“The State sometimes makes mistakes. When one of these mistakes occurs, a quantitative decrease is noted in each of the elements that make it up, and work comes to a standstill until it is reduced to insignificant quantities; it is the moment to rectify.”
Ernesto “Che” Guevara, El socialismo y el hombre en Cuba. 1965
“The economy cannot be managed with death throes or ideological squeamishness. The economy, as a science that it is, has its laws and it is not possible to be inventing with them, nor solving the problems as in a puzzle.”
Joaquín Benavides Rodríguez, Cuba y la Economía, August 4, 2021.
In a previous article we summarized and analyzed some of the most recent economic revival measures that the Cuban government has taken in recent months. Of the six Decree-Laws, one Decree and more than 15 ministerial resolutions announced on August 6, none have entered into force, as they have not yet been published in the Gaceta Oficial, but working versions of some are circulating, telling us where things stand and allowing us to have a glimpse of some of the essential changes they contain. Three of the Decree-Laws are aimed at promoting non-state forms of management (FNGE), micro, small and medium-size enterprises (MSMEs), non-agricultural cooperatives (CNA) and self-employed workers. For its part, the Decree deals with the Activities to be Performed by MSMEs, CNAs and the self-employed.
The questions of the moment are: what else can our country do to alleviate the health, economic and political crisis it is facing? What concrete measures can be implemented to boost the economy, based on those that have been proposed for years? Will we be in a position to urgently adopt other, more difficult and controversial decisions, and adjust mistakes along the way while we forge the political consensus that allows their implementation? There is no more time to lose.
We start from government statements and the national consensus that there are three priorities: overcoming the health crisis caused by COVID-19; inflow of “fresh” foreign exchange through export of goods and services, investments and remittances; and developing national production to the maximum, particularly food, based on endogenous resources, savings, increased productivity and efficiency. Let’s review each of these priorities in detail below.
Controlling and overcoming the COVID-19 pandemic
The international consensus is that the COVID-19 pandemic cannot be eliminated — if the new coronavirus can be fully exterminated — until at least 70% of the world’s population is vaccinated, assuming that existing vaccines protect against the current strains and those that may arise. There are countries that are not going to reach that figure in the next two years, if they ever do.
In the face of each epidemic, the need for herd immunity is calculated. In the case of COVID-19, at the beginning of global infections it was estimated that the required herd immunity was 70%. With the appearance of the “delta” variant, this index has been increasing and today there is even talk of 85% -90%. Cuba — even though 30% of its population has completed the immunization scheme — is still far from this goal, although its vaccination figures are growing day by day, at a rate that represents almost double the world average.
Cuba is a country with an open economy — the sum of exports and imports constitutes 27% of the GDP (2018) — and a large flow of national and foreign travelers (10 million in 2018 with a population of 11.2 million at the time). This means that since we cannot isolate ourselves from the world and from COVID-19, we can only aspire to achieve maximum immunity for our population (the sum of those vaccinated and those recovered from the disease) and indefinitely maintain health control measures, especially in ports and airports.
We cannot afford to keep the country closed to tourism — one of the three main sources of foreign exchange income for the island — so it will eventually be necessary to open the airports, reestablish flights and recover international tourism, as soon as the conditions allow it. It will be necessary to maintain measures such as requiring a negative PCR or vaccination certificate, such as that of the European Union, for all incoming travelers, and even to access closed services and premises in the country. And it will be necessary to learn to live with — and control — a limited level of indigenous transmission, so that it does not exceed the detection and treatment capacity of the country.
The country’s decision to bet on the production of vaccines was wise, despite criticism and questions, not only because buying vaccines abroad would have been very expensive at a time of serious shortage of foreign exchange, difficult also due to permanence of the U.S. blockade, but, supported by the formidable development of biotechnology, pharmaceuticals and health in Cuba, the investments that are being made promise to pay off more than once, when the vaccination of the entire population is achieved before the end 2021 and there is the possibility of significant exports of national vaccines as of 2022. “The surplus that we have of vaccines during 2021 will be available for export and only when we have the entire Cuban population immunized at the end of 2021. We could be exporting all the doses of vaccines that we are capable of producing to the countries with which the corresponding agreements are reached,” said Mayda Mauri, first vice president of BioCubaFarma.
