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Díaz-Canel in his labyrinth

Is Raúl Castro's likely successor a scapegoat? This is the economic scenario he will find.


When Fidel Castro officially retired in 2008 he left his brother Raúl not just a ruinous economy, but one that was also severely distorted, and almost unmanageable.

The first major distortion appeared right from the beginning of the Revolution, when the Government refused to acknowledge that the Cuban peso had lost value relative to the dollar. Thus, with an arbitrarily overvalued currency, the fiction of peso-to-dollar parity was maintained. This distortion warped the accounting systems of companies, which were forced to undervalue the costs of their imported goods, and grew over the years, accelerating during the massive expropriations of the 60s.

Other distortions appeared with rationing and centralized planning, since the prices of all goods and services, and employees' salaries, began to be dictated arbitrarily, based on no sound economic footing. The study of the determination of prices by means of the theory of supply and demand was banned at universities because it was considered bourgeois and capitalist, while its application was proscribed at planning offices.

The result of the indiscriminate accumulation of cost and price distortions was that neither State companies nor the Government as a whole actually understood the efficacy of their management – a problem whose severity it is difficult to overstate, and which helps to explain why the Cuban economy does not produce enough and has always needed the help of other countries to survive precariously. This is also the reason why the Cuban worker produces less and less, undercutting the purchasing power of the Cuban peso.

The situation was aggravated by the collapse of the Soviet Union in 1991, which forced Fidel Castro to urgently open up new lines of economic activity to compensate for the subsidies no longer flowing from Moscow. But the slapdash way in which this was done further exacerbated distortions in the Cuban economy.

These new approaches (foreign investment and tourism, the export of medical services, remittances from abroad) would generate foreign currency - US dollars and others - that paid for the imports that had hitherto reached Cuba almost as gifts, including oil and wheat. These new activities actually meant a segment that was hastily added to the socialist economy, replacing the disappearing segment of economic activity.

But the new activities had a distinctive feature: most of the population had no access to them, as workers or consumers. Only a portion of citizens received the dollars that the tourists brought, and that stemmed from various new transactions, such as tips from tourists to hotel employees, payments for food and transportation services, private rentals of rooms, the sale of handicrafts, and personal services, including prostitution.

In parallel, the Cuban government allowed and facilitated the transfer of remittances from other countries, their volume swelling, but benefiting mainly those who had relatives and friends working outside of Cuba.

Faced with this cascade of dollars flowing through various channels, the Government was forced to legalize their possession and circulation, creating a monetary dualism that, in practice, had existed in Cuba until 1958, when the peso was pegged to the dollar and accepted as a means of payment at many establishments in the country. Monetary dualism resurfaced in Cuba as a response to a form of economic dualism that discriminates against Cubans based on their access to jobs or transactions that generate dollars.

Cubans' access to these dollars, or lack of it, constitutes, in itself, a further distortion of the economy. In this great tangle of distortions we must include the segmentation previously generated by the rationing system, in which citizens had access to a limited and unstable number of consumer goods at very low and, therefore, subsidized prices. At the same time, if they had dollars, Cubans could buy items outside the rationing system.

In order to capture the largest possible volume of these dollars, the Government instituted the "convertible peso", or CUC, thus creating a "dual currency", which only worsened the distortions of the economy by establishing multiple exchange rates between the CUP and the CUC.

The CUP maintains the almost forgotten fiction of officially having the same value as the dollar, for certain transactions, but at the official exchange houses, known as CADECA, it is traded at 24 per CUC. The convertible peso, meanwhile, is worth one dollar, but with a 10 percent surcharge.

It must be stressed that the dual currency arose in response to the Government's creation of a "dual economy," one to which most citizens do not have access, or very limited access, simply because they do not receive dollars or CUC as part of their income, but rather CUP, because they are employees of the Government, State companies, or pensioners.

These wages are a historical and distorted holdover, from when the peso had an official value close to that of the dollar. In this way, the dual currency has built a monetary wall between two economies, and also confused them through the phenomenon of "monetary illusion" as it is known the field of Economics.

Two congresses, no solution

When becoming president of the country Raúl Castro had seemed willing to fix and improve the economy he inherited, and also to eliminate its monetary dualism, through what was called the "unification of currencies." These intentions - which never materialized in plans - were embodied in the "Guidelines" issued by the 6th Congress of the Communist Party, held in 2011, after much fanfare announcing economic reform.

However, the 7th Congress of the PCC, held five years later, in contrast to the optimism of the 6th, revealed that most of the Guidelines had not been followed. This coincided with clear indications that the Cuban economy was not growing, but showed signs of contracting again. Now, with the reform process at an apparent standstill, it can be stated that Raúl Castro's management as president has been a resounding failure, and that he will retire bequeathing to Cubans a battered and unsustainable economy.

And this is what Miguel Díaz-Canelis supposed to fix as the new president of the Council of State, a position that on April 19 he is to receive when Raúl Castro steps down from it.

As Eugenio Yáñez told me yesterday, Díaz-Canel is inheriting a real nightmare, because it must be assumed that the Party's top brass expect him to solve the problems that Raúl did not know how to solve, or failed to, or was afraid to; in addition to monetary unification, the housing shortage, and the ongoing presence of rationing.

The interesting thing about the monetary problem is that, basically, its solution is not monetary, but requires a radical change in the actual economy, the country's productive base, which sustains the supply of goods that Cubans consume.

Unifying the currencies would have to be done at a single exchange rate; for example, giving those who have CUCs 24 pesos or CUP for each one, so that all transactions are carried out in pesos.

This means that State companies would have to calculate their expenses by multiplying by 24 (or by a similar rate) those corresponding to imported goods, and, in the same way, to avoid going bankrupt, multiplying the price of their products by approximately the same amount. That is, the prices of non-rationed goods would skyrocket about 24 times, generating inflation, and wages would have to rise in the same proportion, to catch up with the new prices, letting Cubans see how poor they have really become since 1959

And the only thing that can prevent this dire situation is to increase the supply of goods by around 24 times, which is obviously impossible in the short term. Any government would be anxious about a scenario like this, in which it is not known what the people's reaction will be.

 It is hardly surprising, then, that Raúl Castro is passing the baton to Díaz-Canel. I have no reason to think the general wants to make life easier for his successor by implementing monetary unification before his retirement. And I doubt he wants to close out his presidency by taking the blame for what might happen.

Thus, it is conceivable that they are promoting Díaz-Canel as a scapegoat who may be forced to undertake monetary unification, sparking protests. If he does not do this, however, he will also be criticized. He's damned if he does, and damned if he doesn't. What is clear is that nobody wants to be in his shoes.

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