Steven J. Green School of International & Public Affairs - Cuba's Future Economic Policies (21464)

VÁCLAV HAVEL PROGRAM FOR HUMAN RIGHTS & DIPLOMACY

CUBA’S FUTURE ECONOMIC POLICIES UNDER A REPRESENTATIVE DEMOCRACY Jose Antonio Villamil The Washington Economics Group, Inc.

Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

About the Author Jose Antonio (Tony) Villamil is a nationally recognized economist, with a successful career spanning more than three decades as a business economist, university educator, and high-level policy maker for both federal and state governments. He is a past chair of the Governor’s Council of Economic Advisors of Florida, and in 1999 he was appointed

by Governor Jeb Bush to be his first Director for Tourism, Trade and Economic Development. Later, Tony served as the U.S. Undersecretary of Commerce for Economic Affairs under President George H. W. Bush.

More recently, he was dean of the School of Business of St. Thomas University in Miami. Dr. Villamil is the founder and senior adviser of The Washington Economics Group, Inc. (WEG), an economic consulting firm that has been providing customized research and adviser services for corporations since 1993. The firm specializes in the emerging markets of Latin America, the Caribbean, and the state of Florida, as well as in U.S. trade policies. Recent WEG clients with interests regarding Cuba include travel and hospitality companies and educational service providers.

Dr. Villamil also provides commentary on Cuban economic issues in the local and international media. His articles and research on Cuba have been published by the Miami Herald; Studies in Comparative International Development; the Atlantic Council of the United States, Latin America, and Caribbean Center, Florida International University; and the University of Miami, Center for Hemispheric Policy (formerly North-South Center).

Dr. Villamil earned his bachelor’s and master’s degrees in economics from Louisiana State University (LSU), where he also completed coursework for a doctoral degree. In 1991, Florida International University (FIU) awarded him a Doctoral Degree in Economics (Honoris Causa), for “distinguished contributions to the nation in the field of economics.” He frequently speaks to business, government, and university audiences on the Florida economy, U.S. trade policy, and economic development issues.

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Cuba’s Future Economic Policies Under a Representative Democracy

LETTER FROM THE DIRECTOR As the director of the Václav Havel Program for Human Rights and Diplomacy, I am pleased to present Cuba’s Future Economic Policies Under a Representative Democracy authored by Jose Antonio Villamil, Chief Executive Officer of The Washington Economics Group, Inc. His analysis offered here to the readers is another part of our Cuba Initiative — a joint project of the Václav Havel Program and Inspire America Foundation, a Miami-based charitable and educational NGO, operating in the “hot” environment of the Cuban American community in Florida that set for itself a challenging goal in its mission statement: “inspiring freedom and democracy in Cuba and the Americas.”

already stored under its “roof” — cooperating for years with a number of entities and initiatives, domestic and international, engaged in one way or another in the “Cuban question.”

First, a quick explanation of the basic aim of this project.

The Cuba Initiative is a project dedicated to the research, exploration, and dissemination of alternatives for Cuba’s future. It aims to engage the United States, the international community, and Cuban democrats in an ongoing dialogue about all the issues of common concern. It speaks directly to the Václav Havel Program for Human Rights and Diplomacy’s goal of creating opportunities for conversation and exchange about democratic transitions, utilizing in the first place the transformations of Central European countries —Václav Havel’s home turf— after the fall of communism as its experiential basis, both good and bad, for seeking and promoting viable paths to Cuba’s return to the community of democracies.

What must be taken into consideration at the same time, however, is the larger context in which Cuba is finding itself in the beginning of the third decade of the 21st century.

It is also important to note that, at the moment when the Cuba Initiative of the Václav Havel Program at Florida International University was launched —in the presence of the Minister of Foreign Affairs of the Czech Republic in September of 2019— it was not starting from “zero”. Instead, it has had its solid and historically tested foundations in the Central European experience in resisting communism in the 1970 and the 1980s.

It could depart from the lessons in transition from totalitarianism to democracy enabled by the Velvet Revolution of 1989, from Václav Havel’s “legacy”, from its rich history of engagement in Cuban matters, and also from past Czech diplomatic experience in this area (going back to the moment when I was dealing with the “Cuban question” in my capacity as head of Czech delegation at the annual meetings in Geneva of the UN Commission for Human Rights between 1999 and 2001).

When planning its activities in the context of this brand-new cooperation, the Václav Havel Program for Human Rights and Diplomacy was adding an important element to what was

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Here is the principal question The Cuba Initiative is focused on, as a partner in dialogue with Inspire America Foundation, as it was raised by its founder Marcell Felipe: “If and when there is a regime change in Cuba and there is a consensus for transition to democracy, what are the steps to be taken in that particular moment?”

