How Vietnam Could Mitigate Cuba’s Economic Crisis
Originally Published in the December 2019 Journal, Breaking the Silence, Pg. 11
In May 2019, after weeks of intense domestic pressure, the Cuban government began rationing staple foods and basic hygiene products to ease mounting stress on its centrally-planned economy. The drastic move, which resulted in hours-long queues and widespread public outrage, was an attempted response to ongoing regional instability and deteriorating U.S. bilateral relations that have placed Cuba’s financial health at extreme risk. As Venezuela’s economy — ravaged by hyperinflation, reduced exports, and food shortages — flounders amidst a domestic power struggle, Cuba has lost access to heavily subsidized oil and critical foreign aid. The United States’ recent decisions to tighten its longstanding trade embargo and impose travel restrictions compounded this problem, catapulting Cuba into its worst energy and economic crises since the infamous “Special Period” that followed the Soviet collapse in the early 1990s. While the Cuban government has previously attempted to address this vulnerability by occasionally inching toward free-market policies, such efforts have not met expectations. Due to this failure, Cuba should draw from Vietnam’s development success and install a state-driven model of economic reform, appeasing the Communist Party while facilitating long-term private sector growth.
Following Raúl Castro’s presidential inauguration in 2008, the government rolled out a series of reforms aimed at spurring private investment and domestic entrepreneurship. Within several years, people could open businesses and hire non-family labor for the first time since 1968. Shortly afterward, the country passed the Economic and Social Policy Guidelines (known as the Lineamientos) in 2011 that, among other notable developments, legalized the buying and selling of homes and cars for the first time in nearly fifty years. Since then, Cubans have enjoyed greater technological freedom, additional options to travel abroad, and more expansive property rights.
Despite their underlying free-market principles, these initiatives have produced mixed results. The average annual GDP growth rate over the past nine years remains at an anemic 2.3 percent. In the past three years, it has tapered off to 1.5 percent. These sluggish numbers reflect the problems associated with actually implementing the reforms: while Castro and the Communist Party claimed to support further market liberalization, they are still hesitant to cede state control. As such, the installation of and commitment to upholding these reforms have been hampered by bureaucratic red tape, restrictions, and taxes. It is evident that the central government wants to limit the growth of private markets to avoid undermining the prevailing one-party system.
However, president Miguel Díaz-Canel, elected in 2018, could present Vietnam’s market socialist model as an alternative that builds on Castro’s existing framework yet preserves the power of the Communist Party. Following the introduction of Vietnam’s doi moi (“renovation”) economic reforms in 1986, the country has championed a successful development strategy. By gradually opening its domestic market and promoting strong export growth, Vietnam has carved out an influential role for state-owned enterprises despite adopting free-market tendencies. If implemented, this approach could solve several of Cuba’s top structural issues and maintain communist control.
Under this model, Cuba could slash capital controls to promote foreign direct investment (FDI). Allowing international financial inflows has been integral to Vietnamese growth; as the ratio of FDI to GDP increased from zero in the mid-1980s to over 75 percent by the 2000s, Vietnam’s annual growth rate jumped from 2.79 percent to above 7 percent. Furthermore, during the first years of the reforms, Vietnam similarly navigated a U.S. trade embargo and lacked access to multilateral institutional funds. However, this influx of investment overcame these obstacles and allowed multinational corporations to construct supply chains, which subsequently drove Vietnam’s export strategy. Given that Cuba struggles to produce anything for the international market, ranking as the 138th largest export economy in the world, foreign investment could provide an avenue to bolster its global competitiveness.
State-administered agricultural reforms could further alleviate this problem. Approximately 29 percent of Cuba’s land is arable, compared to 21 percent of Vietnam’s. Yet, due to the inefficiency of collectivized agriculture, Cuba imports approximately two-thirds of its food at an annual cost of more than $2 billion. While Castro initiated a program that leased state-owned land to farmers through 10-year contracts, with renewal contingent on the farm’s performance, it forced them to sell crops back to the government at a below-market price. Though Vietnam’s domestic agriculture situation initially mirrored this, the government extended the leases to over 50 years and did not impose restrictions on crop sales, while still utilizing state-owned land. In the absence of price controls, Vietnam not only achieved food self-sufficiency but exported a surplus. Although Cuba recently expressed willingness to move in this direction — lengthening agreements to 20 years and doubling the amount of land first-time farmers can lease — there is potential to go further. If Cuba deepened these types of reforms, it would help mitigate the country’s food shortage while reducing dependency on imports, enhancing the country’s economic sustainability.
There are inherent limitations to extrapolating a model from a different world region. Vietnam not only has a unique political history and culture but may have better embraced opening its markets due to the established influence of the southern part of the country. However, state-driven economics and free-market principles are not mutually exclusive. With few reliable allies left, Cuba should look inward to solve its economic woes, which may require searching elsewhere.