A little over a year has gone by since the beginning of the “Task of ReorganizationTask of Reorganization.” Some conclusions can be drawn. Let’s make it clear from the outset: it couldn’t work and it hasn’t.
It’s not that it has a few simple design problems. A hotel can have an ugly design or access problems for the handicapped, and still function as a hotel, with greater or lesser success. And a car can have a design that detracts from aerodynamics, but it will function as such. Designing a car and a bicycle coming out is not a design problem, although the bicycle is also a means of transportation.
This has happened with the so-called Monetary Reorganization. The following are its problems.
Sequence or priorities
As several economists have mentioned, before the exchange unification (I refuse to call it monetary unification) and the disappearance of the CUC, prior to carrying out reforms in the circulation or in the monetary sphere, many modifications had to be made in the productive sphere to increase the production of goods and services.
And it is not about eliminating state ownership or social property over the means of production. It is about the enterprises being real enterprises, although in the end the profits would operate in favor of the nation’s budget. For years, countless structures have been tested for state-owned enterprises, be they “consolidated enterprises” or “Union of enterprises” or the “Business Group” or the Business Management Higher Organization (OSDE). These structures have been tested both with large enterprises and with smaller “basic business units” without legal status. And there have also been smaller independent enterprises. It has been tested through centralized “top down” or more decentralized decision making. OSDEs and ministries are intended to control and design procedures, but not direct. Therefore, there can be no complaints about lack of tests with different structures. And yet, the result in production and services does not seem to improve.
But little has been proven with what is fundamental: business managers’ real independence in decision-making. What to produce or what to stop producing, because it is unprofitable? From whom to acquire raw materials, at what prices and how to pay for them? Who to sell to or who to suspend sales to? What prices to fix to the final production? How to pay employees, and how much? How to freely use the foreign currency obtained from exports or from sales to the domestic market in foreign currency? How to invest to modernize production? Or who should approve the investments to be made with one’s own profits or the amortization fund created by the enterprise itself? What to do with the net profit?
They seem like simple questions. In fact, the answers to many of them have been dealt with in multiple courses, diplomas and master’s degrees that have been taught for many years to business and ministerial cadres. These courses were very good to acquire knowledge and general culture, but for practical life they were not always very useful, precisely because of the existing limitations to apply the knowledge acquired. Even multiple marketing positions were created in innumerable work centers, when it is known that in markets with scarcity everything is sold and sold out quickly, even if the quality is not the best, without much marketing.
For example, the Reorganization improves the aspect of payment to workers by allowing a part of the profits obtained by the enterprises to be distributed in their favor. But if there are various obstacles to obtaining profits, then that part of the provisions may have a greater or lesser impact on the real life of the employees.
It is understood that it is very difficult to change an entire way of running the economy, deeply rooted and with multiple links with other functioning mechanisms of society. But, for that very reason, in 1993, the double monetary circulation and the double exchange rate emerged: in order not to complicate the reforms with measures of much greater scope and depth, to stimulate the capture of family aid from abroad, reducing the maximum possible interference of these funds in the rest of the economy. It is true that it was necessary to move, little by little, from the “less efficient” economy to the most efficient; to gradually extend the economy from the foreign exchange sphere to the rest of the country, until later it would be easier to convert everything to a single currency. It is also true that the double monetary circulation and the double exchange rate took root over time and their pernicious effects were felt more and more. Now one part of the equation has been removed, but if the others are still mostly intact, what could be expected?
Cuban government recognizes 6,900% inflation in informal market
Historical moment
When strong devaluations of currency or monetary reforms have been carried in many countries they have had to go to the International Monetary Fund (IMF) or other sources to have strong currencies that would allow them to face both the shock of the moment and the high demand for foreign currency in the market. Cuba did not have and does not have access to loans from the IMF, or from other sources, to deal with this situation. This was not going to change even if the “Reorganization” was done sooner or later.
However, the country was facing the reality of COVID-19 (in Cuba, since March 2020); of the fall of international tourism worldwide (and of Cuba in particular); of the harsh measures of the U.S. blockade; of the drop in external income from medical services and other collaborations, both with countries that broke the existing agreements with the island, as well as others with good diplomatic and friendly relations. There was also the reality of the increase in unpaid debts due to external suppliers, many of them with suppliers of merchandise sold in the former stores in CUC. Given these non-payments from Cuba, plus the economic and health problems in their own countries, and the damage caused by the U.S. blockade, suppliers could not increase their sales to the Cuban market, increasing shortages and making it look like a negative result of the “Task of Reorganization.” All this was known in advance.
