Houses, Used Cars and Markets: Change Cubans Can Believe In.

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There is much political continuity in Raul Castro’s government, but the recent announcement that Cubans will be able to sell and buy houses and their used cars represents an important change. These are visible economic reforms with direct impacts on Cuban lives. The marketization of these assets unleashes Cuban entrepreneurial spirit and might increase the remittances received from relatives and friends abroad.

For decades, rigid communist regulation of real estate and car sales created major resentment in Cuba, but the government didn’t respond to the public's criticism. After a brief interregnum from 1984 to 1988, when Cubans could sell their houses, Fidel Castro cancelled this right arguing that it was fomenting inequalities, creating a class of intermediaries who were capitalizing on transactions, and rewarding the nouveau riche.  His characteristic aversion to market mechanisms also exerted a virtual veto against the sale of automobiles acquired after 1959.

The opening of these two critical markets is not a response to a governance crisis, given that the political opposition is dispersed and divided. Nevertheless, the changes will have political consequences. By allowing the sale of houses and used cars, Raul Castro’s administration addresses a crisis of confidence found among Cuba's younger generation regarding the government's capacity to carry out urgently needed reforms. While it will increase gratitude towards the government from its political base, it will also facilitate the development of a sense of property ownership by many Cubans who will solve their housing and transportation problems with less dependence on the Communist Party.

Over the years, discussing changes without implementing anything drastic has generated social fatigue. After the policy reversals in the late 1990’s, many Cubans were convinced that the timid reforms that had authorized some self employment came out of desperation, stemming from the end of Soviet subsidies.  The current changes signal to economic agents that the government is serious this time about expanding the role of markets and private property in the Cuban economy.  

The broad impact of these measures makes almost impossible to reverse them. The liberalization of these domestic markets will break up some old command economy rigidities and provide cash to Cubans interested in beginning new businesses, emigrating from one region to another, or starting a new life outside Cuba.  Many of these endeavors were previously thwarted by fears about taking risks without a minimal of capital.

The reforms are part of a process to institutionalize the public sector. It will limit some of the government's overextension into private relations between Cubans and reduce the enforcement burden on the state related to futile actions to subdue a rampant black market. The government can now tap some significant transaction tax revenue.  Buyers and sellers will have to use government-owned banks, thereby providing financial institutions with liquidity and profits and, importantly, a track record on the value of traded assets.

The changes eliminate the heavy burden of bureaucratic red tape and corruption that has existed for the exclusive benefit of low and middle level bureaucrats. In advance of the measure, early in 2011, the government relaxed regulations to allow more rentals of houses and rooms for commercial activities. Ending the uncertainty associated with illegality will help transfer assets to people with entrepreneurial attitudes and increasing the number of private sector units to host foreign and Cuban tourists. 

The new markets will likely spill over, revitalizing other sectors such as commercial transportation, housing construction, and car and house repair. It might also add jobs, real estate, and means of transportation to the fast growing non-state segment of the Cuban economy. Furthermore, this will generate incentives for the development of wholesalers either through imports, government sales, or mechanisms involving Cubans living abroad.

The liberalization increases the liquidity of houses and used cars, which are the average Cuban's main assets. These assets can be used as collateral for business loans. Obviously, this would require complementary legislation regarding contracts, bankruptcy, and business restructuring.  Such a move toward the market was unthinkable prior to these reforms. The measures adjust the value of these assets and provide information to lenders and borrowers that reduces the risk associated with starting a new business. The advantages of financial reform are evident.

Risks for the Cuban government:

The central challenge for the government now is to create a system of contracts and institutions to tap this potential increase in productivity, while avoiding predatory and corrupt practices. A corruption boom is a permanent threat to the transition to a mixed economy since the current Cuban power structure is filled with rent seeking opportunities and lacks supervisory capacity and transparency.

With the new markets come new risks. The measure will legalize some accumulated wealth by individuals who have taken advantage of illegal opportunities.. The opening of the real estate market might spark inflationary bubbles in other sectors. Some concentration of real estate property is unavoidable.

The inequality gap between the have and the have-nots will increase, affecting particularly those who work in state sectors, such as health and education, which are not included in this first wave of reforms; and those who have less access to remittances and the convertible currency economy.

On balance, the liberalization of these markets will ignite new demands for reforms. Those who can afford it will be free to decide, with less government interference, where to live and how to move. Raul Castro’s government is breaking away from the old communist tradition of stigmatizing private property and markets. Many people are probably more interested in opening a business than changing the government. Ultimately, however, the question is: how long can the economic genie be out of the bottle without demanding more substantive political reform?

The reforms and U.S policy:

Support for market oriented economic reform and increased private property ownership rights in Cuba must be part of U.S. foreign policy goals. A peaceful and gradual transition to democracy in the mid-term depends as much on economic reform as on the emergence of an independent and globally connected middle class. The most important human rights problem in Cuba today is probably not the lack of freedom to organize political parties, but the lack of jobs for the 1.5 million workers who will be dismissed from the state sector in the next two years.

One political dividend of Raul Castro’s market reform is the exposure of the gap between the priorities of the Helms-Burton Act and the relevant issues affecting the Cuban population. It is difficult to argue that the recent measures do not constitute progress in the human rights arena.  It will be acknowledged as such by the international community, as well as by the most relevant organizations of Cuban civil society, the religious and intellectual communities, and the general population.

In contrast, the Helms-Burton Act, the cornerstone of U.S. policy towards Cuba, recognizes only compensation or restitution to Cuban-Americans for lost properties as progress in private property ownership rights. The predictable result is that Washington’s agenda, in the absence of a response to the new realities in the island, becomes less relevant as Cubans experience change they can believe in.

After a thoughtful analysis of Cuba’s economic reform, a recent report of the Center for Democracy in the Americas concludes: “the right way for the United States to assess the reforms is to ask whether they will enable Cubans to lead more prosperous lives and then determine how our country can best support this process. Economic stability in Cuba would allow its citizens to better share in civil society and in participatory politics”. Instead of inhibiting positive changes in Cuba, the United States must remove all barriers to trade, international assistance and investment that affect Cuba’s emerging private sector.  

Dawn Gable contributed to this article.