Both were driven by a cult of personality cal history, instead of governing through that becomes difficult to extend beyond modest guidance and the presumption the life of the person. And the sweeping that human beings are quite capable of repression so central to both dictator- determining their own lives. n ships depends on an image of invincibility that is often undermined by the death of Irving Louis Horowitz is the Hannah Arendt dis- the leader. The reliance on foreign allies tinguished university professor of sociology generally makes the dictatorship less ten- and political science at Rutgers University. able and the dependence on a command He has published eleven editions of Cuban economy becomes unsustainable, particu- Communism (Transaction Publishers) and larly in the current Cuban context. the Bacardi Lectures on Cuban Politics and The expected death of Castroism be- Culture in an American Context, The Con- comes the ultimate irony and penalty of science of Worms and the Cowardice of Lions. He foisting upon a decent people a truncated is currently at work on a volume of essays, Marxism-Stalinism, making endless ap- The Theory and Practice of Cuban Communism: peals to personal sacrifice and metaphysi- 1959–2007.

Perestroika Cubana Raj M. Desai & Itzhak Goldberg

n April 21, 2007, Granma, vestment and durable goods, and buys the official newspaper of the its sugar and nickel—Cuba has avoided O Cuban Communist Party the regime change that occurred when released photos of a convalescing Fidel East European socialist states faced simi- Castro meeting with a senior member lar economic crises in the late 1980s. In of the Politburo of the Chinese Com- Cuba, housing shortages, mounting debt munist Party. The photos underscored and deteriorating public services have how tightly Cuba has hitched itself to produced no mass protests, no general the Chinese economic wagon, and how strikes, no throngs taking to the Plaza much both Fidel and his brother Raúl de la Revolución to demand multiparty have warmed to a country whose former elections or an end to central planning. leader, Deng Xiaoping, Fidel once de- Indeed, it now seems possible that Cuba scribed as a mentecato (“numbskull”). may follow the “Chinese model” of re- After Cuba lost its main benefactor, form, whereby Communist Party control the Soviet Union, its economy shrank by is maintained alongside a gradual estab- over 35 percent. But Cuba has recovered, lishment of free-market incentives. and more recently, with a little help from But can Cuba continue along this its new friends Venezuela and China— path? Venezuela subsidizes Cuba’s oil consump- Let us assume, for the moment, that tion while China provides Cuba with in- the Cuban regime finds itself—in some

 The National Interest––Sep./Oct. 2007 not-too-distant future—without the Cas- nutshell, the argument is that, in contrast tro brothers and newly headed by reform- to the post-Soviet and East European ers from within the Communist Party, as recessions in the 1990s, China succeeded did the Soviet Union in 1985 when Gor- not only in growing rapidly, but in creat- bachev became the leader of the ussr. ing a vibrant, non-state-owned enterprise The question that Cuba will face then, sector at the same time. as did the ussr in 1985, is: What kind of But there are three well-known (and reform is possible? fundamental) flaws with the comparison Chinese advisors—already in place— of China and the economies of Eastern will tell the Cuban government to avoid Europe and the former Soviet Union. drastic changes to their enterprises. The First, a vibrant private sector emerged in Chinese will remind Cuba what the So- China because, prior to 1978, China was viet republics went through—hyperinfla- a peasant, agricultural society in which tion, skyrocketing unemployment, wide- the migration of workers from low-wage, spread corruption and asset theft, widen- low-productivity agricultural sectors to ing inequality, banking crises, currency higher-productivity industry was rela- collapse and massive social disruption. tively smooth.1 In 1978, over 85 percent They will explain that, instead, it is bet- of the Chinese workforce was employed ter to do what China did: To “grow” its in agriculture. Although that proportion way out of the problem by combining has shrunk by half in the intervening 29 some price and trade liberalization, an years, surplus agricultural labor continues environment for new businesses to flour- to flow to jobs in the steadily growing ish and strict public control over state Chinese economy. By contrast, Soviet enterprises. But they will be giving the labor was primarily employed in heavy Cubans a false choice. It was not China’s industry, restricting the availability of “gradualism”, but rather its unique eco- surplus labor flows into a “new” private nomic structure that allowed China to re- sector. form without suffering economic disloca- Second, because of the economic tions. Likewise, it was not Russia’s reform structure of the post-socialist European speed, but its over-industrialization that economies, radical reform was a neces- led to its economic collapse. sity, not a free choice. One forgets that Cuba’s economy—which resembles Hungary and Poland both tried to avoid that of the smaller East European coun- a harsh break with their socialist past tries at the outset of their transitions far through their own versions of gradual more than it does China—is a poor can- reform in the 1980s, to little avail. In didate for Chinese-style gradualism. Ul- both countries throughout the 1980s, the timately, Cuban prosperity must come “non-state” sector expanded significantly, from the revival its private sector through yet job creation and economic growth rapid reform. did not follow. Instead, these partial re- forms became little more than a way for or almost a decade, the managers and employees to strip their China–post-Soviet contrast companies bare. Finally, it should also be F has been misleadingly used to remembered that governments in Bulgar- demonstrate the supposed advantages of ia, Romania, Slovakia and Ukraine all at- incremental reform—“crossing the river while feeling the stones” in Deng’s mem- 1Jeffrey Sachs and Wing Thye Woo, “Understand- orable phrase—over economic “shock ing the Reform Experiences of China, Eastern therapy” or the “big-bang” approaches Europe and Russia”, Journal of Comparative used in Eastern Europe and Russia. In a Economics, Vol. 18, No. 3 (1994), pp. 74–88..