It is clear that the answer to this fundamental question must first depart from the uniqueness of the Cuban case, from the specificity of the Cuban historical experience. What belongs to our starting point is also the clear awareness that we, who are not Cubans, should refrain from intervening into the domestic Cuban matters and adopt a position of “spectateurs engagées“ (engaged observers) instead.

What can and should be used as a source of inspiration are the transitions from autocratic forms of government to democracy that took place in the other parts of the world in the past: in Spain and Portugal in the 1970s, in our East Central Europe in the miraculous year of 1989, and, of course, in Chile in the end of same year, after general Augusto Pinochet was replaced in the presidential palace in Santiago de Chile, as the result of democratic elections, by Christian Democrat Patricio Aylwin.

There are four areas that have been identified as key components of our cooperation with Inspire America Foundation: law, economics, diplomacy and “the presence of the past”, i.e. the “Cuban Question” in its larger historical context.

So here I present the second results of our debate on Cuban economy that started at a seminar titled Cuban Economy. The Current Situation and Way Forward, which the Václav Havel Program for Human Rights and Diplomacy at FIU organized in February of 2020, in cooperation with the Center for Global Economic Governance at Columbia University in New York.

So, enjoy the reading.

Your respectfully Martin Palouš Director, Václav Havel Program for Human Rights and Diplomacy, Steven J. Green School of International & Public Affairs Florida International University

Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

Abstract This study presents recommended policies to develop a market-based economic system in Cuba under a representative government.

The policies are divided into several phases and components that will guide a future democratic government in setting the foundation for a market-based economy. Among the key components are the following: •

Transition policies to develop a market economy

•

Development of institutions to support a market system

•

Policies to support the growth of an entrepreneurial class

•

Sound economic policies to increase economic momentum over time

•

Steady increase in standard of living through a market economy

The study contains economic projections under the following scenarios:

SCENARIO #1

SCENARIO #2

a) Slow transition

a) Faster transition by implementing “shock treatment”

b) Less-than-potential economic growth

b) Adjustment period with increased economic momentum

c) Strong growth achieved at a later stage than Scenario #2

c) Strong growth with an increase in the standard of living

Factors to consider during the transition period: •

State of the Cuban economy at the start of the transition

•

Sale of state enterprises using best practices

•

Policies to transition to a market-based economy

•

The “take-off” stage to strong and sustainable growth

This policy study includes a summary of factors leading to successful transitions in Former Soviet Union countries, with lessons learned from the Czech Republic and Poland in particular.

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Cuba’s Future Economic Policies Under a Representative Democracy

1. THE ECONOMIC SYSTEM OF CUBA: OVERVIEW Cuba’s economic system can best be described as a “command-and-control” economy, in which the Marxist government fully controls the allocation of scarce resources.

This total control is based on Marxist ideology, which has guided the economy since Fidel Castro’s takeover of power in January 1959. Scarce economic resources are allocated by government fiat to state enterprises that fully dominate the supply chain of production, distribution, and final consumption.

Any attempts at reforms have been constrained by the prevalent Marxist ideology.

1. Czech Republic’s Transition to a Market-Based Economy

After the fall of the Soviet Union in 1989, the Cuban Marxist regime lost most subsidies and financial support. Therefore, it was forced to allow individuals to engage in a very limited number of service occupations called Cuenta Propistas; in essence, providing licenses for small businesses, such as small restaurants (paladares), auto repair, and shoe-shine stands.

This was not a nascent private sector, because the means of production are only allocated by the government to the Cuenta Propistas on a very limited basis, with the state still owning all the resources. Under the current Cuban constitution, only the state is allowed to have full ownership of land, labor, and capital to provide goods and services. Thus, the Cuenta Propistas are only permitted to function by obtaining licenses that permit them to use the means of production, not to own them. This fact precludes them from obtaining commercial financing for expansion.

The former Czechoslovakia’s transition to a market-based economy began in 1990. The initial period was characterized by rapid changes to the following economic conditions that were inherited from the Soviet era:

Since 1959 when Fidel Castro assumed total power, changes in Cuba’s command-and-control economy have only occurred around the margins, while preserving the state as the owner and final decision maker on all resource allocations (see Figure 1). Thus, no significant structural changes will occur unless implemented by the Diaz-Canel administration, which is currently in power. This is highly unlikely given the pervasive Marxist ideology of the regime and the strong backing of the armed forces.

Transition to Representative Democracy and a Market-Driven Economy A transition to a representative government and marketbased economy would first require a steady liberalization of political and economic actors. This liberalization, in turn, would only be possible if the regime would allow individuals to exercise economic and political freedoms, including freedom of assembly and speech, and the ability to own and dispose of the means of production, make investment decisions, and profit from other economic actions, as guaranteed by a new constitution.

