Cuba Under Raul Castro: Economic Reform as Priority?

Raul Castro's first presidential term was marked by economic reform and political liberalization. Over the last five years, the government created important institutional foundations for a mixed economy and a less vertical relationship between the state and civil society. Beginning in 2009, a commission to discuss and implement the reforms was created, and through its own initiative, the Council of State instituted an anti-corruption general agency, while restructuring various ministries, in particular, the Super Ministry for Basic Industry in charge of Energy and Mining, and the Sugar Industry. The institutional changes have been accompanied by fiscal, credit and migration reform, a law for cooperatives, as well as the legalization of various markets for consumer goods (real estate, used cars, fast food and restaurants) and services (transportation) directly impacting Cubans' daily lives.

The presidential succession from Fidel to Raul Castro has been complemented by an almost completely renovated Council of Ministers and an inter-generational transition in the military command at the level of regional armies and in the party and government at intermediate levels.

The Economy as Priority

The strategic nature of the economic transition is expressed in the changes in the composition of the labor force. In less than three years between 2010 and 2013, the number of individuals working in small businesses practically tripled, from around 160,000 to 390,000. The liberalization of the licensing process and the amplifying of the production scale on which these businesses operate are significant. Likewise, contracts between state and non-state sectors have been liberalized, opening the possibility for improved productive and administrative synergies between the two, as well as the creation of wholesale markets and credit mechanisms to support the emerging private sector.

By the end of 2012, the law of cooperatives was approved, indicating a move away from government control over significant areas of agricultural production, services, small industries and transportation. The legislation included mechanisms to create as well as dissolve such entities, offering a legal framework for their operation within market logic. The law allows for the creation of second degree or cluster cooperatives, a legal mechanism that facilitates amplification of production, the coordination of activities and the establishment of stable relationships between various cooperatives.

This shift away from state control is very far removed from an optimal process in economic terms. Instead of maximizing government revenue by selling or renting the assets (taxi cars, restaurants, cafeterias) to the highest bidder, the government has chosen a second best, less disruptive, option: offering the property in usufruct to the same workers who have so far been mismanaging it, with the hope that under the new conditions they will do better. It remains to be seen how emerging institutions will commit to competition and market selection of best practices and administrators, and whether hard budget constraints will be applied in order to allow those who are inefficient under the new conditions to fail.

The cooperatives law expressed a compromise between a desire to improve productivity and a political framework biased towards collectivist forms. Property rights in cooperatives are less defined than in small or medium private business. That situation makes an efficient system of contracts and rule of law more relevant than ever, an area in which Cuba is not exactly the epitome of virtue. The experience since the 1990s with the Units of Basic Cooperative Production (UBCP) illustrates that, in the absence of a market framework and the proper legal autonomy, the record for a cooperative is not substantially different than that for a State enterprise, unlike that of the private businesses.

The new flexibility of contracts between state-owned companies and the non-state sector favor the expansion of areas (such as transportation) in which private or cooperative ownership has expanded in the last three years. This expansion has already created competitive dynamics allowing good State managers to take advantage of the new conditions, and differentiate themselves from those lacking such adaptive capacities, especially at the local level. The government's discipline regarding the granting of subsidies and non-competitive contracts, controlling corruption, and promoting transparency may contribute to the creation of a labor market for administrators, in which those who are able to manage better receive better salaries.

Unfortunately Cuba lacks legal and administrative experience in the preparation and implementation of efficient contracts and this is more difficult to achieve in the short term than simply allowing the expansion of private property. As modern economic theory has shown, in contrast to that what neoliberal ideologues postulate, a better definition of property rights is associated with production increases at the level of small- and medium-sized business. However when corporate structure is more complex, the incomplete nature of contracts between a principal (shareholders, cooperative owners, the government) and its agent (managers) and an environment committed to competition become more fundamental factors.

Two notable failures of the reform so far are the lack of a substantial revival of agricultural production, including in the sugarcane industry, and the weak impulse toward export-oriented foreign investment. Even in East Asian countries, with far larger markets than that of Cuba, state promotion of foreign investment was oriented toward the promotion of exports, where competition performs with greater rigor. In the Cuban case, as University of Havana economist Juan Triana has pointed out, the very meager growth is affected by the perverse incentive that many of the foreign enterprises have, even in the midst of full reform, to increase their projections toward the captive national market. In this context, contracts with state enterprises and monopolistic chains of stores, foreign and local corporations extract the maximum rent from a basically unprotected Cuban consumer.