Ed Pauker - A Framework for Privatization in Cuba

Foundations and Flexibility:

The Keys to Successful Privatization in Cuba

By Edward Pauker

Introduction: A Coming Change

Cuba is in trouble. Economic production and GDP are at the bottom end of all countries in the Western hemisphere, and inflation is high.[1] GDP per capita in 2005 was estimated at $3500, ranking Cuba below Guatemala and Paraguay.[2] Despite a relative upturn in its economy in 2005, by most accounts Cuba’s domestic industries are operating far below their capacity, especially given the relative skill and education of the Cuban workforce.[3] Skilled workers earn the equivalent of $10 per month, and a shadow economy based on the U.S. dollar undermines the government’s support of the Cuban peso.[4] Their support for the current regime notwithstanding, most Cubans seemingly would welcome economic progress. Yet Cuba’s struggling economy is not a recent problem. Even before the collapse of its primary patron, the Soviet Union, in 1991, the Cuban economy was sputtering.[5] Overly dependent on imports from Venezuela, Cuba’s overall debt is estimated at 40% of its GDP, excluding what it may owe in expropriation claims.[6] Its commercial infrastructure is primitive, and quite simply, the situation is unsustainable.

Along with growing economic strain, Cuba faces an uncertain political future as well. President Fidel Castro’s health is failing, and a successor may be unlikely to generate the support the Cuban population as the revolutionary leader once did.[7] Raul Castro, Fidel’s brother, is currently running the government, and while many Cubans assume the political status-quo will continue, the political repercussions of Fidel’s passing are unknown.[8] The only definite is that Castro will soon be gone, and what happens subsequently to Cuba’s government and economy is open to debate. Will former exiles return and a new government establish a free-market economy, or will Communism remain in some form, and a planned economy continue to weigh down Cuba’s beleaguered economy? The answer is probably somewhere in between these two extremes. The domestic political support for the Communist government should caution those who foretell of systemic change upon Fidel’s death. But with its economy in tatters, it is unclear how long the Cuban public will stomach continued political isolation and economic stagnation fifteen years after the end of the Cold War. Changes to Cuba’s economy should be expected if the current Communist government is replaced; but even if it is not, without its charismatic leader, Cuba’s current leadership may find that economic liberalization is necessary to forestall civil unrest.

Yet it is not the goal of this paper to predict or posit what or when any political or economic change may occur. It is enough to recognize that Cuba faces harsh economic times, and possible political destabilization to boot. Even a conservative prediction would encourage the ardent Communist believers to plan ahead and accommodate Cuba’s changing political landscape and worsening economic condition. Thus, no matter the political persuasion of those planning Cuba’s economic future, economic liberalization and at least the partial privatization of its economy should be considered. The current regime has already done so, but with little effect.

This relatively recent dash of capitalism added to Cuba’s economic pot has not improved its forecast. A year after the disintegration of its wealthy benefactor, Cuba amended its constitution and partially opened up its markets to foreign investment.[9] In fact, almost all sectors of the Cuban economy, excluding the health, education and military sectors, were open to foreign investment by 1994.[10] Initially, foreign investors were limited to forming joint ventures with the Cuban government. Under Law 50, foreign enterprises were permitted to purchase a minority share in a state-owned enterprise.[11] Foreign investors were declared exempt from some import duties and taxes, and could hire their own executive personnel.[12] But in these joint ventures, the Cuban government still ran the show. The state retained its power as the majority shareholder, and employed all non-foreign personnel associated with the joint venture.[13] The state thus still controlled both the labor and management side of every enterprise. In 1995, Cuba took superficial liberalization a step further, enacting Law 77, which permitted some enterprises to be 100% owned by foreign investors.[14] Yet foreign investment still only trickled in, as the Cuban government continued to exert its authority over foreign businesses. Even after Law 77, foreign investors still could not acquire title to any property, and the government retained its right to terminate any investment at its want.[15] High taxes, burdensome regulation of the commercial sector, and the state’s monopoly on any sizable labor force severely limited the attractiveness of Cuba’s foreign investment legislation.

Perhaps unsurprising, despite the recent relaxation of its foreign investment laws, Cuba’s domestic economy still remained largely unaffected by foreign direct investment. Between 1990 and 2002, the Cuban government reported approximately $2.5 billion worth of foreign investment.[16] Since then, reported statistics on foreign direct investment have been discontinued, and the number of enterprises with foreign investment has fallen precipitously.[17] In fact, most businesses built with foreign capital were physically cut off from the domestic population. By restricting movement to and from locations set aside for foreign investment, the Cuban government effectively screened off access to foreign capital from Cubans who are not employees of a foreign or joint enterprise.[18]

The half-baked and ideologically driven nature of the legislation is only partially to blame. Foreign investors also must factor in politics. The United States’ trade embargo severely limits Cuba’s economic prospects and has a secondary effect of limiting any other foreign investment.[19] The wisdom of the embargo is not at issue, but its effect on Cuba’s economy cannot be understated. The embargo will likely only end if an anti-Communist government comes to power, or, in a more likely scenario, if enough economic and political change occurs to make the normalization of relations between the two countries politically feasible. Until either of these events transpire, foreign investment in Cuba will be negligible, and will continue to have little effect on the lives of most Cubans.

Economic changes will most likely only come when the requisite political changes occur. When they do, the Cuban government should try a different economic tack. Communism has left Cuba a pariah in a globalizing and largely capitalist world. The current government’s ineffective attempts at trade liberalization have done little to promote foreign investment or improve the Cuban economy. While some countries, most notably China, have succeeded with an economic strategy based off a socially-oriented capitalism, Cuba’s attempt to open up its economy while retaining its Communist ideology has failed.[20] The economic facts bear witness and something must be done. The proposed solution will come as no surprise to anyone watching the development of post-communist states. Privatization and the development of a free-market economy can make Cuba an integrated member of the global community and foster development and stability on the island itself.

Through privatization, property is transferred from governmental control to private individuals or business entities. The essential mechanics of privatization operate as follows. Prospective purchasers pool together investment to purchase the assets formerly owned by the state. After paying the determined price, the new owners receive the assets, usually separate and distinct from any liabilities and claims levied upon them. The liabilities and claims are usually resolved by a separate court using the funds generated by privatization in general. In this way, claimants and creditors of state-owned enterprises receive a financial remedy, while the assets involved are transferred to new private ownership. And because there are a variety of private actors which can purchase these assets, as opposed to a governmental monopoly, privatization creates competition. This in turn encourages owners to increase efficiency and quality. Ultimately, privatization allocates assets to the individuals and entities that use them most efficiently. By distributing assets to efficient users, productivity increases and an economy should prosper. And if privatization is successful, Cuba should flourish.

By opening up its borders, embracing the free market principles and a more democratic political system, Cubans will be able to enjoy the fruits of their labor and will hopefully prosper. The sine qua non of privatization, however, is a termination of most government involvement in the economic sector, enterprise by enterprise, as each one is sold off. When the state dominates the economy as it does in Cuba, such a transformation can be a seismic one. Sometimes, privatization can cause a rupture in the social and political order. In other cases, most notably Eastern Europe, such economic change only follows political restructuring. Privatization could come to Cuba in any number of ways, and with the political and economic sands beginning to shift, Cuba needs a plan.