It is true that monetary and exchange rate unification had been promised for years, it had been the mandate of the last two Congresses of the Communist Party of Cuba (PCC), and that it was a promise of the First Secretary of the Party, who would leave his post in the hands of the new generations. But if the issue had been under study for more than ten years and it had not been implemented, it was surely because the problems and weaknesses of undertaking a reform of this scope without having the conditions for it were known, not because of poor work by the Implementation Commission created for this and other tasks. Once again, political intent outweighed economic reality, but that intent alone is not always a guarantee of success.
In addition to the circumstances mentioned (need for other previous reforms, international health, economic, tourism crises, etc.), before January 2021 there were other realities that by themselves threatened the success of the Reorganization:
- Interruption of the sale of foreign currency by CADECA and banks of the system or loss of the internal convertibility of the Convertible Cuban Peso (CUC). This interruption was the result of the state of the currencies held by the country and the high demand for foreign currency, situations that would remain after the so-called “Day Zero.”
- Emergence of store establishments with sales in freely convertible currency (FCC) and the objective need to increase this type of sales. The country was indeed forced to continue and increase sales in FCC in order to capture foreign currency more quickly and maintain the product replenishment cycle in stores, but this was already an indication that there would not really be a real monetary unification.
- Loss of foreign currency backing from the other mechanisms created to control imports and payments abroad.
In previous years it had been seen that businesspeople signed import contracts without much control or beyond the country’s payment capabilities. It had also been detected that the CUC balances of the enterprises were much greater than the capacity to support those CUCs with foreign currency. Or that the country could not pay for all the purchases to be made, even if the enterprises had sufficient balances in CUC (not in CUP) in their accounts. For this reason, a control was established for the signing of international contracts: each purchase had an Authorization Number (AN) and certain essential purchases had automatic authorization (Permanent Instruction or PI). It was assumed that, by reducing imports and controlling contract approvals, there would exist the capacity to pay what was approved. However, over time, not only did the balance of enterprises in CUC increase without backing in foreign currency and without convertibility (which was to be expected). It was also not possible to comply with the payments of everything purchased under the new forms of import control.
Then came the controls/certificates of liquidity or CL. This has been like a memorandum account or control account for the balances of CUC (or CUP at present) that could really be exchanged for foreign currency to meet the obligations of the enterprises. In other words, it is equivalent to having a balance in foreign currency, but since the country had abolished the circulation of the USD and had closed the foreign currency accounts of the enterprises, it did not want to recognize a reverse of the previous measures, inventing a complex mechanism that commonly comes to say: “all enterprises have accounts in a single currency (the CUP), but a CUP with CL support and another CUP without that support are not the same,” or “everyone is the same, but some have a bluer blood than others,” or “the tall ones have more advantages than the short ones.”
But over time the CLs also lost all their immediate security and convertibility. And the CIMEX/TRD/Caracol/PALCO store chains were again approved foreign currency accounts to collect directly in these currencies what is sold in part of their establishments with foreign currency trading, through bank cards.
And now those state importers may have paid foreign currency to foreign suppliers, and they find that their transfers abroad do not go out. All providers mention that they do not understand the reasons that have been explained to them in Cuban banks as to why their transfers do not go out, when it is simply most likely that there is not enough foreign currency, even though the population has previously deposited that currency in the banks before making purchases in stores.
This short story probably shows that in the country’s economy the theory of the baseball championship and its sixth Play-Off game prevails, losing the championship 3 to 2, and where it is essential to win the sixth game to be able to go to the seventh and last. All available weapons are used, the best pitcher is used, even if he cannot pitch in the last game, etc. If the sixth game is lost, there is nothing to do! Probably here, in Cuba, the same thing happens: if it is necessary to buy medicine to combat COVID-19 or necessary food or fuel to avoid uncomfortable “blackouts,” well, I imagine that the hand does not shake to resort “to the best pitcher of the moment”: the USD in the bank, and tomorrow…tomorrow we’ll see.
How many contracts with CL have been approved and could not be paid? How many CL balances do enterprises have, for which the country does not have liquid backing in FCC? How many balances in USD do the chain stores and foreign enterprises have, plus the population, for which there is no support neither in liquid currencies nor in products in stores?
