Thursday, September 17, 2009

Summary of one article about Cuba's Economic Reforms.

Cuba's Economic Reforms in A Chinese Perspective

Jiang Shixue
Chinese Academy of Social Sciences
(This is the paper presented to the Wilton Park Conference on Cuba, October 2002.)

Despite the geographical distance and different population size, Cuba and China have at least two things in common: They are socialist countries and both are on the road of economic reforms. While Cuba began to reform its economy in the early 1990s, China started its reforms and opening-door as early as in 1978. (In December 1978 the Third Plenary Session of the 11th Central Committee of Communist Party of China, CPC, was held in Beijing).
Compared with Cuba, China has made greater progress in stimulating economic development, raising people’s living standards and upgrading comprehensive national strength. From 1978 to 2000, for instance, China’s average annual growth rate was 9. 5%, and for some of the years it stood at 15%. At the same time, inflation rate was often kept below 10% with the exception of only a few years at over 15%. As a matter of fact, few economies in the world have achieved such remarkably high growth rate without high inflation.
It took China 9 years (from 1978 to 1987) to double its average per capita income. But it was 58 years for the United Kingdom (from 1780 to 1838), 47 years for the United States (from 1839 – 1886), 34 years for Japan (from 1885 – 1919) and 11 years for South Korea (from 1966- 1977) to do the same. Then, from 1987 to 1996, China doubled its average per capita income again in 9 years.

I. An Overview of Cuba’s Economic Reforms

The pushing forces that made Cuba walk upon the path of reforms came mainly from the outside. Cuba signed its first major trade and economic agreement with the Soviet Union in February 1960, under which Cuban sugar was provided in exchange for Soviet crude oil and petroleum products, wheat, fertilizer, iron, machinery, and trade credits. It was widely believed that the Soviet Union maintained the Cuban economy by paying “higher than market prices” for Cuban sugar. At the same time Cuba paid “lower than market prices” for Soviet petroleum products. In addition, Cuba joined the socialist trade and economic organization, the Council for Mutual Economic Assistance (CMEA), in 1972 and conducted most of its trade with CMEA countries.
The disintegration of the Soviet Union and break-up of the trade relations within CMEA induced hardest difficulties for the Cuban economy. Between 1991 and 1994, the Cuban GDP declined by 35%, imports dropped by 75%, oil imports fell by half, and people’s caloric intake was reduced from roughly 2800 to 1735 per day. Faced with this harsh situation, Cuba decided to “defend socialism” by reforming the economy.
Cuba’s economic reforms in the past decade can be summarized in the following areas:
1) Decentralization in the agricultural sector;
2) Legalization of the use of foreign currency;
3) Authorization of self-employment;
4) Improving fiscal management ;
5) More integration with the world market;
6) Attracting more foreign investment;
7) Establishing free trade zone (FTZ);
8) Restructuring the economic structure
In China, soon after the June 4 incident of 1989, some leftists were increasingly opposed to the nation’s reform process. In early 1991, concerned with the possibility of retreat on the path of reforms, Deng Xiaoping, who was then celebrating the traditional Spring Festival in Shanghai, said to the Shanghai municipal leadership, “Do not believe that planning belongs to socialism and market belongs to capitalism. Both are instruments. Market can also serve socialism.” He called upon the city officials to be “more liberal, braver and swifter” in pushing forward the reform process.

It seems that Cuba’s reforms are not based on any clear and well-defined theory, although Cuban leader Fidel Castro and other senior Cuban officials have repeatedly said that Cuba’s reforms should be carried out within the principles of socialism. They have expressed their wishes to utilize some forms of the market mechanism, but insist that Cuba will not walk towards market economy. From their perspectives, socialism and market economy are not compatible.

2. Tortoise or hare: Choosing the right speed of reforms
In discussing the speed of economic reforms, people tend to use such words as “gradual” or “shock therapy”.

According to Barbara Stallings and Wilson Peres, the “aggressive” reformers undertook many reforms in a relatively short period of time, while the “cautious” reformers implemented reforms more gradually.

