Author Archives: The Economist

Welcome to Queueba: WITH SHOP SHELVES BARE, CUBA MULLS ECONOMIC REFORMS

The government hints it may scrap its dotty dual-currency system

The Economist, Oct 10th 2020

Original Article: Cuba Mulls Economic Reforms

LONG QUEUES and empty shelves are old news in Cuba. Recently, though, the queues have become longer and the shelves emptier. Food is scarcer than it has been since the collapse in 1991 of the Soviet Union, which supported the island’s communist regime. Now shoppers queue twice: once for a number that gives them a time slot (often on the next day). They line up again to enter the store.

Once inside, they may find little worth buying. Basic goods are rationed (for sardines, the limit is four tins per customer). Shops use Portero (Doorman), an app created by the government, to scan customers’ identity cards. This ensures that they do not shop in one outlet too often. Eileen Sosin recently tried but failed to buy shampoo and hot dogs at a grocery store near her home in Havana. She was told that she could not return for a week.

Queues at grocery stores are short compared with those outside banks. They are a sign that, under pressure from food shortages and the pandemic, the government is moving closer towards enacting a reform that it has been contemplating for nearly two decades: the abolition of one of its two currencies. In July state media began telling Cubans that change was imminent. Cubans are eager to convert CUC, a convertible currency pegged to the American dollar, into pesos, which are expected to be the surviving currency. If they do not make the switch now, Cubans fear, they will get far fewer than 24 pesos per CUC, the official exchange rate for households and the self employed.

Cuba introduced the CUC in 1994, when it was reeling from the abrupt end of Soviet subsidies. The government hoped that it would curb a flight into dollars from pesos, whose worth plunged as prices rose.

The system created distortions that have become deeply entrenched. The two currencies are linked by a bewildering variety of exchange rates. Importers of essential goods, which are all state-owned, benefit from a rate of one peso per CUC. That lets them mask their own inefficiencies and obtain scarce dollars on favourable terms. This keeps imports cheap, when they are available at all. But it also discourages the production of domestic alternatives. Foreign-owned earners of hard currency, such as hotels, do not profit from the artificial gap between revenues and costs. That is because instead of paying workers directly they must give the money to a state employment agency, which in turn pays the employees one peso for every CUC (or dollar). The rule is, in effect, a massive tax on labour and on exports.

The dual-currency regime is an obstacle to local production of food, which already faces many. Farmers must sell the bulk of their output to the Acopio (purchasing agency) at prices set by the state. It gives them seeds, fertiliser and tools, but generally not enough to produce as much as their land will yield.

A farmer from Matanzas, east of Havana, recently complained on social media that the Acopio, which required him to provide 15,000lbs (6,800kg) of pineapples, neither transported them all the way to its processing facility nor paid him. Instead, they were left to rot. When the Acopio does manage to provide lorries, it often fails to deliver boxes in which to pack farmers’ produce. They can sell their surplus to the market, but it is rarely enough to provide a decent income. No wonder Cuba imports two-thirds of its food.

It is becoming more urgent to free the economy from such burdens. Although Cuba has done a good job of controlling covid-19, the pandemic has crushed tourism, a vital source of foreign exchange. The Trump administration, which imposes sanctions on Cuba in the hope that they will force the Communist Party out of power (and, perhaps more important, that they will please Cuban-American voters in Florida), recently tightened them. In September the State Department published a “Cuba prohibited accommodations list”, which blacklists 433 hotels controlled by the regime or “well-connected insiders”. Venezuela, Cuba’s ally, has cut back shipments of subsidised oil. The economy is expected to shrink by around 8% this year.

As it often does when times are tough, Cuba is improvising. To hoover up dollars from its citizens, since last year the government has opened many more convertible-currency shops. As these usually have the best selection of goods, demand for dollars has rocketed. Banks have none left. Cubans either get them from remittances, sent by relatives abroad, or on the black market, where the price can be double the official rate of one per CUC.

The government is now sending signals that it wants to scrap the economy-warping dual-currency regime. “We have to learn to live with fewer imports and more exports, promoting national production,” said the president, Miguel Díaz-Canel, in July.

But it has signalled before that such a reform was imminent only to decide against it. That is because the change, when it comes, will be painful. Importers with artificial profits may lay off workers en masse. If they have to pay more for their dollars, imports will become more expensive, sparking a rise in inflation. Pavel Vidal, a Cuban economist at the Pontifical Xavierian University in Cali, Colombia, expects the value of Cubans’ savings to drop by 40%. The government has said that it will raise salaries and pensions after a currency reform, but it has little cash to spare. This year’s budget deficit is expected to be close to 10% of GDP. That could rise when the government is forced to recognise costs now hidden by the twin-currency system.

The government may yet wait until it has built up bigger reserves of foreign exchange to help it cushion the shock. It may hope that Joe Biden will win the White House and reverse some of the sanctions imposed by the Trump administration. That would boost foreign earnings.

The economic crisis makes other reforms more necessary. Under Raúl Castro, who stepped down as president in 2018 (but still heads the Communist Party), a vibrant private sector started up. It has gained more freedoms, but at a slow pace.

The government has recently promised faster action. It said it would replace lists of the activities open to cuentapropistas, as Cuba’s entrepreneurs are called, with negative lists, which specify in which sectors they cannot operate. The new rules have yet to be published. The government recently let cuentapropistas import supplies through state agencies, but prices are prohibitive. In July it opened a wholesale market, where payment is in hard currencies. Firms that use it no longer have to buy from the same bare shops as ordinary citizens.

Cuentapropistas have been lobbying since 2017 for the right to incorporate, which would enable them to sign contracts and deal normally with banks, and to import inputs directly rather than through state agencies. The government has yet to allow this. Until it frees up enterprise, Cubans will go on forming long queues outside shops with empty shelves. ■

 

Street Vendor , 2015

State Food Distributer, 2015

State Vendor, ANAP (Asociacion Nacional de Agricultores Pequenos)

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CUBA: PRIVATE, OWNED. New rules make it even harder to do business in Cuba.

The Economist, December 8, 2018

Editor’s note (December 6th, 2018):

Late on the evening of December 5th, after this piece had been edited and fact-checked but before it went to press, Margarita González Fernández, Cuba’s Minister for Work and Social Security, announced last-minute changes to new regulations governing Cuba’s private sector. Happily, the modifications address some of the more unpopular aspects of the new regulations, which were first announced in July. Of greatest significance is the change that will allow Cuban cuentapropistas, or the self-employed, to keep multiple work licences, rather than having to surrender all but one, as previously announced. (Bookshops with attached cafés will no longer be breaking the law.) The percentage of earnings that cuentapropistas must deposit into designated bank accounts has been lowered from 80% to 65% and the rule to prohibit restaurants from seating more than 50 patrons at a time has been dropped. The last-minute modifications are a sign that while the government is far from enabling the private sector to flourish, it is concerned with creating too much discontent and is, if ever so slightly, considering public opinion when making its decisions.

