Díaz-Canel announces reforms aimed at encouraging self-sufficiency

The Cuban Government has announced an integrated series of measures intended to stimulate development and growth, undertake gradual economic reform, raise standards of living, and begin the lengthy process of preparation to unify the country’s dual currency system.

Speaking on the Cuban flagship television programme Mesa Redonda on 2 July, Cuba’s President, Miguel Díaz-Canel amplified the messages contained in a speech he delivered in Pinar del Rio on 27 June (Cuba Briefing 1 July 2019) which was subsequently published in full.

Commenting on television on the background to the economic reforms (detailed below), Díaz-Canel said that they resulted from what he and other members of the Council of Ministers had heard during their tours through the provinces, as well as from concerned workers, the trades unions, and views expressed by the country’s economists.

 The new measures, he said, had been analysed before their approval “by experts, academics and members of the Council of Ministers, and evaluated by the Political Bureau of the Communist Party”.

They were a first step in breaking the inertia and “to give an alternative dynamic to the issue of wages and the relationship of work to people’s income”, he said.

He however stressed that the salary increase was not wage reform, “as this would contemplate other aspects such as a more consistent price policy, the end of the monetary and exchange duality and the elimination of subsidies”.

Implementation of these first steps, he said, required Cuban’s “to think and act as a country, with a sense of responsibility, participation and collective contribution”.

Cuba’s President said that new approach began the process of ordering the country for the future, as the measures proposed enabled the creation of a base that would enable the national economy to work in a coherent manner.

“The entire economy of the country has to support itself. Now we must see an improvement in the quality of essential services such as health, education or community. In addition, the preparation of cadres, officials and administrators, he told the Cuban people is essential “to avoid misinterpretation of the changes”.

New measures aim to stimulate economic development

Much of the early media focus in Cuba and elsewhere was on the announcement of wage increases for Cuba’s state workers and the likely link to eventual currency unification. However, the President’s full remarks and other ministers’ subsequent interventions suggest that Cuba has embarked on a process of unorthodox economic reform which, according to the Minister of Economy, Alejandro Gil, will require constant monitoring and modification.

Although little fine detail was announced about the new measures, the most significant was the decision to increase wages.

The proposed increase in salaries detailed in the last issue of Cuba Briefing are closely related to reforms to pricing which together, are intended eventually, to quote Cuba’s President, to bring about “monetary and exchange unification and the elimination of subsidies”.

At present, Cuba has two currencies that operate in parallel resulting in very low CUP national domestic peso prices for the basic goods and services that Cuba’s system guarantees, while most other items considered less essential are valued in CUC convertible pesos, creating distortions that damage the country’s ability to develop. Since currency unification is likely to be inflationary and make CUP-earning Cubans poorer, gradual but significant increases in state salaries, along with subsidy reform, stable pricing and encouraging savings are seen as essential precursors to change.

For this reason, the decision to address both wage and prices would seem to mark the start of what will be a complex and potentially socially disruptive process leading to a single currency. As such it represents a major change of policy designed to make the management of Cuba’s socially oriented economy and stimulating growth more orthodox.

Economic self-sufficiency and growth to be incentivised

In his address, and on television, President Díaz-Canel set out a range of further measures breaking with the past by seeking to incentivise initiative and success.

State enterprises given new decision-making powers. In future, state enterprises will be allowed to retain any surplus beyond what is due to the state and to decide themselves whether such sums can be reinvested or used for co-investment with foreign companies or non-state enterprises. By encouraging state companies to take their own decisions as to how to increase efficiency and productivity and allowing them to incentivise workers within more generous guidelines, Cuba’s Council of Ministers hope that domestic self-sufficiency will increase.

Role of FINATUR extended. FINATUR SA, a form of development bank connected to Cuba’s Central Bank, is to make available financing in foreign currency for Cuban investment projects or development projects outside of the allocations made from the country’s Central Fund. The new mechanism is intended to be an independent source of finance operating on a revolving basis in ways that will avoid the country’s “excess of administrative mechanisms”, the President said.

Retention by companies of foreign exchange. All companies will be able to retain totally or partially foreign currency profits arising from their over-compliance with planned levels of exports once they have met their commitments to the state. This is intended to stimulate and incentivise companies to reinvest, develop their productive capacity and productivity, and increase exports.

Pre-financing arrangements. Consideration is to be given to providing refinancing of investments by identifying for the first time the business potential national entities have.

Mariel development zone. The new measures incentivise state company relationships with foreign enterprises based the Mariel Special Development Zone by allowing Cuban companies to retain 50% of the currency earned from the profits on their commercial operations with their commercial partners in the Zone. The measure is intended to encourage import substitution and exports.

Relationships between state and with non-state enterprises. Limits on commercial relationships between non state companies and state enterprises are to be removed to establish more efficient and integrated domestic value chains.

Excess production. State enterprises will be allowed to commercialise on the domestic market excess production over their plan at state established prices.

Increased bonus payments to workers. Bonuses paid to workers in state enterprises from profits can in future amount to as much as five times average salaries.

Foreign exchange savings from remittances. New financial products are to be created that encourage individuals to save some of the remittances they receive from abroad.

Fuel theft. The installation of Global Positioning Systems (GPS) in state vehicles and the use of magnetic cards will be introduced to strengthen measures to prevent fuel theft.

Cryptocurrency. Work has begun on the study of the possibility of using cryptocurrency.

for national and international commercial transactions. A team from the Ministry of the Economy and Prices and academics are working together to explore the possibilities.

Other measures. Consideration is also being given to other measures that will encourage the export of goods and services as part of a comprehensive strategy. These include: enabling non-state enterprises to export through arrangements with state entities; the introduction of new incentives to create municipal self-sufficiency and increase agricultural production; and action to reduce the personal importation of merchandise by individuals. Changes will also be made to the taxation of some imported inputs if used for export production.

Essential to all of this, Cuba’s President said, will be the strengthening of accounting, accountability and “overcoming the inertia of the tired”. He also signalled that the measures proposed, which he said are inter-related, may have to be adapted, and if successful could lead to further reforms.

The proposals still must be formally considered by the country’s National Assembly and its commissions when they meet this month.

A new approach to economic management

In his published remarks which appeared under the headline ‘Update of the Cuban Socialist Model’, Cuba’s President set out a peculiarly Cuban economic model that mixes incentives, market forces, expert advice, currency reform, and decentralised and managerially led decision making, with exhortation, social commitment, accounting and centralised planning.

The approach appears to break decisively with the concept of a top-down centrally directed socialist economy in favour of one that is still socially oriented but managed within a plan derived from bottom-up inputs and decentralised and more liberal decision making.

In a Cuban context this would appear to represent a significant step towards freeing the market by devolving decision making to managers, enterprises and collectives in ways that enable both the state and all state workers to benefit from success.

Put another way, the proposed system incentivises those in the state economy to take decisions, take responsibility for their actions and benefit from them within certain limits, rather than just trying to meet unambitious or over ambitious targets determined by bureaucrats.

How well Cubans adapt to this, if the country can overcome its initiative-stifling bureaucracy and dated structures, and whether influential conservatives within the higher reaches of the Cuban Government and Communist Party allow such changes to become irreversible, remains to be seen.

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