Author Archives: Morales Emilio

ASSOCIATION FOR THE STUDY OF THE CUBAN ECONOMY, PAPERS AND PROCEEDINGS OF THE TWENTY-FIFTH ANNUAL MEETING, JULY 30-AUGUST 1, 2015

ASCE: Cuba in Transition: Volume 25

Papers and Proceedings of the Twenty-Fifth Annual Meeting,  July 30-August 1, 2015

All papers are hyperlinked to the ASCE Website and can be seen in PDF format.

wwwPreface

Conference Program

Table of Contents

Reflections on the State of the Cuban Economy Carlos Seiglie

¿Es la Economía o es la Política?: La Ilusoria Inversión de K. Marx Alexis Jardines

Los Grandes Retos del Deshielo Emilio Morales

Preparing for a Full Restoration of Economic Relations between Cuba and the United States Ernesto Hernández-Catá

Economic Consequences of Cuba-U.S. Reconciliation Luis R. Luis

El Sector Privado y el Turismo en Cuba Ante un Escenario de Relaciones con Estados Unidos José Luis Perelló Cabrera

The Logical Fallacy of the New U.S.-Cuba Policy and its Security Implications José Azel

Why Cuba is a State Sponsor of Terror Joseph M. Humire

The National Security Implications of the President’s New Cuba Policy Ana Quintana

Factores Atípicos de las Relaciones Internacionales Económicas de Cuba: El Rol de los Servicios Cubanos de Inteligencia Enrique García

Entrepreneurship in Post-Socialist Economies: Lessons for Cuba Mario A. González-Corzo

When Reforms Are Not: Recent Policy Development in Cuba and the Implications for the Future Enrique S. Pumar

Revisiting the Seven Threads in the Labyrinth of the Cuban Revolution Luis Martínez-Fernández

La Economía Política del Embargo o Bloqueo Interno Jorge A. Sanguinetty

Establishing Ground Rules for Political Risk Claims about Cuba José Gabilondo

Resolving U.S. Expropriation Claims Against Cuba: A Very Modest Proposal Matías F. Travieso-Díaz

U.S.-Cuba BIT: A Guarantee in Reestablishing Trade Relations Rolando Anillo, Esq.

Lessons from Cuba’s Party-Military Relations and a Tale of “Two Fronts Line” in North Korea Jung-chul Lee

The Military, Ideological Frameworks and Familial Marxism: A Comment on Jung-chul Lee,“A Lesson from Cuba’s Party-Military Relations and a Tale of ‘Two Fronts Line’ in North Korea” Larry Catá Backer

Hybrid Economy in Cuba and North Korea: Key to the Longevity of Two Regimes and Difference Young-Ja Park

Historical Progress Of U.S.-Cuba Relationship: Implication for U.S.-North Korea Case Wootae Lee

Estimating Disguised Unemployment in Cuba Ernesto Hernández-Catá

Reliable Partners, Not Carpetbaggers Domingo Amuchástegui

Foreign Investment in Cuba’s “Updating” of Its Economic Model Jorge F. Pérez-López

Global Corporate Social Responsibility (GCSR) Standards With Cuban Characteristics: What Normalization Means for Transnational Enterprise Activity in Cuba Larry Catá Backer

Bienal de la Habana, 1984: Art Curators as State Researchers Paloma Checa-Gismero

Luchas y Éxitos de las Diásporas Cubana Lisa Clarke

A Framework for Assessing the Impact of U.S. Restrictions on Telecommunication Exports to Cuba Larry Press

Measures to Deal with an Aging Population: International Experiences and Lessons for Cuba Sergio Díaz-Briquets

Posted in Blog | Tagged , , , , , , , | Leave a comment

CONFERENCE PROCEEDINGS, ASCE 2014

The papers presented at the 2014 Conference of the Association for the Study of the Cuban Economy are now available.

Cuba in Transition: Volume 24: Papers and Proceedings of the Twenty-Fourth Annual Meeting.

The papers listed below are hypewr-linked to directly to their respective file on the ASCE web site.

Posted in Blog | Tagged , | Leave a comment

ETECSA: un monopolio creciente

Original here: ETECSA

Por Emilio Morales, Miami (The Havana Consulting Group).

13-companhia-cubana-de-telefono-435x650.jpg aaaEdificio ETECSA, formerly the US-owned Compania Cubana de Telefono

El crecimiento de los servicios de telefonía celular en Cuba se ha convertido en uno de los más prósperos y rentables negocios que controla el gobierno de Raúl Castro.

El papel imprescindible del desarrollo de las telecomunicaciones para la economía cubana y las necesidades de capital del país han transformado este sector en un exitoso activo financiero durante los últimos seis años. Para ello, el gobierno cubano ha implementado un plan de inversiones que le ha permitido renovar las plantas telefónicas, extender la red de telefonía celular a casi todo el territorio nacional, y preparar y formar a personal técnico y de marketing en el exterior. Actualmente el monopolio estatal cubano ETECSA está valorado en alrededor de $3,000 millones de dólares.

