Cuba loosens up but ...

Dennis Morrison, Contributor

Last week, further details about the unfolding economic reform programme in Cuba were announced amid widespread interest and anticipation as to the path the Raúl Castro regime will eventually adopt. A fundamental question is the extent to which Cuba will be influenced by the Chinese or Soviet-Russian approach as it seeks to update its economic model.

The details revealed, so far, deal with the scaling back of controls on small businesses, and the loosening of rules on private employment, but there is, as yet, no signal as to the breadth of the strategic shift to be pursued.

The lessons of the failed attempt at reform of the Soviet political-economic model are well known. Under Gorbachev's dual plank of Glasnost [openness] and Perestroika [restructuring], political reform was supposed to pave the way for economic reform with greater reliance on market forces. This proved catastrophic, however, as political disarray ensued, intensifying the process of economic decay that led eventually to the disintegration of the Soviet model across the whole of Eastern Europe. The Cubans would have learned that loss of political control, as happened to Gorbachev, would be the end of their reform process.

A successful model

The Chinese approach, on the other hand, provides a successful model, as demonstrated by the transformation of that economy over the last 35 years to number-two, ranking behind the United States. In China, domestic economic reforms, starting with agriculture and the opening up to foreign participation in special economic zones, was emphasised, rather than political reform. Further liberalisation, inclusive of ownership that allowed foreign and local entrepreneurs, targeted development of low-cost manufacturing for export markets, set the stage for accelerated growth in industrial production.

This combination of a mixed-economy model and continued tight political control by the communist party has steered China to rapid development. While there were threats to political stability as the economy was liberalised culminating in the 1989 Tiananmen Square showdown, the command-and-control political system has reinforced stability.

Before now, Cuba's reform efforts have been extremely limited, and have been carried out on a stop-and-start basis. The current reform measures which are to come into effect shortly are more extensive, although still restricted to the privatising of small-scale, state-run service activities. This is meant to be the basis for expansion of small businesses and private employment. And, for the first time, Cubans in private activities would be allowed to employ people other than their relatives in a range of activities - barber shops, taxi services, automobile repairs, farming, bed-and-breakfast establishments, as well as professional services.

The intent is that these would absorb the estimated half a million state employees slated to be let go. But Cuba's economic revival is going to require greatly increased access to capital and markets, and hence, an expansion of foreign participation in its domestic production, investment and trade. So far, there is, however, no hint of changes in these areas, in the ownership and control of the commanding heights of the economy, and in the role of market forces, except in a limited way.

Cuba has major strengths including a high level of educational attainment and a large professional workforce that puts it ahead of most developing countries and would position it for rapid economic transformation. Its wide-ranging manufacturing capacity built up for import substitution and to counter the embargo could be a platform for export growth within Latin America and for markets in other developing countries. Solid relations with a range of countries that it has assisted over the years would also be a springboard for expansion of foreign economic and trade relations to underpin the overhaul of its economy.

An attractive partner

Advances it has made in medicine and biotechnology makes it an attractive partner and location for an offshore health-care centre to rival India and Singapore, which are becoming important players in this field. The linkage to its tourist industry would be significant, as that industry, which grew rapidly in the recent past, is already attracting significant numbers of visitors from Canada, Europe, and Latin America. But reforms to facilitate such expansion in foreign participation would be necessary.

The big obstacle is the US embargo which is also reinforced by the hostile posture of Cuban exiles in America and their grip on US policy towards normalising relations. While the lifting of the trade embargo is being discussed in the Congress, the tide in American politics is unfavourable. This is unlike the case of China where the overseas Chinese communities have been active agents of trade and investment for the mainland. A big difference, too, is that the US, for geopolitical reasons, and with long-term economic considerations in mind, saw advantage in normalising relations with China even as it tightened restrictions against Cuba under the Bush administration.

Other impediments include the country's primitive financial system and rigidly bureaucratised state apparatus that is built on a war footing. Distortions in its allocation of resources to provide free welfare services, transportation and heavy subsidies for basic food, and to support military expenditures represent huge political and economic challenges. But updating the Cuban economic model cannot avoid far-reaching adjustments in this area. Getting the sequencing of economic and political reforms right will, therefore, require that tight political control be maintained.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.