Tag Archives: Economic Reform

MUCH UNFINISHED WORK REMAINS AS CUBA REFORMS ITS ECONOMY

December 14, 2014 – Miami Herald – MIMI WHITEFIELD

Original here: UNFINISHED WORK

Unifying Cuba’s cumbersome dual-currency system tops the list of reforms the government says it will carry out, but analysts say other changes — from measures to speed up foreign investment to a new tax structure — are critical to deepen and expand the reforms.

Cubans use one type of money, the Cuban peso, for everyday purchases and most salaries. But tourists generally use another currency, the convertible peso, which is also needed to purchase coveted consumer items.

To add to the confusion, there’s also one exchange rate for state enterprises and another for Cuba’s fledgling private businesses. The official exchange rate is 25 Cuban pesos (CUPs) for one Cuban convertible peso (CUC), but for state enterprises the CUP is on par with the CUC. One CUC equals $1 U.S.

The government first said it planned to eliminate the unwieldy two-tiered system in 2013 and work toward a single currency, the Cuban peso, but currency unification remains the most important piece of unfinished business as Cuba seeks to overhaul its ailing economy.

“This is probably the most difficult reform of all. It’s extremely complex but it’s also a key reform, especially at a time when Cuba is trying to attract foreign investment,” said Carmelo Mesa-Lago, an economist who has written extensively on Cuba.

Not only is the CUC over-valued but it creates distortions across the Cuban economy. The 1-1 exchange rate, for example, makes it difficult to determine the true productivity of state enterprises. Most wholesale and retail prices in Cuba are out of whack and the over-valued CUC tends to make Cuban exports less competitive.

“It holds them back and deforms everyone’s economic behavior,” said Arch Ritter, an economist and professor at Carleton University in Ottawa.

The dual-currency system also has created severe wage disparities in Cuba. Those who work for foreign companies and receive tips paid in CUCs are far better off than those who work for the state and receive their salaries in CUPs.

Cuban Economy Minister Marino Murillo said last month that eliminating the dual-currency system is the most important task now before the government and that certain transitional steps are underway.

There had been speculation that currency unification would come as a big bang, but now it appears the government is taking the gradual approach.

Stores that once only accepted CUCs have begun to accept both currencies, and prices are now being posted in both currencies at selected stores. The practice is gradually being rolled out across the island.

The government also has been running small-scale experiments with different exchange rates — 10 CUPs for 1 CUC, for example — in some state industries, said Mesa-Lago.

Analysts said a realistic and unified exchange rate will make the Cuban economy more competitive, but the process isn’t without risks, and there may be winners and losers during the transition.

“They need to be very careful; there could be unrest,” said Richard Feinberg, a professor of international political economy at the University of California, San Diego and a senior fellow at the Brookings Institution.

But government officials have tried to calm the population by saying the currency unification will be done in way that won’t be detrimental to those who have maintained their savings in Cuban banks in either CUCs or pesos.

“I don’t know how they will do this,” Mesa-Lago said. “There is also the possibility that it will generate inflation. But if they do it right, in the long-run it will be beneficial.”

Feinberg and a group of scholars and economists from the United States, Cuba and other Latin American countries met over the course of a year to examine how to shape Cuban economic policy in a way that encourages sustainable growth.

“We wanted to look at a country transitioning from a central economy to a somewhat more market-oriented economy” and study it from the point of view of economies that have already gone through the process, Feinberg said.

“We’re not saying you can take lessons learned and copy them like a stencil but there is no point in repeating mistakes,” he said.

The collaboration resulted in a Brookings report, Cuba’s Economic Change in Comparative Perspective, that concludes now is the time for Cuba to accelerate its reforms and prioritize price reforms, expansion of the private sector, foreign investment and gradual engagement with international financial institutions.

Phil Peters, president of the Cuba Research Center in Alexandria, Va., agrees that the government needs to come up with a way to allow lawyers, engineers, architects, consultants and other professionals to engage in self-employment.

Some are getting around the prohibition. An architect, for example, may take out a license as a self-employed construction worker, Peters said.

