Economic Transformations, Property Rights, and Cuba’s Current Constitution

Economic Transformations, Property Rights, and Cuba's Current
Constitution / Estado de Sats, Antonio Rodiles
Antonio Rodiles, Estado de Sats / State of Sats, Translator: Unstated

By Antonio Rodiles

Introduction

The Sixth Congress of the Cuban Communist Party just concluded, leaving
a trail of questions to be clarified. Most of the televised debates
turned into semantic discussions, while a few dealt with practical
mechanisms to achieve stated objectives. Listening to the speeches,
which at some moments were limited exclusively to mentioning desires, I
had the impression that they referred to the construction of some kind
of Frankenstein, full of patches, fixes and half-measures, and not to a
socio-economic system of in the 21st century. The Congress definitely
fell far short of the expectations generated by the government itself.

It was surprising to observe that issues of vital importance, such as
the international context, the flow of information and knowledge, Cuba's
inclusion in the global economy, internet use in our country, the role
of Cubans from the diaspora in the future of the country, were
completely ignored. The issue of the legal framework, which must support
any economic transformation, was another of the notable absentees. The
phrase "property rights" was never mentioned, nor was the immediate need
to make transparent the "process of privatization" which is implicit in
the economic plan.

For years in our country a process of privatization has been occurring
which falls principally on specific corporate groups. These groups
operate under a market system and sell their products and services in
hard currency. While they lack ownership titles, they enjoy broad
autonomy. However, Cuban citizens lack necessary information about these
corporations and their economic dynamics. It is very important to note
that in creating these corporate groups, both national and joint
ventures, political loyalties have played an essential role, along with
ties of family and friendship.

I think, as a first step, we have to put all these issues on the table
in order to understand and discuss in great depth this moment in which
we are living as a nation. Any transformation process must be undertaken
with the greatest transparency and social consensus.

In this article I address the issues of property rights, privatization
and the legal framework that must support transformations in the short,
medium and long term. I compare the existing Constitution with the
Economic and Social Policy Guidelines for the Party and the Revolution
("Guidelines"), dated April 2011 and publicly released in May of that
year, in advance of the Sixth Party Congress. The 41-page Guidelines
contain 313 numbered points addressing health, education, sports,
culture, agriculture, industry, tourism, transport, housing and other
issues.

At the end of this paper, I also look at the experiences of Vietnam,
China and the former Soviet Union, and finally I offer some comments and
conclusions.

Property Rights, the Constitution and the Guidelines

The Universal Declaration of Human Rights[1], to which Cuba is a
signatory, speaks of property rights as a basic human right. The
statement reads:

Article 17.1: Everyone has the right to own property alone as well as in
association with others.

We must not forget that when we speak of property rights this implies:

1) Control of the use of the property.
2) The right to any benefit from the property, including rent.
3) The right to transfer or sell the property.
4) The right to exclude others from the use of the property.

In the case of the Cuban Constitution property rights are mentioned, but
with clearly defined limitations subordinate to the socialist character.

After the fall of the Berlin Wall in the 1990s, the exact meaning of the
term "socialism" was no longer clear. Traditionally, socialism is
understood as: a system with a centralized and planned economy in which
the State has ownership of the means of production and the common goods.
In socialism "private" property has a meaning distinct from that
accepted in liberal democracies, because the "owners" cannot exercise
all the prerogatives mentioned above.

Due to all the changes that have taken place in our country in the last
two decades, and the evident contradictions between the traditional
definition of socialism and the current situation, we must ask
ourselves: What does the current Cuban government mean by "socialism"?
It is important to remember that it is this core concept of the
Constitution in force since 2002.

The Constitution of the Republic of Cuba [2] states:

ARTICLE 14. In the Republic of Cuba rules the socialist system of
economy based on the people's socialist ownership of the fundamental
means of production and on the abolition of the exploitation of man by man.

In Cuba also rules the principle of socialist distribution of "from each
according to his capacity, to each according to his work." The law
establishes the provisions which guarantee the effective fulfillment of
this principle.

