Cuba’s economic reform: Implementation is the key

We recently learned that the Cuban government has resumed the process of reforms on the Island — almost a decade after their approval. In the current context, the outlined strategy has been interpreted by many as a commitment by President Díaz-Canel and First Vice Prime Minister Alejandro Gil in favor of the country’s postponed economic reform plans. 

“Among the most important things are those explained in the first sentence, by Minister of the Economy Alejandro Gil, that planning will continue to be centralized, but that this does not mean the centralization of allocation of resources. That appears as a correct concept,” explained economist Oscar Fernández Estrada.

Ileana Díaz, professor and coordinator of the University of Havana Entrepreneurship Network, agrees with this idea. She says that “the flexibility of the plan, in terms of it being a resource allocation plan, and therefore combining the use of the market and the indirect and regulatory methods of the economy, which are not administrative, is very positive. Seen as a whole, it is a strategy with an appropriate approach.

“However,” Díaz adds, “for a more in-depth assessment of the strategy, clear objectives are necessary, as well as its timeframe and the methods used. We still know little about that.”

In the opinion of Cuban economist Tamarys L. Bahamonde, a doctoral student at the University of Delaware in Public Policy and Urbanism, it is important to make the distinction between the economic measures and strategic lines of work “because it gives a general idea of what it is that you want to do and where you want to go. 

Where we’re going has yet to be explained. It should be understood that in the ‘how’ these questions are most impacted.”

Dollarization in Cuba

The expansion of retail sales in freely convertible currencies (MLC) has been one of the measures, already implemented that has generated the most reactions since its announcement. “It is something that can interpreted in different ways,” says economics professor Dr. Ricardo Torres.

“The truth is that the balance of payment situation in Cuba, specifically the shortage of foreign exchange, dollarization is a natural and inevitable result of this situation. Perhaps what the Cuban government is doing, as it once did in the early 1990s, is trying to make it institutional, to try to take advantage of dollarization, use it and capture more directly some currency flows that were previously being lost. From that point of view, this is inevitable,” Torres explains.

For Fernández Estrada this is a key issue. “Here a very complicated decision is being played out, because this is one way of doing this, and unification is another; they do not intersect. It is politically a very sensitive measure. It all depends on how it is accompanied, what products are sold in some stores or others, at what prices, what facilities they have … But, above all, that the government provides sources of currency to people who do not receive remittances, and have no access to dollars, so that they can have access to these new stores.” 

Otherwise, Torres insists, “the market is very clearly segmented according to who has access to these currencies, for whom their consumption, investments, etc. will be available. For those who do not, well, they will have to wait and these processes will be postponed. (…) There is no formal market right now for Cubans, at any price or exchange rate, to access foreign currencies, and what is growing tremendously is the informal market.”

This measure, according to professor Ileana Díaz, can provide good results. “But it has many dangerous edges, some even mentioned by President Diaz-Canel, such as inflation, the black market for foreign exchange, and the resale of products, for example. Logically this can negatively impact a wide sector of the population that, as is known, receives its salary in Cuban pesos.”

On the other hand, one can expect other distortions to be generated in the country’s monetary system “because there is concern about what will happen to the CUC, now that it is not convertible,” says economist Bahamonde. For her, “this is a purely financial measure, which does not seek a specific social objective, and of course the adjustments so that the social equity that is being pursued is not lost must be done in other ways, and must not be overlooked.”

The tax imposed until Monday, July 20, on the dollar was the main obstacle for people banking their money, adds Fernández. “The blockade continues and the country continues to have extremely high costs for using cash dollars, because it has to physically transfer them to a third country, partly hidden… All of this is true. What happens is that if you do not have dollars at all, one does not face those costs and nothing can be done. It is the main incentive that could be given at this time.”

For economics professor Henry Colina, “it is about measures of conjuncture, which ‘marries’ the balance of payments crisis with the explicit objective of increasing the volume of foreign exchange available to the government in the short term. The latter is key, because the deepening of the circulation of foreign exchange in the country conspires against the monetary order mandated by the governing documents. That is why this measure must be designed with an existing exit strategy, and the fact that all is done by bank transactions can possibly contribute to its speedy completion.”