Despite these definitions, however, the specific criteria for defining the reform process as being “gradual” or “shock”, are still controversial in practice.

While many transition economies in the former Soviet bloc are seen as “aggressive” reformers practicing “shock therapy”, China is considered as a “gradual” and “cautious” reformer. As Deng Xiaoping aptly put it, China carried out its reforms like “crossing the river by feeling the stones in the water”. Indeed, because of the following reasons, it is easy to understand why China should wage a cautious and gradual reform process. First of all, as a huge country with more than 1.2 billion people, China should maintain social stability as one of the priorities.

Apparently, Cuba has chosen the gradual approach. This choice is proved to be reasonable and correct. Cuba’s reforms were launched under economic difficulties and harsh conditions, i.e., decades of U.S. blockade and abrupt disappearance of aids from the Soviet bloc. (Remember that, compared with China, Cuba’s initial conditions of reforms were much worse.) If Cuba had followed the style of “shock therapy” as Russia and some other Easter European countries have done, the situation could have gone uncontrolled. However, as some Chinese scholars have pointed out, the Cuban leadership should be more liberal and more brave in such areas as ownership restructuring and opening to the outside world.

3. “Let some people get rich first”, but benefits of reforms should be equally distributed.
Before the 1980s income distribution in China was remarkably equal, or even egalitarian. The Gini coefficient for the urban-rural inequality was only 0.
Deng Xiaoping was wise enough to proclaim that “To get rich is glorious”. He also said, “Let some people get rich first”. Indeed, as many Chinese, including scholars, fully understand, if some people had not been allowed to get rich first, or egalitarianism had still dominated the society, China would not have been able reduce poverty so progressively.
First of all, the gap between urban and rural areas has widened.
Second, while income inequalities within either the urban or the rural areas have become worsened, it is even more conspicuous within the latter.
Third, the whole picture of unequal income distribution for the nation is alarming.
The fact that economic reforms tend to generate worse income distribution has been proved in Mexico, Brazil, Argentina and other Latin American countries that have been marching on the reform paths. Indeed, economic reforms and opening to the outside world tend to create opportunities for people to get rich. But the privileged group tend to acquire more opportunities than the others.
For Cuba, it seems that it is also necessary to “let some people get rich first”. China’s experience has proved that this policy will effectively stimulate people’s initiative to work and therefore to speed up the economy.
4. Improving the ownership structure is the key to successful reforms.

Since China and Cuba are socialist countries, they cannot rely on privatization to improve the ownership structure.15 Rather, they must keep public ownership as the foundation of their socialist economic system. At the same time, however, being in the primary stage of socialism, they need to develop diverse forms of ownership with public ownership in the dominant position.
In the past two decades the non-public sector has increased ostensibly and it is increasingly recognized as an important component of the socialist market economy (see table 1). In some places, particularly in the eastern part of China, the non-public sector has become the most important engine for the development of local economy.

Table 1 China’s changed ownership (%)
1978 1999
Public ownership 78 40
Non-public ownership 22 60

Cuba has been trying to diversify its ownership system. Compared with China, Cuba needs to quicken its steps in this regard. As some Chinese scholars put it, the Cuban leadership should take a more tolerant attitude towards the non-public sector.
5. Reforming the state-owned enterprises is essential for the establishment of a socialist market economy.

As mentioned earlier, Cuba and China are socialist countries and the state-owned enterprises (SOEs) should play an important role in the economy. However, before reforms were initiated, the SOEs could not raise their efficiency, and some of them had long been money-losers, incurring a heavy fiscal burden on the state budget.
Many countries in Latin American and Eastern Europe have privatized the majority of their SOEs. In some extreme cases, almost all the SOEs have been sold to private investors. Results of privatization have been mixed.