ARTICLE 15. Socialist state property, which is the property of the
entire people, comprises:

a) the lands that do not belong to small farmers or to cooperatives
formed by them, the subsoil, mines, mineral, plant and animal resources
in the Republic's maritime economic area, forests, waters and means of
communications;

b) the sugar mills, factories, chief means of transportation and all
those enterprises, banks and facilities that have been nationalized and
expropriated from the imperialist, landholders and bourgeoisie, as well
as the factories, enterprises and economic facilities and scientific,
social, cultural and sports centers built, fostered or purchased by the
state and those to be built, fostered or purchased by the state in the
future.

Property ownership may not be transferred to natural persons or legal
entities, save for exceptional cases in which the partial or total
transfer of an economic objective is carried out for the development of
the country and does not affect the political, social and economic
foundations of the state, prior to approval by the Council of Ministers
or its Executive Committee.

The transfer of other property rights to state enterprises and other
entities authorized to fulfill this objective will be prescribed by law.

ARTICLE 24. The state recognizes the right of citizens to inherit legal
title to a place of residence and to other personal goods and chattels.

The land and other goods linked to production in the small farmers'
property may be inherited by and only be awarded to those heirs who work
the land, save exceptions and as prescribed by law.

The law prescribes the cases, conditions and ways under which the goods
of cooperative ownership may by inheritance.

ARTICLE 25. The expropriation of property for reasons of public benefit
or social interest and with due compensation is authorized. The law
establishes the method for the expropriation and the bases on which the
need for and usefulness of this action is to be determined, as well as
the form of compensation, taking into account the interest and the
economic and social needs of the person whose property has been
expropriated.

In the Guidelines [3], the issue of private enterprise and properties is
addressed as follows:

General Guidelines section

The socialist planning system will continue to be the main national
management tool of the national economy. Its methodology and
organization and control must be modified. Economic planning will
influence on the market and take into account its characteristics.
The management model recognizes and encourages socialist
State-owned companies – the main national economic modality – as well as
the foreign investment forms described in the law (e.g., joint ventures
and international association contracts), cooperatives, small farming,
usufruct, franchisement, self-employment and other economic forms that
may altogether contribute to increased efficiency.
In the forms of non-State management, the concentration of property
in the hands of any natural or legal person shall not be allowed.

Section on Cooperatives

25. Grade 1 cooperatives shall be established as a socialist form of
joint ownership in various sectors. A cooperative is a business
organization that owns its estate and represents a distinct legal
person. Its members are individuals who contribute assets or labor and
its purpose is to supply useful goods and services to society and its
costs are covered with its own income.

26. The legal instrument that regulates the cooperatives must make
sure that this organization, as form of social property, is not sold or
otherwise assigned in ownership to any other cooperative or any
non-State organization or any natural person.

27. A cooperative maintains contractual relations with other
cooperatives, companies, State-funded entities and other non-State
organizations. After satisfying its commitment with the State, the
cooperative may pursue sales operations free from intermediaries and in
accordance with the business activity it is authorized to perform.

28. Subject to compliance with the appropriate laws and after
observance of its tax and contribution obligations, each cooperative
determines the income payable to its employees and the distribution of
its profits.

29. Grade 2 cooperatives shall be formed and the partners of which
shall be Grade 1 cooperatives. A Grade 2 Cooperative shall represent a
separate legal person that owns assets. The purpose of this cooperative
is to pursue supplementary related activities or conduct operations that
add value to the goods and services of its partners (such as production,
service and marketing operations) or carry out joint sales and purchases
for greater efficiency.