The Necessary Groundwork for Privatization: A Summary

Transforming the Cuban economy will be no easy task. Cuba’s debt is massive, its labor force under-utilized, its industry under-capitalized, and whatever economic support its friends provides, it is ultimately from Cuba itself where economic growth must come. Privatization can provide that, for the betterment of Cuba’s economy, for the improvement of the standard of living of its people, and for the long-term interests of its political leadership. But privatization itself is no magic elixir. It is simply one method, albeit based on globally accepted notions free market economics, for transforming and developing the Cuban economy. The key to any successful privatization program is tailoring. Thus, any privatization program implemented in Cuba needs to be, foremost, Cuban. Such tailoring is important for both operational and sociological reasons. Without such tailoring, a privatization program in Cuba will simply not function effectively. And just as importantly, an understanding of the sociological factors involved in remaking the economy will make privatization more palatable to all Cubans.

First, any privatization program must take full account of the intricacies of the economy on which it is built. The architects of any such program must understand not only the economy, however, but also the legal, financial, and social institutions with which the entities most immediately affected by privatization interact. The spectrum ranges from changes required in the Cuban constitution to its property, business, and financial laws. But the required institutional changes need to be beyond mere paper. The state apparatus that ran, planned and anesthetized the Cuban economy must be dismantled, and the apparatuses that support a private economy need to be developed. Any privatization program should include an appraisal and a reformation, if necessary, of the training for lawyers and judges, the enabling of bar associations. Furthermore, the government will need to reform the accounting and banking institutions, create the businesses to appraise the credit-worthiness of new enterprise, and enable independent regulatory agencies to protect creditors’ rights. It is the changes in these institutions, prior to the commercial effects of a privatization program, will be Cubans’ first point of contact with the new economy.

Any plan to change Cuba’s economy must also take into account the overwhelming ideological component of the Cuban economy and society. Whether right or wrong, the effect of fifty years of an economy and a citizenry ruled chiefly by ideological concerns will last longer than any of the legal and institutional changes made during the economic transition. Latent Communist ideology will not necessarily undercut any attempts at privatization, but understanding how such ideology permeates the legal and property regime and affects individual managers and business owners will be crucial to enabling Cuban citizens to use and take advantage of the new institutions created by privatization.

Yet reforming the Cuban economy, the institutions that support it, and understanding the changes necessary to prevent privatization from being hamstrung by Communist ideology are only two steps towards the creation of a free-market Cuban economy. Those may be difficult enough, but privatization must also anticipate and plan for the inevitable initial sputtering of the Cuban economy after privatization. Privatization should not begin without planning for such difficulties. A failure to do so could result in the public turning against privatization. If the public outcry and re-nationalization that has occurred in South America spreads to Cuba, it would be a serious setback for the Cuban economic growth. Such a result can be avoided. Steering clear of a top-down approach by beginning privatization with businesses that have a high chance of success, reserving limited state control over some industries, and providing a means for low and middle income Cuban employees to benefit directly from privatization are all steps that the lease of Cuba privatization should take to ease the transition to a new economy.

Lastly, any attempt at economic liberalization or privatization must deal with the contentious and important issue of outstanding expropriations claims. The expropriations issue involves Cubans currently living on the island, those living abroad (primarily in the southern United States and other countries who claim that the seizure of property by the Cuban government after the 1959 revolution violated their rights of ownership. Many of these claims have already been filed and many more will be. The total amount of damages claimed in cases filed in the United States alone is estimated at $1.3 billion. Some claimants seek restitution, others simply damages, and some, an apology. The merit of these filings may differ, and it is not the object of this author to judge them. What is important, however, is that these claims to land and assets on Cuba are acknowledged and successfully dealt with in the privatization process. Every single claimant need not be satisfied, but as long as the title to the land and assets of privatization are saddled with lawsuits and disputes over title, little investment will occur and privatization will ultimately fail.

Throughout all these guidelines the support of the international community is needed. Clearly the United States must resume normal diplomatic relations with Cuba, resolve its expropriations issues, and repeal the Helms-Burton Act. Beyond that, what Cuba needs is sustained engagement by international financial institutions, a plan for alleviating its mounting debt, on-the-ground support professionals skilled in privatization, and most of all, investment. Yet investment in Cuba will yield little if the proper foundation is not laid. With all the opportunities to invest in Cuba, and there are many, especially in the tourism sector, a free-market economy will not truly take hold and benefit all Cubans if certain legal, institutional, and sociological concerns are not addressed. To that end, international partners should work hand in hand with Cuba’s government to ensure that privatization progresses in a fashion that garners acceptance by most of Cuba’s citizens, and re-establishes Cuba as a dependable player in the global economy. As of now however, Cuba’s economy currently is in shambles and the road to a free-market economic growth long and strewn with obstacles, but with planning, hard work, and an ounce of humility, they will not be insurmountable.

Creating a Foundation

Privatization requires a healthy context for it to be successful. The context of privatization refers to the legal framework in which the privatization regime will operate, as well as the economic and social institutions that are critical in supporting any real push for privatization. The need to strengthen the legal and institutional foundations for privatization cannot be overstated. For whatever form privatization takes in Cuba, it will never fully get off the ground if such basic recommendations are not fulfilled.

Some of these changes should come before others. Before privatization, and if Cuba makes a shift away from socialism and toward a free-market based economy, its constitution must be redrafted. As discussed supra, the reforms to Cuba’s constitution in 1992 failed to promote a substantial increase in foreign investment, and subsequent changes that have strengthened the government’s grip on foreign investment laws make it clear that a fresh start is needed. Decentralization in both the political and economic fields will be required. The language of the current constitution vests power in the legislative branch, but in fact all political power resides in the executive.[21] While executive power may be partially retained during the transition period when a new constitution is drafted, ultimately a new legislature must be formed and entrusted with lawmaking authority. By dissolving the current highly-centralized system, power will spread out among the competing representatives of the new Cuban legislature, empowering citizens to participate and have a voice in their national government.

Enshrining democracy is not the most critical hallmark of the new constitution. In fact, changes to the property rights regime must be promulgated regardless of how much the Cuban government democratizes or decentralizes. The language of the new Cuban constitution also should openly embrace both the free market and private property. The specific language regarding property rights need not be based off the U.S. Constitution, but it should guarantee all Cubans similar rights as those enjoyed by citizens of the United States and the European Union. The effect of this new constitution should be to declare that Cuba open for business. In doing so, it should explicitly address privatization and the future of state-owned enterprises.

The breadth and detail of the new Cuban constitution is not a chief concern of this author. Cuba’s current constitution, as amended in 1992, includes a full 137 articles. [22] And however detailed the new constitution is regarding Cuba’s aspirations for a free-market, it must be augmented by further regulations and legislation. Thus, in addition to legislation that encourages foreign investment in the newly privatized economy, Cuba’s property and contract laws should be redrafted taking into account Cuba’s push towards a free-market.[23] Despite the changes made in the 1990s allowing more foreign involvement and limited independence for some enterprises, such reforms have only been superficial.[24] Indeed, Cuban corporate law is antiquated, based upon the Spanish Commercial Code of 1885.[25] Even the most autonomous of commercial organizations, the independent economic collectives, are still owned and controlled by the state.[26] In particular, the Cuban government must promulgate laws governing business entities, a commercial code, and legislation supporting investment, creditors, and bankruptcy protection. In addition, the Cuban government should also promulgate laws regulating the banking and accounting sectors, and establish a central government agency to oversee each aspect of the financial services sphere.[27] In particular, the banking sector should focus on creating feasible opportunities for domestic investors to spur on the new economy.[28]

Only a strengthening of these property and contract laws will provide the cooperative framework in which the privatization process can operate. Just as importantly, these changes will enable all Cubans, not just those involved with privatization, to understand and benefit from the newly-created free-market system.

