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Cuba steps on the accelerator of economic reforms

2021-05-16T23:02:39.702Z

Havana tries to contain the perfect economic storm that threatens its economy with a transformation of the production model



Tobacco plantation in Viñales, western Cuba.YAMIL LAGE / AFP via Getty Images

Imagine that you live in a country whose main trading partner has been in free fall for five years.

Imagine that the most powerful nation in the world, with which it had achieved a truce after decades of tensions, once again restricts the sending of money and tourists.

Now imagine that a pandemic further reduces remittances and closes its borders to tourism, two of the three main sources of foreign exchange in the country.

And finally, imagine that unlike other countries, yours cannot go to the financial markets to soften the blow.

More information

  • Cuba gambles everything for everything in the face of the urgency of change

  • The Cuban Communist Party declares the economy and food production "national security"

You guessed it: the country is Cuba, the partner with difficulties in maintaining its oil supply is Venezuela and the arch enemy, the United States Government, too busy with its problems to spend a second on the wrongs caused in Havana by the previous one. occupant of the White House.

With a decline in GDP in 2020 that the Cuban Government estimated at 11%, with basic consumer items multiplying their price by up to five;

and with hours of queues to acquire them, the island is experiencing the closest economy there is to a perfect storm.

When nobody gives you credit —Cuba defaulted in 2020 on the second interest payment for the 30 million euros that it owes to the Paris Club creditors—, a fall in the sources of income almost automatically implies a fall in consumption.

Unless, of course, within the country there is room for improvements that increase local production.

Hence, to all these changes outside the island must be added the gigantic "rearrangement" of the economy that the Cuban government had been delaying since 2006, when Raúl Castro assumed the presidency.

Gradual withdrawal of subsidies to state companies and public services, end of the double currency, and more space for

self-employment

, as private activity is called on the island. In very broad strokes, this is how the three pillars with which local leaders are trying to build, based on improvements in supply, a breakwater to face the storm could be summarized. As the economist Ricardo Torres, from the Center for Studies of the Cuban Economy in Havana, says, "unlike Spain, where the market is dominated by the consumer, in Cuba companies know that everything they produce is going to be sold." In oligopolistic and monopoly markets, companies survive despite incurring great inefficiencies. For this reason, Torres understands the need to reformulate state companies to make them truly autonomous, with fewer subsidies, but also less intervention, where the authorities cannot "take the money every time they need it for something else.""If the government wanted to act seriously, it would have to accept that it is going to have a much smaller sector of state-owned companies," says Torres, and make way for the improvements in efficiency that the arrival of private competition can produce.

One of the problems is that first you have to go through the bad luck of inflation driven by the new price of the items sold by state companies (forced to make them more expensive due to the withdrawal of subsidies);

for the salary increase decreed on January 1;

and by the new rates for public services, where state support was also reduced.

The other major source of inflationary pressure has been the end of a dual currency system that has forced state companies to end the fiction of cost accounting where a Cuban convertible peso (which disappeared on January 1) was equivalent to the called “Cuban peso in national currency” (the only one that remains in force), when its true value was 24 times higher.

After the

initial

shock

, the mechanism to avoid inflationary spirals such as those in Argentina and Venezuela has been to impose maximum prices, a more viable tool in a country with tight control over production and markets. And the consequences, to be expected, have been a widening of the black market and shortages reminiscent of the worst times of the special period in the 1990s, when the dissolution of the Soviet bloc on which the Caribbean economy rested caused the loss of a third of GDP. In any case, the Government seems to be choosing queues over prices that are absolutely prohibitive for a large part of the population.

According to the Cuban economist and emeritus professor at the University of Pittsburgh, Carmelo Mesa Lago, the measures are going in the right direction, but they should have come before and not during "a crisis as acute as the current one." In his opinion, what should be done as soon as possible is an agricultural reform “in the style of Vietnam”, giving farmers more freedom to choose what to plant and to whom to sell the harvest. That would relieve them of the corset of a state collection system that is not generating enough food and would multiply the much-needed local production (between 70% and 80% of the food consumed today in Cuba is imported), he continues.

"I'm not so sure that focusing on being self-sufficient in food production is a good goal for an island economy," says Emily Morris, a specialist in Latin American economics at University College London. "Of course you have to cultivate as much as possible, but we must not forget that we are talking about a tropical island where there are droughts, floods, depleted soils ... Things are always a little more complex."

Where there do not seem to be differences in appreciation is in the weight that the economists consulted attribute to the US boycott against the Cuban economy.

Óscar Fernández, professor at the University of Havana, says that it is so true “that the blockade and the persecution of transactions carried out from the United States makes rational economic management impossible”, as that blockade is what “prevents the Government of Cuba commits its own mistakes without the possibility of attributing them to another ”.

Diversify sources of income

The coronavirus pandemic will end, planes full of tourists will land again, and perhaps Joe Biden will back down from Donald Trump's restrictions. What will happen to the Cuban economy then? For the economist Óscar Fernández, the collapse of tourism in 2020 is a demonstration of the risks involved in betting on a single “winning horse”. A development path in which progress has already been made is the export of professional services, which today represents the main source of foreign exchange (for Cuban doctors and professors in other countries), and has room for growth in computer and pharmaceutical services, especially after the publicity that Cuba is receiving for its vaccine for covid. Another reason for optimism is the change in regulation for foreign investment. According to Fernández,Before, only large investors were sought, but the Cuban market is too small for them and the United States is forbidden to them, while "now local governments are allowed to approve smaller foreign investment projects and that is a very important conceptual change." .


Source: elparis

All business articles on 2021-05-16

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