Desde que fuera liberada la contratación de los servicios de telefonía celular en el 2008, el número de líneas arrendadas alcanza los dos millones, lo cual le ha permitido a ETECSA ingresos de alrededor de $2,000 millones de dólares solo en la modalidad de telefonía celular prepagada, que es la que utiliza la población cubana.

Continue Reading: ETECSA March 2014

Año

Líneas

Facturación

2008

431,861

$146,223,512

2009

785,324

$257,403,045

2010

1,127,985

$280,473,300

2011

1,431,589

$340,095,000

2012

1,792,345

$450,100,465

2013E

1,912,340

$561,278,780

emilio-morales-dopicoEmilio Morales

Posted in Blog | Tagged , | Leave a comment

Publication of the Papers from the 2013 Conference of the Association for the Study of the Cuban Economy

 

The proceedings of the Association for the Study of the Cuban Economy’s 23rd Annual Meeting entitled  “Reforming Cuba?” (August 1–3, 2013) is now available. The presentations have now been published by ASCE  at http://www.ascecuba.org/.

The presentations are listed below and linked to their sources in the ASCE Web Site.

ASCE_logo_220

 Preface

Panorama de las reformas económico-sociales y sus efectos en Cuba, Carmelo Mesa-Lago

Crítica a las reformas socioeconómicas raulistas, 2006–2013, Rolando H. Castañeda

Nuevo tratamiento jurídico-penal a empresarios extranjeros: ¿parte de las reformas en Cuba?, René Gómez Manzano

Reformas en Cuba: ¿La última utopía?, Emilio Morales

Potentials and Pitfalls of Cuba’s Move Toward Non-Agricultural Cooperatives, Archibald R. M. Ritter

Possible Political Transformations in Cuba in the Light of Some Theoretical and Empirically Comparative Elements, Vegard Bye

Las reformas en Cuba: qué sigue, qué cambia, qué falta, Armando Chaguaceda and Marie Laure Geoffray

Cuba: ¿Hacia dónde van las “reformas”?, María C. Werlau

Resumen de las recomendaciones del panel sobre las medidas que debe adoptar Cuba para promover el crecimiento económico y nuevas oportunidades, Lorenzo L. Pérez

Immigration and Economics: Lessons for Policy, George J. Borjas

The Problem of Labor and the Construction of Socialism in Cuba: On Contradictions in the Reform of Cuba’s Regulations for Private Labor Cooperatives, Larry Catá Backer

Possible Electoral Systems in a Democratic Cuba, Daniel Buigas

The Legal Relations Between the U.S. and Cuba, Antonio R. Zamora

Cambios en la política migratoria del Gobierno cubano: ¿Nuevas reformas?, Laritza Diversent

The Venezuela Risks for PetroCaribe and Alba Countries, Gabriel Di Bella, Rafael Romeu and Andy Wolfe

Venezuela 2013: Situación y perspectivas socioeconómicas, ajustes insuficientes, Rolando H. Castañeda

Cuba: The Impact of Venezuela, Domingo Amuchástegui

Should the U.S. Lift the Cuban Embargo? Yes; It Already Has; and It Depends!, Roger R. Betancourt

Cuba External Debt and Finance in the Context of Limited Reforms, Luis R. Luis

Cuba, the Soviet Union, and Venezuela: A Tale of Dependence and Shock, Ernesto Hernández-Catá

Competitive Solidarity and the Political Economy of Invento, Roberto I. Armengol

The Fist of Lázaro is the Fist of His Generation: Lázaro Saavedra and New Cuban Art as Dissidence, Emily Snyder

La bipolaridad de la industria de la música cubana: La concepción del bien común y el aprovechamiento del mercado global, Jesse Friedman

Biohydrogen as an Alternative Energy Source for Cuba, Melissa Barona, Margarita Giraldo and Seth Marini

Cuba’s Prospects for a Military Oligarchy, Daniel I. Pedreira

Revolutions and their Aftermaths: Part One — Argentina’s Perón and Venezuela’s Chávez, Gary H. Maybarduk

Cuba’s Economic Policies: Growth, Development or Subsistence?, Jorge A. Sanguinetty

Cuba and Venezuela: Revolution and Reform, Silvia Pedraza and Carlos A. Romero Mercado

Mercado inmobiliario en Cuba: Una apertura a medias, Emilio Morales and Joseph Scarpaci

Estonia’s Post-Soviet Agricultural Reforms: Lessons for Cuba, Mario A. González-Corzo

Cuba Today: Walking New Roads? Roberto Veiga González

From Collision to Covenant: Challenges Faced by Cuba’s Future Leaders, Lenier González Mederos

Proyecto “DLíderes”, José Luis Leyva Cruz

Notes for the Cuban Transition, Antonio Rodiles and Alexis Jardines

Economistas y politólogos, blogueros y sociólogos: ¿Y quién habla de recursos naturales? Yociel Marrero Báez

