Economic Policy Changes in Cuba

1. Economic Policy Changes in Cuba An Assessment and Proposals for Further Changes Lorenzo L. Perez

2. Economic Background • Negative shock of food and oil prices in 2008 and again in 2011. • Global financial crisis: Deceleration in economic growth; contraction of external credits and massive decline in imports and a sharp drop in exports; accumulation of external payments arrears and a freeze in foreign exchange deposits; and a widening of fiscal deficits.

3. Characteristics of the Cuban Economy • High degree of centralization of the economy • Excess labor in the public sector, ghost workers problem, low labor productivity. • Low wages compensated by the possibility of stealing public goods and materials in the places of work, availability of free public services, and the distribution of rationed goods at subsidized prices. • Increased financial difficulties in the provision of free public services and rationed goods.

4. Key Economic Policy Measures Recently Announced • 10-year leases of agricultural land to Individual Farmers and Conversion of State Farms to Cooperatives • Reduction of the Public Sector Labor Force. • Expansion of Permitted Private Sector Activities (to 178 narrowly defined activities). • More delegation of pricing and investment decisions to public enterprises within the general framework of central planning.

5. Recently Announced Measures (Continuation) • Reform of the tax system: • Personal income tax: 25 and 50 percent rates • Social Security contribution: 25 percent contribution. • 10 percent sales tax (5 percent for agricultural products). • 25 percent payroll tax for private companies. • Simplified tax system for specific self-employment activities with minimum monthly tax payments

6. Assessment of the Measures • The Plan to reduce the public sector labor force was unrealistically ambitious in the time frame originally announced by the government and the limited opening made so far for private sector activities. Indeed, President Castro has already acknowledged this fact and has begun to talk in terms of a five year period to reduce the size of the public sector.

7. Opening in Private Sector Activities • The list of permitted private sector activities is ridiculously small, too narrowly defined, referring mostly to artisanal activities which are unlikely to absorb in a significant way the dismissed workers from the public sector. • Professionals in Cuba need to be allowed to exercise their professions independently. Entrepreneurs should be allowed to open companies without restrictions to the number of employees they can have. Only this way, there will be an increase in productivity.

8. Devolving authority to Public Enterprises • As part of the topics to be discussed in the Communist Party Congress next month are a number of proposals to make the public enterprises more autonomous and self financed. • But there is still a defense of sectoral price policies guided by the regulating agency of public enterprises and remains to be seen how independently managed public enterprises can be.

9. Conversion of Public Enterprises into Workers’ Cooperatives • Part of the announced policies is that public enterprises could be converted into workers’ cooperatives with the government not longer having to meet the payroll. • But if these are not viable enterprises ,converting them in cooperatives are not automatically going to make them viable. • Unclear how the problem of excess labor and low productivity would be handled in these cooperatives and how the management will be chosen.

10. New Tax system • At face value, the new tax rates appear to be confiscatory and unlikely to promote the development of the formal economy necessary for an improvement in efficiency. • Particularly damaging is the payroll tax for private companies. • At the end, maybe only the simplified tax system is implemented but it is difficult to say how realistic are these minimum monthly tax payments.

11. Additional Initiatives that are required • Clear rules of the games and the elimination of the bias against private sector activity (e.g., drop the talk that measures are only improving the socialist model, reasonable tax levels, etc.). • Ensure that existing institutions and commercial legislation lead to a respect of contracts with commercial disputes having a recourse to courts. • Allowance of private property to encourage continuous investment by the private sector.

12. Additional Initiatives (continuation) • Liberalization of prices and salaries to allow an efficient allocation of resources. It is naive to think that certain prices can be liberalized and others not. Of course, the initial shock can be large, but not as much as people may fear when looking at black market prices, because black market prices today reflect fear of government prosecution of “illegal” activities.

13. Additional Initiatives (continuation) • Unification of the exchange rate system and the setting of a realistic level for the exchange rate. • The solution is not to try to appreciate the value of the Cuban peso from the existing unofficial black market rate!! • The unified exchange rate of the Cuban peso will need to be depreciated substantially to reflect the realities of the external sector of Cuba.

14. Additional Measures (Conclusion) • A more ambitious social assistance effort has to be put in place to at least partially help the losers of these changes: old people, disabled, and workers that will face long periods of unemployment. • The budget constraint is large but it is difficult to judge how many fiscal resources could be available for this purpose today because of the lack of available information.

15. Final Comments • Announced measures go in the right direction but are much too timid/or counterproductive. Cuba has the right to have more than a “timbirichi” economy. • Misguided target of an external current account surplus and lack of an effective debt restructuring strategy. • Need for the United States and multilateral agencies to engage Cuba directly abandoning the old paradigms of the embargo and exclusion, while not given a free pass to economic irrationality and political oppression. Easier said than done.