In China, the Party and the Government have recognized that well-executed reform of the SOEs is of vital importance to building a socialist market economy and consolidating the socialist system, and the best way to reform them is to establish a modern corporate system.
By World Bank standards, most of Cuba’s industrial plants are considered “large”. Their production cannot be considered as efficient, mainly due to the lack of modern equipment, input and innovation as well as poor management. Many Chinese scholars agree that it is better for Cuba to integrate the reforms of the SOEs as an integral part of the whole reform process, and lagging behind would produce negative impact upon reforms in other areas. In addition to raising efficiency by adopting a modern corporate system, Cuba might need to make greater use of the private and foreign capital and even close down some of the big “money-losers”.
It is encouraging to see that as early as in 1998 the Council of State of Cuba passed the Decree Law 187, stipulating detailed measures to reform its SOEs. Its principles include:

1) Enterprises have to achieve self-financing within the approved social objective.
2) Incentives for the workers are the heart of the business system.
3) Profits, after payment of taxes, are distributed by the appropriate body. One part is set aside for enterprises’ reserves.
4) Appropriate differentials are to be created to encourage the qualified and responsible workers.
5) Labor and wages policies are to be closely linked.17
According to the Chinese experience, Cuba should get well prepared to tackle the problem of rising unemployment as SOEs reforms tend to turn a large number of workers out of their post. If re-employment opportunities and social security benefits could not be provided to them, social stability might be in danger.
6. Corruption is detrimental to reforms.
Corruption simply means the use of public office to pursue private gain in ways that violate laws and other formal rules.

Unfortunately, China is also suffering from corruption, which has aroused public anger and generated economic costs. The idea that corruption can facilitate economic development is wrong. A well-known Chinese economist by the name of Hu Angang categorized corruption activities in China into four types:

1) illegal exemption of taxes and tariffs;
2) underground economic activities like smuggling, drug trafficking and so on;
3) embezzling public funds; and
4) rent-seeking, mostly in the form of market monopoly.
As many commentaries put it, corruption and smuggling are two malignant tumors growing together, and the only way to wipe out smuggling is to eliminate corruption.

On the other hand, the officials should build what the media suggest an “ideological Great Wall” to resist decadent ideas, greed and self-indulgence.

“When the window is opened, a screen is needed to keep the misquotes and flies out of the house”.

As socialist countries, Cuba and China should have their own values compatible to their political system and traditional cultures. Indeed, for them, socialist modernization requires both a prosperous economy and a flourishing culture, and economic reforms need to serve this objective.
In China, the Party has long been promoting socialist culture with Chinese characteristics. As Jiang Zemin said at the 15th National Congress of CPC, “ In building socialism with Chinese characteristics, we must redouble our efforts to raise the ideological and ethical standards and scientific and educational levels of the whole nation and provide a powerful ideological driving force and strong intellectual support for economic development and all-round social progress.
With the reform process proceeding forward, Cuba would be increasingly faced with a similar task of “keeping the mosquitoes and flies out of the house” Particularly, U.S. government sponsored radio and television broadcasting to Cuba (Radio and TV Marti), begun in 1985 and 1990 respectively. So Cuba would confront additional threat.

III. Conclusions

As Deng Xiaoping put it, “Do not believe that planning belongs to socialism and market belongs to capitalism. Both are instruments. Market can also serve socialism.” In order to speed up socialist constructions, China and Cuba need to implement economic reforms, and it is encouraging to see that both nations have achieved remarkable results.
In the light of China’s experience and lessons, the following implications are important:

1) pay more attention to theoretical innovation for the reform process;
2) choose the right speed of reforms;
3) “let some people get rich first”, but benefits of reforms should be equally distributed, 4) improve the ownership structure in a more effective way,
5) privatization is not panacea, but the SOEs should be reformed,
6) corruption is highly detrimental, and
7) “put a screen on the window when it is opened”.

Globalization is proceeding more swiftly than ever. Both China and Cuba must take an active attitude towards this tendency. As President Castro said, “Globalization is an inevitable process. It would be pointless to oppose a law of history.”18 But globalization poses both opportunities and challenges to socialism. As long as Cuba and China can stick to the policy of reforms and opening to the outside, socialist constructions will achieve great progress in the new century.

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