What to Make of Cuba’s Planned Economic Reforms?

 

CUBA REVIEW: What to Make of Cuba’s Planned Economic Reforms?       Cuba announced sweeping (and long-awaited) economic reforms to attract foreign currency and boost national productivity   “Cuba said on Thursday it will allow some stores to sell food, personal hygiene and other consumer goods in U.S. dollars and will eliminate a 10% tax on the greenback, an effort to rake in more hard currency to purchase goods abroad. It is one of a list of reforms the Communist government said it would detail and implement in the coming months such as the expansion of the private sector that Economy Minister Alejandro Gil termed necessary to face an ‘exceptional situation,’” during the evening broadcast of Mesa Redonda on state television. (Reuters, July 16, 2020)   A response to crisis: "Cuba, which monopolizes retail and foreign trade, faced a liquidity crisis even before the coronavirus pandemic shuttered tourism and hit other revenue earners with the implosion of ally Venezuela’s economy and the tightening of the decades-old U.S. trade embargo under President Donald Trump. Pandemic fallout has worsened shortages of food, medicine and other goods and long lines at retail outlets. Cuba’s economy is forecast to decline nearly 10% this year after stagnating in 2019.” (Reuters, July 16, 2020)   "We cannot continue to do the same thing in our economy, because we won’t obtain the results we need", said Cuban president Miguel Diaz-Canel during an “extraordinary session” of the Council of Ministers that preceded the Mesa Redonda broadcast.   In his appearance on Mesa Redonda, Minister of Economy and Planning Alejandro Gil assured that the reforms approved on Thursday “are aimed at eliminating obstacles that operate in the economy, while maintaining and defending the concept of central planning.” (OnCuba News, July 16, 2020)   The new economic strategy, approved last week by the politburo of Cuba’s Communist Party (PCC), is based on economic and social development documents approved during the VII Congress of the PCC in 2016. According to Gil, the following principles will guide the new strategy: “1) Maintain centralized planning (which, he clarified, does not mean centralized allocation of resources); 2) Depend more on national production and banish the import mentality; 3) Regulation of the market by mainly indirect methods; 4) Complementarity of the different economic actors (state and non-state, all together); 5) Dynamic role of internal demand; 6) Give state companies greater management autonomy so that they are efficient and establish similar rules of the game for all forms of economic management; 7) Implement ‘key aspects already approved’ on the various forms of ownership ("resizing" of the state sector, non-state management, etc.), 8) Promote competitiveness, savings, increased efficiency and motivation for work through incentives, and 9) Maintenance of an active environmental policy that corresponds to the social model.” (Blog de Mauricio de Miranda Parrondo, July 17, 2020)   Gil “emphasized that the principal focus is on food production, where he identified the need to eliminate many subjective problems related to financing structures and marketing flexibility…Another purpose is to fortify the autonomy of socialist state companies. Gil stated that they seek to boost efficiency and create conditions for management to have a higher level of decision-making authority on business decisions.” (OnCuba News, July 16, 2020)   Included in the strategy is “the design of micro, small and medium-sized enterprises [MSMEs] in the private, state and mixed sectors. “[Gil] explained that these will not come into operation immediately, but that they were in development. Another important measure stressed by Gil ‘lies in the work so that non-state forms of management can import and export their products�Work will allso be done to encourage foreign direct investment, especially in food production.’ Gil also stated that self-employment will be improved, expanded and promoted by cooperatives. For this, the granting of licenses will become more flexible, and stressed that conditions will be created so that non-state forms of management can export and import.” (OnCuba News, July 16, 2020)   Cuban economists reflect on new economic measures and their potential impact   Julio Carranza: “the measures presented today are not the only ones necessary, the reform process is supposed to continue.” But what has been decided is an important step in the right direction, and part of what several economists have been proposing for a long time: food production has been prioritized, and its forms of agricultural production and marketing will be loosened and decentralized; foreign trade operations are authorized to all economic agents; the reform of the state company begins with greater decentralization; micro, small and medium-sized companies with all forms of ownership and management, including private and cooperative, will be legally recognized, etc.” (OnCuba News, July 16, 2020)   Omar Everleny Pérez: “These are laudable principles�but must be translated into concrete results. What the Cuban president announced must be realized: we cannot continue doing the same in the economy. And I wonder: do we need to keep thinking about how to do it? Isn't it about time to recognize a path more successful than ours, the one taken by Viet Nam?” (OnCuba News, July 18, 2020)   On the continuation of central planning�with decentraliized resource allocation   Pedro Monreal: “It was said quickly and as if ‘flying under the radar’, but the most intrepid idea expressed at the July 16 Mesa Redonda was what appears to be the replacement of the traditional concept of ‘central