Lessons from Cuba: when communists outgrow their own ideology

Cuba’s Communist Party has approved the country’s most sweeping economic reforms since the 1959 revolution.

On 18 June the National Assembly adopted close to 200 measures that scrap the requirement for foreign investors to form joint ventures with the state, permit private companies with more than 100 employees for the first time, allow Cuban and foreign investors to buy stakes in state-owned enterprises, and open the door to private banks.

Prime Minister Manuel Marrero told lawmakers the changes recognise the market as an instrument for the efficient allocation of resources. Coming from a senior official in a one-party communist state, that kind of statement would have been unthinkable five years ago.

The reforms are born of desperation. The perpetually fragile Cuban economy – the necessary outcome of communist ideology and policy – faced even more pressure following the imposition of a United States oil blockade in January.

Blackouts lasting up to 20 hours a day, food shortages and a worsening health crisis left the Cuban leadership with two options: reform, or watch the system fail outright. According to the Financial Times, Chinese officials have for years privately urged Havana to shift away from its vertically planned economy and have grown frustrated at Cuban leaders’ reluctance to act, despite the obvious dysfunction of the status quo. Cuba has run out of room to keep saying no.

There is an obvious irony in a communist government discovering, under duress, what classical liberals have argued for over two centuries. Private capital and secure property rights generate growth. Cuba has hopefully arrived at this conclusion because the alternative was state failure.

South Africa should pay attention because the underlying economic lesson is the same one the government still resists. During a radio interview on 20 June at Kasi FM Studio in Katlehong, President Cyril Ramaphosa said that in five years he wants the economy growing at 5% or more, because higher growth creates more employment.

While few would dispute the aspiration, the problem is that the president did not say what would have to change to get there, and the single most important number behind that question is one his government rarely discusses in public.

Gross fixed capital formation, the measure of how much a country invests in factories, infrastructure, plant and equipment relative to the size of its economy, has sat in the 13% to 15% range for years.

Economies that sustain growth above 5% a year, from East Asia in earlier decades to Cuba’s own stated reference points of China and Vietnam today, typically run investment ratios in the high 20s or above. South Africa is not close to that, and has not been for over a decade.

This reality is not coincidental. It is the predictable outcome of an ideological and policy environment that keeps the country’s risk premium elevated. Investors price risk before they price opportunity.

When expropriation provisions remain unresolved, when licensing requirements add cost without adding productivity, when state-owned enterprises crowd out private capital in electricity, ports and rail, and when policy uncertainty around mining rights and water licences persists year after year, capital responds rationally. It goes elsewhere, or it stays in cash.

President Ramaphosa’s 5% target is not unreasonable, but it is quite unreachable under current conditions. No government in modern economic history has sustained growth at that level with an investment rate stuck at 13% to 15% of GDP. Higher growth requires more capital formation, and more capital formation requires investors who believe their capital is safe.

Cuba’s reforms, however limited their eventual implementation proves, came from a government that finally accepted this arithmetic. Havana is gambling that opening the economy to private capital is less dangerous than continuing to manage scarcity through central planning.

South Africa faces no comparable crisis, no blockade, no blackout regime on Cuba’s scale. That should make reform easier here, not harder. We have the institutions, the capital markets and the legal infrastructure that Cuba lacks. What we do not yet have is a government willing to treat and tackle the risk premium as a policy choice rather than an external imposition.

If Pretoria wants 5% growth, the starting point is not another summit or strategic plan. It is removing the specific policies and pieces of legislation that keep investors pricing South Africa as a riskier bet than it needs to be.

Cuba is reforming because it has no other option left. South Africa still has the luxury of choosing to reform before the choice is made for us.