Duality is not the only obstacle
The sudden avalanche of information in recent weeks, suggesting the proximity of a monetary reform, has unleashed a kind of collective nervousness capable of relegating the main focus of concern from the pandemic. In the midst of such an intense environment, very little has been officially revealed, only the ratification of what does not require further confirmation: first, the currency / exchange duality is too stubborn a drag to aspire to reverse the model’s disfunctionalities; second, facing it is a decision of domestic economic policy that, like others, does not depend on the United States’ inclemency; third, it should have been undertaken several years ago when it was started and stopped for unexplained reasons; and fourth, the current conditions for doing so are terrible, but delaying it even longer would not bring any truce, in fact, quite the opposite.
That the monetary reunification process would begin in Cuba was the news of the day back on October 22, 2013, when Granma published an official government release announcing implementation, by the Council of Ministers, of a timetable for its execution. Four months later, on March 6, 2014, the Extraordinary Official Gazette No. 12 published resolutions of the Ministry of Finance and Prices that, as part of that sequence, established the accounting standards and methodologies establishing wholesale and retail prices for legal entities. But for reasons that were not explained to the public, the process was quietly stopped. The issue disappeared from articles in the press, and it was diluted between the bonanza and suspicions of that undermined normalization.
That same alarm is sounding again. On this occasion, there has been no official press release, but on July 16 of this year, President Díaz-Canel affirmed that the monetary unification would be implemented as part of the strategy against the current economic crisis. One month later Granma reported of an unusual and striking dialogue between experts from the Central Bank on the origins and consequences of the dual currency / exchange rate. Immediately thereafter, Cuban television, together with other state-run media, deployed an intense campaign of related content suggesting the imminence of the process. The public, also fed by the meta-truth of social networks, but with expectations and reactions that are relatively anticipated in this case, began to transform their assets’ denominations. And a new reason to leave the queues blossomed, this time in the banks.
Cash and bank balances will not be affected
The Central Bank of Cuba recently affirmed that the beginning of the monetary unification will not take place immediately, which is very positive given the epidemiological situation that Havana and other provinces are currently experiencing. The Bank has reiterated its commitment that cash held by account holders, or the balances in their bank accounts, will not be affected when the process begins. However, all savings denominated in CUP (Cuban pesos), as well as personal non-state income, will be affected by their subsequent purchasing power once the process is rolled out if it includes price and wage reforms. For this reason, prices in the informal MLC (convertible currencies) markets have skyrocketed recently.
Once they decide to open this complex reunification process fully, three transcendent changes will have to take place: 1) definitively eliminate the CUC (the Cuban convertible currency) from circulation, both for businesses and the general population; 2) devalue the official exchange rate of the CUP against the U.S. dollar (USD), either gradually or radically, whether it eliminates the exchange rate multiplicity or maintains it for a time; 3) radically modify price levels, wages and pensions, in a kind of resetting of almost the entire economy.
All of these are essential actions whose short-term social costs will have to be solved with boldness and dynamism. The price reform could include some way to eliminate general subsidies for products contained in the regulated rations. Similarly, salary reform should include the elimination of institutional perks, which have developed over the years in organizations and companies, with the aim of discretionally ‘compensating’ for inconsistencies in remuneration systems.
However, even when applying the most ambitious program, the monetary duality will not disappear as long as an internal portion of goods and services in dollars persists, which sends signs of consolidation and expansion. It is very striking that the stores that sold automotive components and electrical appliances in MLC, are now adding food, toiletries, hardware, and other goods. For example, ETECSA (Cuba’s telecommunications provider) has announced the sale of equipment in MLC, the Business and Logistics Group of the Ministry of Agriculture (GELMA) has reported the upcoming sale of agricultural supplies and tools in MLC. This trend is very likely to be reinforced. At this point, it is interesting that in the “Synthesis of the Economic-Social Strategy to boost the economy and face the global crisis caused by COVID-19” published a few days ago, there are no significant references to the issue of monetary rearrangement.
Therefore, the process that apparently may begin soon would not complete the monetary reunification, although it would imply a general reform of great importance.
The problems of the economy of exhortation are not solved by unification
It is already known that the reform of the Private and Cooperative Sector (SPC) —expansion of permitted activities and formalization of MSMEs— must precede any reunification measure. The generation and consolidation of productive or service options in the SPC, derived from the devaluation that takes place, must be guaranteed before the adjustment of the workforce in the State sector. In fact, licensing should remain open now to provide short-term options for entrepreneurs and employees who have been hit hard by inactivity during these months. On the other hand, the limited institutional capacity to carry out several complex processes at the same time — and with the pandemic as background — could cause setbacks.
Nevertheless, monetary reform by itself is not going to remove the obstacles that we face today for the development of the productive forces. Because duality contains only part of the distortions. The interlocking of the operating model, and therefore the poor productive response, is associated with the prevailing incentive system. The visible and comprehensive currency-exchange distortions are one of the problems of this incentive system, but not the most important.
The system has a diffused targeting problem that needs to be solved. Strengthening the control actions on the rigorous statutes of legality — still rampant in absurd prohibitions that the Ministry of Economy and Planning itself struggles to correct — leads down a path opposite to the productive leap that is required. Trying to unleash the productive forces under the narrowness of the current legal and political framework is what has been tried for decades. It does not produce results. It is time to question the ordinances. If the inventory of obstacles that the president has been identifying proves to be thorough, the law and the order in Cuba will have to incorporate two essential theses: an economy designed for control may produce control, but not development; becoming an export economy is not possible on the basis of exhortation.
If rigorous data was acquired to confirm these theses, there we would see the agricultural production of the last five years prior to the pandemic. It contains them both. This is the sector most and best served by all the leadership of the Party and the Government, the most visited, the most controlled. And without a total revolution in agriculture — which dynamites policies, managers, institutions, incentives, management models, resource allocation mechanisms, marketing channels, verification methods, and even forms of property if necessary — there will be no possible salvation. The same applies to the rest of the economy.