planning’ in Cuba�It is said to no longer consist of centrallized administrative allocation of resources. As is known, the only other way to allocate resources in an economy is through the market, with prices playing a key role�We can assign narrative ornaments tto the mutating notion of central planning, but that will not change the essential: if allocations are not directed by a central bureaucracy, then they have to be made by the market�With a relatively llimited percentage of direct control over the country's economic assets, the state would control the pace of economic growth and the direction of the development process. It is not a ‘grand’ vision of socialism, but that type of system works in practice in China and Vietnam. I am not making a value judgment here on the reform of those two countries, much less suggesting that any model be copied. I simply note that it is feasible.” (El Estado como tal, July 17, 2020)   On the prioritization of national food production and marketing flexibility   Monreal: “This is, by a wide margin, the most relevant of the measures announced yesterday. It ‘certifies’ what has been said in recent months about comprehensive agriculture reform, which includes the many links in the process. Important components were mentioned such as changes in the structure of the Ministry of Agriculture, reform of state agricultural companies, changes in relations between state companies and non-state actors, price-setting, elimination of non-payment to producers, simplification of distribution chain, facility of exporting and importing ‘directly’, and credit support through a specialized agricultural development bank. One component that will need to be closely monitored is that of state monopolistic functions, which should not be allowed. The ‘contact surface’ of this measure is very wide and in fact has the capacity to function as a ‘catapult’ for other measures, mainly those related to the increase and diversification of exports, the establishment of wholesale markets for means of production, and the establishment of micro, small and medium enterprises (MSMEs). (El Estado como tal, July 17, 2020)   Mauricio de Miranda Parrondo: “Some elements that would support this would be: the creation of an Agricultural Development Bank, liberalize the marketing these types of products, the promotion of sugar agribusiness, compliance with the collection and payment systems and the transformation of state companies of the sector. My observation at this point is that it is essential to create all possible mechanisms to stimulate food production. It is inconceivable that the country cannot secure with its own production most of the food it consumes�No one knows better than the peasants what they can andd should produce. The agrarian policy must be oriented to incentivize production so that by satisfying the needs of society the peasants satisfy their own interest.” (Blog de Mauricio de Miranda Parrondo, July 17, 2020)   On the diversification of economic actors who can import and export   Monreal: “A very important measure, especially for agriculture because this is the sector that has the greatest potential to offer exports in the short term. A productive base managed mainly by private and cooperative actors, the establishment of incentives and facilitating measures could expand national export assets to a degree that no segment of the non-state sector could do in the immediate term. The measure is established, however, with a caveat that represents an obstacle. Strictly speaking, non-state actors do not need to export through state companies. What they need is to count on state support (such as a chamber of commerce, consulting, information, training, quality control regulations, credits and insurance) and the services of companies (state or not) specialized in channeling exports (freight forwarders, customs agents and logistics operators ) that are in charge of intermediation between national producers and foreign importers. It is also very ‘rare’ for the export price to be established by contract between a national producer and a state company. Both this obligation to export through state-owned companies and the price mechanism do not have a clear economic rationale. It seems to be an administrative ‘shortcut’ to prserve the state’s monopoly over foreign trade�In principle, a private mango producer could even export througgh the website of a distribution giant such as the Chinese company Ali Baba. That works everywhere, I don't see the reason why it couldn't work in Cuba.” (El Estado como tal, July 17, 2020)   Parrondo: “Non-state companies may carry out foreign trade activities (exports and imports) through contracts with state companies designated for this purpose. In my opinion, this is an inadequate measure because any company, be it state, mixed, cooperative or private, should have the power to export and import freely without the need to go through ‘screening’, much less pay a ‘toll’, which means payment for the services of the Ministry of Foreign Trade and Foreign Investment entity that will be actually doing the exporting or importing. In reality, under these conditions, the State maintains a monopoly on foreign trade, which has proven to be ineffective. Although it is said that these tasks will be carried out through contracts, it is known that if only the State can be contracted, it will be the State that will impose the conditions, so the contracts will not be established on an equal footing.” (Blog de Mauricio de Miranda Parrondo, July 17, 2020) On the establishment of micro, small and medium-sized enterprises (MSMEs)   Monreal: “Interestingly, the measure has been presented as a ‘combo’ by mixing private and state MSMEs. I'm not saying it's not