The Castro brothers get capitalist religion

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Appeared in the Financial Post

In Fidel Castro’s recent interview with Atlantic Monthly columnist Jeffrey Goldberg and in response to the question, “Is the Cuban economic model still worth exporting?”, the retired dictator made this admission: “The Cuban model doesn't even work for us anymore.”

Several days later, Castro backpedalled. He claimed he actually meant the opposite. “My idea,” said Fidel, “is that the capitalist system no longer works for the United States or the world. How could such a system work for a socialist country like Cuba?

Goldberg didn’t buy the post-interview spin and neither should the rest of the world. Castro only admitted what was obvious to any tourist and what the economic data has shown for years: Cuba’s detour into economic tyranny produced a half-century of suffering for Cubans. It’s why many of them risked their lives on rickety rafts to get to Florida.

Castro’s recent frankness was of particular interest to me because in February 2008, I was in a hotel bar in Varadero, Cuba when Castro announced his resignation; a friend and I toasted his departure.

The tourist resort was not the real Cuba, so I spent two days there and five in Havana. With rare exception, crumbling buildings and rationing for ordinary Cubans were the norm. One guidebook said 45 per cent of Cubans live in substandard shelter. When it came to food, the Varadero resort had full trays of scrambled eggs for tourists. But in Havana, the average Cuban faced rations. I snapped a picture of one store that sold eggs; a nearby sign noted a limit of five eggs per person.

Since Fidel’s brother Raoul took over power in 2008, the reforms have mostly been minor; all Cubans were finally allowed to own cell phones but all the more serious restrictions remained. Recent reforms might now be more consequential. In conjunction with Fidel’s recent interview, Cuba’s government just announced one-tenth of the island gulag’s workforce, or 500,000 people, will be laid off from inefficient state enterprises (there are rarely any other kind).

Revolutionary as that realization of state inefficiency is, even more surprising is the statement from Cuba’s only legally-allowed union, the Cuban Workers’ Confederation. It supported the cuts to state enterprises with this language: “Our state cannot and should not continue supporting businesses, production entities and services with inflated payrolls, and losses that hurt our economy are ultimately counterproductive, creating bad habits and distorting worker conduct.”

Granted the Cuban union is a mouthpiece for the Communist government, but that’s the point. Along with Fidel’s comments, they both underline how serious the regime may be about opening the door a crack to economic freedom.  

It’s been a long time coming. In 1958, the year before Fidel Castro came to power, Cuba was no paradise, troubled as it was by poverty, a corrupt dictator and the American mafia. But it was better off than most developing nations.

In 1958, Cuba’s per capita GDP was $2,363. (In comparison, Canada’s was $8,534.) Cuba outranked all other Caribbean countries on this measure, save Costa Rica, Jamaica, Puerto Rico and Trinidad/Tobago; it was also not far off the Latin American average of $3,047.  (The data, in 1990 Geary-Khamis PPP dollars, is derived from the statistical work of the late economist Angus Maddison at the University of Gronengen.)

In 1958, Cuba’s per capita GDP was even higher than some East Asian jurisdictions such as Singapore ($2,295), Taiwan ($1,290), and South Korea ($1,234).  Pre-Castro Cuba was not far behind Japan and Hong Kong at $3,289 and $2,924 per capita GDP respectively. In the late 1950s, Cuba was two-thirds as rich as Japan, equal to Singapore, and about twice as prosperous as South Korea.

Castro’s January 1, 1959 revolution promised prosperity, democracy and the restoration of Cuba’s (1940) constitution; Cubans have seen none of it.   

Five decades after the Revolution, by 2008, Cuba’s per capita GDP was just $3,764, due mostly to growth in the past decade, and presumably from growth sectors such as tourism. As recently as 2000, Cuba’s per capita GDP at $2,422 was almost exactly the same as it was in 1958.  

In comparison, the economy of another Latin American country also run by a dictator for a time, Chile, grew from $4,392 per capita GDP in 1958 to $13,185 in 2008. That transformation occurred because its rulers, including the dictator Augusto Pinochet, at least embraced the market economy.

