[Cuba] Dealing with the dollar

From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Sat Aug 23 2003 - 18:55:51 EDT


        Volume 16 - Issue 8, Apr. 10 - 23, 1999
India's National Magazine
from the publishers of THE HINDU

Table of Contents

Dealing with the dollar

How Cuba copes with the long-term effects of the U.S. blockade
against it by making the pursuit of dollar earning a virtual movement.

recently in Havana

EVEN for the intrepid American traveller, getting to Cuba is no easy
task. The United States' blockade means that a Cuban destination,
lying just a few kilometres to the south of Florida, is best reached
by taking a detour through a third country. But once in Cuba, such
tourists find themselves at home. For one, their opposition to the
U.S. Government notwithstanding, Cubans make American visitors feel
welcome and even wanted. For another, their domestic currency, the
dollar, is Cuba's most widely accepted legal tender and commodities
and services (including taxi meters) are priced in dollars in all
outlets that a foreigner is likely to access.

The twin-blockade, which forced the Cuban Government to declare a
"Special Period in Peacetime", has made access to foreign exchange a
principal concern for the Government of what is a small island
economy. Food, medicines, inputs and fuel can be accessed in adequate
volumes only with foreign exchange, making the effort at restoring
the health of a devastated economy and protecting the quality of life
of its citizens dependent on dollar earnings. Fidel Castro's
Government is committed to ensuring that the entire population has
access to basic necessities. But the definition of what goods and
services and how much of them constitute basic necessities depends in
turn on the amount of foreign exchange that could be drawn into the
economy and soaked up by the Government.

With no supporter of the Soviet kind in sight, recovery became
synonymous with the pursuit of the dollar. The previous article in
this series (Frontline, April 9, 1999) detailed the measures taken by
the Cuban Government with regard to trade, foreign investment and
tourism with the aim of furthering that pursuit. But despite this
willingness to "open up" to deal with what many people considered an
impossible situation, the pursuit was rendered difficult by the U.S.
blockade, which was intensified by the Toricelli Act of 1992 and the
Helms-Burton Act of 1996 approved by the U.S. Congress. The Toricelli
Act prohibited foreign-based subsidiaries of U.S. companies from
trading with Cuba. It also prohibited U.S. citizens from travelling
to Cuba and banned family remittances to Cuba. According to its
author Robert Toricelli, it was designed to cripple the Cuban economy
and bring down Castro "within weeks". Among the provisions of the
Helms-Burton Act was one which allows Cuban-Americans whose assets
were taken over during the revolution to file a suit against any
foreign company which transacted in those assets as part of their
Cuban business interests. The Act also provided for the denial of
U.S. visas to any foreigner holding a stake in property expropriated
from Cuban-Americans.

The Cuban Government's response to this tightening of the blockade
has been along two lines. First, it has made an effort to win the
support of as many nations as possible to fight the blockade in
international forums and to convince them to flout or circumvent the
efforts of the U.S. to internationalise the blockade. Success here
has been remarkable. Not only do Canadian, European and Latin
American firms do business with and in Cuba, but there is a growing
private lobby within the U.S. pressing for the lifting of the
blockade. In the United Nations, support for the resolution to
terminate the economic, commercial and financial blockade of the U.S.
against Cuba has shifted sharply over the seven years in which it has
been consecutively tabled and put to vote. While in 1992, 59 out of
133 participating countries voted in favour and five against and 71
abstained, in 1998, 157 out of 171 countries voted in favour and 12
abstained and only two countries (the U.S. and Israel) voted against.

But Cuba is not a country that seeks outside support alone. To make
its pursuit of dollar earnings a virtual movement, it has sought to
involve the average Cuban in that effort by means of persuasion and
incentives. To convey to its population the premium that has to be
placed on the dollar, the Government legalised the use of foreign
currency after August 1993 and created a convertible peso in December
1994 which exchanged for the dollar on a one-to-one basis. Public
support was crucial here, for the legalisation of the dollar has
created a dual economy, with the dollar economy being characterised
by high prices and easy availability of goods and the peso economy by
low, subsidised prices but limited availability of commodities. It is
obvious that the average Cuban yearns to access commodities available
in the dollar shops that are ubiquitous at least in the cities and
towns. This is not only because of the strong "demonstration effect"
that the consumption of dollar-denominated commodities has on the
population, which increasingly aspires to the lifestyle those
commodities represent. It is also because there are many essentials
like cooking oil and some medicines that are more easily accessed
through the dollar shops.

Cigars and dollars in Havana.

There are two ways to ensure such access for the common Cuban. The
first one is to allow them to access foreign exchange directly from
relatives abroad, through legal (and sometimes illegal) means of
self-employment in sectors that yield dollar incomes or through
working in sectors and jobs that are provided with dollar incentives.
The second method is to accumulate pesos that are officially
convertible into dollars so as to ensure that people can buy those
commodities (such as colour televisions) that can be accessed only in
the dollar economy.