In the points above it is necessary to clarify certain aspects such as:

a) Under what criteria would the formation of new company be permitted
and who would be in charge of the selection and decision process?

b) There is a strong contradiction between maintaining central planning
and permitting the development of the market. What will be the practical
mechanisms to implement central planning without dismantling market
dynamics? Do such mechanisms exist?

c) Will a system of consultation be created, citizen directed, to review
contracts with domestic and foreign business groups?

d) Is it contemplated to include investments from Cubans living outside
the island among the possible investments?

e) Will the issue of confiscations from Cubans who were not corrupt and
who were not large landowners — who obtained their possessions and
property as their fruit of their own or their family's labor — be addressed?

f) How will the criteria forbidding the accumulation of property be
applied? Are joint venture or national corporate national groups such as
Cimex, Habaguanex, Cubatabaco, Gaviota, Cupet, among others,
contemplated within the restrictions regarding the accumulation of
property and capital?

The constitution defines the economic dynamic in the following terms:

Article 16: The state organizes, directs and controls the economic life
of the nation according to a plan that guarantees the programmed
development of the country, with the purpose of strengthening the
socialist system, of increasingly satisfying the material and cultural
needs of society and of citizens, of promoting the flourishing of human
beings and their integrity, and of serving the progress and security of
the country.

The workers of all branches of the economy and of the other spheres of
social life have an active and conscious participation in the
elaboration and execution of the production and development plans.

Article 17: The state directly administers the goods that make up the
socialist property of the entire people's, or may create and organize
enterprises and entities to administer them, whose structure, powers,
functions and the system of their relations are prescribed by law.

These enterprises and entities only answer for their debts through their
financial resources, within the limits prescribed by law. The state does
not answer for debts incurred by the enterprises, entities and other
legal bodies, and neither do these answer for those incurred by the state.

Meanwhile in the Guidelines we read:

5. Planning shall include State-owned companies, the Government funded
entities, the international economic associations, and also regulate
other applicable forms of non-State management. Planning shall be more
objective at all levels. The new planning methods will modify economic
control methods. Territorial planning shall take into consideration
these transformations.

8. The increase in the powers vested upon entity managers shall be
associated with their higher responsibility for efficiency,
effectiveness and for their control of labor utilization, financial and
material resources, coupled with the requirement on the executives to
account for their decisions, actions and omissions that lead to economic
damages.

Section on the Business Sector

14. The internal finances of companies shall not be intervened by any
unrelated entity. This intervention shall only occur in compliance with
legally established procedures.

16. Each enterprise shall control and manage its working capital and
capital expenditures within the limits allowed by the plan.

17. The State-run companies and cooperatives that steadily post losses
and insufficient working capital in their balance sheets or are unable
to meet their obligations with their assets, or whose financial audits
render negative results, shall be subject to liquidation or converted to
any other form of non-State organization in compliance with the
regulations on this matter.

19. Subject to observance of their commitments with the State and
compliance with the existing requirements, the companies may use their
after-tax profits to create funds for development, investments and
incentive payments to their workers.

21. Each company and cooperative shall pay to the Municipal
Administration Council with jurisdiction over its business operations, a
territorial tax, that will be set centrally according to the specific
characteristics of each municipality, as a contribution to local
development.

Section on Cooperatives

25. Grade 1 cooperatives shall be established as a socialist form of
joint ownership in various sectors. A cooperative is a business
organization that owns its estate and represents a distinct legal
person. Its members are individuals who contribute assets or labor and
its purpose is to supply useful goods and services to society and its
costs are covered with its own income.

26. The legal instrument that regulates the cooperatives must make sure
that this organization, as form of social property, is not sold or
otherwise assigned in ownership to any other cooperative or any
non-State organization or any natural person.

27. A cooperative maintains contractual relations with other
cooperatives, companies, State-funded entities and other non-State
organizations. After satisfying its commitment with the State, the
cooperative may pursue sales operations free from intermediaries and in
accordance with the business activity it is authorized to perform.

28. Subject to compliance with the appropriate laws and after observance
of its tax and contribution obligations, each cooperative determines the
income payable to its employees and the distribution of its profits.

29. Grade 2 cooperatives shall be formed and the partners of which shall
be Grade 1 cooperatives. A Grade 2 Cooperative shall represent a
separate legal person that owns assets. The purpose of this cooperative
is to pursue supplementary related activities or conduct operations that
add value to the goods and services of its partners (such as production,
service and marketing operations) or carry out joint sales and purchases
for greater efficiency.