possible to operate a state MSMEs. I suppose that they would have to be of municipal subordination. The measure could include both forms of ownership. I don't have a big problem with that, but it is worth drawing attention to three things: it is not exact to say the scale of a private MSME can equal that of a state MSME. There are differences in legal and support needs that must be considered. Second, the reason why the state should deal with assets that are generally of low productivity is not clear. The exception could be state MSME in areas of innovation. Finally, there are notable asymmetries between the starting point for establishing state and private MSMEs. While today there are cuentapropista activities that could be legally transformed into MSMEs and that already work with a devalued [CUC/CUP] exchange rate (1:24), state MSMEs are already legal and, working with an overvalued rate of 1:1, live in 'another economic planet'�In the case of Cuba, the agro-foood sector is where there seems to be the greatest potential for doing MSMEs in the immediate term.” (El Estado como tal, July 17, 2020)   Parrondo: “There was a lot of emphasis that [MSMEs] would not only be non-state, but also state and mixed. On various occasions, several economists have written about the need to enact a Enterprise Law that regulates the creation of companies with their own legal personality, regardless of the type of property. The most important thing is that both the legal framework and the tax system are the same and do not privilege one type of property over the others.” (Blog de Mauricio de Miranda Parrondo, July 17, 2020)   On the promotion of non-agricultural cooperatives (NACs) and expansion of self-employment (cuentapropismo or TCP)   Monreal: “It is probably the measure that most Cuban economists I know have suggested for the longest time. The NACs represent the most underutilized non-state organizational form in the country and self-employment, despite its importance in the creation of net employment in the last decade, has institutionally evolved little and is one of the most restricted areas of the economic system. Not many details were given. Only that the current NAC experiment is going to be ‘terminated’ (a kind of limbo) and that from now on NACs ‘will be promoted’. Regarding the self-employment, it was announced that ‘the way it is authorized would be transformed’ and that it would be ‘made more flexible’ and that the mechanism would be changed so that ‘there is not as much detail as to their activities.’ A short-term problem is that a high percentage of self-employment licenses include activities related to tourism and travel-related supply networks, making it a sector in a crisis whose end is difficult to estimate. Expanding licenses to other activities with other types of demand would undoubtedly help to provide jobs and income, but that would not solve the crisis in other segments of self-employment and possible measures were not mentioned on that point.” (El Estado como tal, July 17, 2020)   Parrondo: “This ends the long and incomprehensible ‘experiment’ of cooperatives, which suggests that the creation of new non-agricultural cooperatives will be promoted. Greater flexibility and expansion of self-employment is announced. Will it move from the current system of permitted economic activities to one that allows everything that is not expressly prohibited? One of the issues that caught our attention was the statement by the Minister of Economy that these measures ‘are here to stay.’ One of the biggest problems of the Cuban economic organization, especially since the 80's, has been that the economic changes have taken place in moments of very acute crisis (and this time it is) and when that deep crisis is overcome (without a bonanza is reached that in reality has not existed in the last six decades), then the reforms are paralyzed, centralization is strengthened and the economy of ‘command and control’ is strengthened. The ‘command-and-command’ economy does not have a promising future. It has only shown itself incapable of promoting development or ensuring the well-being of society.” (Blog de Mauricio de Miranda Parrondo, July 17, 2020)  On the establishment of a wholesale market in MLC (freely convertible foreign currencies) and the expansion of “MLC stores”   Monreal: “This measure could have a notable impact in the short term, especially in agriculture. Two comments on it: first, establishing a dollarized circuit will segment the national market and therefore there must be a strategy to ‘de-dollarize’ at a later stage. Secondly, the irrationality of having to operate in foreign trade through a state company, in this case to import, also applies here. Anyone with enough money could import a tractor today, with choice of brands and features, directly from a website.” (El Estado como tal, July 17, 2020)   Parrondo: “A few days ago, a measure was rumored that sparked concerns and criticism in various media and was the decision to increase the assortment of products that would be sold in stores that could only be operated with freely convertible currencies (MLC). Initially, these stores were created due to the general shortage of foreign currency in the country and the conversion, in practice, of the convertible peso (CUC) into an overvalued currency because its level of circulation far exceeds parity with its support, the US dollar. Thus, officials decided to allow the creation of bank accounts in MLC transferred from abroad so that natural persons could acquire these ‘high-end’ goods through the use of electronic cards. Now [MLC stores] will not only offer ‘high-end goods’ but also food and hygiene products that, incidentally, are is serious short supply amid the pandemic. It