1. NS4540 Winter Term 2019 The Cuban Endgame
Robert Looney, Socialist Cuba’s Endgame, Milken Institute Review, October 16, 2018

2. Overview
Under the Castro’s regime, the Cuban economy did well during period of generous assistance from:
The USSR/Russia
Venezuela
In the 1980s aid from the USSR boosted Cuba’s average growth to 4.1%
Following USSR’s collapse growth fell to 2.0%
In 2000s growth increased to 5.6% with aid from Venezuela
Growth dropped to 2.1% in as Venezuelan economy collapsed.

3. Foreign Exchange Constraint
Cuba’s main economic problem
Suffers from a serious foreign exchange constraint with only competitive exports:
Raw materials (nickel)
Tourism
Medical services
Ambitious efforts of achieving relative independence from imports sagging
Government appears unwilling to undertake reforms needed to
Improve the business environment and
Position the service sector to take advantage of export markets

4. Cuban Governance Patterns

5. Caribbean Regulatory Quality

6. Growth Patterns
Economy’s structural weaknesses not only inhibit exports but have led to declines in productivity
Economy largely a relic of Soviet Union’s old extensive growth model. Under that model growth
tied to the sheer expansion of capital and labor
slows rapidly when these slip.
Between and 2007
the Cuban labor force expanded at an average annual rate of 1.2%
gross capital formation expanded at 7.4%
Since the 2008 beginning of Raul Castro’s administration
Labor force grew at an average rate of 0.5% annually
Gross capital formation 3.6%

7. Reforms and Virtuous Circles
Typically stagnant non-market economies like Cuba’s eventually adopt liberalizing reforms
Often these reforms lead to a virtuous circle whereby
Initial growth leads to follow-on investment from home and abroad
Growth expands government revenues enabling increased social investment in infrastructure and human capital
As growth accelerates government and the private sector see mutual gains from improved governance and growth-enhancing institutions
Improved rule of law, control of corruption and secure property rights facilitate greater savings and investment further augmenting growth
And the cycle continues.

8. Virtuous Circle Model

9. Cuba’s Partial Reforms I
Cuba has instituted a series of reforms to prop up the economy which
Fell far short of creating a virtuous circle
Did not even intend to create a virtuous circle
Modest changes introduced by Raul Castro in 2010 motivated more by fiscal pressures driving him to scale back a bloated public sector
Reforms dubbed “market socialism” which
Allowed self employment, especially in tourism and
Encouraged the establishment of small restaurants and bed and breakfasts
All under tight government controls
However did not create a pure vicious circle

10. Vicious Circle Model

11. Cuba’s Partial Reforms II
Instead the private sector grew dramatically
Business not only flourished but paid wages considerably above those in pubic sector
Wage differential in part result of new dual currency system designed to lure workers out of redundant government jobs
Under the system
Public sector workers paid in Cuban pesos than can only be converted at a very unfavorable rate to dollars (needed to buy consumer goods)
Workers in tourism are paid in the Cuban convertible peso

12. Cuba’s Partial Reforms III
Eight years after Castro put new market socialism model in place
Average wages in the state sector still around $30 a month measured at the unprivileged exchange rate
Making goods and services with prices determined by the small free market unaffordable
Government efforts to expand price controls to protect access to staples for state workers backfired
These have reduced supplies in formal market by diverting them into the underground economy

13. Cuba’s Partial Reforms III
A more flexible government would have built on the success of the tourism sector by instituting follow on reforms
Instead government has focused on the increased inequality facilitated by the dual-currency system
In summer of 2017
It suspended new licenses to private firms, and
Introduced a series of burdensome regulations limiting the size of enterprises
In early 2018 Castro’s successor Miguel Diaz-Canel introduced even more stringent regulations limiting scope of private sector activity as well
At least for now growing inequality driven by private enterprise is seen as riskier to regime than economic stagnation.

14. Cuba’s Partial Reforms IV
In keeping private sector down in the short run, government can protect state-owned enterprises that still dominate economy
However in longer run this compromise will not be able to assure an adequate standard of living

15. Future Possibilities I
Current situation not sustainable and something must change
Option 1
Prioritizing market decentralization and increased global integration would lead to greater inequality
Risky because government’s reputation centers on eradication of poverty
Option 2
Developmental state model similar to Ethiopia where central planners are actively pursuing economic growth without allowing widening income gaps
Cuba does not have natural resources like Ethiopia
Need technocrats that can function without political interference
Unlikely Cuban Communist party would relinquish power to this group

16. Future Possibilities II
Option 3
Vietnam model
Many ways Cuba today like Vietnam before its takeoff
In both major land reform and decades long effort to create a relatively equal distribution of income and wealth proceeded market based reforms
Like Vietnam Cuba has a rural population with the health and literacy to become a fairly flexible urban workforce
Vietnam eventually generated high rates of economic growth by introducing market reforms and welcoming foreign direct investment

17. Assessment
Communist leadership in a situation where it reduces its power if it reforms the economy, but in danger if it does not.
Vietnam experience offers a possibility that allows Communists to maintain political control
Castro still head of Communist party until 2021, so major changes may not take place until then.