The restructuring of the state apparatus should be wide-ranging, and must encompass both the legal and economic spheres. How great the changes in the social sphere will depend largely on the nature of the political change that precedes privatization.

The redrafting of Cuba’s constitution, promotion a new property rights regime, and promulgation of new laws that support the new economy are transformations that may cause an ideological shift away from Communism. The necessary legal changes, such as the embracing of private property are an obvious shift away from a planned, state-centric economy, and in that regard, the required ideological shift merits further discussion. For Cubans to be able to fully embrace privatization and take advantage of a free market economy, some of the restraints of Communism may need to be torn away. Part of that work can be done by legal drafting, but much of the heavy lifting needs to be done outside the halls of Cuba’s government.

Legal and Commercial Institutions

Modernizing Cuban law will only help so much. Two other steps must also be taken in transforming the institutional framework with which privatization interacts. This involves breaking down the institutions and beliefs built up under Communist rule, and replacing them with governmental and civil society groups and institutions that support the new Cuban economy. Regulatory agencies will have to be staffed with professionals competent in many fields requiring specialization in fields in which most Cubans may not be familiar. Thus, during the early stages of the economic transition, the Cuban government should consult frequently with international organizations and foreign specialists who can aid them in developing the necessary expertise in among Cuban nationals.

With the drafting of a constitution and a change in the organizing principles of its government, Cuba will need a new class of trained and trustworthy law-makers, lawyers and judges, and perhaps most important for privatization to succeed, business executives and managers. Lawyers will be needed in both the public sphere and growing private sector. Cuba’s independent prosecutor office, the fiscalia, currently oversees the acts of government officials, but is currently understaffed and mostly ineffective.[29] With privatization, control over financial resources will decentralize and shift from the state to individual businesses. Thus, more resources will need to be devoted to oversee corruption in the private sector. Even though governmental officials will exercise less control than they did in Cuba’s centralized command economy, the role of public lawyers should continue to be emphasized. Whether through a revamped fiscalia, or other agencies modeled on the United States’ Government Accountability Office, anti-corruption efforts must be robust.

It is the private sector, however, which is in greater need of legal professionals. In 1992, there were approximately 1900 lawyers in Cuba, all of whom were organized into 250 state-monitored lawyers’ collectives.[30] How many lawyers practice privately and how many are unlicensed, however, is unknown. There is no magic lawyer-per-capita number that Cuba need reach, but with none of 1900 having practiced any form of commercial law within the past fifty years, some new blood and new training will be necessary.[31] The instruction in commercial, bankruptcy, tax, and intellectual property law in Cuba’s four existing law schools also must be improved. A new and large class of private lawyers must be able to assist and advocate on behalf of their clients amid the contentious transition process of privatization, and the legal pitfalls of a decentralized economy.[32] In addition to retraining its current lawyers, the Cuban government should encourage its young lawyers to study abroad and welcome foreign students and professionals to study, teach and practice in Cuba. An integrated approach that encourages education and training for new lawyers, and old ones, will help speed the reconstruction of Cuba’s legal institutions.

Lastly, reform and training is needed in Cuba’s judicial system. The current Cuban judicial system comprises a People’s Supreme Court, fourteen Provincial Courts and approximately 160 municipal tribunals which are the courts of first instance for most Cubans.[33] Many Cuban judges are laypersons, and are as inexperienced in the complexities of commercial law as the lawyers that currently appear before them.[34] Cuba’s current judges should be trained so that they can properly adjudicate commercial claims, and after their retirement, replaced with professionally trained lawyers. Improving the court system from within is not enough. Article 121 of the Cuban Constitution declares that the courts are subservient to the legislature and executive branch, where power is centralized.[35] In order to preserve the integrity of its laws, the judicial branch of the Cuban government must be autonomous and independent of the legislature and executive. Lastly, and to be discussed in further detail infra, the transitional Cuban government should create courts of limited jurisdiction that have exclusive jurisdiction over property and contract cases arising out of privatization.[36] This court should be staffed by internationals as well as local judges, and of critical importance, should process privatization claims efficiently.

An Ideological Shift

Depending on the swiftness of Cuba’s transition to a free market, the economic changes may come as a shock to some Cubans. Whether it is accompanied by equally shocking political change depends on how the current regime responds to Cuba’s withering economy. Communism is currently infused in almost all aspects of Cuban society. Declaring Cuba a socialist state, the constitution states that the means of production are protected for the benefit of the workers themselves.[37] Cuban Communism is ardently anti-capitalist, centralized, and organized around one party, one ideology, and some say, one man.[38] Privatization and foreign investment are an anathema to this system, and the two must ultimately be reconciled.

Privatization de-concentrates capital and labor to those that use it most efficiently. It encourages individualism and competition and through such self-interest, threatens to stratify and decentralize both the working classes and the organized social structure. Cuban privatization may not begin with wholesale capitalist revolution. It may be more closely based on the socially-oriented market capitalist approach that has transformed China in the past decade. With either approach, Cuba’s private sector must be transformed. And no matter how perfectly constructed a property rights system or how finely tuned the procedures of the privatization court, real change in Cuba will not occur solely by the words of the Constitution. New laws and the reformation of governmental institutions may alter how Cuba operates de jure, but de facto change will only occur once the skills and competitive mentality required by the free-market takes hold in the hearts and minds of individual Cubans.

Cuba’s working classes must adapt from a centralized command economy organized around collectives, to the entrepreneurial attitude needed to propel and support fledgling free market democracy. This need for more capitalist spirit extends to all levels of the new Cuban economy, whether it is an investor taking a chance on a new enterprise or whether a business executive will take the risks needed to acquire new capital or reach new customers. The autonomy, self-belief, and belief required in the trustworthiness of other private decision makers to facilitate amicable business partnerships and investment may at first be hard to come by.