Increasing convertible currency earnings. The standing obstacles
When in the 20th century the Cuban economy was part of the socialist division of labor and had conditions of high external compensation, it was logical to privilege the central allocation of resources based on an almost total control over the means of production, including a monopoly over practically all of Cuba’s foreign economic ties: foreign trade, the financial market, communications, foreign direct investment. To this must be added the state dominance over the labor market, with more than 90% of employment in that sector, budgeted and business. “All the elements of this paradigm are unviable under current conditions,” said economist Ricardo Torres. The central planning scheme as the only resource allocation mechanism has been exhausted.1
On foreign trade
The starting point — the stark reality, as the American analyst William LeoGrande wrote — is that “the Cuban government is broke. Over the past two years, it has lost every major source of foreign exchange earnings it had.” Obviously, increasing the flow of freely convertible currency, by any means possible, becomes a strategic objective for the survival of the nation.
The late but laudable decision to authorize foreign trade in freely convertible currency for the private sector, export their productions and import supplies and equipment, obliges them to use authorized state foreign trade enterprises (Comex) as intermediaries. MINCEX announced that, as of July, non-state management systems managed to export more than 10 million pesos (400,000 dollars) in items such as charcoal, agricultural products and services, and more than 3,500 import contracts had been signed for producing in the country, through Comex.
The argument that these specialized enterprises are favored by international experience, their infrastructure, links with customs and regulatory entities in the country and abroad, knowledge of suppliers and markets, is powerful, but why is it the only option?
In the world there are several options to export and import: for example, the producer himself can do his commercial procedures and hire a simple freight forwarder — it can be state-owned — who receives the merchandise that the client wants to export, dispatches it to the destination and charges for the service. A private fruit producer could export, for example, through the website of a distribution giant like the Chinese company Alibaba. A producer in need of acquiring equipment or supplies can go to free-zone importers or foreign representations of manufacturers and suppliers, to buy products and services that he would later import, not having to pay the commercial commission charged by Comex. Why is this not possible for farmers, self-employed workers, cooperatives and future private MSMEs? It seems to be one more obstacle, apparently insurmountable, and at this moment unappealable, for the “development of the productive forces.” Is it an economic or political decision?
According to Cuban economist Oscar Fernández Estrada: “Absolute state control over foreign trade is far from constituting a principle of socialism, much less if it works through a monopoly structure. The only thing that it efficiently produces are obstacles to the development of the productive forces, as well as a formidable instrument of control and non-tax collection. Promoting private commercial imports would have more costs than benefits if it is suggested only ‘to establish a non-state system of internal trade.’ But, at the same time, it is essential for the accelerated development of domestic productions that must be undertaken by the private and cooperative sector.”
On the other hand, the differentiation between the rights of individuals and legal entities regarding imports is indefensible. The decision to “exceptionally and temporarily authorize the import of food, toiletries and medicine via passenger with accompanying luggage” insists that it must be non-commercial. Doesn’t it seem nonsensical to think that a Cuban person is going to import a suitcase full of deodorants, shampoo and aspirin only for personal use? Wouldn’t it be more consistent and transparent to also eliminate — albeit temporarily — the commercial import ban for individuals, and not simply for the authorities to turn a blind eye later?
In this regard, Fernández Estrada adds in another analysis: “The State could — with the audacity required by the historical moment — suspend the cult of the monopoly on foreign trade, and articulate partnerships with those private actors that have been supplying informal domestic markets for years, creatively evading the most varied internal and external restrictions. In this way, it would link them to state enterprises, entrust them with purchasing missions, hampered by the blockade, appropriate for their scale, and thus establish true alliances that contribute to alleviating the situation.”
In other words, openly recognizing the space of individuals and private entities in the import and supply of products in scarce supply would help to alleviate the shortcomings that the State cannot solve: not only recently authorized products, but many others such as motor vehicle parts, hardware items, household supplies, etc. It also constitutes an inflow of foreign exchange in kind to the country, without the corresponding expenditure of State resources, and a boost to economic activity and employment in the private sector.
