Sunday, March 9, 2014

The End Of Communism In Latin America

Cuba and Venezuela are failed states, and regime change in both is increasingly likely. Fidel Castro and his brother are nearing their demise, a challenge for a regime which relies on personalities for legitimacy. This dynastic challenge is not really news since all dynasties have the same problem. What is news for Cuba is what is happening in Venezuela, which has major implications for Cuba’s future history. This is because concessionary Venezuelan oil has kept Cuba alive since the USSR went away in 1991.
Venezuela has two main problems: bankruptcy and revolution. Either could result in a cutoff of aid to Cuba. Here’s what Moody’s says: “Should Venezuela no longer be able to provide this support [to Cuba] to such a great extent, it is likely that Cuba would experience a balance of payments crisis.”
Moody’s rates both Cuba and Venezuela at Caa1, a default level rating. However, Venezuela’s bond-implied rating is now C, which signals default with little or no recovery. Cuba has no bonds from which to imply a rating, only long-defaulted bank loans from imprudent European banks that were written off ages ago.
Moody’s has very little nice to say about the Venezuelan credit: “Rising government liquidity risk reflects the deterioration of market access indicated by a recent sharp rise in yields on Venezuela's external debt. Vulnerability to external shocks is increasing as well as the current account surplus continues to shrink while the capital account remains in deficit. Consequently, foreign exchange reserves have fallen to perilously low levels.” Moody’s concludes that “the risk of an economic and financial collapse has greatly increased.”
If  Venezuela does succumb to bankruptcy or revolution, so will Cuba because Cuba will collapse without foreign aid.  Cuba is the Gaza Strip of the Carribean. Regime change could occur within Fidel’s lifetime, an event prayed for by Cuban exiles. Fidel and his wife du jour might even be the Nicolai and Elena Caucescu of Cuba.
The post-communist future of Cuba and Venezuela is very dark. Economies which lack the rule of law and enforceable property rights have difficulty making the transition from marxism to capitalism. They generally tend to export capital and to subsist upon official inflows and commodity exports. However, no marxist regime has ever succeeded in a successful export strategy, aside from China which is only nominally marxist. In China, the state does not wish to own the land or the means of production.
Both Cuba and Venezuela have completely scrapped their Spanish heritage of rule of law and private property (yes, Spain has rule of law). Nobody knows who owns anything, and no titles are enforceable in courts--such as they exist. Both countries will face the post-marxist challenge of adjudicating the legal claims of those whose property or businesses were illegally expropriated, a difficult and time-consuming process especially when the current owners have “legal” title.
It is likely that any American aid to Cuba will be contingent on the satisfactory resolution of expat claims, since so many of them are now Florida voters. The absence of a functioning and impartial Cuban judiciary may render this process impossible, as it is in other former communist countries.

My view is that the most likely outcome for both regimes after their collapse will be chaos and a Haitian-style humanitarian/refugee problem. Both countries’ geographic proximity to Florida will result in a massive refugee crisis for the US. The rich of Venezuela already have their Miami condos and bank accounts, but the poor of Venezuela will resemble their fellow Caribbean refugees. There is seldom a happy ending for the world’s Marxist experiments.

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