Executive Summary: For nearly nine months, we have been engaged in discussions with the Cuban government, both about the conversion of Cuba's command economy to market socialism and a peaceful normalization of relations between our two countries – a process initiated by Rep. Charles Rangel [D-NY]. Earlier this month, I traveled to Havana, gathered general impressions, met with senior officials of the government, offered constructive criticism of their reform efforts, and outlined an alternative approach. On my return, I met with several important leaders of the Cuban émigré community in Miami. The purpose was to report on what I saw and said, to collect their impressions of how things stand, and to suggest how they might help accelerate a process by which normalization could be achieved to the satisfaction of both important parts of the Cuban nation, which essentially divorced in 1959 and have been separate since. Cuba's incredible potential is buried in an economic depression which grows worse daily. Castro's government would like to follow China's successful path to conversion, but instead finds itself in an IMF-type rut, which I characterized to them as Gradual Shock Therapy, or slow poison. The following report represents out best, honest efforts to put this nagging residual of the Cold War, located in our own backyard, into a perspective that might yield a bloodless, diplomatic resolution.
A Visit to Castro's Cuba
Last October, Rep. Charles Rangel [D-NY] invited me to a dinner at his home in Harlem to meet the Cuban Foreign Minister, Roberto Robaina. Rangel, an influential member of the House Ways & Means Committee who advocates lifting the U.S. embargo of Cuba, indicated that the economic situation in Cuba appeared to be growing worse. Aware of my interest in helping communist countries convert to market economies, he thought it would be useful if the Cubans could draw on my experience with Moscow and Beijing. Because of a prior commitment, I asked Irene Philippi, my senior economist for Latin America, to attend the dinner. She came back impressed with the youthful flexibility of Robaina, who spoke of "breaking the embargo against ideas in Cuba." ["A Dinner With the Cubans," October 12, 1993] She found "a determination to work at replacing the crumbling edifice of Cuba's political economy. Robaina clearly understands that Cuba's model is exhausted and that pragmatic openness is required for the nation's survival."
Rangel thereupon encouraged me to explore the possibilities of developing thoughts on how we might peacefully bring about a normalization of relations between our two countries. I asked Ms. Philippi to travel to Washington for a further exploratory meeting with the Cuban diplomats who work out of the Swiss Embassy. Believing they might try to retain our services, I had Irene inform the Cubans this would compromise my relations with Republican political leaders, but that I might be able to assist them pro bono. Late in 1993,1 visited them in Washington, and we spoke largely of the difficulties involved in converting a command economy to a market economy, and my experience in advising the Russians and Chinese in such matters. Knowing that Rangel had told the Cubans I was an outside advisor to Senate Minority Leader Bob Dole, I felt I could not proceed without informing Dole. I met with him, explained Rangel's interest and that of the Cubans, and told him I would not proceed if he did not want me to. This secured his passive assent. I also met with presidential counselor David Gergen at the White House and informed him of these developments. The Cubans throughout knew that I was keeping my government informed. They asked if I would go to Havana to meet with government economic officials, but I asked that Ms. Philippi be invited to make the initial inquiries. As a result, she spent a week in Havana in January and we published her lengthy report, "Cuba's First Step Toward Reform," on March 2. The summary of her report read as follows:
Cuba is currently in the early, halting stages of transition, as it attempts to move away from the socialist-command dictatorship structure in place since the revolution of 35 years ago. Polyconomics last year was asked by Rep. Charles Rangel [D-NY], the leading advocate of a diplomatic solution to the Cuba problem, to undertake an assessment of the Cuban political economy ~ and to advise the Cuban government on a transition strategy. An invitation from the Castro regime led to a January visit to Havana, to meet with senior government officials and to evaluate the nascent forms of market activity and participatory democracy that have so far been instituted. This report is the result of that fact-finding mission. Unlike the "big bang" approach that was attempted in the formerly communist nations of eastern Europe, Cuba's paradigm is cautious incrementalism. More than any other, the Cubans wish to follow the model first adopted by China, which has been stunningly successful in raising the living standards of the Chinese population. Market mechanisms will coexist with the state apparatus until the political and social concerns about private ownership and control of economic assets can be fully resolved. In Cuba, the full evolution of this process may take several years. At this early stage, however, the government appears to recognize the importance of establishing the foundations for a market economy, including monetary confidence and incentives for private entrepreneurial activity.
The report circulated in the Cuban government and Ms. Philippi's characterizations were generally accepted, as the Foreign Ministry then asked me to provide it with dates when I could travel to Cuba. I indicated the primary purpose of my trip would be to meet with Fidel Castro, to permit me to discuss political philosophy with him, in order to determine for myself the parameters of his flexibility. Throughout, I had indicated to all concerned that I believed a peaceful solution to the problem necessarily required the genuine agreement of Castro, the head of state, whom I believed would not agree to any solutions that would infringe upon the sovereignty and independence of the Cuban state. My guess, and that of Cubans with whom I spoke in the Cuban American community, was that he would sooner go down with the ship than suffer such indignities. Although I did not meet with Castro, the trip I undertook, from Sunday May 29 to Friday June 3, confirmed my sense that after 35 years in power, the 68-year-old Cuban President has no intention of departing with a whimper. If he should leave his post with his boots on, it will either be on his own terms, with the dignity of his office and person intact, or with a fight.
