Tuesday, September 30, 2008

Price freeze, policy freeze (Updated x2)

With the hurricanes gone, the country officially in recovery phase, and huge challenges looming to restore half a million damaged homes and a flattened agriculture sector, one might think the Cuban government would reach into the economic policy toolkit for solutions.

Not so, at least not so far.

Until yesterday, the only hint of something new was a vague one, when Fidel Castro wrote on September 7 that “Russia, Vietnam, China, and others expressed the disposition to cooperate as much as possible in investment programs that we should undertake immediately to re-establish production and to develop it.”

In the same essay, he noted that Venezuela’s aid offer is “the most generous gesture of solidarity” that Cuba has ever known.

“Steady as she goes” seems to be the guiding concept in economic policy.

In the one area where major change seems to be under way, the farm sector, Cuba is proceeding with the distribution of idle state lands to people who will use it to grow food. More than 18,000 people and 221 “personas juridicas” (cooperatives, I assume) filed papers to acquire new farmland in the first few days after the government started accepting applications, according to this Cuban media report.

Three of four applicants have no land now, the report says, representing an influx of new producers – a positive sign in a sector where it’s generally believed that it’s hard to find people who want to work.

Raul Castro made an appearance in Pinar del Rio last week and reiterated his concern about salaries, purchasing power, and work incentives: “People have to feel the need to work,” he said. He reiterated that Cuba’s commitment to equality doesn’t exclude higher pay for higher productivity: “You work more than me and you sacrifice more than me, and you have to receive more than I do.”

In the same appearance, he addressed the dual currency/dual salary system that is at the heart of the work incentive problem – but he said it “might be audacious” to think that Cuba could unify its currency within five years.

What to do to revive food production? There are numerous reports that Cuban farmers are doing what they know how to do after hurricanes, which is to plant short-cycle crops as fast as they can (see AP story here or video linked here).

But price increases are a problem. According to this report, prices in the agros, the farmers markets where producers sell their surplus at market-driven prices, have doubled since the hurricanes.

The government’s response is to institute price controls. Yesterday’s Granma carried a front-page announcement under the headline “Information for our people” that warned against theft and speculation, stated that previously planned food imports are “guaranteed” and new imports to replace lost domestic production are being contracted, stated that the government will not raise prices on food that it sells and that prices in the agros will be capped. (AP story here.)

Over the years, Cuban data have shown that about two thirds of their products come from private farmers, the most productive in Cuba. To my knowledge, this is the first time that prices will be controlled since the agros began operation in 1994. Until now, supply and demand has been the rule.

One can understand that any government would protect against price gouging, but that’s not what is happening here. “Provisionally,” the announcement says, for a “group of basic products,” vendors may charge no more than the prices that were prevailing in the markets before the hurricanes struck.

So prices will be frozen for the producers who are being called upon to increase production, who face higher production and transportation cost due to the government’s recent fuel price hike, and who surely face additional costs related to the hurricanes, such as repairing their homes, or hiring extra labor to clear fields and get new crops in the ground.

This is not a signal that will increase production.

Indeed, today’s El Pais reports that an “employee” of a Havana agro (that could mean a private vendor or a state administrator, the article doesn’t specify) predicts that the price controls will backfire. Producers will not want to bring product to market, he said, and he predicted that the agro “will be bare in a week.”

Meanwhile, Venezuelan President Hugo Chavez has visited Cuba twice in one week.

Maybe his help will be enough.

Update: There are several reports about the markets, both state and private, with less supply and less variety of products in recent days: EFE and Juventud Rebelde (Spanish), and EFE and IPS (English). The immediate cause of the reduced supply seems to be, obviously enough, that the hurricanes ravaged so many crops in the fields. But price controls are pinching, too. The EFE article cites a market vendor who is not selling onions because his supplier’s price to him, and the maximum price he can charge at retail, are exactly the same. In other words, no margin.

Update: La Jornada’s article today is more concrete than those cited above. The products subject to price controls are: three types of plantains, three types of beans, garlic (three sizes), malanga, boniato, yuca, onions, tomatoes, cabbage, and rice.


Anonymous said...

