Foreign Affairs

Scraping the Rust off Cuba

When the Sixth Congress of the Communist Party of Cuba met in Havana in April, its 1000 delegates approved a radical economic reform plan based to some extent on the market principles once reviled by Cuban socialism. The endorsement of this 311-point plan represents the biggest shift in economic thinking inside Cuban communism since the Castro regime embraced the Soviet Union’s economic model in the 1960s.

Although it did little to distract the world from the momentous Arab Spring in Egypt, Tunisia, Libya and Syria, the decision to tilt Cuba’s economy towards the market has raised the prospect of political reform in this tightly repressed communist state. If the market reforms go ahead successfully, will the next step be political reform, possibly even the end of one-party rule in Cuba, a nation ruled by the Castro brothers for the last fifty-two years?

The answer will depend on whether they actually work, but it will also depend on Cuba’s President, Raul Castro, who at seventy-nine years old took over when his brother Fidel, now eighty-four, fell ill in 2006. Formally appointed President of Cuba in 2008, Raul has a reputation as a more pragmatic and flexible politician than his older brother, although his nickname of “Raul the Terrible” has dogged him for years.

What Raul knows, along with Marino Murillo, his economic reform supremo, is that without changes that deliver tangible consumer benefits, Cuba’s socialist experiment is bound to fail. At the same time, the raulistas are aware that the economic liberalisation needed to rejuvenate Cuba’s economy could lead to greater demands for freedom of expression and democracy.

Therein lies Raul’s big gamble. If Cuba doesn’t reform it will fail economically and politically; if Cuba does reform successfully, there is a risk the Communist Party will lose power or be challenged by a Tiananmen Square-style incident.

The rationale for economic reform has been clear enough to many of the myriad Western scholars, spies and journalists who have watched Cuba over the past fifty years. Cuba’s economy is stagnant and unless reforms are put in place this nation of 11 million—conquered in 1511 by the Spanish, almost 100 years before the English landed in Jamestown, Virginia—will go broke.

To be sure, Cuba is no longer the whorehouse of the Caribbean, an idle paradise for rogues, greedy commodity traders or the bored American rich. There is poverty and there are beggars. Yet unlike other parts of Latin America, you don’t see people sleeping on streets or the grotesque poverty of Brazil. In 2007, life expectancy for Cubans was the second-highest in Latin America at 78.5 years; infant mortality was the lowest; Cuba ranked first in adult literacy, and there was a 100 per cent enrolment rate in primary and secondary school.

Yet the raulistas know these achievements are becoming more and more vulnerable to Cuba’s failing economy. Cuba’s average monthly wage is about US$20, and real wages are still an estimated 40 per cent below what they were in 1989, just before the Soviet Union imploded.

Economic dissatisfaction in Cuba has been confirmed in recent polling by the International Republican Institute, which is funded by the US National Endowment for Democracy. In February this year, the institute polled 436 Cuban adults in twelve provinces and asked what the biggest problems were in Cuba. By far the biggest gripe—60 per cent—was about low salaries and the high cost of living, followed by food scarcity (12 per cent).

Cuban society, as well, is in a parlous social and political state—people are poor, powerless and fed up with revolutionary slogans and manipulation. Long gone are the hopeful early days of the Revolution, when Ernesto “Che” Guevara talked of creating a New Man, El Nuevo Hombre, and of building a new society on the basis of moral rather than material incentives.

The revolution had been energised by Cuba’s interminable political struggles, the terrible legacy of plantation slavery and the cruelty of mighty Spanish conquistadors like Hernan Cortes, who set off from Cuba to conquer Mexico. Che’s New Man was to redress the effect of Cuba’s long history of slavery, exploitation and conflict with imperial powers, such as Spain and the United States. Instead of individual gain, Cuba’s New Man would be motivated by a sense of justice, and this moral force would form the backbone of the socialist economy.