“But if they don’t find a way to allow skilled professionals to work, they are leaving a lot of money on the table,” he said.

There are other missing pieces — both big and small — in Cuba’s economic reform process. If they’re implemented, Cuba analysts say they would make the island’s fledgling entrepreneurs more successful and could help revive economic growth.

When Cuba’s National Assembly convenes Friday, it’s expected to review the reforms to date, and discuss the 2015 budget and the island’s new foreign investment law.

Not so much a missing piece as a question mark is Cuba’s ability to attract foreign investment, which officials have said is essential to the island’s development plans.

This fall, Foreign Trade Minister Rodrigo Malmierca Diaz announced 246 projects adding up to an investment of $8.7 billion that are open to foreign investment. The government hopes to attract $2 billion to $2.5 billion annually from foreign investors.

Among the projects on the wish list are 86 in the oil industry, 56 tourism projects — including golf-condo projects and 21 new hotels, a plant to produce bottles and another to produce aluminum cans, shrimp and peanut farming projects and wind farm projects where 100 percent foreign ownership will be allowed.

Health, education, the media and the military remain closed to foreign investment.

The Cubans hope that their foreign investment list in combination with the new foreign investment law plus a special economic zone tied to expansion at the Port of Mariel will entice the investors who are needed to jump-start development.

Malmierca has said the Cuban economy must grow at the lofty level of 7 percent annually for the type of development the country needs and that foreign investment will play an important roll in that equation.

The foreign investment law exempts investors from paying a tax on profits for eight years and cuts the tax from 30 to 15 percent.

But foreign firms will not be free to hire and pay workers directly.

“A lot of potential foreign investors question whether there will be sufficient freedom, profitability and security for their investments,” Feinberg said.

Malmierca himself also pinpointed another issue that makes foreigners wary. “Many people complain about the time in which we do things, but everyone’s got their own pace. We’re going to do this our way and we want to do it well,” he said.

In the past, approvals for joint ventures have often come at a glacial pace and the process has been excessively bureaucratic.

The 180-square-mile Mariel Special Development Zone, about 30 miles west of Havana, is supposed to be a focal point for foreign investment and offers the possibility of 100 percent ownership for foreign ventures that set up there.

Cuban leader Raúl Castro and Brazilian President Dilma Rousseff jointly opened the first phase of the nearly $1 billion Port of Mariel renovation in January. It is largely financed by Brazil and Cuba purchased more than $800 million in goods and services from Brazilian suppliers during construction.

The container port, which is eventually supposed to take Havana’s place as Cuba’s main commercial port, is operating and a ship from South Florida, a Crowley vessel loaded with frozen chicken, was the first to call. A rail link to the port also has been completed.

But those who have toured the special development zone recently say it is far from finished and companies are yet to move in. Build-out for specific projects is expected to take place some time next year.

Tim Cole, the British ambassador to Cuba, was among the recent visitors. “What’s immediately striking as you drive in is the ambitious nature of the project. The area set aside for the zone is huge… with plans that include logistics facilities for offshore oil exploration and general cargo and bulk foods facilities,” he wrote in his blog.

“There are, apparently, more than 100 companies who have expressed an interest with the first projects likely to be approved by the end of the year,” Cole wrote. “Deadlines are tight as those companies coming to Mariel will need efficient services — for example, water, sewerage, electricity and high-speed Internet — to be able to operate.’’

As the work proceeds in Mariel, enforcement of the slew of new regulations and tax evasion by budding entrepreneurs remain problems for the government.

Granma, the Communist Party daily, recently reported that the government plans to tackle a number of enforcement issues in 2015. Among them: the under-reporting of income by self-employed workers and misrepresentation of how many workers they employ in their businesses.

Changes allowing Cubans to take full advantage of the new real estate market are also needed. Before Cubans could legally buy and sell homes, a permuta or swap was the way people moved from house to house — often with an under-the-table cash payment to sweeten the deal. Some of that sleight-of-hand has translated to the new market with off-the-books foreign owners putting up money for purchases, buyers and sellers declaring a lower-than-actual purchase price to lessen taxes and sales masquerading as donations.

