Cuba Lags Behind

Carmelo Mesa-Lago

Comparing the Performance of Two Socialist Economic Models: Cuba and China-Vietnam [1]

 

March 31, 2023

After the disappearance of the USSR and the socialist camp in the 1990s, very few “command” or centrally-planned economies have survived. In Central and Eastern Europe, the countries that were in the Soviet orbit have been transformed into market economies in varied degrees. In Asia, China, Laos and Vietnam became “socialist-market” economies and only North Korea maintains the old Soviet model. Cuba also retains a command economy, although with some modest market-oriented reforms. It is impossible to find data on North Korea and little statistics are available on Laos.

Two Socialist Economic Models Compared

This article, a very brief summary of a forthcoming book of mine, compares two current economic socialist models for which enough data are available:

  • The Cuban model, characterized by the central plan and large state enterprises dominating the market and private property, with timid and incomplete reforms that have resulted in two severe economic-social crises; and
  • The successful Sino-Vietnamese model of market socialism, typified by predominant small, medium and some large private enterprises with a market that operates under a decentralized plan—more of a guide to development than a strait jacket—and with the state regulating the economy and controlling the largest enterprises.

A good indicator of the two models is the share of the state sector in the gross domestic product (GDP): in 2019, the proportions were 27% in Vietnam and 30% in China, but 91% in Cuba. Conversely, the share of the private sector in GDP has grown rapidly in China and Vietnam and is today the most dynamic factor in the economy.

In Cuba, the small expansion of the private sector has been hampered by excessive regulations, prohibitions, bureaucratic obstacles, heavy taxes, as well as the uncertainty created by policy swings. For example, university-graduates (such as engineers, architects, physicians, nurses, etc.) cannot practice their profession privately, but they can work renting a home to tourists, or as taxi drivers or restaurant owners. This ban encourages many professionals to leave their state jobs that pay a miserable salary and move to the private sector where they earn much more, or leave the country.

Such prohibitions do not exist in China or Vietnam; furthermore, a farmer can freely decide what to plant, to whom to sell the produce and set its price by supply and demand. As a result, China, a country that historically suffered periodic famines is now self-sufficient in food and Vietnam generates a large agricultural surplus that it exports. It is already the world's second largest exporter of rice and exports 250,000 tons annually to Cuba, which could produce it domestically.

The reason it does not do so is that, in Cuba, all non-state producers (small private farmers, members of production coops, state farm employees and usufruct owners) are obliged to sell a portion of their harvest (sometimes up to 70%) to the state (a policy known as “acopio”) at prices set by the government below the market price. If Cuba were to follow a similar agrarian policy as in the two Asian countries, in a few years the severe food shortage and the need to import about 80% of what it consumes, at the cost of $2 billion dollars per year, would end.

Measuring Economic and Social Performance in the Three Countries

My book first proves that it is possible to compare the three countries and then describes the key economic policies of the two models and their results. Second, it utilizes 20 indicators (half economic and half social) to compare the performance of the two models. Three examples of economic indicators follow:

  • While Cuba suffered economic stagnation and decline in the period 2009-2020, China's average annual GDP rate grew almost eight times the average of Cuba and that of Vietnam grew five times the average of Cuba.
  • Between 1989 and 2020, Industrial production jumped in China 153 percentage points and in Vietnam 57 points, while in Cuba it decreased 45 points.
  • In 2020, inflation in China was 2.5%, in Vietnam 3.3% and in Cuba 19% (it escalated to 400% in 2021).

Cuba ranked third in all ten economic indicators.

Concerning social indicators, between 1989 and 2020, the average annual inflation-adjusted wage in the state sector rose 289% in Vietnam and 217% in China, but fell 46% in Cuba.

Healthcare is usually considered one of the areas of greatest progress in Cuba. This was true in 1989, when the island was ranked among the first Latin American countries and among the Eastern European socialists; but the crises of the nineties and the current one, have caused a severe setback. For example,

  • Cuba’s maternal mortality rate per 100,000 live births shot up from 39.1 to 176.6 in 2017-2021, which pushed Cuba back to its level of the 1950s. Conversely, in 2021 Chinese maternal mortality was 17.8 and Vietnamese was 46, both showing a decreasing trend.
  • The “misery index” (a combination of economic and social variables) in Cuba was 1,227, while in China it was 4.3 and in Vietnam 4.8.
  • In the ten social indicators, Cuba ranked third in seven indicators and first in three:
    • open unemployment (but with a very high underemployment rate),
    • years of schooling (they are fairly similar in the three countries); and
    • the rate of infant mortality (Cuba’s rate was virtually tied with China’s and while the two Asian countries showed decreasing rates, Cuba’s trended up).

The average ranking of the 20 indicators was: China first, Vietnam second and Cuba third, lagging significantly behind the other two countries.  It must be taken into account that, at the time of their revolutions, the two Asian countries had a much lower level of economic-social development than Cuba, so they expended greater effort to match and surpass Cuba.

