Cuba’s Economic Change in Comparative Perspective EDITED BY: RICHARD E. FEINBERG AND TED PICCONE NOVEMBER 2014 Latin America Initiative Foreign Policy at BROOKINGS Preface Since Raúl Castro assumed the presidency in 2008, Looking forward, many challenges remain to shap- Cuba has been engaged in a process of updating ing comprehensive and coherent economic strate- its economic model aimed at modernizing state- gies that encourage sustainable economic growth, owned enterprises and institutions and opening facilitate Cuba’s international economic integration, up more space for the non-state sector. The highest and contribute to the efficiency and competitive- authorities are involved in a government-wide ef- ness of Cuba’s economy while simultaneously safe- fort to implement this economic policy agenda. The guarding the revolution’s gains in social inclusion Economic and Social Policy Guidelines (known as and equity. To confront these challenges, it is useful the Lineamientos) passed by the Sixth Congress to look to other international examples of economic of the Communist Party of Cuba in 2011 set forth restructuring to identify best practices for inspira- steps to put Cuba on a new growth path, including tion and possible application in the Cuban case. identifying the need to unify the currency, among other necessary changes. In support of this effort, scholars at the Brookings Institution’s Latin American Initiative and econo- Some important progress has already been made. mists at the University of Havana’s Center for the The emergence of small-scale business is visible Study of the Cuban Economy (CEEC) and Center throughout the island, demonstrating the entrepre- for Research on the International Economy (CIEI) neurial instincts and talents of the Cuban people. embarked on a joint research project to examine Most Cubans are now free to travel abroad and use Cuba’s economic reforms from a comparative per- of mobile telephones and the internet are slowly ex- spective. The project delved into three specific areas panding. To improve its international creditworthi- of study: economic growth with equity, monetary ness, Cuba has successfully renegotiated some of its policy, and institutional change. The comparative outstanding bilateral debts. Furthermore, in 2013- perspectives focused mainly on the Latin American 2014, the Cuban government announced a series of and Caribbean region while also incorporating rel- structural reforms which, if implemented, could be evant experiences from other regions like Eastern major steps forward. Deep reform of the system of Europe and Asia. The papers on these topics were state enterprises, begun as a pilot project, has been presented by the authors at three workshops held generalized, promising more autonomy for firms to over the course of a year: Washington, DC (May retain earnings and make decisions regarding invest- 2013), Havana, Cuba (September 2013) and Chica- ments, employment and prices. The government has go, Illinois (May 2014). They were subsequently re- authorized the formation of non-state cooperatives vised following discussions at the three workshops outside of the agricultural sector. Recognizing the among convened experts, including colleagues need for foreign capital and technology, in spring from four international financial institutions acting 2014 the government announced with considerable in their individual capacities. An executive summa- fanfare a new foreign investment law; it remains to ry, along with the final products and their recom- be seen if it will yield important new projects. The mendations, are collected in this edited volume. difficult tasks of monetary reform and currency re- unification are also on the official agenda. Each paper is the sole responsibility of its author(s). Cuba’s Economic Change in Comparative Perspective i WORKING GROUP MEMBERS INVITED EXPERTS Omar Everleny Pérez Villanueva (Center for Humberto Blanco Rosales (Center for the Study the Study of the Cuban Economy – University of of the Cuban Economy – University of Havana) Havana) Augusto de la Torre (World Bank) Richard Feinberg (University of California, San Diego and Brookings) Raj Desai (Brookings) Carmelo Mesa-Lago (University of Pittsburgh) Saira Pons Pérez (Center for the Study of the Cuban Economy – University of Havana) Richard Newfarmer (International Growth Centre) Andrew Powell (Inter-American Development Bank) Guillermo Perry (Universidad de los Andes) Germán Ríos (CAF Development Bank of Latin Ted Piccone (Brookings) America) Antonio F. Romero (Center for Research on the Rafael Romeu (International Monetary Fund) International Economy – University of Havana) Jose Juan Ruíz (Inter-American Development Alberto Trejos (Instituto