Shadow Government

Cuba move is a victory for U.S. policy

The Castro regime's stunning announcement that it is planning to lay off more than 500,000 state workers in the next six months, dropping fully one-tenth of the country's labor force into a barely existent "private sector" has sparked a flurry of commentary on just what the move portends for the captive island's future.

Does it mean Cuba going capitalist? Are they importing the China model? Who's really in charge, Fidel or brother Raul? And, of course, that hardy perennial, whatever the announcement means, the U.S. should immediately lift the embargo and restore full diplomatic relations with the Castro regime (see here, here, and here).

On the latter, it is a measure of the investment so many have made into their opposition to U.S. policy that even as they cite the abysmal state of the Cuban economy as the central factor in forcing the regime's decision, they cannot recognize the significant role played by U.S. economic pressure in bringing that situation about. The embargo has indeed been pocked with holes in recent years, but two critical escape hatches for the Cuban economy -- U.S. tourist travel to Cuba and the extension of trade credits -- remain beyond the regime's grasp, and thankfully so.

In short, the decision on layoffs was dictated by the bankruptcy of the Cuban economy and the lack of prospects it will improve anytime soon. Desperate times call for desperate measures.

It thus defies logic to argue for any lessening of the pressure against a regime that has fought tooth and nail against any liberalizing reforms since the collapse of the USSR. Just as in the early 1990s, when the regime had its first go around with limited self-employment, as soon as the economy ticked up a few notches, the hammer came back down on those attempting to eke out an existence beyond state control.

Easing pressure now will only serve to halt in their tracks whatever steps the Castro brothers conjure next to try and reverse their declining fortunes. Policymakers need to remember that what drives this regime is survival, not appeasing the United States in the hopes of some policy concessions or allowing, out of some sort of beneficence, more freedoms for the Cuban people to better their lots.

So what do the layoffs mean, besides the fact that the regime is broke? The simple fact is we don't know, because we don't have any insight into the ruling clique's thoughts. It's probably safe to say they have no idea where they are going either.

What we can say with some degree of assurance is that the regime is taking a huge gamble in putting up to an eventual one million Cubans on the street to fend for themselves -- a gamble that could have serious repercussions for the regime's continued grip on power. That's because they are going to be extremely hard pressed to create any semblance of conditions where half a million or more Cuban workers are going to be able to find any employment on their own.

We need to remember that this regime consists of a dwindling cohort of dogmatic revolutionaries whose only accomplishment in life was to shoot their way into power fifty years ago and stay there. They no more understand market economics than they do Einstein's quantum theory of light.

Also, an important clarification for much of recent news reporting -- which has it that laid-off Cubans will be free to start "small businesses" -- is necessary. More accurately, they are micro-enterprises, an important distinction in order of magnitude. And the relatively few micro-enterprises that do exist -- a beautician here, a taxi driver there -- struggle to operate under such a mountain of regulations as to who they can hire, what and where they can sell, on how much they can earn (no one is allowed to become "too rich") as to make the whole effort practically fruitless. Many Cubans simply opt for the underground economy.

Be that as it may, the regime is going to have to figure out how it is going to deal with the social impact of a large group of idle Cuban workers unable to make a living honestly or dishonestly. It is a volatile mix that could lead to an upsurge in crime or other social agitation that could challenge the regime's internal security apparatus. Policy critics will likely argue just that point to justify a U.S. rapprochement with the Castros: that we need to help the regime achieve a "soft landing," as opposed to a descent into instability on the island.

But decisions on a soft versus hard landing in Cuba won't be made in Washington; they will be made in Havana. Those concerned about the latter ought to focus their lobbying efforts on the ruling clique there, not on policymakers in Washington. What is the appropriate role for Washington is to continue to close off all economic escape hatches for this obsolete regime and let it continue to face the consequences of its own misrule.


Shadow Government

The Palestinian (economic) problem

Today, international donors to the Palestinian Authority (PA) will meet in New York. This meeting comes at a crucial time -- while the Sept. 26 expiration of the Israeli settlement freeze is the most imminent threat to the future of the peace process, Palestinian economic stagnation poses a more fundamental long-term threat to peace and stability, which I discuss at greater length here.

The headlines on the Palestinian economy are quite positive: GDP growth is expected to reach 8 percent in the West Bank in 2010, and 16 percent in Gaza, and PA Prime Minister Salam Fayyad's institution-building efforts have been successful. Beyond those headlines, however, one finds cause for sobriety. The PA's impressive economic growth is fueled largely by public spending, which in turn is financed by international donors. What's more, as significant as foreign assistance to the Palestinians has been, it has not been sufficient: the PA faces an imminent funding shortfall of $300-400 million. Notably, Arab states have been reticent with their aid -- Saudi Arabia has given the PA $30.6 million in 2010, and the UAE has provided $42 million. By this point in 2009, they had given $221 million and $174 million, respectively.

Much of the PA's 2010 economic growth was made possible by Israeli Prime Minister Benjamin Netanyahu's focus on improving conditions in the West Bank by removing checkpoints, facilitating commerce, and issuing more permits for Palestinians to work in Israel. These Israeli measures were, in turn, made possible by an improved security atmosphere in the West Bank stemming in part from the PA's security reform efforts. Donors have called for further Israeli steps to ease the business climate in the West Bank, but such steps will likely hinge upon better Israeli-Palestinian security cooperation and progress on the peace process.

Even if the immediate threats to the Palestinian economy are overcome -- such as the funding shortfall and the ever-present possibility that the West Bank will once again be engulfed in violence -- it will be a long time before longer-term structural problems can be resolved, private sector investment reignited, and growth and development restored to the trajectory they appeared to be on in 1994, at the beginning of the Oslo era. The challenges are not only economic -- right now, much of the PA's success in keeping aid flowing and implementing reform is the result of Salam Fayyad's talents and reputation. Continued success will require political reform, as well, to build an accountable bureaucracy around Fayyad and offer up a viable alternative to groups like Hamas.

To make it past the short-term problems and even have the opportunity to grapple with the deeper, long-term problems facing the West Bank and Gazan economies, the Palestinians, Israelis, Americans, and their partners must avoid the temptation to focus solely on peace talks and ensure that greater attention is paid to Palestinian economic development and institutional reform. Doing so can spark a virtuous cycle -- good economic news can bolster Palestinian public support for peace, and progress toward peace in turn can help create conditions for the return of private investment, which is the key to long-term economic growth and prosperity for Palestinians.