In 2017, The Havana Consulting Group estimated that the total value of merchandise shipped to the island in 2015 was $3.5 billion. Of these, $1.5 million, or 43%, was sent through specialized parcel agencies, while $1.9 billion (57%) was moved by these passengers. Between 2011 and 2015, the value of the parcels sent grew 62%, estimating the total value sent in this period at $14.8 billion.2 Compare this with the official figure of 11.7 billion pesos of total merchandise imported by the country (state sector) in 2015.3
Eliminating the monopoly of foreign trade in such a way that all actors who wish to do so can import and export directly or through Comex, and boosting the sectors that produce goods for national consumption and export, with an emphasis on the production of food and value chain approach, represents a net profit for the economy. The use of enterprises and state agencies specialized in foreign trade must be optional and competitive, not mandatory.
But even the announced reforms are taking too long to be implemented and the economy in general continues to be overly regulated and bureaucratic, a foreign investor complained to Reuters: “They need to get things done quickly. There are so many rules, and everyone is terrified of breaking the rules,” he said, and gave as an example a state pig farm where pigs were dying because it did not get permission to import feed.
On domestic trade
On the other hand, why does all — or almost all — the activity of wholesale and retail sale of goods have to be irretrievably in the hands of the State?4 In particular, the main non-subsidized product store chains, both in national currency and in freely convertible currency (Caribe: TRD; Panamericanas: Cimex, belong to the Grupo de Administración de Empresas, GAE, S.A. consortium). When the hard-currency collecting stores began operating, some economists recommended introducing foreign chain stores, arguing that similar advantages to those in the tourism sector would be obtained with joint ventures, as well as management contracts with foreign hotel chains and tour operators. The latter has allowed us “win-win” in tourism: growing without losing control and generating income and jobs for the country, in addition to technology transfer in hotel management.
How much would we have benefited if the government had made concessions to foreign retail chains that are in charge of managing the financing, purchase, transportation, import and marketing of all kinds of products that the country requires, and that now, more than ever, are lacking? Chains such as Carrefour (France), Aurrerá (Mexico) or El Corte Inglés (Spain)5 could establish a presence on the island and the State could collect, for example, 30% of the sales tax, at the same time that they would have healthy competition for Cuban chains, for the benefit of consumers. On the other hand, Chinese chains for selling auto parts and hardware, hardware for construction, could alleviate a part of the current shortages. Don’t we have the experience in the tourism sector?
Even the attempt to control prices in supply and demand markets by setting caps has largely failed. As predicted at the time, that led to hoarding and the black market and, ultimately, further scarcity. In July, the Ministry of Finance and Prices (MFP) annulled the limit of growth of retail prices (price caps) of agricultural products, in force since February 2021.6 The effect was immediately seen in an increase in the assortment and in prices in supply and demand markets. It is ironic that the same people who defended price caps in February, as a mechanism to control inflation, appeared in July defending market prices to stimulate production.
As Joaquín Benavides Rodríguez points out: “Resolution 320 signed by the minister of finance corrects an error that was made by the leadership of the economy, by imposing administrative caps on the prices of agricultural products, thereby causing significant damage, not only to the country’s agricultural production, but to the consumption of the population in a complicated situation, aggravated by the pandemic and also by the financial blockade, in which deficits in national food production cannot be replaced by more imports. There were signs of concern by many, with years of experience of seeing a similar mistake made, but not only the state bureaucracy, enemy of the operation of the market in agricultural production, but also, unfortunately, the policy, imposed the caps on prices and the results can be seen. Agricultural producers produce a minimum, and no matter how much they are urged, they do not increase their areas. And in the current situation the insufficient national food production cannot be supplied with imports.”7
On foreign direct investment
Foreign investment has been handled in recent years as a strategic component for the development of the country. Despite attempts to streamline and expand capital flows, the state monopoly and desire for control, as well as favoritism for large projects with state-owned enterprises and preferably in special zones, has limited investment as well as the external obstacles of the blockade and its aftermath.
