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State Capitalism in Cuba: the Lessons of the Literature on State Owned Enterprises and Market Liberalization D Florida Journal of International Law Volume 29 | Issue 1 Article 14 2017 State Capitalism in Cuba: The Lessons of the Literature on State Owned Enterprises and Market Liberalization D. Daniel Sokol University of Florida Levin College of Law Follow this and additional works at: http://scholarship.law.ufl.edu/fjil Recommended Citation Sokol, D. Daniel (2017) "State Capitalism in Cuba: The Lessons of the Literature on State Owned Enterprises and Market Liberalization," Florida Journal of International Law: Vol. 29 : Iss. 1 , Article 14. Available at: http://scholarship.law.ufl.edu/fjil/vol29/iss1/14 This Article is brought to you for free and open access by UF Law Scholarship Repository. It has been accepted for inclusion in Florida Journal of International Law by an authorized editor of UF Law Scholarship Repository. For more information, please contact [email protected], [email protected]. Sokol: State Capitalism in Cuba STATE CAPITALISM IN CUBA: THE LESSONS OF THE LITERATURE ON STATE OWNED ENTERPRISES AND MARKET LIBERALIZATION D. Daniel Sokol* I. SOES, INCENTIVES AND PERFORMANCE ..................................... 215 II. SOLUTIONS .................................................................................. 218 A. Privatization .......................................................................... 218 B. Corporatization ..................................................................... 220 C. Performance Contracts ......................................................... 221 D. Introduce Competition Policy ............................................... 221 III. CONCLUSION ............................................................................... 222 The basic theory of market liberalization is a simple one1—create proper incentives based on property rights,2 contractual enforcement,3 competition,4 well-functioning financial markets,5 effective corporate * Professor of Law and University of Florida Research Foundation Professor, University of Florida Levin College of Law. 1. See generally John Williamson, Overview: An Agenda for Restarting Growth and Reform, in AFTER THE WASHINGTON CONSENSUS: RESTARTING GROWTH AND REFORM IN LATIN AMERICA (Pedro-Pablo Kuczynski & John Williamson eds., 2003). 2. See generally HERNANDO DE SOTO, THE OTHER PATH: THE INVISIBLE REVOLUTION IN THE THIRD WORLD (1989). See also Gillian K. Hadfield, The Many Legal Institutions that Support Contractual Commitments, in HANDBOOK OF NEW INSTITUTIONAL ECONOMICS 175, 17576 (Claude Menard & Mary M. Shirley eds., 2005) (surveying the literature); DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE 54 (1990) (“[T]he inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the Third World.”). 3. See generally Michael Trebilcock & Jing Leng, Essay, The Role of Formal Contract Law and Enforcement in Economic Development, 92 VA. L. REV. 1517 (2006). 4. See generally Simeon Djankov et al., The Regulation of Entry, 117 Q.J. ECON. 1 (2002); D. Daniel Sokol, Limiting Anticompetitive Government Interventions that Benefit Special Interests, 17 GEO. MASON L. REV. 119 (2009); Cécile Aubert & Jean-Jacques Laffont, Multiregulation in Developing Countries 44 (World Dev. Report Paper, Dec. 2000). 5. See generally Rafael La Porta et al., What Works in Securities Laws?, 61 J. FIN. 1 (2006). 211 Published by UF Law Scholarship Repository, 2017 1 Florida Journal of International Law, Vol. 29 [2017], Iss. 1, Art. 14 212 FLORIDA JOURNAL OF INTERNATIONAL LAW [Vol. 29 governance,6 investor protection,7 trade openness,8 and rule of law/legal institutions.9 These ingredients plus the effective organization of the institutions of government and the markets10 lead to economic growth. Yet, creating such change is not easy nor does it occur without economic and social disruption and without pushback from entrenched interests. Thus, the promise of market liberalization has not always delivered. In this context of liberalization and privatization, Cuba is charting a path that many countries have already transitioned to over the past 25 years. However, Cuba has a potential late-mover advantage as it transitions to a market economy. In addition to a rich theoretical literature in economics on how best to establish market mechanisms, there is also significant empirical literature describing both what worked and what are the shortcomings in the implementation of market liberalization and privatization of state owned enterprises (SOEs).11 This literature also speaks specifically to the Latin American experience.12 Overall, Latin America, with a history of statist intervention extending into the 1990s (and in some cases due to popular resurgence, more recently as well), lagged behind US, European, and East Asian development.13 Since the 6. See generally Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998); Andrei Shleifer & Robert Vishny, A Survey of Corporate Governance, 52 J. FIN. 737 (1997). 