China

The editor of Foreign Policy, Moisés Naím, discusses factionalism, scenarios and the possibility of Cuba turning into Albania:

Raúl’s invisibility in Fidel’s blog is a manifestation of the secretive power struggle to define Cuba’s future. Inevitably, several factions are jockeying for dominance in the post-Fidel era. The two main ones are “the Chinese” and “the purists”. The first favours a Chinese-inspired model with an economy open to foreign trade and investment, tightly controlled politics and the military playing a large role running state-owned businesses.

The purists instead maintain that Cuba is now in a position to attain Fidel Castro’s socialist dream: a centralised economy with political power firmly concentrated in the State and the party. They argue that Hugo Chávez’s oil-fuelled generosity and ideological commitment makes this approach economically viable.

The Chinese faction is led by Raúl Castro, a pragmatic military man more interested in logistics than ideology. The leader of the purists is the Foreign Minister, Felipe Pérez Roque, Fidel Castro’s former aide. Pérez Roque also counts on Hugo Chávez. After all, the 110,000 barrels of oil that Chávez ships to Cuba every day must count for something in terms of political influence in an otherwise bankrupt economy.

It is impossible to predict the path that Cuba will follow. The most likely scenario is a messy hybrid that continues with much of the current policies and politics but where different approaches are periodically tested, embraced or discarded. But in addition, interesting insights about Cuba’s likely evolution can also be gleaned by looking at the experience of other nations making the transition to a post-communist model.

One sobering lesson is that, in the transition to a democratic market economy, protracted failure is more common than rapid success. More nations are stuck in a disappointing transition than those, such as the Czech Republic, that have progressed quite fast after communism. Another lesson is that the more internationally isolated, centralised, and personalised a former communist regime is, the more traumatic and unsuccessful its transition will be. Ceausescu’s Romania is having a more troubled transition than Estonia, for example.

Thirdly, dismantling a communist state is far easier and faster than building a functional replacement for it. Think Yugoslavia. Fourthly, as Russia shows, the brutal, criminal ways of a powerful communist party with a tight grip on public institutions are usually supplanted by the brutal, criminal ways of powerful private business conglomerates with a tight grip on public institutions. Finally, introducing a market economy without a strong and effective State capable of regulating it gives resourceful entrepreneurs more incentive to emulate Al Capone than Bill Gates. Think Bulgaria.

It is therefore safe to assume that if the post-Castro regime suddenly implodes, Cuba will end up looking more like Albania than the Bahamas. Instead of a massive flow of foreign investment into Cuba, America will get a massive inflow of refugees escaping a chaotic nation that no longer can or will stop them from fleeing abroad. Domestic politics will be unstable and nasty, with the Cuban exile community from America adding to their complexity.

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Stratfor’s Global Market Brief assesses Cuba’s future economic reforms, which will be slow paced.

Some snippets of the brief:

Meanwhile, the Cuban economy faces significant problems. Its black market is growing significantly. Inequality is on the rise, along with corruption and crime. Its agricultural output is in decline and its industry inefficient. Though Cuba is unlikely to address these problems by embarking upon an openly free-market, capitalist course, it is no secret that Raul has been looking to China and Vietnam as candidates for economic emulation.

Raul Castro clearly would prefer to model any economic reforms on China, which has maintained state control along with its rapid gross domestic product growth. China is approximately 86 times larger in population than Cuba, but with a much larger proportional rural population — something that helped fuel China’s industrialization. In contrast, Cuba’s economy is more similar to those of the former Eastern Bloc nations, which experienced economic havoc in the 1990s after moving quickly from command-and-control economies toward liberalization.

To avoid such an outcome, Cuba will proceed slowly. Raul cannot make radical changes, and he knows it. Drastic changes reinventing Cuba’s capital structure could prove disruptive, possibly even undermining the island nation’s military. While he must implement reforms to maintain economic growth and prevent Cuba’s standard of living from worsening, continued assistance from Venezuela and China — Cuba’s two largest trading partners — will allow Raul and whoever takes his place to proceed with reforms at a slow pace for quite some time.

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Cuban market reforms similarly could pave the way for significant foreign investment in the agriculture, service and technology sectors. Raul Castro is less opposed to ethanol than his predecessor was, and Cuba has the capacity to manufacture as much as 3.2 billion gallons of ethanol annually from its sugar crop. This could serve as a huge source of capital, particularly as demand for the fuel rises worldwide. Cuba’s well-educated population also could provide an ideal labor pool for outsourcing in a variety of areas in the service sector, as well as in technology and biotechnology firms.

For any real economic takeoff to occur, however, Cuba’s leaders will have to promote an entrepreneurial ethos among its people and businesses. (Such an ethos already exists in the black market.) Cuba will have to invent a business culture mostly from scratch, though it already has instituted programs that support (albeit heavily taxed) small businesses that serve the tourist industry. The regime also will have to balance any economic reforms with its propaganda of economic egalitarianism, though this already is being undermined by rising inequality. A successful model for maintaining communist rhetoric in support of the party while simultaneously pushing through capitalist reforms exists in China, and Cuba has been watching.