“In that sense,” adds Colina, “they cannot be asked to generate equity by themselves or to have an impact on the reduction of inequalities: that is not their objective. The design of transparent mechanisms that make effective use of these currencies in the effective replenishment of other markets of consumer goods in the currencies used by the majority of the Cuban population, will be part of the compensation necessary to guarantee that the policy is the least harmful possible.”

State sector, and the small- and medium-sized businesses

Certainly there is much to be done with regard to state-owned companies in the country. Ileana Díaz explains that “there have been many measures in this sector that have not yielded the expected results. Foreign currency financing schemes and the expansion of social objects will be positive. But there are other elements on state business autonomy that do not require financing and that have to do with daily management, and which today are tied as one. It is something that must be resolved in order for the state-owned company to play the role to which it is destined, since it has not yet done so.”

“A more precise mapping of the Cuban productive and business network is also one of the objectives stated in the program presented, and it is important because it does impact the structure of the ownership matrix of the Cuban economic model,” says Colina.

But this cannot be done overnight. In Bahamonde’s words, “there is a culture of operation, of business administration, that is rooted within well-established structures with vertical, bureaucratic, inflated templates, and all these things affect the operation of the state company, and therefore affects how these companies are going to relate to other forms of ownership.”

However, there are things that can be advanced, says Bahamonde. “The need to prepare the Law for Companies, to review the group of occupational categories authorized to receive private investment in Cuba, or for non-state forms. That group of activities is limiting an important group of the population, fundamentally professionals and women, of their participation in this sector, which is at this moment where the best opportunities for expansion, employment and income are available.”

Colina adds, “the legalization of non-state productive entities cannot only generate a positive impact in terms of tax collection, but can also serve to increase the supply of goods and services. And it can contribute to the transit of informal workers towards the formality of the contract and the benefits that this entails, while separating, as it should, employers, employees and the self-employed for the so-called Self-Employment (TCP) Regulation.”

In these matters there are still very few details offered by the authorities. “Allowing TCPs and cooperatives to import and export, even through state-owned companies, is among the most interesting measures. But unlike the 1990s, this is the first time that dollarization has been accompanied by a process in which the agents that exist in the Cuban economy today can have access to the means of production. It is a very important difference,” explains Torres.

Our current situation, and the future

“All this occurs under an extremely aggressive context in the economic sense. Not only has the U.S. blockade against Cuba been intensified, but also under a worldwide economic crisis brought on by a pandemic; and with tourism, one of the country’s main source of income, stifled because of the situation with no short- or mid-term recovery in sight,” says Bahamonde.

And according to Colina, one must consider “the effect that the stoppage of activities and the increase in expenses has had on the country’s budget. And how to finance the deficit (monetization is out of the question under pain of aggravating the inflation that the current state of hypo-production can generate)?” She adds that “without a doubt, these are the boldest measures announced since the transformations began in the 1990s. All that’s left to check is the legalities that will protect them and their practical implementation.”

The same way that prevention and a collective awareness helped avoid the collapse of the Cuban health system in the fight against COVID-19, “what should prevent the collapse of our economic model will be a collective construction and prevention based on a transparent design that is both orderly and coherent. You don’t grow it to later distribute it, because in the interim debts accumulate: it grows by distributing and including us starting with the production. It is one of the keys to not abandoning the construction of an alternative society in Cuba; designed not only for consumers, but with the citizens in mind,” adds Colina.

So far, concludes Fernández, these measures “are intuitive, logical and rational things, to help eliminate obstacles and distortions that have been latent for a long time, and which are absurd. These, for some reason (unknown to me), have been reproduced and strengthened, and are now being dismantled. This is perhaps their main virtue. In this sense, it is a package of rational and adequate policies. The only thing remaining is to see their scope and true impact once implemented.”