DILEMMAS OF A CUBAN TRANSITION: WILL HISTORY …Sweig and Michael Bustamante attempted to justify ... missed an obvious opportunity to resume some mod-est, but badly needed economic

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DILEMMAS OF A CUBAN TRANSITION: WILL HISTORY REPEAT ITSELF?

Vadim Grishin

In the long-run Cuban history, tragic as it hasbeen, shows that nothing is to be excluded asimpossible.1

Almost 30 years ago, a communist system in Centraland Eastern Europe cracked and quickly collapsed,followed by the “unexpected” dissolution of the Sovi-et Union two and half years later. Today, only twonations still belong to that faded “socialist archipela-go”: Cuba and North Korea.2 While there are mean-ingful differences between them—structural, histori-cal, cultural, experiential, military (nuclear weaponcomponents), as distinct leadership and rulingelites—it is important to note the common threadsthat contributed to the long preservation of a “social-ist system.” Among them: geography, geopolitics,geo-economics, a mix of nationalism and populism,social demagoguery, along with a high degree of stateoppression and political violence. Recent events con-firm that the North Korean totalitarian regime is sur-viving under the economic and political patronage ofa great neighboring power. Any significant changethere would happen only with China’s direct involve-ment, based primarily on Beijing’s vision of NorthKorea’s future.3 With such complex and subtle inter-ests around the Korean peninsula, a German-style (as

a critical pillar of post-communist transformation inEurope) or China-Hong Kong version of South andNorth Korea unification is unlikely.

The Cuban situation is different, currently definedby the transitioning dynamics of a post-Castro peri-od. That most significant transfer of power since the1959 Revolution has coincided with the dramaticdisruption of an economic “modus vivendi”—thedrying up of subsides from Caracas, resulting in in-creasing economic dysfunction, exacerbated by thedisastrous consequences of hurricane Irma and newsanctions imposed by the Trump Administration.These new realities have challenged a preservation ofthe “status quo” and potentially created opportuni-ties for adjustments in the island’s historical trajecto-ry. A key question is whether this critical combina-tion of factors can overcome political patterns datingback 60 years and provide passage to a new economicand political model for the future?

The experience of post-communist transitions showsthat the main driving force of significant structuralreforms can only be national in nature, i.e., it mustbe based on conditions in the country. Ultimately,national actors determine the substance and time-

1. Thomas, Hugh, 1998. Cuba or The Pursuit of Freedom. New York: Da Capo Press, p. 1508.2. Neither Venezuela nor Nicaragua, which are frequently referred to in mass media as socialist countries, can be seen as part of that ar-chipelago. In those countries markets have never been completely eradicated and political opposition (formally) has continued to exist.Meanwhile, reforms that followed in China and Vietnam, inserting strong market forces into their economies, dramatically changed thesocial and economic realities of these socialist autocracies.3. Kaplan, Robert, 2018. The Return of Marco Polo’s World: War, Strategy, and American Interests in the Twenty-First Century. NewYork: Random House, p. 93.

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frame of a transformational agenda. At the sametime, external environments can readily help or hin-der reforms. In Europe, returning to a common Eu-ropean house and the possibility of joining the Euro-pean Union became a powerful unifying target, andencouraged Central and Eastern Europeans from theformer socialist bloc to tolerate the hardships oftransformational shocks. The international condi-tions affecting Cuba today, however, are far fromthose that existed during the fall of the Berlin Wall atthe end of the Cold War.

A TURBULENT EXTERNAL ENVIROMENTFive years ago in an article in Foreign Affairs, JuliaSweig and Michael Bustamante attempted to justifyObama’s rapprochement with Cuba by suggestingthat deeper U.S.-Cuban political and commercial tiescould “have repercussions beyond the economicrealm, giving internal reformers more leeway and in-creasing support to the island for greater economicand political liberalization.”4 The authors focused onCuba’s unique demographic, geographic, and eco-nomic realities which, they believed, set the islandapart from other countries that moved away fromcommunism. If we look closely at these realities, wefind nothing unique in the island’s typical socialist,economic and demographic situation, except perhapsCuba’s geographical proximity to the U.S.5 Eventual-ly, however, expectations regarding accelerated re-forms through bilateral détente and the opening ofCuba to the world haven’t materialized. Havanamissed an obvious opportunity to resume some mod-est, but badly needed economic modifications favor-able to the incipient domestic private sector that hadbeen initiated 10 years ago.

Former President Obama’s confidant and adviser,Ben Rhodes, who was in the thick of Cuban mattersand negotiated secretly with Havana to normalize re-

lations, has offered some insight on the failure of thatpolicy. First, the U.S. side pushed Havana to pro-mote internal reforms and accelerate reconciliationbetween Cubans and Cuban-Americans “too far, toofast.” Second, these efforts provoked a pushback inboth countries from opponents of rapprochement,including a reprimand from Fidel Castro.6

This relatively brief warming of bilateral relationsconfirms a standard takeaway from the post-commu-nist transformation: external factors can only addi-tionally support the work of internal reformers.