In the several excellent meetings Ms. Philippi and I had in Havana, I explained that on my return to the United States I would stop in Miami for two days, to meet with leaders of the Cuban American community, to report on my findings, and to assure them I understand that no peaceful solution to the problem is possible without their political assent. During one of those meetings in Miami, at the home of one of the leaders of the émigré community, I was told that my efforts were appreciated, but that in the end I would fail in my mission because Castro had become deranged. He would not listen to reason, but would prefer a Gotterdammerung exit, bunkered down in Hitler fashion, and going down in flames. The evidence of this derangement was a story, told to the Cubans recently by the President of Portugal, Mario Soares, who met last year one-on-one with Castro during a conference in Brazil. As he tells it, Soares sat for 20 minutes or so telling Fidel how much he and the Latin American political community wanted to help him out of his box. But Castro had to show some flexibility, he said, some small signs that his friends could use as diplomatic leverage, some gestures, such as freeing political prisoners or a liberalization of the press. When Soares finished, Castro stood up, walked over to him, and fingered the small flag pin in the lapel of the president's suit. "What is this, a flag of Portugal or a flag of Brazil?" he asked. The Portuguese president was amazed, as if Castro had sat there all that while without listening, and said, "Of course, it is the flag of Portugal. I am the president!" Whereupon Castro smiled, shook his hand warmly, told him what a pleasure it was to visit, turned, and walked away.
The account was meant to persuade me that some of Castro's screws are loose, but instead I took it to mean that he is not open to any suggestions that he improve his position vis-a-vis the United States by offering gestures, which he sees as an attempt to gain something by giving away some of Cuba's sovereignty. His question about the lapel pin was not out of curiosity. There is no point in trying to find a peaceful solution to this problem by asking Castro in any way to genuflect to Uncle Sam. If I were to succeed, I would have to find another route which would appeal to Fidel Castro's national pride. Insofar as the Cuban émigrés, or "exiles" as some still call themselves, also have national pride that might offset their hatred of Castro, there might be some room for maneuver. A photograph of Castro in the June 16 New York Times, shows him attired in a cotton sport shirt, a guayabera, instead of the olive military garb he has worn for 35 years; this, for a summit meeting of Latin American heads of state in Cartagena, Columbia, at which Castro participated in preparations for a Latin American common market. This, I thought, is tangible evidence that he is ready to do business. The war is over. Castro knows his team lost. It only remains for a peace treaty to be drawn up, one that does not require the abject humiliation of the head of state.
Meetings in Havana
Of the several meetings in Havana, none lasted less than two hours, and some extended to three or more. At the Foreign Ministry: Isabel Allende, deputy foreign minister; Alina Alayo, head of the U.S. desk; Tomas Misas, protocol officer. At the National Bank of Cuba: Raul Amado Blanco, vice president; Sergio Plasencia Vidal, department chief; Luis Torres Borges, specialist in American and Caribbean business. Dr. Alejandro Aguilar, senior researcher at the National Institute for Economic Research (INIE). At the Ministry for Foreign Investment: Dr. Miguel Figueras, senior advisor; Maria Carrillo de Albornoz, associate consultant. At the National Assembly: Dr. Ricardo Alarcon, president of the National Assembly of the People's Power. At the Trade Ministry: Maria de la Luz B'Hamel, minister of trade. At the Chamber of Commerce: Dr. Carlos Martinez Salsamendi, president. In addition, I hosted dinners on consecutive evenings with Ms. Alayo, head of the U.S. desk at the Foreign Ministry, with Professor Aguilar of INIE, and with Tomas Misas, protocol officer, U.S. desk.
General Impressions of Cuba
The 11 million people of Cuba, excepting the small number who have gotten a foothold in the "dollarized economy," are in desperately poor circumstances. It is amazing that on the surface the people seem as cheerful as they do, without the long faces I remember from Moscow during 1990-91 when the economy was in a similar stage of disintegration. The peso economy is deteriorating at a steady rate, as evidenced by the continuing decline of the purchasing power of the peso on the black market. The official rate of one Cuban peso equaling US$1.35, was also the official rate of the Russian currency before Moscow floated the ruble in 1990. In January, Irene Philippi had found the black market rate at 90 pesos to the dollar. It is now 120 to the dollar in Havana and 140-150 to the dollar in western Cuba, according to a Canadian businessmen I happened to meet. As there are 11 billion pesos in circulation, at the 120 rate the total value of these pesos is about $92,000,000, which amounts to $8.36 per capita. Aside from the U.S. dollars in circulation, an unknown amount, this $8.36 per capita represents the entire monetary capital available to the population. Their physical capital is nil, as the state owns all of the nation's assets (excepting the small, but growing amount in the hands of foreign investors, mainly from Canada, Spain, Italy and Germany).
There is no discernible business activity in Havana involving peso exchange, as there is nothing to buy with pesos. The people are given ration books for food and clothing, and must pay with pesos at rates fixed when the peso's purchasing power was still equivalent to the dollar. But increasingly, the monthly allotments are not to be found, even with the ration coupons. There are no shoes, for example, except for dollars. Gasoline can be bought only with dollars, at $4 per gallon, which can be had for 480 pesos. The standard wage, for doctors and university professors, as for everyone else, is 400 pesos per month. Ordinary citizens with whom we spoke say conditions are getting worse daily, that every day is now becoming an exercise in survival, that electricity is available in homes only a few hours per day, and that even the supply of tap water is becoming sporadic. (At the Foreign Ministry, one of the few buildings in Havana that had been freshly painted, there was no running water in the men's lavatory.) Health care is "free," but the only medical supplies coming into Cuba are those carried in by the daily visitors from Miami's Cuban community. A young man with a broken leg told me he was turned away at the hospital on a Saturday because they did not have plaster on hand for a cast, finally getting it the following Tuesday. Others told me they could exist only on the money they received from relatives in Miami and did not know how those without relatives could survive.
Still, it appears everyone is somehow surviving, probably because the few earning dollars from tips in the tourist trade, or illegally through theft and rampant prostitution of teenage girls, share their earnings with their families and friends. At the best hotel in Havana, the Nacional, where we stayed, the security is so tight that there is a definite police-state feeling reminiscent of my visits to Moscow. When, for example, a man and woman, both middle-aged, got on the elevator with Ms. Philippi at the ground floor, the operator asked the woman if she was registered. When the man said she was just visiting, the operator advised him it would not be allowed, that she had to be registered. What startled me was not only that the elevator operator was on the lookout, but that he also was able to identify a non-registered guest when he saw one. It is not that the hotel is trying to keep out prostitutes. They were everywhere in evidence, earning hard currency in the obvious employ of the best hotel in Havana - a marvelous 60-year-old edifice, with food and service as bad as in Moscow. There are a few very good hard-currency restaurants in Havana, in the embassy district, but these are also state owned.
