Notes of Papers Delivered at the 2013 Annual Conference of the Association for the Study of the Cuban Economy

The Association for the Study of the Cuban Economy held its 23rd Annual Conference in Miami this past week. The conference theme this year was "Reforming Cuba?" Conference papers focused on internal economic and political reforms and their impact on the economy of Cuba and the region, and  also included general sessions on the Cuban economy and society.

This post summarizes the presentations of  the opening plenary session, entitled, "An Overview of Reforms," chaired by Joaquín Pujol, International Monetary Fund (Retired) and featuring the following speakers:

--Carmelo Mesa-Lago, University of Pittsburgh, “Overview of Cuba’s Reforms and Their Effects”
--Rolando H. Castañeda, “Cuba: Análisis de las Reformas Socioeconómicas Raulistas, 2007-2013. Principales Logros y Limitaciones. Imperativo de las Reformas Difíciles”
--René Gómez Manzano, Havana, Cuba based attorney (invited)
--Emilio Morales, The Havana Consulting Group

This from my notes of the session:

Carmelo Mesa-Lago, University of Pittsburgh, “Overview of Cuba’s Reforms and Their Effects”

Mesa Lago focused on a general overview of Cuban economic reforms between 2006 ans June 1013, focusing on obstacles and progress. He divided the analysis into four parts, (1) scope of reforms, (2) obstacles, (3) micro/macro results, and (4) conclusion.

Mesa Lago divided Cuban reform efforts into three types: (1) administrative, (2) structural and (3) non-structural.  

Administrative reforms have been long in implementation and are well known.  They include the reorganization fo state enterprises which is an ongoing effort.  Also included, and related to this reorganization has been the efforts around the perfeccionamiento empresarial. (e.g., Empresas en Perfeccionamiento and the Sinification of the Cuban Economy).  Now much higher on the list now are anti corruption efforts. (e.g., Raúl Castro, The loss of ethical values and disrespect for good manners can be reversed by concerted action on the part of all social actors). These extend not just to officials but have now been directed to all elements of society. Equally important has been a limited, but discernible, new openness to criticism of the regime--either in its role in the state apparatus or of the Communist Party.

Structural reforms have become an increasingly important part of both Communist Party and State policy. Mesa Lago provided a list of what he believes are the most important:

--2011 Lineamientos (updating economic model through changes in the Communist Party Line)

--2006 Commitment to the gradual end of rationing (meeting lots of opposition because the program serves as a long term means of food subsidies)

--2008/12 initiation of the usufruct program for idle agricultural lands

--2010 announcement of state commitment to gradual reduction of the number fo state employees

--2008 program of reducing welfare payments

--2011 sale of homes permitted

--2012 opening up to out bounbd migration

--2012 tax reform program initiated

--2012 non-agricultural cooperative regulations promulgated

--2013 announced liberalization of wholesale market controls

The government has also announced a number of future initiatives.  These include:

--2014 reform of state owned enterprises (further development of perfeccionamiento programs)

--2014 de-regulation of key state owned enterprises (e.g., more on a profit model; can keep 50% of profit as long as it is reinvested; closing SOEs that operate at a loss for more than 2 years).

--2014 reform of foreign investment law to be structured as a supplement to the current structures focusing on technology, finance and employment elements.

Even longer term structural reforms being considered include the end of the dual currency system (with potentially large effects on prices), unification of foreign exchange at reasonable rates, general price reform (though no indication that the state will give up price control power), and bank reform.  The details fo these remain unclear. 