The major outcome of Obama’s thaw was crackingof the myth in Cuba, cultivated for almost 60 years,about implacable American hostility. His initiativedemonstrated the potential, when political will existson both sides, for refusing to be trapped in the com-plexities and controversies of the past, and to moveahead by searching and finding new solutions. Suchflexibility was possible because of a shift in U.S. pub-lic opinion, particularly among a young generation ofCuban-Americans, who embraced a more pragmaticand realistic approach to the island. Additionally,even some previously hardline leaders in the Cuban-American community came around to supportingPresident Obama’s outreach to Havana.7 However,the Cuban government’s response was extremelyweak.

The Trump administration’s rejection of this nor-malization policy to Cuba reflects a new political bal-ance in Washington—the growing importance of aconservative Cuban-American electorate in the swingstate of Florida, and GOP efforts to undo the previ-ous administration’s foreign policy initiatives. Somesteps were adopted to tighten U.S. cooperation withHavana in the areas of tourism, investment, andtrade, and to reduce diplomatic interaction in re-sponse to health incidents involving diplomats—themysterious attacks on American Embassy personnel

4. Sweig, Julia and Michael Bustamante, 2013. “Cuba After Communism. The Economic Reforms That Are Transforming the Is-land.” Foreign Affairs, 2013, July/August Issue.5. Grishin, Vadim, 2017. “Economic Reforms in Cuba: What’s Next?,” Cuba in Transition—Volume 27, Washington, D.C.: ASCE,p. 108.6. Rhodes, Ben, 2018. The World As It Is. A Memoir of the Obama White House. New York: Random House, pp. 358–359.7. Huddleston, Vicki, 2018. Our Woman in Havana: A Diplomat’s Chronicle of America’s Long Struggle with Castro’s Cuba. New York:The Overlook Press.

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in Havana by a kind of sonic weapon.8 Such U-turnsfrom political détente and business engagement toold fashion adversarial styles9 have played out amidthe retreat of Western global liberalism and an ad-vance of illiberal populism and patrimonial autocra-cies.10 Samuel Huntington’s third wave of democrati-zation (from the mid-1970s to the mid-2000s)initially promoted post-communist transitions.These have now converted into “democratic reces-sions”, which run the risks of turning into full-fledged “democratic depressions”.11 The negativetrend increases global skepticism, and constrains theefforts of reformist and pro-democratic forces aroundthe world, while strengthening those who opposethem.

New autocratic leaders using electoral procedures(often based on manipulation and distortion of infor-mation) have gained political time and space andwon the support of significant population groups.These “strong leaders” believe they are authorized by“the people” to intervene in developments beyondtheir borders. They are also seeking to rewrite histo-ry. Some of the goals are to discredit the accomplish-ment of post-communist transitions, foment andconsolidate a shift toward reactionary anti-westernnationalism, exploit fears of external threats by ap-pealing to anti-migration phobias, and call for therestoration of strong state-regulated law and order.Notions of authoritarian modernization and compet-itive authoritarianism are again in political fashion.Some contemporary analysts and policy makers areemphasizing “traditional values,” voicing skepticismabout the possibility of progress and trying to con-vince the public that previous periods of market

transformation and structural reforms wereabnormal—a kind of short run deviation from long-term historical development. A path dependence the-ory that advocates slow incremental evolution vs.abrupt structural change has captured the attentionof many new partisans.12

One of the main instruments used widely by the newcritics of transition is to separate and isolate factorsbehind such a transformation and show that they areunique and not repeatable. In the case of the SovietUnion’s collapse, critics have exploited the conceptof a so-called “Gorbachev moment,” emphasizing aweak, corrupt leadership as the principal reason forthe country’s demise. Other critics, called “new tradi-tionalists,” have over-emphasized ethnic/nationalmatters, the arms race, technological disasters and theeffects of oil price drop in the Soviet economy at theend of the 1980s. While these factors were relevant,they did not appear in isolation but, rather, leveragedeach other, creating irresistible pressures. Most im-portantly, the Soviet system with its obsolete institu-tions, policies, old-style ideologies, inflexibility, andtechnological lag was not capable of responding tothese challenges or taking advantage of new opportu-nities presented by dramatically expanding interna-tional trade and investment, as well as rapidly devel-oping innovative consumer products andtechnology.13

Similar attempts to rewrite history based on princi-ples of populist nationalism have been made in Po-land and Hungary, where transitions have been par-tially reversed and there has been a slide backward