Meanwhile, the East Asian jurisdictions who half-a-century ago were either below or barely above Cuba’s economic status have long eclipsed Castro’s island. In 2008, per capita wealth was $19,614 in South Korea, $20,926 in Taiwan, $28,107 in Singapore, and $31,704 in Hong Kong. In real terms over five decades, Hong Kong’s per capita economy grew by a factor of 11, Singapore’s by 12, and South Korea and Taiwan by a factor of 16—this while Cuba’s equivalent didn’t even double from its pre-Revolutionary state.   

Apologists for the Cuban regime often point to the American economic embargo as a prime reason for Cuba’s poverty. They’re partly right—it’s that and communism, but oddly, the defenders never understood their own argument: free-flowing trade between countries can help lift a country’s economic prospects and let it flourish, just as free-flowing trade internally does as well.

I don’t hold out much hope the Canadian apologists will get it, but Fidel Castro apparently now understands the obvious: his attack on markets was a colossal failure. 

With the launch of the Plan Nord, the Quebec government, provincial political parties, and society in general appear to consider mining as a financial windfall and the public debate is now about how to allocate the spoils. Yet we should keep in mind that there is an alternative to this rosy scenario where the commodity super-cycle comes to an end and the windfall evaporates. That’s why Quebec politicians should rethink the assumptions contained within their mining policy.

The industrialization and urbanization of China and other emerging countries are the source of soaring demand for commodities, which suppliers are struggling to meet. This has caused prices of non-oil commodities to triple in the past decade and reinforced the view that a commodity super-cycle has replaced the volatile market of old.

Higher profits accruing to miners have spurred governments around the world to try and increase their share of this windfall through higher taxes, royalties or even nationalization.

Quebec is no stranger to this evolution. The Plan Nord that will be carried out over a period of 25 years is based on the assumption of rising metals prices and revenues and politicians are busy looking for ways to take advantage of the mining bonanza.

Following on the suggestions of mining activists and Jacques Parizeau, former premier of Quebec, the Parti Québécois and the Liberal government have given in to the lure of resource nationalism. The official opposition is calling for higher royalties and replacing the current profit-based mining rights with a royalty based on the gross value produced plus a tax on « excess profits ». The PQ also advocates direct equity investments in strategic mining projects. In the same vein, the Quebec government’s latest budget contained ill-advised plans to take equity interests in mining projects.

Investments in mining are very risky. It takes a long time for mining investments to pay off – the process of exploring, developing and bringing a deposit to market can last 20 years. That is why investments have usually been made by the private sector. This new policy of public investment in private projects is definitely not in the interest of Quebecers, especially if metal prices start to go down.

This wave of resource nationalism is based on the premise that the consumption of industrial metals in China and other emerging economies will remain high for a long time. Virtually all who favor higher royalties in Quebec point to the rising price of minerals as a reason for increasing the government’s share of mining revenue.

But is the premise correct and will the mining boom be sustained? Unfortunately there is no guarantee this is the case.

Mining has traditionally been subject to wide swings in commodity prices and experience tells us that there is a definite possibility that the current boom could fade in the future. A recent study by Credit Suisse even wonders if the commodity super-cycle is over. Why?

The super cycle is based almost entirely on Chinese demand, with that country being the largest consumer of almost every metal. China’s share of global consumption in 2011 was 38.6% for copper, 36.7% for nickel, 41.4% for zinc and 43.7% for aluminum. Now China is entering a transition phase from a resource-intensive growth model based on investment in infrastructure and exports to a model based on domestic consumption driven by efficient, value-adding industry and services in which the economy will slow down and metals consumption will be lower. There is obviously a lot of uncertainty as far as the future course of the Chinese economy is concerned. But, if achieved, such a development could affect the global price of metals and, in the long run, has the potential to put an end to the commodity super-cycle.

The imbalance between demand and supply has played into mining suppliers’ interests so far but what will happen if demand decreases and global mining capacity is much higher in 20 years than it is today?