Territories

35. The Provincial and Municipal Administration Councils will discharge
State duties and will not intervene directly in the management of any
business.

36. The state functions exercised by provincial and municipal sectorial
offices will be defined in relation to the functions discharged by the
Central Government Bodies, and the applicable scopes of competence,
links, operating rules and working methodologies of each authority will
de identified.

37. The implementation of local projects by Municipal Administration
Councils, in particular for food production, is a work strategy for
municipal food self-reliance. Mini-industries and service centers must
be promoted on the principle of financial sustainability as a key
feature that must be harmoniously consistent with both the municipal
goals and the objectives of the national economic plan. Upon their
completion, the local projects will be managed by organizations based in
the municipality.

Within the articles and the policy guidelines quoted above are apparent
contradictions. For one thing, it becomes apparent that there is a need
to end the process of centralization and nationalization that has
produced high indicators of inefficiency in the Cuban economy. But in
parallel, due to the desire of the nation's leadership to maintain
economic control, affirm that there could be a new form of central
planning adapted to the new context. That is, the Guidelines speak of
the need to take the market into account, but at the same time reject
it. This ambiguity will create discretion in applying the law, becoming
one more stimulus for corruption.

Any modern economy must have a basis in clear and transparent rules,
which encourage the entrepreneurial spirit in society, and not on
arbitrariness. This thesis, which is very simple, is the basis of any
modern functioning society. It is essential that an atmosphere of trust
and confidence exists for both domestic and foreign investments. As well
explained by the Peruvian economist Hernando de Soto, there is a strong
correlation between the clear establishment and enforcement of property
rights, the rule of law, and efficiency in the functioning of free
markets [4].

Unfortunately, in our country only select business groups, many of them
associated with the Revolutionary Armed Forces (FAR) and the Ministry of
the Interior (MININT), enjoy the benefits of operating under a market
economy, creating monopolies that control the entire Cuban market.

In contrast, the ordinary Cuban is allowed to open only small cafes,
tiny businesses almost medieval and artisan in nature, stalls selling
all sorts of trinkets, to which the regime applies exorbitant taxes and
a series of limitations that don't permit any growth. In these stunted
freedoms, professional services – a sector vital to any modern economy –
remain excluded.

Experiences of Vietnam, China and the former Soviet Union

As a point of comparison it is very important to analyze the processes
occurring in these countries with similar experiences, as they can offer
us invaluable lessons.

Although the core of the changes in these countries was the
liberalization of the economy coupled with the emergence of new forms of
property, it is clear that the processes of privatization have been
problematic. Nepotism, bribery, the lack of job guarantees for workers,
violations of environmental rules, among other ills, have been common
factors in the transformation processes of these countries.

At the starting point for the economic changes in these nations,
collective and state property took priority. In the case of Vietnam,
after reunification in 1976, the government gave itself the task of
eliminating all forms of private property, an approach it corrected
after facing a profound crisis. One of the first steps in the later
economic reforms was to break the state monopoly on property. This
occurred in 1986 when restaurants and shops were allowed to open. As
early as 1995, in the admission document to the World Trade
Organization, we can read:

"State-owned, collective, private individual, private capitalist, state
capitalist and foreign investment property are all equal before the law.
All businesses operating legally in the territory of Vietnams and/or
under its laws are recognized and protected under its laws, including
protection against nationalizations." [5]

In the case of China, the privatizations began in 1979 when the
collective communes were replaced by family farms.[6] Local businesses
also appeared, managed by the component governments themselves. Within
the latter there were different categories:

1) Private but registered as collectives, popularly called "using the
red cap."

2) Those which were authorized but had to pay a bonus to the authorities
at the end of each year.

3) Those over which the authorities exercised fierce control.

The use of soft credits on the part of state-owned enterprises has been
one of the common problems of the Asian giant. It's been said that in
socialism with Chinese "characteristics," the "characteristics" have
worked but not the socialism.