8. The White House, Fact Sheet on Cuban Policy. https://www.whitehouse.gov/articles/fact-sheet-cuba-policy/; The White House,Strengthening the Policy of the United States toward Cuba. https://www.federalregister.gov/documents/2017/10/20/2017–22928/strengthening-the-policy-of-the-united-states-toward-cuba.9. Such hard regime change policies pursued at times during the Cold War did not work in the past and are unlikely to work now. Theassumption that increasing external pressure will cause rapid regime collapse has not been borne out in the last 60 years. The existing re-silience and adaptability of the Cuban system has not been completely taken into consideration.10. Luce, Edward, 2017. The Retreat of Western Liberalism. New York: Atlantic Monthly Press.11. Diamond, Larry, Plattner, Mark, and Walker, Christopher (eds), 2016. Authoritarianism Goes Global: The Challenge to Democracy.Baltimore: Johns Hopkins University Press.12. Auzan, Alexander. “Revolutions and evolutions in Russia: In search of a solution to the path dependence problem”, Russian Journalof Economics 3 (2017): 336–347.13. Gaidar, Egor, 2007. Collapse of an Empire. Lessons for Modern Russia. Washington, D.C.: Brookings Institution.

https://www.whitehouse.gov/articles/fact-sheet-cuba-policy/

https://www.federalregister.gov/documents/2017/10/20/2017-22928/strengthening-the-policy-of-the-united-states-toward-cuba

https://www.federalregister.gov/documents/2017/10/20/2017-22928/strengthening-the-policy-of-the-united-states-toward-cuba


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toward authoritarianism—surprisingly while re-maining inside the EU institutions.14

These anti-democratic trends in overseas political lifeare directly and indirectly affecting Cuban politicalperceptions about post-communist transition. Ac-cording to their current thinking, there is no reasonto start a painful experiment with rule of law and de-mocratization when many post-communist countriesin later transitional stages have gone back to authori-tarianism, and some, who never abandoned autocrat-ic governance, such as China and Vietnam, have evenbecame very successful economically. An ongoingpublic discussion in Cuba of a new constitution gen-erally confirms that there is a climate of intellectualisolation and obsolete Martí-Marx-Lenin-Fidel local-ization in the application of core political and eco-nomic principles, concepts and ideas. In an extremelycontroversial constitutional draft some timid changeshave been proposed to decomunization (the wordcommunism is withdrawn from its text) and legaliza-tion of enrichment without right to accumulateproperty and wealth beyond the state sector. Overall,it protects “sacred” socialist norms, particularly oneparty system, and authorizes use of military forceagainst political opponents. Such identity is an evi-dent burden and outdated liability rather than an as-set.15

There are many ways of spreading anti-reformist andneo-socialist ideology and rhetoric in the island to-day. Ben Rhodes, in the memoir mentioned above,describes a meeting with Raúl Castro in which theCuban leader promises to send him a copy of his ownbiography written by a Russian.16 The author, Niko-lai Leonov, a retired lieutenant general of the KGB, isa hardline active promoter of a Russian World con-cept, a revanchist idea of the restoration of the SovietUnion. In the early 2000s he was elected to the lowerhouse of the Russian Parliament (State Duma) as amember of a nationalist party, Rodyna. Leonov has

closely identified himself with the current Kremlinadministration, as a longtime friend and mentor ofVladimir Putin. His book about Raúl Castro is man-datory reading on the island. In the first page of Cas-tro’s biography Leonov praises Josef Stalin as thegreatest political leader of the XX century and usesevery opportunity throughout his book to criticizeseverely any transitions from a socialist system, whichhe sees as treasonous.17

In general, Russian anti-reformist and anti-Americanpropaganda is very active in the island. As an aside,Cuba is one of a few countries that representatives ofRussian enforcement agencies are allowed to freelyvisit, as their trips are limited or entirely prohibitedby the Russian government to more than 200 coun-tries. The influence on Cuban society of such chan-nels should not be overestimated, but it would be un-wise to ignore them completely. Fortunately, Hegel’shistory mole is relentlessly digging up the country’spolitical and economic ground. No one can stop themarch of time. The Cuban center of political gravityis shifting generational power.

THE TRANSITION: CHANGE VS. CONTINUITY

History shows that power succession in socialist na-tions, as well as those in transition, can be brutal andchallenging because it is often accompanied by redis-tribution or reconsolidation of power and wealth (ondifferent scales), particularly under a generationalmodel of succession. Previous balances and compro-mises between elites are frequently broken. There canbe winners and losers in the process that complicatethe scenarios and ways of managing them. Many so-cialist leaders, in the process of rising to the top, haverejected the legacy of previous rulers and blamedthem for all past errors. Khrushchev held Stalin re-sponsible; Brezhnev was critical of Khrushchev; Gor-bachev defined the Brezhnev period as stagnant;

14. Fukuyama, Francis, 2018. Foreign Affairs, September/October.15. Proyecto de la Constitucíón de la República de Cuba. 07.25.2018. La Habana: Empresa de Artes Gráficas Federico Engels.16. Rhodes, Ben. Op. cit., p. 351.17. Leonov, Nikolai, 2015. Raúl Castro: un hombre en Revolución. La Habana: Capitán San Luis.