These questions are not only for the current moment, but should also have been asked when the so-called Monetary Reorganization was going to begin. If the answers were not very satisfactory, they could have indicated that it was not the best time to “add more fuel to the fire.”
It is recognized that it is very difficult to change that “baseball” mentality, when you have bigger responsibilities. It can be very complex to change the rules of the game, however advisable it may be, and decide to stop using those currencies that belong to banks or enterprises or people, in the face of urgent needs. But if those risks were not wanted, it was necessary to be consistent and not undertake half-hearted reforms, changes that didn’t delve into more essential aspects of the economy, where partial changes could bring more problems than benefits.
Some untouchable aspects of economic practice that can undermine any monetary reform
The changes that should have been made before the “Task of Reorganization” have already been mentioned. But, leaving it at that, to put it badly and quickly, it may seem that mistakes were only made in putting the cart before the oxen, and not the other way around.
However, we must return to some of those issues. What it’s about is that many do not yet understand that carts necessarily have to be pulled by oxen or other means of traction. Rather, they think that they are carts that move on their own, independent of the realities that they later contemplate.
The “Monetary Reorganization” continued to treat some economic concepts in the same way that they have been conceived historically. So it is very difficult for the economy to change.
The issue of prices, which is continually discussed so much, the issue of wages, and others, are aspects on which there are different criteria in society. To mention a few, which we continue to assess under the same criteria since the existence of the former Soviet Union.
What has taken the authorities and the mass media the longest attention is the issue of prices, the fair complaints of the population in this area. Sometimes it seems that ceiling prices at all costs is the main tool to say if the “Task of Reorganization” is successful or not. Again, instead of concentrating on discussing what has been legislated to get the economy to take off, to increase production and services, the issue of prices per se is the one that concentrates almost all attention.
And it’s not that it’s not an important issue; it’s the view on the subject. The inflation rate not as a way of measuring the results of the reforms, but seen to control prices, how to top them, to avoid complaints from the population. Hence the characteristic ups and downs when prices are topped and products immediately disappear; but after the prices are liberalized, the products appear, but the prices are very high for the level of wages in the country. And so periodically, from one side to the other….
By identifying prices as the fundamental aspect, we again focus on the sphere of distribution, rather than on the sphere of production, when Marx himself warned the following: “it is wrong, in general, to take as essential the so-called distribution and put the main emphasis on it.” Could someone show me where the classics of Marxism-Leninism could have ensured that social justice (or better labor productivity leading to greater satisfaction of the needs of the population) would be achieved with price controls?
It was stimulating to see the number of resolutions that were repealed on prices in the regulations of the “Reorganization,” but even so the new ones continued to contain many resolutions on prices. And, above all, these regulations, with prices approved “from above,” rigid for long periods of time, continue to forget the fundamental thing: that prices, if they are formed freely in the market, are a mechanism for stimulating production; and if they are regulated outside of supply and demand, they can give a signal to stop or reduce production or supply of services.
The issue of profits is another that continues to be analyzed as before, and the resolutions of the “Monetary Reorganization” are full of regulations aimed at limiting them. Profits are the sources of wealth not only for the owners, but also for the whole of society, through increased wages, taxes, contributions and dividends in the case of state-owned enterprises. Therefore, it is not profits what we must limit. It is the income of the workers that we must try to improve based on those same profits.
What comes first producing and obtaining wealth in order to later be able to redistribute it. And to achieve increases in production, it is necessary to stimulate the obtaining of profits by those who invest and produce. Whether private or state.
And when it comes to fixing the prices of merchandise, it is not surprising that the CUP exchange rate against foreign currencies has been fixed as it had always been done in Cuba and in other former European socialist countries. At the end of the day, the exchange rate is the relative price of the currency. The “Reorganization” was not far from the practice of establishing fixed prices.
The bottom line was not whether the Day Zero exchange rate was going to be 24 or below 24 or above. That would be just a photograph of the moment, even if it was more or less blurred. The important thing would be to see how the CUP exchange rate against other currencies would continue to be fixed over time; to see if it was true that there would be a relatively flexible exchange rate regime, as announced.
It’s very difficult to change from a fixed exchange rate regime to one with flexible exchange rates. It implies permanent variations in many aspects of economic life, with a constant influence on prices, salaries, pensions, etc., and a close interrelation with all other macroeconomic variables. Let’s say that this flexible exchange rate regime is not adapted to resolutions with strict fixing of merchandise prices. But successful economies do not function with exchange rates fixed for long periods of time.