The intent of the latter method is really to mop up past peso savings
and liquidity. It would be difficult for an average Cuban earning
peso incomes in a range equivalent to $20-25 to save up much in the
form of pesos that can buy expensive dollar goods. Yet the
dollarisation of the economy is proceeding apace. According to
official sources, in 1996 close to 50 per cent of Cubans had some
access to pesos and the level of foreign exchange held by the
population in the middle of 1997 amounted to 49.5 per cent of the
currency in circulation in the country. This large share of the
dollar and the convertible peso has been attributed to "purchases of
foreign exchange with national currency, family remittances and the
growth of tourism, in addition to expansion of the systems of
incentives in this currency that benefited more than 1.4 million
workers." That is, the ability of some Cubans and domestic firms to
earn dollars directly and spend them in the dollar economy has risen
quite sharply, while the ability of those who seek to convert peso
incomes into dollars in order to acquire imported commodities has
been less buoyant because of depressed incomes. The faster rate of
growth of the supply of dollars relative to demand is reflected in
the fact that the regular peso, which is the principal form of income
for the average Cuban, has improved its position vis-a-vis the dollar
over time.

From an all-time low of 130 pesos to the dollar in 1994, its value
rose to 40 pesos to the dollar in November 1995, 30 pesos to the
dollar in July 1995 and an unusual seven pesos to the dollar, in
August 1995. Since then the rate has stabilised at 20 pesos to the
dollar, where it currently stands.

THERE are two questions that this process of dollarisation of the
economy gives rise to. The first is: how are the two economies - the
dollar and peso economies - to be reconciled in the long run? The
second question is: in the interim, how are the inequalities arising
from the differential access to goods and services to dollar and peso
holders being handled? The introduction of the convertible peso in
December 1994, which exchanges with the dollar on a one-to-one basis,
was seen as a first step towards resolving the dual economy problem.
As mentioned earlier, over the 1990s the regular peso has been
revalued seven times, taking its value from 130 to the dollar to 20
to the dollar. The Government's expectation is that this process
would continue, resulting in a situation where the difference in
value between the regular peso, on the one hand, and the convertible
peso and the dollar, on the other, would disappear. Once that
happens, there would be no need for the country to keep the dollar in
circulation, since the convertible peso can be used as legal tender
in both peso and dollar shops.

The second one is a more tricky question. For the moment, the
Government is dealing with the problem in two ways. To start with,
the regular earnings of Cubans consist of three parts. One part is a
peso income, which allows them to access rations and low-priced
commodities from the peso economy. The second part is a payment in
kind - virtually a bag of goodies - consisting of commodities varying
from toiletries and detergents to cooking oil, which are not easily
available within the peso economy. The bag varies by enterprise and
month and often involves "repeats" that are reportedly traded for
other goods in an informal barter market. Finally, there is a third
part in the form of dollar incentives provided on the basis of
qualifications, job description and performance of the individual.

This three-part payment system does partially reduce the disparity
between those who can access dollars through remittances or
employment/self-employment in sectors such as those linked to
tourism, either as regular earnings or tips. However, the dual
economy system does create a situation where an individual's quality
of life is divorced from his or her station in life. Highly trained
doctors and scientists, for example, would have less access to the
dollar shop than a taxi driver or a worker in the tourist industry
would have. And any effort to correct this anomaly with special
dollar incentives does increase inequalities in the purchasing power
of different sections of the population and their access to

The problems are compounded by the fact that beneficiaries tend to
guard zealously their advantages relative to others. For example, the
Government at one point permitted individuals and families to set up
"paladares" or private restaurants, with the seating capacity limited
to 12, as a source of dollar earnings for their self-employed
operators. Margins in these restaurants can be high in some
locations, even if low in others. But when the Government imposed
taxes to mobilise resources and deal with the inequality generated by
the creation of a set of dollar-earning individuals, the move created
much resentment. Individuals who have not been taxed in the past felt
that the Government was taking away with one hand the opportunity it
offered with the other.

On a Havana promenade.

Such problems can be resolved only when dollar inflows, relative to
outflows, reach a level where the peso can exchange for the dollar on
a one-to-one basis and average incomes rise to match the
international prices at which a range of commodities are increasingly
sold. Till that time, the Government has to sustain the morale of the
population. Besides its revolutionary history and the charismatic
presence and persuasive eloquence of its leader Fidel Castro, Cuba
has two means to this end. First, by ensuring the availability of
basic necessities to all people, including access to almost the best
in health and education. Second, a refusal to transform the
unavoidable need to provide a role for markets into the voluntary
embrace of a market-based system. Cuba's economic policy trajectory
during the Special Period has been different from that of the other
"economies in transition". While Cuba did decentralise its
decision-making structure, introduce elements of a market economy and
seek out private foreign investment, the economy is still
characterised by a dominant presence of the state in small and medium
industry and trade and by a substantial degree of regulation of the
market and private investment.

The only danger is that as recovery strengthens, average incomes rise
and the gap between the dollar and the peso narrows, the desire of
the population to be "paid off" for more than a decade of sacrifice,
could result in pressure on the state to allow more freedom for
private enterprise and to free markets in the name of "choice". Such
pressures may be all the greater if Cuba wins the battle against the
U.S. blockade, unleashing new opportunities and bringing in new
influences from closer home. If it does, transition of a kind seen in
much of Eastern Europe, to a system wherein growth, if it occurs, is
inherently inequalising, is a real danger. But then, in a world of
neoliberal globalisation such dangers cannot be avoided; they must be
faced, as President Castro repeatedly emphasises.

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