Cubanálisis El Think-Tank

ARTÍCULO ESPECIAL EN EL THINK-TANK DE CUBANÁLISIS

Reforming Cuba

Be more libre

 

The transformation of the economy needs to happen much faster

 

IT HAS been five months since Cuba and the United States announced that they would end their long cold war, but Cuba’s president, Raúl Castro, is still basking in the afterglow. On his way home from Russia this week he stopped off at the Vatican to see the pope, and said he might return to the Catholic faith. Later François Hollande paid the first-ever visit to Cuba by a French president; he was granted an audience with Fidel Castro, Raúl’s ailing brother, who led the revolution in 1959 and ruled until 2008.

 

But beneath the bonhomie lies unease. Cuba’s creaky revolutionaries spent half a century blaming the American embargo for all the island’s woes. Now they resist American capitalism for fear of being overrun. The result for most ordinary Cubans is not too much change but too little. The island is poorer than many of its neighbours. Doctors earn just $60 a month -after a 150% pay rise. Food and other basics are in short supply. Boat people still flee to Florida’s shores.

 

Cuba deserves a proper democracy and a robust market-based economy. Sadly, that is unlikely to happen soon. Some things are changing. Private guesthouses, restaurants, barber shops and the like have begun to flourish, creating the kernel of an entrepreneurial middle class. But if Cubans are to benefit from the opening with America, their rulers need to reform more boldly and quickly than they have done so far.

 

A cocktail of reform

 

Where to start? Cuba should begin by opening up many more sectors to private enterprise. Currently, Cubans can be “self-employed” in 201 activities (including reading Tarot cards), but few that require a university degree. In place of a “positive list” of permitted private activities, the government should publish a negative one that reserves just a few for the state. All others would then be open to private initiative, including professions such as architecture, medicine, education and the law. The new bourgeois are potential customers for professional services; catering to that demand would in turn expand the middle class.

 

Liberalisation is urgent in wholesale markets. Today enterprises such as restaurants are forced to buy supplies from state-run supermarkets where ordinary people shop, which exacerbates shortages. This undermines popular support for the emerging private sector.

 

The climate for foreign investment must also improve. Cuba woos foreign investors for the expertise, jobs and currency they bring, but treats them shabbily. Under a supposedly friendly new law, they must still recruit workers through state agencies, to which they pay hard currency; the agencies then pay out miserly salaries in pesos. Imported inputs pass through bureaucratic state-run enterprises. Worst of all, legal codes are vague and their application is arbitrary. In recent years several foreign businessmen have been imprisoned (and later released) with little explanation.

 

How much of this thicket Mr Castro is prepared to clear away is uncertain. The party’s leadership has hinted that its congress would strengthen the National Assembly, a rubber-stamp body. A proper legislature that could write laws would give security to enterprise. Cuba is also bracing for a painful currency unification, which will end a huge subsidy to state companies.

 

For many of the revolution’s ageing leaders reform and privatisation are yanqui-inspired dirty words. The regime looks to China and Vietnam, where communist governments have embraced capitalism without yielding power. The Cuban communists are wary: they fear that, if they give up too much economic control, they will be obliterated just like the communists of eastern Europe. Yet the bigger risk would be merely to tinker with a system that keeps Cubans poor at a time when their aspirations are rising.

 

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Cuba’s economy (1)

Picturesque, but doing poorly

 

Despite the thaw with the United States, politics is paralysing the economy.

The first of two stories

 

BY DAY grey-haired Americans trundle through the streets of Havana in pink 1957 Chevy convertibles, klaxons blaring. By night they recline over rum and cigars, tipping generously, listening to hotel salsa and reminiscing about the cold war. Many of the new American visitors to Cuba, whose numbers have surged since a diplomatic detente in December, are old enough to remember life before the internet and relish a few days in one of the world’s last Facebook-unfriendly bastions. What tourists find quaint seems stifling to many Cubans themselves.

