Solving Cuba’s Two-Currency Dilemma Is Not So Difficult

By Repatriado

Photo: Ghyslaine Peigne

HAVANA TIMES — If you ask any Cuban to list the most pressing economic problems that need to be solved, they will mention our dual currency. The media’s united push to make this “problem” the keystone of economic ideas is such that it might be the first thing you think about. Once again, the government has managed to impose its discourse by placing the focus wherever is more convenient for them.

Both openly government economists, such as Marino Murillo, and the government’s allied economists who dedicate themselves to more theoretical work, such as Juan Triana, are contributing to this fantasy. Some use it to explain their failed improvement processes, while others use it as a subject to publish brainy analyses about the possible consequences and problems of currency unification.

Don’t be fooled, currency unification is as simple as the CADECAs (1) establishing the purchasing and selling exchange rate at 1 CUC(2) to 25 CUP(3) and allowing the Cuban people to use both of these currencies for any transaction made within Cuba, full stop. Thus our currencies would be unified and giving or receiving 1 CUC or 25 CUP would be the same thing. It would also prevent the need to suddenly take all CUC out of circulation and compensate this value by making more CUP, which is an expensive task.

When it comes to currency unification, you don’t need to beat around the bush or do financial magic to unify these two currencies, and you don’t need to make the earth shake because of effects that are incomprehensible financially-speaking.

Why aren’t they doing this instead of feeding this obscurantist and mystical atmosphere around the subject?

First of all, because the financial mess that the Cuban business system has created by juggling all of these different exchange rates(4) in order to hide their failure is so great that even they can’t fix it and so they prefer to continue on living in this game of Monopoly where the USSR used to work as the Bank, and now Venezuela. Currency unification would shed light on this bubble that has been hidden in the deliberately complex national accounting, thereby exposing the great failure of 60 years of the State centralized economy and how unwarranted it has been to keep up this practice.

Second of all, keeping this debate open gives the feeling that there is still a margin in which our economy, in the way it’s currently set up, can still improve (which is extremely important for our leaders). The following line of reasoning has been promoted in the collective mind: “if having two currencies is a heavy burden for our economy, when they finally manage to solve this issue, which must be extremely difficult, our economy will make progress.”

Foto: Ghyslaine Peigne

This kind of argument is the same as what the Aztec elite used to use when they justified their own existence by sacrificing thousands of people so that Popocatepetl wouldn’t erupt, a false premise which led to a mistaken conclusion. The State Council seems to be our shaman circle, but its best we don’t give them ideas of sacrifice.

The third and the most important reason, in my opinion, for targeting and sacralizing currency unification is the excuse it gives them, the pretext to win more and more time without making much-needed economic reforms, the justification to make people keep on believing that the State isn’t increasing wages or lowering prices among other things, which are extremely important, because until these two currencies are united, everything else is irrelevant; thus, making currency unification the precursor for everything else.

The answer to all of this is simple: the Cuban State’s monopoly capitalist economy is a disaster with no temporary solutions, it is beyond reform and nothing done within its current ideological premises is sustainable. Only a change in the system can lead to the country making progress.

Cuba’s biggest problem is productivity. Cuban workers are extremely underproductive and this is where we find another lie that government economists like to feed by upholding the mistaken idea that it’s true that people don’t work because they aren’t paid proper wages, but, how can you pay them more if they don’t work?

This dichotomy is false and Alfred Marshall already resolved this in theory more than a century ago when he said: “ “highly paid labor is generally efficient and therefore not really expensive,” and Fordism has empirically proven the benefits of highly motivated and well-paid labor as a preliminary step to increasing production.

Photo: diariolasamericas.com

Of course, the Cuban economy can’t increase wages with the ridiculous level of services and products it produces, it would lead us to today’s Venezuela-style inflation. Private investment is the only way to break this cycle, which includes, but isn’t only limited to, foreign investment.

However, opening up the economy requires an absolute turn-around of the structure in which our controlled economy operates, where our shamanic leaders sit so comfortably.