According to economist José Luís Rodríguez: “In practice, the criterion has prevailed many times that the most profitable investments are reserved for the Cuban State, which then has to cover all the [counterpart’s] capital or a majority proportion of the shares. If this is not possible, in multiple cases the investment has not been made. Thus, non-hotel investments have not been approved in tourism for amusement parks, nightclubs, cabarets or wellness services (gyms). Neither investments under franchise, nor the so-called BOT projects (the foreign party builds, operates and transfers the investment to the Cuban party when it recovers the investment plus profit). Investments have only been promoted in hotels outside the priority regions or high-cost non-hotel investments for foreigners: marinas and golf courses (two have been approved, but they do not get the capital for the investment from the Cuban side).”8
The foregoing gives rise to some difficulties those who wish to invest in Cuba may face, beyond the commercial and financial blockade, low country-credit and other external obstacles. According to the sectoral policies explained in the MINCEX Foreign Investment Opportunities Portfolio (2020-2021):
- “In order to present a project to MINCEX, the investor must do so through a sponsoring body, agency or national entity.” It means that someone interested in investing in Cuba cannot take the initiative to present a project directly: first they have to find a state enterprise that is interested. Private business consultancies, which could assist them in this search, are not authorized to operate in the country, and the state ones are not inclined to receive clients who have small capitals.
- “The pre-feasibility studies that should be part of the proposal and business file are presented.” These studies must be contracted in Cuba to the approved state consultancies, and their costs must be borne by the potential investor, increasing the amount of their initial investment, at risk. They cannot do it with independent consultants, in the country or abroad.
- “Smaller scope businesses and investment amounts that have a marked export character or are linked to the production of goods and services for export, as well as that contribute to local development, will be promoted.” The experience so far is that there are few — if any — “smaller scope” investments; that is, below one million dollars, and the last Portfolio of Opportunities only presents two projects below that amount. MINCEX announced an eighth edition of the Portfolio of Foreign Investment Opportunities in Cuba for 2021, which intends to incorporate, among its options, smaller business opportunities. It has not yet been issued.
- “In businesses with foreign investment there will be no free hiring of the workforce, with the exceptions provided by law.” For the majority of foreign investors, this clause represents a dissuasion to invest in Cuba, since it reduces their autonomy and makes the process of hiring Cuban personnel more expensive and slower.
- In principle, agricultural cooperatives can be associated with foreign investors under Law 118 on Foreign Investment, however, it is not by chance that there is not yet a single cooperative business with a foreign investor: the obstacles and hindrances are many and great, among them is the guarantee that investors must receive from their state “sponsors,” who are more interested in the possible investments being made with their enterprises than with the cooperatives they “cater to.”
- Cuban individuals who permanently reside in the country and/or those Cubans who temporarily go abroad, either to work or on vacation, and enter capital in this way are not considered among possible investors: they must be foreigners. Investments by Cuban permanent residents in Cuba, with the capital they accumulate here, bring from abroad, or receive in the form of productive remittances, are regulated by the rules that the country has approved for these individuals. However, experts know that the country receives more capital through informal means of remittances and investments to the private sector than the total amount of Foreign Direct Investment (FDI) to the state sector.9 Insisting on the alleged monopoly is harmful to the economy and the development of the country.
On investment priorities
The monopoly is not the only aspect present in the external sector of the economy: internal investments, especially in tourism, are dominated by a large conglomerate, GAE S.A., which continues to commit a large part of the Cuban State’s scarce investment capital for the construction of hotels, while the tourism sector is collapsed and its recovery is more than uncertain. Meanwhile, investments in agricultural production, the food industry and the energy sector — keys to sovereignty and survival — languish. According to the National Office of Statistics and Information (ONEI) of Cuba (2020), 46.9% of the total investments in 2020 of the civil state sector were destined to the activities of “hotels and restaurants” + “business services, real estate activities and rent,” against 5.3% for “agriculture, livestock and forestry.” A restructuring of investments with state funds is imposed in favor of the now priority sectors.
