Inflation Hits Cuba, Is the Market to Blame?
Dmitri Prieto
With the new openness to the private businesses in Cuba, I have observed an economic phenomenon that I don’t understand.
Theoretically, by increasing the supply of goods and services to a fixed demand, the prices should go down.
Nevertheless when I going to a cafeteria, I find that the fruit juice that used to cost 2 pesos now costs 3 in many places. Even in the barbershop where they had charged 5 pesos for a haircut, they now want 10.
The same thing goes for other things.
A glass of Kool-Aid that had gone for 1 peso now costs 2 in many places.
And it’s the same with pastry, whose prices have risen by one or two pesos.
There are private taxis and van routes whose prices have also shot up.
Is there anyone out there who can anyone explain this phenomenon?
The recent market-oriented reforms that Raul Castro’s government has pursued have both their positives and negatives aspects – if in one hand they dinamize the economy as a whole, on the other you get inflation, unemployment and a bigger gap between the rich and the poor.
So yes, the “God Market” is to blame.
Good article, Dmitri. In a regular market scenario, prices tend to fluctuate up and down according to the law of supply and demand. These fluctuations however have limits. They tend to fluctuate around a natural, objective point that is ultimately determined by the real cost of both producing the given product or service and bringing it to the consumer. If you compare today’s prices to formerly subsidized prices, they will always seem unwarranted and capricious.
In a market scenario, all added costs of production must be, and are passed down to the last person in the chain–the final consumer. If they could not be passed down, production of a commodity would halt abruptly. This is why taxing businesses is a fraud. Businesses, if they are to remain viable, simply add such costs to the price of the product at the next stage of production or distribution. The new taxes by the Cuban gov’t on nascent businesses therefore are actually taxes on the common citizens.
I think the sudden rises in prices of which you’ve taken note are natural attempts by the invisible market mechanism to find the objective cost of production point around which the fluctuations will inevitably hover. One thing Cuban consumers can do, to avoid price gouging by unscrupulous business persons, is to vote with their pesos, refuse to purchase at exorbitant levels, and force prices down using natural market motivations.
The market is like fire. It can be used for much good, but it can also result in much evil. The market under a socialist cooperative republic would act differently from that of either a capitalist or a state monopoly socialist mode of production because cooperative socialist markets would be conditioned by the National Plan and helpful regulations–at least, that’s the theory.
Perhaps the best thing you can do is appreciate the market for what it is, and for its progressive potential, and try to manipulate it for the good that it can do.
Dmitri, I think what is happening is that the original price was a guess estimate of the real price and now prices are getting set by all the forces of the market. Remember that changes in any affect the others. For example if taxes or gas price change then everything else will change accordingly. Is there is a price hike on any particular product it could drag along a group of products. That is the normal behavior of the market. On the other hand if the prices for those selling get to be to hight then they will not be able to sell but naturally as long as there is someone willing to pay the price they will sell.
Cuba got a peculiar situation. Those that receive money from outside. That may have a tendency to produce inflation by default because is money out of the economical system. It increase circulating money with no corresponding increase in productivity or increase in products produced therefore its effect is one of augmenting inflationary pressure and that is what will keep the prices at hight level. That itself is a good thing for now because it does stimulate people to produce those things that are needed. Mainly food.
Well in case of Cuba, inflation shocks have a couple of reason:
– in general come from more expensive imports.
– if the state stops to compete with privates with subsidized prices, privates will raise there price
– if production rises intern and ressources are insufficient prices rise too, f.e. black market products
– and of course due to the behaviour of your copatriots which a more into “approveching” then into long term confiable business and therefore overcharge as much as they can, and tell you they have necessities…
– and the fifth maybe is more and more higher consuming tourist are coming to the country as well as more investments to come.
– higher taxes on gasoline and other goods who are needed for production
Production cost rise due to more demand, when ressource is finite, large scale normally should bring them down.
In case of fruit juice, fruits and electricity got more expensive, batidor less expensive and fridges more efficient, water stayed they same. Quality? Maybe better due to competition. Maybe the produced before without taking depreciation into account.
Barbers have to pay a rent, me as a foreigner who has to pay more then 10 Euro in my country for the simplest haircut, means over here people don´t cut there hair when its time, they wait for a good reason to do so.