Of course, Fidel and his compañeros knew how powerful profit was as a motivating force, but their overwhelming belief was that the essential injustice of capitalism required removing profit as an incentive. Their intense identification with the oppressed eventually blinkered them to broader truths. By abandoning the great insights of Enlightenment philosophers and economists, such as Adam Smith, the regime left itself clueless when it came to economic psychology. Those philosophers had understood that individual self-interest, properly understood, was necessary for wealth creation and that good intentions alone would not make a society wealthy. 

Travelling around Cuba in recent times was like stepping into the Caribbean of Ian Fleming’s Dr No, a frozen movie set full of fifty-year-old designs and fashions and nineteenth-century social thought. On the streets of Havana, grandpas sell the Party newspaper Granma, scratching themselves, grinning and drinking beer in the sun. Television is a dead zone of drear and propaganda and there is no access to international media unless you have a satellite dish

Cheap stores for the campesinos throughout Cuba sell hot dogs, cordial drinks and coffee for a few pesos, one of two national currencies in Cuba (the other being the convertible CUC) but Cuban markets for fresh food or consumer goods are dire and expensive. On Cuba’s highways and roads, horse-and-carts compete with pre-revolutionary cars, and a sprinkling of modern Chinese cars zoom through traffic lights equipped with Chinese-made countdown timers.

Havana is still possibly the finest city of architectural heritage in the Western Hemisphere, but it is decaying before the eyes of the millions of tourists who flock to Cuba each year. Beyond the tourist zone Havana’s streets are decrepit, the shops empty. Blackouts occur regularly in the regions, and everywhere people seem somehow stranded, in need of transport.

The loss of faith in the revolution is apparent especially among the young bloggers, led by Yoanni Sanchez’s “Y Generation”, who have sprung up like a literary opposition movement in recent years. These bloggers would prefer to write scathingly about how soldiers get subsidised Viagra rather than discuss stale revolutionary slogans, and they view Cuba’s ageing regime as a sort of joke or nightmare sustained by a police state.

As one bookseller told me in Havana, as he stared glumly at the stale collection of second-hand Marxist literature, paperback nineteenth-century novels, and volumes of unknown Latin American poets: “I don’t think humans are ready for communism, or socialism. I think we can do better here.”

Yet if the New Man is discredited, who or what will replace it? 

Raul’s answer when he addressed the Sixth Party Congress was that equality of opportunity, not egalitarianism, was Cuba’s new socialist principle. Raul bemoaned the performance of Cuba’s economy and its management. He spoke of “streamlining bloated payrolls in the public sector”, of reforming the welfare system, of initiative-sapping centralisation, and of entrepreneurs with an “allergy to risks”. Most remarkably, he criticised Cuba’s fabled ration book, a system of subsidies for food and everyday items, by suggesting it should be phased out for everyone but the neediest.

Raul had already revealed a taste of the reforms when he addressed Cuba’s National Assembly of People’s Power in November last year: 

It is simply about transforming erroneous and unsustainable conceptions of socialism that have become deeply rooted … as a result of the excessively paternalistic, idealistic and egalitarian approach instituted by the Revolution in the interest of social justice …

Many of us Cubans confuse socialism with giveaways and subsidies and equality with egalitarianism. 

These were stunning comments from a politician who was the leading architect of Cuba’s radical agricultural land reforms in the 1960s and an ardent fan of Soviet planning.

The reforms have been under way since Raul effectively took over from Fidel in mid-2006 and since then Cubans have gained the right—if they have the cash, of course—to buy DVDs, mobile phones, computers, toasters, air-conditioners and computers.

Raul had also announced a major plan to downsize the public sector by 500,000 people and new reforms to allow unused state land for private agricultural purposes. Large swathes of state land—amazingly, Cuba is a net food importer—are unproductive, something easily confirmed by a casual observer travelling through the island on roads scattered with gloomy campesinos desperate for a ride.

Cuba’s great sugar industry lies in ruins, devastated by the irrationalities of its dual currency system, sugar substitutes and soft global prices. Few people seem to be working in the fields, which seem overgrown with a sort of nettle or thorn bush, which the Cubans call marabu.

