Capitalism for Cuba

By Llewellyn H. Rockwell, Jr.

With the ouster of Fidel Castro now inevitable, the most important issue for Cuba is the future of the economy, which has been devastated by socialism, price shocks, trade embargoes, and the cutoff of Russian welfare. The Cuban population is one third larger than it was at the time of the revolution, but the economy is less than half the size.

After Castro, Cuba can learn from the post-socialist blunders of Eastern Europe and the former Soviet Union. With the partial exception of the Czech Republic, these countries have squandered a historic opportunity to rescue their people from poverty and degradation, and to show the world what capitalism can do. Instead of the free markets we all hoped for, we've witnessed the creation of state-controlled social democracies that still keep the masses under the thumb of central managers.

The creation of a free market in Cuba would be a poke in the eye of international and U.S. bureaucrats who intend to control Cuba's post-Castro destiny. It could also serve as model for the U.S. to follow when time comes to reestablish a free market at home.

The essential contribution of the free market is that it allows the economy to ran itself, so long as the legal structure protects property and freedom of contract. Somehow this was forgotten after the events of 1989. In Eastern Europe, for example, governments adopted heavily interventionist IMF plans, and Russia renamed Gosplan, the former central planning bureaucracy, the Ministry of Privatization. It wasn't, of course.

All these governments made the frightful mistake of instituting progressive-income and capital-gains taxes to mimic the West. Yet these taxes can only retard economic growth by penalizing wealth and capital accumulation. If Cuba eliminated all capital-gains and income taxes, it would immediately become a magnet for investments from all over the world. Cubans themselves would have the incentive to work, save, invest, and produce because they would be able to keep the fruits of their labor. Cuban standards of living would reach pre-Castro levels in no time, and eventually could exceed Florida's.

In Eastern Europe, new governments have been tempted to mulct the public to pay off Communist debts and raise new revenue, which has also impeded recovery and growth. There is also a moral issue: why should the victims of communism be taxed to pay off those who were stupid or evil enough to loan money to the communists? The new Cuban regime should cut its ties with the communist past by repudiating all of Castro's debts. If it hurts the creditworthiness of the new government, fine: it should stay out of debt anyway. Creditworthy governments have too often become uncreditworthy by borrowing.

There is one link to the past that Cuba should not cut, however, namely who owned what before the revolution. The new regime will have to reassign property titles to demonstrate a commitment to justice. Land and buildings confiscated during the revolution should be returned to the original owners or their heirs. Industrial capital created under Communism should be given to the workers as shares of stock.

Undocumented property should go to those who have homesteaded it: apartments to apartment dwellers, buses to busdrivers, streets to the businesses and homes on them, etc.

The technique of privatization aside, the important thing is to move quickly from collective ownership to private ownership, and not to try to manufacture a compromise between the two. Eastern European and Russian reformers found that this was like trying to change the direction of traffic a little at a time. The result is a pileup. Complete and immediate privatization is the only answer.

Cuba should also establish the freest labor markets in the hemisphere, the only real full-employment policy. This would help cushion the necessary mass firings of bureaucrats. Cubans should be free to work without regard to labor union restrictions, minimum wages, or racial politics. In a country as diverse as Cuba, employers must be free to hire and fire. And there should be no "unemployment insurance" except private charity.

Cuba should also open its borders to imports from anywhere in the world, and put no restrictions on the flow of money and goods out of the country. Let other nations worry about economic "protection." But it should not subsidize any foreign companies, especially American ones, as the pre-Castro regime did. T'his not only causes economic discoordination, it fuels understandable resentment against foreigners with special privileges.

Welfarism has been a temptation for all former communist countries, but it would be the kiss of death for Cuba's people. As in the old Soviet Union, many Cubans have become used to life without work. That's understandable in a system where pay and production have no relation to each other. This dilemma can only be solved by asking people to make their own way. The Church and other charities will meet the needs of those who suffer. Welfare only creates suffering for th productive.

No doubt Cuba will have to deal with a vast underground economy. In all countries, shady characters – those who aren't in the government, anyway – dominate underground markets. There's an easy answer: legalize. Let anyone who can make a product or a service do so without interference, and let him sell it to anyone who will buy it, for whatever price he will pay, so long as no fraud is involved. What Marx derided as the "anarchy of production" must reign supreme.

If Cuba took these steps – complete privatization, zero income and capital-gains taxes, free labor markets, free trade, a legalized underground, and no regulatory or welfare state – the economy would boom. In fact, Cuba would develop immigration problems, as other Latin Americans sought to move to a free-market paradise right off the coast of the U.S.

But to do all this, Cuba needs political independence. U.S. bureaucrats will try to prevent a free market from being established in Cuba, as they have in Eastern Europe and Russia, by sending missionary teams from U.S. regulatory agencies, and by refusing aid to anything but a mixed economy with privileges for U.S. special interests.

The new Cuba should not take a nickel in U.S. foreign aid, or a penny from the IMF or the World Bank. In Russia, for example, the IMF has been behind such crazy policies as currency switches, forced devaluations, and high tax rates.

Taking foreign aid would also subject Cuba to environmental and labor treaties that are incompatible with high economic growth. For example, Cuba should have nothing to do with Nafta, this hemisphere's answer to the bureaucratic monstrosity called the European Community.

Nafta would impose on Cuba the worst sort of statist policies, from minimum-wage and "child-labor" laws to "clean air" acts and land-use restrictions. As U.S. Trade Representative Mickey Kantor wrote in the Wall Street Journal, Nafta will ensure law "that no nation will lower labor or environmental standards, only raise them." "If a country doesn't go after its polluters," Kantor adds, "we will."

Any country, including the U.S., that stays away from Nafta and its even more statist "side agreements" will have much more chance for economic growth than those that go along. By cartelizing governments so they can gang up against small entrepreneurs and taxpayers, Nafta prevents experimentation with free markets, deregulation, and free labor.

Americans have a good reason to hope for a free-market Cuba. It would be an example to this country, just as we were a good example to the world from 1776 to 1933. If a free Cuba's per capita wealth ever surpasses ours – thanks also to our own departure from free-market principles – U.S. citizens may demand the kind of radical changes Cubans now want. And besides, if Clintonian socialism is fully fastened on America, the middle-class will need some place to move.