Can Raul Castro's Reforms Create a New Cuba?

Can Raul Castro's Reforms Create a New Cuba?
Published November 22, 2011 in Arabic Knowledge@Wharton

Plagued by US$72 billion in foreign debt, rising unemployment and low
industrial productivity, the government of Cuban leader Raul Castro is
undertaking a series of economic reforms aimed at downsizing Cuba's
bloated public sector and encouraging Cubans to find -- or create --
employment in the private sector. Despite the focus on the country's
long dormant private sector, the goal of the reforms is not really to
build the capitalist economy long dreamed about by Cuban-American
refugees. Instead, the government is aiming to enable Cuba -- which
annually imports 80% of its essential foods at a cost of US$1.6 billion
-- to gain the financial footing to pay for critical imports without
resorting to further soft credits and long-term flexible financing
currently provided by Venezuela, China, Brazil, Iran and Vietnam.

"Cuba's credit cards are all maxed out," says Hans de Salas Del Valle, a
Cuban-born researcher at the Institute for Cuban and Cuban-American
Studies at the University of Miami. "The Cuban government needs to
increase food output, and it can't afford to pay wages to [between] two
million to 2.5 million people for whom there are no real productive
jobs." Real unemployment is over 25%, Del Valle notes, and it could rise
to as high as 45% if the government enacts its anticipated series of
massive dismissals of public-sector employees.

With a debt burden equivalent to 125% of Cuba's gross domestic product
in 2010, "Havana finds itself between a rock and a hard place," argues
Del Valle. The debt is "an unbearable burden and surreal sum to repay
for a country with an economic output barely one-fifth the size of
Greece's own bankrupt economy, and an unemployment rate far higher than
Europe's worst [case], Spain." He adds that "Greece is an economic
success story in comparison with Cuba." Consider the numbers: Greece's
population of 11.28 million people -- almost the same level as Cuba
(11.2 million) -- generated more than US$300 billion in goods and
services last year, and earned a modest US$21 billion in hard currency
through exports. Meanwhile, Cuba's US$58 billion economy exported a mere
US$3.3 billion in 2010.

According to Del Valle, Cuba's debt crisis, which has been expanding
over the past two decades, "has always been very troubling for Raul
Castro," who sees economics as a pillar to the country's survival,
unlike his brother Fidel, "who put ideology over economics" during his
decades of ruling the island-nation. Speculation that Venezuelan
president Hugo Chavez could soon pass away - or at least resign his
office - has boosted the pressure on Raul to take stronger reform
measures, as had growing encouragement from his mentors in communist
China and Vietnam, who see Cuba as an important counter-weight to U.S.
influence in the Caribbean.

Cuba's debt crisis has received little media attention in the U.S. or
Europe, despite widespread distress over the EU's debt. Yet the
predominantly European members of the Paris Club collectively hold over
US$30 billion in Cuban debt, virtually all of it in default or arrears,
notes Del Valle. Other major creditors of Cuba include Russia -- with
some US$27 billion in outstanding trade credits and loans -- and
Venezuela. By 2015, Venezuelawill surpass Russia as Cuba's largest
creditor, predicts Del Valle. Over the latest decade, Venezuela has
provided more than US$15 billion in crude and refined oil in an effort
to keep Cuba's lights lit and its buses running.

Modeling China and Vietnam

At first glance, say experts, Raul Castro seems to modeling his
country's future after China and Vietnam, whose one-party, nominally
communist governments have managed to maintain power for decades while
also emerging as globally competitive exporters of industrial and
agricultural goods. Look deeper, however, and it is apparent that Raul's
approach won't turn Cuba into a miniature of those two much larger Asian
communist countries, experts say. The key problem for Cuba is that
Raul's reforms are not nearly as deep or thorough as those enacted by
communist governments in China and Vietnam. In Cuba, "they are going in
the right direction, but the issue is whether the reforms are profound
enough or fast enough to meet the difficult crisis," says Carmelo Mesa
Lago, emeritus professor of economics at the University of Pittsburgh,
whose new book on the Cuban economy is scheduled to be published in
Spain and the U.S. in 2012.

Mesa Lago notes that in China and Vietnam, local farmers have been
allowed to lease from the government the land that they work on for an
indefinite time period; Chinese and Vietnamese farmers have been
encouraged to care for that land as if it were their own. In Cuba,
contracts to lease plots of land are valid for only ten years. "After
ten years, that contract may or may not be renewed by the government,
and the land may be seized by the Cuban state for social needs," Mesa
Lago notes. That's particularly troubling because "a lot of land in Cuba
has been taken over by the notorious marabou plant," says Adrian E.
Tschoegl, a management lecturer and senior fellow at Wharton. It often
takes two years just to clear marabou-infested land, Tschoegl adds, so a
ten-year lease is effectively cut by one-fifth, right off the bat.

Equally counter-productive, says Mesa Lago, is that "Cuban farmers must
sell part of their crops to the Cuban government at a price below market
price." In China and Vietnam, farmers are free to sell to whomever they
want, and at whatever prices the market can bear. In Cuba, the new law
also prohibits the construction of houses on these newly distributed
lands. As a result, notes Mesa Lago, farmers must regularly carry their
crops back and forth from their farms, rather than risk leaving them
behind at the farm and having them stolen.

