Cuba’s incoming constitution unlikely to see new market reforms

Cuba is on track to maintain sluggish growth, and price increases that outpace wage growth.

26 Jun Cuba’s incoming constitution unlikely to see new market reforms

Global Risk Insights

Conrad Petraitis–

June 26, 2018—

A general anticipation of change is natural in a country that has engendered a class of nepotism synonymous with the Castro family. The latest push to rewrite Cuba’s four-decade old constitution is another momentous opportunity for change, but it is unlikely to bring desperately need political and economic reforms expected for the island.

Cuba’s current constitution is unique in Latin America. Apart from being a near duplicate of the Soviet constitution, it still has a tinge of Latin American flare to it with mentions of “Spanish colonialism” and “Yankee imperialism.” It has remained largely unchanged since its adoption in 1976 and was most recently amended in 2002, essentially uncoupling the island’s day to day existence from its laws. Although idiosyncratic terms referencing Spanish and American colonialism are likely to remain in place, there will be some changes.

The bulk of reforms have, by and large, already been announced by former President Raul Castro and Communist Party (PCC) officials since the island’s legislative assembly last met in April 2018. Castro, who still heads the party after having stepped down from office earlier this year, has signaled his intent on placing term limits on the island’s presidency and reforming the 600-member National Assembly. He has suggested the Assembly could be reduced in size, its membership professionalized, and the post of Prime Minister introduced over time.

Mariela Castro, gay rights activist and Raul Castro’s daughter, has also said the new constitution will modify the current definition of marriage, paving the way for the legalization of gay marriage. Nevertheless, political and social concession are not likely to translate into economic reforms as Castro has suggested in recent weeks.

Some reforms, but not the ones one might expect

Castro first grabbed international headlines in 2011 when he announced that his administration would move to modernize Cuba’s centrally planned economy, asserting that the reforms would “preserve” socialism but not replace it. His market-style reforms largely focused on overhauling small-business practices, remedying fiscal policy largely absent since 1959, and reorganizing state firms which make up around 70% of the country’s economy. The reforms were by and large advanced by executive decree, in spite of the constitution which among other things bans “procuring income derived from exploiting the work of others”.

Their outcome has ultimately borne mixed results. There have been concessions in the state management of firms and private property rights, but the majority of proposed changes were halted by a lack of financial backing, sluggish bureaucracy, and a lack of a  fiscal or accountancy culture. Older generations of party leaders also sided with the eldest of the Castro brothers, Fidel, who belittled market-reforms, describing them as “concessions to the enemy”.

In lieu of stalled market reforms, however, the constitutional rewrite will have to respond to the island’s growing financial constraints. When the Soviet-era constitution was first introduced over four decades ago, the island was heavily dependent of Russian subsidies and a guaranteed market for its sugar exports. Since the fall of the Soviet Union, Cuba’s saving grace was Hugo Chavez’s Venezuela and record high oil prices. Venezuela’s oil shipments to Cuba per a series of bilateral agreements signed in 2000 provided the island up to 115,000 barrels per day (bpd) of heavily subsidized crude at their peak in 2008.

As Venezuelan production decreased due to a lack of investment and severe mismanagement, Cuba has been forced to cut public lighting and reduce fuel allocations to state-run companies. Just this year in early March, local sources reported gasoline and diesel shortages in service stations throughout La Havana.

Without Venezuelan oil imports, which were used both for domestic consumption and resale on international markets, Cuba has been more dependent than ever on foreign exchange inflows and  tourism-generated foreign currency earnings. The country’s new constitution will likely focus on both sources of revenue, eliminating the ban on dual citizenship that discourages remittances and adopting legislation to attempt to reduce the well-perceived risk of nationalization or expropriation of foreign investment currently pouring into the tourist industry.

Separate reforms that could supplant, or even try to displace the economic power of Soviet Russia or Venezuela’s oil reserves are not in the pipeline, and are are unlikely to come as long as contradictions over revenue are still ingrained in the constitution. Anything short of opening up the economy, which would include eliminating trade barriers and loosening controls over foreign exchange will fall short of the intended target.

Rebranding itself

An underlying theme in the constitutional rewrite has been that of the island’s current demographics. The vast majority of the country’s population does not remember the 1959 Revolution, Fulgencio Batista, or many of the socio-economic causes that led to guerrilla warfare in the country’s mountain ranges. Cuba’s younger generations do not have a sense of obligation to the revolution, much less a romantic memory of it. Miguel Angel Diaz-Canel, the island’s newly empowered president, was not yet born when the revolution which he swore to uphold came into power.

Cuba’s revolutionary, communist, and anti-imperialist constitution is more likely to undergo a rebranding to enhance its audience than to implement any substantive change that will open the centrally planned economy. The coming executive and legislative reforms only aim to install a semblance of checks and balances on a political system that for the first time in six decades is not ruled by a Castro.

Despite any attempt to rebrand itself, Cuba is likely to continue to see sluggish growth, price increases that outpace wage growth, and reverberations of political discontent throughout society. Excessive bureaucracy that holds ingrained ideological suspicions to foreign direct investment and no sense of regulatory transparency will also continue to hold-back trade and investment in the island. The island might have a new president and new constitution, but tangible market reforms are not in the pipeline.

Frank Rodriguez Junior
frodriguez110@gmail.com
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