 

For a lucky minority life has improved since “D17” (December 17th), the day Barack Obama and his Cuban counterpart, Raúl Castro, announced that they would seek to end five decades of hostility. Mr Obama’s decision to relax some restrictions on American visitors is expected to push tourism to Cuba up by 17% this year, bolstering foreign exchange by around $500m, or 1% of GDP, estimates Emily Morris, an economist at the Inter-American Development Bank. Visitors spend CUCs (Cuba’s dollar-equivalent hard currency) at a few swanky private restaurants where the quality (and prices) have reached fashionable Florida standards. Cubans are borrowing whatever they can to spruce up accommodation in a city where hotels are now booked up weeks in advance. According to Omar Everleny, a Cuban economist, 18,000 private rooms have become available. That is the equivalent of 31 new hotels the size of the 25-storey Habana Libre.

 

This activity is expected to boost economic growth from last year’s meagre 1.3%. But there is little sign as yet of the $2.5 billion a year in investment that the government hoped to woo with a new foreign-investment law last year, mostly because it sends mixed signals. It has authorised at most two manufacturing projects at its Mariel port and special economic zone, despite hundreds of applications. It continues to view private business with distaste, and believes socialist state enterprise will remain the core of the Cuban economy. As one economist puts it, “the government wants to create prosperity, but it doesn’t want to create prosperous citizens.”

 

As a result, it risks creating neither. Some of the 500,000-odd people self-employed in private enterprise -about 10% of the labour force- benefit from earning hard currency, and represent a nascent middle class. Unlike the rest of the labour force, their productivity is improving.

 

But the majority who work in the state sector earn Cuban pesos, live on ration books and can barely make ends meet unless they receive remittances from abroad or do informal jobs illegally. This produces stark inequality, which is exacerbated by shortages, especially of food. Some of the new restaurateurs admit that they face wrath in Cuban supermarkets when they pull out wads of notes to stock up on scarce beer, milk and cheese, leaving shelves empty and pushing prices higher. They insist it is not their fault; the government has failed to open up well-supplied wholesale markets or allow them to import goods. But that argument counts for little with a hungry public.

 

What’s more, it exacerbates a vicious circle in which disgruntled government employees slow down at work, further sapping output and causing more shortages. In a bid to counter inequality, the government has raised salaries of favoured state workers such as doctors. It has authorised public entities such as the sugar monopoly to raise pay if productivity improves (this year, sugar production is up 22%). But partly as a result of higher wages, the budget deficit is expected at least to double to above 6% of GDP this year.

 

All this creates a headache for Mr Castro. He has less than a year before a Communist Party congress next April. There he will have to defend reforms launched at the previous congress in 2011, including a planned unification of Cuba’s two currencies, despite their disappointing results so far. Mr Castro must also worry that a Republican will succeed Mr Obama, who will leave office in early 2017. To forestall a renewed tightening of the American embargo, he will want to show that Cuba is making economic progress.

 

Next April’s congress could also mark the start of a generational change in Cuba’s leadership. Mr Castro, who took over from his brother, Fidel, in 2008, is expected to step down as president in 2018. He has said that he is keen to promote younger leaders, replacing the “historic generation” of octogenarians who fought under Fidel in the 1959 revolution.

 

He is grooming Miguel Diaz-Canel, the 55-year-old first vice-president, to replace him. There is a possibility that Mr Castro could step down as head of the party next year. Economists working for the government say some of Mr Diaz-Canel’s peers are receptive to reformist ideas. They are often seen carrying PCs or tablets, suggesting an interest in bringing more internet to Cuba. But they are also reluctant to defend reform publicly, so it is hard to know what they stand for.

 

Many in the establishment are terrified that change will jeopardise what they see as the main gains of the revolution, such as free education, health care and welfare. “The economy has to become more efficient, but you can’t ignore our principles or you’ll get a tsunami of capitalism washing over the whole island,” says Luis René Fernández of the University of Havana.

 

Mr Castro may be preparing to take on Communist Party conservatives. The party’s central committee said in February that it would discuss a new electoral law at next year’s congress. It gave no details; no one expects anything like political freedom. The aim may be to pressure mid-level bureaucrats to stop paralysing reform. “Change starts from the top and those at the bottom want it, but it gets stuck in the middle,” says Rafael Hernández, editor of Temas, a social-sciences journal.

