Two economic moves

No announcement was made, but two important economic policy moves came to light last week, one in agriculture and one involving foreign companies.

The agriculture move was not hard to foresee. Farm production is clearly one of Raul Castro’s priorities; in his 26^th of July speech, he lamented that too much good land is idle, and he called for expansion of the practices that work well within Cuban agriculture. That could only mean greater reliance on Cuba’s private farmers and their small cooperatives – the producers who deliver about two thirds of the produce to Cuba’s 300 farmers markets.

So when Reuters correspondent Marc Frank visited farmers in Camaguey, he found that Cuban officials are meeting with farmers, urging those who have less than the legal maximum of land to apply for more land if they can put it into production.

Cuba’s farmers were already free to apply to increase their land holdings, but my understanding is that in the past, the response was a nearly automatic “no.” With weeds taking over idle lands, it appears that the government is looking for ways to say “yes.”

We’ll see how widespread this practice becomes. Potentially, it would have three positive effects: increased food supply, downward pressure on food prices, and higher income for the private farmers and cooperatives.

Another Reuters report told of a meeting last Wednesday where the Finance Ministry told foreign companies that as of January 1, they must keep records of hard currency payments they make to their Cuban workers, and the workers will have to pay income tax on them. I understand that a formal regulation is to follow.

For more than a decade, it has been an open secret in Cuba that foreign companies make these cash payments. They are an established feature of the labor market – and they are also illegal. A foreign company in Havana that wants to hire a secretary or driver can expect to pay $100 to $150 per month (now 100 to 150 convertible pesos); a professional can earn $300 per month or more. Smaller payments are typically made to workers at joint ventures, but this new policy does not apply to them.

These payments are the obvious reason why Cubans overwhelmingly prefer to work in tourism and the foreign business sector.

Faced with this widespread and illegal practice, Cuba authorities could have done nothing, as they have done for years, or they could have cracked down on it. Instead, they decided to regulate it and to tax the income. Cuba’s foreign investment minister told Reuters that this step will “normalize relations” with foreign investors, and Cuba is “adjusting the taxes to the circumstances.”

As a result, a worker who earns $200 per month from a foreign company will have to pay the same tax as a Cuban entrepreneur who earns the same amount as an artisan, taxi driver, or home-based bed-and-breakfast operator.

The workers now subject to income taxation probably don’t see this as progress, and one can hardly blame them. Unless their employers increase their pay, these first-time taxpayers will see their income decrease.

From an economic policy perspective, the government has legitimized hard currency payments that put one sector of the workforce at an income level far higher than the average Cuban worker. The message is that it’s ok for some workers to be paid more than others, and the way to address equity concerns is not to stamp out the higher incomes, but to tax and redistribute some of it.

This particular move, if it plays out as described in the initial reports, will not stimulate the economy – but if foreign investment expands in the coming years, the result will be a larger share of the workforce earning hard currency incomes.

What is more interesting is the philosophy behind it, and it will be interesting to see if it appears in other moves in the months ahead.