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Yeltsin humiliated Gorbachev; and Deng Xiaopingimposed major revisions on Mao’s policies.18

Heads of secret services, and in some cases armychiefs, play a significant role in the succession pro-cesses. They can become “kingmakers” or “kings,”because civil institutions do not work properly or donot exist at all. Nevertheless, it is not easy to foreseethe future policies of new autocratic rulers. A recentexample of authoritarian takeover was the surprisingemergence of Shavkat Mirziyoyev, after the death ofUzbekistan’s first president, Islam Karimov. Manyexperts were sure that Mirziyoyev, receiving supportfrom the country’s head of National Security, wouldbe more repressive than the widely criticized Kari-mov. Freedom House, a democracy watchdog, hadlong equated Uzbekistan with North Korea in termsof lack of political rights and civil liberties. Unex-pectedly, Mirziyoyev, who won the presidential elec-tions in December 2016, introduced several econom-ic and judicial reforms and improved relations withneighboring countries. Uzbek’s political spring showsthat changes are possible when an aging authoritarianleader passes away and those who are part of the oldsystem modify their identities to start reforms.19 Theemergence of Deng Xiaoping and Michael Gor-bachev confirm the proposition that socialist authori-tarianism from time to time can make “fundamentalerrors.”

Can Cuba’s rigid political and economic system pro-duce innovative and creative leaders who will notlimit themselves to stylistic changes? The new CubanPresident, Miguel Díaz-Canel, is seen by some ob-servers as a temporary, transitional political figure.20

Such a conclusion seems premature, given that achallenging generational transition in Cuba is in itsinitial stages. Díaz-Canel as a political personality is,no doubt, to paraphrase George Kennan, a “productof ideology and circumstances.”21 He is an insiderand a political survivor who understands perfectlywell the limited time he has to deliver results that willsatisfy the demands of different power groups. Con-currently, he has to consolidate his position, and gainpopularity, primarily among the country’s youth.22

He also needs to implement some long delayed re-forms, focusing on unification of multiple currencyexchange rates and fiscal consolidation in the contextof Venezuela’s economic crash.23

To be efficient, Díaz-Canel should violate some writ-ten and unwritten taboos, but his authority is limit-ed. He continues to be under the strict control—andwatchful eye—of the old guard, specifically RaúlCastro who still wields “a golden share” of futurepolicy decisions, as commander-in-chief and first sec-retary of the Communist party.24 The separation ofideological, executive, military and administrativefunctions will likely be enforced by a new Constitu-tion. This future division of labor and a split of thehighest responsibilities between president, primeminister, head of the party and commander-in-chiefsuggests a fear of concentrated power in the hands ofone person. An existing mutual mistrust can incen-tivize the struggle between different powerfulsectors—party nomenclature, military and civilelites—for important bureaucratic positions. To be-come a unifying leader and make a difference, Díaz-Canel has to create the right identity and generateproper legitimacy. He does not belong to the privi-

18. Taubman, William, 2003. Khrushchev: The Man and His Era. New York: W.W.Norton & Company; Taubman, Wiliam, 2017.Gorbachev: His Life and Times. London: Simon & Schuster; Coase, Ronald and Wang, Ning, 2013. How China Became Capitalist. NewYork: Palgrave Macmillan.19. Buckley, Neil, 2018. “Once-repressive Uzbekistan begins a post-Karimov opening.” Financial Times, February 13.20. Labrador, Rocio Clara, 2018. “What Is Cuba’s Post-Castro Future?” Council on Foreign Relations, April 1821. Kennan, George (1947) Foreign Affairs, July, Vol. 25, No 4, p. 566.22. Jimenez, Marguerite, 2018. Foreign Affairs, March/April.23. Feinberg, Richard, 2018. Cuba’s Economy After Raúl Castro: A Tale Of Three Worlds. Washington, D.C.: Brookings InstitutionsPress; Morris, Emily, 2017. Foreign Affairs, January/February.24. Nelson, Anne, 2016. Foreign Affairs, November/December; Piccone, Ted, What to expect from a post-Castro Cuba. Washington,D.C.: Brookings Institutions, April 18.


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leged revolutionary veteran nobility or the militarycupula. He is not a Castro family member and doesnot head the party. At this stage he mostly looks likea compromise choice for a high-ranking manager.25

Applying the same criteria, Raúl Castro’s son, Alejan-dro, he could be even a more “natural” successor ascarrier of a Castro Espín surname and his experi-ence as liaison between the military hierarchy, se-curity agencies, and civilian group interests.26 Ale-jandro Castro played an important role asintermediary in Obama’s secret diplomacy to nor-malize bilateral relations.27 Because of a massiveupcoming attrition of octogenarians from keypower positions, the emergence of new names inthe political arena should not be excluded. In anycase, all of them, including Miguel Díaz-Canel (58years old) and Alejandro Castro Espín (53 yearsold), belong to a new generation. Who from thatgeneration will dominate remains to be seen in theisland’s changing dynamics.28

CAN CUBA “COME IN FROM THE COLD”?According to Janos Kornai’s classification of socialistprototypes, Cuba today represents “classical social-ism” transitioning to a reform socialist system.29 Allthe main features of that classical socialist model arestill there: the supremacy of state property; the domi-nant role of the state in the mobilization, distributionand utilization of national savings; the existence of amanagerial hierarchy as an essential part of a com-mand economy and nomenklatura system; the devel-opment of patron-client networks; the prevalence ofan autarky; the persistence of shortages; the mobiliza-tion of the economy for the sake of militarization;the reallocation of resources from agriculture to in-dustry and services; the limited role of money; the

fixing and distorting of prices; the predominant prac-tice of soft budgets; the ongoing reality of hidden in-flation; the constant hunger for imports and the aver-sion to exports; the low proportions of domesticconsumption in GDP growth and the low efficiencyof human capital investments; the egalitarian accep-tance of common poverty among broad groups of thepopulation; along with the perpetuation of messianicideologies and tight political controls.

