New rules coming for Cuba's entrepreneurs

The news starts about ten paragraphs into this Granma story on a Central Committee meeting on economic policy. New “legal norms” affecting Cuba’s more than 580,000 cuentapropistas have been signed and will soon be issued, and there will be some kind of “training” for them and 30,000 officials, presumably to promote tax and regulatory compliance.

Apart from that, monetary unification remains a high priority, there are plans to continue investing in the industries (construction materials, etc.) that enable improvement of housing stock, and work continues on constitutional reform to make Cuba’s constitution reflect “the principal economic, political, and social transformations” resulting from the last two party congresses. No mention of term limits or new laws governing the election process, comminications media, or non-government entities, all of which have been said to be under consideration.

Reuters story here.

A heads-up on currency reform

The process of unifying Cuba’s two currencies is set to begin, according to a Nota Oficial in today’s Granma. 

But no details about the process were given.

A timeline of actions that will lead to monetary unification was approved last Saturday by the Council of Ministers, the note says.  As steps are taken in the process, the public will be informed.  The initial changes will affect mainly businesses and other institutions, which seems to imply the use of interim exchange rates among state enterprises and government units.  The purpose, the note says, is to re-establish the “value of the Cuban peso and its monetary functions as a unit of account, means of payment, and store of value.”  It also assures Cubans that the changes will not harm those who earn an honest living in either currency.

In that the details are not known, it is impossible to figure the economic impact of today’s announcement.  But Cuba has a lot to gain by ending its dual-currency system.  It creates two tiers of wage-earners and distorts incentives in the labor market.  In Cuban businesses, it creates an accounting fiction that favors imports penalizes exports.  And in general, it denies all actors in the economy the clear price signals that are necessary to make sound economic decisions.  Fixing the currency is only one part of a puzzle that also includes wage and salary policy, price policies in the state retail sector, and a decision on whether or not to allow state enterprises to import and export without prior permission from the government.  Those details will tell whether there are winners and losers in this process, and who they are.

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.

Odds and ends

• Cuban central bank chief Ernesto Medina announced an eight percent devaluation of the Cuban convertible peso, returning it to par with the U.S. dollar (Prensa Latina, Reuters) and making Cuban tourism more competitive and remittances more powerful. The ten percent surcharge on exchanges of dollar cash for Cuban currency remains; Cuba continues to describe this surcharge as a response to U.S. financial sanctions.

• Our friend Mauricio doesn’t like to see USAID’s covert action programs described as “covert” action because, after all, they are announced here in bid solicitations and other documents. True. Also true that they are attempted to be carried out covertly in Cuba. So we should call them “semi-covert,” which is more accurate but makes them appear even dumber.

• Local authorities come across one tremendo santero in Clearfield, Utah, with a few human skulls in the shed out back.

• Oscar Elias Biscet, just released from prison, is named “the most important opposition figure in Cuba” in El Nuevo Herald while a columnist calls for a Havana boulevard to be named after him. He addressed a Miami audience by video link (see three-minute video excerpt in the El Nuevo story) and called the Cuban government’s ideology “anti-U.S. anti-semitic, and anti-black.” “I demand the immediate resignation of Fidel Castro, Raul, and their acolytes,” he said.

• The Directorio’s Orlando Gutierrez writes in the Herald about an “extensive civil-resistance movement” in Cuba today, and notes “mass demonstrations” on Cuban streets as antecedents – 31 years ago at the Peruvian Embassy, 17 years ago on the Malecon, and in 2006 in Madruga.

• An August 2006 Wikileaked cable from the UN Mission in Geneva covers the beginnings of the new UN Human Rights Council. On Havana’s role: “Cuba, not surprisingly, continues to play the spoiler, looking to eliminate country mandates (at least the one focused on Cuba) and to blame the U.S. and EU for anything it opposes.”

• The Herald’s Juan Tamayo reports on smuggling and installation of satellite communications equipment that has nothing to do with the U.S. government.

• Some time ago I noted this August 2006 cable from the U.S. Embassy in Caracas that reflected U.S. government thinking at the time, that Fidel’s illness spelled “transition” in Havana. Here’s another from that period: September 1, 2006, from the U.S. Embassy in San Jose, Costa Rica, on discussions with the administration of President Oscar Arias. The State Department did not like suggestions that Washington shake things up by dropping the embargo or returning the Guantanamo naval base and called them “unhelpful.”

