WASHINGTON D.C. � The
Cuba Study Group issued the following statement in response to the economic
measures announced on Thursday, July 16, 2020 by the Cuban government:
Facing its greatest economic crisis in thirty years, the Cuban government last week outlined the parameters of a new economic strategy, involving significant steps toward market liberalization. Some measures, like the immediate expansion of sales of goods in U.S. dollars to the population, are controversial and will only directly benefit a small portion of Cuban consumers. Others—like a commitment to expanding the parameters of “self-employment,” transforming the commercialization of agricultural products, and legalizing micro, small, and medium-sized enterprises (particularly in the private sector)�are welcome steps that have the potenntial to set the country on a path to more sustainable growth.
We, like many Cubans, eagerly await the details of new regulations to fully assess their implications. Both the timing of their rollout and follow-through upon implementation will be key. Cuban President Miguel Díaz-Canel and Minister of the Economy and Planning Alejandro Gil Fernández have now committed their government to fulfilling, and in some ways exceeding, the program of economic reform approved by their predecessors, but frozen due to internal resistance in 2017. Importantly, they have also stated that coming reforms�with the exception of hard-currency sales are not temporary measures to get through the presennt crisis. In the words of Minister Gil, “everything we are doing to confront this scenario�is here to stay.” This is encouraging. However, we harbor concerns that these measures are being taken without a clear, corresponding acknowledgement that they are overdue and necessary for a well-functioning economy. The problem is not just the crisis, but an outdated economic system in need of fundamental market reforms. To that end, these measures would represent a welcome first step in transforming Cuba's economic model so that it lifts the Cuban people from the economic hardship they have endured for so many years.
Admirably, Cuba appears to have conquered the worst of the Coronavirus pandemic, outperforming regional and many first-world peers. But the pandemic has also exposed deep structural flaws in the Cuban economy, like an overreliance on tourism, an insufficient domestic productive base, and import dependence. It should not have taken a global economic crisis to prompt the government to commit to steps that the best Cuban economists have long insisted were necessary. But now that it has, Cubans at home and abroad will be watching closely, and their expectations will be high. So will Washington. Indeed, in addition to improving the welfare of the Cuban people, steady progress on internal economic reform can also create a propitious environment for returning to a more constructive relationship with the United States after November 2020. Nothing less that the well-being and future of the Cuban people is at stake.
Ricardo Torres Pérez, Professor of Economics and Deputy Director of the Center for the Study of the Cuban Economy (CEEC) at the University of Havana.
CDA: What are the main takeaways from Cuba’s announcement on Thursday? Why was the announcement made now? What is unique about the current moment?
Ricardo: There are two main processes that will gain traction in the near future. On one hand, a further advancing of dollarization, which is expected given the dire state of Cuba’s external finances. On the other hand, the expansion of the private and cooperative sectors. It has to be seen whether this time dollarization is used as a mere revenue source or as a vehicle for structural transformation of the economy. The expansion of the private and cooperatives sectors is in line with meaningful economic restructuring.
The pandemic exacerbated economic problems to a point something radical had to be done. These difficulties made possible otherwise politically unfeasible reforms, like many other times in the past. And the government can well say it’s only fulfilling the mandate from the VII Party Congress.
It’s good to hear that they want to do as much as possible simultaneously. The situation is very serious, the world economy is also in trouble, society is not as homogenous as it was back in the nineties, and the government does not take its legitimacy for granted. The only way out: looking inwards and dealing with its domestic mess.
CDA: Cuban economist Pavel Vidal predicts that Cuba’s GDP will shrink 10 percent in 2020 and continue shrinking in 2021. What do you believe will be the tangible impact of these measures on the economy? What do you think is missing?
Ricardo: Dollarization may allow the government to collect much needed foreign currency to ease balance of payments tensions. However, other sources of revenues will remain depressed for the time being. The expansion of the private and cooperatives sectors is a welcome move, but its impact will be felt mostly in the medium and long terms. Lack of domestic demand and scarcity of inputs will inhibit robust growth in those sectors.
We need to wait for details and implementation. I think radical restructuring of state companies is critical. Most are very inefficient and a drag on the economy. That would be another way for the government to save hard currency and divert it to more promising projects. We do not know yet the details of the much anticipated “National Development Plan 2030” but given the new global scenario, Cuba needs to rethink its economic strategy. For instance, the coming years will be tough for international tourism.
CDA: What are the most relevant changes for the development of the private sector? What types of licenses, professional services, and non-agricultural cooperatives do you think should be prioritized?
Ricardo: It’s encouraging to see how we moved from stopping the issuance of new licenses in critical activities for over a year to the current situation. So far, the possibility of engaging in foreign trade and the access to a domestic wholesale market are steps in the right direction, albeit only in foreign currency. I anticipate more flexibility and more categories to set up businesses. I think it’s time to allow talented Cubans to enter more sophisticated activities; that’s been one of the handicaps of the private sector since the early nineties. IT, consultancies, design, architecture and other creative industries are promising areas. Cuba is much more than just beaches, restaurants and salsa.
The challenge will be to create enough higher quality jobs not only to curb emigration but also to help the restructuring of the public sector and curtail the expansion of the informal economy. Today, almost 35 percent of the working age population lack a formal job.
A critical factor is to convince the population and relevant foreign actors that this time the change is permanent. It seems that every 3 or 4 years the Cuban government has second thoughts about reforms. We know investment levels are suboptimal when uncertainty is dominant. It does tremendous damage to the economy.
CDA: Cuba announced the elimination of the 10 percent tax on U.S. dollars. Do you see this as a move toward currency unification? Why or why not? Many Cubans do not have access to tradable currencies or remittances. How will the new stores which only accept hard currencies impact inequalities for Cubans across the island?
Ricardo: Partial dollarization and currency and exchange rate reforms are connected but different processes. Authorities stated that a monetary reform is going to happen in the near future. Cuba’s trouble is that it has two national currencies and neither is convertible.
The dropping of the 10 percent tax is helpful because it eliminates an unnecessary distortion in the determination of the market price of the US dollar. It actually created a huge informal market and deprived the government of valuable revenues for more than 15 years.
A big problem with the advance of dollarization right now is that there is no mechanism to buy foreign currency in a formal market. Neither the CADECAs (state-owned currency exchange offices) nor the banks are selling hard currency. People’s access to foreign currencies depends on remittances or the informal market. Tourism is down now. We may well see workers demanding their companies to pay bonuses in hard currency, at least in the export and travel industries.
Inevitably, like in the nineties, this move will exacerbate inequalities. And that’s something very sensitive and clearly the government does not feel comfortable with the situation. Economic differences will rise in an already unequal society.
CDA: How will current U.S.-Cuba policy impact these proposed reforms?
Ricardo: Economic restructuring needs resources. Some industries die and others rise. The current U.S. policy aims at curtailing Cuba’s access to foreign cash, making the process more painful than it otherwise would be. Without foreign clients the private sector will have a hard time setting and growing new business. The same applies to foreign trade. If permanent, the reforms are a smart move. The state is retaking the initiative and giving a blow to those who say that under attack, the only option is to go conservative.
Today, confrontation between the West and China is becoming the norm, isolation and punishment will only push Cuba to whichever country offers a lifeline, Russia, China and so on. It will be very disappointing to see a repetition of the Cold War, with Cuba and the U.S. in opposite camps.