What Cuba has really missed since the global finan-cial crisis of 2008/2009 is high and sustainable GDPgrowth—a situation that has dramatically worsenedwith the deepening Venezuelan crunch. The loss offinancial flows from Caracas has been irreversible.Neither Beijing nor Moscow can provide a substituterole as generous sponsor. Various damaging stormsin the past years, as well as Cuba’s deteriorating rela-tions with the U.S., had additional negative implica-tions. Remaining stagnant and dysfunctional, Cuba’seconomy has undermined the stability of a “classicalsocialist prototype,” as has happened in practically allother countries that belonged to the “socialist archi-pelago” and at best it has only pushed Havana to im-plement timid reforms that open a limited space forprivate sector development. From a macroeconomicperspective, Cuba has to switch from a model basedon foreign subsidies to an investment-type economy.However, by eroding the “traditional model” andshifting to a “reformist socialist system” the countryrisks rising fiscal deficits, soaring inflation and for-eign debts, unless new sources of growth are found.30

The fear of ruling elites of losing state control overthe economy and the powerful presence of vested in-terests motivated by protection of privileged rents,have significantly slowed down the pace of structural

25. Jimenez, Margueritte, 2018. “Cuba after the Castros,” op. cit.; Feinberg, Richard and Ted Piccone, 2018. “Cuba’s Stalled Revolu-tion: Can New Leadership Unfreeze Cuban Politics After the Castros?” Foreign Affairs, September/October.26. Álvarez Quiñones, Roberto, 2018. “Must Alejandro Castro Be President?” Diario de Cuba, 23 de enero.27. Rhodes, Ben. Op. cit., pp. 213–216, 263–264, 284–285, 301–303, 348–350, 359, 413.28. Cárdenas, José, 2018. Foreign Policy, February 7; Mourdoukoutas, Panos, 2018. Forbes, May 16; Deare, Craig, 2018. AmericasQuarterly, May 30.29. Kornai, Janos, 1992. The Socialist System. The Political Economy of Communism. Princeton: Princeton University Press.30. Aslund, A. and Djankov, Simeon (eds), 2014. The Great Rebirth: Lessons from the Victory of Capitalism over Communism. Washing-ton, D.C.: Peterson Institute for International Economics.


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reforms in Cuba beneficial to society at large. Despiteevidence that the current economic model has beenexhausted, rent-seekers, as the most influential grad-ualist group in the country, continue to gain signifi-cant economic benefits through state budget subsi-dies, negative interest rates, multiple exchange ratesand price disparities (domestic vs. world, public vs.private). While Cuban economic authorities havepublicly recognized the tense economic situation, re-alizing that there is a need for significant inflows ofcapital, technology, and market development as pre-requisites for future growth, Díaz-Canel remains cau-tious as suggested by statements about the need forforeign “productive” investments in tourism, energy,and food processing “without creating a threat to na-tional sovereignty.”31

It is puzzling to read general and vague messagesfrom Havana, because they explain too little if thereader does not know the hidden matrix of informalcodes, but it seems evident how the existing systemblocks and misses opportunities, making it less thanclear how a mysterious decision-making mechanismis able to generate positive changes. There is also agreat deal of uncertainty regarding the real goals thatthe current Cuban leadership is pursuing.

We can only guess (based on some official statementsand frequent exchanges of delegations at differentlevels between Cuba and Vietnam) that Hanoi’s re-form experience and socialist-oriented market econo-my could be appealing to Havana. Vietnam’s econo-my has had solid growth (above 5% of GDP) in thelast 30 years and low inflation that reflects policy at-tention to maintaining macroeconomic stability. Therate of growth now is at roughly the same level asChina’s (Figure 1).

Nevertheless, Vietnam’s example has not played acatalytic role and has not served as an inspiration forCuba. While Vietnam introduced profound eco-

nomic reforms, which permitted the country’s percapita income to increase 20 times since the early1990s, and pursued a strategy of normalizing rela-tions with the United States, Cuba has put on holdits modest reform efforts and did not make efficientuse of Obama’s rapprochement. Hanoi has alloweddiversified ownership of the means of production,seeking the “development of a market economy witha socialist orientation.”32 Havana does not venture toreference the Vietnam reformist experience either inits draft of a new Cuban constitution or in any otherpublic document, although it has stated that theplanned new constitution has a transformational pur-pose and more advanced constitutional models wereconsulted, like those of Vietnam and China.33 Nodoubt the most attractive feature of the Vietnamesetransformation for Havana has been the stability ofVietnam’s one-party illiberal political regime, its slowstate sector structural modification, and absence ofshocks.