As a sign of just how far the new reformist thinking has gone, the regime has pushed up the age of retirement in an attempt to address a looming demographic crisis. Millions of young people are without opportunities, and having children seems pointless to many. They dream of Miami’s riches and of promenading down that town’s Calle Oche after winning the bombo, one of the 20,000 “lottery tickets” or US visas issued annually to fleeing Cubans.

At the heart of the reforms is an attempt—through higher exports and import substitution—to break out of Cuba’s continual balance-of-payments problems and, by so doing, modernise the economy. Over the last decade, international banks have slowed their lending to Cuba; those loans have usually been in the form of trade finance or trade credits. This trend has created a liquidity crisis, as Cuba must now pay for imports up front with hard currency. Cuba does not earn enough hard foreign currency from its exports and spends too much on imports, such as food and oil. The budget for imports has already blown out by $800 million this year as the prices of imports rise.

This problem has been worsened by the US economic embargo, which has restricted trade but also investment and finance between Cuban and US firms. Cuba cannot borrow money from international institutions like the IMF and the World Bank, let alone Wall Street banks, and must rely on a group of sympathetic but wary creditors from Europe, Latin America and China. Cuba also owes interest on its foreign debt—estimated at US$21 billion—which it finds hard to service, and this is becoming a sticking point with one of its main creditors, China, whose leadership has been pushing Cuba to reform. Once reliant on the Soviets for oil imports and sugar exports, Cuba now depends on the generosity of nations like Venezuela, China and Brazil to sustain its economy, backed up by a stream of US dollar remittances. 

The plan’s central tenets are eclectic. They have a market flavour. But they also incorporate some of the principles of China and Vietnam’s market socialism, with their emphasis on export-led development. In addition, the plan draws on Cuba’s unique form of managerial improvement, perfected by the FAR, Cuba’s armed forces, which control an estimated 60 per cent of the economy.

This eclecticism is unsurprising. Raul’s fascination with Deng Xiaoping’s reforms, and his trips to China and meetings with Zhu Rongji, the economist who planned China’s early economic ascent, are well known. China’s market socialism originated primarily in the postwar experience of Japan, and also Japan’s copiers in Korea, Taiwan and Singapore. Inspired by Japan’s “miracle economy”, those nations used state intervention to develop their economies rapidly but within the framework of a market economy. After Mao’s death, China adapted this developmental capitalism for communist use under Deng Xiaoping. For the Chinese communists, as for Raul, the great charm of market socialism is that it has enabled China’s Communist Party to remain in power by delivering growth.

Export-led development relies on several factors—cheap labour, foreign investment, technology transfer, soft credit and open export markets. By the pursuit of a surplus on the trade balance or the current account, export-led development can generate large holdings of foreign reserves. These reserves can be used to invest in industrial development and infrastructure, or pay off foreign debt, the very things Cuba needs to expand its economy and escape the grip of the US embargo.

In Cuba, there is now talk of creating Special Economic Zones, where foreign investors can manufacture goods for export, just as China did in Shenzhen province in the late 1970s. The reforms also hint at providing favourable credit terms to exporters and businesses engaged in import substitution; of restoring once great Cuban industries like sugar, tobacco and coffee; and of developing new oil and gas resources in the Gulf of Mexico.

The plan has also stressed the importance of contracts, the quintessential legal tie in capitalism; the need to remove caps on relative incomes; the importance of bankruptcy for business discipline; some freedom to set prices and to hire and fire; and creating non-state enterprises.

Essentially, the plan involves linking reforms in agriculture and in small-to-medium-sized enterprises, and combining them with a revolution in the way business can be done in Cuba and a changed relationship between the Communist Party and government. The aim is not just to increase jobs and income by diversifying Cuba’s small business base or increasing agricultural output, but also to increase taxation revenue to fund Cuba’s socialist promises in health and education. Increased revenue will also mean a greater capacity to provide generous credit terms to Cuban exporters and import-substitution businesses, as well as to agricultural producers who export. Through hard currency exports, combined with newly liberalised foreign capital foreign investment laws, the regime hopes to expand the economy, lift productivity, and ultimately escape its balance of payments crisis.

