Economic Reform in Cuba: There’s still a ways to go…

By Ricardo Torres  (Progreso Weekly)

HAVANA TIMES – It is regrettable that the debate and ideas that end up dominating economic policy in areas of great importance do not seem to have shifted to a higher level in terms of the issues and alternatives to consider. Recent measures related to Self-Employment (TCP) and Non-Agricultural Cooperatives (CnA) confirm this.

This occurs despite very advanced and balanced proposals presented by several groups of researchers. And without the vast majority finding echo in previous steps taken, which can be described as limited (where there was progress), with clear setbacks, and disjointed not only with respect to the letter of the documents that guide the economic ‘update’ — the spirit is more difficult to describe — but also to the new reality being experienced since the start of 2019.

The process has been more palliative and delayed when comparing it to its concrete contribution in unlocking the multiple bottlenecks that persist. At the center of this apparent contradiction is the old question of how much is enough in terms of the expansion of the non-state sector in Cuba. Much of it seems to drive growth without compromising political equilibrium, even without considering ‘ideological purists’ who maintain (and double down on) their commitment to build castles (or models) in the air.

Any genuine development process (one that is truly worthwhile) alters the economic and social structures in such a fundamental way that the transformation of the political model is inevitable. This last issue has always been seen as an existential threat when it should not be perceived as a choice between what exists and barbarism. It seems clear that viewing the world in black and white is a convenient strategy.

The art of good governance is not to avoid change (sometimes painful), but to conduct it in a way that procures good results for all groups, even if this is not achieved in the short term or simultaneously.

As for self-employment, there has been progress in important aspects such as the possibility of establishing contractual relations for the purchase and sale of goods and services with all types of entities operating in the national territory, or the abandonment of the nonsense represented by the transportation ‘experiment’ in Havana.

The number of experiments that have already been carried out are way too many to count and all filtered through the same errors: ignorance of market conditions and the abandonment of negotiations with interested parties (taxi drivers and customers). My advice for the current situation: Any attempt to significantly deviate results from the actual operating conditions is bound to fail.

That said, I question how little progress has been made, considering that improvement of the TCP circumstances began in the summer of 2017, with the suspension of licenses for almost a year of the main activities. Of these, ‘computer equipment operators’ remain on hold.

As for cooperatives (CnA), the setback is plausible. The decree explicitly states that their existence is reduced to those activities that the State determines and labels as principals (and entities in trouble). It is a kind of reservoir for what is irremediable and does not deserve the administrative wear and tear of small enterprises and others that are not cost effective.

Approval of each ‘experiment’ is enshrined at the highest level, and follow a highly vertical pattern. An especially harmful element is the approval of the governing body of the activity in question, which practically rules out competition with public entities. It is almost impossible to rationalize how this arrangement can contribute to shaping a scheme of adequate incentives that favor efficiency. It is the well-known ‘judge and jury’ dilemma.

There is also not much room for the determination of the corporate purpose, whose definition is also at the discretion of the authorities. The possibilities of limiting the scope of operations to the territory’s area reduce the size of a market, already small and fragmented. This is another pernicious effect on specialization and productivity.

Additionally, strict limits are imposed on the incorporation of new partners and the hiring of the workforce. Sales prices are determined primarily by the Ministry of Finance and Prices. The temporary cancellation, or the definitive revocation, of the cooperative is decided with a high level of discretion in the hands of the designated authorities, which makes it difficult to consider a long-term plan to contemplate investments or other large-scale actions.

In summary, the CnA lack real autonomy in most of the decisions that are key to the proper performance of their operations, which is reduced to an organization that manages a relatively small set of capital goods and services. The experiment, already in its seventh year, has taught us lessons, but perhaps not the right ones.

Some regularities can be extracted from the analysis of the new legislation — alerts for economic policy. First, the delay in making obvious changes is critical. And the hypertrophy and legislative and normative dispersion does not stop growing, to which a recurring theme has been added. I have emphasized it at other times in my column(s): Beating around the bush will only end up exacerbating Cuba’s already serious economic problems (not all attributable to the escalation in U.S. sanctions).

Price control is a renewed and obstructive tendency by the authorities and largely motivated by the precarious current monetary balance that is characterized by an appreciable dose of ‘repressed inflation.’ Similar economies to ours have demonstrated that administrative price controls, in the absence of structural measures to address economic imbalances, are ultimately counterproductive and ineffective. Recent trends in the informal currency market with the depreciation of the CUC, or the overflowing demand in the new stores that sell in foreign currency, are examples of this.

One would have imagined that between the essential contributions of the self employed and the CnA the economy would be provided with greater flexibility and an agility to begin the postponed but necessary process of productive restructuring (discontinuing unviable activities and transferring work force and factors towards sectors with a productive future).

Extreme fragmentation of the domestic market and weak productive integration are the two most serious problems to be faced by an economic reform program, regardless of ideological preferences. Therefore, a part of what has been done, not only now, but since 2011, does not point in that direction. Rather there are mixed signals, incomplete measurements, slowness, and more of the same.

Spurious protection of inefficient and unviable activities is the worst service that can be offered for the development of productive forces. Maybe it’s time to back our words. Protecting jobs that would not exist under appropriate incentives has nothing to do with workers’ rights or social policy. The subsidy of companies (and even entire sectors) that hopelessly purport a productive future is a serious commitment to the economic development of this country.

An urgent change to a new monetary scheme is the only means to achieve this. Getting there under rigid conditions within the economic agents does not reduce the risk. Let us not forget that those imbalances reflect much deeper problems, the same ones we refuse to assume.