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EIGHT YEARS ago Cuba’s government laid off a tenth of the country’s workforce—some half a million people—and encouraged them to start their own businesses. They did, with gusto. Nearly 600,000 Cubans have become cuentapropistas, or self-employed, opening restaurants, boutiques, repair shops, beauty parlours, bakeries and bars. They have renovated and rented out spare bedrooms in their homes, turned family cars into taxis and poured their savings into design studios, creating an additional 400,000 jobs and a much-needed, if still tiny, tax base. Many now earn much more. The average state wage is 848 Cuban pesos ($33) a month; a taxi driver with a decent ride can make more than ten times that. But new regulations, which run to 129 pages and take effect on December 7th, look likely to damage the country’s nascent private sector. They come at a particularly bad time for Cuba’s economy, which is already suffering from stagnant exports, broke allies and disappointing tourist numbers.

The most devastating new rule is one that makes it illegal for individuals to hold more than one licence to engage in private business. Cuba issues licences in only 123 categories—and if a licence for a job does not exist, neither does that job, at least officially. There is little logic to the system. A single licence does the trick for any computer-related business, allowing a cuentapropista to provide everything from software to online marketing services. Separate licences for massages, manicures and braiding have been consolidated into one, to the delight of salon owners. But other categories are narrower: selling hardbacks and brewing coffee require two separate licences, effectively making bookshops with cafés illegal. Restaurants that double up as bars face the same fate.

Officials at the Ministry of Labour and Social Security say that the new regulations are meant to discourage black-market trading and tax evasion, while also reducing inequality. The expansion of private businesses over the past few years has indeed contributed to these problems. But the government’s proposed solutions will either have no real effect—business-owners will acquire licences in the names of friends or family—or exacerbate them.

Take wholesale markets. There is only one on the island. Most businesses must rely on state-run shops, which offer a limited range of goods, or acquire products on the black market. The government’s answer is to require cuentapropistas to open bank accounts so that it can track where they spend their money. Drivers of almendrones—ride-shares that substitute for a functioning public transport system in Havana—will be given magnetic cards with which they are expected to buy a set quantity of “subsidised” petrol every month. But since subsidised fuel costs more than the black-market stuff, many drivers are simply handing in their licences.

Cubans who rent out rooms or run other small businesses, such as restaurants or repair shops, must deposit 80% of their income in a designated bank account. They are understandably loth to do so in a cash-based economy where simple transactions at the bank can take hours. They can withdraw money from this account to cover business expenses and will be given a card that entitles them to small discounts when they buy items for business. But few stores accept cards.

The state has also found a novel way to tackle the concentration of wealth: restaurants are now limited to seating only 50 patrons at a time, ostensibly to keep owners from consuming too many resources. And under a new tax scheme, any cuentapropista who wants to hire more than 20 workers must pay onerous wages for each additional employee. The government is happy for people to start businesses, so long as they do not make too much money.

A few helpful new rules have snuck in among the enterprise-throttling ones. Employers will be required to have formal contracts with their workers. They face the suspension of their licence if they are found to be discriminating on the basis of race, sexuality or disability. And business-owners no longer need to close up shop if they fall sick or have a family emergency; they can appoint an interim manager and take some time off.

Yet the overall effect of the new regulations will be to slow the budding private economy. “Being a cuentapropista is the only opportunity we have at a better life without leaving the country,” says the owner of a modest craft shop in central Havana. Her monthly taxes will triple this week; the new rules impose higher taxes on certain businesses in central Havana. “If they take that away from us, what’s left?”

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CUBA’S LEADERS ARE TRAPPED BETWEEN THE NEED FOR CHANGE AND THE FEAR OF IT

A new study shows just how weak the Castros’ economy is

 The Economist. Print edition | The Americas; Dec 7th 2017

Original Article: The Need for Change and the Fear of It

Raúl Castro and Miguel Díaz-Canel

FOR decades Cuban exiles in Miami dreamed of the day that Fidel Castro would die. They imagined that Cubans would then rise up against the communist dictatorship that he imposed. Yet when, a year ago this week, Castro’s ashes were interred in his mausoleum, it was an anticlimax. His brother, Raúl, who is now 86, has been in charge since 2006. For a while, he seemed to offer the prospect of far-reaching economic reform. Now, as he prepares to step down as Cuba’s president in February, he is bequeathing merely stability and quiescence.

Raúl’s planned retirement is not total—he will stay on as first secretary of the ruling Communist Party for a further three years. He is due to leave the presidency as Cuba is grappling with two new problems. The first is the partial reversal by Donald Trump of Barack Obama’s historic diplomatic and commercial opening to the island, which will cut tourist revenues. The second is the aftermath of Hurricane Irma, which in September devastated much of the north coast and several tourist resorts. That has prompted speculation in Miami that Raúl may stay on.

That is to misread the man. In his decade in power Raúl has striven above all to institutionalise the Cuban communist regime, replacing the wayward charisma of Fidel with orderly administration and a collective leadership. He has groomed as his successor Miguel Díaz-Canel, a 57-year-old engineer who has already assumed many public duties. Yet, as president, Mr Díaz-Canel’s autonomy will be limited. He is just one of a group of party bureaucrats and generals who are the real power in Cuba, steadily replacing the generación histórica (those who fought in the 1959 revolution), who are dying off.

The new generation faces an acute dilemma. Despite aid from Venezuela, which has now fallen to half its peak level, Cuba remains unable to produce much of the food it consumes or pay its people more than miserable wages. That is why Raúl embraced market reforms, albeit far more timid ones than those in China or Vietnam. More than 500,000 Cubans now work in an incipient private sector of small and micro businesses or co-operatives.

But these reforms bring inequality and a loss of state control. When Mr Obama visited Cuba in 2016, offering support for entrepreneurs and calling on live television for free elections, the regime appeared to panic. Since then, the government has placed some curbs on small business to stop what Raúl called “illegalities and other transgressions”. In other words, the government wants a market economy without capitalists or businesses that thrive and grow. It seems nowhere near tackling the multiple exchange rates (ranging from one peso to the dollar for official imports to 25 for most wages and prices) that ludicrously distort the economy.

Stalling may leave intact the regime’s political control—its overriding priority. But this ignores a fundamental problem. Since the 1980s the Cuban economy has steadily lost ground in relation to those of other Latin American countries, as a study published last month by the Inter-American Development Bank shows. Its author, Pavel Vidal, was one of Raúl’s team of reformist economic advisers and is now at the Javeriana University in Cali, Colombia. He has devised hitherto unavailable internationally comparable estimates for Cuba’s GDP since 1970 by calculating an average exchange rate which takes into account the weight of the various rates in the economy.

Mr Vidal finds that GDP per person in Cuba in 2014 was just $3,016 at the average exchange rate, barely half the officially reported figure and only a third of the Latin American average. This includes the value of free social services (such as health, education and housing) that Cubans receive. Taking into account purchasing power, GDP per person was $6,205 in 2014, or 35% below its level of 1985. Mr Vidal goes on to compare Cuba with ten other Latin American countries whose populations are similar in size. Whereas in 1970 Cuba was the second-richest, behind only Uruguay, in 2011 (the latest year for which data are available) it was in sixth place in income per person, having been overtaken by Panama, Costa Rica, the Dominican Republic and Ecuador.

Cuba’s decline is above all because of lack of investment, says Mr Vidal. But a shrinking and ageing population plays a part, too. He finds that the reforms have brought about a modest increase in income and even in productivity. They “go in the right direction but have fallen short”, he concludes.

For Mr Díaz-Canel and his reformist colleagues the message is clear: speeding up change carries political risks, but not doing so involves economic ones.