6

Successful examples of such fundamental economic changes and democratic transition regimes have occurred in Eastern European countries after the fall of the Former Soviet Union; these can provide useful lessons for Cuba. The Czech Republic and Poland offer successful transitions that could serve as models:

•

Private-sector ownership of the means of production was nonexistent under a command-and-control economy.

•

Prices were centrally controlled; that is, this key market signal to allocate resources was absent.

•

State enterprises operated within the rigid limits of a centralized planning system.

•

The critical export and overall trade sectors were under state control, with the sole objective of generating hard currencies, which the regime required.

•

The environment, infrastructure, and stock of capital were neglected and obsolete.

Under these conditions, the new democratic regime opted for a rapid transition after implementing a new constitution—in essence, “shocking the system” by implementing the liberalization of economic policies and activity as fast as possible. The following principal economic liberalization policies were enacted: •

The lawful ability by the private sector to own and dispose of the means of production

•

Restrictive fiscal and monetary policies to reintroduce macroeconomic equilibrium

•

Liberalization of most prices to allow resource allocation through market signals

•

Provision of a viable social safety net, with significant foreign support through grants and soft loans

•

After achieving macroeconomic stabilization, the freeing up of international trade and the introduction of partial currency convertibility

Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

Figure 1. Cuba’s command-andcontrol economy.

STATE

Communist Party

State Enterprises

Land

Small Cuenta Propista Sector

Labor

Production of Goods and Services

Domestic Allocation for Consumption

•

The first priority was to cut subsidies and investment spending by obsolete and inefficient state enterprises. The new government embarked on an inventory of assets and a privatization drive to dissolve some of the enterprises or turn them into solvent profit-making entities, using private capital and management expertise.

•

Government funds were prioritized toward investment in infrastructure to enable the efficient delivery of goods and services by the private sector.

•

Macroeconomic stability policies were a key feature at this early stage, with an emphasis on tight monetary policy.

Monetary authorities also imposed tight controls on net domestic credit to combat high inflation.

•

The overvalued exchange rate was depreciated to align relative prices for tradeable goods between the country and top trade and investment partners.

•

Prices were liberalized to improve market signals for private investment. This initially led to a sharp rise in prices, which were stabilized over time through tight fiscal and monetary policies and an increased supply of goods and services provided by the expanding private sector.

•

After the initial sharp depreciation of the exchange

Small Agricultural Sector

Exports for Generation of Foreign Exchange

2. Poland’s Transition to a Market-Driven Economy Poland provides another useful example of a successful and relatively fast transition to a market-driven economy. It began in 1990 with passage of a new constitution, and during the initial years, the following economic changes were instituted:

Means of Production Owned by the State

Capital

rate, trade activity and the exchange rate were liberalized to allow marketplace signals to determine investments in tradeable goods. This change was concurrent with the signing of trade and investment treaties with top global partners.

•

At the same time as these structural changes were made, the country negotiated for and received significant levels of financial support from large Western European countries, Japan, and the United States. These inflows of capital allowed for increased investments in public welfare goods like housing and health care. The increased investment in social infrastructure led to a rise in popular support for the structural, and initially difficult, economic restructuring.

The economic successes of the Czech and Poland transitions are models for a Cuba in transition, which can be adapted to the unique characteristics of the Island. Cuba also has two advantages that can contribute to the success of an economic transition. One is its proximity to the largest market in the world: the United States. In addition, a democratic transition in Cuba would benefit from support of the Cuban diaspora, who can provide significant financial resources and know-how on the workings of a free-market economy. The large Cuban American community has significant financial capital and political influence in the United States. Roughly two to three million Cubans have left the Island since the start of the revolution.

Leveraging these two unique factors, together with the Eastern European successful transition examples, would provide the Island with a positive pathway toward an efficient and marketdriven economy.

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Cuba’s Future Economic Policies Under a Representative Democracy

2. DEVELOPMENT OF A MARKET-DRIVEN ECONOMY IN CUBA The development of an efficient, market-driven economy critically depends on political change that creates a representative democracy guaranteeing individual economic and political liberty through a new constitution and the rule of law.

Cuba’s political leadership during the transition must establish the basic foundation and popular support for the development of a new economic system by an effective communications strategy that educates the public on the benefits of individual economic freedom.

The new political leadership also needs to attract grants and soft loans from key donors, such as the United States, which can fund investments in social infrastructure such as housing for the low- and lowmiddle-income population, a modern health care system available to all residents, investments in educational excellence, and workforce development targeted to the needs of the marketplace. These investments should be given priority.

transition to an economic system based on individual initiative within a broad framework of economic and political rights. The timing for implementation of this new economic system is critical. Experiences in other countries suggest that a relatively quick transition has a much greater possibility for a successful outcome than a long, drawn-out process. Figure 2 illustrates the key milestones in such a transition.

