Back to top

Is a new salary increase coming up in Cuba? The tactic of an arsonist/firefighter

By pretending to fight inflation, the Cuban Government could aggravate it. The measure would, however, be consistent with the economic demagoguery characterizing the Raúl Castro era.

La Habana
Workers at a warehouse in Havana.
Workers at a warehouse in Havana. Diario de Cuba

Officially, nothing has been confirmed, but a general increase in wages should not be announced too far in advance, as it will only improve workers' real purchasing power  (which is what wages are raised for) if they are taken by surprise and cannot alter their consumption patterns in advance.

This secrecy seeks to keep expectations of improvements in disposable income from precipitously driving up demand, which would result in, even before higher paychecks are issued, the market nullifying, via price increases, any real improvement in income.

Why are we even talking about this? Because both Díaz-Canel and Economy Minister Alejandro Gil have made veiled statements, probably aimed at the mid-level bureaucracy, indicating that another increase in wages and pensions in Cuba is in the pipeline.

In his last remarks before the National Assembly, the Economy Minister, speaking about how workers suffer from inflation, said: "we have to concentrate, rather than on lowering prices, on the gradual recovery of purchasing power." As the only two ways to regain "purchasing power" are to lower prices (which the minister rules out) and increasing wages, it follows that the latter is being considered.

Only a few days later, at an expanded Council of Ministers meeting, widely broadcast on Castroist television, Díaz-Canel said: "I think we have to take another look, in the midst of this situation, and look for other sources (...) to seek a transformation in the minimum wage and pensions, which are where the sector is that is most complicated in terms of inflation issues." The only thing more explicit than this would be a direct announcement that, as we said, they will not make until they have the measure ready to serve ... but, apparently, they are preparing it.

Although in the short term generally increasing wages cheers everyone up, because it creates the monetary illusion that more is being earned, it does not really improve the economy because it has no effect on productivity. The country’s experience in 2021 demonstrates this. However, it does imply increasing the monetary base because, as there are no more goods and services available, the speed of circulation remains constant, at the same level of transactions, such that new wages will come from new issuances of money. In this way, by pretending to fight inflation, the Government will only worsen it.

This measure is perfectly consistent with the economic demagoguery that characterizes the Raúl Castro era, which feigns transformation, but only with window-dressing measures, such that what is, supposedly, for the best, ends up making things worse. The government, thus, is an arsonist/firefighter, as it were.

This issue will not end in simply an unhealthy upward adjustment of general prices and a further disruption of relative prices. Raising wages across the board in times of very high inflation also creates a change in expectations called the "second round effect," which embeds in a society's collective psychology the idea that inflation is normal and will last a long time, which becomes a self-fulfilling prophecy.

One of the most insightful phrases in Pablo Coelho's The Alchemist reads as follows: "Everything that happens once may never happen again. But everything that happens twice will certainly happen a third time." Thus, once wages have risen this second time, the theory of adaptive expectations ensures that economic agents will expect future increases, which will modify consumption and price formation patterns, producing an inflationary spiral that is particularly difficult to stop.

This, however, does not worry Castroism, because keeping the inflationary flame alive is its best way to redistribute the national economy's few real resources, allowing it to align the factors of production, including workers, in such a way that the private structures that are emerging are chained to state companies, municipal governments, or any other bureaucratic structure faithful to the system.

There is no other way to improve Cubans' purchasing power than improving the real economy. But this would mean, in short, the disappearance of Castroism, because it is the main obstacle between the people and the capital needed to invest in Cuba and make it prosperous. Anything else, and particularly a wage increase, is nothing more than the pyromaniac fanning the inflationary fire to, like Nero, dance merrily while Cuba burns.

1 comentario

Necesita crear una cuenta de usuario o iniciar sesión para comentar.
Profile picture for user Pedro Benitez

I love the title in English.