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    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.

    http://knowledge.wharton.upenn.edu/arabic/article.cfm?articleid=2744&language_id=1