Does the Cuban model work? Look to numbers, not tea leaves

By Heather Berkman

Last week, Jeffrey Goldberg posted a column at The Atlantic that sparked an international uproar over whether Fidel Castro had admitted that Cuba's economic system is failing. Goldberg published a series of interviews he conducted with Fidel during a recent trip to Cuba. In response to Goldberg's question on whether "the Cuban model was still something worth exporting," Fidel reportedly replied that "the Cuban model doesn't even work for us anymore."

The quote unleashed the expected frenzy of analysis of what Fidel meant -- and Castro himself attempted to backtrack, later claiming that Goldberg had "misinterpreted" his statement.

Whether Fidel has recognized that the socialist model on Fantasy Island has failed, it is clear -- judging from younger brother Raul's economic policy decisions of the past year -- that the government recognizes that the current system doesn't work. Put Fidel's commentaries aside and look at the numbers, if you believe them.

The Cuban economy is an unsustainable mess. Raul, who took over from Fidel in early 2008, is in the unenviable position of dismantling more than 50 years of policies that obliterated the private sector and shaped generations of people who rely on the Cuban state for employment, income, and social services. With accumulating debts to foreign creditors, about half of an initial $1 billion in foreign suppliers' accounts still frozen in local banks, a devastated agriculture industry (Cuba imports more than 60 percent of its food), a sluggish tourism recovery, a distortionary currency regime, and crumbling infrastructure, Raul has little choice but to continue the piecemeal reform approach his government has slowly but surely undertaken over the past year.

The Cuban government will dismiss any suggestion that it's moving in a liberal direction, but the numbers don't lie. The government, which employs more than 85 percent of the labor force, will lay off a million workers -- including half a million over the next six months -- to try to reduce the state-run payroll and encourage workers to find other jobs. The government plans to issue licenses for more workers to run small service-providing businesses like restaurants, construction companies, and repair shops. Last year, the government began granting licenses to barbershops and taxis to give them more authority over pricing of services. Agriculture reforms have included provisions to allow farmers to directly purchase supplies and equipment and sell produce directly to consumers instead of working through a state-run farm produce contracting system. With an eye on the tourism industry, Raul recently signed a measure that increases the length of time that foreign investors can lease state-owned lands, from 50 to 99 years.

The Castro government isn't about to completely dismantle the state-run economy, and policy decisions will be taken slowly to ensure that the state retains its iron grip on Cuban political and social life. And there's no guarantee that Raul won't reverse field if the changes provoke serious unrest. Further, the ongoing U.S. economic embargo and the pending headache of resolving about $U.S. 6.8 billion in U.S. property claims will continue to limit the island's growth and investment opportunities.  

But as it becomes more obvious that the current system must change and as public anger grows over the average citizen's poor quality of life, the Cuban government is already looking for new ways to loosen its grip.  

Heather Berkman is an analyst in Eurasia Group's Latin America practice.