The reason in historical, and while this author does not doubt the zeal and heartiness that individual Cubans will have once private ownership and economic freedom become a reality in Cuba, the residual effects of fifty years of Communism still must be addressed. Castro’s version of Communism mandated that the state control the political, social and economic spheres. And even with the reforms made in the past fifteen years, the two hallmarks of the Cuban economy were bureaucracy and inefficiency. The industries reformed to the greatest extent in the 1990s, the agricultural, artesian, and self-employed restaurateurs, were still strictly regulated by local government ministers.[39] As discussed supra, the legislation allowing for limited joint-ventures is also remarkably inefficient. Each investment and each joint-venture requires individual authorization from the central government.[40] And any local labor required by entities with foreign investment must be contracted through the government.[41]

Furthermore, the effect of Cuba’s recent reforms on the mentality of everyday Cuba is most likely superficial. While the few Cubans who have been exposed to Western business models and entrepreneurship should be at the forefront of Cuba’s new middle class, more initiatives are required to accelerate the sociological shift from an economy rife with stagnation to one that is more free and fast-moving. For the proceeds of privatization to be distributed among all Cubans, entrepreneurship and capitalism should be encouraged. The Cuban government, foreign states, and international organizations aiding its transition must focus on supporting the burgeoning business class. In doing so, the international community should continue its efforts of micro-lending to small Cuban industries. New initiatives should also be taken to foster an environment that encourages risk and teaches the business skills and competition strategies necessary for Cubans to more effectively embrace their new economy. To that end, international aid should provide for and the Cuban government should accept financial assistance for the creation of new business schools and chambers of commerce. Thus, the Cuban government and international community must create the institutions that support Cuba’s risk-takers and entrepreneurs and continue to sell and promote the new economy to those not readily embracing the transition.

A Partner for the Transition

Cubans’ taste for capitalism may not come naturally. Failing to provide a legal, economic and social framework by which everyday Cubans can access and understand their new economy would undercut and inhibit its efforts at economic liberalization. In that regard, the financial and human resources of the international community will be crucial. Just as critically, the Cuban government must work with the international community to establish an appropriate entity to organize its privatization efforts and navigate its inevitable pitfalls. Consultation with this entity should add to the transparency and competency of Cuba’s economic restructuring. In determining who would fulfill this administrative function, the Cuban government should select an entity that is both acceptable to its citizens, its regional partners, and to the international community at large.

A hemispheric limitation should be the first requirement. The government that administers this most crucial assistance in the privatization effort should be aware of Cuba’s political climate, regional trade issues, and expertise in privatization, among other things. The geographical proximity of a partner in the Americas would also provide the Cuban government and its citizens with some assurance that a foreign partner is not, in essence, a meddling neo-colonial power simply playing with borrowed money. The difficult transitional period and the shock of privatization could easily breed resentment among Cuban officials and citizens who feel as if they were left out of the process. A nearby partner, could assuage any feelings of patronization, and engender the belief that the efforts at developing a free market economy are a partnership of equals, and not simply a case of neo-colonial plundering. Lastly, a hemispheric partner would provide peace of mind, and perhaps, greater accountability.

But who should this equal partner be? For political reasons, the United States would be an unreasonable choice to administer such aid. The U.S.-Cuba relationship over the past fifty years has been poisonous, and neither nation would benefit particularly from a partnership that is politically charged at the outset. Two other hemispheric leaders, Venezuela and Mexico, should also be excluded. Venezuela, under its current regime, though a political ally of Castro and economic supportive of the Cuban people, lacks the relevant expertise in privatization and quite frankly, is an international pariah. Few investors, already wary of a fledgling economy in Cuba, would entrust their money to a privatization effort spearheaded by the Venezuelan government. Mexico is a more attractive candidate, though still not optimal. While currently accorded far greater respect than Venezuela in the international community, and Cuba’s largest regional trading partner, Mexico has itself made many missteps during its own privatization efforts.[42] Just as importantly, Mexico is also a country in transition to real democracy, and though it has made great strides over the past decade, issues of corruption and the transparency in the both the public and private sector preclude it from being a suitable partner.

Canada fits all the criteria listed above. It is a stable democracy, a regional trade power, and is as experienced and trusted in Cuba politics as any other western capitalist democracy.[43] Its reputation for transparency in international economic affairs is better than most. With the aid of the Canadian government, and assisted by other foreign governments and international organizations, the Cuban government will have a stable and willing partner in the privatization process.

Expropriations: The 500 lb. Gorilla

Even after the legal and economic restructuring, privatization could still ultimately fail to resuscitate and transform the Cuban economy. The likely culprit would be a failure to successfully resolve expropriations claims. Beginning with the revolution in 1959, the communist government seized the private property of foreign, particularly U.S., and Cuban nationals.[44] Almost all of the individuals and entities from whom the Cuban government seized property have yet to be compensated.[45] Most of these individuals, families, and corporations have filed claims against the Cuban government for the wrongful taking of their property. In the United States alone, the Cuban Claims Program of the Foreign Claims Settlement Commission certified the validity of just under 6,000 claims by U.S. nationals, totaling an estimated $6.8 billion in 2002.[46] The expropriation claims of other foreign nationals have, for the most part, been resolved by negotiated settlements between Cuba and their national governments.[47] Yet given Cuba’s current economic state, and the depreciation of many of the seized assets, even successful claimants have recovered a fraction of the worth of their expropriated assets.

The claims of U.S. nationals remain a political and economic roadblock. For political reasons, the United States will not end its embargo or assist in privatization if the claims of its citizens remain unresolved. Similarly, the new Cuban government should seek to resolve such claims, but for two more important reasons. First, the successful resolution of all outstanding expropriation claims would be a public demonstration to the world that Cuba’s government is indeed a reformist one. Second, ending this expropriation crisis is even more critical to the privatization process. Private and public investors, both foreign and domestic will only put their money into Cuba if they are sure that the title to whatever assets they seek is clean and free of any claims. No reasonable private actor will buy property in a country in transition when title and future profits are both in doubt. A prompt and widely-accepted resolution of expropriation claims is, quite simply, a prerequisite for a successful privatization program.

How expropriation claims should be resolved is open to debate. The first primary concern is ascertaining a solution which is economically acceptable to the claimants and politically acceptable to the U.S. government. The second, and competing, issue is providing a remedy appropriate to the claim without crippling the current Cuban economy in the process. The desired means for resolving these claims depends on the individual claimant and the nature of the property involved in each claim. Despite this variety, all remedies are not created equal, and the Cuban and foreign negotiation teams should resolve things quickly, and with an eye toward the future.

Alternative 1: Restitution

There are three remedies most often used to resolve expropriation claims between nations. The first possible remedy, and one which has generated a great deal of debate, is the restitution of expropriated assets to their former owners. A solution to expropriations claims based on restitution, however, is not a one-size-fits-all proposition. The most extreme form of restitution, often called direct restitution, may be appropriate when the identity of the former owners is clearly established, and when the property has not been divided, deteriorated, or transformed in any way. This may be the case with heavy equipment and land that can be salvaged and refitted for use in modern industry.[48] For other property though, or where the assets have been substantially altered in some way, direct restitution may be too difficult a process. It could involve assets deemed indispensable to the public by the Cuban government, or the assets could have already been sold to a foreign investor. If the former owners of such property still demand some form of restitution, then perhaps substitute restitution, using another similar parcel of property or asset would be sufficient.[49] This is the middle of the restitution continuum. Substitutional restitution, however, would only be sufficient for small landowners who, while not receiving their original land, could be assuaged by something similar. For most claimants, however, substitutional restitution would simply be unsatisfactory, and at best, impractical.

For many claimants, however, restitution remains an attractive option. It restores claimants as the owners of the expropriated assets, or similar ones. Furthermore, restitution results simultaneously in the privatization of the transferred properties, engaging new investors immediately in the new economy. Restitution provides claimants with an economic stake in the new Cuba and perhaps most importantly, is a symbol of victory against the former regime.