These structural reforms face a number of substantial obstacles.  Mesa Lago highlighted the most important of these for Cuba in the short term.  These include a number of important long term policy issues.  First, the Party-State's unwillingness to reduce excessive regulation and controls stands as a principal obstacle to reform.  I have suggested the details of the difficulty with respect to non-agricultural cooperatives, e.g., "The Problem of Labor and the Construction of Socialism in Cuba: On Contradictions in the Reform of Cuba’s Regulations for Private Labor Cooperatives." The continued policy commitment to central planning at a very detailed level reduce the effectiveness of any reform.  The same is true for the government's approach to the taxation of activity outside the direct control of the state sector.  These high tax structures, meant to capture the value added of economic activity serve as a substantial disincentive to activity.  Lastly, the structuring of regulations as blanket prohibitions with specific exceptions and the realated licensing programs also impede the implementation of he reforms and make attainment of the objectives thereof harder to realize.

Mesa Lago thus argues that "the greatest obstacle is the model itself."  He provided several examples to support this point.  First he noted that the usufruct program has been substantially less successful because of the bureaucracy and approval processes, the regulatory incoherence of the program, and the easier with which the state can appropriate any land thus alienated for any of a number of violations, some of them hard to avoid.  Similar obstacles impede the development of the non-state sector.  The non-state sector is constricted by too much regulation that serves as an effective barrier to people unschooled in the subtleties of bureaucracy.  The bureaucratic processes, heavily tilted toward licensing and examination also open the door to unaccountable discretion.  That discretion in turn can produce both regulatory incoherence (as decisions change vastly from place to place) and opens the door to corruption. Indeed, Mesa-Lago emphasized the way in which the licensing aspect of the regulations limits opportunity not merely through its transaction costs but my significantly constraining the scope of non state sector activities in ways that may have little relation to the markets in which these activities are meant to take place.  Excessive taxes create substantial threshold barriers to operation--businesses that cannot operate successfully enough to meet tax obligations will not be formed.  That problem is exacerbated by the limited amount of finance capital available for business formation. Most important, perhaps, the bureaucracy at virtually all levels continues to oppose, and oppose strongly, the efforts to open the non-state sector.  All of these forces apply to the efforts to make the cooperative form available for non-state sector activity.  Mesa Lago noted particularly the system of licensing that required up to four distinct approvals by state organs from the local to the national level.

Mesa Lago also noted a number of more general micro and macro obstacles.  He noted that it was too early to tell whether the efforts to liberalize wholesale markets would be effective.  He also noted that home sales are producing two parallel markets.  While 45,000 units were officially sold in 2012, that number increased to about 100,000 units when illegal sales are aggregated.  And that aggregation is necessary tot he extent the state continues to tolerate that activity.  Yet that toleration also increases the uncertainty of transactions as the state can always unwind them.  Macro indicators were stable.  GDP grew 3 percent in 2012, lower than the 3.4 percent projection.  And Cuban official acknowledged that despite efforts to open private lands, agricultural production remained flat. 

Mesa Lago concluded that agricultural and non-structural reforms are both the least complex and important, and thus the most successful.  On the other hand, key structural reforms have proven to be quite complex and have failed to achieve expected results, at least to date.  Future reform will remain a function of the the way in which conflicts between the Communist Party left and right are resolved.

Rolando H. Castañeda, “Cuba: Análisis de las Reformas Socioeconómicas Raulistas, 2007-2013. Principales Logros y Limitaciones. Imperativo de las Reformas Difíciles”

An excellent presentation that focused on an analysis of the reasons  that Cuban structural reforms are not achieving expected results.  Castañeda started by noting the Raúl Castro's speeches of June 28 and July 7 2013 and the omission of discussion of reforms in his July 26th speech signal impatience at the pace of reform,.  He argues  that at its foundation the reasons for slow reform is both ideology and structural.  For the latter, he focused on the intransigence of the bureaucracy.

René Gómez Manzano, Havana, Cuba based attorney, "New Legal Treatment of Foreign Empresarios Under the Criminal Law."