 

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Slim pickings. CLUELESS ON CUBA’S ECONOMY

HAVANA. The communist regime can no longer rely on the generosity of its allies. It has no idea what to do

The Economist.  Print edition | The Americas. Sep 30th 2017

GABRIEL and Leo have little in common. Gabriel makes 576 Cuban pesos ($23) a month as a maintenance man in a hospital. Leo runs a private company with revenues of $20,000 a month and 11 full-time employees. But both have cause for complaint. For Gabriel it is the meagre subsistence that his salary affords. In a dimly lit minimá (mini-mall) in Havana he shows what a ration book entitles one person to buy per month: it includes a small bag of coffee, a half-bottle of cooking oil and five pounds of rice. The provisions cost next to nothing (rice is one cent per pound) but are not enough. Cubans have to buy extra in the “free market”, where rice costs 20 times as much.

Leo (not his real name) has different gripes. Cuba does not manufacture the inputs he needs or permit enterprises like his to import them. He travels abroad two or three times a month to get them anyway. It takes six to eight hours to pack his suitcases in such a way that customs officials don’t spot the clandestine goods. “You feel like you’re moving cocaine,” he says.

Making things easier for entrepreneurs like Leo would ultimately help people like Gabriel by encouraging the creation of better jobs, but Cuba’s socialist government does not see it that way. In August it announced that it will stop issuing new licences in two dozen of the 201 trades in which private enterprise is permitted. The frozen professions include running restaurants, renting out rooms to tourists, repairing electronic devices and teaching music.

This does not end Cuba’s experiment with capitalism. Most of the 600,000 cuentapropistas (self-employed workers), including restaurateurs, hoteliers and so on, will be able to carry on as before. But the government mistrusts them. Their prosperity provokes envy among poorer Cubans. Their independent-mindedness could one day become dissent. Raúl Castro, the country’s president, recently railed against “illegalities and other irregularities”, including tax evasion, committed by cuentapropistas. He did not admit that kooky government restrictions make them inevitable. The government “fights wealth, not poverty”, laments one entrepreneur.

A Santeria Message

Trump’s mouth, Irma’s eye

The clampdown on capitalism comes at a fraught time for Cuba. Mr Castro is due to step down as president in February. That will end nearly 60 years of autocratic rule by him and his elder brother, Fidel, who led Cuba’s revolution in 1959. The next president will probably have no memory of that event. Relations with the United States, which under Barack Obama eased its economic embargo and restored diplomatic relations, have taken a nasty turn. President Donald Trump plans to make it more difficult for Americans to visit the island. Reports of mysterious “sonic attacks” on American diplomats in Havana have further raised tensions.

Hurricane Irma, which struck in early September, killed at least ten people, laid waste to some of Cuba’s most popular beach resorts and briefly knocked out the country’s entire power system. With a budget deficit expected to reach 12% of GDP this year, the government has little money to spend on reconstruction.

These are blows to an economy that was already in terrible shape. Cuba’s favourite economic stratagem—extracting subsidies from left-wing allies—has had its day. Venezuela, which replaced the Soviet Union as its patron, is in even worse shape than Cuba. Their barter trade—Venezuelan oil in exchange for the services of Cuban doctors and other professionals—is shrinking. Trade between the two countries has dropped from $8.5bn in 2012 to $2.2bn last year. Cuba has had to buy more fuel at full price on the international market. Despite a boom in tourism, its revenues from services, including medical ones, have been declining since 2013.

Bound by a socialist straitjacket, Cuba produces little else that other countries or its own people want to buy. Farming, for example, is constrained by the absence of markets for land, machinery and other inputs, by government-set prices, which are often below the market price, and by bad transport. Cuba imports 80% of its food.

Paying for it is becoming harder. In July the economy minister, Ricardo Cabrisas, told the national assembly that the financial squeeze would reduce imports by $1.5bn in 2017. What appears in shops often depends on which of Cuba’s suppliers are willing to wait for payment. GDP shrank by 0.9% in real terms in 2016. Irma and the drop in imports condemn the economy to another bad year in 2017.

The government does not know what to do. One answer is to encourage foreign investment, but the government insists on pulling investors into a goo of bureaucracy. Multiple ministries must sign off on every transaction; officials decide such matters as how many litres of diesel will be needed for delivery trucks; investors cannot freely send profits home. Between March 2014 and November 2016 Cuba attracted $1.3bn of foreign investment, less than a quarter of its target.

Faced with a stalled economy and the threat of shortages, the government is trying harder to woo investors. It has agreed to let food companies, for example, repatriate some of their profits. But anything more daring seems a distant prospect. Cuentapropistaslike Leo are waiting impatiently for a planned law on small- and medium-sized enterprises. That would allow them to incorporate and do other sorts of things that normal companies do. It will not be passed anytime soon, says Omar Everleny, a Cuban economist.

An even bigger step would be a reform of Cuba’s dual-currency system, which makes state-owned firms uncompetitive, keeps salaries in the state sector at miserable levels and distorts prices throughout the economy. Cuban pesos circulate alongside “convertible pesos” (CUC), which are worth about a dollar. Although for individuals (including tourists) the exchange rate between Cuban pesos and CUC is 24 to one, for state-owned enterprises and other public bodies it is one to one. For those entities, which account for the bulk of the economy, the Cuban peso is thus grossly overvalued. This delivers a massive subsidy to importers and punishes exporters.

A devaluation of the Cuban peso for state firms is necessary for the economy to function properly. But it would bankrupt many, throw people out of work and spark inflation. Countries attempting such a devaluation usually look for outside help. But, because of American opposition, Cuba cannot join the IMF or World Bank, among the main sources of aid. Fixing the currency system is a “precondition for further liberalisation”, says Emily Morris, an economist at University College London.

It is unlikely to happen while Cuba is in the throes of choosing a new leader. The process has sharpened struggles between reformers and conservatives within the government. Mr Trump’s belligerence has probably helped the latter. Most Cuba-watchers had identified Miguel Díaz-Canel, the first vice-president and Mr Castro’s probable successor, as a liberal by Cuban standards. But that was before a videotape of him addressing Communist Party members became public in August. In it, Mr Díaz-Canel accused the United States of plotting the “political and economic conquest” of Cuba and lashed out at media critical of the regime. Perhaps he was just pandering to conservatives to improve his chances to succeed Mr Castro. If those are his true opinions, that is bad news for Leo and Gabriel.

State Food Distribution Center:  the rationing system. (2015)

Mobile Self-employed Food Vendor.  (2015)

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SUN, SAND AND SOCIALISM: WHAT THE TOURIST INDUSTRY REVEALS ABOUT CUBA

Stuck in the past: The revolutionary economy is neither efficient nor fun.

The Economist, April 1, 2017

Original Article: STUCK IN THE PAST

TOURISTS whizz along the Malecón, Havana’s grand seaside boulevard, in bright-red open-topped 1950s cars. Their selfie sticks wobble as they try to film themselves. They move fast, for there are no traffic jams. Cars are costly in Cuba ($50,000 for a low-range Chinese import) and most people are poor (a typical state employee makes $25 a month). So hardly anyone can afford wheels, except the tourists who hire them. And there are far fewer tourists than there ought to be.

