Cuba´s new economic measures (II)

Cuba Standard survey about Cuba´s economic outlook

HAVANA, July 26th  On July 21, a new package of actions approved by the government of Cuba was announced, aimed at trying to lead the Cuban economic crisis towards recovery. Announced by Minister of Economy and Planning Alejandro Gil Fernández, the package consists of 75 measures aimed primarily at attracting foreign currency, protecting the most vulnerable people and making the productive sectors more flexible.

We will offer the readers the opinion of economists who have agreed to answer some questions on the subject, in this second part we publish the answers of Tamarys Lien Bahamonde, PhD candidate in Public Policy and Urbanism at the University of Delaware. She has a master’s degree in Local Development from the University of Camagüey and a degree in Economics from the University of Havana.

One of those announced this week, one of the measures that directly affect the population is the opening of a foreign exchange market. What impact could it have on the informal exchange rate?

It is a good idea to reopen the forex trading opportunity in a legal context. The informal exchange rate is a reflection of the availability of foreign currency in Cuba. Like any market of supply and demand, if the offer grows, the price must tend to fall.

However, we still know very little about these 75 announced measures. The behavior of the market is also influenced by the expectations of the individuals participating in it. This means that in the coming weeks we could see a decrease in the price of currencies in the informal market as a result of this announcement.

In any case, short-term changes in the informal exchange rate do not reflect the dynamics or structural problems of the economy.

In reference to the debt, is it possible to grow and revitalize the economy without solving this problem?

We must begin by explaining that the debt is an international problem, but that it attacks countries like Cuba with limited access to sources of external financing with special force. It occurs when it is necessary to borrow money to cover the demands of the domestic economy.

Generally, it increases the fiscal deficit and has, when it is very high, a negative impact on the economy’s recovery capacity because many resources must be diverted to pay interest and the amount of the debt.
Now, when the debt cannot be paid or there are delays in payments, the chances of accessing foreign credits necessary to cover the current account deficit, that is, the country’s expenses that cannot be covered with income, are reduced.

So, debt is a double-edged sword. On the one hand, it is a necessary evil, and on the other, it can become an infinite loop from which there is no escape: while loans are requested to cover the deficit, the deficit is increased by covering debt payments.

In conditions of chronic crisis like the Cuban one, it is difficult to revitalize the economy with a high debt. It is necessary to resort to other sources of financing such as foreign investment. But to attract foreign investors, it is necessary to have a dynamic economy that offers security to those investors.

In addition, Cuba is not in a void but is integrated into a world economic and financial scenario that is in crisis. In this context, any new investment is a risk, given the uncertain conditions that exist in the markets. What I mean is that this is not a good time for any economy in the world, and that undoubtedly has an impact on the Cuban economy.

In the same way, it is to be expected that access to credit is limited by the global recession that economists are already announcing. Creditors may show limited willingness to negotiate debt payments, and that could further impact the Cuban economy. It is a time to look inward more carefully, and effectively decentralize forms of financing. That model could be more successful.

The announced measures mean granting a greater role to the non-state sector. What else could the government do in this regard, where has it still fallen short?

The theoretical debate on reforms always has a component on the scope of the market in the planned economy. Strictly speaking, the intention of a socialist economy is not state ownership but social ownership.

Opening opportunities to non-state forms of ownership ― which do not have to be exclusively private ― must be a priority for Cuba, as well as promoting their development and integration into the local and national economy.

I always insist that it is not about announcing strategic lines but about creating the legal and material conditions so that progress can be made in the desired direction. Non-state ownership in Cuba operates in a context of resistance that is perceived fundamentally in small tasks, such as the use of banking tools or flexibility in paying taxes

What we Cubans call “paperwork,” and which seems so insignificant, carries a terrible weight on Cuban economic actors, especially those with limited resources and in more intricate places. There is a marked territorial differentiation and Cuban economic policy, although it is apparently aimed at reducing these gaps, does not outline specific equity policies for that.

The equal treatment given to economic actors by territories in terms of taxes, for example, is a problem. It is necessary to begin to incorporate decentralization in aspects beyond having Local Development Projects or allowing local governments to establish investment priorities.

Decentralization is the devolution of power, and the devolution of power also implies freedom to define not only prioritized areas but also to independently establish opportunities and facilities in those areas for non-state actors.

Those who wish to undertake in Cuba require capital, and although there is a credit policy, many investors or interested persons need advice.

In addition to regional differences in Cuba, there are profound social, gender, and skin color differences that require differentiated treatment, including differentiated tax and credit opportunities for poor people, for example, who wish to join a cooperative or have an idea for a small business. Along the same lines, the unions have to separate themselves from the state and play their role as protectors of workers’ rights.

Foreign investment reappears within the instruments to revitalize the economy. What could be the concrete actions in this regard for the state and non-state sectors?

It is interesting that there is talk of legislation to regulate foreign investment in the non-state sector of the economy. This is an important step that can have a positive impact on the recovery of some small local industries. I always insist that form matters.

How this policy is to be implemented will define its success and its contribution to the national (or regional) economy. For example, we do not know if all non-state actors are included in that policy or only some, such as cooperatives.

We do not know if a limit will be placed on the amounts to be established for the investments to be received, or if the participation of some foreign investors will be limited for any reason. For example, will investments by Cuban Americans in small private enterprises be allowed in Cuba?

I would insist on the need to create flexible regulations that allow opening channels of economic cooperation with foreign investors interested, above all, in promoting manufacturing industries that contribute to increasing the supply of goods and services for Cubans.

It would be essential to explore the possibilities of this type of cooperation in the agricultural sector, so backward and affected by the crisis. Let us remember that Murillo admitted that of the state enterprises that closed with losses in 2021, 82% belonged to that sector. Obviously, the unintended impacts of many of these scenarios need to be analyzed.

Will promoting a more efficient agriculture affect production costs and make it even more expensive? Will the increased supply effectively have an impact on prices? Unfortunately, we do not have immediate and accurate answers to many of the questions that may arise, but we must think and carry out concrete actions to guarantee the future of Cubans on the island.

Do you think that the modifications to the import of packages will have a significant impact on the supply of goods?

Cuba is an economy affected by scarcity. Transforming this scenario requires structural transformation policies that contribute to a substantial increase in the supply of goods and services to meet the needs of people in the country.

A policy like this, although positive, is limited in its scope and its impact is likely to be concentrated on a segment of Cubans, which would exclude an important part of Cubans from its benefits. Let us remember that it is an import without commercial purposes.

We also know that many of these products will end up on the informal market. Still, it is not enough. A policy of expanding the actors participating in Cuba’s foreign trade and in the retail sales system would be much more effective in the short-term solution to chronic shortages in Cuba.

Someone will always argue that we run the risk of becoming an extremely importing country of consumer goods and it would affect the national industry. And it’s true, but isn’t the national industry already affected? Are we not already importers of consumer goods?

The recovery of the industries takes a lot of time and resources that Cuba does not have now. I would take the risk of resolving the serious supply situation through the available means and alleviate the living conditions of Cubans.

Do you consider it to be a pertinent package of measures? What would be your recommendations?

Many announced measures are essential, such as the establishment of a foreign exchange market and legislation for foreign investment in the non-state sector. However, we know, I repeat, very little about the policies and how they will be designed and then implemented. The key to success lies precisely there.

Policies should also explicitly consider not only the issues of crisis resolution and economic growth, but also social and environmental protection, and increased equity.

Long-term problems such as the emigration of professionals, impoverishment, and regional, racial and gender inequalities appear little among the economic policy priorities in Cuba and should be a priority.