The Cuban Economy–Progress, Challenges and Opportunities

The Cuban Economy–Progress, Challenges and Opportunities
Richard Feinberg | November 6, 2014 12:00am
Cuba

A new report from the Foreign Policy Program's Latin America Initiative,
Cuba's Economic Change in Comparative Perspective, underscores a clear
lesson from the Cuban experience: without economic growth, social gains
cannot be maintained. To be sustainable, progressive politics require
economic prosperity.

Since Raúl Castro assumed the presidency in 2008, Cuba has been engaged
in a process of updating its economic model aimed at modernizing
state-owned enterprises and institutions and opening up more space for
the development of the non-state sector. Progress has been made, but
many challenges remain.

Inspired by the question of how to shape an economic policy that
encourages sustainable growth in Cuba, Brookings scholars and economists
at the University of Havana's Center for the Study of the Cuban Economy
(CEEC) and Center for Research on the International Economy (CIEI)
gathered an experts working group to examine Cuba's economic reforms
from a comparative perspective. The findings they debated over the
course of a year are collected in Cuba's Economic Change in Comparative
Perspective.

The good news is that the reform guidelines (Lineamientos) adopted by
the Cuban government and Communist Party in 2011, confirm these lessons
and set forth steps to elevate Cuba onto a new growth path. While they
accept the importance of market-oriented reforms, however, the
guidelines reaffirm socialist planning and state-owned enterprises and
do not clearly outline Cuba's future development model.

Progress to date

Since the Lineamientos were adopted, progress has been evident on many
fronts:
- Small-scale business has emerged throughout the island;
- Non-state cooperatives outside the agricultural sector have been
authorized;
- Unsustainable social subsidies are being cut and the educational and
health care systems are being rationalized;
- Most Cubans can now travel abroad freely and return without penalty;
- Mobile telephones and internet are becoming more widespread (though
slowly by international standards); and
- Moreover, during the last two years, the Cuban government has
announced a series of structural reforms, which, if implemented, could
be major steps forward to assuring more autonomy for firms to retain
earnings and make their own decisions regarding investments, employment
and prices.

But despite how far the economy has come, it still has a very long way
to go. The papers in this volume analyze three key areas of reforms
needed going forward: economic growth with equity, monetary policy
reform and exchange rates, and institutional change.

Economic Growth with Equity

Juan Triana and Ricardo Torres propose a future development model that
prioritizes growth and stresses market signals. They would progressively
reduce the state administrative apparatus in favor of indirect
regulation with clear rules and incentives. But a smart state, in the
Triana-Torres model, would still perform a great many strategic
functions in the economy while more effectively tending to the Cuban
consumer.

The paper by prominent Costa Rican economist Alberto Trejos explains the
dramatically successful restructuring of his nation's formerly rather
closed and protected economy. Costa Rica opted for an unambiguous
openness to international trade and active promotion of foreign
investment, but the state remains a strong player through state-owned
enterprises in various sectors. In Costa Rica, foreign investment has
diversified in dynamic clusters in electronics, medical equipment, life
sciences and business process outsourcing –sectors where Cuba might also
hope to be competitive.

Monetary Reform and Exchange Rates

Writing in their own capacities, World Bank economists Augusto de la
Torre and Alain Ize argue for a "big bang," a quick unification of the
two currencies and two exchange rates. However, they also accept a more
gradual transition toward adjustment of the exchange rate regime,
allowing initially for a fixed exchange rate, followed later by a more
flexible but still managed exchange rate regime with inflation targeting
– a common approach in Latin America today.

Cuban economists Pavel Vidal and Omar Everleny propose a somewhat more
gradual adjustment path, accepting multiple exchange rates as an interim
measure – the approach the Cuban government appears to be following at
present. However, they also urge the government to be more transparent
in defining its monetary policy strategies and more effectively
communicate them to the Cuban public.

All four authors offer a critical warning: these tasks are extremely
complex and entail significant risks. A botched monetary reform could
catalyze a dangerous inflationary spiral.

Institutions

Author Carmelo Mesa-Lago provides a somewhat more impatient assessment
of progress to date than other authors in this volume. While applauding
the general thrust of reforms, he nevertheless bemoans the slow progress
and suggests the old socialist planning model may be the crux of the
problem. He also locates stubborn opposition within the government whose
orthodoxy and fear of delegation account for the frustrating delays and
contradictory steps that have marked the Cuban reform process to date.
Mesa-Lago points to the lessons learned from previous reform efforts in
China and Vietnam, where too slow and partial change failed to generate
dynamic growth and improvements in living standards – lessons Cuba's
government seems to be disregarding.

Meanwhile, Cuban economist Antonio Romero addresses sequencing, warning
that various sectors must be transformed simultaneously for reforms to
be effective. He adds that government entities must be better
coordinated, and that excessive gradualism can actually complicate
matters. Finally, he flags the need for a legal system that provides
guarantees to all economic agents, and policies that actively protect
natural resources and cultural patrimony, a theme touched on by many
other authors in this volume.

Next Steps

Looking ahead, now is the time for the Cuban government to accelerate
reforms. Among possible short- and long-term policy priorities, the
authors point to the following:
- More aggressively reform domestic price mechanisms to increase
agricultural production and alleviate some pressures on the balance of
payments;
- Further expand the domestic private sector, especially regarding
professional services, to allow middle class Cubans to work for
themselves as architects, lawyers and private consultants and open space
for more creative innovation and youthful employment;
- Offer a more welcoming hand to foreign investment which will open
access to new technologies and markets; and
- Gradually engage with the international financial institutions.

Overall, the papers in Cuba's Economic Change in Comparative Perspective
urge more clarity regarding Cuba's ultimate development model, a
consistent, comprehensive reform strategy, and greater transparency to
facilitate scholarly analysis and mid-course corrections.


Richard Feinberg
Nonresident Senior Fellow, Foreign Policy, Latin America Initiative

Source: The Cuban Economy–Progress, Challenges and Opportunities |
Brookings Institution -
http://www.brookings.edu/blogs/up-front/posts/2014/11/06-cuba-economy-progress-challenges-opportunities-feinberg