Hotel at Vinales; apparently constructed with Mafia money as part of their major money-laundering 1950s tourism investment project. (Photo by Arch Ritter, 2015)

Few places are as naturally alluring as Cuba. The island is bathed in sunlight and lapped by warm blue waters. The people are friendly; the rum is light and crisp; the music is a delicious blend of African and Latin rhythms. And the biggest pool of free-spending holidaymakers in the western hemisphere is just a hop away. As Lucky Luciano, an American gangster, observed in 1946, “The water was just as pretty as the Bay of Naples, but it was only 90 miles from the United States.”

There is just one problem today: Cuba is a communist dictatorship in a time warp. For some, that lends it a rebellious allure. They talk of seeing old Havana before its charm is “spoiled” by visible signs of prosperity, such as Nike and Starbucks. But for other tourists, Cuba’s revolutionary economy is a drag. The big hotels, majority-owned by the state and often managed by companies controlled by the army, charge five-star prices for mediocre service. Showers are unreliable. Wi-Fi is atrocious. Lifts and rooms are ill-maintained.

Despite this, the number of visitors from the United States has jumped since Barack Obama restored diplomatic ties in 2015. So many airlines started flying to Havana that supply outstripped demand; this year some have cut back. Overall, arrivals have soared since the 1990s, when Fidel Castro, faced with the loss of subsidies from the Soviet Union, decided to spruce up some beach resorts for foreigners (see chart). But Cuba still earns less than half as many tourist dollars as the Dominican Republic, a similar-sized but less famous tropical neighbour.

But investment in new rooms has been slow. Cuba is cash-strapped, and foreign hotel bosses are reluctant to risk big bucks because they have no idea whether Donald Trump will try to tighten the embargo, lift it or do nothing. On the one hand, he is a protectionist, so few Cubans are optimistic about his intentions. On the other, pre-revolutionary Havana was a playground where American casino moguls hobnobbed with celebrities in raunchy nightclubs. Making Cuba glitzy again might appeal to the former casino mogul in the White House.

The other embargo is the many ways in which the Cuban state shackles entrepreneurs. The owner of a small private hotel complains of an inspector who told him to cut his sign in half because it was too big. He can’t get good furniture and fixtures in Cuba, and is not allowed to import them because imports are a state monopoly. So he makes creative use of rules that allow families who say they are returning from abroad to repatriate their personal effects (he has a lot of expat friends). “We try to fly low under the radar, and make money without making noise,” he sighs.

Cubans with spare cash (typically those who have relatives in Miami or do business with tourists) are rushing to revamp rooms and rent them out. But no one is allowed to own more than two properties, so ambitious hoteliers register extra ones in the names of relatives. This works only if there is trust. “One of my places is in my sister-in-law’s name,” says a speculator. “I’m worried about that one.”

Taxes are confiscatory. Turnover above $2,000 a year is taxed at 50%, with only some expenses deductible. A beer sold at a 100% markup therefore yields no profit. Almost no one can afford to follow the letter of the law. For many entrepreneurs, “the effective tax burden is very much a function of the veracity of their reporting of revenues,” observes Brookings, tactfully.

The currency system is, to use a technical term, bonkers. One American dollar is worth one convertible peso (CUC), which is worth 24 ordinary pesos (CUP). But in transactions involving the government, the two kinds of peso are often valued equally. Government accounts are therefore nonsensical. A few officials with access to ultra-cheap hard currency make a killing. Inefficient state firms appear to be profitable when they are not. Local workers are stiffed. Foreign firms pay an employment agency, in CUC, for the services of Cuban staff. Those workers are then paid in CUP at one to one. That is, the agency and the government take 95% of their wages. Fortunately, tourists tip in cash.

The government says it wants to promote small private businesses. The number of Cubans registered as self-employed has jumped from 144,000 in 2009 to 535,000 in 2016. Legally, all must fit into one of 201 official categories. Doctors and lawyers who offer private services do so illegally, just like hustlers selling black-market lobsters or potatoes. The largest private venture is also illicit (but tolerated): an estimated 40,000 people copy and distribute flash drives containing El Paquete, a weekly collection of films, television shows, software updates and video games pirated from the outside world. Others operate in a grey zone. One entrepreneur says she has a licence as a messenger but wants to deliver vegetables ordered online. “Is that legal?” she asks. “I don’t know.”

Cubans doubt that there will be any big reforms before February 2018, when Raúl Castro, who is 86, is expected to hand over power to Miguel Díaz-Canel, his much younger vice-president. Mr Díaz-Canel is said to favour better internet access and a bit more openness. But the kind of economic reform that Cuba needs would hurt a lot of people, both the powerful and ordinary folk. Suddenly scrapping the artificial exchange rate, for example, would make 60-70% of state-owned firms go bust, destroying 2m jobs, estimates Juan Triana, an economist. Politically, that is almost impossible. Yet without accurate price signals, Cuba cannot allocate resources efficiently. And unless the country reduces the obstacles to private investment in hotels, services and supply chains, it will struggle to provide tourists with the value for money that will keep them coming back. Unlike Cubans, they have a lot of choices.

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HUSTLING, CRADLE TO GRAVE

As Cuba’s economy flat-lines, retirement has become notional, tiny pensions must be supplemented by whatever work is available

 The Economist, Mar 23rd 2017 | HAVANA

NORBERTO MESA, a 66-year-old grandfather, stands in the hot sun 11 hours a day, six days a week, guiding cars in and out of the parking spaces in front of a bustling farm stand. The 4,000 Cuban pesos ($170 at the official exchange rate) he earns each month in tips is more than ten times his monthly old-age pension of 340 pesos. Without it, the retired animal geneticist could not afford fruit and meat, or help his children, who work for low salaries, to feed his four grandchildren.

Though revolutionary Cuba had one of the region’s earliest and most comprehensive pension systems, in recent years retirement has almost vanished. Without further economic reform, and the cheap oil that used to come from Venezuela, the economy has stalled. Pensions have been frozen, and their value eaten up by inflation. According to the most recent government statistics, from 2010, a third of men past retirement age are working. Three-fifths of older people say they often have to go without necessities.

The insular socialist paradise supposedly offers a social safety-net, cradle to grave. But it is full of holes. Medical care is free, but most medicine is not. Retirement homes are scarce, and rules that mean residents must give up their pensions and homes put off many, since these are often a lifeline for younger relatives in equally distressed circumstances.

So old people can be seen on the streets of Havana selling newspapers and peanuts, or recycling cans. They are scrubbing floors in affluent homes or cooking for a growing number of private restaurants and bakeries. Ernesto Alpízar, an 89-year-old former agronomist, goes door-to-door selling strawberries and flowers. Even so, he remains an ardent “Fidelista”, grateful to the island’s late dictator for the free cataract surgery that saved his eyesight.

For even as the island’s old and infirm must hustle to survive, they have benefited from its success at providing health care. Life expectancy at birth is 79, not far short of most developed countries, and widely available birth control helps explain why family size has fallen further and faster than in most other countries (see chart). The flip side, though, has been a breakneck demographic transition—exacerbated by the large share of young and middle-aged Cubans who have fled to America. Over-65s now make up 14% of the population. The national statistical office estimates that the total number of pensioners will overtake the number of state-sector workers by 2025.