Free elections are the first step to a successful transition, with support from the other democracies in North, Central, and South America and from other regions of the globe. The new representative government would then move quickly to enact a constitution and bill of rights. It is critical at this stage that a broad framework for economic development, with input from all strata of society, be developed. At a minimum, the framework should contain the following: •

These strategies would prepare the population for the

A long-term vision based on individual freedoms to act in the economic area and reap the rewards accordingly

Figure 2. Key transition milestones.

TIME

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Market Economy

Macroeconomic Stability

Market-Based Prices

Investments in Infrastructure

Privatization Drive

New Constitution and Bill of Rights

Representative Government-Elected

The Sequencing of the Transition Period

Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

•

An assessment of the country’s factor endowments and the optimal strategy to develop them, based and led by private actors with support of the public sector

•

An analysis of the likely trade partners and the products and services that can be offered

•

A financial resource inventory to meet urgent infrastructure requirements, with the names and countries of likely donors

•

A strategy to penetrate major global markets and the likely products and services that can be offered to those markets; this strategy must be developed jointly with private-sector representatives through the creation of a public/private partnership

•

A public/private workforce development partnership based on the new skills to be required to achieve higher productivity and wages

The framework and vision need to be developed with inputs from all representative groups on the Island; town hall meetings need to be held throughout the country. A draft document outlining this vision must be presented for discussion and amendment. Once the document is finalized, working groups must be organized to work with public and private entities for strategy implementation, with benchmarking of results over time.

Concurrent with the privatization of state assets, a broad framework of rules and regulations for private-sector development must be enacted as follows: •

Constitutional changes to fully allow civil liberties, the development of private enterprises, and the right of individuals to own and dispose of the means of production

•

Limited creation of public institutions to broadly oversee a free-market economic system under the rule of law

•

Liberalization of prices and other market signals within the newly created institutional framework

•

Rules and regulations that protect the rights of foreign investors, incentivizing the growth of outside financial capital and foreign direct investment (FDI) to strengthen economic activity, thereby improving employment opportunities.

Privatization Privatization of former state assets is critical to transition success. There are examples of successful privatizations throughout the world that can be used as models, including their best practices of innovative financing methods and private ownership of shares in those assets as shown next.

Pre-Sale Phase a.

Hire investment advisers who are accountable and have no conflicts of interests through a competitive recruitment process

Pricing of Assets a.

Develop a valuation methodology for assets to be privatized

b.

Analyze comparable assets in other countries that underwent privatization and their final results

Organization of Privatization: Process for a Public Offering a.

Prepare a prospectus, with input from the state entity to be privatized and private-sector investment advisers

b.

Hire communication advisers to assist in initial launching of public sale

c.

Prepare road shows on the advantages of privatization to increase popular support

d.

Review purchase offers

e.

Set final prices and announce the winning bids

f.

Close transactions

Investment of Proceeds: Prioritize Infrastructure Improvements

Infrastructure Development The development of infrastructure assets is critical to winning and sustaining popular support for reform measures and to improving the ability of the nascent private sector to efficiently produce goods and services for both domestic and global markets. Figure 3 shows some of the critical infrastructure investments to be prioritized.

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Cuba’s Future Economic Policies Under a Representative Democracy

Figure 3. Priority infrastructure investments.

Airports Ports Road Network

Smart Infrastructures such as Cyber Investment

Building low- to moderate-income housing, with easily obtained financing, will facilitate home ownership and is necessary for getting support for economic changes from the majority of the population. There are many examples of successful public housing ventures and best practices in financing implemented in the United States, Europe, and Japan that the new Cuban government could follow.

Another key initiative in this area would be development of a high-quality and affordable health care system that would reach all segments of the population. Improving roads, airports, and transportation systems is key to creating interconnectivity of markets. Airport warehouses need to be expanded to accommodate increases in cargo; existing ports must be modernized and new ones established to handle growth imports and exports. New “smart” infrastructure for homes and businesses is essential.

All these developments would require, during the transition period, a significant amount of foreign aid support and innovative ways of financing. The United States, together with foundations and nonprofit institutions, are likely to provide soft loans and grants to bridge the financing gap for infrastructure. Furthermore, as the economy recovers from decades of stagnation, new fiscal revenues generated through strong economic growth can be allocated for investments in infrastructure development.

The rapid mobilization of financing for infrastructure investments would create new employment opportunities at higher wages, thus decreasing social tensions and increasing the capacity to supply new goods and services over time.

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Public Housing Investment

Market-Based Prices and Macroeconomic Stability Concurrent with investments in infrastructure, a necessary condition for a market-driven economy is macroeconomic stability. The initial liberalization of prices is likely to cause “hidden inflation” to surface. Monetary and fiscal policy measures are needed to steadily reduce “hidden inflation” until the greater supply of production generated by the market economy is able to meet the increased demand for goods and services.