Even the officials of the government will acknowledge that Havana is not close to being a tourist attraction. There is a faded charm to the city, which has not been much disturbed since the revolution, but it will take a decade of face-lifting to clear away the general dilapidation. There are few shops and little to occupy a tourist trade. We took a few hours to walk around the old part of Havana, but with children and old women tugging at our clothes, begging for "dollars," it was not very pleasant. We walked along the seawall promenade, and it struck me that there was no music to be heard, although young people gathered there in small groups. There are no batteries available, no radios. In the evening, a larger crowd of young people gathered near where a hard-currency cruise boat was anchored to hear the latest music from the U.S. drifting across the water.
There remains a reservoir of support for Castro in the general population. Criticism of the government is open and sharp, but as yet people cling to hope, to the possibility that Castro will somehow turn things around. The growing, organized efforts to escape the island, either by seeking asylum in foreign embassies, or by hijacking boats, is hard evidence, however, that Castro is running out of time. One Argentine businessman, who has spent serious time in Havana trying to assess investment opportunities against political risk, told us that Castro's public appearances before mass audiences are becoming riskier ~ any spark could turn them into angry demonstrations against him.
Foreign Investment Reforms
The Cuban government is earnestly trying to find an acceptable path to a market economy, "market socialism" if you will. And as Irene Philippi found during her January trip, Castro has introduced a grassroots democratic process designed to find a popular consensus on how to proceed. A new set of reforms were announced in May, but it was not until we reached Havana that we received sufficient detail to understand them, what they seek to accomplish, and the theory behind them. It was my unhappy task to inform everyone I saw that the steps being taken, while well-meaning, were misguided, and would not work to achieve their stated objectives. Indeed, upon examination and some discussion, I was forced to point out that they are in the same economic framework as the reforms produced in the Soviet Union that Mikhail Gorbachev called perestroika. The biggest mistake is in trying to initiate the conversion process by loosening up the rigid economic system by attracting foreign capital through joint ventures. This element was necessary as a step in the conversion process, but it leads to all sorts of difficulties when it is high on the priority list. "You are letting the tail wag the dog," I suggested in every meeting. The worst effect, which developed in the USSR, is that the government is first subject to a barrage of advice from foreign investors on how to conduct the reform process. The advice is invariably tailored to increase the profitability of the foreign investments, with little consideration of the effect on the domestic economy. In later stages, as foreign investors interface with the bureaucracy in control of the economy, bribery and corruption follow. It is almost impossible to expect government bureaucrats who are paid in a worthless currency to resist dollar bribes. The vast majority of ordinary citizens look on as their conditions worsen, while a small minority operate in an underground economy controlled by local mafia. The Russian economy is now in the later stages of this development. Cuba is in its early stages.
Throughout my visit, I had to explain that serious foreign investors are not yet interested in Cuba as it exists today. The official view is that the U.S. embargo is denying U.S. businessmen the opportunity to get in on the ground floor of a booming Cuba. They should, I was told, persuade the government to lift the embargo. The truth, I said, is that there is no U.S. embargo against Russia today, and yet there is little serious foreign investment there. The first rule of foreign investment is to assess the level of domestic contentment. If the people are happy, government political risk will be small, and political risk in large part determines the value of financial assets. A nation's principle creditors are its own people. A nation's currency is its non-interest bearing debt. If the value of a nation's currency is falling, it can only mean that the people are betting against the government, showing discontent by refusing to hold the government's debt instruments.
Until the Cuban government concentrates on increasing the demand for pesos by its own citizens, it cannot hope to attract long-term capital from abroad. There are foreign businessmen in Havana who represent serious international companies, looking around, doing small joint ventures that will establish a commercial beachhead against the day when Cuba successfully completes its transition. The most important thus far is that of Mexico's Grupo Domos International, which will eventually sink $1.4 billion into rebuilding Cuba's decaying phone system, in exchange for 49% of the state phone company. But these are outnumbered at the moment by the sharks and pirates, looking for fire-sale bargains at ten cents on the dollar that could be immediately cashed. I asked the Cuban officials to think of the U.S. foreign investor as a single person, walking into a restaurant for a buffet lunch. He can select from a huge bowl of Europe, an exciting selection of China, Japan and the rest of Asia, a NAFTA platter of Canada and Mexico, and the enormous emerging market of Latin America. In this buffet Cuba is a tiny dish, with a sign marked, "Don't Touch." The U.S. investors who are most interested in Cuba are the Cuban Americans in the émigré community, those who have the best feel for the market, the best inside knowledge of how to do business within the Cuban culture, and are consequently the most likely long-term investors. The equivalent in China, of course, are the Chinese capitalists in Hong Kong, Singapore and Taiwan. These are the foreign investors you have to think about attracting, I suggested, and you will receive prices for state assets far better than you could get for your phone company. If you can get your domestic economy humming, the Cuban community in the U.S. will itself urge the lifting of the embargo — and it will be done. The Cuban community in the U.S., perhaps one million people, has grown so wealthy and politically influential in the last 35 years that it now dominates both the Democratic and Republican parties on the issue of Cuba and its status. It has veto power on the embargo.