is logical that they are scarce because a good part of these products are imported, because they are not produced in the country ­� mainly because the economic system has not only not gennerated the necessary incentives but has even destroyed them. If we add to this that, due to the pandemic, international tourism has decreased to zero, the income in foreign currency that Cuba has had in the last four months must have been very scarce (unfortunately, the Cuban government does not make periodic reports on the main variables of the economy and the external financial situation of the country is still considered a state secret). (Blog de Mauricio de Miranda Parrondo, July 17, 2020)   On the partial dollarization of the economy   Monreal: “There is a ‘cross-cutting’ issue for which measures were not announced in the immediate term: monetary and exchange rate unification. The implication is that at the future moment when the CUP is devalued at its official rate, many parameters of the economy will change and with this the impact of those measures that are beginning to be applied now would change, but I suppose that has been considered in the plan�The partial dollarization on whiich the scheme is based could alleviate a worsening balance of payments, but the accompanying economic fragmentation creates inefficiencies and is not compatible with the model described in the reform's guidance documents. In this sense, partial dollarization must be assumed as a necessary and transitory ‘evil’ and therefore must be accompanied by a de-dollarization program to be applied at a future stage of the process�Special attention should be given to measuring the distrributional effect of measures, that is, their possible impact on inequality.” (El Estado como tal, July 17, 2020)   Parrondo: “Although they do not want to admit it, we are in the presence of a partial dollarization of the economy and that dollarization implies the operation of a market in MLC (of which the most frequent is the US dollar) in which access requires cash transfers from outside, that is to say that with the income from work you cannot access those goods that under the conditions of any normal country would be sold in the country's national currency. The prices of goods offered in that market are dollarized, but the wages of the workers are not dollarized. From an economic point of view, it seems a measure of imperative necessity due to the near absence of foreign exchange alternatives, but from a political point of view, it is a fatal measure because it further deepens social inequalities that are not driven by differences in productivity or professional and technical training or even willingness to work, but are motivated by whether or not one receives remittances from abroad. Almost thirty years ago, a similar system was tried, which in the end did not give adequate results because it deepened inequalities for the same reasons and also inverted the social pyramid.” (Blog de Mauricio de Miranda Parrondo, July 17, 2020)   On attracting Foreign Direct Investment   Parrondo: “It is known that FDI is a fundamental variable in any strategy aimed at promoting national production because it provides fresh capital resources and knowledge transfers, and also connects national production to international value chains. China and Vietnam managed to strengthen their economies, positively change their productive structures, improve their international standing, and increase the well-being of their respective societies (even though they are still far from being democratic and pluralistic societies) largely thanks to encouraging unrestricted FDI. The FDI authorization system in Cuba is still excessively discretionary, concentrates on a specific portfolio, and requires long and complicated procedures. However, in order to promote FDI, it is essential that the rules of the game be transparent, that judicial and arbitration systems be truly independent from government, and that there be effective mechanisms for controlling corruption embodied in a transparent, effective and open institutional system.” (Blog de Mauricio de Miranda Parrondo, July 17, 2020) For more analysis, read OnCuba's Sunday interview with Cuban economists on the announced economic reforms.     Facing crisis, Cuba calls on citizens to grow more of their own food   “Food security has lately risen to the top of the national agenda in Cuba, with countless news headlines and televised roundtable discussions dedicated to the topic. ‘Cuba can and must develop its program of municipal self-sustainability definitively and with urgency, in the face of the obsessive and tightened U.S. blockade and the food crisis COVID-19 will leave,’ José Ramón Machado Ventura, 89, deputy leader of the Cuban Communist Party, was quoted as saying by state-run media on [June 29th]. The Caribbean island imports roughly two-thirds of the food it consumes at a cost of around $2 billion annually, in addition to key farming supplies like fertilizer, machinery and animal feed. But imports have nosedived in recent years as aid from ally Venezuela shrank following its economic implosion and U.S. President Donald Trump tightened the half century-old U.S. trade embargo. That led first to shortages of imported food and then to drops in national agricultural production. Output of Cuban staples like rice, tomatoes and pork fell 18%, 13% and 8% respectively last year, according to data released this month. The coronavirus pandemic, which has paralyzed the key tourism sector, has only exacerbated the situation.” (Reuters, June 29, 2020)

 

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.
 

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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.