Macroeconomic stability can also be achieved by reducing significantly the size of government and fiscal spending through state privatization efforts. The resources derived from such privatization then can be invested in public/ private partnership investments that increase the capacity to produce goods and services for the marketplace. In addition, tight monetary policy will absorb excess liquidity from the economy and allow time for the expected greater supply of production to meet the growth in demand.

It is important to recognize that the implementation of macroeconomic stabilization early in the transition period could create social tensions. Managing this period successfully will require a rapid mobilization of public investments in infrastructure using donor funds and innovative financing like public/private partnerships.

Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

3. EXPECTED ECONOMIC OUTCOMES DURING THE TRANSITION AND BEYOND: The Importance of Rapid Implementation to a Market Economy A peaceful change to a representative democracy and the rule of law provides the necessary foundations for the transition toward a high-growth, market-driven economy that increases economic opportunity and the standard of living.

We now present two scenarios that illustrate the importance of a rapid and successful transition as opposed to a slow approach (see Figure 4). They are based on the experiences of the Eastern European countries that implemented market reforms. The scenarios also take into account the unique advantages of Cuba: its proximity to the United States and the large, economically well-off Cuban diaspora. Each scenario has three sequential phases, building on the success of prior ones.

1. Transition Stage toward a Market-Driven Economy Both scenarios assume three-year transition toward increasing development of a market economy and its integration into the global economy. It is also assumed that, during this transition, there will be growing levels of foreign assistance to invest in infrastructure, public housing, and public health, among other sectors.

The inflows of assistance will be made up of grants and soft loans from the United States, Japan, European countries, and others. It also assumes growing levels of multilateral support from the World Bank, Inter-American Development Bank (IDB), United Nations Development Programme (UNDP), and other international financial institutions.

Foreign direct investment (FDI) and other inflows of private capital will come from a variety of sources, but initially from the more than two million Cubans living in the United States and other countries. Simultaneously, multinational companies will begin investing together with private Cuban capital, thereby generating employment and growing levels of household income for the population.

2. Take-Off Stage The second stage of the transition will be the “take-off” stage, based on Walter Rostow’s analysis of economic development. As appropriate economic policies are

implemented and market-driven activities continue, economic growth in this stage becomes stronger and selfsustaining through the reinvestment of profits from an expanding number of private companies, individual wealth gains, higher wages for the population, a growing middleincome class, and the establishment of new industrial sectors based on competitive advantage.

3. Steady-Growth Stage After the initial three-year period and the surge in economic growth predicted in the rapid transition scenario, the economy will expand at a steady pace, based on growth in real capital formation, population, and productivity.

Outcomes of the Two Scenarios Scenario 1 assumes a transitional government for at least three years, with free elections. This approach results in slower but much-needed economic and fiscal reforms as such a government takes on the legitimacy of popular support that freely elected leaders would have. Scenario 2 assumes immediate free elections that bring a new government into power. This scenario enables the new political leadership the legitimacy to implement deep economic reforms and difficult fiscal adjustments and facilitates the attraction of foreign aid and international private capital. Consider these other implications of a faster transition: •

Increased popular support as the standard of living rises faster than under a slow transition

•

Growing levels of foreign direct investment and capital inflows, which improve the balance of payments and exchange rate

•

Election of leaders who will pursue implementation of sound economic reforms

As shown in Figure 4, Scenario 2 projects steady and strong increases in economic activity, per capita income, and population. Thus, the speed, depth, and breadth of transition policies are critical to a successful outcome that improves the standard of living of Cubans (see Figure 5).

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Cuba’s Future Economic Policies Under a Representative Democracy

Figure 4. Rapid versus slow transition outcomes.

Scenario 1 Slow Transition Toward Market Economy Transition Stage

Indicator Real GDP Growth Rate

Take-Off Stage

Steady Stage Strong Growth

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 4

1.0%

1.0%

1.0%

2.0%

2.0%

3.0%

3.0%

3.0%

4.0%

4.0%

Real Per Capital GDP Growth Rate

1.9%

1.9%

1.0%

1.8%

1.8%

2.5%

2.5%

2.3%

3.3%

3.1%

Population Growth

-0.1%

-0.1%

0.0%

0.0%

0.0%

0.1%

0.1%

0.1%

0.1%

0.1%

Scenario 2 Immediate Change with External Support Toward Market Economy Transition Stage

Indicator

Take-Off Stage

Steady Stage Strong Growth

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 4

Real GDP Growth Rate

2.0%

5.0%

7.0%

10.0%

10.0%

8.0%

8.0%

7.0%

7.0%

7.0%

Real Per Capital GDP Growth Rate

2.0%

3.2%

4.3%

7.7%

7.8%

5.8%

5.5%

4.6%

3.8%

3.9%

Population Growth

0.0%

.02%

0.3%

0.2%

0.2%

0.2%

0.3%

0.3%

0.4%

0.4%

Source: United Nations Conference on Trade and Development (UNCTAD)

Figure 5. An increased standard of living is one outcome of a rapid transition.