A few churches and charities, mostly funded from abroad, are trying to fill the gap. Rodolfo Juárez, a pastor of the International Community Church, a Protestant congregation, helps 60 indigent elderly people in Havana. His scheme provides fruit, vegetables and beans to supplement government rations of a daily piece of bread; and 7lb of rice, 2lb of sugar, five eggs and a piece of chicken a month. Although running it costs just 18,000 pesos a month, funding is a constant problem.

Mr Juárez and his wife, at 80 and 75, are older than many of those they help. Between their church duties and his teaching at a seminary, they make 3,600 pesos a month. Though that does not go far, it dwarfs Mr Juarez’s pension. As long as Cuba’s economy flat-lines, its elderly will have no rest till they drop.

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The Economist: “FIDEL’S LAST STAND”

The Economist, April 29, 2016

Original Article: Fidel’s Last Stand

WHEN Fidel Castro made a brief appearance at the Cuban Communist Party’s seventh congress on April 19th he was greeted with prolonged applause. “Well, let’s move to another subject,” he eventually said, his stentorian voice distorted by age. It was a joke. But he might as well have been turning the page on the historic visit to Havana by Barack Obama in March and the expectations it generated among Cubans of speedy changes. Having reminded his audience that he would soon turn 90 and that death comes to all, Fidel went on: “The ideas of Cuban communists will endure.”

No serious student of Cuba imagined that Mr Obama’s visit and his televised call for free elections would prompt overnight change. But the party congress proved to be a disappointment even by the cautious standards of the reforms that Raúl Castro, Fidel’s slightly younger brother, has set in train since he took over as president in 2008.

The stasis was symbolised by the retention as second party secretary (behind only Raúl) of José Ramón Machado Ventura, an 85-year-old Stalinist ideological enforcer. Even officials had hinted that his powerful post might be passed to Miguel Díaz-Canel (56), the vice-president and Raúl’s putative successor as president in 2018. Five new, youngish members joined the politburo, but none is known to be a reformer. Earlier hopes in Havana that the congress might approve an electoral reform and a bigger role for the rubber-stamp parliament were dashed.

Raúl Castro devoted part of his opening report to the congress to answering Mr Obama. Complaining of a “perverse strategy of political-ideological subversion”—a reference to Mr Obama’s call for the empowerment of Cuba’s small businesses and incipient civil society—Raúl told the delegates that “we must reinforce anti-capitalist and anti-imperialist culture among ourselves.” As for free elections, he twice insisted: “If they manage some day to fragment us, it would be the beginning of the end…of the revolution, socialism and national independence.”

He insisted that the “updating” of Cuba’s economy, to give a bigger role to the non-state sector and remove distortions and subsidies, would continue “without haste but without pause”. In fact, the reforms have all but halted: of the 313 “guidelines” approved at the previous congress in 2011, only 21% have been fully implemented. The government recently reintroduced price caps on some foodstuffs.

Days before the congress Omar Everleny Pérez, the most prominent of the reformist economists advising Raúl, was sacked from his post at the University of Havana. His alleged fault had been to share information with American academics. Mr Pérez has often called for the reforms to go faster.

One hypothesis is that Raúl can afford to move more slowly because of the injection of dollars from Mr Obama’s loosening of restrictions on tourism, remittances and investment. That may be true in the short term. But Raúl himself offered a withering critique of Cuba’s underlying problems, criticising “out-of-date mentalities”, “a complete lack of a sense of urgency” in implementing change and the “damaging effects of egalitarianism” in failing to reward work or initiative. He lamented the economy’s inability to raise wages, which “are still unable to satisfy the basic needs of Cuban families”.

So what explains Raúl’s caution? He said that he had joked with American officials that “If we were to have two parties in Cuba, Fidel would head one and I the other.” Joking apart, that rings true. Many of the Communist Party’s 670,000 members are terrified of change, fearing the loss of security, perks and privileges. They see Mr Obama’s opening to Cuba as an existential threat. Fidel is their reference point. He acts as a brake on reform.

What Raúl, in his neat and tidy way, is doing is to institutionalise the Cuban system, which long depended on Fidel’s whims. He has set out a gradual process of transition to a post-Castro leadership. He is no liberal democrat: he praises the balance between state planning and the market in China and Vietnam. He has initiated both a “conceptualisation” of Cuba’s socioeconomic model and a revision of the constitution to incorporate his reforms. These will be the Castro brothers’ political testament.

But Raúl, unlike Fidel, is a realist. He knows that the system does not work and that the steps he has taken, especially the opening to the United States, have unleashed expectations of change and a better standard of living. Cuban society is evolving fast, even as the political leadership remains as stodgy as a government-supplied lunch. In the medium term, something will have to give.

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CUBAN BASEBALL CRISIS: THE DOWNSIDE OF WARMING RELATIONS WITH AMERICA

The Economist, December 18, 2015

Original Essay: Cuban Baseball Crisis

zzzzThe Havana Sugar Kings of the old International League, circa 1956

LOOK for the Che Guevara mural on a pitch-black street corner in Lawton, a run-down district on the outskirts of Havana. Turn left, walk up the concrete steps and give the password (today it’s “I sell green dwarfs”). Inside, around 20 Cuban men sit silently. Despite the humidity, the ceiling fan is still, allowing puffs of sweet tobacco smoke to hover in the flickering fluorescent light. The newcomers are asked for a “solidarity contribution” of 25 Cuban pesos, or $1. After the customary first drops are spilled to sate the thirst of the saints, a $3 bottle of clear rum makes its way around.

It could easily be a clandestine political gathering. But this group has far more important business: the first game in the Major League Baseball (MLB) semi-final series between the Kansas City Royals and Toronto Blue Jays. For half a century after Cuba’s revolution in 1959, the island’s sports fans knew little of professional leagues beyond their shores. But today, thanks to the internet’s belated arrival and a wave of Cuban players defecting and starring in MLB, in-depth knowledge of American baseball is a badge of honour for baseball-loving Cubans—that is, nearly all the men and plenty of the women, too. “You didn’t know Kansas City won? You’re an embarrassment,” one attendee teased a friend during the ride to Lawton in an exhaust-spewing 1950s taxi, whose shock absorbers were no match for the area’s cavernous potholes.

The easiest way for Cubans to follow MLB in real time is at hotel bars in Vedado, a central Havana district packed with middle-aged American tourists taking advantage of the recent relaxation of travel restrictions. But few Cubans can afford a beer priced in dollars. And if a woman happens to be running a shift at the bar, locals say, there’s always a risk she will put a soap opera on the TV instead. So baseball fans gather in speakeasies like this decrepit flat, whose owner has managed to acquire an illegal satellite broadcast signal and hook it up to his 1980s Japanese television.

The group try to keep quiet, lest the neighbours snitch to the local Committee for the Defence of the Revolution (a network of government informants in every town). But they are rooting for the Royals because of the team’s first baseman, Kendrys Morales, who fled Cuba on a raft in 2004 after serving several stints in jail for his seven previous failed escape attempts. Every time he comes up to bat they allow themselves a muffled cheer. A round of high-fives follows Kansas City’s 5-0 victory.