We cannot continue to ignore in official figures and in the minds of officials the contribution of private investment represented by imports in kind and productive remittances, whose amounts, in addition to being significant, have a positive impact on the social economy.
“Wherever there are currencies not used in real priorities, they must be reoriented, since neither business autonomy nor sectoral organization are absolute principles, even less in the context of such an acute crisis, which even threatens national security due to its impact on the population. Every increase in the sums available for peremptory needs, no matter how small, can make life a little more bearable for thousands of people: they are not cold numbers.”
Final thoughts
In an interview published in “Catalejo,” the blog of the magazine Temas, on April 15, 2016, Cuban political scientist, researcher and university professor Juan Valdés Paz said:
“When the construction of a socialism appropriate to national history and culture is sought, then, more than one project, two overlap: that of nation and that of society. For the nation project it is clear what the challenges are, the main enemy, the geopolitical situation, etc. Seeing it from that viewpoint, separately, can suggest more or less openings, closings, exposure, care, delimitation of our relationships and level of regional integration. So it would be necessary to reflect on what type of society and what hegemonic discourse we need to guarantee the nation project, because it needs a society to carry it out; and there is where the society project appears. So my way of answering the question is that we have to create our proposal for national socialism, which we have not developed. We have to consider the demands of the nation project as invariables, and those of the socialist society project, as variables. In other words, we can assume a faster, slower, harder, softer transition, with more or less elements of capitalism; we can make the society project more flexible by virtue of the international challenges to which we are subjected, because we are small, because the world is ‘wide and alien’; we can consider being more flexible in the society project and tougher in the nation project. It is in this perspective that I place myself.”
Placed in these terms, it is up to the leadership of the country, and to us as a people, to think about what else we should make more flexible about the society project to ensure the survival of the nation project. Perhaps it is time to relax the political and economic monopoly and promote more competitiveness, complementarity, diversity, participation in decision-making; in short, more socialist democracy.
***
Notes:
1 Ricardo Torres Pérez (2019) “La transformación productiva e inserción internacional: discusión de propuestas contenidas en el Plan 2030.” In: Group of authors, MIRADAS A LA ECONOMÍA CUBANA, Ruth Casa publishers, 2019. ISBN 978-9962-703-75-4.
2 THCG Business Report, www.thehavanaconsultinggroup.com, February 2017 No. 1. Page 23.
3 Statistical Yearbook of Cuba 2020, Edition 2021, Chapter 8. External Sector http://www.onei.gob.cu.
4 There are a few, but important exceptions, such as the markets for agricultural and food products; the street traders who sell illegally, but are almost always tolerated, products imported by individuals who travel abroad to buy; some cultural and artisan products, etc. and now garage sales.
5 Offering some product lines of these brands in their stores, as Cimex did on some occasion, charging cost prices with the margin of 2.40, was not at all a successful experiment or possible to scale.
6 MFP Resolution 320, published in Gaceta Oficial No. 68 Extraordinaria, of July 30, 2021.
7 Joaquín Benavides Rodríguez. “Suprimir los topes de precios para los productos agropecuarios, rectificación de un error. Demora en la aprobación de las pymes privadas, reincidencia en un error.” Cuba y la Economía, August 4, 2021. https://cubayeconomia.blogspot.com/.
8 Author’s interview with J.L. Rodriguez, June 2021.
9 It has been estimated that around 50% of what is received via remittances is used for investments or working capital. (See: José Luis Rodríguez, Impactos globales y regionales en los flujos de remesas a Cuba, monograph, CIEM, February 1, 2019). That would represent in 2017 approximately $1.750 billion in remittances invested in the private sector, versus the estimate of foreign direct investment in the state sector that year of $875 million. (THCG Business Report, Statistical Yearbook of Cuba 2020).
Author
Rafael Betancourt
I agree 1000% with what has been said here ,it is a long artical and very detailed , but that is the cuban way mine is shorter . The government is so intent in Keeping control ,it risk loosing it all, and I mean All with a capital A ,in this beautiful country . share control or loose it all there is no time left ……… Bert