The hard part

“Now comes the hardest stage” of Cuba’s economic reform process, Vice President Diaz-Canel recently said in Havana.  Others of higher and lower rank have been saying the same thing.  What do they mean?

State enterprises may be the toughest nut to crack.  Many are not profitable, and if the government proceeds with its plan to shutter those that lose money, it will realize fiscal savings but also put people out of work.  Easy for an accountant, tough for a politician.

In recent National Assembly sessions (see coverage in Reuters, Granma, Juventud Rebelde), reform czar Marino Murillo indicated that the government will proceed along these lines in 2014.  Enterprises will receive greater autonomy, he said, by being permitted to use half of their after-tax profits either for investment or to increase worker pay, and through other measures.  As for the unprofitable companies, he said, “We can’t make a plan that includes companies like these.  Either they downsize, or they merge with another enterprise, or they undergo a process of investment to improve them, because otherwise the phenomenon of having to finance these losses will persist.”

As the government downsizes its bureaucracy and its enterprises, it needs a strong private sector that generates jobs for excess state sector workers.  In that connection, it’s good news that the entrepreneurial sector, now triple its size in 2010, continues to grow. 

But more is needed, larger-scale enterprises that can employ professionals and others in larger numbers, including in production of high-value-added goods and services.

The new law on private non-farm cooperatives is in effect, moving slowly in its pilot project phase.  197 have been authorized, according to a labor ministry official; in the Artemisa province there are 15 – 12 farmers markets plus a bus cooperative, another that recycles and sells construction materials, and a construction cooperative.

Most of these new cooperatives are converted state enterprises.  An official told state media that if the government decides to convert a state enterprise into a cooperative and the workers are not interested, then “the building and the equipment are put out to public bidding.”

But Presna Latina reported July 8 that the new cooperatives include 12 start-ups from the “non-state sector,” these consist “of self-employed workers mainly.”  (See coverage from AFP, Juventud Rebelde, and the Economist.)

Another way to generate jobs is through foreign investment, an issue that introduces a tension between the benefits of using foreign capital and know-how, and the risk – from the Cuban socialist perspective – of ceding a little bit of economic sovereignty in every joint venture.  This conflict surely explains, to take one small example, the decade-long wait between the tourism ministry’s identification of the need to build new golf courses and the recent approval of the first project.

The economic policy guidelines approved by the Communist Party in 2011 call for increasing foreign investment by adding new criteria by which projects may be approved, by seeking partners from new countries, and by shortening the time the government takes to make decisions on projects.

Recently there has been lots of talk in Havana about updating the 1995 foreign investment law.  But a vice minister told AP this month that a new law is not in the cards; instead, Cuba is likely to “update certain regulations” to accomplish the job.  Projects are being prepared in mining, tourism, renewable energy, and the food industry, he said.

Finally, in his July 7 speech to the National Assembly, Raul Castro called Cuba’s dual-currency system “one of the most important obstacles to the progress of the nation,” causing an “inverted pyramid” where people with greater responsibility are paid less.  It also means that Cuba lacks a functioning price system, which means distortions in both the state and private sectors that impede efficiency, competitiveness, and rational allocation of resources.

Unification of the currency, Raul said, will allow “more far-reaching and deeper transformations in questions of salaries and pensions, prices and fees, subsidies and payments.”  The result will be that “all able citizens feel an inventive to work legally once the law of socialist distribution is re-established: from each according to his capacity, to each according to his work.”

The problem is how to get there.  A sudden unification of the currency would create winners and losers – for instance, if the convertible peso were to become the new currency at the rate of ten Cuban pesos per convertible peso, those earning state salaries would gain and those earning convertible pesos would lose.  Someday, the government will have to manage the politics of that. 

Then there is the problem of state enterprises, which use a 1:1 exchange rate instead of the 25:1 rate in currency exchange houses.  In recent briefings for foreign journalists, Cuban officials told the Economist that the first step toward currency reform is about to take place, where state enterprises will have new exchange rates for their foreign trade.  They will be, a Cuban economist speculated, 12:1 for exports and 7:1 for imports.

So this is the hard part, not least because these and other changes are being pushed through a bureaucracy steeped in 50 years of centralization.  But these changes can also put the Cuban economy on a stronger footing than before, ending the policy patchwork that has held things together since Soviet support ended two decades ago.