Cambio cultural y actualización económica en Cuba: internet como espacio contencioso, Soren Triff

From Nada to Nauta: Internet Access and Cyber-Activism in A Changing Cuba, Ted A. Henken and Sjamme van de Voort

Technology Domestication, Cultural Public Sphere, and Popular Music in Contemporary Cuba, Nora Gámez Torres

Internet and Society in Cuba, Emily Parker

Poverty and the Effects on Aversive Social Control, Enrique S. Pumar

Cuba’s Long Tradition of Health Care Policies: Implications for Cuba and Other Nations, Rodolfo J. Stusser

A Century of Cuban Demographic Interactions and What They May Portend for the Future, Sergio Díaz-Briquets

The Rebirth of the Cuban Paladar: Is the Third Time the Charm? Ted A. Henken

Trabajo por cuenta propia en Cuba hoy: trabas y oportunidades, Karina Gálvez Chiú

Remesas de conocimiento, Juan Antonio Blanco

Diaspora Tourism: Performance and Impact of Nonresident Nationals on Cuba’s Tourism Sector, María Dolores Espino

The Path Taken by the Pharmaceutical Association of Cuba in Exile, Juan Luis Aguiar Muxella and Luis Ernesto Mejer Sarrá

Appendix A: About the Authors

logo

Posted in Blog | Tagged , , , , , , , , , , , , | Leave a comment

The Mariel Special Zone: Economic Wagers and Realities

By Emilio Morales and translated by Joseph L. Scarpaci, Miami (The Havana Consulting Group). Original Essay here:  The Mariel Special Zone The November 1 opening of the Mariel Special Economic Zone (ZEDM in Spanish) by the government of Raúl Castro is part of the so-called ‘economic model updating’ that seeks to attract fresh foreign capital to Cuba.A first step is the inauguration of the ZEDM Regulatory Office to receive and evaluate investment bids. Representatives from some 1,400 firms from 64 countries will get a chance to learn more about these investment opportunities when they attend the XXXI Havana International Fair from November 3 – 9. The special zone plays a key role in driving the government’s economic reforms, which have become the top priority. After the failures of the socialist economy over some five decades, the government leadership has little choice but to restructure the economy’s strategic sectors. Nothing short of a gradual opening towards a market economy, and shrinking the public sector, are key elements in this transformation. Second Stage Reforms Reforms seem to be headed towards stage two. Recently, 70 cooperatives outside of the agricultural sector came into operation and the number of approved self-employment jobs has risen to 201. The new Mariel project follows in the path of the Duty-free Zones (Zonas Francas) launched in the 1990s, and played an important role in attracting foreign investment. It is important to remember that such investment brought Cuba out of the so-called Special Period.   However, those Duty-free Zones were eliminated in the middle of the last decade when the government of Fidel Castro did an about-face and re-centralized parts of the economy. The current investment climate is clouded with uncertainty because of the current state of the Cuban economy and the condition of its main trading partner, Venezuela. That is why this new zone, built at an estimated cost of some $900 million USD, faces a daunting start. Recalling Recent Memories Let’s take stock of what led up to this mega-project. The sole purpose of the Duty-Free Zones (ZF in Spanish) born out of Law Decree 165 in 1996 was to attract foreign investment. Operators in the ZFs were spared import tariffs on manufacturing and assembling, or on processing finished or partially-finds goods.  Cuba’s competitors back then were from the Dominican Republic, Mexico, and a few Central American companies. In all, there were some 65 ZFs in the region and they produced footwear and leather goods, candy, electronic goods, plastics, and textiles. These products were largely destined to the United States, whose market has been off limits to Cuban products since 1960. The first three ZFs in Cuba appeared in 1997. The largest area was in Mariel, followed by Berroa (near the Havana port), and the smallest one, Wajay, was close to the José Martí International Airport in the southern section of the capital. Of the 243 operators in the ZF, about two-thirds were involved in trade, a fifth were in services, and 14% was in manufacturing. The latter category included the technology sector such as software, industrial projects, and machinery. Wajay had 120 operators, followed by Berroa (91) and Mariel (32). Spain (62) and Panama (43) had the largest number of companies in these duty-free zones. Foreign investment and operations in the ZFs peaked in 2002 with some 400 joint-venture and strategic alliances that brought just under $3 billion USD in investment. Starting in 2002, companies started closing in these zones and foreign investment tapered off. By 2008, only 200 firms operated there and business tapered off. New Picture (2) Three Strategic Sectors The Cuban equivalent of the U.S. Federal Register – the Gazeta Oficial No. 26 of 2013— recently stated the zones were “to promote the increase of infrastructure and activities to expand exports, import substitution, high-tech projects [and] generate new sources of jobs that contribute to the nation’s progress” (our translation).  This pronouncement marks the second time in 20 years the government has tried to implement duty-free zones, and could strengthen three strategic sectors.