Rocky Shoals of Reform  tempted their own versions of gradualism It is notoriously difficult to lure work- after 1990 that, in all cases, pushed these ers, capital and productive inputs from countries deeper into economic crisis. the state sector to the private sector, as Finally, Chinese reformers did not long as the former remain heavily subsi- choose gradualism purely because it was dized. State-enterprise employees in cen- an optimal reform strategy. Rather, a trally planned economies, of course, ben- series of stalemates between hardliners efit from a whole host of “social assets” and pragmatists following Mao’s death, that are funneled through their work- combined with the Chinese Commu- places, such as health clinics. Cuban state nist Party’s ideological commitment to enterprises continue to offer job security, public ownership, restricted the range guaranteed income, health care and hous- of choices available to reformers.2 To as- ing through their places of employment, sume that reformers everywhere are free creating strong disincentives for reloca- to choose a reform path based purely on tion to the private sector. sound economic and technical judgments So, unlike in China, where large completely ignores the political realities numbers of peasants left agricultural col- that reformers face, including the inter- lectives that did not provide that level of nal power struggles in which they are social protection to work in the emerging involved, the need to compromise and private sector, it is highly unlikely that the need to secure a minimum degree of Cuba will be able to rely on the type of public support. workforce flows from subsistence agricul- And Cuba shares much more in com- ture that have been the source of China’s mon with the smaller East European long expansion. countries in 1990 than with China in A post-Castro government may find 1978. it tempting to maintain state ownership As of 2005, just 20 percent of the in order to avoid unemployment or so- Cuban workforce is employed in agricul- cial unrest. But Cuba will not be able to ture. That compares closely to the situa- rely on the good graces of state-enter- tions in Ukraine (22 percent), Poland (23 prise managers, particularly if the Cuban percent), Bulgaria (25 percent) and Lith- party–state apparatus begins to fray. In- uania (20 percent) almost two decades deed, there is evidence that some spon- ago. Cuba’s share of labor in industry taneous privatization has already been (22 percent) also compares to Ukraine’s underway since Cuba’s main benefactor, (26 percent), Moldova’s (20 percent) and the Soviet Union, collapsed. Lithuania’s (29 percent). In the 1990s Cuba experimented with The service sector in Cuba is domi- various private-sector reforms, in particu- nated by tourism. Since these workers lar, the establishment of joint ventures already receive certain benefits—wages with foreign investors, the conversion of paid in dollars or in convertible pesos state enterprises into joint-stock corpora- along with additional, unofficial in- tions (sociedades anónimas) and a reduc- come—they will stay tied to that sector. tion in budgetary subsidies.3 Many of the This leaves laborers in industrial state en- corporations created out of these private- terprises to fill the labor-force void—pre- sector reforms, for example, have be- cisely the same “available” workers that forced smaller East European nations to 2Barry J. Naughton. Growing Out of the Plan: Chi- adopt rapid privatization and enterprise- nese Economic Reform, 1978–1993 (Cambridge: restructuring reforms in order to facili- Cambridge University Press, 1995) tate the migration of these employees to 3Philip Peters, “State Enterprise Reform in Cuba” the new private sector. (Arlington, va: Lexington Institute, 2001).

