September 2006
Position Papers

Unleashing Microeconomic Reforms: Investing in Cubans

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PREAMBLE

Transitions from totalitarian systems are more complex and difficult than transitions from simply authoritarian systems. Such transitions require, among other efforts, the building of social institutions, an entrepreneurial class, legal structures, and independent judicial systems to address issues of private property and commercial transactions, which simply do not exist in totalitarian systems. 

Such transitions require changes along three basic tracks—political, social, and economic—ultimately resulting in full political, social, and economic transformations. In the most successful transitions, certain economic openings have preceded political reforms, but generally the speed of change along these three tracks is unpredictable and difficult to control. With few exceptions, most transitions that have taken place at low levels of gross domestic product (GDP) per capita (generally estimated at below US$3,000) have failed, as a functional economy is a precedent for the creation of a civil society and for the development of viable political processes. By definition, these changes require time and must be inherently gradual if they are to have an opportunity to succeed, as true economic prosperity can only be achieved under a social order that ensures political and social stability and an impartial legal system. Nonviolence has been the most significant variable among successful transitions. 

It is safe to say that notwithstanding the temporary Venezuelan bonanza, Cuba is running out of time. Cuban leaders must face a fundamental reality: Cuba’s future is unsustainable without domestic production and wealth creation. Continuing to ignore this reality will increase the inevitable transformational costs, make the transformation more difficult, and increase the probability of a breakdown of the social order, possibly leading to violence and rampant corruption.

The stakes are high, as Cuba is already in a suboptimal pre-transformation state. Failed economic policies litter the landscape of transitioning economies, and many countries end up facing worse economic conditions than existed during the predecessor regimes. 

While Cuba has started down the path of economic reform, albeit very slowly since the time it dollarized its economy, the pace of reform has not been nearly fast enough to avert mounting economic difficulties and hardships. The Castro regime has, since receiving generous Venezuelan subsidies and aid, retracted most of its economic reforms. If the regime fails to provide economic relief to the population soon, the probability of violence will be exacerbated in the inevitable transitional processes and will make economic recovery much more difficult and painful. Faster, more effective reforms are a fundamental necessity. 

Undoubtedly, the most fundamental problem in addressing these transitions is to get them started. This proposal is intended to outline a plan to jump-start the Cuban economy that addresses the main socioeconomic problems present in contemporary Cuba, capitalizes on its assets, and avoids, as much as possible, the enormous dislocation and impoverishment of large sectors of society that typically occur in such transitions. Among other objectives, we seek to lessen the pain and costs inherent in such a transition, which usually cause the poorest and most vulnerable sectors of society to suffer the most. At the same time, we strive to preserve Cuba’s sovereignty by preventing it from becoming exclusively beholden to foreign capital. 

A key element of this plan seeks to unleash the enormous human capital available in Cuba today and to turn the value of the residential real property assets of Cubans on the island into financial assets that can be used to generate a base of domestic capital investment. Given that there are likely to be multiple claims on many of these assets, this paper proposes an approach to dealing with such claims, although it is not intended to constitute a treatise on the resolution of claims relating to other expropriated or abandoned assets. Neither is this proposal intended to serve as a complete and thorough plan to reform the Cuban economy. Such a task is difficult and daunting. Processes dealing with issues of privatizing state enterprises, macroeconomic and agricultural reforms, and so on are not within the scope of this proposal. Additionally, because this proposal lacks the input and participation of knowledgeable individuals residing within Cuba, it is inherently flawed and lacking a most fundamental perspective. Accordingly, we offer it in the knowledge of that fundamental bias and offer it merely as a suggested starting point for further consideration and debate.

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