Partial dollarization is an opportunity to decentralize

HAVANA – If a domestic currency does not guarantee universal equivalence for the exchange of goods; if it generates distortions when accounting for economic activity; or if it is not trusted as a means of accumulating wealth; it is not fulfilling its functions as money. In Cuba’s case, if a second currency — enabled precisely to fulfill that mission — cannot guarantee these things either, then the problem is twice as serious. Spontaneously, the use of another currency, usually foreign, will be extended, which will produce the needed security. It will have initiated a process of dollarization, at least partially.

This can operate implicitly — as is the case in Cuba up to now — if it is held in the annals of the Second Economy. Or the government can explain it — as we recently found out — by deliberately assuming it as an instrument of its economic policy.

On October 15, the Council of Ministers announced the launch of a trade mechanism that will allow natural persons to acquire certain goods and import directly in US Dollars (USD). The government has made a complex move, perhaps even a daring one. Due to its wide ranging implications, the situation needs to be addressed by specialists and looked at from different approaches. One of the areas where it may eventually impact is the transformation of the planning paradigm.

Certificate of Liquidity bonds

From the monetary point of view, Cuba is in one of the worst possible situations: monetary-exchange duality, both currencies issued by the domestic authority without either one guaranteeing convertibility to international currencies at the current exchange rates. The country’s monetary flow and international ones are disconnected, thereby requiring each foreign trade operation to have permanent mediation — authorizing it or restricting it — destined to be discretionary and inopportune or erratic. The impact on the productive sector is huge.

With all the reasons behind the inefficiency of the majority of Cuban state-owned companies, and while surviving a brutal persecution from abroad that makes expensive and complex the external management efforts of the economy, the biggest obstacle in the last 10 years has been the mechanism of currency allocation based on what are known as Certificates of Liquidity (CL).

The de-dollarization of the economy undertaken in 2004 did not propose monetary unification as necessary. The liquidity crisis in 2008 had to be managed then through CLs to avoid a devaluation of the exchange rate of the CUC with respect to the USD. The companies that demanded currencies in order to make payments abroad had to request the issuance of this certificate allowing the conversion of a certain amount of CUC into international currencies.

This mechanism, probably effective in resolving that situation, was postponed much longer than recommended. Since then, any effort to increase production in these organizations, meet demand and avoid shortages — and therefore cases of hoarding — clashed continuously with restrictions of this administrative mechanism of currency allocation.

As a result, the recurring disappearance, or the total absence, of products in demand, added to the extemporaneous policies of collection prices that have persisted in many of the goods offered, created the ideal conditions for the gap to be covered in the Second Economy: private importers. In addition, a very significant part of the 2 billion to 3 billion USD received annually by way of remittances arrives in cash and is exchanged in informal circuits as a means of payment, the importation of goods and profit.

An alternative is born

Finally after 11 years we see an alternative born. This segment of the commercial sector created by the State to operate directly in Freely Convertible Currency (MLC) can mean the emergence of a decentralized and de-bureaucratized currency allocation and automatic completion of business cycles. This points to a momentous change in the planning paradigm, although for now it only includes a few trade companies.

It would be superficial to interpret this measure only as a move to try and capture a greater amount of the dollars on the street, although no one can argue that in the present circumstances these dollars can make a difference. The mere fact that a small supply stream can operate in a sustained and independent way to the totalizing mechanism of the CL already constitutes a paradigm shift.

It starts without involving the productive system, with only imports, and with a handful of standardized minimally diverse products, which facilitates the implementation of what is intended to be a market without financing restrictions — and therefore without hoarders — staked out by demand with powerful demonstrative potential. Each new item that is added to this mechanism, which improves or at least does not affect consumer prices, would be a new conquest taken from the halter prevailing in the central administrative allocation of foreign exchange.

The critical route appears drawn: gradually subtracting from the central mechanism those smaller responsibilities that are not strategic or socially sensitive and generating new spaces of economic self-regulation based on demand. The deployment of a partial dollarization scheme makes possible a shift towards more financial and less physical planning, which could be used as a relaunching ramp for the national economy.

However, it will not be the money raised by this small commercial space that will finance the recapitalization of the industry. If you add to what is offered without subtracting currencies from the central system, you have achieved a substantial goal. The national economy (both state and private) can then relaunch its insertion into this scheme in order to compete with other imports.

This mechanism can generate great opportunities if it is conceived as a platform. In principle it should be relatively easy for state-owned companies because they do not run additional risks. But then the central level must force this step and reduce central currency allocations to force them to sweat their achievements under the decentralized mechanism. There is a domestic market of non-negligible size that with adequate incentives could stimulate the national economic production. The Cuban State economy is waiting for its decentralization reform. This must be the next step.

If the government continues to play a decisive role in the economy, that is where the game is decided in its reform. You can’t build a country if you don’t try to rescue the state sector. Certainly, the latter cannot be done if there is no parallel development of the private sector that can absorb the government’s surplus of workers and allows productivity to grow in both sectors.

After a while, the mass of companies involved would be in better financial shape to face the devaluation required by the exchange unification. And partial dollarization could serve as route to reach an equilibrated exchange rate. That would be the moment.

For its part, foreign investment may appear (if allowed) with renewed interest in a dollar economy for its productions.

In summary, the State must never restrict the amount of goods sold through this newly created route. It must eliminate the desire to fight hoarders with control measures. That is a losing battle. It must implant, once and for all, the idea that this game is won only with supply and more supply. All efforts should be spent on eliminating mechanisms that inhibit productivity by the state or private sector; and obstacles to timely replenishment is one of the most important. The Cuban economy today needs goods to be sold, to constantly rotate this process, and to repeat the cycle over and over again. Articulating a legal and secure supply source, which bridges the gaps with demand, must be a goal for the health of our society.