To curb such practices and help calculate taxes, Granma reported that Cuba will begin using a market-based assessment tool that considers a number of factors, including the number of rooms, location and amenities, such as a garden or patio.

Granma also said the government planned to crack down on illegal economic activity in the coming year and concentrate on increasing the productivity and efficiency of state enterprises to stem losses. A new 2 percent tax on wholesale transactions also will be levied in 2015.

Other issues Cuba needs to address as it shapes economic policy are boosting agricultural production by giving small farmers more incentives, making more credits available so small entrepreneurs can expand their business, and improving wholesale markets, according to Cuba watchers.

Ritter said that even though he’d like to see a complete overhaul of Cuba’s labor laws and wage system, “I don’t think they’re going to do this.”

“The lineamientos were most ambitious,” he said. “If the Cubans could manage to do everything outlined in the lineamientos, it would be a huge reform.”

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Book Review: CUBAN ECONOMIC AND SOCIAL DEVELOPMENT: POLICY REFORMS AND CHALLENGES IN THE 21ST CENTURY

By Archibald Ritter

 Cuban Economic and Social Development: Policy Reforms and Challenges in the 21st Century. Edited by Jorge I. Domínguez, Omar Everleny Pérez Villanueva, Mayra Espina Prieto and Lorena Barberia. David Rockefeller Center for Latin American Studies, USA, 2012. Pp. iii + 333. $24.99 paper.  ISBN: 9780674062434.

This volume is a co-produced University of Havana / Harvard volume edited by Jorge Domínguez, Omar Everleny Pérez Villanueva, Mayra Espina Prieto and Lorena G. Barberia. Its objective is to describe and diagnose some of the central economic and social challenges that Cuba faces and to analyze some policy alternatives for meeting these challenges. The analyses are written by the University of Havana analysts who are among the strongest and most authoritative in their areas. These are accompanied by commentaries from professors at Harvard and the Federal University of Rio de Janeiro. The papers were prepared before the presentation of the government’s preliminary reform program, as outlined in its November 2010 Guide, though Domínguez’s introduction was written on the eve of the April 2011 Sixth Party Congress and draws on the authors’ analyses as well as the government’s proposals. Fortunately, the University of Havana authors present analyses of the key issue areas in an ambitious and long-term frame that goes beyond the discussion in the Guide and therefore does not read as dated.

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The opening chapter by Pérez Villanueva presents a summary overview of Cuba’s economic performance during the “Special Period” to 2010. His analysis leads to the conclusion that, “economic reform should be seen as the first of the structural changes that the country requires. Cuba’s economic problem is that the current economic system cannot serve as a starting point for the country’s development.” (Villanueva 16) He then proposes a variety of policy changes, some of which have in been incorporated into the Government’s policy reform program, for example ending rationing and state regulation rather than direct management of enterprises.

            Two essays on Cuba’s dual monetary and exchange rate system are included from Vidal Alejandro, formerly with the Banco Central de Cuba. The first focuses on the sources, character and cure of the monetary/exchange rate duality. Of special interest is the section proposing a set of policy reforms that provide a strategic approach for the establishment of a single currency.  Vidal Alejandro’s second essay is a more technical analysis of the international economic crisis of 2008-2009 and its repercussions for Cuban monetary policy. 

            Armando Nova González, who by now must be considered the “dean” of agricultural analysts in Cuba, has contributed two essays on Cuban agriculture. The first outlines the reforms of the early 1990s, analyzes and evaluates their impacts, and presents the range of policy changes required to resuscitate agricultural production, some of which have begun already. The second chapter then analyzes the impacts of the 2007-2010 reforms implemented after Raúl’s assumption of the Presidency. His central conclusion is that while the pricing, land redistribution and institutional reorganization reforms have been significant and positive, the reforms “lack a systemic focus” and require further deepening. (p.91)

In chapter six, Anicia García provides a fifty-five page analysis of agricultural production, food availability, and imports and exports of food and agricultural inputs. The sector has been severely damaged by its low policy priority over the last twenty five years, low prices in the state marketing system, minimal investment, a perverse exchange rate, and the strength of foreign competition – notably from the United States since the opening of agricultural exports to Cuba by that country. This is an impressively detailed and comprehensive analysis, clearly the best to appear so far. Following this is a fine chapter by Pérez Villanueva on direct foreign investment extracting insights from the experience of China and Vietnam for Cuba.

