A Look at Cuba Before Normalization Takes Hold

HAVANA, CUBA: In light of the historic thaw in US Cuban relations announced on December 17^th, three items stand out from a four-day visit to Havana:  1/ Cuba’s economy is a disaster in desperate need of reform. 2/ The communist party retains its tight grip and political change is a long way off. 3/It is likely to be months before normalized bi-lateral relations produce real change.

The Economy

 Havana is a ruin, a surreal time warp, exemplified by ancient cars and trucks from before the 1959 revolution. For 50 years there’s been no imports of cars for private use.  Houses and apartment buildings are run down with their occupants not having cash for needed repairs. 

Amazingly, most Cubans subsist on salaries of $20 per month.  Those with more are communist bureaucrats, workers in tourism with access to hard currency, and those receiving remittances from abroad.

Cuba’s economy is dead in the water with barely any advance in gdp. The country is nearly bankrupt with no access to credit. There are frequent power outages. Unemployment is kept low because jobs are provided in a bloated and inefficient public sector where four out of five Cubans work. Inflation is suppressed. There are chronic shortages. Basic foodstuffs are rationed. Ninety percent of Cubans don’t own a car.

Despite the negatives, reforms unveiled in 2011 by President Raul Castro have allowed a small but growing private sector to take hold. The reforms permit Cubans to buy and sell their apartments, 84% of which are privately owned. But while an incipient real estate market exists, it is stymied by an absence of mortgage credit.

Similarly, Cubans can buy and sell their privately owned vehicles. But contrary to expectations liberalization has boosted car prices. Unbelievably, the asking price on the refurbished 1956 Chevrolet pictured below is well over $100,000. Classic cars can’t be exported, meaning that US-based collectors won’t be able to import these treasures anytime soon.

Restored 1956 Chevrolet on Havana’s Prado

Cuba’s economy is further distorted by there being two currencies, both of which circulate. The government says unifying the exchange rate is a priority but that is unlikely to occur until Cuba obtains access to hard currency. Look for early moves for Havana to rejoin the International Monetary Fund.

A Closed Political System

Cuba remains a one-party communist state with little prospect of liberalization. The media is tightly controlled and state-owned newspapers are mostly propaganda. English language newspapers from abroad are banned.

This past week Cuba released more of the 53 political prisoners it promised to liberate as part of the December accord between presidents Obama and Castro. Thirty-six are now free, a move the White House calls “a tangible sign that Cuba is keeping its word.”

As part of the 2011 reforms Cubans can have cell phones, stay in hotels previously reserved for tourists, use the internet, and travel abroad. But because most people don’t have disposable income, the new freedoms mainly help the better off.

Contrary to what many outsiders want to believe, Fidel, his brother Raul and the revolution remain popular, although independent surveys don’t exist. Cubans are proud of their country’s achievements in education and health care, which is free to all.

Change from Normalization May be Slow

 Every Cuban of the two-dozen or so I spoke with favors normalization. Some were deeply emotional, saying they can’t wait for Americans to arrive in significant numbers. The lives of ordinary people are bound to improve with the lifting of the embargo.

But while Cubans and Americans are eager for visits, important restrictions remain. Despite President Obama’s announcement, it is still not possible to use US-issued credit cards in Cuba. Likewise getting email on dial up internet servers can be difficult.  I was unable to access my Google and Yahoo email accounts, getting instead a prompt saying, “access is denied in the country you’re in.” There is disagreement whether these measures can be lifted by executive order or must await congressional action.

Bob Corker, the new chairman of the Senate Foreign Relations Committee, said last week that the embargo has been ineffective, a clear sign that he may favor its repeal. Both the Chamber of Commerce and leading agricultural organizations favor normalization. Congressional hearings are already planned and a top state department official is visiting Havana this month to advance the normalization process.

A Cuban businessman, who declines being identified, told me that Cuba urgently requires reform.  “We’ve created a system,” he said, “that we can’t control.”  The only way for us to have any prospect of economic improvement, he continued, is to open up and build a market economy.

Last May Washington’s Peterson Institute for International Economics released a study on the Cuban economy.  In it researcher Gary Hufbauer concluded “that once the tectonic plates shift” there will clear benefits for both Cuba and the United States.  The tectonic plates have shifted and from my perspective Hufbauer is spot on.#

Barry D. Wood writes often about economic transitions. He last visited Cuba 11 years ago. This piece appeared first on market watch.com.