Centroamericano de Bank) Administración de Empresas) Alejandro Santos (International Monetary Fund) Juan Triana Cordoví (Center for the Study of the Cuban Economy – University of Havana) Harold Trinkunas (Brookings) Ricardo Torres Pérez (Center for the Study of the Cuban Economy – University of Havana) Pavel Vidal Alejandro (Pontificia Universidad Javeriana de Cali) Cuba’s Economic Change in Comparative Perspective ii Acknowledgements The editors are deeply grateful to Ashley Miller for Support for this publication was generously provid- her dedication, professionalism and skill in manag- ed by donors to the Foreign Policy program’s Lat- ing all aspects of what is inevitably a complex un- in America Initiative at Brookings. The workshop dertaking. We would also like to pay special thanks series was made possible by donors including the to Caitlyn Davis, Carmen Muñoz and Kevin Tuta- Government of Norway. sig for their assistance with translations, production and logistics. The Brookings Institution is a private non-profit organization. Its mission is to conduct high quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public. The Brookings Institution does not take positions on any policy issues. The conclusions and recommendations of any Brookings research are solely those of its author(s), and do not reflect the views of the Institution, its management, its other scholars, or donors. Cuba’s Economic Change in Comparative Perspective iii Table of Contents Introduction and Overview . 1 Richard Feinberg Policies for Economic Growth: Cuba’s New Era . 11 Juan Triana Cordovi and Ricardo Torres Pérez Economic Transformations and Institutional Changes in Cuba . 29 Antonio F. Romero Gómez Institutional Changes of Cuba’s Economic-Social Reforms: State and Market Roles, Progress, Hurdles, Comparisons, Monitoring and Effects . 48 Carmelo Mesa-Lago Economic Growth and Restructuring through Trade and FDI: Costa Rican Experiences of Interest to Cuba . 69 Alberto Trejos Monetary Reform in Cuba Leading up to 2016: Between Gradualism and the “Big Bang” . 85 Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva Exchange Rate Unification: The Cuban Case . 103 Augusto de la Torre and Alain Ize Cuba’s Economic Change in Comparative Perspective Working Group Member Biographies . 117 Cuba’s Economic Change in Comparative Perspective iv Introduction and Overview Richard E. Feinberg he Cuban economy has been mired in stag- the gains of the revolution, notably in human capi- nation for over two decades. Living standards tal formation, better exploit its valuable natural re- Thave declined, the revolution’s historic gains in sources in a sustainable manner, and take advantage universal health and education and in social equal- of its strong and diverse diplomatic relations. Cuba ity are eroding, the outdated productive apparatus may also be able to exploit its geographic location is suffering from de-capitalization and technolog- at the crossroads of the Caribbean—if the United ical obsolescence, and the nation’s balance of pay- States finally relaxes its onerous economic and fi- ments is under severe strain. Frustrated by the lack nancial sanctions. of promising opportunities, too many of the best educated youth are exiting the island. In response The authors welcome the growing list of policy to these accumulated challenges, the Cuban gov- initiatives that expand space for private initiative ernment has initiated a process of gradual but in- and market signals, even as they underscore that creasingly comprehensive economic reforms that the emergent private sector labors under many re- eventually may resemble a form of mixed market strictions and state ownership and central planning socialism open to the international economy. maintain their dominance. The first paper by Cu- ban economists Juan Triana Cordoví and Ricardo The six papers in this volume explore the roots of the Torres Pérez focuses on the need to rebalance prior- crisis in the Soviet-style central planning adopted de- ities and to give greater emphasis to efficiency and cades earlier, assess the initial reform measures under- growth as a sine qua non for sustaining social goals. taken since Raúl Castro assumed the presidency in A new development model, in their view, should al- 2008, analyze the many obstacles to be overcome, and low much more space to market mechanisms and suggest some ways forward. Among the many policy openness to global commerce and investment, but recommendations, the Cuban government should a smart state would still perform a great many stra- recognize the inter-related nature of economic vari- tegic functions in the economy. ables—too often isolated reforms introduce further distortions and fail to produce