By Samuel George as part of the Crossroads Cuba series
Since the official reopening of embassies in Washington and Havana on July 20, 2015, much has been made of the apparent thaw in the diplomatic freeze between the US and Cuba.
But – and this may come as a shock to some – just being friends with the United States will not solve some of Cuba’s most difficult problems. Neither would a knee-jerk opening of the country to unregulated capitalism.
On the one hand, Cuba faces a very specific set of challenges such as scarcity and a lack of access. On the other hand, the Cuban economy has developed in such a way to avoid the negative side-effects observed in other Latin American countries such as yawning income inequality and violent crime. It will take a nuanced approach to fix the one hand without breaking the other.
Cuba’s fundamental economic problem is a lack of productivity, particularly from a bloated public sector. In response, the government has implemented reforms designed to shed jobs from public roles, with the expectation that people will join an inchoate private sector.
In agricultural centers, for example, the government has granted farmers increased control over what they harvest and where they can sell their produce. While they still must deliver a majority percentage of their output to the government, they can now sell the remainder at a market price.
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More recently, “cuenta propistas” have created opportunities in the cities for private enterprise and nonagricultural co-ops, from the barber, to the tire repairman, to certain craft and souvenir shops.
The Cuban government appears comfortable with these private operations, with entrepreneurs reporting generally unfettered activity. If anything, some private business owners claim, their taxes produce an important revenue stream for the government.
But with a 21st-century economy comes 21st-century problems. A key concern with Cuba’s economic reforms is that not all Cubans can take advantage of them, and some fear that inequality could be widening.
Productivity suffers from decades of underinvestment in infrastructure, equipment and machinery. This inattention is not surprising given the government’s hostility to larger private enterprise, as well as its own lack of funding. International direct investment and credit is also constrained by the US embargo.
With limited credit options, putting together the start-up capital for a private business is difficult for those without access to remittances or tourist revenue. The Afro-Cuban community, for example, may particularly lack access.
Another distorting factor in Cuba’s economy is the awkward dual-currency system. Two types of currency are currently traded in Cuba, one worth significantly more than the other
The Convertible Peso (CUC), used for example in the tourist industry, is worth more than the dollar. The National Peso (CUP), the currency of state salaries, is worth about four cents.
The result is a widening gap between those earning in CUC and those earning in CUP. Given the marked disparity, taxying a tourist across town can gross about as much as a state employee makes in two weeks. This creates incentives pushing Cubans into any activity that generates a cash flow in convertible currency regardless of productivity.
Havana hopes to unify the regimes in the coming months, but this would not close the gap between those with access to tourism revenue and remittances, and those on state salaries.