There is underway in the U.S., I explained, a shifting attitude toward Cuba and Castro, but it is not nearly enough to bring political normalization between our two countries. This is partly based on a softening of opinion toward most of the countries that had been arrayed against us during the Cold War, including China and Vietnam. But these have no political communities in the U.S. comparable to that of the Cuban émigrés and exiles, and also have markets that dwarf Cuba's. There is at least some softening toward Castro himself, I thought, based on the small signs that he seems to be willing to move Cuba toward a market economy, which necessitates an expansion of the economic and political freedoms of the people. Otherwise, I said, I wouldn't be there. When Irene Philippi visited Havana in January, she had a lengthy meeting with Finance Minister Rodriguez-Garcia. He persuaded her that Castro was prepared to end the state monopoly over its own citizens, giving them the same economic privileges now accorded foreigners. Since then, we have not seen any movement in that direction, although we were again assured that they were in the planning stages. The reform measures announced in May, in fact, were in the wrong direction. It struck me that Cuba is like a giant, dying fish, like the tuna in Hemingway's "Old Man and the Sea," with Castro watching helplessly as the circling sharks chew away at his prize catch.
Gradual 'Shock Therapy'
If a thousand economists were asked to write down ten steps for conversion to a market economy, I suggested in my Havana meetings, almost all would list the same steps. They would each in some way reduce economic control and decision-making at the elite center, dispersing this power to the free marketplace of ordinary people. The problem is that the sequence of steps would be different in every case, and that most economists trained in the west since World War n would put currency reform near the end of this list. Almost none would put it first, although that is where it belongs. The disastrous effects of the "Shock Therapy" method designed for the USSR by Harvard economists Jeffrey Sachs and Lawrence Summers were predictable, in that they advised ending central controls on wages, prices and capital allocation before a marketplace mechanism had been established. A modern marketplace requires a financial services mechanism — a banking system, stock and bond markets, etc. — which cannot function without a unit of account that has a known, predictable value throughout the realm and over time. Foreign investors can operate without a ruble unit of account in Russia or a peso unit of account in Cuba, because they insist their contracts with the government be drawn in hard currency or in commodities. The ordinary people, who must transact in the domestic currency, cannot even begin an effective conversion to a market economy without the currency being guaranteed in value by their government. People work each day to consume and to save. If they do not have a paper asset that holds its value from one day to the next, they will not work to save, and commerce and wealth creation become impossible, except on the black market. The Chinese have been successfully managing their conversion to market socialism because they worked for most of the last 16 years to keep their unit of account, the yuan, steady in value against the U.S. dollar. The Chinese do not understand how the Russians can expect to do otherwise: "You do not burn down your old house before you build a new one," an official of the People's Bank of China told me last September in Beijing, advice I shared throughout Havana.
The Cuban government, including its central bank officials, actually believe they are working to stabilize the peso by trying to reduce the quantity of pesos in people's hands through increased taxation. They also insist they will not emulate the Russian example of shock therapy, although that is exactly what they are doing. I'm reluctant to quote individual officials to whom I spoke, because I had not asked if I could do so. The Financial Times, of June 3, though, accurately presents this Cuban view through Osvaldo Martinez, president of the Economic Commission of Cuba's National Assembly, who was visiting London. The article, entitled "Cuban Economy 'Set to Recover Next Year,'" reports in part:
Mr. Martinez says the main problem facing the government is the big overhang of currency in the Cuban economy. A meeting of the National Assembly at the start of this month, following consultation with 3.5 million workers, has provided the outline for tackling this issue, he says.
The government does not intend to apply shock therapy - "the type of neo-liberal policies as you see in Latin America. The task is to correct the internal financial imbalance and not to kill the social cohesion."
However, the government recognizes that excess liquidity has had negative effects on the economy. "It hurts the discipline of work and the interest in work. It hurts productivity and efficiency and contributes to the development of the black market," says Mr. Martinez.
Excess liquidity was estimated at the start of last month at about llbn pesos - representing about 15 months of the population's earnings....Some 60 percent of this monetary overhang was in the form of deposits in savings banks, and the rest in cash.
This is being made worse by a continuing budget deficit. It was 5.2bn pesos last year, and this year the government is aiming to reduce it by 24 percent, mainly by reducing the inefficiency in and cutting subsidies to state enterprises...
The monetary overhang will be addressed in three ways. Policies will be aimed at encouraging savings; raising prices and eliminating subsidies and certain government gratuities, such as free water; and through the introduction of wider taxation. At the moment, only a few thousand Cubans pay income tax.
Price rises were announced this week, significant ones on products Mr Martinez describes as non-essential goods, such as cigarettes, tobacco, alcoholic beverages, and on petrol. Electricity prices will also go up, but by how much will depend on what is consumed.
"We think that we need not less than 18 months to see the problem under control," though the first effects of the policy will be seen before that. The aim, he says, is to "restore the purchasing power of our national currency." After the problem of excess liquidity is resolved, the possibility of making the peso convertible will be considered.
The policy, which sounds as if it was designed by the International Monetary Fund, whose Russian expert is said to have visited Havana earlier this year to offer friendly advice, will have exactly the opposite effect. The purchasing power of the peso cannot be increased by taxing pesos out of the hands of the people. Because the state owns all the nation's assets, the prices it charges for goods it acquires from the production of the people determine the purchasing power of the peso, as I tried to explain. It may reduce the quantity of pesos by raising prices, which is the same as raising taxes, but people will then have less incentive to work for pesos, which now buy less. At the margin, they will leave the peso economy and enter the underground dollar economy. The velocity of the pesos in circulation will increase, as people try to get rid of them in any way they can, more than offsetting the reduction in the quantity of pesos. With less production, the government budget deficit widens, and it must print more pesos to cover it. When Moscow tried the same method, the ruble traded at four to the dollar on the black market. It is now almost 2000 to the dollar. The collapse began in earnest when the government "floated the ruble" in 1991, abandoning the official exchange rate of one ruble to US$1.35, the same as the Cuban peso's rate today. Even though the black market peso rate is 120 to the dollar, I told the Cubans I thought it significant and important that they had not abandoned the old official rate, which gives them something to shoot for.