Like I’ve said in previous posts, Cuba doesn’t have an economic problem, (how are we going to have an economic problem when we don’t even have an economy?), we have a political problem.
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Notes:

1 CADECA, acronym for Bureau de Change, a state-owned company dedicated to the hard-currency market where the price of buying CUC for 24 CUP and selling it for 25 CUP has been established for years.

2 CUC, Cuban currency equivalent to the US dollar.

3 CUP, Cuban currency which National Accounts are written in and used to pay public sector wages.

4 As well as the CADECA’s official exchange rate, Cuban businesses use different exchange rates for the same currency written in their books, which makes it impossible to know the real situation our economy is in.

 

 

16 thoughts on “Solving Cuba’s Two-Currency Dilemma Is Not So Difficult

  • By and large, Repatriado is completely right. Cuban production, however, can improve even WITHOUT higher wages. How else can you explain hard-working migrant farm workers in the United States? The difference is simply: low-wage hard workers in the US are more productive because they believe, rightly or wrongly, that the hard work for low pay today will generate a higher wage in the future. Economic mobility is a cornerstone of the capital system. In Cuba, no matter how hard you work, the pay is the same. So why bother?

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    • The Castros tried to used Marxism as their recipe to keep power, during long time they tried to use this ideology as foundation of their politics, an important aspect of this foundation is that material bonus for hard work is a capitalist idea, so they try to use moral bonus for hard work, results, we are broke, but Castro´s are not.

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  • Unification will not impact everyone in the same way. At least in the short run, some groups will be better off and others worse off. Which will be the winners and which will be the losers?

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    • What you meant to say is that the relatively better off economically group of white Cubans with greater access to tourists and the hard currency they bring to Cuba will benefit first while the relatively poorest group of darker-skinned Cubans with lesser access to tourists will suffer from the likely inflationary impact of the currency unification.

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  • Precisely my point is that unification do not have a real economic impact, both currency, CUC and CUP are just to be used inside Cuba, CUC has theoretical but not real equivalence with USD, and so the problem is for an Accountant, not an Economist. They, the government, has inflate artificially this issue.

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    • There will likely be an initial inflationary reaction. Imagine what the costs of a new flat-screen 32-inch TV would be in CUP? Today, in the Carlos III shopping center in Havana that TV costs 2000 cuc. Imagine the psychological impact of seeing a 50000 cup price tag?

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      • Moses, I think we Cuban are so use to accept silently whatever the government does that there won’t be any psychological impact, prices in shops are already expressed in both currency. The impact will come when after two years of unification Cuban economy remain still broke, but do not worry, the communist government will have for sure a brand new justification, if not, there is the priceless blockade to help them.

        There can´t be inflation react cause the demand will remain the same. Thinking about it probably right now is a good moment to invest in gold here in Cuba.

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    • repatriado: I believe your point that unification will not be an economic issue but only an accounting one will be valid ONLY if all 3 scenarios happen:

      1) there is no change in government economic decision making resulting from getting honest and no longer being influenced by the current monkey business accounting of using different CUC / CUP exchange rates to justify predetermined political goals. I personally speculate this getting honest and making better decisions is what Raul had in mind all along.
      2) all CUC is exchanged for CUP at the current 25:1 rate. I personally speculate that the government cannot resist changing this rate, possibly gradually over time, which will result in a one time transfer of wealth from those in the CUC economy to those in the CUP economy.
      3) the CUP remains valued as a US dollar, just at a 25:1 rate, as is currently. This is disadvantageous since US monetary policy as set by the Federal Reserve Board becomes de facto Cuban monetary policy. I personally speculate the government acknowledges it lacks the economic power to long term link Cuban currency in value with US currency and must let the international value of Cuban currency float based on economic factors just as Euros, Sterling, and Canadian do. This will have dramatic effects on all international transactions such as the value of foreign remittances, what tourists pay, and the prices Cuba pays for all that imported food. The government realizes it must let the value of its currency be economically determined or it will continue down the same path of economic self-destruction that Venezuela has taken.

      So I am convinced unification will be a economic impact. While unification is necessary long term, the short term impact will be negative. This is exactly the reason the government had continued to delay implementation.