Metals are not an inexhaustible source of income. Quebecers should realize that metals are not like oil; their prices are not set by a cartel but reflect the global supply and demand. Non-oil commodity prices have traditionally fluctuated greatly and, even if the recent super-cycle has been unusual, the old normal may eventually return.

In this context of high uncertainty, demands to increase the government of Quebec’s slice of the profit pie may prove to be dangerous policy for the future of the province’s mining industry.

Ecological Integrity --EI to enthusiasts-- along with ecosystem management and ecology buffer zones are the latest rhetorically impressive buzzwords that radical environmentalists have deployed in the direction of Parks Canada Agency. The bureaucrats in turn adopt them as scientific protocols, and use them to justify expanding their regulatory control.

The reality to which the terms refer is thus less concerned with the natural world than the intention of Parks Canada to tighten its choke hold on human activity within the parks and to extend its administrative arm beyond the park boundaries. This bureaucratic empire-building has serious implications not just for people living and working in the parks but for home-owners, ranchers, farmers, miners, and other ordinary citizens who may wake up one morning and find themselves incorporated into an ecology buffer zone.

A major indication of the new course Parks Canada has been taking is contained in the final report of the Ecological Integrity Panel, published last year. Parks Canada, the report said, should cease to be bland administrators and become an advocacy organization promoting park values. The park values they have in mind are precisely those that would ensure a much reduced human presence.

The Panel went on to recommend that legislation governing the operation of Parks Canada and the Environmental Assessment Agency be changed to enable officials in these agencies to influence what goes on outside the parks. This recommendation reflects the doctrine of “ecosystem management,” which would require that all land in an ecosystem be administered without regard to individual property rights or the constitutional responsibilities of the provinces.

The grave defect with the doctrine, however, is not political but conceptual. An ecosystem is a mental construct, not a fact of nature. It may be useful in research, but as geographer Allan Fitzsimmons said, it is far too ambiguous to serve as an organizing principle for the application of federal law and policy. As spatial units, ecosystems represent a geographic free-for-all. But a geographic free-for-all is just what those keen to impose park values on buffer zones across the land are seeking.

Parks Canada’s advocacy is already harming the Canadian economy. In 1997, the Cheviot coal mine east of Jasper was approved for development following lengthy environmental scrutiny. The development permit was then challenged in court by a several environmental groups along with Parks Canada. They recruited ecologists and biologists who alleged the proposed mine could harm a regional grizzly bear population “that may be vital to the ecosystem integrity of Jasper National Park.” By the time the environmental review and litigation were over, Cheviot had lost its major customer. Environmental groups are now lobbying to have the mine site incorporated into the park.

Tourism is in some respects at the other end of the industrial picture from coal but it is at least as great an anathema to radical environmentalists. A resort called Three Sisters Mountain Village, located east of Canmore and well outside the boundaries of Banff, was initially approved in 1992, following a review process so prolonged that the initial owner had sold out.

Resort management consider wildlife as an asset, not a liability, and accordingly have taken great pains to mitigate any adverse effects. Over the past decade, Three Sisters has spent millions of dollars on the study of their own property, looking at the effect of the development on the local and regional wildlife populations. Not good enough: environmentalists have recently launched a new campaign to shut down the entire project.

Further south, on the Canada-U.S. border west of Cardston, is Waterton National Park. By wanting to build houses on his land adjacent to the park, Cardston County landowner Jim Garner has become another victim of ecosystem management. As Cheryl Bradley, former president of the Alberta Wilderness Association, explained in her presentation to Cardston County Council last February: “Our rights to property will never take precedence over the needs of society. Nor should they, we all must agree in our grudging hearts. In Ms. Bradley’s grudging heart her vision of the needs of society evidently exclude the entrepreneurial activity of Jim Garner.

These disputes along the eastern edges of three of Canada’s national parks have transformed Parks Canada into a major influence on provincial land use. The recent closures and restrictions within the national parks turn out to have been but a prelude to the extension of federal administrative control outside the park gates. All the scientific rhetoric used by environmentalist radicals --ecological integrity, ecosystem management, buffer zones, and the like-- is just camouflage for a different and much less respectable agenda.

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