But restitution has many downsides. Specific property may not be available for restitution for the reasons described above. There may be a dispute as to who the actual owners are, and there will surely be difficulties in displacing the individuals and entities that are the current occupants of the property. Because all claims to such property have to be adjudicated before title could move from the current owners to the new ones, restitution will end up being a long and difficult road.[50] Such a process, while attractive to the claimants for reasons both political and economic, would end up hurting the new Cuban economy more than it helps. Resolving these expropriations claims is only a necessary first step towards revamping the Cuban economy, but if over-emphasized as a remedy, restitution may stall the new economy before it even gets a chance warm up.[51] While acknowledging that some restitution may be inevitable for political reasons, the legal and bureaucratic brambles that accompany restitution are something that the planners of Cuba’s new economy should seek to avoid. It should therefore be deemphasized as a method to resolving expropriations claims.

Alternative 2: Vouchers

The resolution of expropriations claim should get the new Cuban economy moving. Claimants for whom direct restitution may be too complicated a task and for whom substitutional restitution is unacceptable, vouchers may be the ideal remedy. This remedy would require the Cuban government to issue state-sponsored financial instruments to expropriations claimants for use in the Cuban economy. Claimants would receive neither land, nor cash. Vouchers could be issued by the new Cuban government, to claimants in proportion to the loss suffered, and could have any number of uses. Vouchers could be used, for example to purchase formerly state-owned entities in the privatization program, to purchase other investments instruments in Cuba, as collateral for loans, or redeemed for cash.[52] The voucher system could be the incorporated into expropriations solution that emphasized restitution, or vouchers themselves could be the main emphasis of an expropriations solution. They would be an appropriate solution for many of the small and medium size claims.[53]

Either way, providing state-sponsored instruments like vouchers would provide immediate opportunities for investment and could be used to spur on the privatization program without economically hamstringing the new government the way a lump sum payment would, or stalling a fledgling economy as a restitution-based system threatens to do. Vouchers would not be a total panacea for a new government in need of fluid capital and fast growth. Vouchers would provide little compensation to a Cuban government in need of funding. Another obvious danger of an expropriations solution based on vouchers is that given their flexibility, vouchers may fluctuate greatly in value if the economy falters. Yet given the likely broad acceptance of a Cuban government once relations are normalized, and if the legal and institutional recommendations discussed above are followed and steady domestic leadership and foreign support are provided, vouchers could play an integral part in Cuba’s expropriations solution.

Alternative 3: A Lump Sum

The final alternative, a negotiated lump sum payment from Cuba to the United States, also could provide a successful remedy. In this method, the U.S. government would negotiate directly with the Cuban government to receive a lump sum that would satisfy all U.S. claims. Upon receiving the negotiated amount, the U.S. government would distribute a percentage to all claimants who agreed to receive payment according to the amount and conditions negotiated by the government.[54] Assuming a bilateral agreement would be similar in form to prior ones negotiated by the United States, each claimant of an expropriated asset would receive a proportional share of the lump sum based on an agreed upon formula. Other individuals who opted out of the negotiated lump sum solution would have to fend for themselves, though any negotiated settlement with Cuba would most likely bar any U.S. claimants from pursuing their claim in U.S. courts. By most accounts, such a result would only yield a small fraction of the money sought by each claimant, yet given the relative unlikelihood of a dramatic shift in Cuba’s political leadership, a lump sum would provide U.S. claimants with some immediate relief. A lump sum negotiated payment also has the benefit of deflecting this difficult issue to the political sphere, from where any satisfactory solution to U.S.-Cuban relations must originate. If such political forces align, a lump sum payment could resolve outstanding expropriations claims quickly and effectively.

The disadvantage of resolving expropriations through this method is that a large lump sum could cripple the new Cuban government, whether it was paid at once or over time.[55] Thus, it is argued that while a lump sum payment might be the quickest choice to resolve expropriation claims, it could severely damage the Cuban government’s prospects for growth, thereby failing to meet the second requirement of successful resolution agreement. But this possible pitfall of a lump sum payment is more imagined than real. While the detractors of a lump sum payment are correct to point out that the payment of a large lump sum could effectively bankrupt the Cuban government, it is doubtful that the U.S. and Cuban governments would agree to such an unreasonable sum. More importantly, the payment of whatever sum the two sides agree on, will be a part of a normalization of U.S. relations with Cuba. For even if Cuba’s pays out a large lump sum in a negotiated settlement, it will subsequently receive much more in investment from the United States. A lump sum payment would swiftly resolve outstanding expropriations claims while promoting Cuba’s economic growth while avoiding the some of the disadvantages of a restitution or voucher-based solution.

The Mechanics of Cuban Privatization

Solving the expropriations dilemma and beginning to lay the foundation for governmental and economic change are not enough. It is only with a successful privatization program that the Cuban economy can be transformed. Privatization has the possibility of empowering an entire new generation of Cubans, and it will put the legal, sociological and economic foundations of Cuba to the test. A successful free-market will demand the creation of an entrepreneurial class. It will demand the taking of risks, and placing one’s trust in another individual as a business partner, instead of a paternalistic central government. Such a transition will be difficult, but a well-designed and executed privatization program can enhance Cubans’ thirst for free market, foster a renewed belief in their government, and can finally put Cuba on the road to economic prosperity.

Privatization has such a broad effect because it is a process that Cubans will interact with everyday. Privatization can reach into one’s wallet, head, heart and household and can provide individual Cuban’s with a sense of hope and a power to change their lives. On the other hand, privatization can also rupture an individual’s understanding of government, of one’s economy, of how one make a living and feeds one’s family. Privatization can be put stress on the fabric of society and a family. Thus, if privatization is executed poorly, it can devalue any institutional changes already made and undercut Cubans’ belief in their government. Such an alternative is something Cuba cannot afford. Whatever the shape of such program, it must take into account issues specific to Cuba, or else it is doomed to failure. Privatization can take any number of forms, and Cuba’s leaders and the internationals advising them must create a privatization process that is suited to Cuba’s unique situation.

The keys to building on the foundation will be to create a privatization authority that has the vision, the authority, the manpower, and the flexibility to manage the complexities of privatization. The Cuban government should move to privatize quickly. Rapid privatization would generate capital for the transitional government and provides greater opportunity for Cubans to participate in privatization. To do so, the government first must enact the legislation governing the privatization process. With that in mind, one of the initial steps taken by the government should be the establishment of independent privatization agency tasked with the development, management, and completion of a full privatization of the Cuban economy. The entities subject to privatization should include almost all state-owned enterprises. Having a state agency to manage the privatization of such entities would allow the government to maintain control of some enterprises as it deems necessary for the public good, and would provide a discrete entity with the authority and expertise to wind up the affairs of the former SOEs and ready them for sale to private owners.[56]

This new Cuban privatization agency should have broad, but not unchecked, power. The agency, led by a team of Cuban and foreign nationals, should have the power to transform state-owned enterprises into private ones, and should maintain the authority to manage the enterprise in any way in order to protect or improve the value or viability of the entity. Neither the managers nor the current employees should have any formal power to initiate privatization.[57] This authority should include any power that a CEO or Board of Directors would have over a private enterprise. In its administrative role, the agency should do a proper accounting of the financial state and a physical review of each enterprise under its jurisdiction. The agency should be authorized to maintain the structure of the former SOE, to restructure the SOE, to transform it into more than one enterprise or subsidiary ones, merge it with enterprise, or to liquidate the SOE altogether. Such a decision will be based primarily on the profitability of the SOE as it’s currently structured and prospects that it will be attractive to private investors.