In some of our meetings, there was resistance to our assertion that the peso's decline on the black market was a gathering vote against the government. I explained that it was the only peaceful way the people had to express disagreement with the direction of government policy and should be viewed in that context. In the same way, the value of Cuba's hard-currency debt in the international market is the purest indication of how the world is rating Cuba's reform efforts. In January, Cuba's $8 billion debt was trading at 16 cents on the dollar. It moved up smartly, touching 32 cents, with reports of the contested elections for the National Assembly and expectations that the government was preparing the market reforms announced in May. With the announcement, though, the debt slumped back to 23 cents. Irene Philippi pointed out that they were still ahead of where they were in January, two steps forward, one step back. If the peso's value continues to fall in the black market, however, this might further persuade global speculators that Cuba's hard-currency debt should be discounted back to 16 cents or below.
China's Impact on Cuban Agriculture
In our early meetings in Havana on this trip, we were told rather proudly that the recent agricultural reforms, as well as those still to come, would be extremely important in moving Cuba forward. The decision had been made to convert the state communes to cooperatives, which is what the Chinese did in 1978, providing the foundation for the great economic expansion that followed. Clearly, the government believes the reforms will increase the production of farm produce, especially sugar, by permitting the coop workers a greater say in how they organize themselves and how they are paid. I told them these reforms might help offset the negative effects of the other reforms, but this would depend on the organization of the co-ops. I told them what Deng Xiaopeng had done in 1978 and why it worked, with an analysis they acknowledged they had not heard before:
On one day in the spring of 1978, the Beijing government announced that all communes would henceforth be cooperatives. Essentially, this meant that the members of the co-ops could do anything they wished to organize themselves and their work, so long as they paid taxes based on the previous year's production. Workers would not get ownership of the land, but the collective co-op would be guaranteed a free hand for a 25-year-period — a critical move that has enabled the co-op to make long-term investment decisions. It was also important, I told the Cubans, that Beijing did not issue a guide on "how to be a coop," a central template. Each commune now had to organize itself, like a beehive, outside of central authority. This was a huge grant of power from the state to individuals, within the collective framework. In a land of a billion people, the greater part of whom are engaged in the production of food and fiber, this was an astounding transfer of power and control by the Communist Party and the Beijing elite.
A Chinese co-op, comprised of perhaps 2,000 or 10,000 or 20,000 people, suddenly had local authority and local accountability. For as many co-ops as existed, there were that many different kinds of organizations. The most successful were those which organized themselves most effectively. As a commune, they were directed to plant rice or raise pigs or produce melons. Now, they had to decide what to do with their human resources. They elected their leaders and debated the issues. They would decide to plant less rice, raise more pigs, produce vegetables instead of melons. Families could depart from this plan as well. If the decision were correct, the co-op profits would vastly exceed the taxes paid to the government. The co-op would have to decide how to distribute the profits, how much should go as a cash bonus to labor, how much should be withheld for investment, to buy a truck or install an irrigation system.
To make these kinds of decisions requires a stable unit of account, and this China's central government has provided. Until recently, the government kept the price of petroleum at one fifth of the world price level, thus maintaining the purchasing power of the yuan as it existed in the old command economy. Farm co-ops could continue to purchase state fertilizer and gasoline at yuan prices reflecting this low oil price. Western economists view this as an inefficiency, but as I have explained in Moscow, Beijing and Havana, during the transition process it is appropriate for the state to transfer resources to the private sector in this manner. A central goal of transition, in fact, is to transfer capital owned by the state into the hands of individuals in an equitable fashion. Russian and Ukrainian agriculture remains plagued by inequities largely because, unlike China, the state has maintained control of the process of organization. With several thousand people on a Russian co-op and no agreed-upon social contract of what belongs to whom, individual work and investment cannot proceed with any sense of confidence.
Year after year in China, by contrast, word would spread about co-op successes and shortfalls, and delegations would be sent from the poorer to the richer to glean information and advice on how to organize. By 1983, when I spent two weeks in China studying the reforms, the co-ops were voting to shift out of agriculture entirely, financing bicycle shops and light industry. Now, 16 years later, there are co-ops which once planted rice but now plant nothing. They have gradually shifted toward production of higher value-added products, and have invested in urban projects, hotels and office buildings, for example. From the outside, these still look like "socialist" enterprises, but close-up they are modules of democratic capitalism. The next step will be to permit individuals to cash in on their co-op investment, receiving a "share" that they can sell to others, in order that they be able to migrate to another area and another occupation. This will give the Chinese system an even more "capitalist look." It will happen as the country grows richer, and as young Chinese wish to cut their ties to the land, migrating to where their individual potentials can be realized.
All this I explained again and again in Havana, in order to let them see how their own agricultural reforms compared. From the long faces I encountered, it was clear the Cubans realize how far they are from the successful Chinese approach, and how close to the Russian failures. Now and then I was met with hostile comment, that "Cubans are not Chinese," or that China is so vast it can experiment in many ways, a luxury Cuba does not have. I could only suggest that Cuba can now benefit from the Chinese and Russian experiments, avoiding those that failed. Of course, Cubans are not Chinese, but their similarities are far more numerous than their differences, I pointed out. The Russians, once again, have been pushed by their "shock therapy" advisors to leap from communism to capitalism, without the political or economic mechanisms to absorb the pressures of adjustment. On the advice of the World Bank and IMF, both the Gorbachev and Yeltsin governments raised the ruble price of petroleum, for example, on the simplistic idea that the lower price represented an inefficient state subsidy. In practice, this generated the inflation that has crippled Russian commerce, agriculture in particular. Unable to afford the higher-priced fuel and fertilizer, Russian farmers and co-ops have watched yields decline and crops rot in the fields without transport to markets.