  1. Depwater oil exploration and extraction to become a      crude-oil proicessing center.
  2. High-tech industrial parks for all kinds of products.
  3. Container storage and distribution center.

Explore or refine oil? This idea draws on the relative location of Cuba and the port of Mariel. Researcher Jorge Piñón points out that Mariel is strategically located at the crossroads of basins in the Gulf of Mexico and Caribbean Sea, where 49% of the hemisphere’s crude oil production, and 59% of its refining capability, are located. Moreover, Mariel sits at the doorstep of the world’s largest consumer and importer of oil: The United States. Considerable planning preceded the decision to commence deep-water oil exploration over the 112,000 square kilometer area of the Economic Exclusive Zone (ZEE in Spanish) just north of Cuba. But oil was not located and, in the medium run, there is just a small chance that Mariel will become a refinery center. In that scenario, there are plans to construct at the port of Mariel, 45 kilometers west of Havana, a huge warehouse center. It would also mean reviving super-tanker facilities at the port of Matanzas, the pipeline linking Matanzas and Cienfuegos (the latter, on the south-central coast), and expanding the recently upgraded oil refinery in Cienfuegos. The latter will increase daily processing from 65,000 to 150,000 barrels daily. All that depends on Venezuelan financing. Producing Goods and Services The second objective is to convince foreign investors to produce high-value goods and services in Cuba that can then be exported. To that end, the Cuban company ZDIM S.A., a subsidiary of the Cuban Revolutionary Armed Forces holding company, GAESA, has been created. ZDEM aims to link myriad development and industrial sectors via road, rail, and high-level communication networks. The strategy entails creating maquiladoras –low-cost and skilled labor clusters—to produce high-value added goods such as appliances, computers, construction materials, exportable biotechnology products, and even automobile assembly.  A canning and packaging industry is also expected to support the Cuban domestic and export markets. Even though foreign companies operating in these zones will be exempt from salary and wage taxes, free of taxes on earnings for 10 years, as well other incentives, these measures are insufficient because they rely on traditional barriers of contracting labor through a government agency. Licensure to operate in the zone still relies on government agencies, and therein is the danger of a cumbersome and highly bureaucratic approval process for investors. The Container Business A third objective is a modern facility for dispatching and warehousing maritime and truck containers. Mariel would receive cargo ships that presently operate out of the aged and inefficient port of Havana. In turn, the capital city’s port would house cruise ship and recreational boating and sailing. Ambitious port expansion plans at Mariel are undoubtedly linked to the renovated Panama Canal, which will be completed in 2015. All this bodes well for maritime traffic throughout the Caribbean, which is poised to do substantial business with the break-in-bulk activities related to the gigantic ships known as Post Panamax.  PSA International from Singapore will administer Mariel’s facility and will become the main port for Cuban imports and exports. A 2,000-meter long dock will be able to handle deep-water vessels and up to 3 million containers annually. The initial stage will develop the first 700 meters of berths and a storage capacity of 1 million containers per year. By 2014, it should be able to receive cargo ships bound for ports elsewhere in the Caribbean and the Americas. Installations include warehouses, could storage, fuel storage tanks, food distribution facilities, and other services. A highway and rail network will connect this, potentially the most important port in Cuba, with existing networks to guarantee the flow of goods. From Dream to Reality In theory, the Mariel project can only be viable over the long term. In the short term, however, it faces serious obstacles. First, ZEDM faces competition from similar installations in Panama, Jamaica, and elsewhere in the Caribbean basin and Central America. That competition is already tried and tested and operates with competitive prices. Significantly, they are in a better position to develop trade with the main market in the region: the USA. The Cuban project will be constrained by the U.S. trade embargo that prohibits ships that visit any Cuban port from entering U.S. territorial waters within six months.  Accordingly, the zone’s reliance on large foreign investment will require those foreign businesses to stay on the island for a long time to recover their costs and turn a profit, and those investors will also be constrained by the embargo regulations. It is difficult to forecast the long-term investment successes in this first stage because of these risk factors. Instead, medium-term investments from Cuba’s main business partners –China, Brazil and Venezuela—are more likely.  The zone’s development will require more flexible and open laws than the ones just launched. That means a new Foreign Investment Law, which was announced by Raúl Castro at the beginning of the year, but was inexplicably postponed until this week. Novel amendments to the existing legislation might allow for the Cuban exile community to invest or to exert pressure on the U.S. congress to lift the embargo. But let’s not deceive ourselves: The ZEDM has been conceived and designed all along with an eye on U.S. business investment. That is the same motivation behind Brazilian wagers and is the bait that will attract other investors.  Havana in November 2013 has become a mid-summer night’s dream.

New-Picture-3

 Mariel

Posted in Blog | Tagged , | 1 Comment

Emilio Morales, “JOINT VENTURES ARE THE BIG QUESTION IN UP-DATING THE CUBAN MODEL”

By Emilio Morales and translated by Joseph L. Scarpaci, Miami (The Havana Consulting Group).