After the assessment and administration period during which the agency sorts out the affairs of the SOE and prepares the enterprise for privatization, the agency should put the former SOE up for sale. The watchword for this tendering process should be one of transparency. Whomever the buyer and whatever the method of sale, the privatization agency should bend over backwards to disclose and publish all information regarding the entity being sold, its possible purchasers, the amounts offered, and on what basis the agency made its decision. Almost all aspects of the bidding process and, quite obviously, the agency’s ultimate decision as to whom the SOE will be sold, should be made public. Further, with so much money flowing in and out of the agency’s control, and with it having the ultimate authority in the development of the new Cuban economy, the agency should engage in a vigorous public relations campaign encouraging trade, investment, and participation in the new economy.

The privatization agency must also determine who has the right to bid on an SOE. If the agency permits only Cuban nationals to invest and purchase SOEs, they would be severely limiting the price which the state could get for a given enterprise. The overriding goal of privatization should be to attract foreign investment. On the other hand, selling simply to the highest bidder, with such a bidder often times being foreign, could create some political backlash. If privatization is mostly externalized, Cubans may feel that they’re losing their country to a foreign presence and that the ongoing political and economic modernization is going on largely without them. The agency may therefore require some national involvement for each bidder, thus making an attempt to maximize profit along with the need to make privatization more palatable at home. On the other hand, the agency could simply alter the bidding requirements given the nature of the enterprise. For example, if the SOE is a well-established hospital or a firm in an industry near and dear to the Cuban identity, the agency could require that any bidder is comprised of a majority of Cuban investors. When the SOEs tendered are more ordinary businesses or undeveloped real property, any such restrictions on bidding should be minimized.

While the agency should make private investment in Cuba as attractive as possible for foreign investors, it must also determine what to do regarding the investors who are already participating via joint ventures in Cuba’s current planned economy. Placing the joint venture into the privatization pot and tendering it with all other SOEs could alienate an already keen investor. Thus, assuming that the foreign joint investor wants to continue its investment in a free-market Cuba, the agency could engage this initial investor in a private negotiated sale. In such a negotiated sale, the investor could purchase the remaining amount of the SOE, or could seek a partner of its choice to join in the investment. The agency should then negotiate with the initial investor and their chosen partner for an appropriate bidding price. A drawback of a negotiated sale is that the government may not get the full value for the enterprise that they would if they put the entire SOE up for bidding.[58] Preserving current foreign investment should be a priority, however, and the new Cuban government should do what it can do retain the limited investment that is present, while creating ample opportunities for future investors.

Reacting to Contextual Changes

But the privatization of the Cuban economy will not happen in a vacuum. There will be enormous stress on the social fabric of Cuban society as well as a myriad of political difficulties. Therefore, the aim of the privatization agency in modernizing the Cuban economy must be balanced by other socio-political needs. This should not be seen as reigning in privatization, but instead, as understanding privatization as it truly happens. Similarly, the Cubans and internationals running the privatization agency should not interpret an accounting for political and social considerations as an encroachment on their turf. The mechanics of the privatization process, the transformation of the SOEs, the manner of their sale, and to whom they will be sold, will still be handled by the agency.

The reality is that privatization is an attempt at transforming an economy in a a country already in transition. Taking account of socio-political considerations may appear to temper or slow down the privatization process. In fact, such considerations will make it easier to sustain the new economy, and will ultimately make its chances of success more possible. The development of legal and financial institutions, a free-market mentality and an entrepreneurial class will continue to develop concurrent with and following privatization. These factors will affect the impact and effectiveness of the privatization, no matter how well-planned the program.

Thus, one of the keys to a successful privatization process, whatever form it takes, must be responsive to the needs, though not the whims, of the Cuban people. The reaction on the Cuban street and the changing political landscape will impact privatization whether the architects of the agency’s policies like it or not. The agency should therefore not be afraid to alter its strategy. If they believe the developing economy requires a broad and direct infusion of capital, then it should not hesitate to issue vouchers. If the agency plans for and prepares for such possibilities, they can either structure the privatization process to anticipate them and deal with them from the start, or simply have their responses ready and shape privatization as the economic and social landscape changes. But however privatization goes, the agency must remain flexible and aware of Cuba’s changing needs. To ignore them, and to simply stick to the privatization script, could be fatal to privatization’s long-term success. To maintain such flexibility, the leaders of the privatization agency must accomplish a balancing act. They must be attuned and adapt to the changing needs of the Cuban people, while being steadfast in their pursuit of foreign investment.

Getting Off the Blocks

One of the key determinants of whether a successful free market economy can be implemented is the engendering the support of the majority of the Cuban population. The agency must start privatization off on the right foot. If the goal is to free up assets and privatize the economy as rapidly as possible, the agency should choose its first targets carefully. It could start by selecting small SOEs, either pieces of land or business that ordinary Cubans could bid on and successfully operate. Targeting middle class Cubans and focusing on privatizing these smaller assets could spread an understanding that the new privatization process would work for everyone, not solely wealthy Cubans or foreign investors. Another, competing, possibility is that the agency tender some of the larger SOEs first, in particular focusing on businesses or a high-profile industry that would offer employment opportunities to many Cubans. An initial step such as this would be a high visibility example of how privatization works.

Either choice would be fine, with the latter perhaps offering great opportunity to market privatization across the island. The agency can either start with small or large SOEs, building momentum for privatization incremental steps or opting for a big bang, but either way, the first enterprises should involve mainly Cuban investors. Given the possibility that there will be lingering effects of communist ideology and perhaps a distrust of the new regime, demonstrating the benefit of privatization early on, and to as many Cubans as possible, will help generate the required national support for the program so that it can start off with an injection of enthusiasm it needs to take hold.

Managing the Critics

No matter how well planned a privatization program is, there is no guaranteeing its success. An effective initial wave of privatization will woo both foreign and ordinary Cuban investors and promote support for the government’s new policies. But there will be collateral damage as well. Successful privatization will displace old owners, managers, and lifelong anti-capitalist beliefs, all of which is sure to breed resentment. The mistrust of the government’s leadership could spread to the privatization agency. Any rumors of corruption or undue influence could effectively hamstring privatization. This backlash to the economic and social displacement caused by privatization could boil up into social unrest and a political challenge. Or simmer at a manageable level. The former of the two possibilities is a real threat. All over Latin America, national elections have been won by leftist candidates promoting at least a partial roll back of privatization.[59] Whether the detractors of Cuban privatization cause a similar retreat from the free-market depends on a variety of social and political factors, many of which are beyond the scope of the privatization process.

