The ‘uselessness’ of the arbitrary distribution of profits and the need for a comprehensive policy

As we have repeatedly insisted, the Cuban economy needs a comprehensive economic policy of transformations as well as a macroeconomic stabilization policy that connects and makes the former viable.

The permanence of an inflationary process such as the one experienced or suffered today in Cuba is not sustainable in the medium and long term for social and political reasons, therefore the reduction of inflation is essential not only as a condition for feasibility of the deeper economic transformations that the country needs, but also from the political point of view.

In this sense, we have repeatedly expressed the need for a stabilization policy that addresses the problem both on the supply side and on the demand side, in combination with active and well-founded fiscal and monetary policies.

We have addressed this issue in greater detail and with very specific proposals in previous texts: “Preventing inflation: the essentials of a comprehensive policy (supply, demand and monetary policy).

One point in which we insist and have insisted previously is the perverse effect on prices caused by the distribution of profits without material support, and at the discretion of state companies. And all, moreover, lacking progressive, direct taxes on these remunerations, and highly imperfect markets without strong regulation and with poor governance. It is fair to say that our considerations, in this regard, have been systematically sent to the authorities of the national economy. We do not know if they have been reviewed or not.

This issue, which had not been discussed publicly before, has been the subject of attention at the recent meeting of the country’s leadership with representatives of the state business system, the basic contents of which have been reported in the Granma newspaper. The figures and some of the affirmations that have been presented there confirm, in our opinion, what we have been pointing out for more than a year. However, we still do not perceive a comprehensive policy that corrects this negative trend.

In the first half of 2022 alone the distribution of profits was 13 billion Cuban pesos, which means a notable increase in aggregate demand without this being backed by a corresponding increase in the supply of goods and services.

As recognized at the meeting, business profits are often explained by arbitrary price increases, which fuel inflation like a snake biting its own tail.

This figure surprised us as it was even higher (more than double) than what we had previously calculated for one semester. We did not have public information about it at the time. We had estimated it based on fragmented information from the national press and individual interviews.

The process’ effect is that the increase in the real income of workers who benefit from this additional income does not correspond to the nominal increases they obtain, precisely due to the increase in prices impacted by the same action, at the same time that the income in real terms of workers and citizens with fixed salaries (especially retirees) are notably affected by the systematic decline in their purchasing power, bordering, in many cases, on survival levels. Additionally, it has generated sectoral movements of the labor force with negative repercussions on fundamental activities.

Based on quick calculations, it can be said that with much less than half of the money from profits distributed, the amount of minimum pensions and assistance benefits could have been increased by more than 500 pesos per month, which favors the most vulnerable sectors of the country.

The estimated annual budget deficit must be greater than 70 billion pesos. If it were 85% monetized, the unsupported profit sharing effect alone could contribute almost 25% to price increases.

If what different economists have been writing about it is examined, a debate could be developed that would allow the articulation of a comprehensive anti-inflationary policy. However, although this problem supposes a strong technical foundation, this would not be enough due to its great political and social significance. For this reason we have previously proposed the convenience of broadening the discussion to the whole of society with the rapid and urgent presentation of a stabilization policy project.

Surely the popular discussion would not only enrich it, but would favor rebuilding the consensus to advance, with this and with the project of comprehensive reform of the economy, a process that in our opinion is essential for the recovery of a positive dynamic in the life of the nation.  The workers’ parliaments held in 1994 are an experience that must be taken into consideration in the current situation. From a political point of view, the consensus of society has no substitute, and in the case of Cuba, even more so.

None of these considerations fail to take into account the harmful effects of the blockade, but the challenge is to move forward despite these difficult circumstances and to do so very quickly, and with a sense of urgency and responsible boldness. There are substantiated proposals and arguments to do so. Let’s discuss them all in depth — with agility and without dogmas.