Original Article here: The Havana Consulting Group, Joint Ventures

There is a longing in Cuba for the ‘old days’ of the 1990s when there was a successful boom in creating joint-venture companies on the island. Such nostalgia stems from the economic and political crisis in Venezuela, which has lessened the flow of capital from Big-Brother Venezuela.

Joint-venture companies played a key role in helping the Cuban economy recovery in the 1990s when Soviet aid dried up and the so-called Special Period began.

Many of these companies supported the expanding tourist sector and the decriminalization of the U.S. dollar, which became a staple in a dollarized retail market.

This spate of joint ventures sought to develop tourism infrastructure, assist in import substitution, and revive the national economy.

Joint venture companies concentrated mainly in the industrial sector, tourism, food processing, and real estate. Assuming there was a prior agreement with the Cuban counterpart, decisions were usually made by the foreign partner because they had put up the capital and the know-how.

In this stage of the island’s history with joint ventures, foreign companies played a key role training personnel about modern marketing research methods. This was a time when the economic teams of the armed forces launched the so-called ‘business improvement’ (perfeccionamiento empresarial in Spanish) programs.

Upper management teams of these companies learned modern marketing research techniques. Training this echelon of Cuban businessmen and women was a way to ensure loyalty, avoid corruption, and safeguard information.

Some $3 billion drove this surge of joint-venture operations and parallel activities in duty-free zones.

Uncertainty lowers the expectations of reforms.

Around 2002, the number of joint ventures and amount of investment capital began declining. Two years later, the government did an about-face and began centralizing the economy once again which, in turn, caused investment to dry up and erode the economic reforms launched in the 1990s.

As a result, some 200 joint-venture operations folded and investment plummeted. The Cuban government took to prioritizing investments with such friendly nations as Venezuela, China and Brazil to fill this investment void, offering private investors slim pickings.

Investment and joint-venture operations dropped off quickly between 1999 and 2011, except in Venezuela, where they shot up from 13 to 30. Morales

Figure 1. Number of Businesses Operating in Foreign Direct Investment, 1999-2001.

Data source: Ministry of Foreign Investment and Collaboration (1999) and the Ministry of Foreign Trade and Foreign Investment (2001, calculated by The Havana Consulting Group.

Those foreign companies that remained in Cuba during this period had to endure, from 2008 to 2010, diminished or no payments that were owed to them by the island’s government (called the corralito, or little corral). Considerable tension resulted, particularly between the Spanish diplomatic corps that pleaded for payment to some 300 Spanish firms who had operations there.

This acute two-year financial crisis stemmed from the island’s lack of liquidity that not only affected the supply of raw materials in the sectors where these foreign firms operated, but decreased inventory in hard-currency retail chains and in tourism. The Cuban government’s failure to make payments led to a further decline in foreign investment as investors got jittery.

Raúl Castro introduced a series of economic reforms called “updating the Cuban economic model” when he came to power. This entailed trying to insert market mechanisms at all levels of the economy with the socialist planning system. Joint ventures were at the center of these measures so that the economy could receive foreign investment. In all instances, the Cuban government maintains at least 51% control of these companies.

From the start of these reforms until October 2013, the bulk of them have tried to expand the private sector and agriculture. However, the pace of foreign investment has not gone as expected because of corruption charges made against some foreign investors residing on the island, and Cuban business representatives of joint-venture firms.

Cuban authorities have detained or jailed several foreign businessmen and high-ranking Cuban officials (including one minister and several vice ministers and Cuban CEOs. They are charged with corruption, bribery, and related crimes. Some have been sentenced up to 10 years while others were acquitted after having spent more than a year in jail while awaiting trial.

Undoubtedly, this anticorruption has proven unattractive to foreign investors because of the uncertainty and insecurity the matter has created.

Searching for investors.

Despite all this, the Cuban government has created a special zone adjacent to the Mariel port, just west of Havana. The Brazilian government has invested $900 million, which the Cuban government hopes will attract foreign investment and give the economy a second chance.

By the looks of things, the Cuban government is moving forward with plans to attract investment. It is noteworthy that Venezuela, its principle political ally and one of two pillars of the Cuban economy, is coping with a deep crisis back home. Still, these strategic actions aim to exceed the results obtained in the 1990s.

Potential gains in joint ventures will likely concentrate in the tourism, agriculture and real-estate sectors.

However, it is unclear whether the traditional business partners already located on the island will play a prominent role. The lack of transparency about the jailing of foreign businessmen and the closing of joint ventures is unattractive to international investors.

If we consider the recent announcement about shifting to a single currency, it is obvious that foreign companies with investments in Cuba take a beating. Government efforts to attract a new wave of investors to the new Mariel port facilities could be impacted adversely because of these proposed monetary changes.

Another weakness is the lack of flexible and attractive foreign investment laws.