The agency, however, should administer privatization in such a way that accounts for these political tendencies. Clearly, agency should seek to limit criticism of its own management of the privatization process. Again, transparency and public relations will be paramount. The agency’s operating budget should be available to the public, its central and regional offices and staff accessible. Every Cuban doesn’t have access to the agency’s website or offices, and some critics will not be swayed by any assurances. The structure of the agency’s management should do as much as it can to keep any accusation of corruption to a minimum. The assumption is that the foreign advisers, with less familial and economic ties the Cubans bidding on privatization, would be less susceptible to any bribes or undue influence. The existence of foreigners in the leadership of the privatization agency is not without its disadvantages. The appearance of too much foreign involvement in the agency’s power structure may cause some Cubans to think that foreign investors will the main beneficiaries of privatization. In effect, such critics may come to see privatization as an avenue for foreign investors to buy up Cuban land on the cheap and as a more general threat to Cuba’s economic sovereignty.

One way to stem this possibility is for Cuban national to retain a reasonably high level of control over the privatization agency. It would a grave mistake, however, if the privatization agency was viewed by the public as anything but a distinctly Cuban program. . At the very least, the agency’s Cuban staff should be the most active in meeting with local investors and promoting privatization to the public. Ideally, the agency should be staffed and managed by a combination of Cuban nationals and foreign advisers. Thus, by actively promoting privatization and vesting much of its power in the hands of respected and trusted local leaders, the privatization agency will itself be an example of how the new economy can benefit Cuban interests most of all.

Unfortunately, whatever the agency’s management plan, and however smooth a transition seems, a Cuban privatization program will not be immune to political influences, be they local, regional, or global. Thus, the agency should plan for how it might deal with the growing dislike of the free-market system that has plagued economic reformers in hemisphere’s recent past. There are primarily two ways by which the privatization agency could cool down any reactionary anti-capitalist fervor.

First, the agency could limit the scope of privatization, specifically by maintaining state control over the industries that stir Cuban jingoism. If Cubans begin to get leery about whether privatization really benefits them and not solely foreign investors, then some state involvement could reassure them. Particular candidates would most likely be in the energy, utility, or health industries. The reasons for limiting the amount of privatization in these industries are solely political. Attracting the highest bidder with the most experience and operational aptitude in those industries must still be the clear main goal of the privatization agency. And though this strategy could undercut that in some way by closing businesses off to foreign bidders, the political mechanics of privatization seem to council for a strategy that accounts for the possibility of dissatisfaction.

Tempering privatization in such a way has its drawbacks. If the agency decides that the state should retain complete control in certain industries, or that only Cubans could bid, foreign investors may become wary of whether the economy will be a free market in earnest. Retaining state control or limiting the pool of bidders also could eliminate from bidding the investment team most likely to make the new enterprise a successful one. Maintaining state control of businesses goes a step to far, however, and limiting bidding to only Cuban nations would continue privatization while providing comparable political reassurance. With that in mind, the leasehold option, whereby the state retains ownership but leases a business to the highest bidder, should be eliminated. Thus, the agency should select a few industries not to be sold to the highest, and presumably foreign, bidder. For such enterprises, the agency should require any investment team to be more than 50% Cuban. This requirement should apply to very few businesses. Such joint ventures would sustain the capital flow from foreign investors while thwarting any fears among Cubans that they are selling their country away.

There’s also danger if the agency completely fails to plan for a negative reaction and imposes these limitations only when they’ve become politically necessary. If privatization progresses without any limits as to potential bidders or without retaining any state control, then any change of course, especially one in which the state reasserts itself in the economy, will be taken as a warning by future foreign investment. Foreign investors would fear that politics was causing the economic tide to turn once again. Waiting for internal politics to determine the scope of privatization would be unwise. Thus, even though limiting potential bidders for key industries or retaining state control could reign in privatization before it truly begins, a preemptive decision is preferable to a reactionary one. Hopefully, by announcing and initiating full privatization with one strategic limitation, the agency will broaden support among Cubans, and encourage foreign investors to invest in a privatization process that is closely attuned to the economic and political realities that may impact it.

The second of the two possibilities for winning over a hesitant public involves a small bit of pandering to Cuba’s socialist principles. Privatization can cause massive displacement of employees as businesses are liquidated, merged, tendered, and sold. If many of these workers fail to find jobs in the new economy or if the value of their wages is reduced during the transitional period, Cubans may begin to thirst for an economic plan that took better care of the proletariat. In order to preempt this and not to seem unconcerned about leaving middle and lower class Cubans behind, the privatization agency should provide vouchers to any displaced employee.

The issuance of vouchers should be limited however to a very specific group of employees so as not to unduly complicate the privatization process. The agency should only issue vouchers to employees involuntarily displaced by privatization. The first requirement is that such an employee would have to have been employed by the privatized SOE at the date of privatization. The employee also must not have voluntarily quit his job after privatization. All such employees must not be above any mandatory retirement age. If the employee meets these requirements, then the amount of vouchers they receive would be determined by the period of time they worked for the SOE in question. The longer a terminated employee worked for a now-privatized SOE, the more vouchers such an employee would receive. The vouchers could then be used in any manner of ways, as cash for example, or to invest in a bid for a SOE.

The only individuals to receive these vouchers would be those employees who were laid off by the private management or because a former SOE was liquidated, though some employees who worked for SOE may continue to work for the same business, though under new private ownership. Such a provision would hopefully ease any economic growing pains of Cuba’s working classes that were caused by the transitional restructuring of newly privatized businesses. Under such a system, terminated employees would not be cut out of privatization, but instead given a stake in it. In addition their attraction for the proletariat, privatization vouchers support the new free market system as well. Vouchers allow a privatized business to make independent decisions regarding its employees, and yet whenever employees are let go, they are provided an instrument that gives them with the opportunity to reintegrate into the new economy.

An employee voucher system and a strategic limitation on privatizing selected industries are two small steps that could ease any difficulties caused by the economic restructuring. They should be effective enough to make privatization more palatable to its Cuban critics. Enacting any further measures could make privatization overly burdensome to possible investors. It would be foolish, however, to think that even the best privatization system would work perfectly. No matter how well prepared its leaders are, political and economic realities may change, and the needs of a privatization program should change with them. Some rough patches are inevitable. Yet just as Cubans shouldn’t fear the risk that comes with the free-market, the agency leading privatization should not be afraid to make the difficult decisions regarding its operational policies. Privatization should proceed swiftly, and by accounting for Cuba’s unique situation, it will be a success.

Some Necessary Oversight

With the promulgation of new laws and a transformation of its economy, Cuba will also need a judiciary system to oversee the privatization process. Creating a temporary oversight tribunal should be a prerequisite of the privatization program. This court should be administered by at least three internationally respected jurists and supported by a mixed staff of Cuban nationals and foreigners. Critically, any such tribunal should have exclusive jurisdiction over all claims and disputes regarding former SOEs and the privatization process. Thus, if a Cuban or an international wished to sue an SOE, the privatization agency, or a subsequent business entity created by it, then this court would have the exclusive jurisdiction to hear the matter. This court should decide the legality of any privatization issues based on applicable Cuban law, international human rights law, and commercial law principles. This court must be structured and administered in such a manner that enables and encourages foreign courts, if seized by claims regarding Cuban privatization, to defer such matters to the exclusive authority of the privatization tribunal. Most importantly, this privatization court and the decisions it makes should create no room to doubt the legitimacy of its analysis or its objectivity. It is only with a competent oversight body such as this tribunal that Cuba’s privatization will be successful at home and accepted abroad.