The next day a big game is scheduled in the domestic baseball league, at Havana’s rickety 55,000-seat Latin American Stadium. It pits the hometown Industriales, Cuba’s answer to the New York Yankees, against a visiting club from nearby Matanzas. A few years ago the stands would have been packed. But today the outfield bleachers are empty, and only the rows of seats closest to the action appear even half-full. Bored-looking police drag on cigarettes. A group of hometown fans tries to rouse the crowd by blaring on hand-held air horns, but it is well short of critical mass.

One reason for the apathetic mood is that the government has banned alcohol sales in stadiums to stop fights. A bigger problem is the poor quality of the play. Last year 11 Industriales players left for the United States; Matanzas lost ten. Only the weaker players remain, and they are demoralised: runners seem content to jog around the basepaths, and fielders let the ball skip past them on difficult plays. In recognition of the depleted rosters, the Cuban league now disbands half of its teams at mid-season and shares their players among the eight clubs that are doing best.

Today’s game is painfully lopsided, as the Matanzas hitters pound the Industriales starting pitcher for seven runs. The biggest attraction is Rey Ordóñez, who defected in 1993, played in MLB for nine years and is catching a game on a visit home. Fans pose with him for pictures. “It’s very hard for the team,” says Lourdes Gourriel junior, the 21-year-old shortstop for the Industriales, following his team’s defeat. “It’s weird seeing someone on TV [in MLB], and just yesterday they were here with you. But that’s everyone’s individual decision. We’re still friends with those who left.”

South American football fans are accustomed to their countries’ brightest sporting stars decamping to richer European leagues. But for Cuban baseball fans the exodus is new. Less than a year after the United States and the government of Raúl Castro, Fidel’s younger brother and successor, announced they would re-establish diplomatic relations, this brawn drain is the most visible consequence of rapprochement with the yanquis, and an indication of what might be lost as the Cuban economy liberalises.

BOTTOM OF THE NINETEENTH CENTURY

Although baseball originated in the United States, the sport arrived in Cuba during its infancy in the 1860s. Within a decade of the first recorded match on the island, Cuba had established the first professional league outside America and put its adopted national game at the service of political aims: the league’s organisers funnelled its profits to guerrilla groups fighting for independence from Spain, and the movement’s spies posed as baseball players when shuttling messages and funds to and from supporters in the United States. “Baseball is more Cuba’s national pastime than it is America’s,” says Roberto González Echevarría, the author of a history of Cuban baseball. “It was considered modern, democratic and American, while the Spaniards had bullfighting, which was retrograde and barbaric. It’s as if the American Founding Fathers had been wielding Louisville Sluggers [an iconic brand of bat].”

After Cuba gained its independence in 1902 baseball became one of its principal means of exercising soft power. It was Cuban athletes, not American soldiers, who spread the sport across the Spanish-speaking Caribbean, helping to form a shared cultural identity with the Dominican Republic, Puerto Rico, Venezuela and eastern Mexico, and earning the Cuban players the nickname the “apostles of baseball”. And it was baseball players who became the best-known Cubans in the United States. Of all the MLB players born in Latin America who started playing before 1959, two-thirds were Cuban, even though most of the island’s stars were black and banned from MLB until the league’s colour barrier was broken in 1947. (In 1912, in response to inquiries about the lineage of two olive-skinned Cuban players, the Cincinnati Reds conducted an “investigation” which declared them “two of the purest bars of Castilian soap [that] ever floated to these shores”.) During the same period Cuba was putting black and white talent on the same fields in its racially integrated winter league, establishing the country as an exemplar of moral leadership in sports.

After Fidel Castro (pictured, swinging) took power and became the island’s baseball-fan-in-chief, the sport’s tacit political role became explicit. He proclaimed athletes to be “standard-bearers of the revolution playing for the love of the people, not money”. He banned professional sports and founded the National Series, a wildly popular amateur league in which each province fielded a team of players from its territory. He also established a formidable player-development system, with scouts identifying talented children and academies to train them once they became teenagers.

American fans, who then, as now, paid attention only to MLB, were unaware of the stars Cuba was producing, since they never played for a team in the United States. But Cuba’s athletic assembly line yielded a national team that dominated the weak competition in international events like the Olympics (in which MLB players do not participate): from 1987 to 1997, the squad won 156 straight games. The elder Mr Castro made such successes central to his propaganda strategy. “The only way Cuba could raise its head in the world was in sports,” says Ismael Sené, who ran the sports department of the Communist Youth in the early 1960s. “There was a campaign against us from the outside, saying that we were all needy, that we didn’t have food. Well, look at our athletes!” The fact that baseball, America’s “national pastime”, was Cuba’s strong suit made each victory extra sweet.

Fidel Castro might be proud of Cuba’s ability to export baseball players, were they not going to America

But setting so much store by its baseball players left the government vulnerable to shifting geopolitics. In 1991 René Arocha, a pitcher in the national team, walked out of his hotel room during a tournament in Miami, made his way to his aunt’s house, and never returned, making him the first team member to defect in history. He had not been planning on playing baseball afterwards, because he had assumed that MLB players were far superior to Cuban ones. But after connecting with a Cuban-born agent, he was given an MLB contract with a six-figure salary, and the next year became the St Louis Cardinals’ second-best pitcher.

After Mr Arocha had proved that Cuban players were of MLB quality, and the fall of the Soviet Union plunged Cuba into a “special period” of unprecedented poverty, more defectors began to leak out. Two half-brothers, Liván and Orlando Hernández, left the island separately in the 1990s, one at a tournament, the other on a rickety boat. Both played starring roles for World Series champions in their first years in MLB, providing Miami’s Castro-hating exiles with a remarkable narrative about the risks Cubans will take for a taste of freedom and the chance to play America’s game. To reduce the risk of further defections, the Cuban team put its players under tight surveillance whenever they travelled abroad, making their national treasures feel like prisoners and encouraging more defections.

SQUEEZE PLAY

The government responded to early defections with stoicism. “When one leaves, another ten better players emerge,” Fidel Castro once said. But in the past few years, the trickle of defections has become a torrent. As recently as 2007 there were just ten Cubans in MLB. Today there are 27. And whereas some of the early defectors had undistinguished careers, the current crop is aking an impact that, were it to occur anywhere but in the reviled United States, Fidel Castro would probably regard as his greatest accomplishment. Yoenis Céspedes, a burly outfielder with a pronounced uppercut swing, single-handedly powered the New York Mets to the World Series this year. His deadly accurate throws to home plate from distances of 300 feet (91 metres) or more have earned him the nickname the Cuban Missile. José Fernández, who fished his mother out of the ocean after a wave swept her overboard during their escape to Mexico when he was 15, is the toast of Miami’s Little Havana for his unhittable array of blazing fastballs and knee-bending curves. Aroldis Chapman holds the record for the fastest pitch in MLB history at 105 miles (169km) per hour. At the “Esquina Caliente” (Hot Corner), a bench in a downtown Havana park where die-hard fans have gathered daily for decades to talk baseball, the regulars today come prepared with the latest statistics on how Cuban players—and even the American-born children of Cuban exiles—are performing in MLB. They use websites like CubanPlay, a new, locally run site, by connecting their phones to public hotspots accessible with $2-an-hour Wi-Fi cards.

