Story of a Whirlpool: Inflation in Cuba and Venezuela

The great irony here is the fact that people talked about the “Cubanization” of Venezuela for years, and now they are talking about the “Venezuelanization” of Cuba.

By Carlos Avila Villamar  (El Toque)

HAVANA TIMES – The purchasing power of Cuban wages in the state-led sector was cut by half in just a year, thanks to inflation. A 4,400-peso salary that was the equivalent of 88 dollars in January 2021 is now worth 44. It’s a misleading matter: in January 2021, my income as an editor was around 50 USD, and in January 2019, before pay-rises in the public sector, it would have been the equivalent of approximately 30 USD (I say “would have” because I still hadn’t graduated).

In January 2019, a Cuban professional was lucky to earn the equivalent of 30 USD. However, we can all agree that we were a lot better off in January 2019 than we were in January 2022. We were even better off in January 2019 than we were in January 2021, the bubble month. The reason for this lies in the fact that living costs (not only in Cuban pesos, but in dollars too) have shot up.

Basically, we’ve gone through four different phases in a very short period of time: 1) in January 2019, low wages and low living costs; 2) in January 2020, wages a little lower and living costs also a little lower; 2) in January 2021, wages were higher and living costs were higher, but not so high yet; 4) January 2022, low wages and living costs through the roof. There are many forces that explain this extremely irregular behavior, but we can highlight the two most important ones: the number of tourists visiting Cuba and the average wage the State has decided to pay its workers.

The first force is seemingly uncontrollable (although everything would have been a lot different if the State had invested in industries, instead of in hotels. I’m not only talking about 2019, but about 2020 and 2021 too). The second force is seemingly controllable (but the market makes it uncontrollable in the long-term, if there isn’t any wealth to support it, a pay rise will only lead to inflation).

As we’ve seen here, wealth generated by tourism, the only important industry in the country, living costs and wages have been biting each other’s tails, forming the whirlpool we find ourselves in today. There is a frightening resemblance between the Cuban whirlpool and the whirlpool that shook Venezuela.

The great irony here is the fact that people talked about the “Cubanization” of Venezuela for years, and now they are talking about the “Venezuelanization” of Cuba. Venezuela nationalized businesses, redistributed wealth, and didn’t take any care to diversify its economy, just like Cuba had done a long time before (when it only produced sugar). Then, when the crisis hit because oil prices dropped, Venezuela opened dollar stores, which are still the only stores in the country that are stocked up today, just like Cuba did in the nineties. The mirror reflected the mirror.

Without any revenue from tourism (the new single industry), Cuba took a great gamble when it continued to increase wages and “redollarize” its stores. Now, it is suffering one of the highest inflation rates on the continent and it is blaming foreign agents for the dollar’s informal exchange rate (just like Venezuela did). As if that wasn’t enough, both countries have leaders that clearly have no idea how to create their own myth, and have desperately clung to legitimizing themselves with the discourse of being follow-ons of a former leader (Fidel Castro and Hugo Chavez).

These similarities aren’t exactly the same or simultaneous, for that matter. Nevertheless, while Cuba experienced short-lived economic growth as a result of former US president Barack Obama’s rapprochement policy, Venezuela’s economy came crashing down. Now, while inflation is growing in Cuba, hyperinflation seems to be recovering in Venezuela.

These asymmetries have to do with the “forces” we were talking about before: the crisis of oil prices on the global market and the collapse of Cuba’s tourism industry didn’t happen at the same time, nor do they have similar causes. The Cuban Government has been less enthusiastic up until now about raising the minimum wage every six months.

I’m bringing this up because it isn’t a mere trifle: the only thing that has stopped inflation from reaching Venezuela’s inconceivable figures (literally inconceivable: they had to eliminate zeros from bills on more than one occasion) has been the fact that state wages haven’t gone up, that’s to say, extra bills haven’t gone into circulation (I say bills out of convenience: it’s obvious the majority of Cuba’s money isn’t physical anymore).

The inflation Cuba is facing today is still a product of the alleged currency unification process implemented last year, and all it’s done is speed up inflation recently because of the vast quantity of Cubans who need dollars to travel to Nicaragua (this is a separate issue).

The dilemma of state wages is more serious than it might seem. While there’s no doubt that a third artificial increase of wages might set the ball of inflation, or even hyperinflation, rolling for good, the other alternative (not doing anything, letting the purchasing power of pensioners, doctors, teachers, scientists, engineers, cashiers, accountants, superintendents, athletes, etc. continue to drop every month, so that the purchasing power of the private sector may “not drop”, or those who live off of remittances) doesn’t seem any better.

The only obvious solution would be for millions of tourists to magically start flocking to Cuba, but this isn’t going to happen. Nor will the Cuban Government gain some sense and begin to invest in national industry instead of in hotels. I believe it’s more likely for the Government to create a cryptocurrency whose worth rests on Cuban beaches as a resource (just like Venezuela’s disastrous Petro, which is backed by the country’s oil reserves), rather than to opt for industrializing the country.

How can we reduce prices and stop inflation in Cuba?

This high rate of inflation distorts market signals and also generates inefficiency, while driving up Cubans’ cost of living.

If wages are increased for the third time, inflation and/or hyperinflation in Cuba (and for anyone who believes hyperinflation in Cuba is impossible, I suggest they look at how it all began in Venezuela, just before Hugo Chavez’s death), would mean that businesses and the State’s accounts will become difficult and insecure, with more people living off of price speculation (because it’s more profitable than working), and it will create a general climate of economic uncertainty that will end up scaring off any possible foreign investor.

If inflation is to continue at its current rate (it might slow down once all the Cubans who want to go to Nicaragua get there), not increasing wages will mean that Cubans working for the State will end up earning the equivalent of 10 or 15 USD per month by January 2023, just like they did a decade ago, with the difference now being that living costs in Cuba were much lower a decade ago. When I talk about living costs, I’m talking about the absolute basic: food.

Let’s remember that a decade ago, the dollar was worth a lot more in the US too. It’s extremely likely that 15 USD in 2023 will be worth the same as 10 USD were in 2013. Let’s not overlook this detail to understand the gravity of the Cuban crisis today. Especially the crisis for those who depend on their state wages to survive.

This possible landscape for January 2023 (wages of 10 USD and food with first world prices at stores) is becoming more and more likely, seeing that tourism won’t recover for several years yet, and that the Government’s every attempt to push forward the agricultural sector has been more rhetorical rather than practical (pushing a sector without injecting capital is like blowing at an engine to get it moving). If wages today are doubled, prices will quadruple in the long run, and a worker will earn the equivalent of 5 USD instead of 10 USD, which is exactly what happened in Venezuela.

I have explored many different endings for this article: proposing a concrete solution, or at least leaving the door open for a miracle (wasn’t it sad to hear people’s hopes on the street with the news that gold reserves had been found?). The reality is that I’ve been thinking up solutions for four years, and I’ve posted them. Experts, people who have the economic knowledge I don’t possess, have contemplated and published these solutions a long time before me, with many more details, and the Government hasn’t paid any attention to them.

They resort to geographic fatalism to say that Cuba is a country without resources and so it can only depend on tourism, or that it is always going to be threatened by the US, and if it wasn’t for the blockade… The preachers who give these excuses are the only ones admitted into the power structure, and the only ones who are allowed to govern our country. The solutions we need aren’t only economic in nature, it took me a long time to understand this: before being an economic problem, inflation in Cuba is a political problem.

Read more from Cuba here on Havana Times.