Contradictory policies mean one step forward and one step back for Cuba’s ailing economy

Large cranes can be seen at the Port of Mariel inside the Mariel Special Economic Development Zone. Cuba is pursuing foreign investments for the zone, but so far the process has been slow. Contradictory economic policies have hampered Cuba’s ability to reach its economic goals.
Large cranes can be seen at the Port of Mariel inside the Mariel Special Economic Development Zone. Cuba is pursuing foreign investments for the zone, but so far the process has been slow. Contradictory economic policies have hampered Cuba’s ability to reach its economic goals.

The Cuban government has said it wants more foreign investment, that it can’t afford to keep so many Cubans on the payroll of inefficient state industries, and it needs more revenue to help its stumbling economy.

But some economists say recent economic moves seem contradictory to realizing those goals and that new regulations governing the island’s private sector also fly in the face of meeting the island’s economic challenges.

With official economic growth a meager 1.1 percent in the first six months of the year, a sugar harvest of just over one million tons — one of the worst in Cuban history, a growing trade deficit, a soaring fiscal deficit and continued oil supplies from Venezuela problematic, Cubans don’t want contradictions. They are looking for clarity about Cuba’s economic future.

In a recent speech, Raúl Castro, who wields considerable power as head of the Communist Party, talked about the “tense” economic situation as a result of a slowdown in tourism in the first half of the year and declining sugar exports due to a prolonged drought, the impact of Hurricane Irma and unseasonably heavy rainfall. As a result, he said, Cuba will need to reduce non-essential expenses, shift scarce revenues to areas that generate hard-currency earnings and boost exports.

“Cuba’s economic leaders are going around in circles. They have too many ideas and not enough means,” Gary Maybarduk, a retired State Department officer, said at last month’s annual meeting of the Association for the Study of the Cuban Economy.

For example, Cuban officials have been talking for years about unifying Cuba’s unwieldy dual currency system, a move that would give foreign investors more clarity and confidence about exchange rates.

In December, Castro said currency unification was imminent, but now some Cuban economists say the needed reform may not be undertaken until after a new constitution is approved, presumably some time next year.

“The state is always saying the conditions aren’t right [to unify the currencies and exchange rates]. But when will there be these conditions?” Cuba economist Omar Everleny Pérez said.

If the currency problem isn’t resolved, he said, the Cuban economy will be neither efficient nor competitive.

A food vendor at a Havana agro-market shows Cuban convertible pesos (CUCs) on the right and Cuban pesos (CUPs) on the left. Cuba uses both currencies and has multiple exchange rates. Ramon Espinosa AP

Camilo Condis, a Havana entrepreneur, said he doesn’t understand why new private sector regulations that will go into effect in December seem designed to clip the wings of budding entrepreneurs rather than encourage them.

“The government needs the taxes they would pay; it needs the employment they provide,” he said. “But they’re not doing anything to accomplish that.”

“The new regulations all go against the grain of their [the government’s] stated goals,” said Ted Henken, a Baruch College professor and expert on the island’s private sector. “The state said the new regulations are designed to perfect the self-employment sector, but almost all the new regulations are about improving order and increasing control.”

Not only is there a long list of fines and sanctions for those who don’t follow the rules, but Cubans will be able to hold only one business license. That means an entrepreneur can’t diversify or form multiple businesses.

When Castro began implementing his economic reform package in 2010, measures such as allowing Cubans to buy and sell homes and automobiles, eliminating exit visas so Cubans could more easily travel abroad and instituting a system of licenses for self-employment went into effect.

All of that stimulated the private sector, said Condis. The number of people with private business licenses rose steadily from 150,000 in 2008 to the current 591,456 — around 13 percent of Cuba’s workforce.

In 2010, Castro said state enterprises had 500,000 workers that were no longer needed. He later raised that number to 1 million and then to 1.8 million. Because state companies had so many redundant workers, it depressed productivity and wages.

“In order to dismiss that many people they would have needed to expand the non-state sector by 1.8 million or they would have a lot of unemployed people,” said economist Carmelo Mesa-Lago. “The government fired 500,000 workers but they needed to fire more than three times that amount.”

That’s what makes the one person-one license edict so contradictory, he said: “It’s ridiculous if you need to employ more people. Rather than restrictions, there should be incentives and a more flexible policy for cuentapropistas (those who are self-employed) who provide jobs for those who have been dismissed.”

A worker toils in the sugarcane fields near Artemisa, Cuba. This year Cuba has one of the worst sugar crops in its history. Ramón Espinosa AP

Even though the government announced it will unfreeze approvals for licenses for private restaurants and bed and breakfasts, Cuban entrepreneurs aren’t optimistic about the new regulations.

Condis said among the most worrisome is a regulation that would fine cuentapropistas who are operating without a license and then bar them from engaging in such economic activity for two years. The government instead should be encouraging them to take out licenses, Condis said.

“The interest isn’t in legalizing them. Quite the contrary,” he said. “Unfortunately we’re looking at a very cloudy future.”

Meanwhile, even though Cuba desperately needs foreign capital, its record in attracting foreign investment has been lackluster.

Over the past couple years, Cuba has signed foreign investment deals worth around $3.5 billion, but it is still waiting for much of those investment funds to arrive. To reach a goal of 7 percent annual economic growth, Cuban officials estimate foreign investment would have to come in at a rate of around $2.5 billion each year.

The new regulations for cuentapropistas apply to domestic firms, but potential foreign investors may view them unfavorably because they indicate the government is willing to abruptly change the rules of the game and is wary of, if not hostile to, private enterprise, said Richard Feinberg, a professor at the University of California San Diego’s School of Global Policy and Strategy and a Brookings Institution fellow.

“It’s not stable policy. You can’t change things every other year just because there is in-fighting [within the hierarchy],” said Mesa-Lago.

Economists said another contradiction in the new rules is the failure to establish a system of wholesale outlets for cuentapropistas. Only those who work in private cooperatives may shop at the island’s limited wholesale outlets. Other cuentapropistas must rely on retail shops or the black market.

Cuba Wholesale Market
Cubans shop in El Egido market in Havana. The Cuban government hasn’t created a wholesale network for private entrepreneurs to buy the goods they need for their businesses. Desmond Boylan AP

“If you don’t create a market for inputs, how is the problem going to be resolved if [the state] doesn’t want there to be a black market or corruption?” Pérez said. “There is no coherence between what they say they’re trying to enhance and what they’re implementing.”

But while putting the brakes on cuentapropistas and delaying currency unification may seem contradictory to good economic policy, analysts say it makes more sense in the context of the government’s most important goal: maintaining political control and the continuity of the revolution.

The cuentapropistas, who aren’t as dependent on the government for their livelihood, are “agents of social change,” said Roberto Díaz Vázquez, director of Fundación Logos, a Havana non-governmental organization that supports entrepreneurs. “But the government doesn’t want to make changes. [The cuentapropistas] are capitalists inside a country that doesn’t permit capitalism by rule or statute.”

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