7. See generally Rafael La Porta et al., Investor Protection and Corporate Valuation, 57 J. FIN. 1147 (2002). 8. See generally Sebastian Edwards, Openness, Productivity and Growth: What Do We Really Know?, 108 ECON. J. 383 (1998); Jeffrey A. Frankel & David Romer, Does Trade Cause Growth?, 89 AM. CON. REV. 379 (1999). 9. See generally KENNETH DAM, THE LAW-GROWTH NEXUS: THE RULE OF LAW AND ECONOMIC DEVELOPMENT (2006); KATHARINA PISTOR & PHILIP A. WELLONS, THE ROLE OF LAW AND LEGAL INSTITUTIONS IN ASIAN ECONOMIC DEVELOPMENT, 19601995 (1999); DE SOTO, supra note 2, at 186 (“Development is possible only if efficient legal institutions are available to all citizens.”); Kevin E. Davis & Michael B. Kruse, Taking the Measure of Law: The Case of the Doing Business Project, 32 LAW & SOC. INQ. 1095 (2007); Daniel Kaufmann et al., The Worldwide Governance Indicators: Methodology and Analytical Issues, (World Bank Policy Research, Working Paper No. 5430, 2010). 10. See generally OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM: FIRMS, MARKETS, RELATIONAL CONTRACTING (1985); NORTH, supra note 2. 11. William Megginson, Privatization and Finance, 2 ANN. REV. FIN. ECON. 145, 146 (2010) (“Well over 100 empirical studies have examined the economic and financial performance of privatized companies or industries, either on a case-by-case basis or using multinational or multicompany datasets.”). 12. Aldo Musacchio et al., State-Owned Enterprise Reform in Latin America, Inter- American Development Bank 13 (Inter-Am. Dev. Bank, Discussion Paper No. IDB-DP-401, 2015). More broadly, the Latin American liberalization and privatization wave did not reduce economic inequality. Miguel Székely, The 1990s in Latin America: Another Decade of Persistent Inequality, but with Somewhat Lower Poverty, 6 J. APPLIED ECON. 317, 317 (2003) (“[T]here is no country in Latin American where inequality declined during the 1990s.”). 13. SEBASTIAN EDWARDS, CRISIS AND REFORM IN LATIN AMERICA: FROM DESPAIR TO HOPE ch. 5 (1995). http://scholarship.law.ufl.edu/fjil/vol29/iss1/14 2 Sokol: State Capitalism in Cuba 2017] STATE CAPITALISM IN CUBA: THE LESSONS OF THE LITERATURE ON STATE OWNED ENTERPRISES 213 1990s, Latin America’s growing pains in introducing liberalization have been significant.14 As such, Cuba can learn from the mistakes made in prior Latin American (and other) market liberalizations to create a more effective strategy to bring economic prosperity to its people. The reason why SOEs and liberalization matter so much for Cuba is that Cuba lacks capital to improve its infrastructure, modernize its existing SOEs, and invest in growth. Liberalization can help transform Cuba and promote the well-being of its citizens. Part of this liberalization will occur by reforming Cuba’s SOEs (including privatization). Changes to SOE structure to liberalize SOEs can have profound changes on the Cuban economy. If a country improved the efficiency of SOEs by a mere 5%, the World Bank estimates that in that country, this efficiency gain could free up approximately 15% of a country’s GDP.15 Greater privatization and market liberalization, if managed properly with an effective competition policy framework, can create dynamic growth that can help navigate Cuba out of a potential middle income trap (once the initial growth/catch up phase has subsided).16 Part of the complexity of Cuban economic liberalization is that both the future and pace of its transition are unclear. Though Cuba has slowly begun liberalization, whether the current pace of gradual change and the desire to maintain that change within a socialist system will continue remains unknown. Cuba has gone through phases of liberalization, including most importantly the Lineamientos de la política económica y social del 14. See generally D. Daniel Sokol, The Second Wave of Latin American Competition Law and Policy, in COMPETITION LAW IN LATIN AMERICA: A PRACTICAL GUIDE (Julián Peña & Marcelo Calliari eds., 2016) [hereinafter Sokol, Second Wave]; ELEANOR M. FOX & D. DANIEL SOKOL, COMPETITION LAW AND POLICY IN LATIN AMERICA (2009). 15. Maria Vagliasindi, Governance Arrangements for State Owned Enterprises, 2 (World Bank Pol’y Res., Working Paper No. 4542, 2008). 16. John Davies & Ania Thiemann, Competition Law and Policy: Drivers of Economic Growth and Development, OECD COHERENCE FOR DEV., Jan. 2015, at 1, available at https:// www.oecd.org/development/002014381_CfD_E-book_FINAL%20VERSION%20FOR%20WE B.pdf [https://perma.cc/K85M-PHNG].
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