Photo via (cc) Flickr user Natalie Maynor.

Reform Push Gathers Pace

The market-reform push initiated by President Raúl Castro has gained momentum over the last several months, but the changes to the economic system will not be accompanied by any significant political liberalization. That was the clear message that came out of the first-ever national conference of the Cuban Communist Party held in late January, at which Castro rejected any possibility of dismantling the country’s one-party system as long as the US maintains a hostile posture toward the regime in Havana.

The government has approached economic reform with a greater sense of urgency since July, when Venezuelan President Hugo Chávez revealed that he had been diagnosed with cancer. Venezuela’s financial support has been crucial to propping up Cuba’s moribund economy over the last decade, and Cuban officials are only too aware that the many benefits they derive from Chávez’s patronage—cheap oil, investment capital, and diplomatic legitimacy—would evaporate if he ceased to control the political reins in Caracas.

In recent months, the government has introduced laws establishing the property rights of homeowners—in effect clearing the way for the creation of a housing market—and expanding the availability of bank credit to private entrepreneurs. However, the reforms are not going to produce big changes overnight.

In order to ensure that the reform does not increase wealth disparities, individuals are limited to owning no more than two residences. In addition, homeowners are required to obtain the permission of any adult who has resided in the house for five years or more before selling. Moreover, a severe housing shortage will discourage some homeowners from selling out of fear that they will not be able to find an alternative place to live.

Significantly, the property reform reversed a longstanding policy under which people leaving Cuba forfeited any claim to their homes. The move raised hopes that the government might be preparing to lift restrictions on outward migration, which could go a long way toward easing the housing shortage, but there has been little else to suggest that such a change is planned anytime soon.

The reforms implemented in late 2011 will have a positive effect on private-sector economic performance this year, but the benefits are unlikely to be significant in the early going. Real GDP growth is forecast to hold steady at 2.5% in 2012, but given the uncertain outlook for the global economy and the possibility that President Chávez’s health issues could lead to a seismic shift in bilateral relations with Venezuela, downside risks to the forecast will predominate.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

 REGIMES & PROBABILITIES Raúl Castro
70%
Hard-line Communist 20% Reform Communist 10%
RISK FACTORS CURRENT
Turmoil Low Same MORE SLIGHTLY MORE
Investment
  Equity Very High SLIGHTLY LESS SLIGHTLY MORE SLIGHTLY LESS
  Operations Very High Same Same LESS
  Taxation High Same SLIGHTLY MORE Same
  Repatriation High Same SLIGHTLY MORE Same
  Exchange Very High SLIGHTLY LESS Same LESS
Trade
  Tariffs High SLIGHTLY LESS Same SLIGHTLY LESS
  Other Barriers Very High Same SLIGHTLY MORE SLIGHTLY LESS
  Payment Delays Very High Same SLIGHTLY MORE Same
Economic Policy
  Expansion Very High SLIGHTLY LESS SLIGHTLY MORE SLIGHTLY LESS
  Labor Costs Low SLIGHTLY MORE Same SLIGHTLY MORE
  Foreign Debt High Same MORE SLIGHTLY LESS

SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIES Raúl Castro
55%
Hard-line Communist 25% Reform Communist 20%
RISK FACTORS BASE
Turmoil Low SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE
Restrictions
   Investment High SLIGHTLY LESS SLIGHTLY MORE LESS
   Trade High SLIGHTLY LESS SLIGHTLY MORE LESS
Economic Problems
   Domestic High Same MORE SLIGHTLY LESS
   International High SLIGHTLY LESS MORE LESS
   * When present, indicates forecast of a new regime

For more information, check out the Cuba Full Report!