At no time has it been explained how this relatively flexible exchange rate regime would be carried out. Or was that left for later? If so, is it a simple design error?
However, more than a year has gone by and what there is is a fixed exchange rate of 24:1. In other words, the same as before the “Reorganization,” when it was 1:1, but where only the proportion has changed. With the aggravating circumstance that the closest exchange rate to reality is not set by an official institution such as CADECA but by the unofficial market.
Collateral political damage
With greater or lesser success, since 1993 the Cuban population had been adapting to the existence of chain stores in foreign currency (first in USD, then with the coexistence of the USD and CUC, and later only in CUC) and had accepted them despite not receiving wages in those currencies.
The population had been convinced of the need for its existence, to increase the collection of foreign exchange from abroad, for the good of society’s other plans, and to not mix the economy in foreign currency with the other, more inflationary economy in national currency with better chances of replenishments in those stores.
However, the current stores in FCC, which work only with cards, have had and continue to have a strong and widespread popular rejection. There isn’t a day that you don’t hear or read something against these stores. I would be willing to admit that these stores are nothing new, that they are practically the same, because the stores of the past also sold in currencies that were not the wages of the population. One wonders, then, why the widespread rejection of FCC stores now? Here are five possible explanations:
- Before, the population could exchange in the CADECA CUP for USD or CUC, even if it was in the small amounts that salaries allowed. Now if someone does not receive income in FCC, they have to go to the unofficial market to acquire FCC. With greater difficulties and with a constant devaluation of the exchange rate of the national currency.
- There were foreign exchange incentives for part of the country’s employees.
- Trades workers (masons, plumbers, etc.), as well as casual vendors, could easily charge in CUC (cash) for their services and products. Today many can only collect cash in national currency. And for many it is more complicated to charge for transfers in FCC. If they receive cash in USD, they cannot deposit the salary in the banks. It is also very difficult to collect cash in euros.
- To acquire a product, you must first go to the banks to deposit the cash in FCC. There have also been difficulties in the connections between stores, FINCIMEX and banks, to be able to pay with the use of bank cards.
- And, above all, there are the long queues and the shortage of supplies in the stores, even when they sell the products in FCC.
Ideas had also been leaked that the “Reorganization” had the intention that the salary would serve to satisfy the needs of the population; that it could not be admitted that someone who received family aid from abroad without working had economic advantages over the working people. Very laudable ideas and goals to be achieved, but very difficult to put into practice simply with a monetary reform. Monetary reforms are not magic and cannot create wealth out of thin air. They encourage or not the creation of wealth. But we already mentioned that the greatest solutions are in the productive sphere. Those broken promises damage the political capital of any government, even when the intentions have been the best.
It could be said that before the “Reorganization,” the population, with their salary, had less access to imported products than after the process. Monetarily, at least, the salary could not satisfy an extensive purchase of products. Now with an official exchange rate of 24:1, salaries are enough to buy more imported products, which are sold in stores in CUP. However, this monetary advantage is almost instantly erased when these CUP stores do not have a large assortment of products. Or when you have to stand in endless queues to have access to them. Paradoxically, a monetary advantage is perceived by many as a current disadvantage. However, chain stores must allocate a large amount of their revenue from sales at FCC stores to stock their CUP establishments. And this effort is erased by other drawbacks, in addition to reducing the ability of store chains to expand offers in establishments in FCC.
The shortages in stores that sell in FCC has multiple explanations that go beyond this article. Many of its causes were already known before the “Reorganization” and it was not expected that they would disappear after January 2021. However, and as collateral political damage, a large part of the population mistakenly considers that the shortage in stores in FCC is only a product of the “Reorganization” (although it is not the fundamental cause, it also influences the shortage).
I recently heard people say that we were facing the same dilemma as in the 1990s and that we would soon see the reestablishment of the same solutions of yesteryear (for example, incentives in foreign exchange for workers, sale in FCC between state enterprises, etc. ), because they did not believe that a single real currency could work without a flexible exchange regime and exchange between currencies; or did not believe that the stores in FCC could be eliminated, under the current conditions of the economy.
I partly agree with this diagnosis. But hopefully the solutions are not totally the same as before, that the government finds more accurate solutions, in favor of business efficiency and the increase in production and services, where monetary solutions are only part of the solutions.
Author
Omar Everleny
