Perestroika Cubana

Perestroika Cubana

Mini Teaser: Rather than using the Chinese model of gradualism, the Castro brothers should look to Eastern Europe for cues.

by Author(s): Raj M. DesaiItzhak Goldberg

ON APRIL 21, 2007, Granma, the official newspaper of the Cuban Communist Party released photos of a convalescing Fidel Castro meeting with a senior member of the Politburo of the Chinese Communist Party. The photos underscored how tightly Cuba has hitched itself to the Chinese economic wagon, and how much both Fidel and his brother Raúl have warmed to a country whose former leader, Deng Xiaoping, Fidel once described as a mentecato ("numbskull").

After Cuba lost its main benefactor, the Soviet Union, its economy shrank by over 35 percent. But Cuba has recovered, and more recently, with a little help from its new friends Venezuela and China-Venezuela subsidizes Cuba's oil consumption while China provides Cuba with investment and durable goods, and buys its sugar and nickel-Cuba has avoided the regime change that occurred when East European socialist states faced similar economic crises in the late 1980s. In Cuba, housing shortages, mounting debt and deteriorating public services have produced no mass protests, no general strikes, no throngs taking to the Plaza de la Revolución to demand multiparty elections or an end to central planning. Indeed, it now seems possible that Cuba may follow the "Chinese model" of reform, whereby Communist Party control is maintained alongside a gradual establishment of free-market incentives.

But can Cuba continue along this path?

Let us assume, for the moment, that the Cuban regime finds itself-in some not-too-distant future-without the Castro brothers and newly headed by reformers from within the Communist Party, as did the Soviet Union when Gorbachev became the leader of the ussr. The question that Cuba will face then, as did the ussr in 1985, is: What kind of reform is possible?

Chinese advisors-already in place-will tell the Cuban government to avoid drastic changes to their enterprises. The Chinese will remind Cuba what the Soviet republics went through-hyperinflation, skyrocketing unemployment, widespread corruption and asset theft, widening inequality, banking crises, currency collapse and massive social disruption. They will explain that, instead, it is better to do what China did: To "grow" its way out of the problem by combining some price and trade liberalization, an environment for new businesses to flourish and strict public control over state enterprises. But they will be giving the Cubans a false choice. It was not China's "gradualism", but rather its unique economic structure that allowed China to reform without suffering economic dislocations. Likewise, it was not Russia's reform speed, but its over-industrialization that led to its economic collapse.

Cuba's economy-which resembles that of the smaller East European countries at the outset of their transitions far more than it does China's-is a poor candidate for Chinese-style gradualism. Ultimately, Cuban prosperity must come from the revival of its private sector through rapid reform.

FOR ALMOST a decade, the China-post-Soviet contrast has been misleadingly used to demonstrate the supposed advantages of incremental reform-"crossing the river while feeling the stones" in Deng's memorable phrase-over economic "shock therapy" or the "big-bang" approaches used in Eastern Europe and Russia. In a nutshell, the argument is that, in contrast to the post-Soviet and East European recessions in the 1990s, China succeeded not only in growing rapidly, but in creating a vibrant, non-state-owned enterprise sector at the same time.

But there are three well-known (and fundamental) flaws with the comparison of China and the economies of Eastern Europe and the former Soviet Union. First, a vibrant private sector emerged in China because, prior to 1978, China was a peasant, agricultural society in which the migration of workers from low-wage, low-productivity agricultural sectors to higher-productivity industry was relatively smooth.1 In 1978, over 85 percent of the Chinese workforce was employed in agriculture. Although that proportion has shrunk by half in the intervening 29 years, surplus agricultural labor continues to flow to jobs in the steadily growing Chinese economy. By contrast, Soviet labor was primarily employed in heavy industry, restricting the availability of surplus labor flows into a "new" private sector.

Second, because of the economic structure of the post-socialist European economies, radical reform was a necessity, not a free choice. One forgets that Hungary and Poland both tried to avoid a harsh break with their socialist past through their own versions of gradual reform in the 1980s, to little avail. In both countries throughout the 1980s, the "non-state" sector expanded significantly, yet job creation and economic growth did not follow. Instead, these partial reforms became little more than a way for managers and employees to strip their companies bare. Finally, it should also be remembered that governments in Bulgaria, Romania, Slovakia and Ukraine all attempted their own versions of gradualism after 1990 that, in all cases, pushed these countries deeper into economic crisis.