Having said that, we should admit that the twocountries differ significantly, and many aspects ofVietnam’s transition cannot be directly replicated inCuba: size does matter. The population of Vietnam(94.5 million) is 8 times the population of Cuba(11.5 million).34 The structure of their economiesalso differs (Figures 2 and 3). Vietnam’s agriculturalsector contributes 17% of GDP while Cuba’s rep-resents about 4%. Cuba’s service sector dominatesthe country’s GDP (74%), while in Vietnam itmakes up 46% of GDP.

Vietnam had a double transition—from a traditionalagricultural society to an industrialized one, andfrom centralized economy to a “socialist market”.Steady integration into the global economy sinceWTO accession in 2007 has brought a higher flow offoreign direct investments and greater exports. Viet-nam’s exports and imports are much more diversified(about 20% to the US, followed by 13% to China)

31. Hernández, Marcelo, 2018. 14 y medio. La Habana, Junio 21.32. Truong-Minh Vu, 2015. “Challenges for the Communist Party of Vietnam,”Diplomat. February 1; Resolution No. 02 KL/TW ofthe Politburo.33. Acosta, Homero, 2018. Granma, August 2.34. The World Bank Group. Country Data. Cuba. Vietnam. www.data.worldbank.org

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than Cuba’s overall foreign trade. Vietnam’s way ofintegrating with the global economy is “thick” (theproduction and services of many Vietnamese enter-

prises now form an integral part of the global supplyand value chains), Cuba’s is “thin”, with maximuminvolvement in state of the art offshore zones.

Figure 1. China and Vietnam, Real GDP Growth in %; Actual and Projections, 1989–2020

Source: IMF.

Figure 2. Vietnam, GDP composition by sector of origin (% of GDP), est. 2017

Source: The World Factbook. CIA. Last updated September 06, 2018.

Figure 3. Cuba, GDP composition by sector of origin (% of GDP),est. 2017

Source: The World Factbook. CIA. Last updated August 27, 2018.


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ECONOMIC DECLINE AS A TRIGGER OF REFORMS

The previously mentioned new critics of post-com-munist transition have extended their “innovative”approach to economic development strategies by in-sisting that gradual reforms and less globally integrat-ed nations can significantly reduce their vulnerabilityto external shocks. They believe that mass mobiliza-tion, economic planning and state dirigisme aremuch more effective anti-crisis instruments than thetraditional counter-cyclical fiscal measures and struc-tural reforms that improve the allocative efficiency ofresources, while boosting productivity and strength-ening domestic-regional markets on the supply anddemand side.35 The reality has been more complex,with empirical evidence and data analysis showingthat Central and Eastern European countries that ap-plied shock therapy during their transition periodsand relied mostly on “laissez-faire” policies, weremuch more resilient to global turmoil and exitedfrom a crisis more quickly than some Central Asianrepublics, which got stuck in their transitions withhuge reform gaps. China and Vietnam’s GDPgrowth slowed down at the time of global financialcrisis of 2008–2009, but less than during the Asianfinancial crisis of 1997 (Figure 1). Such an outcomewas determined by larger scale government interven-tions and evident progress in both countries: movingahead on a track of structural reforms that stimulatedmarket and trade diversification. Any growth strategypackage should take into account external and do-mestic volatility. The eventual impact of externalshocks can be significantly amplified by domestic fac-tors: weak institutions, underdeveloped financial sys-tems, bad governance, and well-connected political

or economic groups promoting biased anti-crisis pol-icies. Unless domestic roots are remedied, sustainedlong-run growth will be difficult to achieve.36

There is a vast literature that explains how an eco-nomic crisis can act as a trigger for transitions andstructural reforms.37 In the case of Cuba we wouldlike to clarify how varying economic cycles can im-pact a future transition and in the process addresscertain questions: Is Cuba decoupling from the glob-al economy? Which countries mostly affect CubanGDP growth? Which sectors of the Cuba’s economyare more sensitive to global ups and downs?

Data in Table 1 shows a significant reduction in therelationship between Cuban economic growth andthat of the world economy (0.58 in 1988–2017 vs.0.16 in 2008–2017). We can also see a weakening re-lationship between the island’s development andGDP growth in the advanced economies (includingU.S. and Canada), as well as in emerging markets(0.60 in 1988–2017 vs. 0.32 in 2008–2017). How-ever, Cuban growth was strongly correlated to GDPgrowth in Latin America and the Caribbean region,with Venezuela and Brazil still maintaining leadingpositions. There was a huge jump in the significanceof Chinese influence on the Cuban economy (from-0.07 in 1988–2017 to 0.32 in 2008–2017). The de-clining relevance of global economic growth forCuba in the last 10 years means that the island, be-cause of its considerable isolation and inefficiency, isless receptive to the positive impulses of global mar-kets, while at the same time it is not sheltered fromthe negative side effects of global instability(see vari-ous charts of Cuba’s real GDP growth vs. GDP