As if that weren't enough, loans for acquiring supplies and tools to
work these newly distributed lands are in short supply, Mesa Lago says.
Only about 2% of the 400,000 members of ANAP, Cuba's national
association of small farmers (Asociación Nacional de Agricultores
Pequeños) have received loans from the Cuban government to buy the
equipment and tools they need to make their lands productive.

If the Cuban government were to enact all of the reforms already made by
China and Vietnam, says Mesa Lago, "Cuba would be self-sufficient in
food, and it could export its surplus." Pursuant to its own such
reforms, for example, Vietnam's rice output more than tripled between
1976 -- the first year after the Vietnam War -- and 2007, as Vietnam
overtook Thailand to become the world's largest rice producer. (Last
year, Vietnam's production fell sharply because of drought.) Given the
limitations of Raul's agricultural reforms, that kind of productivity is
not likely to happen in Cuba. According to Jaime Suchlicki, director of
the Institute for Cuban and Cuban-American Studies at the University of
Miami, "The Cuban government is not creating institutions that will
enable the country to make deals to import or export its products or
attract foreign investments" that enable manufacturers to take advantage
of Cuba's proximity to U.S. markets. In short, "Raul Castro is not a
reformer like [China's] Deng Xiaoping or [the Soviet Union's] Gorbachev."

Workforce Reduction

Removing vast quantities of unproductive workers from the public payroll
-- and finding private-sector jobs for them -- is a cornerstone of the
government's current reform strategy. The Cuban government originally
planned to dismiss about 500,000 public sector workers between October
2010 and March 2011 -- the equivalent of about 10% of its workforce,
says Mesa Lago. Its eventual goal was to dismiss a total of one million
workers by the end of 2011 - or 20% of its total workforce - and 1.8
million by the end of 2014. Those dismissals seemed to make economic
sense, since the government had long been hiring far more workers than
it needed, says Mesa Lago. "They would hire 200 workers to build a
factory that everyone knew needed only 100 workers." Huge numbers of
workers would report to their jobs daily with few if any tasks on their
daily plate.

The government's plans for vast workforce reductions were predicated on
the assumption that newly dismissed workers would be able to find
employment in the private sector. The stakes are significant because if
250,000 private-sector positions are not created this year (2011),
Cuba's unemployment rate will soar to unprecedented levels. But when the
projected number of new jobs failed to materialize last spring, the
government was forced to hold back on its ambitious layoff plans. So
far, only about 100,000 workers have apparently been dismissed, says
Mesa Lago, because so few private-sector jobs have opened up for those
who were dismissed by the government.

Why have so few jobs been created in the private sector? In part, that's
because the government initially defined 178 separate categories of new
jobs in an artificial way that reflects the mindset of Cuban
bureaucrats, not the needs of the marketplace, experts point out. (Other
job categories are to be created in the future.) Workers must apply for
a permit to get any job in any specific category; they are not permitted
to identify a need, and then create a job that meets that need. Some of
the new jobs have been defined in ways so narrow that they are
"ridiculous," notes Mesa Lago. For example, there are specific positions
for people who peel fruits, and other jobs for people who sell fruits;
but the same person can't (legally) both peel fruits and sell fruits.
Other "authorized" job categories include clowns, shoe-shiners, water
carriers and people who fill cigarette lighters. When it comes to
higher-paying jobs, professional workers - such as teachers, managers
and accountants - face a particularly daunting challenge: Having lost
their government jobs, these professionals are nonetheless not
authorized to exist in the context of private-sector positions.

Any jobs that have not been explicitly spelled out in the regulations
are presumed to be forbidden, says Tschoegl. "It's a code law regime,
and it has a very interesting dynamic," he notes, contrasting the Cuban
approach to the common law regime used in the U.S., where anything not
explicitly forbidden by law is presumed to be permitted. Mesa Lago adds
that by imposing higher taxes on those private sector companies that
hire larger numbers of displaced workers, the Cuban government is
providing a further disincentive to hire people. "It is ridiculous," he
says. "If you dismiss 500,000 people, you want to create jobs for them,
but by imposing [especially] high taxes, you are punishing
entrepreneurial people who want to hire larger numbers of people."

How much worse can things get for ordinary Cubans? Del Valle believes
that surging unemployment could lead thousands of Cubans to seek refuge
in southern Florida, generating a new, massive wave of Cuban
immigration. "If you add two million to 2.5 million people to the ranks
of Cuba's unemployed, many of them will see immigration as their best
hope for a better life." He estimates that as many as one million Cubans
could flock to the U.S. (80% of them to Florida) over the next decade --
a pace of 100,000 a year. "It is impossible for the Cuban government to
create so many jobs; this [new wave of immigration] is an economic
relief valve," according to Del Valle.

According to Suchlicki, the recent relaxation in U.S. immigration
policy, which allows more Cubans to travel to the U.S. and send money
back to their relatives at home, will help only the minority of
relatively affluent, mostly white Cubans. "More than 60% of Cubans [in
Cuba] are blacks [or mulattos], and they have no relatives in Florida;
they are getting nothing" from the changes in U.S. policy. Overall, the
bleak reality is that, rather than follow in the same path pursued by
China and Vietnam -- which managed to raise their living standards while
preserving an authoritarian style of government -- "a gradual
deterioration" of the country's economy "seems the more likely scenario
in Cuba," says Suchlicki.

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