A New Five-Year Period for Reform: The Economic Challenges of the New Generation of Cuban Leaders

The 8th congress of the Cuban Communist Party took place amid the worst economic crisis since the collapse of the Soviet Union. As expected, there were no novel initiatives related to the reform process beyond embracing, in general terms, the changes that were formally launched in 2011. These serve as limits to frame the transformation of the economic model. The beginning of a new political cycle is an appropriate time to assess outstanding debts.

Once the generational transition in the principal offices of the state has been ensured, what follows is economic reforms. The challenges facing the Cuban government are enormous, and have only grown since 2011. After six decades of applying orthodox central planning (with some variations), Cuba is only surpassed by the former Soviet Union’s model, which was similar and lasted 74 years.[1] But the USSR was a gigantic country, with infinite natural resources at its disposal, and it managed to create and sustain for more than four decades—with great limitations and contradictions—a community of states with similar orientations.

Since 1990, Cuba has not had any arrangement that provides comparable protection and compensation.[2] There is no space among equals for the Island in the world economy. If the following three elements are taken into consideration: the duration of the orthodox model, the absence of external relations with countries of a similar orientation, and the new challenges that derive from the evolution of international capitalism, it can be concluded that the Cuban government is navigating completely unexplored waters with no reference as to how to bring economic viability and social sustainability to its model.

Cuba faces additional obstacles. Latin America does not classify as an economically dynamic region. Since the 1980s, it has been on the periphery of the world economy. The growth rates of the regional benchmark, Chile, pale in comparison to its counterparts in Asia. Due to its own production structure and profile of international insertion, there is nothing comparable here to regional value chains, at least not with the conceptualization of this idea in Asia, Europe, or North America. The countries in this area appear more as competitors than as complementary economies. These adversities are notably reinforced by the United States’ economic sanctions, which distort Cuban trade, increase costs, and erode the possibility of adequately exploiting the island’s comparative advantages.

Domestically, Cuba is nothing like its Eastern European and Asian counterparts. It has neither the external financial support or the institutional reference of the former; nor the young, growing populations of the latter. In fact, quite the opposite. Its workforce began to contract in 2016, and the average age is steadily increasing. To make matters worse, the quality of basic education has declined, and the proportion of the workforce in formal employment has plummeted since 2009, while emigration has risen, particularly among young people.

The trajectory of the last three decades is disturbing: increasing inequality, a lag in physical infrastructure, the loss of quality in public services, high emigration rates, increasing dependence on remittances to obtain foreign exchange, insufficient domestic food production, and the expansion of informal markets, among others. The economic crisis caused by the COVID-19 pandemic has clearly exposed the great vulnerabilities of the island’s productive system. The Cuban economy remains trapped on a path of low growth that has been further reduced in recent years. The stagnation is now accompanied by greater macroeconomic instability. The fiscal deficit has been growing in recent years and is projected to reach 20 percent of GDP in 2021. Simultaneously, the public and external debts are growing. There are notable pressures on prices, and the domestic currency, the peso, depreciates in the informal market. The parallels with the first half of the 1990s are inevitable.

More than a serious, temporary recession resulting from a range of adverse events, Cuba has suffered for decades from a crisis in its development model. None of the features of its production system allow it to take advantage of the opportunities offered by the world economy, however scarce and asymmetrical they may be, nor do they allow the country to make sufficient profit on internal resources, such as investment in education, security, or natural resources. The lack of institutional coherence is such that, no longer referring to just the private or cooperative sector, even State companies do not operate under homogeneous rules. These are undoubtedly formidable challenges.

In Search of an Opportunity for Necessary Change

What Cuba shares with socialist, Asian countries (China, Vietnam, Laos) is an overlap of problems associated with development as with the reforms of a centrally planned economy. It was clear to reformists in those nations that economic development could not wait for a change in the model. But they went a bit further, displaying legendary Asian pragmatism. The old model was an obstacle to development, and reforms became the vehicle for solving concrete problems in people’s lives. The legitimacy of the communist party was threatened, not by a siege from the West nor the remnants of war, but by obvious economic failure.

The Cuban authorities have been careful to avoid generating high expectations. When the so-called “update (actualización)” process was launched, explanations were offered to distinguish it from the Eastern European “transition” and from Chinese or Vietnamese “reform.” What is reform? In the framework of this discussion, it can be understood as “… a type of deliberate policy measure that modifies the rules under which economic actors operate” (Naughton, 2018). Additionally, a “market-oriented” reform focuses on increasing competition in the different branches of the economy, either by eliminating barriers of entry to new competitors, or by establishing fair and transparent rules that govern and stimulate that competition. Under these criteria, Cuba’s approach to reforms has been, to say the least, inconsistent.

There has been no “reform” in the strategic sense of the word. In fact, proposals have been implemented with countless restrictions and conditionalities, ultimately undermining not only their effectiveness, but also the credibility of the overall program, as well as the commitment of the authorities to both a domestic and international public. It is a “fragmentary and biased” process that has generated its own contradictions (Alonso & Vidal, 2020).

The nature of reform makes it difficult to implement for economic and political reasons. When it comes to radical change programs, it is common to generate great disruption and instability in the short term while there is a delay in obtaining benefits. The “ordering (ordenamiento)” offers a good example of this intertemporal problem. Inflation and business losses are immediate, while any realignment that leads to productivity and efficiency gains will take time.