Standard of Living

Positive Economic Outcomes

Implementation of Quick Economic Reforms

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Election of Pro-Market Leaders

Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

4. DEVELOPMENT OF A MARKET-BASED ECONOMY AFTER A SUCCESSFUL TRANSITION During the transition period, an institutional framework for effective functioning of the market should be created, which together with a growing entrepreneurial class, will shape the contours of a market-based economy. Three key institutions will broadly oversee and support private-led economic development: 1) An independent Central Bank with the following principal functions: a.

Overseeing and creating a broad set of regulations and rules to foster growth of a private-sector financial system

b.

Developing appropriate monetary policies to support non-inflationary economic growth

c.

Representing the nation at key multilateral institutions, other central bank organizations, and at interagency meetings of the government, among other duties, based on best practices

2) A Securities and Exchange Commission to provide oversight over public companies, the development of a securities market, and other transactions of the private sector. The goal is to create a transparent system to avoid fraudulent activities while fostering the growth of private entities.

3) Development, within a Justice Ministry, of a department to broadly oversee the competitive characteristics of proposed mergers and acquisitions by private entities, among other responsibilities. The goal is to discourage illegitimate business transactions and ensure the growth of transparent and competitive markets.

In addition to the creation of the previously presented institutions, the implementation of pro-growth policies is an essential component for a market-based economy to maximize its full potential. Among policies to implement, the following stand out.

Monetary and Fiscal Policies for the Growth of a Market-Based Economy Monetary and fiscal policies play a key role in the development of a market-driven economic system. The monetary history of economically successful countries is full of examples of appropriate policies to maximize private sector-led economic development. Among best practices in developing a pro-growth monetary policy is to establish a range of monetary growth based on price stability and full employment. Price stability is achieved by fostering the potential growth of the economy based on factor productivity and labor force growth. In the case of an open economy like Cuba, the exchange rate changes signal appropriate monetary policies leading to price stability.

The average exchange rate, in addition to playing a key role in price stability, is an important market signal for developing an export-oriented economy in Cuba. The development of a deep foreign exchange market, based on supply and demand fundamentals, is a principal determinant of the success that a market-based, open economy like Cuba should enjoy.

In addition to the important role played by the foreign exchange rate in price stability and export-oriented economic development, the factor endowments of the nation are critical. These are natural resources (“land”), labor, and capital. Technological innovation is another important determinant of factor endowment productivity.

Given the growth of factor endowments under a marketbased economy, with price stability and a foreign exchange rate reflecting economic fundamentals, the operative question is as follows: What types of products and services can a market-driven economy like Cuba export on a competitive basis?

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Cuba’s Future Economic Policies Under a Representative Democracy

Development of a Competitive Export Sector Under the current regime, Cuban exports have stagnated over the past ten years, both in value and product categories. The Marxist regime’s failure on the domestic side of the economy has filtered into its international sector, as shown by statistics from 2001 to 2015 (Figure 6). The data, generated by the Economic Commission for Latin America and the Caribbean (ECLAC), clearly present a dismal picture of Cuban = exports of merchandise. The Island has had to rely on exports of services, such as tourism, to earn muchneeded foreign exchange in hard currencies.

develop a competitive advantage in light manufacturing and knowledge-intensive products and services. For this to happen, trade agreements and bilateral investment accords must be implemented, allowing Island products and services to tap developed markets such as the United States, the European Union, Japan, and others.

A principal role of economic policy is to allow market signals to channel private investment to economic sectors based on the expected return of the investment. For the export sector, this implies allowing the exchange rate to reflect market fundamentals, full currency convertibility, and macroeconomic stability.

A market-based economic system would reverse the poor performance of Cuban exports. Cuban exports of basic commodities and minerals would increase steadily as much-needed FDI is channeled to the international sector by private investors. Furthermore, over time, Cuba could

Figure 6. Cuban exports from 2001–2015.

Cuba Export of Goods, FOB a/ ($ Millions of Cuban Pesos) 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Total Goods Exports

$1,622

$1,422

$1,672

$2,332

$2,159

$2,925

$3,686

$3,664

$2,863

$4,550

$5,870

$5,577

$5,283

$4,857

$3,350

% Change

-3.2%

-12.3%

17.6%

39.5%

-7.4%

35.4%

26.0%

-0.6%

-21.9%

58.9%

29.0%

-5.0%

-5.3%

-8.1%

-31.0%

$80

$97

$64

$88

$71

$63

$82

$74

$46

$60

$66

$66

$71

$80

$66

Of Which: Fresh and frozen fish and shelfish % Change

-8.1%

22.2%

-34.5%

38.1%

-19.3%

-11.7%

31.5%

-10.6%

-38.0%

30.5%

10.5%

-0.3%

7.8%

12.3%

-16.8%

Tinned fruits and vegetables

$50

$22

$44

$64

$33

$23

$28

$25

$27

$23

$25

$19

$12

$3

$5

% Change

-34.6%

-55.7%

100.9%

44.0%

-48.4%

-31.4%

23.5%

-12.3%

10.1%

-16.4%

12.7%

-25.6%

-34.5%

-76.8%

77.6%

Sugar (raw, base 96º polarization)