            Mayra Espina Prieto and Viviana Togores González contribute a valuable chapter analyzing Cuba’s changing socio-economic structures since the beginning of the “Special Period” in 1990, characterized by greater economic and social differentiation among sectors, regions, social groups and individuals and some exacerbation of inequalities, all of which have been generated by enhanced social mobility for those riding high in emerging economic activities and sectors of the economy, notably the higher end “self-employment” activities such as tourist oriented restaurants and “bed and breakfasts.”  New circumstances require new policy approaches and the authors emphasize the importance of targeting social programs, of focusing at the household level, of enhanced and sustained financial support for social policy and of social program decentralization.

The last chapter, by Lucy Martín Posada and Lilia Núñes Moreno, examines the regional and housing dimensions of inequality in Cuba. Drawing on regional statistical information from the Oficina Nacional de Estadísticas, the work of other analysts, their own analyzes and a survey, they construct a clear portrait of regional, housing and economic inequalities. They also present a range of specific policy recommendations for reducing these inequalities.

All in all, this is a valuable analytical survey of some of the central issue areas in Cuba’s current reform process. However, economic policies in a range of vital issue areas remain to be analyzed in greater depth as part of the process of the actualización of the Cuban economy. One hopes that the next round of major publications on the Cuban economy will investigate some of these specific policy areas more profoundly than was possible in a general volume such as this. Of particular relevance would be analyses of the policies toward industry, energy, infrastructure, the service sector, small enterprise and the private sector, cooperatives, state enterprise, foreign investment and joint ventures, exchange rate and monetary issues, trade policy, policy towards foreign investment, social policies, health and education, labor issues, pensions, demographic issues, cultural areas, etc. The work ahead is daunting.

 

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Book Review: Carmelo Mesa-Lago and Jorge Pérez-López, Cuba Under Raúl Castro: Assessing the Reforms

 

Carmelo Mesa-Lago and Jorge Pérez-López, Cuba Under Raúl Castro: Assessing the Reforms, Boulder CO: Lynn Rienner, 2013, pp. 1-293, Copyright © 2013;  ISBN: 978-1-58826-904-1 hc

M-L & P-L

Cuba Under Raúl Castro: Assessing the Reforms is, so far, the definitive survey, analysis and evaluation of Cuba’s economic and social policies and of its development experience during the Presidency of Raúl Castro.

This is an excellent volume. Mesa-Lago and Jorge Pérez-López have built on their 50 and 40 years records respectively of their highest quality analyses of the economic strategies, policies and economic performance of Revolutionary Cuba, as well as numerous in-depth analyses of specific issue areas.

This study is comprehensive in scope, yet concise and focused. It is balanced and objective. It is constructed on a solid and broad a foundation of statistical information and a deep knowledge of the meaning and limitations of that information. It includes virtually all possible source materials from inside as well as outside the island.

In sum, it constitutes the best starting point for any observer, analyst, researcher or scholar trying to understand Cuba’s economic experience after Raul Castro’s “Acting” Presidency then Presidency.

Below is the Table of Contents to provide a quick overview of the scope of the volume.

Chapter 1        Cuba’s Economic and Social Development, 1959-2012.

Chapter 2        The Domestic Economy, 2006-2012.

Chapter 3        International Economic Relations, 2006-2012.

Chapter 4        Social Welfare, 2006-2012.

Chapter 5        The Reforms, the National Debate, and the Party Congress.

Chapter 5        Assessing the Reforms: Impact and Challenges.

