Are Price-Caps the Solution to Cuba’s Inflation?

By Amaury Valdivia  (El Toque)  

Photo: Jorge Beltran.

HAVANA TIMES – In early December, a resolution came into force which set out a price-cap for different food items. Within days empty shelves prevailed in most of Havana’s markets.

In order to fill pallets again, the government called upon exceptional deliveries from other provinces and made road checks more flexible. While some food items have reappeared, it will be hard for others, such as pork, to adjust to official prices.

In November, Havana only received around a quarter of the agricultural produce it needs per day to satisfy its residents’ needs. That is why the brakes were put on inflation, Havana’s Finance and Prices director announced on national TV. The answer was to establish the same old law, to replace another similar one that passed in August 2019, which wasn’t successful either.

Price-caps aren’t enough

Ever since summer 2019, when the central government raised public sector wages exponentially, the premise that administrative checks could stop inflation, gained ground in public discourse. At about the same time, the Ministery of Finance and Prices calculated its best forecasts in a so-called “Price Observatory”, which sounded the alarm about abusive practices.

“Public authorities need to respond more, because they should and need to protect consumers,” the head of this department, Meisi Bolanos, said in January this year. The Ministry’s headquarters received over 730 complaints about price violations in December 2019 alone. This she said, “without counting all of those that came from other regions.”

In the short run, the policy was partially effective, until Cuba got caught up in the COVID-19 whirlwind and health expenses increased dramatically. Then came the closed borders dealing a devastating blow to the tourism industry. On top of that, the government lost several lucrative medical missions abroad. The combination added up to less foreign currency in the country and less government liquidity. 

The need for revenue pushed the government to implement measures archived for a decade until “more favorable circumstances came along”. In some regards, the current landscape would seem like a rerun of what happened in the early 1990s. Back then Fidel Castro gave in and authorized private businesses, decriminalizing the dollar and seeking foreign investment… These decisions were crucial in controlling inflation, according to economist and Public Policy expert Tamarys Bahamonde.

Lessons from the 1990’s crisis?

The 1990s are a source of opposing opinions for experts both in Cuba and abroad. Quite a few believed that the first push for reforms was a great opportunity lost in trying to deal with the national development plan’s shortcomings.

Bahamonde agrees with this point of view. Bahamonde believes that “the Cuban economy faces structural problems that won’t be resolved in the short-term.” There’s nothing like prices to back up her statement, as “they are totally established in the wrong way” in Cuba. “The economy is a living organism and prices are its temperature. If you have a fever, you know that something is wrong with your body. The same thing happens with prices. If inflation takes off, you know that something really bad is going on with the economy.”

Up until now, the Government insisted on not allowing public discussion on this variable to be “freely expressed.” “I don’t know what can help to stop inflation from getting out of control,” Bahamonde confessed. Price-caps can delay some things, but economic players are the ones that need to “absorb this inflation”, she said.

Economist Omar Everleny Perez is one of the voices that has greater authorization in the field of Cuban economic studies. He spoke on the above-mentioned broadcast on elTOQUE. He weighed in that the only way price-caps would work is if supplies increase to such “a great extent, that people would see that Cuban pesos have real purchasing power.”

However, recent events in Havana have shown that private business owners stand together in their rejection of government regulated prices. They note the State’s inability to overcome this challenge and satisfy the population’s needs with greater supplies.

Fixing prices within a context of shortages and currency unification

Forecasts for this current farm cycle are not looking too promising. The government gives as reasons a shortage of fuel and of other supplies. If a year ago, only 70% of expected harvests were achieved, when we were in a better situation and with a less ambitious new sowing plan, I have the feeling that the new goal is practically out of reach.

In 2019, other economic sectors paid for food imports of what agriculture couldn’t produce. However, this option is now very limited because of low revenue flowing into the State budget.

A formula that combines less farm production and less imports can only result in a drop in supplies for the domestic market. The Government has three options under these circumstances. Allow a free market to operate, but with price-caps (the option that public officials defend); ration sales with fixed prices; or eliminate all controls of marketing and prices.

Any one of these would imply significant risks for a society where family budgets have centered around buying food for a long time.

In Cuba, the biggest dilemma for many families is breakfast, lunch and dinner

As part of the currency unification process, the announced devaluation of the CUP peso will inevitably have a strong influence on your average Cuban’s food bill. Administrative regulations or calls for social conscience will do little more than shine a light on the problem.

Five years of price-caps have proved this already. It was in December 2015 when citizen discontent made it to the National Assembly and managed to get them to abandon their laissez-faire policy. A strategy which reformists headed by Marino Murillo Jorge defended.

Then, the following year, the first lists with price-caps have begun to appear in provincial papers when Cuba had a record pork production. Back then, a pound of pork didn’t cost more than 25 pesos, not even in more exclusive establishments. Five years later, it’s hard to find it for four times this price in some provinces…

Read more from Cuba here on Havana Times.

One thought on “Are Price-Caps the Solution to Cuba’s Inflation?

  • It is indeed economics 101. Supply and demand.

    Unfortunately, Cuba does not have the ability to increase its supply of food and goods. After years of mismanagement and disincentivizing production, its agriculture and manufacturing capacity is virtually non-existant. Even if it releases restrictions on entrepreneurs or moves toward capitalism, it does not have the resources to invest in its own productive capacity. It must look to foreign investment……, which is futile. No sober business person will commit capital to a venture he/she is prevented from controlling, in a country with a history of expropriating the assets of successful businesses. The bottom line is that Cuba’s supply of products for its people or for export is stagnant, and may actually decrease.

    Correspondingly, demand is stable, if not increasing. The Cuban people must be fed and educated. They aspire to the same standard of living as the people of other countries.

    The natural balance between supply and demand, is reflected in the dollar price of goods in Cuba. It doesn’t matter how many Cuban pesos are paid to Cubans. They are worthless, except to the extent they can be exchanged for dollars or other stable currency. If wages paid in Cuban pesos go up by 500%, prices charged in Cuban pesos will go up by 500%. The peso cost of buying dollars will go up 500%. Nothing fundamentally changes. There is still a limited supply of goods being demanded.

    Until Cuba abandons the socialist model, nothing will change. And the Cuban people will continue to suffer.

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