The case of the former Soviet Union and its controversial process of
privatization also offers us an instructive example.[6] As it began the
transformations toward a free market, one of the primary problems was
the almost complete absence of a definition of property rights. As a
consequence, there were no clear rules on the use of property and
businesses, resulting in high levels of corruption. In other cases,
disputes between various actors trying to make use of the same property
resulted in no one's being able to take advantage of it, and left the
involved companies directionless.

At the moment of privatizations there were various protagonists involved
in the process:

1) Workers
2) Managers
3) Ministries
4) Local Governments
5) Central Government

However the managers and bureaucrats within the ministries exercised a
strong influence through the strategic management of the companies and
were able to count on networks of connections that allowed them to take
control over production and marketing.

As the process of decentralization advanced the ministries could no
longer dictate the policies the companies must follow. The planned
economy, the fulfillment of the plans and the assignment of resources
collapsed, while the sale of products in the free market was gaining
ground. The managers gained autonomy and control over what they
produced, and at what prices and to whom to sell their products, the
latter based principally on their personal relationships.

On the other hand, the ministries tried to maintain control over imports
and exports through the issuing of licenses. This new economic design
was in the hands of the Party nomenklatura, military elites, and the new
oligarchs who competed for power with the old elites.

The State tried to maintain control of the most profitable sectors, only
accepting privatization when it believed it would exercise control over
the companies. Local governments gained power in the management of their
pieces of land, exercising control over vital public services such as
water and electricity, among others, which they used to exert a strong
influence over firms and they began to demand their share, reaping huge
benefits from the process of privatization.

One of the strategies, taking advantage of the lack of transparency, was
the creation of parallel firms or cooperatives, even within a single
firm. Such private firms or cooperatives bought the production at low or
controlled prices and sold it according to supply and demand. This
allowed the managers to garner personal earnings, and in turn to provide
wage increases for the workers.

All these maneuvers were possible because of the laxity of the laws and
because the local authorities colluded with the central government. The
managers received funds from other businesses or commercial banks with
which they could buy their own companies at low prices. In this
modality, known as "spontaneous privatization," consistent elements
included bribery, the use of political and economic alliances, the use
of public funds and the returning the benefits to many Party cadres.

In some cases this process was hampered by conflicts of interest between
different actors. Conflicts between local governments and managers were
common, because the former saw the possibility of managing these
businesses from the State and taking their own profits.

Another very popular form of privatization was through the use of bonds,
as conceived by the American economist Milton Friedman. This method was
more common in the case of small enterprises [7] and was also known as
mass privatization. The method consisted in issuing check to the
population for the value of the companies; it was a quick process and
achieved a more equitable distribution. However, the problem with this
method was that it was impractical for the future management of the
companies, because the property was dispersed and very difficult to
govern. With this method it was initially possible not to divide the
companies among small groups, but in some cases certain tricks to hold
onto the companies were used later. Among these was to bankrupt the
companies, so as to be able to buy the stock at very low prices.

Other methods of privatization were:

1) Open sales
2) Restitution
3) Settlement

All these methods had their own advantages and disadvantages
corresponding to the conditions that characterized each country. But
the key lesson is that whatever method is applied it must take into
account a knowledge of the specific conditions of each place and there
must be a basic consensus for its application. A complex process should
never become a piñata that ends with the discredit of the political
system and institutions.

Comments and Conclusions

As can be seen, many of the proposals contained in the Guidelines are
similar to the dynamics discussed above. Some of them operate
unofficially, that is they are quasi-legal, while others operate
"illegally." Thus, we have more than a few problems of corruption which
have touched the senior management of companies.

As Cuban citizens, we do not have mechanisms that allow us to use our
own resources, or to manage the finances of firms or companies. Despite
the recently created position of Controller General of the Republic,
citizens do not have access to the reports and audits of this government
agency.