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      • Bob I will need some time to write in “my” English an answer for you, but the short one is do not analyse Cuban economy as a regular economy, Cuban economy is centralized and planned, the basis for its planning are always political. To be continued…

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        • repatriado: I am interested in your thoughts. I will say that I believe I have a reasonably good understanding of the Cuban macro economic situation driven in part by political desires.

          However there are some basic economic principles that are universal. These cannot be changed by Cuba’s political desires any more than than they can make water flow uphill. One of these of foreign exchange rates which impacts the cost of the many goods Cuba needs to import as well as the value of Cuba’s limited exports and more importantly the value economic inflows from foreign remittances and tourism. Long term term these foreign exchange rates are determined by economic decisions made by forces outside Cuba.

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        • There is a news in cubadebate right now that says, I quote, “los daños cuantificados en la actividad presupuestada, que superan los 300 millones en moneda total” translation: total damage in the budgotten activity are more than 300 million in TOTAL COIN, what is total coin?

          It is an example of how government use the double currency to make up figures. 300 million in that total coin could be more than 7 billion in CUP

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      • Hi, firs, I hope to have understood your allegations, second, I hope you can understand what I am trying to say.

        1) Monkey business are not a particular decision coming from Cuban companies managers, it is a guideline from top to bottom in order to manipulate accountings to keep reality out of their minds, out of Cuban population´s minds and very important, out of foreign investors’ minds. I disagree with you in one important point, you cannot be ruling a country for 60 years and be honest, the only better decisions you can do after a life in power are those to keep your status, not those that can actually improve people life.
        2) I say than the government have not to change money, what they have to do is unification of values, that unification 1:25, or better for them 1:24, do not create any capacity of acquisition, that eliminates risk on inflation and people do not need to move from one currency to the other because they will be the same, you can keep your cash as It is.
        3) I think Cuba cannot allow its currency floating, I think Cuba do need a Central Bank with a very defined monetary policy, if not we will be like Argentina or Mexico in the 80´s. The problem in Venezuela is general, they have the Mafia in Miraflores and the consigliere is Cuban State Security Department.

        None of this 3 points are possible, from my point of view.

        I do agree with you that unification will impact negatively, but not for Cuban population that has being suffering this absurd double currency for years, it will be negative for the government and that is why they are delaying implementation.

        Once they show to the people and to the world how deeply wrong works Cuban economy, even the parts that has nothing to do with the US Blockage or embargo, they will lost credibility, even more, investors will scream of fear or run away ASAP.

        If the Cuban government could close and destroy Cuban sugar industry by the simple order of Fidel, making hundreds of ghost towns because sugar industry was a culture, a way of life, believe me, they could make unification whenever they wanted.

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        • repatriado, thanks for the reply.

          1) we both believe that the Cuban government has been using different exchange rates (monkey business accounting) to generate data that supports decisions the government already make for political purposes. In reality, they should have been using a consistent exchange rate to generate realistic data, and only then let the data guide them to realistic decisions.

          2) The government will make a decision in the near future to maintain the 25/24 to 1 exchange rate in the process of eliminating the CUC as you think they will. Or, they will adjust the rate to favor CUP holders over CUC holders as I think they will. We just need to wait and see what they government does as I believe they will care less what you or I think. BTW, I think it would be best if they maintain the existing rate as you think they will. I just don’t have that much confidence in the government.

          3) We just have differing economic opinions if it is best that the government continue to keep the Cuban currency fixed to the US dollar or to allow the value of the currency float based on the traditional market factors of supply and demand. Economics is one of those things that different options will always be a subject for debate with no resolution.

          It will be interesting in the next few months to see how all of this plays out.

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  • Is there anything that cannot be bought with CUP these days ?

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    • There are still some Shops that do not accept CUP, any way as the most of the thing Cuban buy come from black market I guess there is nothing you can not buy in CUP these days.

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  • If they just unified the currency the way he says people’s income would be hit Dramatically. Cuba doesn’t have the reserves to actually back their cuc. If they pegged cup to cuc it would be the same as pegging the cup

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