This is why the government urgently seeks a new wave of foreign investors. To do that, it has announced that it is reworking its investment laws so that they appeal to the international community. Moreover, for the first time in half a century, these new laws may consider allowing Cubans who reside off the island to invest.

Until now, however, these new laws have not appeared. Until they do, uncertainty grows, the crisis deepens, and the country is losing the glamour and allure it needs to attract new investment.

01MeliaCohiba-GeneralHotel Melia Cohiba, Spanish-Cuban Joint Venture

Sherritt-RefinerySherritt International Nickel Refinery, Fort Saskatchewan Alberta: Cuban-Canadian Joint Venture in Canada!

Posted in Blog | Tagged , , | Leave a comment

Eliminating Dual Currencies in Cuba: Measured, but Necessary Risk

By Emilio Morales and translated by Joseph L. Scarpaci, Miami (The Havana Consulting Group).

Original Here: Eliminating Dual Currencies in Cuba: Measured, but Necessary Risk

New Picture

The Cuban government finally announced the elimination of its dual currency system in what will be one of the most challenging reforms to the economic model. Great expectations are riding on this new, single currency, which will have a great impact on the island’s society and economy.

Said measures will change the prevailing lifestyle of the past nearly 20 years for 11.2 million Cubans. That consisted of getting paid in a devalued ‘soft’ currency yet purchasing essential goods and services daily in a ‘hard’ currency, one used by tourists or sent by loved ones from abroad.

Authorities say they will deploy the new measure in stages, and the timeline will begin with government businesses.

A first stage will entail specifying the legal framework to support the move to a single currency. Financial information systems and adjustments to accounting systems are required as well.

Accountants and other personnel from across the country will require some training to handle the transition.

Uncertainty Awaits.

This important announcement, however, fails to specify firm dates and related details. News of the single currency system no doubt aims to calm the nerves of those who have saving accounts in convertible pesos (CUCs), international currencies, and Cuban pesos (CUPs). Still, the government will continue to apply the current policy of both subsidizing retail prices, and subsidizing those Cubans who require special government assistance.

Both subsidy strategies, though, are contradictory. On the one hand, a single currency means that one of those subsidies will be eliminated. Therefore, bank accounts will lose some value when they are rolled over to a single currency, whenever and whatever that might be.

On the other hand, in order to unify the currencies, sate subsidies will have to disappear or be reduced to a bare minimum, and that will be the hardest measure for the Cuban government to carry out. How will authorities face the dilemma of protecting the most vulnerable groups once this process takes holds?

The list of subsidies is extensive: utilities (electricity, telephone, gas, potable water) and the dwindling list of sparse, yet essential products provided by the longstanding ration book (libreta). Other subsidized public services include transportation, all levels of education, health care, and the sale of prescription drugs.

Do conditions exist to eliminate or drastically reduce these subsidies? Do the results achieved by the reforms carried out thus far justify these measures Will the government allow the private sector to expand in order to minimize the pain this difficult process will unleash?

All of this is uncertain. As the details of this currency matter become known, we will be able to assess the real impact that the elimination of the dual currency will have. Until then, it remains a uncertain.

New Exchange Rate in Sight

The government announcement also fails to specify how it will adjust the exchange rate in the process. We anticipate an immediate and sharp rise in the black-market dollar; perhaps two or three times for what the dollar will officially sell at the state-run CADECA money-exchange houses.

CADECA exchange rates currently value 25 Cuban pesos (CUC) for a single convertible peso (CUP). It is likely that in a few weeks the government will adjust this rate as a first step. That will be the first test of the impact this monetary policy will have in the marketplace and in everyday living. It will no doubt shape how the rest of the reforms unfold.

For instance, reducing the exchange rate to 1 CUC for 18 CUPs would lower the ceiling on the black market and avoid early speculation. At the same time, the move would increase workers’ purchasing power if prices set in dollars in state stores remain unchanged.

In this regard, the 240% mark up that the government automatically places on consumer goods sold in the so-called ‘dollar stores’ (e.g., hard-currency CUC sales) will give the government some cushion in absorbing these costs because it is a handsome margin. Foregoing some state profit will increase consumer purchasing power for ordinary Cubans.

But one thing is a fine wine and the other is just plain table wine, which gives pause and makes us wonder these first-stage measures really will jump start the process.

Investors on Alert

If the impact will be great on the Cuban people, it will be no less salient for investors residing on the island.

Regardless of the fine points these changes unleash, foreign joint-venture companies with investments in Cuba will be affected in some fashion. The bottom line for these companies will be affected by the costs, exchange rates and prices of the products they produce there. Profit margins will likely diminish somewhat until the currency changes stabilize, and production cycles catch up other changes in the monetary system.

Even if the transition is relatively smooth, it is likely that investment will slow down or simply be deferred until the most challenging part of the transition is over. It is noteworthy that over the past ten years, almost 200 joint-ventures have closed in Cuba, particularly since the freeze on repatriating profits took place in 2008, which was not fully over until 2010. On top of that comes the anti-corruption campaign carried out over the past four years.