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Wired explores Cuba’s potential as an ethanol player post-Fidel:

Fidel Castro hates ethanol. He thinks it punishes the poor by driving up food prices. But Cuba produces a lot of sugar, and with Fidel’s brother Raul — a fan of biofuels — calling the shots (at least for the time being), Cuba could become a key player in the global ethanol game.

It wouldn’t happen overnight, and it would take a huge investment in the country’s rickety sugar industry, but Cuba has the potential to produce 3.2 billion gallons of ethanol annually, according to an analysis (.pdf) by Juan Tomas Sanchez of the Association for the Study of the Cuban Economy. Another Cuba expert, Jorge Hernandez Fonseca, puts the figure (.pdf) closer to 2 billion gallons but even that figure would place Cuba third — behind Brazil and the United States — in worldwide production.

Of course, reaching either of those numbers would require Raul Castro to open the door to foreign investment, but that may not be as unlikely as it sounds. The Washington Post notes there’s speculation that Fidel’s exit opens the door to economic reform like we’ve seen in China, and it’s worth noting Cuba is quietly modernizing its ethanol infrastructure.

Raul Castro is seen as a pragmatist who is more concerned with improving Cubans’ daily lives than spreading la revolución, and according to Reuters he is believed to favor loosening state control on Cuba’s economy. The country has said it would allow foreign investment in its tourism industry.

Whether that means he’ll allow foreign investment in the sugar and ethanol industries remains to be seen (Cuba produces about 1.2 million tons of sugar annually, but was the world’s leading producer before Castro took over in 1959). Cuba started overhauling 11 of its 17 ethanol refineries last year. That’s an expensive proposition, and the money will have to come from somewhere. And its not as if agribusiness wouldn’t love to have a piece of that pie. The Wall Street Journal notes that Archer Daniels Midland tried to get in on the Cuban ethanol game in the 1990s but was rebuffed by Fidel. Perhaps Raul will be more welcoming.

Cuba doesn’t have much need for ethanol, Sanchez writes, and could export as much as 3 billion gallons a year — worth about $7 billion at today’s prices. Don’t look for any of that ethanol to flow in America though. The State Department says it won’t lift the trade embargo on Cuba any time soon.

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According to AP via International Herald Tribune, trade between Cuba and China grew by 23 percent to more than US$2 billion (€1.4 billion) in 2007, solidifying China’s place as the communist-run island’s second-largest economic benefactor behind oil-rich Venezuela.  China is Cuba’s second-largest trading partner and the top importer of Cuban products, especially nickel and sugar.

China’s influence throughout Latin America is prevelant, and its strategic relationship (economic & military) with Cuba is evident. 

Read the prospect of China’s rise to superpower status for 2008.

Excerpt of article:

Here comes the world’s newest superpower. The rest of the world is gloomily contemplating economic slowdown and even recession. Not in Beijing. China is set to make 2008 the year it asserts its status as a global colossus by flexing frightening economic muscle on international markets, enjoying unprecedented levels of domestic consumption and showcasing itself to a watching world with a glittering £20bn Olympic Games.

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Might Cuba’s military draw parallels to China’s plight in regards to unemployed ex-servicemen?

The Economist features an article detailing the predicament be facing China’s PLA and leadership’s concern over such a destabilizing situation.

The following excerpts illustrate the case in point:

Over the past couple of years protests by demobilised soldiers have become a potent challenge to local governments trying to keep the lid on unrest during a period of wrenching social and economic change. The unrest has embarrassed the ruling Communist Party, which came to power militarily and might have fallen in 1989 but for the army’s crushing of pro-democracy protests in Tiananmen Square.

The ex-servicemen’s main grievance is the difficulty of settling back into civilian life. Most soldiers from towns are assigned jobs in the civilian sector when they leave the army. But this has become increasingly difficult because of the dismantling of state-owned enterprises (SOEs) in recent years and the resentment of surviving SOEs at having ex-soldiers foisted on them. Rural soldiers—the bulk of the non-officer ranks—are being sent back to villages where there is next to nothing to do.

In Yantai around 2,000 ex-soldiers gathered in mid-July outside the local legislature to demand better benefits. They also wanted to make the point that the toothless legislature should be doing a better job of supervising the government. The Yantai authorities responded unfavourably. Activists say that police have stepped up surveillance of their homes and that plainclothes officers often follow them. Police broke up your correspondent’s meeting with a group of ex-servicemen, on the pretext of a passport check.

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Given the army’s vital importance to the maintenance of party rule, the official press is especially reticent about publicising unrest among ex-servicemen. Chinese academics rarely mention the topic. But in an article that appeared in the spring edition of China Security, a quarterly published in Washington, DC, Yu Jianrong of the Chinese Academy of Social Sciences said that demobilised soldiers could act as a “bond” to bring together isolated disaffected groups. Mr Yu said ex-servicemen in the countryside, who he said numbered 20m, had the “social capital, organisational, networking and mobilisation capabilities to be the bridge between workers and peasants”. In the southern province of Hunan, he said, veterans had formed an “anti-corruption brigade” including laid-off workers, peasants and intellectuals of 100,000 members. This number is unverifiable, given the underground nature of any such movement.

[Photo: The Economist]

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