It is us against ourselves

The “Economic and Social Strategy for the Strengthening of the Economy” announcement has generated a far-reaching debate among experts and citizens, inside and outside Cuba. The moment for the new economic policy appears in the midst of a dire situation comparable to the deep recession of the early 1990s. To get an idea of the acute difficulties that the Island is going through, in the first quarter of 2020 imports sank 45 percent compared to the same period in 2019. Although this year there are extraordinary situations (the COVID-19 pandemic), external financial tensions had been manifesting long before this.

The topics that have been put on the table have been discussed assiduously in the academic field since the end of the last century. Private companies and cooperatives, foreign investment, food production, export promotion, state-owned companies, market regulation or decentralization, can hardly be considered novelties in the debate on economic policy. In many cases they were obvious, postponed or forgotten over and over again, despite the fact that the fundamental political documents supported clear options in many of the aspects that are now being taken up again. Even more revealing is the scant evolution of alternatives to ‘reform’ traditional centrally planned economies. Since China began its strategy in 1978, both the Soviet Union of “perestroika” and Vietnam have applied variations of the same score. The bases of those efforts are not so different from what has been done in Cuba in the last three decades, perhaps with less dedication, and therefore, with little result.

The precarious state of the Island’s external finances confirms the failure of a strategy of international insertion based, among other elements, on a concentration of foreign trade with allied countries under political agreements of dubious sustainability over time. Any temporary relief from external constraint in this way is accompanied by future turmoil that has the potential to ground any serious development effort. The apparent improvement in numbers at the top of the cycle only serves to divert attention to the essential problem of low external competitiveness. In fact, the advantages extracted from the commercial partners distance the serious approach to the problem and hinder the inefficiency of the state company. In this scenario, there are no serious efforts to change that reality. The competitiveness problem is nourished by the profound disarticulation of the domestic productive system that faces the many barriers erected over the decades that respond to good intentions, but with poor economic analysis.

The low level of external competitiveness is the true cause of the dollarization that now appears as inevitable, and that bothers so many. Dollarization itself, a fact that many officials have tried to deny or limit, is far from being an innovation in Cuban economic policy. It has a not so distant history. Were the corresponding lessons learned? Hopefully… What follow are two lessons, which have not been so clearly outlined in the progress of the Strategy.

First, macroeconomics is one of the most complex and fascinating areas of economic analysis. At the base of all global balances is the real sector, that is, the productive system. Monetary, fiscal or financial instruments cannot replace structural policies that are aimed at changing the rules of the game that essentially determine the framework for decision-making of the agents: companies, consumers, the State. For almost two decades Cuba managed to achieve and sustain acceptable macroeconomic balances, but it postponed the restructuring of the state-owned company and the productive transformation was only just in the beginning. The imbalances continued to accumulate, even if they were not visible. At the time, a clear example was the loss of convertibility of the CUC. Once the external compensation weakened, the result could only result in the current morass.

The second problem, related to the previous one, is the assumption behind the conviction that the State can be a good re-distributor and allocator of the foreign currency that it captures from the different economic agents. Hopefully they’re on the ideological antipodes, but it looks like a tropical variation of trickle down economics. That is, benefiting a few in the short term is the way to benefit the majority in the near future. The subject is tricky, but it is very risky to accept that where you failed before you can succeed now. If the Cuban State intends to play that card again, it must ensure that it is using completely different instruments. In the past — the 1990s — action was limited to extracting income from surplus currency sectors while doing little or nothing to reform the public sector. What ended up happening was that currencies were misallocated and probably wasted, obtaining low returns over time. Consequences of that misstep can now be seen.

Certainly, new elements appear this time, although permeated by the dogmas of the past. A relevant positive step is that this time dollarization will allow (with certain limitations) that the different agents can access the purchase of means of production. It is a great idea to ensure that a proportion of those dollars is effectively invested and guarantees future returns. The bottleneck happens when state companies serve as mediators in this scheme. Neither foreign trade companies, nor those related to domestic wholesale activity, have the capacities or the incentive structure to efficiently fulfill this function. If they have not succeeded to date for a much smaller and less demanding universe of state customers, there is nothing to guarantee that they will be able to achieve it with a much broader and more diverse universe of actors. Around the world, companies that engage in international trade purchase support services from specialized companies to successfully complete this task. As a rule, there is competition for the provision of these services. That is very different from what they intend to do here. The state company is again operating with a captive market and extracting rents to continue nurturing its own inefficiency.

Finally, it is worth highlighting two aspects of the external context that will mark the new courses of development of the Island. The world is changing, and it seems to be heading towards a bitter confrontation between two powers, the United States and China. The dynamics of world trade has been reversed over the past decade. Growth has been meager, and many anticipate the end of globalization as we know it. Global value chains will be eliminated and become more regional. One of the consequences of these events is that any export-based growth strategy is an uphill path. It is interesting that now that the world is receding a little, Cuba plans to put into practice active export promotion policies. I am sure they are necessary, but it seems clear that, if it was difficult before, now it will be even more difficult.

In any case, it is not so much the external context (although some will repeat it to the point of exhaustion), but rather the inconsistency of domestic policies which has wrecked, more than once, the past versions of the “Cuban development strategy.” It is simply us against ourselves.