The political economy of reform is even more complex. The beneficiaries of the “status quo” are fully aware of the privileges at stake, while the potential winners are scattered and cannot determine with certainty the magnitude of the potential benefits. Processes of this nature take place in favor of young people, who are politically less seasoned and have less political influence (Naughton, 2018). The likely losers are well identified, have powerful investments at stake, and strong incentives to oppose change, while the reverse is true for those who can receive the benefits.

How to Assemble a Coalition to Advance Reform?

The 8th congress presents a new opportunity in this regard. With the arrival of a new generation to power, the rush to build and cement their reputation is a considerable incentive to try their own way. This is reinforced because they have precise time constraints to achieve the construction of their legacy. The law now imposes a maximum of two terms (10 years) for senior public offices. That period started in 2018.[3] In addition, the interested sectors now have representation in the main decision-making bodies, especially in the Political Bureau.

A second aspect lies in the seriousness of the situation. The Island is going through a delicate economic moment. The combination Venezuela’s decline, renewed hostility from the United States under the Trump administration, the COVID-19 pandemic, and its own inadequacies has produced the worst of forecasts. Insular GDP has contracted for two consecutive years. And the first quarter of 2021 has continued the negative streak. This year’s harvest is heading towards its worst result in more than a century, while tourism has failed to start the recovery. The local currency has lost value. Crises have the effect of increasing the opportunity cost of inaction and broaden bases of support for previously unthinkable paths.

It seems that the economic urgency can act as a catalyst. The limited progress of the last five years materialized mainly in July 2020 when mediated access to foreign trade was granted to the private and cooperative sector, the network of stores that commercialized goods and services in foreign currency was expanded, the monetary system implemented, a set of transformations announced in the agricultural sector, certain changes introduced linked to the state company, the scope of action of local governments in local development projects expanded, and an expansion of self-employment was announced that will work as a guideline for the adoption of SMEs and cooperatives. At the same time, decisions of diverse scope have been chained to favor foreign capital.

Another element in favor is the growing collaboration of the academic sector in policy design. One of the weaknesses of this process is the diminished institutional capacity within different government agencies. While academia cannot replace public officials, in the short term it can help inform decisions and provide a broader menu of options. Although collaboration is not without its formalities, and the impact is not equally beneficial in all cases, the recognizable nuances in various aspects of the authorities’ public discourse indicate that there is a stronger influence from that sector. An additional step would be to consider promoting qualified academics to key technical positions.

However, the 8th Congress also made worrisome judgments about some areas that should be an organic part of a successful reform. Controversial considerations were issued on the expansion of private activity, a more relaxed state monopoly on foreign trade, the role of tourism as a key sector of the economy, and the participation of companies controlled by the military sector in productive activity. In all cases, the arguments outlined only reflect a part of the broad social discussion on these issues. Worse still, they can be used as justifications to limit the scope of the transformations.

It also failed to unify a clear and concise message regarding the Party’s primary objectives. Getting ahead amid so many challenges requires a compact statement in finding a new national unifying purpose. Advancing rapidly towards economic development and tangible improvement in the material standard of living of the population can be a good start. That is a message that resonates in contemporary Cuban society. It also helps clear doubts and second interpretations from members and officials. This statement must be supported by quantitative goals that are verifiable, transparent, and achievable in the medium term.

Final Thoughts

Official forecasts anticipate growth rates in 2021 and 2022 that would lead to an almost total recovery of output lost in 2019 and 2020. Even in this scenario, GDP per capita would only return to 2018 levels by 2023. The crises would have cost the Island five years of growth. The difficulty with these assumptions is that these projections are well above the forecasts for all Latin American countries except Panama. By comparison, scenarios for the Dominican Republic, which does not have access restrictions to the North American market or its visitors, foresee growth of 5 and 5.5 percent in 2021 and 2022.

The main obstacle is that to achieve this performance, which is almost unprecedented in the economic history of recent decades, a 180-degree turn in the pace and content of the reform would be required. If the last years are extrapolated, there is no evidence to justify such an event.

Finally, the size of the accumulated distortions is such that even consistent reform will generate severe imbalances in the initial moments before heading towards robust growth. The calculations carried out[4] indicate that the distortion of the Cuban productive structure towards the end of the eighties was greater than that of most of the socialist countries of Europe. Even if the positive effect derived from the reduction of the industrial establishment is discounted, postponing the restructuring of state-owned companies and the concentration of much of the trade under political agreements indicate that these distortions will continue to reproduce. Correcting this will inevitably take time.

The foregoing analysis suggests that even in the best of scenarios (excluding the lifting of all U.S. sanctions), Cuba is heading towards an unflattering decade in economic terms, accompanied by the reduction and accelerated aging of its population. There is no time to lose.

Dr. Ricardo Torres is a professor of economics with the Center for the Study of the Cuban Economy at the University of Havana.

Illustration by Maikel Martínez Pupo. You can find him @MaikelStudio @maikelmartinezpupo.

References

Alonso, J., & Vidal, P. (2020). Economic reform in Cuba: caught in the middle. In J. Alonso, Cooperation between the EU and Cuba for economic reforms and productive (pp. 19-36). Barcelona: CIDOB.

Naughton, B. (2018). The Chinese Economy. Adaptation and Growth. Cambridge: MIT Press.

[1] North Korea is excluded from this comparison, because it is essentially an autarkic state, which adopted a very specific economic model based on the Juche ideology.

[2] Making abstraction of the role of Venezuela.

[3] If the mandate is restarted after the adoption of the new Constitution that formally created the new positions, then it would be from 2019.

[4] The author estimated that in 1990, these distortions were equivalent to 27% of GDP and would have grown to 40% in 2017.