As mentioned earlier, privatization will not pass without any challenges. Some will be political, some economic, and some based on legal argument. It is the task of the privatization tribunal to only deal with the latter. The first rule of any privatization tribunal should be to do no great harm to the overall privatization process. The tribunal, therefore, should decide cases quickly but judiciously. It must understand that while its secondary role may be to demonstrate the correct operation of rule of law principles, its primary obligation is to shepherd the privatization process along while making sure it abides by Cuban and international law. With responsible oversight and a clear vision of its place in the process, the tribunal can ensure privatization continues smoothly and withstands any legal challenges. If the court accomplishes this task, then privatization will succeed in transforming and modernizing the Cuban economy.

Conclusion: Selling the System

Ultimately, successful privatization depends on more than just a solid foundation, a well-planned privatization program, and an effective tribunal. It is only the individuals directing the privatization effort and, more importantly, the leaders of the Cuban government, that can make the transition to a free market a smooth one. Cuba’s leadership must develop the foundations of a free-market economy the moment it becomes politically feasible to do so. In preparation for such a change, the international community should continue to help develop the institutional foundations on which privatization will be built. It is also incumbent on that leadership and its international support to demonstrate to ordinary Cubans and investors worldwide the opportunities that come with the new Cuban economy.

If the leaders of the new economy fail to integrate a plan for privatization with Cuba’s specific needs, then the political and economic challenges of the transitional period will only be greater. That needn’t be the case. Its natural resources, educated citizens, and strategic location make Cuba an attractive place for investment; and that investment will come if privatization is properly managed. With a solid foundation, foresight and creativity, privatization can respond to Cuba’s changing political and economic conditions. A thoughtful and well-executed privatization program can provide political security for Cuba’s political leadership, opportunity for international investors, and most importantly, economic revitalization for all Cubans.

[1] Christy M. DeMelfi, Nothing But the Facts: An In-depth Analysis of the Effects of Economic Sanctions Against Cuba [hereinafter Nothing But the Facts]. 5 J. Int’l. Bus. & L. 137, 159 (Spring 2006).

[2] For comparison, the GDP per capita in the United States in 2005 was estimated at $41,600. See CIA-The World Factbook, https://www.cia.gov/cia/publications/factbook/rankorder/2004rank.html, last checked on December 10, 2006.

[3] Cuba’s GDP grew by 8% in 2005. See CIA-The World Factbook, https://www.cia.gov/cia/publications/factbook/geos/cu.html#Econ, last checked on December 10, 2006.

[4] See Dual Economy Could Trouble Cuban Peso, The Miami Herald, November 17, 2006.

[5] Rolando H. Castañeda, Key Lessons Learned From the Transition to a Market Economy in Asia, Europe, and Latin America Over the Last 15 Years: Application to Cuba [hereinafter Key Lessons]. Cuba in Transition, Volume 15: Papers and Proceedings of the Fifteenth Annual Meeting of the Association for the Study of the Cuban Economy (ASCE) Miami, Florida August 4–6, 2005, page 293.

[6] Key Lessons, at 294. Cuba’s foreign debt would more than double if expropriations claims were figured into the calculus.

[7] See Surprising Experts, Cuba Stays Calm with Castro on the Sidelines, Ginger Thompson, The New York Times, August 14, 2006.

[8] See A Party Without Fidel Castro, Frances Robles, The Miami Herald, December 3, 2006.

[9] See Larry Cata Backer, Cuban Corporate Governance at a Crossroads: Cuban Marxism, Private Economic Collectives, and Free Market Globalism [hereinafter Cuban Corporate Governance], 14 Transnat’l L. & Contemp. Probs. 337, 366-367 (Fall 2004).

[10] Matias F. Travieso-Diaz, The Laws and Legal System of Free Market Cuba: A Prospective for Business [hereinafter Free Market Cuba], p 106. (Quorum Books, Westport, Conn., 1997).

[16] Carmelo Mesa-Lago, The Cuban Economy in 2004-2005. [hereinafter Mesa-Lago], Cuba in Transition, Volume 15: Papers and Proceedings of the Fifteenth Annual Meeting of the Association for the Study of the Cuban Economy (ASCE) Miami, Florida August 4–6, 2005, p. 12.

[19] See 22 U.S.C. 6021-91. The Cuban Liberty and Democratic Solidarity Act of 1995, also known as the Helms-Burton Act reaffirmed and strengthened the U.S. embargo of Cuba. It pledged to support a democratically-elected transition government and most importantly, imposed sanctions and penalties on foreign companies trading with Cuba. The Act has been sharply criticized for its extraterritoriality.

[20] See generally Cuban Corporate Governance, 385-404.

[22] See http://pdba.georgetown.edu/Constitutions/Cuba/cuba2002.html, last visited on November 6, 2006.

[23] See generally, Matias F. Travieso-Diaz, Legal Foundations for a Successful Privatization Program in Cuba [hereinafter Legal Foundations], 17 Emory Int’l L. Rev 1001, 1038-1039 (Fall 2003).

[28] Antonio Jorge, Privatization, Reconstruction and Socio-Economic Development in Post-Castro Cuba. Cuba Transition Project, Institute for Cuban and Cuban-American Studies, University of Miami, 2003, p. 11.

[29] See Luis P. Salas, The Maintenance of Internal Order in Cuba, Transition in Cuba-New Challenges for U.S. Policy 5, 255, Lisandro Perez ed., 1993.

[33] Matias F. Travieso-Diaz and Armando A. Musa, Courts of Limited Jurisdiction in a Post-Transition Cuba. 39 Vand. J. Transnat’l L. 125, 127 (January 2006).

[35] See Article 121, http://pdba.georgetown.edu/Constitutions/Cuba/cuba2002.html, last visited on November 6, 2006

[36] See generally, Travieso-Diaz and Musa, 136-141.

[37] See Constitucion De La Republica de Cuba, art. 14. “En la Republica de Cuba rige el sistema de economia basado en la propriedad socialista de todo el pueblo sobre los medios fundamentales de produccion y en la suppression de la explotacion del hombre por el hombre.”

[38] See generally, Cuban Corporate Governance at 390-392.

[42] Damián J. Fernández, Continuity and Change in Cuba’s International Relations in the 1990s. Cuba at a Crossroads: Politics and Economics after the Fourth Party Congress, ed. Jorge F. Pérez-López. University Press of Florida, Gainsville, 1994, p. 49.

[44] For a brief description of the legal foundations for such seizures, see Matias F. Travieso-Diaz Esq., Alternative Recommendations for Dealing with Expropriated U.S. Property in Post-Castro Cuba [hereinafter Alternative Recommendations], Cuba in Transition, Volume 12: Papers and Proceedings of the Fifteenth Annual Meeting of the Association for the Study of the Cuban Economy (ASCE) Coral Gables, Florida August 1–3, 2002, page 103-104.

[50] See E. Hernández-Catá, Institutions to Accompany the Market in Cuba’s Future Economic Transition. Cuba Transition Project, Institute for Cuban and Cuban-American Studies, University of Miami, 2005, p. 15.

[59] See generally The World: Latin America Looks Leftward Again, Juan Ferrero, The New York Times, December 18, 2005.