Finally, Chinese reformers did not choose gradualism purely because it was an optimal reform strategy. Rather, a series of stalemates between hardliners and pragmatists following Mao's death, combined with the Chinese Communist Party's ideological commitment to public ownership, restricted the range of choices available to reformers.2 To assume that reformers everywhere are free to choose a reform path based purely on sound economic and technical judgments completely ignores the political realities that reformers face, including the internal power struggles in which they are involved, the need to compromise and the need to secure a minimum degree of public support.

And Cuba shares much more in common with the smaller East European countries in 1990 than with China in 1978.

As of 2005, just 20 percent of the Cuban workforce is employed in agriculture. That compares closely to the situations in Ukraine (22 percent), Poland (23 percent), Bulgaria (25 percent) and Lithuania (20 percent) almost two decades ago. Cuba's share of labor in industry (22 percent) also compares to Ukraine's (26 percent), Moldova's (20 percent) and Lithuania's (29 percent).

The service sector in Cuba is dominated by tourism. Since these workers already receive certain benefits-wages paid in dollars or in convertible pesos along with additional, unofficial income-they will stay tied to that sector. This leaves laborers in industrial state enterprises to fill the labor-force void-precisely the same "available" workers that forced smaller East European nations to adopt rapid privatization and enterprise-restructuring reforms in order to facilitate the migration of these employees to the new private sector.

It is notoriously difficult to lure workers, capital and productive inputs from the state sector to the private sector, as long as the former remain heavily subsidized. State-enterprise employees in centrally planned economies, of course, benefit from a whole host of "social assets" that are funneled through their workplaces, such as health clinics. Cuban state enterprises continue to offer job security, guaranteed income, health care and housing through their places of employment, creating strong disincentives for relocation to the private sector.

So, unlike in China, where large numbers of peasants left agricultural collectives that did not provide that level of social protection to work in the emerging private sector, it is highly unlikely that Cuba will be able to rely on the type of workforce flows from subsistence agriculture that have been the source of China's long expansion.

A post-Castro government may find it tempting to maintain state ownership in order to avoid unemployment or social unrest. But Cuba will not be able to rely on the good graces of state-enterprise managers, particularly if the Cuban party-state apparatus begins to fray. Indeed, there is evidence that some spontaneous privatization has already been underway since Cuba's main benefactor, the Soviet Union, collapsed.

In the 1990s Cuba experimented with various private-sector reforms, in particular, the establishment of joint ventures with foreign investors, the conversion of state enterprises into joint-stock corporations (sociedades anónimas) and a reduction in budgetary subsidies.3 Many of the corporations created out of these private-sector reforms, for example, have become profit-sharing arrangements for the Cuban equivalent of the nomenklatura, the pinchos grandes who, as with their East European counterparts, have occasionally used their position to engage in similar theft and corruption.

Whether a reformist Cuban government might embrace a voucher system leading to "mass" privatization is not clear. Several East European and former Soviet countries, facing the task of changing ownership in large numbers of companies, turned to mass privatization through the free distribution of vouchers to the public-vouchers that could be exchanged for shares in state enterprises. After the voucher scheme seemed to work in Czechoslovakia and Russia, voucher privatization was enthusiastically embraced by both reformers and external advisors, and by the mid-1990s it was the privatization method of choice in 17 East European and former Soviet nations. Proponents of mass privatization hoped that the profit incentives unleashed would soon revive faltering, centrally planned economies. That revival didn't happen.

Instead, groups of insiders, speculators and fly-by-night investors managed to grab most of the shares in these firms, usually by exploiting the fact that capital markets were unregulated in most countries and that most voucher-holding citizens were unprepared to be shareholders. So, investment funds began offering "deals" to convince citizens to sell their vouchers for cash, and by the mid-1990s, had acquired controlling interests in most voucher-privatized companies. Lacking oversight and regulation, many of these investors (along with enterprise managers) enriched themselves by diverting cash flows and assets, while leaving worthless, debt-ridden shells for other shareholders.

Essay Types: Essay