Government efforts to attract new waves of investment to the upcoming duty-free zone of Mariel port (just west of Havana) will be challenged by these proposed banking measures. The uncertainty caused by the positive and necessary combining of the island’s currency will not be attractive to investors, at least until the process is fully implemented.

We can only hope that efforts to modernize the Cuban economy through these fiscal and monetary proposals –the most daunting measures proposed in recent economictimes—achieves its goals for the good of the Cuban people and does not become a huge disaster.

peso_cuban_currency_cuba_photo_gov

Posted in Blog | Tagged , , | Leave a comment

Remittances Drive the Cuban Economy

By Emilio Morales and Joseph L. Scarpaci, Miami (The Havana Consulting Group).— Fidel Castro’s government reluctantly accepted remittances from abroad in 1993 when it realized it needed access to hard currency to survive.

It was a devastating ideological blow at the beginning of the so-called ‘Special Period in a Time of Peace’ because it revealed that the Cuban exile community had become a lifeline for the island. Suddenly, U.S. dollars started inundating the island and would never leave. Both the Cuban society and the exile community were startled by this bold move.

The former Cuban leader probably never imagined that the forced opening up to dollars was going to become the most efficient driver in the economy over the last 20 years. Not a single Cuban economist foresaw that outcome. Today, remittances reach 62% of Cuban households, sustain about 90% of the retail market, and provide tens of thousands of jobs.

Money sent from overseas far exceeds the value of the once powerful sugar industry which, in 1993, began a huge decline from which it has not recovered. Remittances in 2013 surpass net profits from tourism, nickel, and medical products manufactured by the Cuban biotech industry.

Table 1. Remittances versus Other Sources of Hard Currency in Cuba, 2012 (in millions of US dollars)

No.

Source

2012

1

Remittances received in cash

$2,605.12

2

In-kind remittances

$2,500.00

3

Total remittances

$5,105.12

4

Tourism revenues

$2,613.30

5

Nickel exports

$1,413.00

6

Pharmaceutical exports

$500.00

7

Sugar exports

$391.30

Data sources: Calculated by The Havana Consulting Group, based on their data and open-source statistics published by the Oficina Nacional de Estadísticas e Información (ONEI), Havana.

The table above shows that remittances ($5.1 billion) outstrip the leading four sectors of the Cuban economy combined ($4.9 billion). Moreover, the figures for items 4 through 7 do not take into account expenses incurred in generating those gross revenues (i.e., costs of processing sugar, manufacturing drugs, food imports, etc.). Sending remittances does not cost the Cuban government money, but it circulates throughout he economy and supports most Cubans in some way.

White House Policies Trigger Growth in Remittances

Barack Obama’s arrival in the White House has directly influenced the increase in money being sent to Cuba. In the past four years, $1 billion USD of remittances have infused the Cuban economy.

Cash remittances in 2012 reached a record $2.61 billion USD; a 13.5% increase over 2011.

In other words, cash remittances outweigh government salaries by 3 to 1. The current monthly mean salary according to ONEI (the official government statistics agency) is 445 Cuban pesos, or the equivalent of just under $19 USD. Today, the economically active work force is 5.01 million workers, of which about 80% (4.08 million) draw state paychecks, whereas the balance is self-employed, agricultural, or cooperative workers.

If we use the official exchange rates that one Cuban convertible peso (CUC) equals 24 pesos (CUP) or one US dollar, the annual payout for state workers is three times less than the volume of money that Cuban émigrés send to family back home. Include in-kind remittance contributions (gifts, appliances, clothing, etc., brought to Cuba during visits), and the ratio leaps to 5.5 to 1.

Behind this growth in sending money to Cuba is the opening up of travel to Cuba as well as eliminating restrictions on sending money there. In 2012, just over a half a million Cubans residing abroad visited Cuba, making them the second largest tourist group in the island’s market; only Canadians (1.1 million visits) surpass them.

Out-migration from Cuba –about 47,000 annually on average over the past decade or nearly a half million émigrés—is also a contributing factor because those who have most recently left the island are the ones most inclined to send money back home. That was not the pattern with the original exile community in the 1960s; sending dollars to the island was forbidden back then.

We also need to acknowledge that several reforms introduced by the Cuban government in the past three years have encouraged remittances. This cash infusion helps to start home restaurants (paladares), B&Bs, car rentals, and more recently the buying and selling of private cars and real-estate. These businesses are aided by the 1.6 million cell phones in use today –available to the general public only since 2007—of which 70% are paid for by Cubans living off the island.

Never at a loss to encourage remittances, the Cuban government announced just last month the opening of 118 Internet stations that charge very high hourly rates. The new cyber cafés will initially cluster in the tourist poles across the island and the provincial-capital cities.