Carmelo Mesa-Lago is undoubtedly well-known to all all observers and analysts interested in Cuba in view of his prolific and excellent work on Cuba over the last half-century. He currently is distinguished service professor emeritus of economics and Latin American studies at the University of Pittsburgh. He is the author of numerous books on Cuba, most recently Cuba’s Aborted Reform: Socioeconomic Effects, International Comparisons, and Transition Policies (with Jorge F. Pérez-López).

Jorge Pérez-López is executive director of the Fair Labor Association in Washington, DC. He also has been the organizer of the conferences and publications of the Association for the Study of the Cuban Economy since its inception some 20 years ago. His publications on Cuba have been numerous and excellent – as a spare time activity. His recent publications include Corruption in Cuba: Castro and Beyond. How he manages to carry out his excellent research and writing on Cuba over and above his demanding employment is an amazing mystery to me!

The full Introduction to the book can be read here: https://www.rienner.com/uploads/51cb22c8e9c96.pdf

The Lynne Rienner web site where it can be ordered is here: https://www.rienner.com/title/Cuba_Under_Raul_Castro_Assessing_the_Reforms

New Picture (3)

Carmelo Mesa-Lago and Jorge Pérez-López

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Raul on a Roll; Anti-Reformers in Retreat!

 

President Raul Castro, January 2013

By Arch Ritter

Migratory reform. New cooperatives legislation. Tax reform. Conversion of pseudo-cooperative “UBPCs” to more authentic cooperatives. Liberalized markets for housing and cars. Liberalized regulations and taxation for small enterprise. And perhaps more to come as some of the “Lineamients” recommendations get implemented.

President Raul is seems to be trying to escape from Fidel’s shadow and create his own legacy as he proceeds to reverse some of the most foolish of his brother’s policies. Indeed future history will not view Raul as his big brother’s sidekick and will evaluate him more positively.

Every successive Raulista  policy reform is a further condemnation of Fidel’s near-half century of personal rule in Cuba. No doubt Raul’s government would build a nice mausoleum for Fidel were he to die before Raul and Cuba’s media and speeches by Party members pour unanimous adulation on Fidel. But Fidel’s approach to the economy – not the polity – is being condemned by his own brother and by the Communist Party itself with every new reform measure.

Is anyone defending Fidel’s economic record?  One looks in vain for any critical analysis from the Fidelista conservative “left” in the press, the universities, or even in the world of the pro-government bloggers.  (Please let me know if I have missed this.)

Where are the defenders of Fidel’s approach to economic management?  They have fallen silent because Fidel, his economic team and his policy approach have been discredited.  Moreover, in Cuba’s one party system, Raul has all the means necessary to maintain unanimity and have the whole party and mass organization system move along with him. Interestingly enough, as far as I can determine, even the foreign Fidelista  “friends”, opportunists, sympathizers, and sycophants remain largely unanimous in abandoning Fidel’s economic approach and backing Raul’s reforms.

In contrast, those Cubans that want further and faster reforms are vocal and active – though their voices are muffled by the political controls over all the media, by the tight limits on the internet and by the monopolistic political system. However, the voices of independent analysts do get through via some academic and other publications and some blogs.

Will the reforms slow down? Will Cuban citizens be assuaged with the reforms that have now been introduced?  Will Cuban citizens continue to accept Fidel’s political system after having rejected much of his economic system?

Probably not.

Cubans must be asking themselves why they put up with so many of the economic stupidities of the Fidel regime for over 50 years. (Think of the nationalization of almost everything in the 1960s, the shutting down of almost all small enterprise, the 10 million tons, the “New Man,” the abolition of cost accounting – and accountants – in the 1960s, the shutting down of half the sugar sector in 2002.) They must also be asking themselves if the political system installed by Fidel is just as noxious and dysfunctional as the economic system.

Cuban citizens will not be assuaged. The economic reform movement will continue under and after Raul. Heightening popular expectations for reform will spread increasingly into political areas.

If only the United States would drop the embargo and remove the pretext of the regime for maintaining the one-party monopoly status quo, thereby permitting an acceleration of the democratizing process.