The regime clearly wants to change the engine of Cuba’s economy, but the Party tried to do something similar at its Fifth Congress in 1997, and little happened. Can the raulistas pull it off? 

Not everyone believes it is possible to reform socialist Cuba, although reports that the Sixth Congress had approved the private sale of houses and cars have begun to make people more curious.

One sceptic is Huber Matos, a guerrilla leader who fought with Fidel and Raul in the Sierra Maestra before he was jailed for twenty years for opposing Cuba’s drift to communism (Raul had wanted to execute him). Now based in Miami, Matos said it was ridiculous to think the ageing raulistas could fix an economy “which they have spent half a century destroying”, a relevant point when you consider the advanced age of Raul’s newly appointed Politburo. “Until they change the structure of power nothing will change,” Matos told the Associated Press in April.

Yet beyond the recent explosion in the number of private street vendors in Cuba, there are some signs that the reforms might be working. The take-up rate of two of them, in small business licences for the 178 allowable categories of self-employment and for unused state agricultural land, has been strong. Since October 2010, about 200,000 new licences for self-employment have been issued, dragging much of the black market back into Cuba’s taxable economy. And since April 2009, about 143,000 farmers have been given leases to farm unused state land, and more than 70 per cent of them are new to farming.

As the CIA’s former top analyst on Cuba, Brian Latell, wrote recently: 

the changes, however timid they seem now, are likely, over time, to prove truly transformational …

A successor government—almost regardless of its ideological posture and composition—will in all likelihood extend and intensify these raulista reforms, eventually giving rise to a more vigorous and free-wheeling private sector. 

One of the biggest challenges to the reforms will be to overcome opposition, or just plain inertia, in both the Party itself and the government bureaucracy. Already, last October’s plan to offload 500,000 state workers into the non-state sector has been put on hold because it was unmanageable for the Party. Hundreds of thousands of Cuban communists and public servants—mostly hoping for prosperous times, but still committed to the Party—are wondering why, after fifty years of struggle, the regime has suddenly discovered the merits of a market economy. Fear of a Party backlash explains, in part, why Raul has ruled out “shock therapy”, or imposing on Cuba the free market policies the former Soviet nations adopted after the fall of the USSR. Those reforms led in many cases to economic calamity and social upheaval. Raul wants things to go smoothly for ordinary people in Cuba, or else he will face even greater challenges.

Neither did Raul want to shock the Party cadres by too gladly embracing capitalist values, so the words profit and capitalism, for example, are not mentioned in the plan, except euphemistically. At the Congress, of course, there was no talk of ending Communist Party rule, but political change will be necessary to reform the economy and the Party will hold a conference in January next year to discuss how to go about it.

In this light, Raul made several pointed critiques against his compañeros. Party officials were getting old and out of touch, term limits were needed for senior office holders, and the Party had made serious mistakes in economic policy during its fifty-year rule. His self-forgiving admission of the Party’s mistakes highlights just how important his character and mindset are for the fate of the reforms. Can anyone imagine Stalin saying that central planning was obsolete?

Living under the giant shadow of Fidel, Raul has carved out a career for himself as a manager, a long-serving Minister of the Defence Forces, and a loyal henchman. It was Raul who planned the logistics of transporting 300,000 Cuban soldiers to Cuba’s three wars in Africa and who helped restructure the armed forces in the 1990s into a slimmer fighting force.

Raul is a tough customer, and there is little doubt that he will bring this quality to the reform program, and that he will need it. As Ann Louise Bardach, a former New York Times journalist, wrote in her book Without Fidel: “Throughout the guerrilla war in the Sierra [Maestra], Raul did not hesitate to execute suspected informers … Like Fidel, he erred on the side of vengeance, assumed the worst of his enemies, and took no chances.”

Yet Raul is a different man from Fidel, more pragmatic, consultative and sentimental, the family man of the Castro clan. As one defector said about the brothers: “If I had to have an enemy of the two, I would prefer to have Raul, because Fidel never forgets nor forgives.”

