Cuba: The Day After Tomorrow (Part I)

An interview with Cuban political scientist and economist Juan Valdes Paz

Vicente Morin Aguado

Juan Valdes Paz.  Photo: cubainformació
Juan Valdes Paz. Photo: cubainformació

HAVANA TIMES — Professor Juan Valdes Paz’ opening remarks for his interview with Havana Times were a bombshell: “Cuba’s current leadership will have walked away from the historical stage with a minimum sense of achievement if it manages to encourage the creation of a viable and sustainable economic system for the country.”

HT: Professor, we agreed to talk about the Cuban economy, about economic policy specifically. First things first: Why does Cuba have this two-currency system which is stifling and traumatizing the country so?

Juan Valdés Paz: We have to go back to the economic crisis of the nineties, the “Nineties Crisis”, when socialism collapsed in the Soviet Union and Eastern Europe. Cuba’s economy was highly dependent on trade with the CAMECON countries, particularly the Soviet Union. Foreign currency played a relatively small role in these trade relations.

The new trade relations that emerged during the crisis required the exchange of hard currency. Cuba had to implement measures to secure hard currency revenues. The basic measures it implemented were:

–          Eliminating the legislation which prohibited Cubans from holding hard currency, in order to encourage remittances from relatives living abroad. These remittances are received directly by individuals and, in order to absorb them partially, the State, which has a monopoly on Cuba’s domestic trade, needed to create a domestic hard currency market. The result of this was the creation of another market, with its own currency.

–          The expansion of the tourism industry (which had been avoided previously because of the political and social inconveniences it entailed) in order to secure hard currency revenues directly, as well as foreign investment. Cuba had no choice but to offer prices similar to those offered by other countries with a dollarized economy, that is, most countries in the world. Again, this required a new, hard currency market.

HT: Should we have positive expectations about tourism in Cuba?

JVP: Despite its rapid growth, the tourism industry continues to be highly contained in Cuba. The country is not a tourist destination, per se. Tourism had always been regarded as a polluting, ultimately inconvenient phenomenon. Developing the tourism industry was an emergency measure which proved a sound decision, given the country’s situation and natural assets: the sun, the beaches, the natural settings, these things cost the country practically nothing, the required investments are very small. The industry encourages foreign investments with little risk and quick profits. The real question is why this development strategy wasn’t implemented sooner.

Book by Juan Valdes Paz on the organization of Cuban agriculture since the revolution.

HT: So, to cut a long story short, between remittances and tourism, we seem to be stuck with the two-currency system. Will we ever go back to having one currency?

JVP: There is a serious economic policy problem surrounding the current Cuban Convertible Peso (CUC) – Cuban Peso (CUP) exchange rate. The official exchange rate is 24 CUP to 1 CUC. Salaries are paid in CUP, that is, in a currency valued at 1/24th the CUC, and prices are determined on the basis of the CUC market. Therefore, re-establishing a one-currency system will mean closing that gap, through a price and subsidy policy – something far from easy, given the current state of Cuba’s economy.

Eliminating the two-currency system is one of the express commitments of the Cuban government, and it is a logical measure from the economic point of view, given the difficulties it creates. To establish a one-currency system, the economy has to get back on its feet. But, since this economic recovery depends, to a certain extent, on the elimination of the two-currency system, we’re in something of a vicious circle.

Cuba’s current economic situation, reporting a GDP lower than 4 %, average monthly salaries below 20 CUC (22 USD), a rising poverty line and the repercussions of an agricultural and livestock sector which has seen scant recovery, does not seem to favor such a major adjustment.

The State will absorb the better part of whatever stems from such an adjustment, and the Party and government will try and secure as broad a consensus as possible to establish the one-currency system. Even so, we can be sure to see some political tension around the measure and while we wait for a more favorable economic situation.

HT: We’ll continue to move at a snail’s pace, then. Who wants it that way, Fidel or Raul?

JVP: In our socialist system, we always believe we know what we have to do, but we’re not always sure how to do things without political costs. This explains the piecemeal approach which Raul has often referred to. Perhaps Fidel paid more attention to political issues, and Raul is more focused on economic matters. Whatever the case may be, economic considerations have pretty much imposed themselves on Cuba since the crisis of the nineties.