Fidel with President Kirschner of Argentina, January 2013

 

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The “Home Hardware” Cooperative Model and its Relevance for Cuba

By Arch Ritter

As Cuba moves towards a mix of economic institutions with a greater role for the market mechanism as a means of social control over economic activity as well as for private ownership, various forms of co-operative organization have some appeal. Among the many forms of cooperative enterprise that exist and could be considered by Cuba, the Home Hardware variety may have a useful role to play. Already some academic analysts in Cuba are exploring the varieties of cooperative and their relevance for Cuba. ( See New Publication from Cuba: Cooperativas y Socialismo: Una Mirada DesdeCuba).

The Home Hardware Cooperative Model

Home Hardware, is a dealer-owned cooperative, in which about 1000 individual hardware store-owners also own the larger enterprise.  Membership in the cooperative permits the store owners to obtain major economies of scale in terms of purchasing and shared buying power, advertising, comprehensive inventory management and product delivery, and store management techniques. The cooperative has permitted small owner-operated hardware stores to remain viable in small towns and urban neighborhoods. It has permitted them to survive and thrive in the face of the competition from the massive “Big Box” hardware stores such as Rona (in Canada), Home Depot,  Lowe’s Companies Inc., or even Wal-Mart.

Original Home Hardware Store, now “Home Furniture”, St. Jacobs Ontario

The establishment of the Home Hardware co-operative was spear-headed by Walter Hachborn starting at the Hollinger Hardware store in the small town of St. Jacobs Ontario in 1938, working as a stock boy for $8 per week. When Gordon Hollinger died in 1948, Walter took over many of his responsibilities, and purchased the store in partnership with Henry Sittler and Arthur Zilliax in 1950. Hachborn then undertook the difficult task of persuading his fellow retailers to join forces in the Home Hardware’s cooperative – a task requiring diplomacy and determination. (Hachborn, who – full disclosure –  is my Father’s cousin, was awarded “The Order of Canada” as well as the “Queen’s Golden Jubilee Medal” in tribute to his business achievements and community service.)

Relevance for Cuba – and Any Country

The Big Box chains exist because of their economic advantages, namely economies of scale in purchasing, marketing and advertising, and management systems plus bargaining power in their relationship with their workers. However there are also a variety of major disadvantages of the Wal-Mart type of Big Box model of retailing or of the “Starbucks” model of service provision.  Among these are:

1.      Major concentrations of income and wealth in the hands of the few owners of the chains. (The Walton family members have estimated assets of $US 92 billion making then the wealthiest family in the world. )

2.      Damage to local communities and neighborhoods as commercial live gets sucked out of them to the sites of the Big Box stores.

3.      Environmental costs as long distance driving to the big stores replaces closer access to community stores.

4.      Exclusion of smaller scale local sources of products in favor of massive low-cost purchases for all their stores from single sources – usually from China, thereby helping to kill off local producers.

5.      Unpleasant shopping experience, (e.g. wandering around large spaces looking for a particular item with no assistance or guidance to be found.)

Already Cuba has a number of state-owned chains of stores,restaurants and hotels such as Tiendas Universo (CUBANACAN S.A.), Tiendas Panamericanas (CIMEX S.A.), Tiendas Caracol (HORIZONTES  Hoteles S.A.), Tiendas y Supermercados de la Sociedad Meridiano S.A. (CUBALSE Corporation; closed in 2009), Tiendas TRD Caribe (GAVIOTA S.A. owned by the militayr), and Tiendas de Habaguanex. If these were to be privatized under concentrated ownership, some of the problems of the Wal-Mart or Starbucks types of conglomerate would be generated or continued.

Tienda Cimex

In the years ahead, it is likely that Cuba will continue to move towards greater private ownership in many areas. If a future government wishes to avoid some of the disadvantages of the Mammoth Enterprise Chain syndrome, it could consider providing encouragement to Cuban-owned cooperative networks or independent enterprises in various activities in retailing and service provision. Possible areas where such a form of organization could be useful might include hardware stores (of course), food stores, bars, coffee shops, variety stores, barber shops, estheticians services and clothing stores, among others.

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