$549

$442

$282

$268

$150

$216

$194

$223

$216

$257

$361

$456

$432

$381

$417

% Change

23%

-20%

-36%

-5%

-44%

44%

-10%

15%

-3%

19%

41%

26%

-5%

-12%

10%

Rolled tobacco

$193

$123

$196

$202

$210

$237

$226

$225

$202

$193

$215

$218

$232

$217

$203

% Change

37.2%

-36.3%

59.8%

3.3%

3.5%

13.0%

-4.5%

-0.3%

-10.5%

-4.2%

11.4%

1.2%

6.6%

-6.4%

-6.5%

Iron and steel

$40

$40

$34

$36

$44

$43

$57

$77

$44

$71

$94

$83

$72

$65

$39

% Change

-35.7%

0.0%

-12.8%

4.3%

21.9%

-1.4%

31.6%

35.2%

-42.8%

62.2%

31.9%

-11.7%

-13.6%

-9.7%

-40.6%

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of figures provided by the National Statistical Office. a/ Differences in the sources and methods employed could cause a discrepancy between figures for external goods trade and the balance of payments.

As from 2004 includes grants.

14

Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

5. POTENTIAL ECONOMIC GROWTH UNDER A MARKET-BASED ECONOMY The previous section presented the economic characteristics of a future market-based economy of Cuba and the mix of policies necessary to restructure the current obsolete system.

This section uses the Production Possibilities function, with a graphical illustration to highlight the expected production (output) changes resulting from a structural change in which individuals and markets are the principal actors in the economy. With a simple identity, we can postulate that

productive public actors due to the lack of a vibrant marketbased economy in which resources are allocated by market signals; this leads to minimal private-sector output and to public output at a much higher level. The inefficient use of land, labor, and capital and the absence of technological innovations cause the economy to produce significantly below its full potential.

In Figure 7, the state’s use of factors of production leads to suboptimal economic output. Obsolete and inefficient state enterprises cause the economy to produce below its production possibilities. Resources are used by the least

In conclusion, a market-based economy generates much higher social and economic welfare than a state-controlled system. This leads to an improved standard of living for Cuban citizens over time.

In contrast, Figure 8 illustrates expected output outcomes under a market-based economy guided by policies to foster its growth. Factors of production are allowed to reach maximum output through the use of market signals that allocate production to its most efficient and best uses. A market-based economy generates higher levels of output of both public and private output relative to when state entities control the means of production, as shown in Figure 7.

Figure 7. An inefficient use of factors of production leads to suboptimal economic output.

Public Output

Marxist Economic Policies

Potential Economic Output

Current Policies 1.

2.

Private Output

Economy producing significantly below Potential Economic Output A large level of public output vs. private output

15

Cuba’s Future Economic Policies Under a Representative Democracy

Figure 8. Expected output outcomes under a market-based economy.

Public Output

Market-Based Economic Policies

1.

2.

Private Output

Economy producing at full employment of resources A large level of private output and greater public output than under Marxist policies

6. CONCLUDING OBSERVATIONS •

Cuba is in a downward economic spiral caused by a repressive government and an economic system based on bankrupt Marxist ideology. There are increasing shortages of goods and small, but growing, protests by the population in major urban centers.

•

The downward spiral is irreversible unless a fundamental change occurs in the political system, allowing for the implementation of economic reforms that would lead to a market-driven economy.

•

•

•

16

The path to greater freedom and prosperity for the Cuban people is clear. Election of a representative government through free elections would allow for much-needed political and economic reforms, enabling a transition to a market-driven economy.

Experiences with fundamental structural change in political and economic systems can be found in the economies of Eastern Europe, with Czechoslovakia and Poland being prime examples of successful transitions.

There is no “magic wand.” Economic reforms require selling state enterprises (privatization drive), guaranteeing individual political and economic rights through a new constitution, implementing market reforms, and granting significant levels of foreign assistance.

•

The Cuban transition could be relatively fast, given its proximity to the United States, the large Cuban exile community, and the willingness of developing-country democracies to provide support.

•

The sequencing of reforms and their speed, breadth, and depth are critical to a successful economic transition toward a market-driven economy.

