The markets in Cuba

HAVANA – The regularity of supplies for the processes of the Cuban economy leads many people — be they consumers, state-owned companies or private entrepreneurs — to the darkness of hoarding, an action that constitutes a crime according to Article 230 of the current criminal code.

The original sin contained in the theoretical planning paradigm prevailing in the country — inherited largely from other historical contexts and moments — has been to pretend that the coordinating function between the economic actors played by the market can be replaced at the root by a permanent administrative mechanism — mistakenly identified as planning — which covers almost all economic activity.

Most economies operate based on models composed of values and regularities, and to the extent that patterns and recurrences are identified and the actors consolidate responses consistent with the demands that the system imposes on them. One of those reactive behaviors is precisely hoarding.

This situation occurs because the model is characterized by markets that operate under conditions of chronic scarcity for consumers and producers. In many cases the goods and services needed do not exist in those markets. The recurrence of this situation for a wide range of line items is what is known as an economy of scarcity. One of its fundamental causes is the central planning model.

A centralized coordination mechanism, like the one that characterizes the Cuban economy, undoubtedly achieves a fairer allocation of resources and less social waste, but that’s when dealing on a global scale. The problem is that its extension to almost all economic activity leads to the generation of other costs.

Often the centralized mechanism allocates inaccurate or timeless resources that generate gaps between the supply and demand and leads to simultaneous situations of scarcity and artificial surpluses. This happens when one does not know or ignores the market.

The economic warfare Cuba is subjected to cannot be ignored. It impedes the country’s performance as a normal economy. It also restricts it, to the extreme, from external insertion. But there is also an internal, essential cause, which lies in a planning paradigm that finds it impossible to allocate resources on a daily basis that guarantee a balance in the markets. This also prevents it from producing the appropriate adjustments due to inevitable information gaps suffered when exercising so many centralized decisions.

Given this recurrence, market participants then standardize an automatic adjustment mechanism that, forced to fill the imbalances, finds a way to reallocate resources it finds in its path. Many of the solutions are clear violations and remain outside the scope of direct government regulations, obsessed with control as the only solution. Thus arises what is known in academic literature as a ‘second economy.’ Often referred to as the informal sector of the economy.

Hoarding: A resource used by economic actors

Recurring shortages of necessary products are often identified by some media as persons hoarding for profit. In fact, it is the opposite. It is easier to demonstrate that the frequent shortage of these products is what generates the practice of hoarding.

Given the development of this ‘second economy,’ which effectively provides a compensatory response, the central authorities implement more demanding control mechanisms in state establishments and tighten the regulatory framework to which the entire society is subjected to. None of these actions effectuate changes in the conditions that cause the phenomenon.

When the authorities try to control possible shortages — known in microeconomic terms as excess demand — by establishing quantitative limits on the purchase of products, or by setting prices, this action sends a signal that the product could be in short supply, and therefore warns the buyer to find a way to guarantee his or her long-term supply. This incentive to buy in excess is more often for fear of a shortage and not necessarily based on for-profit intentions.

The not so free market exists and acts …

The market exists in any contemporary socio-economic formation since there are always actors with the power to make at least certain decisions autonomously. As long as those alternatives are not restricted totally, the market will act. 

It is important to emphasize that the market is not synonymous with private property. This is a remnant of a dogmatic interpretation of the past already behind us in Cuba — at least in official documents.

The predominant ownership form among concurrent actors does not imply a greater or lesser prominence of the market. In theory, there could be a perfect market mechanism operating in a one hundred percent, state-owned economy model. Just as there could be markets subject to very high levels of state regulation where most of the players are private owners.

Consequently, the recognition of the role of the market does not mean a total absence of government intervention. The market is like a river: you can’t catch it with your hands, but you can channel it. There is a lot of space to design economic policies that regulate and drive the markets without pretending to supplant their coordinating function with a bunch of administrative orders. It is not a basket with only two options: stimulation or deregulation.

Even if the entire supply were the result of a centrally preconceived mechanism, market forces would still act on the demand side, and of course they would do so independently of the will of any authority. The market, therefore, not only exists, but determines the way in which the goods and services that the plan decides to produce are distributed.

So if the economic plan does not take into account the demand, and if the central authority does not have the instruments, knowledge, or willingness to study the demand — or is not able to guarantee that the planned production corresponds to it — there is little chance of avoiding the repetition of shortages in some cases, or artificial surpluses in others.

Currency management mechanism exacerbates the economy of scarcity

In the particular Cuban case, these systematic supply potholes, which reinforce the economy of scarcity, occur among many reasons because state-owned companies — where most of the supply rests — do not have the autonomy that allow them to react to the market and close its production-marketing cycle.

This small but grave problem occurs due to a very varied trail of restrictions, but the most important, on which action is needed urgently, is that the income generated in CUCs (convertible Cuban currency) is not automatically converted into international currencies to the current exchange rate, and therefore does not grant you the ability to import. It requires some sort of central mediation.

In order for a company to import, it usually requires a central currency allocation, a mechanism called a coefficient, a certificate, or a capacity to achieve Market Liquidity (CL). The non-authorization to import, or the late allocation of this liquidity capacity, obstructs or stops, at least temporarily, productive processes that in turn impact other productions. The supply becomes unstable, and the demand unsatisfied.

Ten years of this administrative mechanism shows us how circumstantial economic policy decisions can obstruct development by mistakenly identifying itself as the only form of intrinsic planning of the socialist economy.

To develop Cuba’s socialist goals there is a need for a financial planning mechanism designed with better incentives and that allows much more interaction without the need of a direct mediator. This can be solved — and in fact it is advisable — even before immersing ourselves completely and definitively in the process of monetary unification.

Otherwise it will not be possible to alleviate the shortage and therefore the hoarding at any of its levels.

Dr. Oscar Fernández Estrada is a Cuban economist.