Odds and ends

• Herald: Cardinal Ortega is back in Washington.

• Miami New Times: Rumors of a high-level official visit to Cuba.
  

• At Along the Malecon, Tracey Eaton summarizes Cuban attitudes and sums up impressions of a recent visit.

• Texas rice farmers need markets and would really like to sell to Cuba; that’s the gist of stories by the Voice of America and the Austin American-Statesman.

Odds and ends

• “Why Are Florida Cubans Lukewarm On Rubio?” The National Journal’s political blog asks that question about soaring GOP Senate primary candidate Marco Rubio – and has figures showing that they are not yet showing him the money.

• “In the months following the revolution, Cuba seemed less an island than an endless sea of triumphant celebration.” That’s former Soviet foreign correspondent Leonid Kamynin, in the first of a series of articles being published by Russia’s RIA-Novosti news agency marking the upcoming 50^th anniversary of diplomatic relations with Cuba.

• Minneapolis Star-Tribune: More on Minnesota farmers and legislators pushing for an opening to Cuba.

• The Herald’s Juan Tamayo recaps the Shakespeare book caper; if Raymond Scott is a thief, he’s the most quotable thief to come along in a long time.

• Two ways to use Cuba as a political football: from the right to bash President Obama (with the author using a pseudonym), and from the left to bash defenders of the U.S. prison at Guantanamo.

Odds and ends

• Central Bank President Francisco Soberon has resigned. His replacement is Ernesto Medina, head of the Banco Financiero Internacional. Soberon managed a monetary policy that kept the Cuba peso’s value relatively stable, about 20-25 to the dollar, ever since it spiked to about 150 to the dollar in the early 1990’s. The announcement of his resignation said he resigned at is own initiative and had worked “with loyalty and honesty,” as did “the majority of the ministers who were replaced last March.” Reuters story here. La Jornada discusses the change in light of the current liquidity crisis here.

• Reuters: National Assembly President Ricardo Alarcon, leader of Cuba’s delegation in previous rounds of migration talks, says the two sides are “in contact” and adjusting their calendars to prepare for a new round.

• AP: Venezuela allocates $70 million to lay the undersea fiber optic cable to Cuba.

• They outfitted a foam raft and headed for the United States and reached…the shore by the U.S. Interests Section in Havana. AP has a story and photos.

Odds and ends

• Marc Frank of Reuters explains Cuba’s tribulations with the U.S. dollar – it accumulates them, can’t use them, and has to pay a premium to dump them.

• While we’re on the subject, can anyone explain how the Obama Administration calculates that Cuba skims 30 percent from remittances from the United States? The exchange rate and dollar surcharge amount to 20 percent – could it be that Western Union and other companies charge ten percent?

• Las Vegas-based Allegiant Airlines will start operating Miami-Havana charters next month.

• Cuba vs. Mexico: Fidel Castro continues the argument with Mexico over H1N1 flu in his latest essay, and Cuba wins one over Mexico in Univision’s beauty pageant.

Bayamo "experiment"

In Bayamo, there’s an experiment under way where goods and services normally provided in hard currency are available for Cuban pesos, AP reports. The effect is to make the purchases, which are now out of reach for most Cubans, affordable.

The article cites local officials saying the initiative is local.

But it doesn’t say what hypothesis the experiment is testing. Maybe this one: if the pesos’s purchasing power is boosted as much as it is in Bayamo today, how much commerce is generated, and how much does the government have to spend to subsidize it?

The answer to that question would be useful to central bankers thinking of strengthening the peso’s value or ending the dual currency system altogether – a step that Raul Castro recently placed at least five years in the future.

Peso speculation

Ever since the early 1990’s when the Cuban peso’s value dropped to about 150 to the dollar, Cuba’s central bank has kept its value stable, about 20-25 to the dollar. Yesterday, the Washington Post reports, the talk of ending the dual-currency system led Cubans to unload their convertible pesos and buy the old currency, anticipating that its value would soon increase. Apparently the “frenzy” subsided when the government reiterated that no sudden change is being contemplated.

Meantime, a Cuban economist speculates in this Reuters report that there might be a different solution to the purchasing power problem: Cuba could cut the mark-up on goods sold in hard currency stores. I’m told that the mark-up is now 140 percent, so that an item that costs a dollar to import wholesale is sold at retail for $2.40.