The Cuban agricultural reforms are doomed to fail, not only because the peso has not been fixed, but also because the state continues to dictate the terms of production. "Commune" signs have come down, replaced by "Co-op" signs, and farm workers are now allowed to decide how they organize themselves into teams. They must, however, grow what the state tells them to grow. "We need them to grow sugar," one official insisted to me, "because we need the hard currency." Giving the co-ops the authority to make these decisions, as the Chinese do, would more likely result in greater production of value, as the co-ops figured out themselves how to optimize their work effort. If production of greater value is produced, hard currency will increase automatically. Once again, though, we see the tail wagging the dog, as the government concentrates on increasing exports instead of increasing the efficiency of the domestic economy. As it is, the central government can only keep its fingers crossed that sugar is the right decision and then offer the excuse that the crop failed because the weather was bad, as it is now doing. I was able to point out that our suggestions were entirely consistent with their intent of converting to market socialism. This point clearly registered, which is why I believe the meetings were so successful. I did not come to them with suggestions that would be politically impractical. The Cubans told me repeatedly that they had to work at their own pace, and that nothing could interfere with their independence and sovereignty.
The political leaders of Cuba should try to imagine that the rest of the world suddenly disappeared, and their island economy constituted all of civilization. If they were to survive, they would have to try to quickly construct a system that would allow production and commerce to ensue. Unless they were to revert to a pre-civilized barter economy, they would have to provide the people with a way to trade and borrow from one another by exchanging pieces of paper, financial instruments. The cities especially have to trade with the farms. This is true no matter what form their economy takes, communist, socialist or capitalist. The first step is to infuse the only Cuban financial instruments now in existence, the government's peso debt, with credibility.
The primary recommendation we made is that the Castro government tell the Cuban people that it would honor its peso debt at something close to the original purchasing power, say one peso per U.S. dollar. It could do this through a peso bond issue, which would accomplish several objectives at once, the most important being to revive the dying peso economy. As noted above, at the current black market rate of 120 pesos to the dollar, the value of the 11 billion pesos in circulation is about $90 million, or about $8 for each Cuban citizen. To restore the purchasing power of the Cuban debt at dollar parity would give Cuba monetary capital of $1,000 per capita. By contrast, the per capita national debt of the United States is roughly $20,000. All Fidel Castro would be doing is restoring the government's obligations to its own citizens in parallel with its obligations abroad.
"How can we afford this?" was the question everywhere. Cuba's current asset value is now tiny because its capital structure prevents it from creating wealth, I said. If it would improve its capital structure, it would create wealth, and the value of its peso assets would rise accordingly. I asked them to consider a modest goal, of achieving the per capita income of the people of Puerto Rico in the year 2004, ten years hence. This is only $7,000 per capita, or a third of the U.S. per capita income. Still, it would mean that Cuba's gross income in 2004 would be $77 billion, at least five times what it is today. A bond issue that capitalized that future value would be extremely credible, both to the Cuban people and the international investment community.
Conceptually, here is how it would work: The government would offer to sell to anyone a bond for 350 pesos. At 120 pesos per dollar, it would thus cost roughly US$3. The government would promise to pay 3 percent interest on a bond held to a 10-year maturity. The bond would be redeemed with either 350 pesos plus accumulated interest of another 120 pesos, or an ounce of gold or its equivalent in dollars, with accumulated interest. The bonds would have instant credibility, because they would be seen as legal obligations of the state, no matter what government might be in power in 2004. If Castro were gone, he would still have committed his successors to pay these obligations in full, or incur the political wrath of the bondholders, the Cuban people.
With the credibility of the bond issue assured, the value of the peso in the black market would soar. Indeed, if the government were merely to announce that the bond issue would soon take place, the peso would climb in value on the heightened expectation that its future value would be secured. The government would allow the bonds to change hands, just as the currency can, and their value would rise on the secondary market as the government's credibility increased. This liquid market of peso instruments would cause the economy to revive immediately. The people would be selling their dollars for pesos and, in order to acquire more pesos, they would resume their efforts at work or commerce in the cities and on the farms. Goods would reappear, first out of hoards, then out of increased production, and as the government restored its credit worthiness with its own people, it would find foreigners willing to resume lending to the government to help finance its transition to a market economy.
Instead of the government worrying about the 11 billion "peso overhang," it would soon discover there were not enough pesos in circulation to transact business on a daily basis. The government would have to print more instead of taxing them out of the pockets of the people. Otherwise, the value of government peso debt on the "black market" would trade at a premium to the dollar.
Of course, the Cubans were skeptical of this scenario. I offered an historical example. This is what happened in the United States in 1791, when Treasury Secretary Alexander Hamilton persuaded Congress to pay its hard currency debt (to the Dutch) at par, and to pay the government's dollar debt to its own citizens at par as well. Before this decision, I told the Cubans, U.S. dollar debt, held by those who had supplied the Revolutionary Army of George Washington with the materials of war, was trading at 15 cents on the dollar in the secondary markets of Philadelphia and New York. When Hamilton told all the creditors, foreign and domestic, they would be paid in gold, even though the U.S. government owned no gold at the time, the value of its debt climbed steadily and by 1793 was trading at a premium, $1.15, such was the demand for liquid assets. The new United States was like a start-up company with great promise, able to capitalize the value of its future income stream with its creditors. Cuba is in the same position today, I explained.
The advice I offered was clearly new to the Cubans and met with great receptivity. There is uniform agreement that the currency problem is at the center of the government's attempts to convert to a market economy. They said they would study the idea and asked for further information on how the Hamilton reform was developed, and for other historical examples.
The other steps I suggested would be possible only after they fixed the peso. These both involve the encouragement of small business. The liberalizations already permit families to engage in private enterprise in more than 100 categories, such as shoe repair, barbering, auto repair, and other services. The law does not permit families to hire non-family members. Nor does it permit family enterprises to contract with each other, or to import goods from abroad. A family business cannot expand by hiring a next-door neighbor, or by buying materials from other families, or by importing needed materials from other countries that are trading with Cuba. These prohibitions amount to internal embargoes against commerce, government barriers that were necessary during the experiment with communism, but are now obsolete. They are doing more damage than the U.S. embargo.