 The National Interest––Sep./Oct. 2007 come profit-sharing arrangements for the disorganized and ill-informed sharehold- Cuban equivalent of the nomenklatura, ers, fueling resentments and frustration the pinchos grandes who, as with their East among ordinary citizens. Although many European counterparts, have occasionally of these programs did succeed on a num- used their position to engage in similar ber of fronts—e.g., the Czech program theft and corruption. quickly transferred ownership over 1,600 Whether a reformist Cuban govern- companies to private hands and removed ment might embrace a voucher system government from the tricky business of leading to “mass” privatization is not industrial restructuring—the opportuni- clear. Several East European and for- ties for pilfering and self-dealing suggest mer Soviet countries, facing the task of that voucher-based programs should be changing ownership in large numbers of avoided. companies, turned to mass privatization Much more contentious will be the through the free distribution of vouch- need to resolve expropriation claims in ers to the public—vouchers that could a manner that does not interfere with be exchanged for shares in state enter- Cuba’s economic reforms. Potential hold- prises. After the voucher scheme seemed ups in the settlement of these claims can to work in Czechoslovakia and Russia, derail Cuba’s efforts to revive its econo- voucher privatization was enthusiastically my, since private investors are unlikely to embraced by both reformers and external put money into entities that have unclear advisors, and by the mid-1990s it was titles, outstanding claims or other liens on the privatization method of choice in 17 their assets. In Eastern Europe, restitu- East European and former Soviet nations. tion claims tended to place heavy burdens Proponents of mass privatization hoped on weak judicial systems and often held that the profit incentives unleashed would up enterprise reforms where enterprise soon revive faltering, centrally planned facilities were located on land subject to economies. That revival didn’t happen. restitution claims. Privatizing national- Instead, groups of insiders, specu- ized companies by restoring ownership to lators and fly-by-night investors man- pre-Castro owners would involve similar aged to grab most of the shares in these problems on a far grander scale. firms, usually by exploiting the fact that Moreover, these claims will remain a capital markets were unregulated in most roadblock to the normalization of U.S.- countries and that most voucher-holding Cuba relations unless they are effectively citizens were unprepared to be share- and quickly resolved. As of 2002, there holders. So, investment funds began of- were approximately 6,000 claims by U.S. fering “deals” to convince citizens to sell nationals totaling $6.8 billion (about 25 their vouchers for cash, and by the mid- percent of Cuba’s gdp). A number of al- 1990s, had acquired controlling interests ternatives to direct restitution have been in most voucher-privatized companies. proposed, and a joint acceptance of any of Lacking oversight and regulation, many these increases the likelihood of an em- of these investors (along with enterprise bargo lift: A negotiated lump-sum pay- managers) enriched themselves by divert- ment from Cuba to the United States on ing cash flows and assets, while leaving behalf of U.S.-based claimants may hold worthless, debt-ridden shells for other the most promise. shareholders. A reforming Cuban government, of A voucher program in Cuba would, course, would find it impossible to pay very likely, suffer a similar fate, creating out anything close to the total owed. But a coterie of well-connected investors able if similar settlements between the United to grow rich(er) quickly by exploiting States and East European nations are