•

Once market reforms are implemented, with a new constitution guaranteeing individual rights, the economy should take off, producing self-sustaining economic growth. This assumes the continuation of market reform policies: •

Privatization of state enterprises and reinvestment of proceeds

•

Policies to allow for macroeconomic stability/ pro-growth tax reform

•

Public/private partnerships for infrastructure and workforce development

•

Opening of the economy through trade, foreign exchange, and investment liberalization

•

Trade and bilateral investment treaties with the United States and other potential partners

Václav Havel Program for Human Rights & Diplomacy Steven J. Green School of International & Public Affairs

REFERENCES Alvarez, Jose. Privatization of State-Owned Agricultural Enterprises in Post-Transition Cuba. https://doi.org/10.2753/ PPC1075-8216530603, December 8, 2014.

Diaz-Briquets, Sergio, and Pérez-López, Jorge. The Role of the Cuban-American Community in the Cuban Transition. Cuba Transition Project (CTP) Miami: Institute for Cuban and Cuban-American Studies, University of Miami, 2003.

Hernández-Catá, Ernesto, Institutions to Accompany the Market in Cuba’s Future Economic Transition. Cuba Transition Project (CTP) Miami: Institute for Cuban and Cuban-American Studies, University of Miami, 2005.

Jorge, Antonio. Privatization, Reconstruction and Socio-Economic Development in Post-Castro Cuba. Cuba Transition Project (CTP) Miami: Institute for Cuban and Cuban-American Studies, University of Miami, 2003.

McCarthy, Kevin F., and Gonzalez, Edward. Cuba after Castro: Legacies, Challenges and Impediments. Prepared for the National Defense Research Institute, RAND Corporation, 2004.

OECD. Privatization in the 21st Century: Recent Experiences of OECD Countries. Report on Good Practices. Paris: OECD, 2009.

Rostow, W. W. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge: Cambridge University Press.

(Originally published in 1960) Villamil, Jose Antonio. “The Impact of Global Economic, Investment and Commercial Trends on Post-Castro Cuba.”

North-South 2, no. 6 (1993): 29–32.

Villamil, J. A., and Cruz, R. D. “Sustainable Small Enterprise Development in a Cuban Transition Economy.” Studies in Comparative International Development 34, no. 4 (2000): 100–122.

NOTES 1.In the United States: International Platform for Human Rights in Cuba, Václav Havel Library Foundation (https://www.vhlf.org/), Cuba Archive (http://cubaarchive.org/), CubaDecide (https://cubadecide.org/), CubaDemanda (Santiago A. Alpizar (alpizarlaw@ gmail.com), Victims of Communism Memorial Foundation (https://www.victimsofcommunism.org/memorial) In the Czech Republic: Václav Havel Library (https://www.vaclavhavel.cz/en), Post Bellum Foundation (https://www. postbellum.cz/english/), People in Need Foundation (http://clovekvtisini.cz/en), Forum 2000 (https://forum2000.cz), CEVRO Institute (https://cevroinstitut.cz/en/).

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Cuba’s Future Economic Policies Under a Representative Democracy

About Florida International University Florida International University, a public university located in Miami, has a passion for student success and community solutions. The university is classified by Carnegie as “R1.” FIU is among the top 100 public universities in U.S. News and World Report’s 2019 Best Colleges and 18 academic programs are individually ranked. FIU was recently ranked as the second best performing university in Florida and graduates are among the highest-paid in the state. FIU has multiple stateof-the-art research facilities including the Wall of Wind Research and Testing Facility and FIU’s Medina Aquarius Program.

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About the Steven J. Green School of International and Public Affairs Launched in 2008, the Steven J. Green School of International and Public Affairs at FIU educates the leaders and changemakers of tomorrow through innovative teaching and research that advances global understanding, contributes to policy solutions and promotes international dialogue. One of the largest schools of its kind in the world, the Green School enrolls more than 5,700 students and employs 360 fulltime faculty. It offers 38 interdisciplinary degree programs at the bachelor’s, master’s and doctoral levels, as well as 54 undergraduate and graduate certificate programs. The Green School encompasses eight signature departments: Criminology and Criminal Justice, Economics, Global and Sociocultural Studies, History, Modern Languages, Politics and International Relations, Public Policy and Administration and Religious Studies.

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About the Václav Havel Program for Human Rights and Diplomacy The mission of the Václav Havel Program for Human Rights and Diplomacy is to study and explore the politics of human rights, the processes of democratization in societies that were once under autocratic or totalitarian governments, and the experiences of societies currently in transition around the world. Our ambition is to foster partnerships, international dialogue, and greater global exchange in the areas of human rights, democratization and diplomacy. Our experiential basis and point of departure is Eastern and Central Europe, the home of Václav Havel. As the struggle that concluded in 1989 with the rebirth of democracy from totalitarianism in said region recedes from the attention of younger generations, the values upheld and the freedoms won more than 30 years ago must be preserved in research, publication, and implementation in all areas of public affairs and in service to the concept of an open society.

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