Perestroika Cubana.

• Author: Desai, Raj M.
• Position: Rocky Shoals of Reform - Economic reforms - Essay

ON APRIL 21, 2007, Gram, a, the official newspaper of the Cuban Communist Party released photos of a convalescing Fidel Castro meeting with a senior member of the Politburo of the Chinese Communist Party. The photos underscored how tightly Cuba has hitched itself to the Chinese economic wagon, and how much both Fidel and his brother Raul have warmed to a country, whose former leader, Deng Xiaoping, Fidel once described as a mentecato ("numbskull").

After Cuba lost its main benefactor, the Soviet Union, its economy shrank by over 35 percent. But Cuba has recovered, and more recently, with a little help from its new friends Venezuela and China--Venezuela subsidizes Cuba's oil consumption while China provides Cuba with investment and durable goods, and buys its sugar and nickel--Cuba has avoided the regime change that occurred when East European socialist states faced similar economic crises in the late 1980s. In Cuba, housing shortages, mounting debt and deteriorating public services have produced no mass protests, no general strikes, no throngs taking to the Plaza de la Revolucion to demand multiparty elections or an end to central planning. Indeed, it now seems possible that Cuba may follow the "Chinese model" of reform, whereby Communist Party control is maintained alongside a gradual establishment of free-market incentives.

But can Cuba continue along this path?

Let us assume, for the moment, that the Cuban regime finds itself--in some not-too-distant future--without the Castro brothers and newly headed by reformers from within the Communist Party, as did the Soviet Union when Gorbachev became the leader of the USSR. The question that Cuba will face then, as did the USSR in 1985, is: What kind of reform is possible?

Chinese advisors--already in place--will tell the Cuban government to avoid drastic changes to their enterprises. The Chinese will remind Cuba what the Soviet republics went through--hyperinflation, skyrocketing unemployment, widespread corruption and asset theft, widening inequality, banking crises, currency collapse and massive social disruption. They will explain that, instead, it is better to do what China did: To "grow" its way out of the problem by combining some price and trade liberalization, an environment for new businesses to flourish and strict public control over state enterprises. But they will be giving the Cubans a false choice. It was not China's "gradualism", but rather its unique economic structure that allowed China to reform without suffering economic dislocations. Likewise, it was not Russia's reform speed, but its over-industrialization that led to its economic collapse.

Cuba's economy--which resembles that of the smaller East European countries at the outset of their transitions far more than it does China's--is a poor candidate for Chinese-style gradualism. Ultimately, Cuban prosperity must come from the revival of its private sector through rapid reform.

FOR ALMOST a decade, the China-post-Soviet contrast has been misleadingly used to demonstrate the supposed advantages of incremental reform--"crossing the river while feeling the stones" in Deng's memorable phrase--over economic "shock therapy" or the "big-bang" approaches used in Eastern Europe and Russia. In a nutshell, the argument is that, in contrast to the post-Soviet and East European recessions in the 1990s, China succeeded not only in growing rapidly, but in creating a vibrant, non-state-owned enterprise sector at the same time.

But there are three well-known (and fundamental) flaws with the comparison of China and the economies of Eastern Europe and the former Soviet Union. First, a vibrant private sector emerged in China because, prior to 1978, China was a peasant, agricultural society in which the migration of workers from low-wage, low-productivity agricultural sectors to higher-productivity industry was relatively smooth. (1) In 1978, over 85 percent of the Chinese workforce was employed in agriculture. Although that proportion has shrunk by half in the intervening 29 years, surplus agricultural labor continues to flow to jobs...