Phil wrote:
"Three of four applicants have no land now, the report says, representing an influx of new producers – a positive sign in a sector where it’s generally believed that it’s hard to find people who want to work".
Raul said:
“People have to feel the need to work,”
Funny how the leadership is unable to see it.
Why were Cuban vegetable markets overflowing before Communism arrived in Cuba?
Simply because people saw a profit in producing and selling what they harvested. It is not very difficult to understand.
Why don't people feel the need to work?
Easy. Because they do not have any expectations of getting ahead and changing the miserable conditions of their daily life.
Unfortunately this rationale cannot penetrate the thick minds of Communists. They cannot see the trees from the forest. The solution to the food problem has been staring them in the face for decades but their ideology blinders prevents them from seeing it.

Anonymous said...

"Price Freeze, Policy Freeze..."

how about "Brain Freeze"?

Anonymous said...

They threaten peasant farmers with prison if they dare raise prices. But, at the same time, they decree a huge increase in the price of gasoline. They know everything will be more costly now because the hurricanes have wasted the crops. Instead of subsidizing these private farmers and cushion the impact of the gas price hike, like socialist govts. usually do, they simply issue threats, like all dictatorial caudillos do, without bringing any hope to the people. They know there is natural inflation when products are scarce, but instead of thinking up economic incentives which could make things a little better, they go back to the same old, tired harangues and threats. The more energetic Castro I becomes, the less things change. They even go backwards.

leftside said...

Cuba is suffering an epic disaster. If prices of food doubled due to a hurricane anywhere, there would be loud calls for government intervention (look at Atlanta). With regards to food, the Revolution's first move was actually providing double rations to affected areas. Then they sped up the land distribution program. Third, they realized they had a speculation problem in something of vital importance right now.

The sad fact is that the agros are operating like a typical market - exploiting tragedy and rewarding greed like we are in the 1800s or something. That is why "free markets" are rejected in Cuba (and increasingly around the world).

You have to admit the move is smart, at least, politically. There had already been too much inflation at the agros, with the (probably correct) feeling that many farmers were getting (relatively) rich.

Of course there are real risks involved with price controls at this time, well outlined by Phil. But I think there are signs the Government is going to do all it can to make things easy in other ways for the producers - private or not. Seeds, land, credits, expertise, manpower can all be marshaled. Thousands of farmers have asked for and received additional land in the last year, in addition to the 18,000. I don't think farmers are gonna be sitting out and not producing anytime soon.

The answer of what Venezuela's "most generous gesture" amounts to is intriguing.

Anonymous said...

"In the one area where major change seems to be under way, the farm sector, Cuba is proceeding with the distribution of idle state lands to people who will use it to grow food."

Dimwits like Lefty and Sub-Coma Andante Raul still can't figure out, after 50 years of failure, that people refuse to work unless they have incentives. How hard are all these "new farmers" going to work when they know that the fruit of their labor will be confiscated by the regime?

leftside said...

Anon, maybe you missed the part where Raul ackowledged this issue and relaxed wage ceilings to meaningfully respond to it. But free markets, whether in labor or agriculture, have shown their ugly face and will not be permitted.

Anonymous said...

leftside, I imagine everytime you walk outside your apartment the free market shows its "ugly face" -- how can you stand it?

leftside said...

Yes indeed anon. I walk past a homeless man and woman on the way to my bus stop, and then walk past about 4 of 5 more on my walk to work. Then I look at the hundreds of thousands of vacant units in this State lying in disrepair - waiting to be lived in. 1 million homeless, 2 million vacant units. Do the capitalist math.

Anonymous said...

they're probably vacant because rent controls have ruined any incentive to maintain them.

leftside said...

Nope. The figure is 2.2 vacant HOMES right now nationwide. Rental units are something else (99% of which are not rent controlled). The vacant units are not in LA proper (where there are controls) - but in the suburbs. Nice try though...

Anonymous said...

the last time I checked leftside people are (mostly) free in this country to own property without the State telling them what they can or can't do with it.

leftside said...

Yes, and with that "freedom" (ie. lack of regulations) we are in the process of bringing down our entire economy. And with that "freedom" (of people to make a profit) we have the highest homeless population in the developed world. And with that "freedom" of real estate markets we have segregation rates and ghettos that are the worst in the world. Cuba suffers from little to none of that.