Missing from the Celebration of Freedom—Two Leaders Who Died Too Soon

BRISBANE, AUSTRALIA:  As the world marked the 25^th anniversary of freedom returning to Eastern Europe, it is sad that two of the wisest post-communisleaders are no longer with us.

In the extraordinary events that followed the collapse of the Berlin Wall, Poland was the inspiration. It had elected a non-communist government months before the wall came down. Lech Walesa, Pope John Paul II are true heroes who changed the world. Ronald Reagan’s strong stance and his 1987 call to “tear down this wall” were similarly decisive. Mikhail Gorbachev, the last Soviet leader-- still alive at 83—courageously allowed the wall to be opened, sacrificing in the process Moscow’s loyalist East German communists. 

Comprehending the enormity of Gorbachev’s deed, an astonished British editorialist wrote that, “all of Stalin’s war time territorial gains in Europe were given up without a shot being fired.”

Events cascaded rapidly. Czechoslovakia’s communist government collapsed within days after the wall came down. Hungary catapulted towards free elections while the remaining regimes-- Romania, Bulgaria and Albania-- toppled like a row of dominoes.  In 1990 East Germans voted to merge their country with West Germany. And late in 1991 the USSR itself collapsed, fragmenting into 15 separate countries.

History, in my opinion, will judge Vaclav Havel of the Czech Republic and Lennart Meri of Estonia the most significant leaders to have emerged from the wreckage of communism.

Meri, Estonia’s president from 1992 to 2001, deserves recognition. Born into a prominent family, when the Red Army invaded in 1940, 12 year-old Meri, his mother and younger brother were exiled via prison train to the Siberian gulags. His father, an Estonian diplomat, had to endure Moscow’s infamous Lubyanka prison. Miraculously the family survived and later Lennart was permitted to attend university. He became a respected writer and filmmaker. He was 60 when the Wall came down.

Meri earned the admiration of Estonians during the failed coup against Gorbachev in August 1991. With his countrymen terrified that a Russian invasion would soon snuff out their drive for independence, Meri took to the radio, assuring citizens they needn’t worry, that he knew the plotters to be clueless and incompetent. There was no invasion and Meri’s grandfatherly counsel had enormous impact. 

Fluent in six languages, most learned as a youth during his father’s postings abroad, Meri repeatedly observed that the end of communism was a beginning, not an end. A tall, dignified man, Meri understood the horror of mass deportation. But remarkably he championed the cause of freedom for Russians. He died in 2006. Were he alive today Meri would be aghast at Russian actions in Ukraine, and equally comforted that Estonia’s security is anchored in Nato and European Union membership.

Lennart Meri as president

Vaclav Havel, like Meri, for five decades was deprived of the honest, authentic life he so passionately wanted. Like tens of thousands, he had to make the best of a bad situation.

Like Meri, Havel paid a heavy price for coming from an entrepreneurial family that after the communist takeover in 1948 was denounced as a class enemy. Coming of age during the period of maximum repression, he was banned from universities.  In 1975 he wrote a devastating critique of totalitarianism. In six pages Havel dissected the massive fraud and corruption of communism. Its lofty ideals, he wrote, were hollow.

Reflecting on the 1989 Velvet Revolution in Czechoslovakia, Havel explained to an audience at the World Economic Forum in 1992 how Soviet imperialism imploded.

"Communism was not defeated by military force, but by life, by the human spirit, by conscience…. It was defeated by a revolt of color, authenticity,.. and human individuality."

Famous for his essay on the power of the powerless, Havel lived to see the society where imperfectly, “truth and love prevail over hate and lies.”

Vaclav Havel

Universally hailed as a great European, Havel the dissident playwright spent years in communist jails before being swept to the Prague Castle in the Velvet Revolution. He served as president first of Czechoslovakia and then the Czech Republic from 1989 to until 2003.  Vaclav Havel died at age 75 in 2011.  Writer Anne Applebaum hails Havel’s unique success in making the transition from dissident to national leader.

