The Never-Ending Story of Price Caps in Cuba

Fifteen years are not anything

By Miguel Alejandro Hayes Martinez  (El Toque)

HAVANA TIMES – In 2008, after Hurricanes Gustav and Ike swept through the country, the Cuban Government limited maximum prices on 16 agricultural products. The result? Less products poorer in quality began to be sold at agro-markets.

Then, in 2011, after the precarious expansion of the private sector kicked off, there were signs in official propaganda about people being bothered by the prices private businesses were selling their products. In 2013, Decree-Law 318 came into force, which capped maximum prices of agricultural products yet again. It was unsuccessful, as expected; prices continued to increase instead.

The story continued. In 2016, the Government “took charge again”, but this time it didn’t only cap prices in agro-markets, but it also capped prices of non-agricultural cooperatives. This “innovative” government initiative resulted in the application of 21,895 fines in 2017, which represented revenue of 815,380 pesos. However, no solutions were found to improve citizens’ wellbeing and the purchasing power of their wages, while “prices considered in the Resolution cannot be violated under any condition,” as an official at the time said (because there’s no tolerance for indiscipline, not even a little bit).

As “the Revolution never rests” or lets up on prices, it launched an attack on private taxi drivers (popularly known as boteros). In addition to a large number of fines, they managed to make transport services worse. As if that wasn’t enough, they got overexcited and even went as far as opting to take away the licenses from private drivers if they didn’t go out to work, in Villa Clara. Something along the lines of “if the Revolution gives you the privilege of being self-employed, who do you think you are to decide whether you work or not?” (similar ideas must have been voiced – or at least thought – in the meeting where they discussed this “initiative”.

Since 2018 – the year when it seems the country’s leadership was busy taking care of other business, such as the formal transfer of power – in 2019 came “and they went even further”, the highest-ranking officials all said “yes” to the “Cold War” against prices. This time they started off by capping prices in Holguin. In July that same year, 12 provinces had implemented the measure and there were results, of course: they received hundreds of calls complaining about sellers who weren’t respecting established prices, which allowed the Government to “cash in” on some more fines.

In 2020, the Government tried to rectify its mistakes like it normally does, but it continued to bet on price caps as the only “alternative”; perhaps thinking that Socialism (which they keep saying they are going to build, but they still haven’t put a hole in the wall) won’t be possible until they manage to cap prices “properly”.

It didn’t work either, but the corresponding authorities didn’t react until July 11, 2021. That was when they removed price caps as part of a few meek measures to alleviate social tension in the wake of the popular uprising. If they did this, they did it because they knew it wasn’t a popular measure.

But “the Revolution has the right to defend itself,” so official propaganda introduced the idea of needing to cap prices again in 2022, knowing full well what it was doing. Once the war was announced, the umpteenth attack appeared and it could only fail again, just like it did in Granma and Santiago de Cuba.  

If we take the last 15 years into account, everything indicates that when prices increase, the Government’s key measure is applying controls. The Cuban economy hasn’t got anywhere with this (excluding the one in the TV News and small isolated cases where price caps do work).

The theory?

Price controls – or caps – have been a well-known practice for centuries. There are arguments for and against it, although the idea that it is an inefficient instrument reigns among the economist community.

For example, price caps can lead to:

●      Drop in profitability for sellers, because earnings are reduced when sales prices are capped.

●      Poorer quality goods and services on offer because one way for sellers to keep their profit margins, when their income from sales is slashed, is to reduce costs that are then seen in the quality of the final product.

●      Shortages, illegal sales and the illicit market, as sellers are able to retaliate (withdraw their products from the market for a period of time) and, regardless of this, seek out those who are willing to pay more (given shortages) on the fringes of the law. The latter also encourages a culture of disrespect for the Law and uncertainty between sellers and customers at the same time; which includes a higher sense of risk and danger of losing their livelihoods or going to jail.

●      Enforcing price controls implies additional costs, such as the wages of inspectors and the hours of work to process and impose punishment.

On the other hand, with less consensus over the problems price caps can have, there are some positive effects that are worth mentioning. For example, price controls work when they are applied to a monopoly that wants to take advantage of its market power to take away a supernormal profit (which implies a social cost). Plus, they play a positive role in counteracting economic actors’ inflation expectations. Even so, it’s not enough that different experts are saying this for it to work; and the Cuban economy is proof of this.

The reason price controls haven’t been effective in Cuba may be influenced by many factors, and it’s worth highlighting special conditions in the Cuban economy:

a) shortages of goods and services, infrastructure, as well as means of production, and

b) the lack of credibility of institutions that try to convince the population that their policies will benefit them (instead many economic policies stir negative expectations).

A similar Government policy wouldn’t be a problem if it had good results, but it always ends up making matters worse. This suggests that the Government’s persistence with a policy/tool to the same problem isn’t exactly supported by Science/Government, which is a trending term in the state-controlled press. This is why any onlooker may suspect the intentions of people responsible for price controls when they bet on a failed policy time and time again, if it’s a matter of taking care of citizens’ wallets…

Furthermore, if price controls do work, and have short-term benefits (according to theory), why is the Cuban Government focusing on this short-range policy every time it takes actions?? It also uses its spokespeople to transmit the message that it will work or that even if it isn’t the solution, it will help. What is the real solution they’re working on while they’re implementing a measure that doesn’t even work, to win time? Nothing. If high prices is a hole in a wall, price caps are a quick-fix that don’t even cover the entire hole.

On the other hand, the Government’s attention to high prices is in the private sector and state-led agro-markets. For example, it doesn’t apply the same rules to its state and military-run monopolies such as MLC (dollar priced) stores or other industries. Are Government price controls really trying to alleviate the negative impact of high prices or is it just a propaganda move to turn the private sector into a scapegoat and hand off its share of blame? Is it a way for them to reaffirm their control over private business or just a concern when it doesn’t have to do with their own companies? The reality is that when prices are capped, the Government is the only one that wins. epression begins, but in its “economic” strain. In two words: monitor and punish.

Where can solutions be found?

The Cuban economy is in a bad point A, and we already know what point B is: in order for rice prices to drop – which is one of the things the population is calling for – there has to be sufficient supply (nationally produced or imported) at least. That goes for the whole economy.

The solution to the problem of high prices isn’t a separate solution, different to other economic problems in the country, it’s the same old problem. High prices are one of the many symptoms that prove how sick the Cuban economy is.

Economists, activists, and hundreds of Cubans interested in the island’s future have been writing about these solutions as well as the price of walking down the wrong path, for decades. The compilation of proposals – which wouldn’t fit in this article – ranges from foreign and national investment in agriculture and livestock, to serious institutional reform and ownership, in agriculture, industry and trade.

However, despite all of the warnings made and alternatives pointed out by different voices, this is where the “Revolution” has brought us. Economic Reforms were a failure foretold, the 63 measures in agriculture, 43 in the business sector, selling dollars at CADECAS (bureaus d’change for foreign currency), dismantling the sugar industry, betting on hotels… even the economic model itself (if we can call it this) has been expected to fail. Thus, if decision-makers continue to bet on price caps as “the alternative”, it’s because they want to and it serves their own interests.