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Experts: 'The price caps will promote scarcity and the black market'

DIARIO DE CUBA presents the views of five economists on a measure that undermines and 'criminalizes' the private sector.

Gráfico DDC

The latest measures to control prices at private businesses in Cuba, announced after the salary increase for the state sector, have once again sparked debate on the Cuban Government's economic policies.

DIARIO DE CUBA asked several economists about the the price caps , an issue that, on the one hand, has placed entrepreneurs against the wall, some already devising strategies to overcome the restrictions; and, on the other, sent authorities on the hunt for what they consider "illegalities."

Have price caps ever worked in any economy? Would it be effective in Cuba to prevent inflation, as Miguel Díaz-Canel's cabinet has argued? Would this affect the issue of currency unification on the Island?

These questions were answered by specialists Mauricio de Miranda Parrondo and Elías Amor, while other experts, such as Pedro Monreal, Pavel Vidal and the young Oscar Fernández, have expressed their estimations on the issue in other media and their own channels.

According to Mauricio De Miranda, "price caps are used in some very specific circumstances for certain products or services and in very specific situations, even in certain markets, the State regulates certain rates, especially in the case of public services."

He cites the example of public transport in Colombia, which "is operated by private companies and even private taxi drivers", but subject to "a price that the State sets and that is the same for everyone."

However, he clarifies that "in any basic course on Economics it is taught that when price caps are placed on products whose supply is exceeded by their demand, the result is an increase in scarcity, or their sale on the black market," a dynamic, in fact, that " Cuba has experienced several times since 1959."

On the question of whether the measure would be effective at tackling inflation in Cuba, De Miranda points out that "the inflation reported by Cuba's National Bureau of Statistics and Information is not accurate, because it only refers to markets using national currency (CUP) when a large portion of basic consumer goods must be acquired using CUC, or at their equivalent prices in CUP, and there are considerable price increases."

"Inflation is difficult to avert in any economy because, in general, there are price increases that, as Keynes said, if moderated, can be stimulants on the supply side because the producer has incentives to produce when prices rise," he says.

The economist rules out hyperinflation in Cuba in the short term, but does believe that "inflation is not prevented by capping prices, because this is an administrative measure."

"One could say that when prices are capped there will be no inflation, but this is because nobody can raise them. And, yes, statistically there will be no inflation, but real (although not measured) inflation will occur when products become scarce on the market, and are purchased on the black market at prices that would probably be higher than if they were sold in the free, legal market, because they factor in the additional component of the risk of punitive measures."

Monetary unification

In De Miranda's opinion, the price cap "would have negative repercussions on the question of monetary unification."

"One of the most serious problems of monetary and exchange rate unification is the difficulty of establishing relative prices in the Cuban economy with respect to the international economy because prices in Cuba are distorted, and this measure will serve to distort them even further."

Elías Amor, however, does not believe it will necessarily affect currency unification, as this process "depends on other considerations outside the functioning of supply and demand markets on the Island."

"One of them is the State's deficit, which is reported by the authorities to be 8% of the GDP, a disproportionate figure given the role of the State in the Cuban economy, which significantly increases indebtedness and makes it very difficult to turn to international financial markets, "he says.

"The other problem is the trade deficit," he told DIARIO DE CUBA. "No matter how many adjustments are made, the reality is that Cuba continues to import some 2 billion dollars worth of food a year, which warps the real exchange relationship and tears a hole in the economy's external accounts."

"The possible unification of the currency must be undertaken from a position based on the internal stability and external credibility of the Cuban economy, and none of these requirements are currently met. And I find this difficult in the medium term."

"A greater evil"

Elías Amor concurs on this with De Miranda: "in any economy capping prices ends up being an evil much worse than if the market were allowed to operate freely to reach a balance based on supply and demand."

One example is the minimum wage, "a policy that many countries implement as part of a social dialogue and collective bargaining to prevent workers from earning wages below a certain level."

"This measure, socially fair, ends up being an obstacle for access by certain groups to the labor market, such as young graduates, because it increases their cost, and more and companies cannot hire them," he says.

"Every time price control measures are adopted, supply and demand react differently to the market equilibrium mechanism, and there are unfair effects, and a lack of efficiency," explains Amor.

"When prices are capped, it is normal for problems such as scarcity to arise, which forces the government to ration, or adopt punitive and repressive measures. The underground economy also tends to flourish, because in the legal one transactions between supply and demand do not reward any of the parties, "agrees with Miranda.

"Economic policy, if it follows the basic rules, should be aimed at allowing as much flexibility as possible in the markets so that supply and demand are guided by prices, which convey precise and detailed information on each of them. The balance is achieved instantly, and no intervention is required. What a government must do is to provide transparency, more flexibility and autonomy to economic agents, and not intervene and control their decisions, as is the case in Cuba."

Thus, Amor associates the price cap in Cuba with "something much worse: shortages, rationing, lines, and the urgent need to scrap to survive, which are the outcomes of inflation. When prices are capped, it is not profitable for producers to produce, so they stop furnishing markets with products and services. Shortages appear, and then the Government responds to demand by rationing. Those who have the resources turn to the underground economy ...where prices soar, much more than they would in the licit one."

According to the economist, the solution to avoid inflation "is to eliminate the rigidity of supply and allow producers to adapt their production cost structures to new market prices."

"Enough criminalization of the private sector"

In an extensive and well-supported article published in OnCuba, in which he advances his view on the salary increase, among other issues, economist Pavel Vidal also correlates price caps with the promotion of "more illegitimacy and scarcity."

"If there are no major structural changes in the production system, distortions will gradually appear that, it seemed, had been overcome and were not going to return: excessive liquidity in Cuban pesos, exchange rates that become more devalued than at exchange houses, and greater use of the US dollar," he says.

"The Cuban Government argues that the measures taken are to avert a Special Period. In reality, they are only steering us closer to one. The economic adjustment had been managed quite well, despite the enormous complexities of the international environment. We had shortages, but monetary stability had been preserved. Now we will have shortages, plus an acceleration of inflation on black markets, more similar to what we experienced in the 1990s."

In an open exchange with an official at the Ministry of Finances and Prices and published on his personal blog, Pedro Monreal describes the price cap in the private sector as "an unusual measure that is justified in cases of supply shock, which is not the case in Cuba. "

"There are no grounds to believe two things: first, that the bureaucracy has the capacity to set adequate prices. To begin with, because there has been a huge distortion in the economy's most important relative price for decades (the exchange rate). Secondly, because even after setting prices, they may not fulfil any function in the economy because the remainder of the factors do not allow it, from the unforeseen lack of imports, to the errors in the investment process," he asserts.

Monreal later argues: "To state, in a fatalistic way, that supply is doomed to malfunction, so that there is a kind of permanent imbalance making it necessary to regulate prices, is very debatable. The supply side does not work well in Cuba, among other things, because the resource allocation system is dysfunctional, employing an absurd exchange rate of 1: 1, with very low productivity, due to bloated workforces, and limited national private sector investment."

In the opinion of the young economist Oscar Fernández,  seconded by Monreal on his website "the price restriction is a total error (...), conceptually."

Fernández believes that "establishing directive price controls on products subject to market conditions has no effect on an economy restricted by supply" such as Cuba's. "On the contrary, it will strongly bolster the 'second economy.'"

The economist believes that, "if the goal is really to protect working people, the vast majority of the prices that affect the people's essential consumption, beyond the rationing card, are in the hands of the State, and not private merchants," so it is those prices that should be acted on.

"Enough criminalization of the private sector; many of them are the same Cubans who handed over everything in the state sector not long ago. You can't build a country with these rash edicts."

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