welfare of a
society. Tajikistan’s civil war in the 1990s is the most tragic
illustration of how state collapse undermines economic well-being.

Past experience has shown that gradualist and sequentialist economic
strategies can play an important role. "Shock" strategies that generate
fast change and rapid implementation have worked well in the Czech
Republic and the Baltic states, among others, but gradualist and
sequentialist strategies have achieved impressive rates of growth in
China, Vietnam, and Uzbekistan.However, this is a delicate balance that
varies from country to country, and excessive gradualism carries high
institutional risks that may hinder future economic recovery. Cuba has
adopted only very modest and insufficient agricultural reforms and still
has yet to authorize significant changes in non-agricultural enterprises
outside the state sector. The experiences of other countries suggest
that gradualism can provide a useful way to prod an economy forward, but
cannot replace a more far-reaching reform strategy.

Transition countries are more likely to thrive when policymakers
recognize that their nation’s principal long-term economic resource is
its people. Investing in the health and education of citizens is not
just a good general idea; it is also good economics in the long term.
The quality of China’s work force is one of its assets, and the Cuban
population has similar potential due to the significant state resources
devoted to education and health care. The Czech Republic has become one
of the most celebrated examples of post-communist economic orthodoxy,
but the advanced education of the Czech people contributed to the
country’s positive performance. Even Russia has managed to maintain a
significant commitment to its educational system, and Vietnam’s level of
educational attainment has risen dramatically in the period since Doi
Moi was introduced. By contrast, the collapse in the educational and
health system in the Central Asian Republics has severely undermined the
economic potential of this region, and facilitated an over-reliance on
natural resources in place of human capital. Access to education and
physical well-being are important determinants in development throughout
the world, and this is especially crucial for centrally planned
economies that are opening up to market forces and attempting to compete
in the global economy.

+++ Even before lending from the IMF, World Bank, and Inter-American
Development Bank becomes politically feasible, Cuba could benefit from
technical exchanges, training and development, and an economic policy
dialogue on the challenges facing Cuba’s integration into the global
system. +++

Finally, communist countries can join and benefit from the international
financial institutions (IFIs). The participation of the Soviet Union in
the 1944 Bretton Woods conference ensured that communist countries could
enjoy full membership in the market-oriented multilateral institutions
of the International Monetary Fund and the World Bank. In fact, Cuba was
a founding member of the IMF and World Bank, but later withdrew during
the early years of the Castro government. Although Russia only joined
these organizations as a post-communist country in 1992, during the Cold
War countries as diverse as China, Hungary, Poland, and Romania all
became members. A member since the mid-1950s, socialist Vietnam later
spent nearly twenty years estranged from the IFIs before normalizing
ties in the early 1990s, as part of its resumption of diplomatic
relations with the United States. As a practical matter, the process of
accession requires improving relations with the U.S. government, which
has the power to veto membership in most multilateral financial
institutions. Short of that, the information and analyses generated by
these institutions and the knowledge of their staff can be resources
that will facilitate Cuba’s market transition and eventual membership in
the IMF, World Bank, and Inter-American Development Bank. Even before
lending becomes politically feasible, Cuba could benefit from technical
exchanges, training and development, and an economic policy dialogue on
the challenges facing Cuba’s integration into the global system.

Cuba’s future remains difficult to predict, but there is little doubt
that the island’s post-Castro leadership will wish to complete the
economic recovery from the early 1990s and generate sufficient resources
to improve the standard of living of its people. Throughout the
developing world, economic growth is a critical element in ensuring
political health, and Cuba is no exception. Hungary, Poland, the Czech
Republic and other countries in Eastern Europe have succeeded in
liberalizing their economies while changing their political structures.
Even Russia has made great strides in escaping from the Soviet shadows.
On the other end of the spectrum, countries as diverse as China, Vietnam
and Uzbekistan have adopted a mix of successful market-oriented policies
without changing their political systems, which are not too dissimilar
from Cuba’s. Cuba’s economic future will be vastly better if the
island’s leaders move further along the path of substantial market reform.

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