The reason the government is not proceeding along these lines has less to do with "socialist ideology" than it does with problems caused when services leave the state sector. Under communism, the state taxes 100% of all economic production and then redistributes it to the population according to central plans, keeping a percentage for itself to pay the bureaucrats and the military. When a cobbler fixing shoes in exchange for a ration coupon and a peso leaves the state sector for private enterprise, he now charges either many more pesos or dollars. People left behind in the peso economy then have one less cobbler and cannot get shoes repaired even with ration coupons. The state now finds its budget going deeper into the red, as it does not have the machinery to collect taxes with any degree of efficiency from this emerging private sector. In addition, the now affluent cobbler can buy with dollars or pesos goods and services that come onto the black market, as bureaucrats, finding they cannot live on their peso wages, sell state production "under the counter." The parallel currency drives a wedge between the people, shredding the rules that govern the social contract.
This is why parallel currencies cannot exist. If the purchasing power of the peso were re-established, it would drive out the dollar, and political inequities would dwindle to a manageable level. In China, which began permitting family business in 1978, rules were relaxed little by little, so that by 1983 an enterprise could hire six non-family members, and by 1986 it could hire up to 20. The stability of the currency made this possible. It is why they can now say "You do not burn down the old house until you build a new one," as the incentives otherwise drive people who are the strongest, the cleverest, and most willing to be corrupted into bidding for space in the as yet incomplete "new house." From the United States, it no doubt appears that Fidel Castro is being stubborn in not doing what seems easy enough — moving to a market economy and a democracy. It is not so easy as all that. I assured the Cubans in Havana that I understood the problems that they face are difficult, precisely because they have never before been confronted. These are complex problems new to world history. There is no textbook on converting from communism to capitalism in ten easy steps. In my final meetings, I suggested that if Castro woke up the next morning, looked around, and decided he had failed, and called exile leaders in Florida to say he would give them the keys to the state, and that he would fly to Madrid to spend the rest of his years, the Cubans in Florida would confront the same unknowns.
This was exactly what I told the members of the Cuban community in Miami during two days of meetings upon my return from Havana. The meetings were arranged by Andres Blanco Fajardo, an executive at Merrill Lynch who has broad contacts in the Miami community. They included dinner with Carlos Alberto Montaner, a noted author, and Juan Alberto Suarez Rivas of the Cuban Democratic Platform; a meeting at the Key Biscayne home of Prof. Luis Aguilar Leon, joined there by Domingo Moreira of the Cuban American National Foundation; an interview with Andres Oppenheimer of the Miami Herald, whose account of my visit appeared in the June 5 edition. I also met with Carlos Palomares of Citibank in the offices of Phillip Markert at Citibank, Miami. In each, I offered the opinion that Castro's reservoir of political support in Cuba, while it may be dwindling, rests of the perception of the 11 million Cubans that the leaders in the Cuban American community may not have their best interests at heart, but merely wish to restore the status quo ante. Castro's 1959 revolution was successful because his objective was the overthrow of the ruling elite of Havana, the oligarchy embodied in Fulgencio Batista, the dictator. As long as Castro can portray Jorge Mas Canosa, the primary leader of the exile community, as the reincarnation of Batista, he can maintain the support of the people. I suggested it was not enough for the exile leaders to promise "free markets and democracy" on their return, which are political platitudes. They must confront the same problems facing Castro, find better options, communicate these to the people of Cuba through the myriad media available, including Radio Marti, and in this way challenge Castro's leadership. One of the Cubans in Miami told me he had gotten the same advice last year from a member of the Czech government.
The Miami Cubans seemed genuinely interested in our analysis. There was little enthusiasm for the notion that Castro might wake up tomorrow and decide to follow the kind of advice we offered, however. The predominant view is that Castro wishes to go down in history as the last true believer in the Marxist ideal and will do anything to keep the people of Cuba enslaved to that ideal as well. The view holds that Castro is prepared to permit Cubans to suffer and die, if need be, to allow him to avoid capitulation to his adversaries in Florida. I could only point out that his adversaries in Florida also seem prepared to have their Cuban brethren suffer and die in order to bring about Castro's ignominious end. Otherwise, they would not object to my offering advice that might keep him in power, by improving the living conditions of the Cuban people. Actually, I did not find unanimity of this position in my Miami meetings. More often, the émigré leaders scoffed at the idea that Castro would take good advice. Well, why not offer it openly, and find out? If Castro would resist sound specific advice, and the people would see him doing so, it might hasten his exit from power.
There are definitely gradations and factions in the Cuban community in Florida. Younger Cubans who cannot quite grasp old resentments are much more willing to see Castro preside over the transition to its completion. The view that it is easier to have Castro remain, so long as he is moving in the right direction, was not as unpopular as I had anticipated. There is something to be said for a known quantity, "the devil you know." I had to point out that any political leader who could retain the support of his people for 35 years had political skills that could not be dismissed. Through my discussions, in fact, I found myself repeatedly in the position of defending Castro against complaints that he was not proceeding faster with reforms presented to him by his advisors. I had to point out that if Castro had not questioned the wisdom of the pace of the reforms, the economy would be in even worse shape than it is. Over the years, Castro might go up to the edge of a cliff, sometimes against his better judgment, but he always seems to draw back instead of falling over. If he did not have this skill, the people of Cuba or his palace guard would have gotten rid of him long ago.