Where Raul saw market reforms as essential, Fidel saw them as concessions. Fidel loathed the new China model, just as he did Gorbachev’s reforms; in both cases he saw the seeds for the end of communism. Fidel famously restricted an early form of free enterprise in Cuba, the private bars and restaurants known as paladeres, after he “discovered” they were making too much money—subsequently, the number of tables was limited to twelve. Raul sacked Fidel’s economic team in 2009, replacing them with reformists, and it is likely that it was Raul who persuaded Fidel to endorse the reforms at the Sixth Congress.

Another factor in the fate of the reforms will be the US embargo and Cuba’s troubled relationship with Washington. For Cuba to implement an export-led development plan, it will require overseas markets for both exports and imports, and the US market is an obvious choice. Unless the regime can negotiate a truce of some sort, the embargo will continue to hurt.

Cuba’s foreign policy will also have a bearing, especially its growing ties with China. In an important gesture, in a letter to Fidel, China’s President Hu Jintao has already endorsed the reforms. So too will Cuba’s strategy of friendship with like-minded leftist nations in South America (like Venezuela) and the Caribbean, through groupings like ALBA, the Bolivarian Alliance with the Peoples of Our America.

The US embargo is critical and the fight continues. In March, for example, Cuba’s state-owned Cubaexport and France’s Pernod Ricard lost their case to retain the trademark for the Havana Club rum label in the USA after an appeal by Bacardi.

The embargo has been in place, in one form or another, since the early 1960s. Its most recent incarnations are the 1996 Cuban Liberty and Democratic Solidarity Act, more often known as the Helms–Burton Act, and the earlier 1992 Cuban Democracy Act. These laws allows US citizens to sue foreign companies that do business with Cuba if they involve the expropriated property of US citizens, including those with a Cuban background. They ban (most) US trade with Cuba, punish shipowners who dock in Cuban harbours, and restrict tourist visas for executives in companies doing business with Cuba, such as the Canadian nickel company Sherritt International. They also specify tight conditions under which the US Congress will lift the embargo. One of those is that neither of the Castros can be in a transition government.

Raul has been more open than Fidel to—as Raul put it in 2006—the normalisation of relations with the USA on an equal basis. For Cuba, the issue of independence is inseparable from the revolution and that is one legacy that is unlikely to be bartered. 

Perhaps the biggest challenge lies in the psychology of Cubans themselves. Cubans have to wean themselves from decades of dependency, either on other nations or on the state itself, and to foster a new culture of entrepreneurship. In Fidel’s Cuba, private enterprise was regarded with the same distaste the regime once reserved for homosexuals, a point that would not be lost on Cuba’s great gay dissident, Reinaldo Arenas, the author of Before Night Falls and a harsh critic of the Castros.

To escape this influence Cuba must now create (yet another) New Man, this time someone more attuned to the merits of individual freedom and with a greater respect for the role of the profit motive in an efficient economy. If Cubans become wealthier, they are almost certain to press for more political rights despite the constraints of a one-party system.

Yummies, Cuba’s young upwardly mobile Marxist middle managers, are already sufficiently frustrated about their future to back the reforms. They want to renovate their Havana apartments, travel overseas and have the chance to buy the latest iPad. The raulistas are aware of this disgruntlement. Like their Chinese counterparts in the late 1970s, they are battle-hardened Marxist politicians prepared to risk reform to avoid becoming the socialist dinosaurs of the Caribbean.

In 1965, Che penned his iconic letter, Socialism and Man in Cuba, in which he said that in moments of great peril it was easy to motivate people with moral incentives. “Retaining their effectiveness,” he went on to say, “requires the development of a consciousness in which there is a new scale of values. Society as a whole must be converted into a gigantic school.”

Cuba will not be restored to the pre-Castro era—the revolution’s roots are too deep—but the beginnings of a new, pro-market consciousness are evident in Cuba today. After the Sixth Party Congress, it remains more than possible that if Cuba’s economy gets going, momentum will build for political reform, and possibly even eventual reconciliation with the United States.

Lincoln Wright works in corporate affairs in Sydney, and is a former political journalist for the Canberra Times and News Ltd. These are his personal views.

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