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Cuba’s Future Economic Model

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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, argues Daniel Erikson.

BY DANIEL ERIKSON

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.

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.

THE 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.

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.

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 FUTIRE 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.

 

 

 

 

 

 

 

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).

Originally published January 2006

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