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Could Cuba be the Next China?

April 18, 2012
Kip Beckman
Principal Research Associate,
Economic Services

Last year, Cuba’s president Raul Castro initiated a number of economic reforms approved by the Communist Party designed to revive the Island’s dismal economy. The reforms will eventually transfer a large part of the state into private hands and they are already having a profound impact on Cuba’s economy. Of course, the Castro brothers will never admit that Cuba’s “workers’ paradise” is being abandoned for dreaded capitalism – Raul simply stated that his goal was to “make socialism sustainable and irreversible”. The interesting question going forward is this: Through economic reform, could Cuba transform itself into another China and start recording double digit economic growth in a few years time?

Raul Castro really didn’t have much choice in adopting a reform agenda similar to other communist countries – unless he wanted to oversee the complete disintegration of the Cuban economy. Per capita output for 15 of Cuba’s 22 most important agricultural and industrial products is lower today than it was in 1958. Between 2007 and 2009, the Island imported about 80 per cent of its food at a cost of $1.7 billion per year. While the US embargo has definitely hurt the economy, the biggest problem is that Fidel Castro’s state has virtually abolished incentives for Cubans to work hard. As a result, most government workers are unproductive and some steal goods from the workplace that are eventually sold in Cuba’s informal economy.

The 2008-09 global recession had a huge impact on the economy and its lingering aftermath continues to take a bite out of Cubans’ standard of living. Tourism slumped and plunging oil prices cut into vital financial assistance from Venezuela. The price of imported food started to accelerate at the same time as nickel prices, Cuba’s most important export, declined. The Cuban government wasn’t in a position to borrow from abroad to help the economy recover from the recession because it had defaulted on foreign debt obligations too many times in the past.

The reforms that have been introduced include measures designed to increase production and exports as well as reducing imports, especially food. The agriculture sector is in desperate need of reform because state-controlled agriculture has been a disaster. State farms occupy three-quarters of Cuba’s 7 million hectares of agricultural land, yet close to half of it sits idle and is overrun by weeds. While Cuba is the only country in the region where it is illegal to kill a cow, the number of cattle has dropped from 7 million in 1967 to 4 million in 2011.

To address this dismal situation, Raul initially permitted farmers to lease idle land for 10 years, but has subsequently increased the lease period to 25 years and has also allowed farm buildings to be constructed on the land. Farmers can also sell surplus production of some crops on their own without going through the state marketing organization. Cubans can now legally sell produce and other products in road-side stalls, which not surprisingly are proliferating in Havana. Many of them are run by doctors, teachers and accountants who have left their secure, but poor paying, state jobs to take a chance on earning more money in the private sector of the economy.

Raul originally promised to let go 500,000 state workers by the spring of 2011 and 1.1 million by 2014. The government has fallen behind its timetable because communist party officials haven’t identified or established enough alternative means for Cuban workers to earn a living. As a result, many workers have been reluctant to leave their state jobs and pursue careers in the slowly developing private sector. Raul has, however, followed through on promises to deregulate the economy by permitting citizens to buy and sell houses and cars, and Cubans can now own computers and mobile phones, but a generation behind others in Latin America.

The economic reforms in Cuba have been introduced gradually and have met with fierce resistance from communist party officials eager to protect their turf. We believe the reforms will eventually lead to a turnaround in the economy and stronger growth – but don’t look for the economy to start generating Chinese-style double digit growth rates. Raul is reluctant to open up the economy to foreign investment due to concerns about corruption. Openness to foreign investment is one of the key ingredients behind China’s economic juggernaut. The government has also shown little interest in following China’s lead by seeking membership in international organizations like the WTO.

Deng Xiaoping, former head of the Chinese Communist Party, allegedly stated that “To get rich is glorious” as his reforms unshackled the economy and ushered in decades of rapid growth. It is unlikely that the Castro brothers will go quite this far in reforming the economy and, consequently, most Cubans will not experience the surge in standards of living that has taken place in China.

Reference

The Economist, Edging Towards Capitalism (March, 2012).

 

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