HAVANA ― For a United States citizen, the short trip to Havana requires navigating an obstacle course, owing to the trade and travel embargo that the U.S. maintains against Cuba. It also turns out to be a trip to the past ― specifically, to 1959.
Signs of this time warp are instantly apparent: the American automotive behemoths of the 1950s stand out among the few cars on the streets in Havana. Most, obviously maintained with loving care, run well and look magnificent.
Unfortunately, the rest of Cuba’s economy and infrastructure does not show the same concern. Cuba has one of the world’s longest-lasting dual-exchange-rate systems: the dollar’s market value is 25 times the official rate of nominal parity (one peso equals one dollar). This means that those hotel or restaurant workers who can retain dollar earnings have incomes that are 25 times higher than those who cannot.
Cuba long ago developed skilled services such as medicine and education. But doctors and professors earn far less than those who join the fledgling private economy. The latter includes 178 approved job types; by design, none ― the choices include waiter, bathroom attendant, taxi driver, auto battery repairman, mule driver, and wheelbarrow operator ― makes use of an educated person’s skills. And most people are still employed by the state.
Perhaps Western-style consumer societies offer too many choices, but Cuba provides far too few. Most ordinary goods ― from shoe leather to software ― are rationed, which means that they are available only by waiting in line or going to the black market. Many goods are not available at all.
So how can such a system have survived for so long? Repression and fear alone do not explain it. In fact, free-market behavior, whatever its benefits, is not hard-wired into human brains, especially not when it seems allied with selfishness and corruption in undermining noble ideals like cooperation, fairness, and equality.
When the Soviet Union was collapsing, Robert Shiller, Maxim Boycko, and Vladimir Korobov surveyed residents of Moscow and New York regarding their attitudes toward free markets. Not surprisingly, many Russians’ responses would strike an economist as failing to appreciate the market’s virtues as a mechanism to bring supply and demand into equilibrium. For example, 66 percent of the respondents thought it unfair of flower-sellers to charge higher prices on holidays, when demand is much stronger and supplies may give out. (The surprising finding was that an equally high percentage of Americans thought the same thing!)
People in Eastern Europe eventually figured out that communism does not work, and that the market system does. If the U.S. did not exist, or if the embargo did not exist, Cubans could do likewise: infer that something is fundamentally wrong with an economic system that involves so much time wasted and so many simple desires frustrated.
But, for many Cubans, the embargo has placed an alternative explanation at hand: Absent the embargo, many goods would be imported from the U.S., or produced at home with U.S. inputs. Therefore, it must be the U.S. and its embargo that is to blame for Cuba’s dysfunctional economy. The lesson is clear: the U.S. should end its obsolete embargo.
Harvard’s Jorge Dominguez likens Cuba’s current dozy reform path to the expansion and contraction of an accordion’s bellows. Liberalization took hold out of economic desperation ― the “special period” that followed the collapse in 1991 of the Soviet Union, Cuba’s long-time benefactor. The reform process then slowed ― or even stopped altogether ― from 1996 to 2005, partly because Venezuelan support made it less necessary.
Reforms have been renewed in recent years ― now under the heading of “los lineamientos,” or the “guidelines.” For example, the government announced in 2011 that it would allow people to buy and sell houses. Similarly, farmers can now sell directly to the market, including hotels and restaurants, rather than just to the government.
One reason for the recent reforms is that the more pragmatic Ral Castro took over after his brother Fidel became ill in 2006. Another reason, however, is that Venezuelan financing has lately begun to level off, and its future appears uncertain.
In 1995, Cuba’s minister for heavy industry, referring to the country’s heavy economic dependence on the US until the 1959 revolution and heavy dependence on the Soviet Union until the 1989 fall of the Berlin Wall, vowed, “We will never let this happen to us a third time.” Yet that is precisely what is now happening with respect to Venezuela.
For now, Cuba is casting about for a new model. The example of Sweden shows that a strong social safety net can be combined with a thriving private economy. But what Cuba seeks is a model of transition from communism. China, beginning with Deng Xiaoping’s reforms, is the obvious choice ― that is, if soaring income inequality is not as important as maintaining Communist Party control and ensuring that Cuba’s leaders never have to admit that their official ideology has expired. (After all, their slogan has long been “Socialism or death!”)
Cubans are proud people who are mindful of their history of subjugation by larger powers. In this respect, they resemble the Chinese, who have energetically converted to capitalism while leaving the giant portrait of Chairman Mao in Tiananmen Square.
Four developments will soon occur, probably at approximately the same time: the aging Cuban migrs who have dictated U.S. policy regarding their homeland will give way to the next generation; the Castros will pass from the scene; U.S.-Cuban relations will be normalized; and one of the world’s two remaining museums of communism will become a rapidly growing, service-exporting market-based economy.
At that point, lineamientos and models will no longer seem necessary. That said, I hope that Cuba’s government undertakes an entirely appropriate intervention before the flood of American money and tourists arrives: a zoning law in some designated part of Old Havana that bans cars built after 1959.
By Jeffrey Frankel
Jeffrey Frankel is professor of capital formation and growth at Harvard University. ― Ed.
(Project Syndicate)