Alan Levy, the founding editor of the Prague Post, was asked why Prague had become the in spot for émigré young Americans in the 1990s. He replied that he himself had pondered the question, why Prague instead of Berlin, the place that exemplified both the wall and freedom. “Prague,” he concluded, “became the Mecca for young people because of one man, Vaclav Havel. It was Havel’s example of intelligence, modesty, artistry and love that drew people to Prague.”

Havel and Meri, I suspect, would both celebrate 25 years of freedom, while warning of the obvious dangers ahead.

Barry D. Wood covered the collapse of communism and the rebuilding of Eastern Europe for Voice of America. A version of this article appeared on marketwatch.com

Poland's Extraordinary Transformation

WASHINGTON:  Twenty-five years ago this autumn two remarkable events took place in Washington.

On September 27^th, 1989 in the musty embassy ballroom of the Polish People’s Republic on upper 16^th Street, Leszek Balcerowicz, finance minister in the new non-communist government, outlined a plan to transform Poland’s economy from communism to capitalism. Shock therapy would be launched in three months.

Balcerowicz’s message was breathtaking.  Prices would be decontrolled, individuals allowed to start businesses, the survival of state enterprises determined by the market. There was more-- the printing press would be shut down—halting hyperinflation, the worthless Polish currency redeemed.

Financial journalists in Washington for the annual meeting of the International Monetary Fund were astonished.  Some sprang from their seats to file stories after the modest man in the ill-fitting East European suit stopped talking. For those of us remaining the room was electric. One reporter said, “there are lots of books about transforming capitalism to communism, none for going the opposite direction.”

This was six weeks before the Berlin Wall came down.

On October 19th, 34-year-old Jeffrey Sachs, the Harvard economist advising the Polish government, made an emotional plea to Washington insiders. At a Willard Hotel dinner arranged by the Institute for International Economics, Sachs said Poland required a cash injection to “leap across the chasm” from disintegrating communism to capitalism. “The next six months,” he said, “are critical in determining whether Eastern Europe’s first non-communist government since World War II succeeds.”

Sachs had made his name by helping to end hyperinflation in Bolivia. He essentially shamed his Washington audience into action, excoriating the US government, the IMF and World Bank for dragging their feet.  It was imperative, he said, that the Polish experiment succeed.

The debate over big bang and shock therapy essentially began that night.

Sachs had offered his services to Poland only weeks earlier and was just off the plane from Warsaw where there was chaos and anger over shortages of basic commodities, including food. Few outsiders thought the planned reforms-- that in the short-term would further depress living standards—had any chance of working. Sachs said later, "It was a terrifying and unpredictable period."

The rest, of course, is history. Not only did the Balcerowicz reforms stabilize and activate the economy, they won critical public and government backing. They became a model for similar plans in Czechoslovakia and the Baltics (where they worked) and in Russia (where they failed).

What could not be foreseen in the autumn of 1989 was that Poland would become the star performer of all the economies that emerged from the wreckage of the Soviet empire. Poland’s return to growth and fiscal discipline were powerful factors in the European Union agreeing to admit eight former communist countries in 2004.

Balcerowicz, now 67, served as finance minister and then central bank chief until 2007. Currently he teaches at the economics university and runs his own research institute.

While Poland has not yet joined the euro currency zone, Balcerowicz subscribes to the fiscal austerity doctrines championed by Germany. He faults Greece and other southern periphery countries for not moving fast enough or hard enough to restructure their uncompetitive economies.

The Polish miracle continues.  Alone among European Union economies it did not experience a downturn following the 2008 financial crisis. In most recent years Poland has been the fastest growing economy in the EU. Its gross domestic product has doubled since 1989 and is today Europe’s sixth largest economy.

More significantly, per capita g.d.p. has more than doubled since 1989.  This in a country of nearly 40 million, by far the largest in Eastern Europe.

Poland and Germany—with a long history of conflict—have become partners, demonstrated most recently by Chancellor Angela Merkel championing the selection of conservative Polish  Prime Minister Donald Tusk as the new president of the EU council. 

Reflecting on the 25^th anniversary of his reforms, Balcerowicz credits Sachs with playing a vital role in persuading the Solidarity-led government that shock therapy was the best way forward. For his part, Sachs says he is "thrilled that the Poles acquitted themselves so beautifully in the pages of history."