By Otaviano Canuto, Samuel George and Cornelius Fleischhaker
Today, July 20, 2015, Cuba and the United States reopened embassies in Washington and Havana for the first time in decades, marking a crucial step towards the normalization of relations. Yet, while much attention will be placed on these international developments, perhaps the most decisive changes for Cuba will be domestic.
Crippled by a US trade embargo since the 1960s, Cuba’s underperforming centralized economy has long been propped up by a series of generous “sugar daddies”, from Soviet Russia to chavista Venezuela.
But Soviet support collapsed with the Berlin Wall, and Caracas is running out of sugar. Havana may not be willing to give up on the revolution, but it cannot afford the status-quo.
On an island known for obstinacy, something has got to give.
While many Cubans welcome change, any transition faces daunting challenges. Can Cuba liberalize commerce without inviting the staggering inequality endemic to Latin America? And can the state relinquish total power without sacrificing high quality, free public services?
Since assuming power from his brother Fidel in 2006, Raul Castro has gently edged Cuba towards a more market-based economy. The partial liberalization of private enterprise, home ownership and foreign direct investment are all suggestive of an economy in transition.
Cuba has taken similarly measured steps in the political realm, as evidenced by diplomatic normalization with the US. Raúl Castro has indicated that he will retire at the conclusion of his current term in 2018, ceding the Presidency to 55-year-old Vice President Miguel Díaz-Canel.
A preordained handover of power falls far short of true democracy, but it is representative of a broader transition from Cuba’s aging revolutionaries to a new guard of younger, ideological but reform-minded leaders.
There have even been indications that the party may be willing to ever-so-slowly loosen its grip on political power. The Cuban government tolerates a degree of political activism. For example, in last April’s municipal elections, the government permitted two non-party candidates to run for office.
Some online activism is also permitted: bloggers such as Harold Cárdenas Lema ofCuba Joven and Yoani Sanchez of 14ymedio have openly questioned Cuban governance, albeit from very different perspectives. However, limited internet on the island significantly curtails the number of Cubans who can access these blogs.
Of course, public displays of dissent — among many other freedoms of expression — are still firmly prohibited.
Still, something is changing here. Raúl’s reforms have been slow and halting, but they are likely irreversible. Cuba is clearly experiencing a transition. But a transition to what? What’s the end game here?
The Cuban Economy: More Money, New Problems
Cuba’s fundamental economic problem is a lack of productivity, particularly from a bloated public sector. In response, the government has implemented reforms designed to shed jobs from public roles, with the expectation that people will join an inchoate private sector.
In agricultural centers, for example, the government has granted farmers increased control over what they harvest and where they can sell their produce. While they still must deliver a majority percentage of their output to the government, they can now sell the remainder at a market price.
More recently, “cuenta propistas” have created opportunities in the cities for private enterprise and nonagricultural co-ops, from the barber, to the tire repairman, to certain craft and souvenir shops.
The Cuban government appears comfortable with these private operations, with entrepreneurs reporting generally unfettered activity. If anything, some private business owners claim, their taxes produce an important revenue stream for the government.
But with a 21st-century economy comes 21st-century problems. A key concern with Cuba’s economic reforms is that not all Cubans can take advantage of them, and some fear that inequality could be widening.
Productivity suffers from decades of underinvestment in infrastructure, equipment and machinery. This inattention is not surprising given the government’s hostility to larger private enterprise, as well as its own lack of funding. International direct investment and credit is also constrained by the US embargo.
With limited credit options, putting together the start-up capital for a private business is difficult for those without access to remittances or tourist revenue. The Afro-Cuban community, for example, may particularly lack access.
Another distorting factor in Cuba’s economy is the awkward dual-currency system. Two types of currency are currently traded in Cuba, one worth significantly more than the other
The Convertible Peso (CUC), used for example in the tourist industry, is worth more than the dollar. The National Peso (CUP), the currency of state salaries, is worth about four cents.
The result is a widening gap between those earning in CUC and those earning in CUP. Given the marked disparity, taxying a tourist across town can gross about as much as a state employee makes in two weeks. This creates incentives pushing Cubans into any activity that generates a cash flow in convertible currency regardless of productivity.
Havana hopes to unify the regimes in the coming months, but this would not close the gap between those with access to tourism revenue and remittances, and those on state salaries.
Diplomatic Relations Are Just a Start
Cuba’s complicated domestic transition requires far more support than simply changing the title of a building on the Malecon from “US Interest Section” to “US Embassy”.
Bringing Cuba into the global financial system and allowing the island become a member of development institutions such as the World Bank or the Inter-American Development Bank would be an important step to start closing the investment deficit. Also, given these organizations’ experience in transition economies, it could help the country with the needed structural and institutional reforms while keeping poverty and inequality in check.
Such multilaterals relations would be an important start, but the US could also play a critical role in helping Cuban economy through this period.
No policy from Washington could assist more Cubans — and more effectively undermine Havana’s hard line — then to end the US’s longstanding trade embargo against the island. The US Congress maintains the economic embargo presumably as a punishment for the government’s civil rights violations against the Cuban people.
The irony is that the Cuban people are the ones most severely punished by the policy.
The Cuban transition will not be easy, and it will not happen overnight. But it has an exponentially greater chance of success if the United States joins the large group of countries that already supports Cuba’s transition through constructive engagement rather than embargo.
The Crossroads Overtime: Otaviano Canuto speaks with Samuel George on Cuba’s Transition
Otaviano Canuto is an Executive Director at the International Monetary Fund. All opinions expressed here are his own and do not represent those of the IMF or of those governments he represents at the IMF Board
Cornelius Fleischhaker is a junior professional associate at the World Bank and co-author of Five Steps to Kickstart Brazil. All opinions expressed here are the authors’ own and do not necessarily reflect those of the World Bank.
NOTE: The videos in this text are a project of Samuel George and the Bertelsmann Foundation and do not reflect the views of co-authors Otaviano Canuto, Cornelius Fleischhaker, or their institutions.