HT: My next question also has to do with Fidel and Raul. I believe that, before stepping down, the Comandante held back the changes.

JVP: It’s true that after Cuba was hit by the crisis in the nineties, Fidel showed himself more conservative, less in favor of changes, accepting these grudgingly. He was looking or hoping for a more favorable international situation. Raul is more rational, he aims for order and organization, for the creation of functional institutions. He believes such an order will provide the needed answers. Fidel improvises. He creates institutions on the basis of the policies he establishes.

HT: Sorry to interrupt, but I can’t help but bring to mind that huge government institution called the “Battle of Ideas”, dismantled by Raul when he became president.

JVP: It is one example of a parallel institution, improvised by Fidel.

HT: I would like you to talk to us about the different ideas about the Cuban economy out there, particularly about the controversial issue of the market.

JVP: The Cuban economy is an extreme case of State regulation, of total, centralized planning and market restrictions. Fidel had always preferred and impelled an economic model based on strong market restrictions. Raul has favored giving the market a greater role within the economy. But the two agree that a strong, regulative State and centralized planning are essential components of Cuba’s economic model. Deciding what will enter the market and what will remain outside of it is a political question.

Unlike Fidel, Raul has favored giving the market a greater role within the economy. But the two agree that a strong, regulative State and centralized planning are essential components of Cuba’s economic model.

 HT: To date, politics has always taken precedence over any economic logic in Cuba.

JVP: I agree with you, Vicente. Cuba’s highly-centralized and top-down institutional model was erected on foundations that are essentially political:

–          A defensive stance against foreign aggression and pressure.
–          A leadership legitimated by its role in the country’s history.
–          A one-party system.
–          A military organizational model.
–          A huge bureaucracy for centralized planning.

Currently, Raul insists the State should not be an administrator, that it shouldn’t manage the economy, that the economy must be based on relations between companies, but this isn’t being done in practice, companies aren’t being given an adequate degree of autonomy.

HT: The agenda is loaded with questions about agriculture, Cuba after Chavez, the so-called “blockade”, the country’s new middle-class. For now, I’d like you to leave us with something to reflect on.

JVP: A key question to ask is what Cuba’s leadership learned from the collapse of East European socialism, what conclusions it drew from the whole affair.

To be continued in part II…

(*) Lecturer at the University of Havana and the Raul Roa Garcia Foreign Relations Institute. Professor of Agrarian Sociology (FLACSO). Researcher at the America Studies Center (CEA). Visiting lecturer at universities in the United States, Brazil, Mexico, Spain and other countries. Author of books on Cuba’s socialist transition and agrarian processes in the country.

Vicente Morín Aguado.  [email protected]

3 thoughts on “Cuba: The Day After Tomorrow (Part I)

  • Professor Paz dances around the main issue: the total value of what Cubans produce isn’t enough to pay for what Cubans consume.

    Agriculture and the productive economy have been destroyed by the dogmatic mismanagement of the Castro regime.

    A lot of the most productive and creative people fled early on. The Cuban system first consumed the local expropriated wealth and since then lived off subsidies. Soviet subsidies paid for health, food and education.

    The fall of the Soviet Union and the ensuing “special period” – or as some people call it more correctly the “normal” period – saw Cuba fall back on its real economy. That created incredible social strains and the regime went to look for extra income. With basic hotel facilities available and no other options international tourism was the easy way out the regime thought. It accepted the risk of “political pollution” of the people by entering in contact with the tourists but created for political and economical reasons an apartheid system.

    Political reasons in the sense that keeping tourists alone in highly controlled settings with tightly controlled staff (mainly though remuneration in part in dollars) would minimize “political pollution”. Economic apartheid because the costs involved in the provision of tourist services was high as the whole system depended mainly on imported inputs (food, cars, basic equipment, …). The government could not afford the risk that Cubans would avail themselves with worthless Cuban pesos of these expensive imports.