Rocky Shoals of Reform  taken as precedent, the resulting agree- with Cuba, many Serbian firms were ac- ment would be less than 100 percent of tually structured as workers’ cooperatives the net present value and would not in- rather than “state enterprises.” clude interest, making some repayments Restructuring in Serbia did not mean possible. that loss-making companies were bailed out, but rather that the company would ut could a post-Castro “gear up” for privatization by separating government make reform its good from its bad parts, selling the B work? Loss-making compa- former and liquidating the latter. The nies, even after they have been privatized, Serbian government put together a list have several ways of avoiding financial of firms, all of which were loss-making, discipline. They obtain cheap loans from but that were thought to contain salvage- state-owned banks. They stop paying able assets. A typical firm then underwent taxes. Or they stop paying bills to sup- “segmentation.” This process divided pliers—especially utility and power com- core and non-core assets and likely vi- panies. These suppliers, in turn, have able units from those more apt to falter. their own reasons to avoid their own bills, It provided for the incorporation of new and sometimes even stop wage payments. companies from salvaged parts of the old These never-ending chains of debt can and the sale of the rest through competi- be broken if these entities lose their open tive auction. Although it may make little access to public finances. In technical sense to restructure companies that are language, the first step in reviving the bound to fail, since governments will al- private sector is to “harden budget con- most always try to resuscitate those that straints.” This means eliminating the flow cannot be sold, better then, to make their of public funds to persistently loss-mak- liquidation politically palatable. ing enterprises, cutting off banking cred- Obviously, governments are also ex- its and creating a level financial playing tremely reluctant to bankrupt compa- field with regard to taxes, customs duties, nies that are un-sellable. Rather, they environmental regulations, licenses, per- let ill-equipped courts deal with these mits and fines. matters, often clogging up the judicial By far the trickiest part of private-sec- system and preventing other, newer com- tor reform in socialist economies involves panies from scooping up the usable land transforming state enterprises from (usu- and equipment. East European countries ally) inefficient and unproductive entities that managed bankruptcy well (Poland, into engines of a new economy. Many of Slovenia, Lithuania) resisted the tempta- the lessons from the East European tran- tion to rely too heavily on the courts, sitions in the 1990s were effectively ap- instead establishing special agencies or plied to the last country in the region to governmental units that could initiate undergo significant reforms: Yugoslavia— bankruptcy proceedings against compa- Serbia and Montenegro, in particular. As nies that continued to receive subsidies, with other East European nations, pri- but had not undergone restructuring by a vate-sector reform proved to be conten- certain deadline. tious, riven by factionalism and politically Finally, one of the mistakes made charged. The Serbian economy also faced in East European reforming economies the risks of asset degradation, theft and was that, following privatization, many corruption that were found elsewhere. reformers assumed that capital markets Yet privatization in Serbia was remarkably would take care of themselves. Consider smooth and has not led to large increases the contrast between the Czech Repub- in unemployment or industrial unrest. As lic and Poland. Czech Prime Minister

10 The National Interest––Sep./Oct. 2007 Vaclav Klaus refused to establish a regu- line against any changes in the common latory body for the securities exchange, stance towards Cuba, effectively freezing fearing it would bring capital markets to the eu’s Cuba policy. a standstill. In 1997, following a series There are, of course, some possible of corporate scandals, he finally relented events that might push Cuba to embrace and established a securities regulator. In rapid reforms—a precipitous fall in com- Poland, on the other hand, rules for a modity prices, or a renewed fiscal crisis securities commission were put in place that forces the government to reduce during privatization. As a result, Poland food subsidies, or the collapse of criti- avoided the asset theft and expropriation cal economic sectors. These events are that was common in the Czech case. unlikely, and whether they would unleash large-scale protests is uncertain. Closer ll of this may end up being ties with Venezuela and China have kept speculation. There are few Cuba’s economy growing and its fiscal A signs that Cuba will seek les- and current account deficits small. sons from Eastern Europe, rather than But Cuba will find that following its Chinese, economic history anytime soon. Chinese (or Venezuelan) benefactor will China’s post-Mao accomplishments in not lead very far. The gradualist reforms reforming its economy under single-party pursued by China are simply ill-suited for rule continue to impress and influence an island nation of eleven million inhabit- the current Cuban leadership. Fidel him- ants with a relatively small agricultural self has called China “the most promising sector, located a half-hour’s flight from hope and best example for all the coun- the world’s largest economy. Without tries of the Third World.”4 Meanwhile, rapidly reforming its inefficient state en- as Sino-Cuban economic and political terprises, Cuba will face the prospect of relationships have expanded, Russia’s ties becoming trapped in a low-wage, low- with its former ally have foundered over productivity cycle. While little is likely issues such as the resolution of Cuba’s to change under Raúl Castro, sooner or Soviet-era debt and the closure of Rus- later Cuba will have to look away from sia’s famous listening post in Cuba, the the Chinese model and embrace some of Lourdes signals-intelligence facility. Cu- the lessons from East European reform- ba’s ties with Eastern Europe have fared ers. n worse. Former leaders Vaclav Havel, Arpad Göncz and Lech Walesa have been Raj M. Desai is an associate professor of interna- at the forefront of an international move- tional development at the School of Foreign ment to support Cuban dissidents. More- Service at Georgetown University, and a visit- over, the new East European members ing fellow at the Wolfensohn Center for De- of the enlarged eu have taken a hard velopment at the Brookings Institution. Itzhak Goldberg is an advisor for policy and strategy 4Quoted in William T. Ratliff, “Raul, China, and in the Private and Financial Sector Unit for Post-Fidel Cuba”, Latin Business Chronicle, Europe and Central Asia at the World Bank. August 28, 2006. Views expressed are entirely the authors’ own.

Rocky Shoals of Reform 11