 

Mr Hernández believes that a priority for the government will be a stronger National Assembly that can approve laws to underpin economic liberalisation, such as the right to own a business (currently, private firms, however prosperous, are considered “self-employment”). He also argues that professionals such as lawyers, teachers and doctors should be able to moonlight from their state jobs in private consultancies, consolidating a “socialist middle class” that pushes for further reform. However, he frets that hardship has made ordinary Cubans apathetic about greater political representation. For them “the glass is always half empty.”

 

Among intellectuals, though, resistance is growing. Dagoberto Valdés, editor of Convivencia, a Catholic journal, says the American thaw has robbed the regime of its ability to cast its neighbour as an “external enemy”, so its own shortcomings have moved into the spotlight.

 

El Capitolio, a marble landmark in central Havana, modelled on (and with a bigger dome than) America’s Capitol, points to a brighter future. It is being refurbished and is supposed to become the seat of the National Assembly for the first time since 1959. Alberto Pagés, a wiry old man who for 30 years has been operating a homemade box camera for small change on the building’s steps, thinks it will attract more tourists and could become “a symbol of how Cuba and the United States can look more like each other”. But ask him whether it could also become a harbinger of democracy and he clams up. “I know absolutely nothing about politics,” he mutters.

 

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Cuba’s economy (2)

Day zero or D-Day?

 

The tricky task of unifying a crazy system of exchange rates

 

CUBA has two currencies and a mind-boggling number of exchange rates. So when President Raúl Castro set out four years ago to unify the currency system by 2016, it was not surprising that he gave few details on how he would achieve it. A year in advance, it is still not clear. Nor is there a fixed date. Cubans call the unknown day of reckoning Día Cero (“day zero”).

 

The main difficulty is not unifying the two currencies per se. They are the Cuban peso, which most people use, and the convertible peso (CUC), worth about $1, which is a dollar substitute used by individuals in tourism, for remittances and in the private sector. It would be relatively easy for the average Cuban to scrap the CUC and conduct all transactions in pesos. Already many goods can be bought with either currency. The exchange rate for the peso is 24 per CUC, a level that has changed little since the CUC was created in 1994.

 

But for the economy at large what looks like a relatively simple book-keeping exercise could have devastating consequences, because there is a parallel exchange rate, mostly hidden from the public, that is used in accounting by state-owned firms and foreign joint ventures. It is one peso per CUC (or dollar). The massively overvalued rate has been in place since the 1980s, when Cuba was subsidised by the Soviet Union. It creates huge distortions in the economy, allowing importers to buy a dollar’s-worth of goods for one peso, a wheeze that drains precious foreign exchange from the country. Cutting the overvalued rate to the cheaper one would be the equivalent of a 96% devaluation. This could bankrupt many state-owned firms, whose costs have been accounted for at the overvalued rate.

 

Augusto de la Torre, the World Bank’s chief economist for Latin America, says he doesn’t know of any country that has started unification with such diverse exchange rates, and that it could be “suicidal” to join them in one big bang at 24:1. Vilma Hidalgo, vice-rector of the University of Havana, urges caution. She says many segments of the economy, such as exporters and firms that struggle to compete against subsidised imports, would benefit from devaluation, but others could be devastated.

 

So Cuba is, typically, treading carefully. The government has started with hotels and the sugar and biotech industries. Though their new exchange rates are far from uniform, the most common is 10:1, which some think may be the target rate for unification. But even if the whole economy were to merge at that rate, it would still represent a 90% devaluation for most.

 

Typically, a country embarking on such an upheaval would get financial help from the IMF and World Bank. Because of its history of enmity with the United States, Cuba does not have that option. Ms Hidalgo hopes that rapprochement will spur enough trade and financial flows to support the new exchange rate. In the meantime, gradualism will remain the guiding principle, which means the distortions will persist. Expect many day zeroes.