The subject of succession is one I dealt with in Havana and in Miami in the context of financial investment. I'm sure that everyone in the Castro government wonders and worries about how the succession will come about. It is also clear that those in the government responsible for trying to attract foreign investment know this is a subject of major concern. I put a finer point on it by explaining how political risk is the primary determinant of the value of a nation's assets, which ultimately are its people. The price/earnings ratio of the financial assets of Thailand is at 19 because the world observes the people are happy and the political horizon is clear. Hong Kong's assets are valued at only about 12 because of the uncertainties of its future and that of China. It is not Deng Xiaopeng that investors worry about. It is the uncertainty of the succession process.
Closer to Cuba, I pointed out how sharply the value of Mexico's assets declined because of the political disturbance in Chiapas, which underscored the inadequacies of Mexico's political system. Mexico's ruling class has come to appreciate the economic importance of strengthening its political institutions. I advised the Cubans that there is only so much they can do in the economic realm to increase the prosperity of the island. This would be true even if the rest of the world disappeared. The most important thing Castro could do would be to begin constructing a credible succession mechanism, so that the people of Cuba could plan for their future with some confidence. So long as I said it in that manner, the advice was noted without hostile comment. Only when I may have left the impression that Castro might take such steps to appease world (U.S.) opinion did tempers flare. There was also occasional ideological resistance to the idea that the government should focus on the value of financial assets, as if I were suggesting that money comes first. On the other hand, those who had read my long essay, "Karl Marx Revisited: A Fluid Society," January 24,1994, which Irene Philippi had distributed on her January visit, did not make that mistake. Stock markets (and governments) crash when governments cater to the elites, forgetting the needs and aspirations of ordinary people.
In the Cuban American community there is a crosscurrent of such interests. The elite, as always, tend to think primarily of money and power, while the ordinary people think of the plight of their relatives and old friends on the island. When Congressman Rangel first asked me to lend a hand toward peaceful normalization, it was clear that any path would have to satisfy the property and financial claims of the 6migr6 community. We did not proceed until we were assured by the Cuban diplomats in Washington that the Castro government was in principle open to financial repatriation. The most aggressive leaders of the Cuban American community to whom we spoke would have the United States government buy their claims, and present them to Castro as the price of lifting the embargo. It does not seem practical to ask U.S. taxpayers to get involved, however. It is one thing for the Congress to give the émigrés a veto over the embargo decision, to enhance their negotiating position with the Castro government. It would be quite another to give them a big bag of money, essentially without a negotiation process.
In Havana and Miami, I presented the following metaphor: In 1959, there was a divorce in the Cuban nation. As nations are simply the aggregation of all families born into the nation — the family being the primary unit of the political economy — we might say the role of mother and wife, which represents security and caution, remained on the island. The role of father and husband, which represents enterprise and risk-taking, emigrated to Florida. The global communist experiment, of course, was one of maximum security and minimum risk. In China, the feminine yin remained on the mainland, the masculine yang departed to Formosa, slamming the door behind as it left.
Reconciliation is not only possible in the Cuban nation, it is inevitable, just as the two Vietnams and two Germanys have united, as the Chinas are coming together, and as the Koreas will sooner or later. It is now becoming clear, through Jimmy Carter's intervention, that even North Korea's Kim II Sung knows the war is over and that his team lost. As with Castro, Kim is maneuvering for peace terms that are as generous as he can manage. Would the U.S. relationship with Japan have developed as it did after World War n if General MacArthur insisted on the abdication of the Emperor? Outside parties are useful in getting the disputants to communicate and negotiate, but the hard work has to be done by the disputants themselves. It is in that sense that I advised the Havana Cubans that they will get nowhere with the United States if they attempt to normalize relations without satisfying the Cuban emigres. They can increase their leverage primarily by seeming more attractive. This means doing the things that make the Cuban political economy more inviting to risk-taking and enterprise. It also means being generous in their settlement of claims - which they can easily do if they get their economy growing rapidly. For the Miami Cubans, who were thrown out of the house 35 years ago, reconciliation will not be possible if they convey the impression that they really do want to restore the status quo ante, with Batista returning in 1994 garb. They also have to be prepared to accept Cuban peso bonds in settlement of their claims, which should be no problem at all so long as the bonds are gilt-edged. Both parties should have a stake in the success of Cuba's future. As it is, the venomous hatreds built up during 35 years at the leadership level will not get the 11 million people of Cuba and the million émigrés in the U.S. very far.
In both Havana and Miami, we recommended a private, scholarly study be undertaken to concentrate on the economic requirements of Cuba's return to a market economy. The sketchy advice we offered was meant only to show that alternatives are not only necessary, but conceptually available. We suggested the possibility of sponsorship by the Manhattan Institute in New York City, which expressed serious interest in the idea when we posed it prior to the Havana trip. The Institute, founded in the 1970s to promote the philosophy of entrepreneurial capitalism, would be an appropriate academic forum to develop options for Cuba's re-entry to the hemisphere's political and economic markets. The project would be financed by companies interested in Cuba's future. We would draw together some of the finest minds in business and finance to contribute their expertise toward this process of reconciliation and renewal. It would require the cooperation of the Cuban government, of course, and at least the passive assent of the leaders of the émigré community – in the same way the community supports a flow of humanitarian relief to the island.
I told the Cubans in both Havana and Miami that once relations are normalized, there is no doubt in my mind that the Cuban economy could soon skyrocket. It is the diamond of the Caribbean, a diamond now in the rough, a tropical paradise the size of Ohio, 90 miles from Florida. It could easily become not only a tourist magnet for North America, but also a bridge between north and south, with Havana revitalized as a commercial and banking center as well. I'd had this dream for Puerto Rico, I explained, and last year thought our efforts with the Puerto Rican business community and the new Commonwealth government were ripening in that direction. Puerto Rico's ambivalent political status, unhappily, continues to hold it back, its leaders frozen somewhere between statehood and independence. A reborn Cuba would have no such inhibitions. Its combined 12 million people, among the best educated and industrious in the hemisphere, could create a dazzling island political economy. Nothing would hold it back.