Money starts to talk

Cuba's economy

Money starts to talk
And eventually, perhaps, in one currency, as the tempo of reform accelerates
Jul 20th 2013 | HAVANA |From the print edition

AT 9.01am one morning earlier this month, Marino Murillo, a member of
Cuba's ruling Politburo, strode on to the stage at the International
Press Centre in Havana, gave a concise account of the government's
economic plans, and took questions for 45 minutes. What would have been
routine elsewhere was remarkable in communist Cuba, for three reasons.
Gone is the interminable waiting around for the late-night rants of
Fidel Castro: punctuality is one of the hallmarks of the government led
since 2006 by his younger brother, Raúl. And after internecine political
battles over liberalising economic reforms, the government is confident
enough of its message to have invited a small group of foreign
journalists to hear it—the first such initiative in many years.

Third was the message itself. Mr Murillo, a burly former army colonel
who is in charge of implementing economic reforms (officially dubbed
"updating"), stressed that the core of the system remained "social
property". But he also talked of "wealth creation" and the need for
"price signals" and "market factors". "Life has shown that the state
can't do everything," he said. "Success will lie in how to maintain
macro balance while giving space to the market and wealth creation."

Under 313 "guidelines" approved by a Communist Party Congress in 2011,
Raúl Castro is trying to revive the island's moribund economy by
transferring a chunk of it from state to private hands and by
streamlining a cumbersome central-planning system. So far the changes
have centred on farming and small business.

The government has handed over, on ten-year renewable leases, nearly
1.5m hectares (3.7m acres) of land to private farmers or co-operatives,
who now occupy 70% of farmland. Farmers can sell almost half their
output to the highest bidder, rather than handing all of it over to the
state as in the past. About 400,000 Cubans work in the budding private
sector of small business and self-employment, up from 150,000 three
years ago. Cubans can now buy and sell houses and cars freely and travel
abroad. From last month, they can surf the internet at what will soon be
a network of 118 telecoms centres, though the price of $4.50 an hour is
about a quarter of the average monthly wage for a state worker.

The tempo of reform is accelerating. Over the next 18 months, Mr Murillo
said, the government will loosen two of the economy's most crippling
shackles. Starting next year, state enterprises will be allowed to keep
half their post-tax profits, to reinvest or distribute to their workers.
Their managers will be given much more autonomy. Companies that post
persistent losses will, in theory, be liquidated.

Mr Murillo is also preparing to unify Cuba's twin currencies, the source
of convoluted distortions and hidden subsidies. Most wages and prices
are set in Cuban pesos (CUPs), 25 of which buy a dollar. The tourist
economy operates with "convertible" pesos (or CUCs), set at par to the
dollar. In fact, CUCs are not freely convertible, because state
companies are allowed to pretend that each of their CUPs is worth one
CUC. The upshot is that ordinary Cubans are paid a pittance (the average
monthly wage of 466 CUPs is worth just $19). Income inequality is rising
sharply as more Cubans obtain CUCs, either as remittances from relatives
abroad or because they work in tourism or the growing private sector.
And since scarce foreign exchange is assigned by government fiat,
companies have had no incentive to export or substitute imports.

The logical step would be to unify the two currencies by devaluing the
CUC and revaluing the CUP, though this would trigger inflation and boost
demand for imports. Instead, officials say that within the next few
weeks several industries—starting with sugar, biotechnology and
shellfish—will be allowed to start experimenting with different exchange
rates. Pavel Vidal, a former official at Cuba's Central Bank now
teaching at the Javeriana University in Cali, Colombia, thinks that
these companies will get 12 pesos to the dollar for exports, will pay
for imports at seven and book oil imports from Venezuela, Cuba's main
benefactor, at four to the dollar.

This experimental devaluation should generate opportunities as well as
costs. Since companies need management autonomy to take advantage of
them, Mr Vidal thinks it is "positive" that currency and enterprise
reform are happening together. But he points out that multiple exchange
rates tend to generate corruption and hidden subsidies—vices that
officials have pledged to fight.