The Impact of the Two Models on Social Protection

The book focuses on the three main social protection programs: pensions, health care and social assistance. To evaluate the performance, it uses 150 indicators grouped by the principles of social security developed over more than a century by the International Labor Organization:

  • Pension coverage of the labor force;
  • Health coverage of the total population;
  • Social assistance for the elderly population;
  • Adequacy or sufficiency of benefits;
  • Social solidarity and gender equity;
  • Administrative efficiency at a reasonable cost; and
  • Financial and actuarial sustainability of the system.

Some examples of such indicators follow.

  • China average monthly pension estimated in U.S. dollars in 2020 was 27 times Cuba’s average and Vietnam’s was 11 times Cuba’s average.
  • China social-assistance to pensioners, as a proportion of the population aged 60 and over, was 18 times that of Cuba while Vietnam’s assistance to its pensioners was four times that of Cuba.
  • Pensions in China and Vietnam are adjusted annually to wages or inflation, but not in Cuba, so in Cuba they lost 32% of their value in 1989-2020.
  • The social assistance pension in China was 3.5 times that of Cuba and in Vietnam 1.8 times that of Cuba, and while in the two Asian countries these pensions exceed the poverty line, in Cuba the pensions were below the poverty line. In 1989-2019 the number of hospitals in China grew 79% and in Vietnam 11%, but in Cuba it declined 32%.

The financial sustainability of the social security system in the short, medium and long term is essential to ensure the continuity of the other social principles, and my evaluation showed that financial sustainability was higher in China and Vietnam than in Cuba.

  • Cuba has social security expenditures proportionally three times higher than the other two countries, but its salary contributions (by employers and workers) are half those of China and Vietnam. As result, Cuba endures a deficit (expenditures are higher than revenues) whereas China and Vietnam generate a surplus (revenues are higher than expenditures).
  • The last two countries have reserves to finance the payment of future pensions but Cuba lacks such reserves.
  • These problems are aggravated by the fact that the degree of aging of the Cuban population is much higher than that of China and even more than that of Vietnam. Based on the 150 social security indicators, the order of the three countries was: China in the lead, followed by Vietnam, and then Cuba lagging behind.

Why has Cuba not Followed the Sino-Vietnamese Path?

The book explores the reasons that Cuba has not followed the Sino-Vietnamese path, despite its success and the fact that the communist party remains in full control of the regime in that model. Political rather than economic causes explain this paradox: the delegation of economic power from the state to the private sector is perceived as a serious danger and the armed forces, through the military-economic conglomerate GAESA that owns and controls all tourist facilities in Cuba, as well as many other enterprises would see its power eroded under that model.

Fidel Castro consistently objected to the Chinese model because he rejected China's delegation of economic power to the private sector. Raul Castro visited China several times and publicly acknowledged its progress, but after assuming the presidency he cautiously said that Cuba did not want to copy an economic model again, but that it did not ignore the experiences of other countries and learned from them. Raul probably wanted to follow the Sino-Vietnamese model, but he lacked the absolute control that Fidel enjoyed and had to share power with other leaders who stubbornly opposed that model, which largely explains why the Cuban reforms have been partial, slow, with ups and downs and without results.

The Cuban Leadership Chooses the Russian Model

Russia and Cuba announced in February 2023 an agreement for the former to advise on economic reform following the Russian model. It was announced by millionaire Boris Titov, a Russian businessman and right-wing politician, adviser to Putin, after a trip to Havana where he met with Cuban President Miguel Díaz-Canel. The latter had previously held a meeting with Putin in Moscow. The agreement provides for the creation of an Economic Transformation Center to be guided by three Russian economic entities.

The Russian model is a hegemony of oligopolies, a limited number of large private companies supported by the government, with little competition and abundant nepotism, essentially a variant of state capitalism. This approach would be ideal for GAESA, as well as for actual Cuban leaders who would strengthen their power. Apparently, Havana is betting that this agreement will achieve greater Russian support in oil supply, investment and expansion of trade with Cuba. If the current Russian model is ultimately adopted, Cuba would copy its former benefactor for the second time, with dubious results, since the model in Russia has generated great economic deformations and social inequalities.

Conclusion and Alternatives

The book proves that the Chinese-Vietnamese model has the capacity to save Cuba from the current chaos and the situation it has experienced since the nineties, and to lead it on the path of sustainable economic and social development. It could also do so by maintaining the power of the Communist Party.

However, this requires a significant change of mentality in the Cuban leadership and the probabilities that this can happen before the current octogenarian and nonagenarian generation disappears are slim. When that happens, we will have to see if the party, the armed forces and GAESA are willing to cede part of their power to improve the standard of living of the people.

Personally, I would prefer a hybrid model (market with state regulation) with democracy, such as the welfare state of the Scandinavian countries or the model followed in most of the countries of Eastern Europe that were previously in the Soviet orbit and today enjoy a higher GDP per capita than Russia.

In summary, Cuba is moving from obsolete-failed Soviet command-planning to inefficient Russian state capitalist-oligopoly instead of implementing models that are more efficient and successful for the nation and its people.


[1] This article is partly based on an interview by Mauricio Vicent, Correspondent in Havana of El País, February 14, 2023, restructured and expanded.