    The costs were extremely high for Cuban society. Resentment grew as Cubans walked by bars with tourists having everything they couldn’t have. Being refused entry to the hotels, bars and restaurants even if you had dollars also increased the feeling of being second class citizens in your own country. Entrepreneurs of all kind started small businesses for tourist. Prostitution started in a less than ugly fashion with women and regretfully also girls trying to get some dollars to get some food for the family or some luxuries only to turn grim with child abuse and organized networks after need increased and repression just hardened the scene. The dollar rose to 130 – 140 pesos in some areas by the middle of the 90’s as people needed more dollars to get even the basics that could only be found in the dollar shops that were set up. The old “diplotiendas” had only been for the elite and foreigners. Now the regime set up a system of dollars shops. That resulted in absorbing the excess mass of (worthless) Cuban pesos in the economy as people used their saving to buy the dollars they needed, but it also cost the regime dearly as it had to import these goods. As tourism gave relatively small margins this wasn’t sustainable. To alleviate the situation some private initiative – mainly tourist oriented – like paladares (restaurants) and casa particular (bed and breakfast) were allowed. Trafficking stolen goods and fakes (rum, cigars) also became a lucrative business). The CUC was introduced to mop up as many dollars as possible in one go. It also was meant to ensure that Cubans wouldn’t have stashes of dollars and Euros not in the hands of the regime.

    Tourism wasn’t enough. The regime started to allow remittances from abroad.

    High markups (240% tax) on items sold ensured that both the need of Cubans for help from abroad was high and that all cash came back to the regime with a neat profit over imported costs. Lots of “leakage” though theft and corruption ensued.

    The subsidies from Chavez and the new opportunities like the rental of doctors brought in some new cash, but not enough.

    As such the dual currency system is enshrined as the Cuban state can not do without.

    Apartheid in tourism was alleviated, but remains in other sectors like health.

    The regime succeeded in avoiding a social implosion by allowing massive emigration and repressing outburst of anger like the maleconazo.

    The basic problem remains: under the communist system the Cuban economy can not produce enough to provide for its people. Pipe dreams came and went. The “boom” from biotech turned out to be a dubious trickle of dollars. The search for oil was a failure. Even worse: Chavez dies and Venezuela became not as reliable as before.

    This is where the regime now stands. The situation is bad, but not explosive. The regime hopes to create some economic change without losing any political control. The elite of Raulistas is ready to reap the benefits.The problem is: they don’t have any real answers and the old man is also still alive.

    Cuba was at several crossroads and the regime each time forced the country down the worst route. Any and all reforms have been lackluster and often based on “plan style” pipe dreams.

    Any democratic government that has to take over this mess starts with a heavy burden. Cubans hate today, but fear the future. The people is between a rock and a hard place. There is no magical solution here. Cuba will need to invest in productive industries ensuring more inputs for the local markets and tourism are generated locally.Cubans will have to work and work hard. Work ethic will have to change. For that investment and freedom to operate is needed for entrepreneurs. State control, its inefficiency and corruption have to be eliminated. But without the certainty that what people create will not again be expropriated and a working private system this can’t happen in Cuba.

  • The explanations Professor Paz gave for why Cuba has a dual currency system is a non-answer. Because of tourism? Many countries have tourism, yet no other country has a dual currency like Cuba.

    To allow Cubans to hold hard currency and receive remittances? That does no require a dual currency system. Many other countries allow their citizens to hold hard currencies and to receive remittances.

    “These remittances are received directly by individuals and, in order to absorb them … the State, which has a monopoly on Cuba’s domestic trade, needed to create a domestic hard currency market.”

    Ah, that’s partly correct. The dual currency system is not a “hard currency market”, in that the exchange rate is set by the government without allowing any market forces to affect the valuation. A “hard currency racket” would be more accurate. But the state certainly did create the dual currency system to allow them to absorb the hard currency, whether in remittances or tourism spending. This scheme has allowed the State to maintain it’s monopoly of the Cuban economy and to keep the people economically powerless. The dual currency forms an economic blockade erected by the Cuban State against the Cuban people.

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