Manzanao spoke to an issue of particular importance to foreigners: a change in the way the criminal law is used against foreigners in Cuba, especially foreign investors operating in Cuba. The change is neither subtle nor insignificant--the state has moved from a regime of expulsion to one of arrest and imprisonment, usually for corruption related crimes.  The face of the new approach against foreigners is Stephen Purvis, e.g., Colin Freeman, The Briton who languished in a Cuban jail after being accused of spying: Stephen Purvis has returned to Britain after spending 16 months in a Cuban jail on false spying and fraud charges. He speaks to Colin Freeman about the ordeal, The Telegraph, July 6, 2013) ("In an ordeal that could have been torn from the pages of a Graham Greene novel, Mr Purvis was falsely accused first of being a spy, and then of obscure breaches of finance laws, while never being told details of the allegations against him. He fled the island after a court released him a fortnight ago, following a trial conducted entirely in secret. Meanwhile, Coral’s offices in Cuba have been shut down, and the country club project in which he has invested millions of pounds and five years of his life handed to a Chinese firm."). 

Stephen Purvis at home in Wembley with his family.  Photo: Geoff Pugh

Manzano suggested that the Purvis story will serve as the new normal in Cuban efforts to manage foreign investment presence in Cuba. For Manzano, this deployment of the criminal justice system against Purvis reflects a change in state policy that means to conflate a new muscularity in efforts against corruption and a fear of foreign business investors as an otherwise uncontrollable element in the state's efforts to control corruption. But the result, he suggests, is another step away from the possibility of a rule of law state as understood in the West; it is not clear that there is even an effort towards rule by law, given the extent of administrative discretion that is otherwise unbounded.  Long periods of time without counsel and the procedural flexibility of the procedures applicable ought to be troubling.   He noted: "El que hizo la ley hizo la trampa."

In effect, Gómez Manzano argues, Cuba has chosen to use its criminal law as an administrative tool.  This is meant, he suggests, to reflect a revival of practices once common in Soviet Marxist Leninist states and is directed with a heavy political overlay.  He asserts that Chinese and Venezuelan business investors are essentially left to operate freely; Canadian and U.K. business people are targeted. The effect is not to reduce but to augment the generalized corruption as noted by Transparency International.  It may lie behind Raúl Castro's has recent public admonition to the Cuban people; this sort of corruption conundrum is well known to and denounced by the leadership  (e.g., Raúl Castro, The loss of ethical values and disrespect for good manners can be reversed by concerted action on the part of all social actors, Speech delivered to the National Assembly, July 7, 2013) but anti-corruption campaigns have been largely unsuccessful.

Cuba remains a very risky place for foreigners seeking to do business there.  Campaigns against Westerners are meant to leverage anti-corruption by pressuring Western companies through selective enforcement and the threat thereof, to use their own governance mechanics to reform Cuban business culture and to police corruption.  In effect, Castro means to privatize anti-corruption campaigns by deputizing Western companies for that purpose and enforcing that regime through the threat of arrest of its investors.

Emilio Morales, The Havana Consulting Group, "Reform in Cuba:  The Latest Utopia?

Morales started by arguing that what supports the Cuban economy today are remissions from exiles and subsidies from Venezuela.  These dwarf exports and tourism by a large percentage.  Cuba, today, is an emigration based economy, much like Ireland 150 years ago.And, indeed, the rate of emigration has increased since the latest economic reforms were put in place.  When combined with increased tourism especially by Cubans living abroad, increases the effective rate of remittances. On the other hand, Venezuelan support is likely unsustainable as the Venezuelan economy collapses and as the time from Chavez's death increases.

In addition, the success of the new opening of a small private sector is not proving to be as important a contributor to income.  Only a fraction of the actual cuentapropistas earn their living form their trade.  Most of the rest are retired people or state workers earning a little extra on the side.  The trend is for people to treat the non-state sector as a place to supplement their income, not to see in it the source of their primary income. This current state of affairs is likely to persist because of the substantial impediments to the creation of robust non-state sector frameworks. And importantly, professionals have not been included int he reforms.  Teh state stuill seeks to control their activities, pricing, etc.