At the present, then, the role the Cuban diaspora plays in developing the island’s economy has never been greater, despite the restrictions on how and where money can be invested. However, the short term is unlikely to witness a greater influx of capital beyond the diaspora’s giving. Witness the failures in recent offshore gas and oil oil drillings that have come up ‘dry’ and the political and economic crisis in post-Chávez Venezuela is mired. This may create a broader space for the exiles to have a more direct hand in rebuilding the country.

Like it or not, Cuban exiles carry economic clout on the island. They have a lot of skin in the game; some of it is economic, and a lot of it is love of family. Their role in shaping the lives of many will be transformative in years to come, and on both shorelines that straddle the Florida Straits.

Last Updated (Tuesday, 11 June 2013 04:20)

Posted in Blog | Tagged , , , , , | Leave a comment

Emilio Morales and Joseph L. Scarpaci, “Bring on the [Cuban] college graduates!”

Original Essay from the Morales Scarpaci  Havana Consulting Group web site here: “Bring on the [Cuban] college graduates!”

The Cuban government slammed on the brakes when it recently scrapped plans to allow private wholesaling and let skilled workers strike out on their own.

 Vice-Minister of Work and Social Security, José Barreiro’s announcement last week signals a strong reversal of reforms that began in 2010. He also stated that jobs that had been previously off limits to private workers –auto-body repairers, floor polishers, aluminum product vendors, rust removers, welders, and confectioners—are now legal trades.

But what about software engineers, tutors and teachers, and other skilled workers?

The new announcement shows resistance to change and the lack of a strategic plan. Both moves are intolerant of free-market competition among the island’s emerging private sector.

President Raúl Castro’s recent trips to China and Vietnam show concern about adapting the magic formula from these two key allies. The Asian answer was simple but it is only part of a recipe for success: open up to foreign capital, liberalize all economic sectors, and let skilled, professional workers earn a living either on their own or in small enterprises.

Vice Minister Barreiro described the ‘new’ changes this way: “[they] are designed for urban cooperatives, a different kind of organization compared to self-employment, [but the cooperatives] will have greater flexibility and work like the state-run beauty shops did where the shops were passed on to its workers.”

We argue that this move is bound to fail. The track record speaks for itself: the classic failures of both the sugar-cane and non-sugar cane UBPCs (a type of cooperative) should not be forgotten by the Cuban government.

Unexplainable contradictions.

A priority two years ago was the plan to shed 2 million workers from public payrolls over the course of five years.  One hundred eighty-three private trades were approved by the Cuban Communist Party to absorb downsized workers. However, the limitations of private-sector work, inflexible laws, high taxes, the continuation of a dual currency system (pesos and CUCs), and poor conditions to acquire inputs have thwarted these efforts.  So how can the government send layoff notices to 2 million workers if it cannot nurture a private sector to employ them? The Nanny State is unwilling to cede economic space that it has dominated for more than 50 years.

A work break in a private sector barber shop, Havana, March 2011, photo by Arch Ritter

How can you build a private sector without private wholesalers?

This is a major weakness of the Cuban model. No country can develop a sustained private sector without wholesalers. Failure to do so will further the pattern of stealing from public institutions and stimulate the black market.

While the mindset of Cuban workers needs to change to adapt to these new measures, both the laws and thinking of the Cuban governments must also adjust if real reform is to take root.

We suspect these observations are not lost on the Cuban leadership because in recent years, hundreds of high-level Cuban scholars have been traveling around the United States, Asia and Europe to gather first-hand observations about what constitutes successful development. They file reports to myriad agencies when they return. Are the polítcos and decision makers reading these reports?

Economic reforms without professionals and technology: Mission Impossible The National Statistics Office (ONE) in Havana claims there are 6.8 million working-age Cubans, of which, about one-fifth are college graduates. So why doesn’t the state allow them (about 1.5 million workers) to work in trades that maximize their skills and training? White-collar and skilled workers drive economic development, and failure to engage them will doom the Cuban economic model.

Remember the fiber-optic cable laid between Cuba and Venezuela? Well, it has been idle for over a year even though it –along with other infrastructure and reforms—could play a key role in creating high-tech work and jump-starting the economy.

Cuban college graduates are needed in housing construction, agriculture, selling automobiles, supply-chain management and distribution channels, tourism development, the food industry, and a plethora of service-sector jobs.

Tapping into college-trained workers will require a change in the mindset of the Cuban leadership. Triggering this new thinking is the main dilemma in changing the economic model. Failure to do so will only produce a “light” version of the economic reforms spelled out in last year’s VI Cuban Communist Party meetings and attendant laws that have been approved in recent years.

Let the college grads work!

___

The authors are principals at The Havana Consulting Group LLC and authored Marketing without Advertising: Brand Preference and Consumer Choice in Cuba. Scarpaci chairs the Marketing and Management Department in the West College of Business at West Liberty University, West Liberty, WV.

 

Posted in Blog | Tagged , , , | Leave a comment