35. Ostry, Jonathan, Alessandro Prati, Antonio Spilimbergo, Lone Christiansen, Prachi Mishra, Chris Papageorgiou, Rodney Ramcha-ran, Martin Schindler, Nikola Spatafora, Stephen Tokarick, and Thierry Tressel, 2009. Structural Reforms and Economic Performance inAdvanced and Developing Countries. Washington, D.C.: IMF.36. Raddatz, Claudio, 2007. “Are External Shocks Responsible for the Instability of Output in Low-Income Countries?” Journal of De-veloping Economics 84: 155–87.37. IMF, 2016. When Do Structural Reforms Work? On the Role of the Business Cycle and Macroeconomic Policies. IMF Working Papers.WP/16/62. Washington, D.C.: IMF; Fischer, Stanley, and Alan Gelb, 1991. “The Process of Socialist Economic Transformation,”Journal of Economic Perspectives, 5, 4: 91–105; Gaidar, Yegor, ed., 2003. The Economics of Transition. Cambridge, Massachusetts: MITPress; Kornai, János, 1994. “Transformational Recession: The Main Causes,” Journal of Comparative Economics, 19(1): 39–63; Pickles,John and Adrian Smith (eds), 1998. Theorizing Transition: The Political Economy of Post-Communist Transformations. London: Rout-ledge; European Bank for Reconstruction and Development. Transition Report, 1994–2017. London: EBRD.

https://www.imf.org/external/np/cv/CV.aspx?AuthID=119







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growth of its selective economic partners in the An-nex).

Initially our assumption was that the Cuban econo-my, which continues to have an ongoing dependenceon Venezuela’s GDP growth through subsidies andtrade in goods and services, would be strongly depen-dent on the oil price variable. Chart 1 shows that thiscorrelation is not as significant (0.34) as expected.We can partially explain it by a floating cost rate sys-tem of medical and other services.

A much stronger dependence of the country’s eco-nomic growth comes from remittance flows (0.95),international tourist arrivals (0.93) and commodityprices on nickel, tobacco and sugar. See Chart 2 andChart 3. At the same time, it’s obvious that these im-

portant drivers of Cuban growth have weak spotsthat can easily be affected by geopolitics and globalmarket turbulences.

Interesting results also appear through regressionanalysis of Cuba’s real GDP growth as it relates tomajor natural disasters (R-squared 0.65). See Table2. The average damage from hurricanes in the last 30years has been around 0.7 percent of GDP annually.However in years following strong hurricanes, theCuban economy normally adds 3.2 percentage pointsto GDP growth. So natural disasters, paradoxically,have not only been a curse for the island, but also akind of additional stimulus. Nevertheless, thereseems to be exaggeration in the logic of a recent arti-cle published in Foreign Affairs magazine, where the

Table 1. Correlation of Cuba’s real GDP growth (%) with real GDP growth (%) of China, United States, Venezuela, Brazil, Canada, LAC region, emerging markets and developing economies, advanced economies, and the world, 1988–2017

ChinaUnited States Venezuela Brazil Canada

Latin Americaand the

Caribbean

Emerging market and developing

economiesAdvanced economies World Cuba

1988–2017 (0.07) 0.17 0.11 0.22 0.36 0.12 0.60 0.22 0.58 1.002008–2017 0.32 0.09 0.67 0.35 0.04 0.46 0.32 0.06 0.16 1.00

Source: World Bank data, author’s computation

Chart 1. Regression of Cuba’s annual GDP growth and change of oil prices, 1987–2017

Source: World Bank, IMF, EIA data and author’s computation


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author chooses only major hurricanes as a catalyst forinternal change domestically and external change vis-a-vis U.S.-Cuba relations.38 Overall, hurricanes inCuba, as in many other Caribbean countries, have re-mained an important cause of macroeconomic insta-bility and human suffering.39 Having said this, wealso need to stress that downside trajectories of global

economic cycles can be much more devastating forCuba than tropical storms.

POTENTIAL ROLE OF THE CURRENT ECONOMIC CYCLE IN A FUTURE CUBAN TRANSITION

Without going into detail on the theories of econom-ic and business cycles, we should acknowledge that

Chart 2. Cuba nominal GDP in USD and international tourist arrivals

Source: World Bank, International Monetary Fund, Anuario Estadístico de Cuba 2016 (Edición 2017, Oficina Nacional de Estadística e Infor-mación).

Chart 3. Cuba’s nominal GDP in USD and remittances from the U.S

Source: World Bank, IMF, IADB, ECLAC.

38. Gettig, Erik, 2017. “How Hurricanes Helped Shape Modern Cuba,” Foreign Affairs, October.39. Acevedo, Sebastian, 2016. Gone with the Wind: Estimating Hurricane Climate Change Costs in the Caribbean. Working Paper. IMFWestern Hemisphere Department. Washington, D.C.