Specific cases remain murky and demonstrate to us the urgency of
undertaking real changes that guarantee the transparent use of our
resources. Notable examples include: General Acevedo, who was in charge
of Civil aviation and who was charged with selling businesses cargo
space on commercial airlines and pocketing the money; former Minister of
the Food Industry, Alejandro Roca Iglesias, sentenced to 15 years for
corruption; the Chilean businessman Max Marambio, sentenced in absentia
to 20 years in prison for corruption associated with his Rio Zaza
company; Pedro Alvarez, former head of the state food company Alimport
who, on being investigated for corruption, sought refuge in the United
States; Manuel Garcia of the cigar company Habanos, jailed for
large-scale graft; and the wholesale arrest of the directors of the Moa
nickel plant, among many others.

I think it is opportune and necessary to point out the mistake we make
when we speak of subsidies on the part of the Cuban State. While there
is no clear definition of the concept of property, the Cuban State must
equitably share all of its resources. It would be an invitation to many
— starting with president Raul Castro who, on multiple occasions, has
referred to the State as an abstract entity, generator and provider of
goods and wealth, followed by vice president Ramiro Valdes, who speaks
of the Daddy State as one might speak of Santa Claus, and continue
through several lower level functionaries who repeat manufactured
phrases – to understand the first socialist Constitution in our country,
which established the whole people as the ultimate owner of all goods
and property.

If the Cuban State, with Raul Castro at the head, wants to be done with
the so-called egalitarianism, it should take the first step to establish
property rights in the Constitution, otherwise we will continue with a
system that supports the collective use of wealth but which, in the end,
allows its use and enjoyment by only a few.

I would like to pose some questions to which — as a citizen of this
country with all the rights granted to me under the Constitution – I do
not have answers and which show the ambiguity of socialist property.

Who knows the real budgets of the Revolutionary Armed Forces (FAR),
the Ministry of the Interior (MININT) and their groups of companies?
What citizen can review the investments and earning of the Office
of the Historian of the City or of the Cuban Export-Import Corporation
(CIMEX)?
Where can one review the finances of the telecommunications company
ETECSA?
Where are the data about the income received by Immigration from
the exorbitant and unjust costs imposed on citizens?
Does anyone know the location of all gold and silver objects bought
from citizens – at terribly low prices – or what the proceeds from their
sale are invested in?
How much will we invest in golf courses and now will their profits
be managed?

These questions and many others are in clear and urgent need of answers.
Legal mechanisms also need to be created that allow us as citizens to
establish legal responsibilities, from the President of the Republic to
the simple public official, when there is a mishandling of our assets
and resources.

In a society where there are no clearly defined property rights, the
necessary transparency to manage the society's wealth and resources is
lacking. If we want to end the egalitarianism and undertake a process of
privatization in any one of its variants as a necessary measure to
emerge from the crisis and stimulate our economy, this must be
accomplished with total transparency and within the appropriate legal
framework and with the participation and consensus of Cubans.

It is also necessary to be able to examine and review, retroactively,
all existing contracts, otherwise corruption will continue to grow to
unimaginable levels.

The Constitution must be changed, along with the corresponding laws
consistent with the real interests of the nation and the global context
in which we live. The constitutional structure and respect for property
rights, as well as the legal framework to support and encourage the
establishment of private enterprise are necessary and indispensable
elements to emerge from the profound crisis that assails us. Any
transformation that takes as a priority interests other than the
immediate improvement of the overall situation of the nation, will be
completely insufficient and only postpone the changes which, in one form
or another, must occur.

References:
1) Universal Declaration of Human Rights – English version from un.org
2) Constitución de la República de Cuba – English version from
http://www.cubaverdad.net/cuban_constitution_english.htm
3) Lineamientos de la política económica y social del partido y la
revolución – English version from www.cubaminrex.cu: THE GUIDELINES OF
THE ECONOMIC AND SOCIAL POLICY OF THE PARTY AND THE REVOLUTION, April
18, 2011
4) De Soto, Hernando. El otro sendero.
5) WTO, Vietnam.
6) G. Rodiles, Antonio. Una rápida Mirada a las transformaciones en China.
7) Aslum, Anders. Building Capitalism. Cambridge, University Press.

16 May 2011

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