If they succeed in their aim of boosting productivity, these reforms are
likely to lead to job losses. Raúl Castro originally said that the state
would lay off 1.1m workers by 2014. He was forced to backtrack, because
many feared losing the little they have (and the opportunity for
pilfering that state jobs offer). Instead, the government is quietly
easing workers off the state payroll. It is encouraging—or obliging—them
to form co-operatives.

The constitution was recently changed to allow co-operatives outside
farming; 197 have so far been authorised, according to Carlos Mateu
Pereira, an adviser to the Labour Ministry. State-owned restaurants are
to become co-ops; many transport businesses will go down the same route.
So will some wholesale markets. There is talk that professionals, such
as architects and lawyers, may be able to form co-ops—something which
reformist economists favoured from the outset.

But the reforms remain limited and cautious. The characteristic
methodology is that change is first piloted in selected provinces or
industries before being rolled out across the island. This reflects the
leadership's fear of social—and potentially political—instability. "We
cannot have a mass of people without jobs," says Mr Pereira. But it also
restricts the benefits of change.

Anti-reform batteries
Reform has powerful enemies. Numbers two and three in the Communist
Party's pecking order, José Ramón Machado and Ramiro Valdés, are elderly
Stalinists. The defence establishment still has ties with such
disreputable regimes as North Korea's. On July 16th Panama announced
that it had seized 240 tonnes of arms, including two anti-aircraft
missile batteries and two MiG-21 fighter jets, concealed beneath a cargo
of sugar on a North Korean freighter bound from Havana. Cuba's
government said they were "obsolete defensive weapons" being sent for
repair. Although this is a breach of United Nations sanctions, Cuba's
quick acknowledgment suggested that it does not want the incident to
inflame its relations with the United States.

"Having been told for 50 years that communism is the way, there's a
natural resistance to change," says Orlando Márquez, the spokesman for
Havana's Catholic archbishop. Bureaucrats fear losing their jobs; for
some, ideology is more important than the economy, he says. Many
mid-ranking officials still spout the language of central planning.

There is also much inertia. Take Héroes de Yaguajay, a long-established
agricultural co-operative an hour south of Havana. It has leased an
extra 200 hectares of land, doubling its size. But it continues to
submit its production plan for approval by the authorities. In an
oxymoron of which he appears unconscious, its president, Alfredo Acosta,
says: "We are autonomous, but always within the decision of the
country." He says he chooses to continue to sell 80% of the co-op's
output to the state. Mr Acosta has been the president for 25 years.

While Mr Murillo insists that Cuba needs foreign investment, the
government seems paralysed by the issue. As part of an anti-corruption
drive, it purged some of its cleverest officials and locked up several
foreign businessmen (in horrible conditions), though two were recently
freed. The government is drawing up rules for a free-trade zone next to
a new container port at Mariel, 40km (25 miles) west of Havana, built by
Brazil's Odebrecht and due to open in December. Brazilian pharmaceutical
firms and a glassmaker have expressed interest in setting up export
plants there.

Cautious though they are, the reforms are producing social changes. "I'm
seeing a very gradual and very slow rebirth of a middle class," says a
teacher in Havana. Many private restaurants, guesthouses and shops have
become genuine small businesses, while many farmers are making good
money. Private gyms, spas and even cinemas are springing up to cater to
this new moneyed group. The teacher reports that the price of a haircut
has gone up from 1.20 to 20 CUPs. Gilberto Valladares, a chubby and
dynamic man who has set up a beauty parlour in his flat in Old Havana
and become a celebrity hairdresser, says he charges up to 10 CUCs a pop.

To those who criticise the slow pace of reform, Raúl Castro rightly
points out that "we are moving at a faster pace" than many imagine. But
so far the benefits of change are limited. Economic growth is running at
under 3% a year. Agricultural production has yet to increase, officially
at least. "Until now the government's proposal has been to create wealth
but not wealthy people," says Mr Márquez. "That's complicated." The next
couple of years will determine just how much Cuba is ready to change.

Source: "Cuba's economy: Money starts to talk | The Economist" -
http://www.economist.com/news/americas/21581990-and-eventually-perhaps-one-currency-tempo-reform-accelerates-money-starts