Should Cuba Change the Model or Weather the Storm

By Ricardo Torres  (Progreso Weekly)

HAVANA TIMES – Economic measures announced on Tuesday, October 15, at the Mesa Redonda TV program contain aspects that deserve quiet reflection. It is not absurd that some return to the 1993 package implemented during the economic crisis to find answers.

In a way, the decision taken by the Cuban authorities was inevitable. The mistakes in monetary policy since 2003 have had consequences, particularly with regard to the management of the convertibility of the convertible peso (CUC) and the conditions that should have made possible the sustainability of the de-dollarization process decided at that time. Added to this is the little progress in increasing external competitiveness, one of the key factors behind the current balance of payments crisis.

In October 2004, the Cuban government announced that the circulation of the U.S. dollar would be eliminated and replaced with the convertible peso (CUC), with which it coexisted since the mid-1990s. At that time, the measure was justified based on the persecution of foreign banks, by the United States government, that exchanged the dollars raised, resulting in a fine to UBS Bank, the largest entity of its kind in Switzerland.

But a year earlier, rules had been issued to eliminate the dollar from transactions between Cuban companies. This was part of the new priorities of the Cuban economic policy of the time, which was moving towards greater centralization in decision-making, especially in the management of currencies. In the background of this gradual process, which changed the priorities of the economic agenda, was a tourism sector with less momentum due to the events of September 11 in New York, and the emerging alliance with Venezuela. Since 2000, foreign investments in the real estate sector had been paralyzed, and a more restrictive policy with respect to foreign capital and the country’s self-employed began to be applied.

Starting 2005, the Cuban economy grew for three years at a good rate but that dynamism essentially responded to a radical improvement in external conditions, while addressing the deep problems of competitiveness and productivity that the country suffers.

The few Cuban export sectors rely on alliances (medical services, rum, tobacco, nickel) that guarantee the placement of the ‘product’ in international markets. Only a small group of companies conceive their processes in the face of external markets, such as the biopharmaceutical complex or certain segments of international tourism. Recent experience with foreign investment refers to a disturbing ignorance of key factors for the realization of business. These include the persistence of a bureaucratic culture at different stages of the process, and low transparency in decision making, aspects that have been recognized, with some reluctance, by the Cuban authorities.

In the midst of these conditions, the ‘update’ adopted at the 2011 Party Congress achieved little progress in transforming the aforementioned problems. Only incremental changes were introduced in government economic entities. They were so ineffective that the authorities question the functions and relevance of the Higher Business Management Organizations (OSDE), an aspect that had already been noticed by experts several years ago.

Likewise, the paradigm that sees the private sector, in the best case, as a necessary evil that must be kept at bay has yet to be overcome. The monopoly of foreign trade was also maintained, which has been an insurmountable barrier to increase and diversify exports, an objective expressed again and again in all the official documents of the Island, but never accompanied by the corresponding decisions.

The current balance of payments crisis, which with a huge delay has led to the measures being discussed now, has been taking shape long before this moment, in the heat of weaknesses addressed without effectiveness, and the tightening of external conditions. US sanctions cannot be exclusively blamed for this.

The fall of Cuban exports began long before the Trump administration. Sales of goods peaked in 2011, thanks to shipments of pharmaceutical products to Venezuela, oil refining exports from Cienfuegos, and the high price of commodities exported by the country. Shipments of goods have fallen 60 percent since then.

When it comes to the service industry, it reached its peak in 2013, and had an accumulated contraction of 10 percent in 2018. And this despite the fact that until 2017, tourism helped compensate for the decline. Revenue from non-tourist services (including doctors) has been reduced by more than 15 percent.

Secondly, the low price of sugar and nickel (only recovering towards the end of 2018) are bad news, but so are the repeated setbacks in the production of both sectors. The new US measures have affected tourism, but the decline covers all major markets in Europe and Canada, which point to deeper problems of competitiveness. Moreover, numerous experts pointed out, at the time, the risks of “over dependence” on one sector of the market, a structural aspect that is highly harmful for a country the size and location of Cuba.

The loss of foreign exchange income, product shortages in the retail network, the rise of domestic demand, and the drop in ‘hard’ currency towards households, has taken its toll on the previous scheme, which had already been touched by the loss of the rules for the issuance of the CUC. All this in a scenario in which a good part of the external debt was restructured, which implies new payment commitments.

A new wave of dollarization had already boomed in Cuba since 2014, boosted by the postponement of monetary and exchange rate unification that was ambiguously announced in November 2013. The new measures only recognize institutional imbalances that have been accumulating for quite some time.

In the short term, the current measures are positive as they help to alleviate the overwhelming shortages and oxygenate the economy with resources that were ‘escaping.’ The unjustifiable commercial margins were already known, and served for too long to sustain the enormous inefficiency of state enterprises and the public sector in general.

While this step brings benefits, it also poses new challenges. In a sense, it complicates monetary-exchange unification by having to start from a scenario in which not two, but three currencies are used.

Although the dollar is limited to the purchase of certain goods, it is very possible that this reinforces the incentives in other actors to try to insert themselves in the circuit that works in dollars, amplifying the scope of dollarization. This can be reflected in a growing use of dollars as a reserve of value, and even as a reference for price formation (in assets such as houses, etc.).

Likewise, the Central Bank should exercise caution regarding the pressures that are derived from domestic currencies in formal circuits such as Cadeca (Exchange Centers) and banks. Liquidity in Cuban pesos has recently been increased with salary increases.

The legitimate concerns around those who have direct access to foreign currency and those who don’t will not be remedied by reversing or adjusting these measures. What has to be addressed is the fact that approximately 10 percent of workers account for almost 90 percent of exports, and the rest depends on the redistribution of these resources or remittances. That is a matter of production, not monetary.

Without other structural measures, the benefit of this latest step is temporary. Since 2017, contradictory signs have been observed in economic policy, including unjustifiable restrictions on self-employment and non-agricultural cooperatives. It is just the opposite of what is needed.

It is essential to address the large deficits exhibited by the Cuban economic model, which have a perverse reflection on the external level. For example, we need to address the fact that too many state-owned enterprises are unfeasible; their restructuring is required. The rethinking is not minor because it requires accepting that greater economic integration with the rest of the world involves costs of different types, which should and can be managed, but not avoided totally. It also includes a new function of international alliances, which, in this new stage, are not limited to offsetting the losses caused by the US sanctions, but are used to reposition our economy internationally.

It seems that in certain circles there is a belief in the notion that long-term solutions can be postponed to the future at a minimal or non-existent cost. Unfortunately, sometimes the future arrives, and it requires adjusting accounts.