Major-league success has been accompanied by major-league riches: the 27 Cuban MLB players earn an aggregate annual salary of $100m. As the rewards have grown, a sophisticated infrastructure to smuggle more players has built up. Almost all recent defectors have escaped with the help of sinister human-trafficking syndicates. These hire boats to bring players to nearby countries, bribe the Cuban coastguard to let them depart, and Dominican or Mexican authorities to grant residency papers, pay tribute to organised-crime groups for the right to operate on their turf, and hold players hostage until they sign an MLB contract and provide a return on the gangsters’ investment, perhaps from their signing bonus. Yasiel Puig, a star right fielder, was held at a motel in Mexico’s Yucatán peninsula for months while his captors, associated with the fearsome Zetas mafia, argued over payment. Leonys Martín, an outfielder, was held at gunpoint in Mexico and forced to sign a contract in which he promised to pay 30% of his earnings to a front company; his smugglers are now in a Florida jail.

Since Raúl Castro became Cuba’s president in 2006, he has cautiously tried to relax state controls. But the defections have forced the pace when it comes to baseball. In 2013 Cuba said it would allow athletes to play professionally in foreign leagues—if they paid a 20% tax and returned for international tournaments and the winter National Series. A handful have gone to the Japanese league in the summer and earned seven-figure salaries.

Both MLB and the Cuban government now say they want a “normalised” system, in which Cuban athletes can travel to America legally and safely, play for MLB teams on a work visa and return home in the off-season. Antonio Castro, one of Fidel’s nine acknowledged children, an international baseball official and the national team’s doctor, has publicly called for such a change.

In an echo of the 1970s “ping-pong diplomacy” in which table tennis helped restore relations between the United States and China, MLB is encouraging a thaw between Havana and Washington. It has applied for an American government licence to do business in Cuba, is sending former players on a pre-Christmas goodwill tour of the island and is trying to organise an exhibition game in Havana featuring one of its teams next March. Meanwhile, Cuban baseball stars are giving Americans a new perspective on a country many perceive as nothing more than a totalitarian dystopia.

Yet the defections continue, for two reasons. The first is that the Cuban baseball authorities’ proclamations that players are now “free to go” ring hollow. It is the government, not athletes, that determines who can leave and for how long, to which country and team, and how much they will be paid. It generally selects older stars who have shown loyalty to the regime.

The second is the continuing influence of ageing “cold warriors” in the United States. Although Barack Obama has streamlined much of the bureaucracy required to authorise contracts with Cuban players, they must still establish residency outside Cuba and sign an affidavit saying that they “do not intend to, nor would [they] be welcome to, return to Cuba”. And America’s trade embargo, which can only be lifted by Congress, bans transactions with the Cuban government. That precludes any arrangement in which athletes would pay a modest tax on their foreign earnings in recognition of the state’s investment in training them, just as the United States taxes its citizens on their worldwide income. Cuba’s requirement that its players working abroad also participate in the National Series and be available to the national team represents another stumbling block, since MLB clubs would never allow their stars to skip out for an international tournament during the season, or risk injury during a long winter campaign in Cuba.

 

Yet for all the Cuban government’s rhetoric about America’s athletic imperialism, it may have an unlikely ally in MLB on the issues that concern it most. Despite MLB’s reputation as a fiercely capitalist industry worth $9 billion a year, the game’s economic model has much in common with Cuban-style socialist principles. To maintain fans’ interest, MLB needs a competitive balance between its rich and poor clubs. It accomplishes this by levying a tax on teams with high payrolls, and via an annual draft that routes the best young players to losing franchises. Cuban players aged over 23 with at least five years in the National Series are exempt from these rules. That enables them to auction their services to the highest bidder, undermining MLB’s carefully calibrated system of economic redistribution and reducing club owners’ profits. As a result, MLB is likely to advocate a tightly controlled system of acquiring Cuban players, rather than a free-for-all.

Moreover, MLB clubs and agents are already warning that after so many defections, the Cuban baseball pipeline is running dry and will need to be replenished. At the Premier 12, an international tournament held last month in Taiwan and Japan, Cuba finished an embarrassing sixth. The unique baseball culture Cuba has developed over 50 years of isolation has proved to be a formidable manufacturer of outstanding players. The Dominican Republic and Venezuela serve as providers of raw athletic material for MLB. Ordinary Cubans, by contrast, have grown accustomed to a remarkable closeness to world-class athletes, who play only for their home provinces and for almost no pay. “I’m just another fan,” says Reinier Reynoso, a 27-year-old pitcher for Industriales who is hanging out with the faithful outside the ballpark before a game. Fans and players “party together”, he says.

Since MLB has a keen interest in producing a new generation of Cuban superstars, it is reluctant to meddle with this potent combination of popular encouragement and state support. “We have no interest in going to Cuba and taking all of their players,” says Dan Halem, MLB’s chief legal officer. “We want Cuban baseball to thrive. We’re perfectly happy for Cuba to develop their own stars and keep them for a period of time. If they lose all their stars, fans will lose interest. There aren’t enough countries where baseball is played for this to just be a feeder for Major League Baseball.”

zzzzzzA recent friendly game

zzzzzWorld champions many times over

CASTRO AT BAT 1977

A Cuban baseball star

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CUBA’S ECONOMY: DAY ZERO OR D-DAY?

The tricky task of unifying a crazy system of exchange rates

The Economist, May 16th 2015

Original here: UNIFYING THE EXCHANGE RATES SYSTEM

CUBA has two currencies and a mind-boggling number of exchange rates. So when President Raúl Castro set out four years ago to unify the currency system by 2016, it was not surprising that he gave few details on how he would achieve it. A year in advance, it is still not clear. Nor is there a fixed date. Cubans call the unknown day of reckoning Día Cero (“day zero”).

The main difficulty is not unifying the two currencies per se. They are the Cuban peso, which most people use, and the convertible peso (CUC), worth about $1, which is a dollar substitute used by individuals in tourism, for remittances and in the private sector. It would be relatively easy for the average Cuban to scrap the CUC and conduct all transactions in pesos. Already many goods can be bought with either currency. The exchange rate for the peso is 24 per CUC, a level that has changed little since the CUC was created in 1994.

But for the economy at large what looks like a relatively simple book-keeping exercise could have devastating consequences, because there is a parallel exchange rate, mostly hidden from the public, that is used in accounting by state-owned firms and foreign joint ventures. It is one peso per CUC (or dollar). The massively overvalued rate has been in place since the 1980s, when Cuba was subsidised by the Soviet Union. It creates huge distortions in the economy, allowing importers to buy a dollar’s-worth of goods for one peso, a wheeze that drains precious foreign exchange from the country. Cutting the overvalued rate to the cheaper one would be the equivalent of a 96% devaluation. This could bankrupt many state-owned firms, whose costs have been accounted for at the overvalued rate.

Augusto de la Torre, the World Bank’s chief economist for Latin America, says he doesn’t know of any country that has started unification with such diverse exchange rates, and that it could be “suicidal” to join them in one big bang at 24:1. Vilma Hidalgo, vice-rector of the University of Havana, urges caution. She says many segments of the economy, such as exporters and firms that struggle to compete against subsidised imports, would benefit from devaluation, but others could be devastated.

So Cuba is, typically, treading carefully. The government has started with hotels and the sugar and biotech industries. Though their new exchange rates are far from uniform, the most common is 10:1, which some think may be the target rate for unification. But even if the whole economy were to merge at that rate, it would still represent a 90% devaluation for most.