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the global economic upswing that began in mid-2016 can be seen as the end of a global mid-termbusiness cycle, and a peak in the rate of expansion ofmajor economies.

First, we saw an initial acceleration of this cycle eightyears ago, after the global financial crisis. In 2018and 2019 we are likely to see 3.9% world growth asthe “last chord” of an unusually long business cycle.Japan, China, EU and the United States, all haveabove-average growth expectations, in tandem withthe global recovery of commodity exporters. Thereare only half a dozen countries with negative eco-nomic indicators, mostly those in the grip of civilstrife (Libya, Syria, Venezuela, and Yemen).

Second, such kinds of acceleration usually happenwhen the world economy is close to a turning point.The IMF’s last update of the World Economic Out-look emphasizes uneven prospects in the develop-ment of advanced and emerging markets “amid ris-ing oil prices, higher yields in the United States,escalating trade tensions, and growing pressures onthe currencies of countries with weaker fundamen-tals.”40 The World Bank also acknowledges that thebalance of risks, which include the possibility of dis-orderly financial market movements, heightened pol-icy uncertainties, and rising geopolitical tensions, hasshifted further to the downside in the short run.41

The World Bank has repeated its “mantra recom-

mendations” of implementing structural reforms andstrengthening economic and financial policies to cre-ate space for the next downturn. Which leads one towonder, how will these challenging circumstances af-fect Cuba?

On first glance, the Cuban system has demonstratedresilience throughout different historical periods.Problematically, it has also shown institutional rigid-ity, low managerial capacity and a lack of politicalwill to implement top-down structural reforms andany kind of modernization. The island continues tobe under the pressure of mounting problems and anoutdated centralized socialist economy (as happenedin the Soviet Union). Can a new leadership addresschronic economic ills and urgent issues? Can itstrengthen the country’s financial system throughcurrency exchange rate unification, to decrease stateownership and state regulation of economic activity,implement deep reform of SOEs, facilitate bureau-cratic procedures for SMEs, initiate a real land re-form, create new social safety nets, and improve theislands’s business environment for FDI?

Can we expect such needed economic and institu-tional reforms to come from above, as the old genera-tion slowly weakens its grip on power? Will such re-forms occur without pressure from below, andwithout serious disruptions? These are relevant ques-tions.

Table 2. Regression of Cuba’s real GDP growth (%) on major natural disasters, 1987–2017Variable Coefficient Std. Error t-Statistic Prob.GDP_GROWTH__ANNUAL____NY_GDP_MKTP_KD_ZG(-1) 0.332419 0.181555 1.83095 0.0858@PC(INTERNATIONAL_TOURISM__NUMBER_OF_ARRIVALS_ST_INT_ARVL) 0.154267 0.061337 2.515069 0.023ND_DUMMY(-1) 3.179747 1.131873 2.80928 0.0126EMERGING_MARKET_AND_DEVELOPING_ECONOMIES 1.034819 0.318274 3.251348 0.005C -5.106535 1.961452 -2.603446 0.0192

R-squared 0.646119 Mean dependent var 4.223658Adjusted R-squared 0.557649 S.D. dependent var 3.3347S.E. of regression 2.217892 Akaike info criterion 4.635248Sum squared resid 78.70469 Schwarz criterion 4.883944Log likelihood -43.6701 Hannan-Quinn criter. 4.689221F-statistic 7.303241 Durbin-Watson stat 2.124299Prob(F-statistic) 0.001517

Source: World Bank, The Emergency Events Database—Universite Catholique de Louvain

40. IMF, 2018. World Economic Outlook, update, July 16.41. World Bank, 2018. Global Economic Prospects. The Turning of the Tide. July.


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There are three main conditions for any reform totake place: elite agreement regarding future changes;strong and consolidated popular demand, and a deepeconomic crisis. We do not see any of these condi-tions happening in Cuba now, but lessons learnedfrom post-communist transformations tell us it is al-most impossible to predict when serious reforms willstart and develop their own momentum.

It is possible that an upcoming global economicdownturn may seriously hit Cuba and create pres-

sures from below that favor a long-awaited markettransition. No doubt worsening economic conditionscould undermine confidence in the stability and ef-fectiveness of the new political leadership, so preven-tive anti-crisis measures should be an essential part offuture reform strategies.

In fact, one can generalize overall that the next globaleconomic crisis might trigger a reformist process.Whether that will actually happened, will still needto be seen.


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ANNEX 1

Chart 1. Cuba real GDP growth (%) vs. U.S. real GDP growth (%), 1987–2016

Source: World Bank, IMF

Chart 2. Cuba real GDP growth (%) vs. China real GDP growth (%), 1987–2016



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Chart 3. Cuba real GDP growth (%) vs. emerging markets and developing countries real GDP growth (%), 1987–2016


Chart 4. Cuba real GDP growth (%) vs. Latin America and Caribbean real GDP growth (%)



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Chart 5. Cuba real GDP growth (%) vs. Venezuela real GDP growth (%), 1987–2016


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