A voucher program in Cuba would, very likely, suffer a similar fate, creating a coterie of well-connected investors able to grow rich(er) quickly by exploiting disorganized and ill-informed shareholders, fueling resentments and frustration among ordinary citizens. Although many of these programs did succeed on a number of fronts-e.g., the Czech program quickly transferred ownership over 1,600 companies to private hands and removed government from the tricky business of industrial restructuring-the opportunities for pilfering and self-dealing suggest that voucher-based programs should be avoided.

Much more contentious will be the need to resolve expropriation claims in a manner that does not interfere with Cuba's economic reforms. Potential hold-ups in the settlement of these claims can derail Cuba's efforts to revive its economy, since private investors are unlikely to put money into entities that have unclear titles, outstanding claims or other liens on their assets. In Eastern Europe, restitution claims tended to place heavy burdens on weak judicial systems and often held up enterprise reforms where enterprise facilities were located on land subject to restitution claims. Privatizing nationalized companies by restoring ownership to pre-Castro owners would involve similar problems on a far grander scale.

Moreover, these claims will remain a roadblock to the normalization of U.S.-Cuba relations unless they are effectively and quickly resolved. As of 2002, there were approximately 6,000 claims by U.S. nationals totaling $6.8 billion (about 25 percent of Cuba's GDP). A number of alternatives to direct restitution have been proposed, and a joint acceptance of any of these increases the likelihood of an embargo lift: A negotiated lump-sum payment from Cuba to the United States on behalf of U.S.-based claimants may hold the most promise.

A reforming Cuban government, of course, would find it impossible to pay out anything close to the total owed. But if similar settlements between the United States and East European nations are taken as precedent, the resulting agreement would be less than 100 percent of the net present value and would not include interest, making some repayments possible.

BUT COULD a post-Castro government make reform work? Loss-making companies, even after they have been privatized, have several ways of avoiding financial discipline. They obtain cheap loans from state-owned banks. They stop paying taxes. Or they stop paying bills to suppliers-especially utility and power companies. These suppliers, in turn, have their own reasons to avoid their own bills, and sometimes even stop wage payments. These never-ending chains of debt can be broken if these entities lose their open access to public finances. In technical language, the first step in reviving the private sector is to "harden budget constraints." This means eliminating the flow of public funds to persistently loss-making enterprises, cutting off banking credits and creating a level financial playing field with regard to taxes, customs duties, environmental regulations, licenses, permits and fines.

By far the trickiest part of private-sector reform in socialist economies involves transforming state enterprises from (usually) inefficient and unproductive entities into engines of a new economy. Many of the lessons from the East European transitions in the 1990s were effectively applied to the last country in the region to undergo significant reforms: Yugoslavia-Serbia and Montenegro, in particular. As with other East European nations, private-sector reform proved to be contentious, driven by factionalism and politically charged. The Serbian economy also faced the risks of asset degradation, theft and corruption that were found elsewhere. Yet privatization in Serbia was remarkably smooth and has not led to large increases in unemployment or industrial unrest. As with Cuba, many Serbian firms were actually structured as workers' cooperatives rather than "state enterprises."

Restructuring in Serbia did not mean that loss-making companies were bailed out, but rather that the company would "gear up" for privatization by separating its good from its bad parts, selling the former and liquidating the latter. The Serbian government put together a list of firms, all of which were loss-making, but that were thought to contain salvageable assets. A typical firm then underwent "segmentation." This process divided core and non-core assets and likely viable units from those more apt to falter. It provided for the incorporation of new companies from salvaged parts of the old and the sale of the rest through competitive auction. Although it may make little sense to restructure companies that are bound to fail, since governments will almost always try to resuscitate those that cannot be sold, better then, to make their liquidation politically palatable.

Obviously, governments are also extremely reluctant to bankrupt companies that are un-sellable. Rather, they let ill-equipped courts deal with these matters, often clogging up the judicial system and preventing other, newer companies from scooping up the usable land and equipment. East European countries that managed bankruptcy well (Poland, Slovenia, Lithuania) resisted the temptation to rely too heavily on the courts, instead establishing special agencies or governmental units that could initiate bankruptcy proceedings against companies that continued to receive subsidies, but had not undergone restructuring by a certain deadline.

Finally, one of the mistakes made in East European reforming economies was that, following privatization, many reformers assumed that capital markets would take care of themselves. Consider the contrast between the Czech Republic and Poland. Czech Prime Minister Vaclav Klaus refused to establish a regulatory body for the securities exchange, fearing it would bring capital markets to a standstill. In 1997, following a series of corporate scandals, he finally relented and established a securities regulator. In Poland, on the other hand, rules for a securities commission were put in place during privatization. As a result, Poland avoided the asset theft and expropriation that was common in the Czech case.

ALL OF this may end up being speculation. There are few signs that Cuba will seek lessons from East European, rather than Chinese, economic history anytime soon. China's post-Mao accomplishments in reforming its economy under single-party rule continue to impress and influence the current Cuban leadership. Fidel himself has called China "the most promising hope and best example for all the countries of the Third World."⁴ Meanwhile, as Sino-Cuban economic and political relationships have expanded, Russia's ties with its former ally have foundered over issues such as the resolution of Cuba's Soviet-era debt and the closure of Russia's famous listening post in Cuba, the Lourdes signals-intelligence facility. Cuba's ties with Eastern Europe have fared worse. Former leaders Václav Havel, Arpad Göncz and Lech Walesa have been at the forefront of an international movement to support Cuban dissidents. Moreover, the new East European members of the enlarged EU have taken a hard line against any changes in the common stance towards Cuba, effectively freezing the EU's Cuba policy.

There are, of course, some possible events that might push Cuba to embrace rapid reforms-a precipitous fall in commodity prices, or a renewed fiscal crisis that forces the government to reduce food subsidies, or the collapse of critical economic sectors. These events are unlikely, and whether they would unleash large-scale protests is uncertain. Closer ties with Venezuela and China have kept Cuba's economy growing and its fiscal and current account deficits small.

But Cuba will find that following its Chinese (or Venezuelan) benefactor will not lead very far. The gradualist reforms pursued by China are simply ill-suited for an island nation of eleven million inhabitants with a relatively small agricultural sector, located a half-hour's flight from the world's largest economy. Without rapidly reforming its inefficient state enterprises, Cuba will face the prospect of becoming trapped in a low-wage, low-productivity cycle. While little is likely to change under Raúl Castro, sooner or later Cuba will have to look away from the Chinese model and embrace some of the lessons from East European reformers.

Raj M. Desai is an associate professor of international development at the School of Foreign Service at Georgetown University, and a visiting fellow at the Wolfensohn Center for Development at the Brookings Institution. Itzhak Goldberg is an advisor for policy and strategy in the Private and Financial Sector Unit for Europe and Central Asia at the World Bank. Views expressed are entirely the authors' own. 

¹Jeffrey Sachs and Wing Thye Woo, "Understanding the Reform Experiences of China, Eastern Europe and Russia", Journal of Comparative Economics, Vol. 18, No. 3 (1994), pp. 74-88.

²Barry J. Naughton. Growing Out of the Plan: Chinese Economic Reform, 1978-1993 (Cambridge: Cambridge University Press, 1995).

³Philip Peters, "StateEnterpriseReform inCuba" (Arlington, va: Lexington Institute, 2001).

⁴Quoted in William T. Ratliff, "Raul, China, and Post-Fidel Cuba", Latin Business Chronicle, August 28, 2006.

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