What Can Cuba Learn from the Experiences of Central and Eastern Europe?

Today, as the communist system in Cuba is weakening, the natural question being asked is: what will come next? The people of Cuba are constantly being warned by the regime that the fall of communism and a transition to democracy and market economy would destroy Cuba by introducing poverty and inequality. Often the communist rulers’ proof that this could happen is based on the transitions that occurred in Central and Eastern European (CEE) countries, where transition was followed by harsh economic conditions and a rise in social problems. However, has the transition to democracy and free markets really brought misery to CEE countries? Has it really been failure or has the life of people in these countries improved?

The current situation in Cuba is similar in many ways to that of Central and Eastern Europe at the end of the 1980s. By that time, forty years of communism had destroyed the economies of the CEE countries and pushed the people into poverty when compared to the Developed World. Perhaps the Cuban people don’t understand the full extent of the misery and destruction that communism has caused them. This was largely the case in CEE countries. By 1989, there was an overwhelming hope that by simply removing the communist rulers from power, the liberated countries would attain a standard of living comparable with Western Europe. However, nobody actually understood how backward and undeveloped the communist economies really were at that point. Once the truth about our economic conditions was revealed, the path to reaching a ‘first world’ level of development proved to be more painful and difficult than anyone had predicted. In the case of Cuba, it is interesting to note that Cubans had a higher standard of living than Spain in the years before the revolution, but this could hardly be said today. The CEE countries and Cuba provide ample proof that the longer communism lasts, the wider the economic gap will be between their countries and the Developed World.

The transition experience in CEE countries may have been hard, but it has proven to be worth it. When a communist system collapses, the public is suddenly confronted by problems that were hidden from them for years. Infrastructure that has been neglected due to a lack of investment for decades will start to fall apart, inflation rates go up, a currency can quickly lose its value, productivity drops, and social problems deepen as social inequality rapidly rises. Meanwhile, the only people with foreign currencies are the ones who belong to the communist nomenclature that are in position to become rich. The experience of the CEE countries demonstrates that the drop in the economy will be smaller when the reforms are started more quickly. Therefore, my first suggestion is: finish with communism as soon as possible. Each additional year under communism will add years of misery.

The first democratic government is responsible for coming to terms with the heavy heritage of communism, by making the decisions necessary to lead their country out of crisis. Speed is one of the most important factors in this kind of situation. Countries need to take advantage of the short period of “extraordinary politics” to launch their radical economic program when the transition begins. If a country fails to do after the window of opportunity closes they will still face the challenge of making the transition to a market economy, but will have to do so under more difficult economic conditions. Countries that miss out on this chance are in danger of moving into a period of macroeconomic instability that is usually marked by chaotic state regulations and massive corruption.

Two other import lessons emerge from looking at the experience of CEE countries. One: take care of politics first before moving full stop into economic reforms. The second can be summed up by the well-known advertising slogan: “Just do it,” that is, be decisive when adopting reforms and stick with them in spite of the short-term pain they cause. Politics have to be dealt with first, because there must be a legitimately formed consensus for change to initiate and sustain radical reforms. This is only possible through a democratic system ready to develop public institutions that are accountable and to organize free and fair elections. Countries have to make a clear brake with the totalitarian past, including the structures and the people to be successful in the future.

Macroeconomic stability must be achieved immediately. Economic reforms, based on a strict monetary policy and balanced budgets, should be initiated to achieve these goals. These reforms are often the most painful ones, but they are essential. Making it from this first stage of reform to the second is one of the most decisive moments in an economic transition. The ‘shock therapy’ necessary for economic stabilization is likely to be a rude awakening for the people. However, without a major readjustment of attitudes, the problems of the post-communist period could easily become a trap and the nation would never have moved forward to become a “normal” country with a free government, free markets and rule of law.

Under communism people were not used to thinking for themselves, taking the initiative or assuming risks. Many had to be shaken free of the illusion – common in post-communist countries – that somehow, somebody else would come along and solve their problems for them. It was necessary to energize people, to get them moving, to force them to make decisions and to take responsibility for themselves. In our case, the government declared that it could only help those who were prepared to do something for themselves. This principle proved to be unpopular, but it helped change attitudes.

Countries have to open themselves up to the rest of the world, including competition and foreign investments to do this. Lots of people are afraid of such openness, so the government must be ready to show the way. Openness provides several advantages for a smooth and rapid transition to a market economy. It establishes a rational set of market-determined processes for resource allocation, introduces more competition, and allows countries to specialize according to their comparative advantage so that the market, rather than the government, can determine who wins and who loses. The policy of openness also sets in place an environment of transparency, with clear market-based signals for producers. In the case of Estonia, it was the first of several CEE countries to introduce a simple low flax tax rate system, which helped to create good conditions for entrepreneurs and investments.

Radical economic reforms cannot be implemented without establishing the basic laws that regulate the economic sector. The rule of law is especially important in the fight against one of the worst diseases of transition economies – corruption. Special attention must be given to the bank reform. Banks are the most important part of economy, and if organized crime takes them over, a mafia can quickly take over the whole country. The money laundering, dirty money and all other unclean operations must be removed from banking system as quickly as possible. The special attention must be given to property reform. At the heart of a transition lies a change in ownership relations. Without this change, without change to private ownership, transition will no doubt fail. So Cuba must decide how they will or in which form return or compensate the property to legal owners and how to privatize state-owned enterprises.

Such reforms can look painful, but they bring success. Estonia has been one of most radical reformers among transition countries and thank to this it has achieved one of the fastest growth rates in the World. In 1992, the average GDP per capita in PPP in Estonia was 15 to 20% of the EU average, but by 2007 it had reached 72%. There is no doubt that in Estonia poverty and inequality are decreasing. In addition, Estonia has successfully passed several social reforms that deal with vital issues such as healthcare and pensions. But lastly, Estonia has never been richer throughout its history, which serves perhaps as the best example that radical reforms really are ground for success.

Mart Laar is a historian and statesman, who served twice as the Prime Minister of Estonia, founded the Foundation for the Investigation of Communist Crimes and is an active member of the International Committee for Democracy in Cuba.