Typically, a country embarking on such an upheaval would get financial help from the IMF and World Bank. Because of its history of enmity with the United States, Cuba does not have that option. Ms Hidalgo hopes that rapprochement will spur enough trade and financial flows to support the new exchange rate. In the meantime, gradualism will remain the guiding principle, which means the distortions will persist. Expect many day zeroes.

Che Guevara: One of the Architects of Cuba’s Monetary Pathology, immortalized (?) on the three CUP and three CUC bills

CU107Three Peso in Moneda Nacional (CUP),  worth about $US 0.12 in mid-2015. 

Cuban3PesosThree “Convertible Pesos”  (CUCs), now ostensibly worth $US 1.00.

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CUBA’S ECONOMY: PICTURESQUE, BUT DOING POORLY

Despite the thaw with the United States, politics is paralysing the economy.

The Economist, May 16th 2015 | HAVANA

Original here: ECONOMIC REFORMS AND POLITICS

 BY DAY grey-haired Americans trundle through the streets of Havana in pink 1957 Chevy convertibles, klaxons blaring. By night they recline over rum and cigars, tipping generously, listening to hotel salsa and reminiscing about the cold war. Many of the new American visitors to Cuba, whose numbers have surged since a diplomatic detente in December, are old enough to remember life before the internet and relish a few days in one of the world’s last Facebook-unfriendly bastions. What tourists find quaint seems stifling to many Cubans themselves.

For a lucky minority life has improved since “D17” (December 17th), the day Barack Obama and his Cuban counterpart, Raúl Castro, announced that they would seek to end five decades of hostility. Mr Obama’s decision to relax some restrictions on American visitors is expected to push tourism to Cuba up by 17% this year, bolstering foreign exchange by around $500m, or 1% of GDP, estimates Emily Morris, an economist at the Inter-American Development Bank. Visitors spend CUCs (Cuba’s dollar-equivalent hard currency) at a few swanky private restaurants where the quality (and prices) have reached fashionable Florida standards. Cubans are borrowing whatever they can to spruce up accommodation in a city where hotels are now booked up weeks in advance. According to Omar Everleny, a Cuban economist, 18,000 private rooms have become available. That is the equivalent of 31 new hotels the size of the 25-storey Habana Libre.

This activity is expected to boost economic growth from last year’s meagre 1.3%. But there is little sign as yet of the $2.5 billion a year in investment that the government hoped to woo with a new foreign-investment law last year, mostly because it sends mixed signals. It has authorised at most two manufacturing projects at its Mariel port and special economic zone, despite hundreds of applications. It continues to view private business with distaste, and believes socialist state enterprise will remain the core of the Cuban economy. As one economist puts it, “the government wants to create prosperity, but it doesn’t want to create prosperous citizens.”

As a result, it risks creating neither. Some of the 500,000-odd people self-employed in private enterprise—about 10% of the labour force—benefit from earning hard currency, and represent a nascent middle class. Unlike the rest of the labour force, their productivity is improving.

But the majority who work in the state sector earn Cuban pesos, live on ration books and can barely make ends meet unless they receive remittances from abroad or do informal jobs illegally. This produces stark inequality, which is exacerbated by shortages, especially of food. Some of the new restaurateurs admit that they face wrath in Cuban supermarkets when they pull out wads of notes to stock up on scarce beer, milk and cheese, leaving shelves empty and pushing prices higher. They insist it is not their fault; the government has failed to open up well-supplied wholesale markets or allow them to import goods. But that argument counts for little with a hungry public.

What’s more, it exacerbates a vicious circle in which disgruntled government employees slow down at work, further sapping output and causing more shortages. In a bid to counter inequality, the government has raised salaries of favoured state workers such as doctors. It has authorised public entities such as the sugar monopoly to raise pay if productivity improves (this year, sugar production is up 22%). But partly as a result of higher wages, the budget deficit is expected at least to double to above 6% of GDP this year.

All this creates a headache for Mr Castro. He has less than a year before a Communist Party congress next April. There he will have to defend reforms launched at the previous congress in 2011, including a planned unification of Cuba’s two currencies (see article), despite their disappointing results so far. Mr Castro must also worry that a Republican will succeed Mr Obama, who will leave office in early 2017. To forestall a renewed tightening of the American embargo, he will want to show that Cuba is making economic progress.

Next April’s congress could also mark the start of a generational change in Cuba’s leadership. Mr Castro, who took over from his brother, Fidel, in 2008, is expected to step down as president in 2018. He has said that he is keen to promote younger leaders, replacing the “historic generation” of octogenarians who fought under Fidel in the 1959 revolution.

He is grooming Miguel Diáz-Canel, the 55-year-old first vice-president, to replace him. There is a possibility that Mr Castro could step down as head of the party next year. Economists working for the government say some of Mr Diáz-Canel’s peers are receptive to reformist ideas. They are often seen carrying PCs or tablets, suggesting an interest in bringing more internet to Cuba. But they are also reluctant to defend reform publicly, so it is hard to know what they stand for.

Many in the establishment are terrified that change will jeopardise what they see as the main gains of the revolution, such as free education, health care and welfare. “The economy has to become more efficient, but you can’t ignore our principles or you’ll get a tsunami of capitalism washing over the whole island,” says Luis René Fernández of the University of Havana.

Mr Castro may be preparing to take on Communist Party conservatives. The party’s central committee said in February that it would discuss a new electoral law at next year’s congress. It gave no details; no one expects anything like political freedom. The aim may be to pressure mid-level bureaucrats to stop paralysing reform. “Change starts from the top and those at the bottom want it, but it gets stuck in the middle,” says Rafael Hernández, editor of Temas, a social-sciences journal.

Mr Hernández believes that a priority for the government will be a stronger National Assembly that can approve laws to underpin economic liberalisation, such as the right to own a business (currently, private firms, however prosperous, are considered “self-employment”). He also argues that professionals such as lawyers, teachers and doctors should be able to moonlight from their state jobs in private consultancies, consolidating a “socialist middle class” that pushes for further reform. However, he frets that hardship has made ordinary Cubans apathetic about greater political representation. For them “the glass is always half empty.”

Among intellectuals, though, resistance is growing. Dagoberto Valdés, editor of Convivencia, a Catholic journal, says the American thaw has robbed the regime of its ability to cast its neighbour as an “external enemy”, so its own shortcomings have moved into the spotlight.

El Capitolio, a marble landmark in central Havana, modelled on (and with a bigger dome than) America’s Capitol, points to a brighter future. It is being refurbished and is supposed to become the seat of the National Assembly for the first time since 1959. Alberto Pagés, a wiry old man who for 30 years has been operating a homemade box camera for small change on the building’s steps, thinks it will attract more tourists and could become “a symbol of how Cuba and the United States can look more like each other”. But ask him whether it could also become a harbinger of democracy and he clams up. “I know absolutely nothing about politics,” he mutters.

Cuba Mar 2014 002

The Capitolio, Under Repairs.

After 56 years. the prospective home of the National Assembly once again,

Cuba April 2015 212

A rationed food outlet on Calle Jovellar

Cuba April 2015 110.jpg qqqqThe Art and Crafts Retailing Center in a Converted Warehouse, a showcase of Cuban ingenuity and creativity.

 

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