A monetary reform along with higher salaries and pensions - Reflections and suggestions (II)

A monetary reform along with higher salaries and pensions - Reflections and suggestions (II)

Humberto Pérez, TEMAS

 [...]

Given its teratological deformation, the first step is to restructure the present context so that production, that is, the existing objective relations of production and ownership and their constituent elements, becomes the determining factor vis-à-vis distribution, exchange and consumption, unlike what we see today, i.e. that circulation is the real determinant. The pyramid is upside down and must be set right.

Throughout the history of economy in every socioeconomic system that we have known, distribution and consumption have been contingent on relations of production marked first of all by ownership over the fundamental means of production. In goods-producing economies and, particularly, where the said activity prevails, this is followed by exchange between production and consumption. It is on the basis of this pyramid of interrelations and determinations ―with ownership and production at its base― and of the material relations thus created, that all acting objective socioeconomic laws come into play and their position, role, conduct and advantages and/or disadvantages to the various economic actors and subjects manifest themselves.

In our present scenario, the most successful economic actors, subjects and sectors of the population are not those that own and manage the fundamental means of production. The most technologically advanced; those whose productive activities are key to the national economy; those that have excelled in efficiency and quality as providers of goods and services, the most outstanding sources of technical-economic initiatives and inputs (although some of them deserve credit in this regard) or the top producers and contributors to the common good; none of these are among the segments that obtain the greatest benefits.

The advantages and privileges enjoyed in the fields of distribution, exchange and consumption of goods and services available in the retail outlets are not determined by production, but by what exists and happens in the area of circulation, and specifically in the monetary and foreign exchange market, pivotal and highly favorable to those who receive remittances or run private businesses that directly generate foreign currencies and CUCs, and particularly to a privileged minority in their midst.

This sector of society gets 24 CUP for every dollar or CUC that they earn or exchange in the money market, whereas Cuban state enterprises that generate foreign currencies or CUCs only receive in their accounts 1 CUP for every dollar or CUC of their revenues, which are used to pay salaries of their employees. Conversely, as collective owners of the country's main means of production, these workers are compelled, just like the pensioners, to part with 24 or 25 CUP of their scant income to obtain in the market the equivalent to 1 CUC.

In the areas of circulation, retail trade and consumption, the former's income ―or part thereof― boasts a purchasing power 24 or 25 times higher than the latter's, in addition to giving MSME[1] owners the possibility of paying salaries several times higher than what state entities can pay, which prompts a labor exodus to the nonstate sector as a result. The fact that skilled labor ends up in jobs by no means in line with their qualification proves to be a very serious problem for the overall Cuban economy, not to mention the loss of whatever was invested in their education. And this brain drain is all the more unfortunate and damaging in the case of education, health and scientific research professionals.

In order to flip our inverted pyramid and set it right, we need to reorganize the existing monetary, financial and economic factors without waiting for any prior quantitative changes in their aggregate levels, and construct a socioeconomic structure that differs from the one in which our economic subjects and agents have been working for years without achieving the expected and long-awaited results. Our prospects will remain gloomy unless we redress the present situation and the relevant actors correct their course as instructed and start fulfilling the role that they are called upon to play. The new setting must smooth the way for a proper social balance and encourage both a more normal and favorable implementation of objective economic laws and a more effective performance by all the economic subjects involved.

Despite the intended goal of these proposals, I am fully aware that they must also be put into practice as cleverly and carefully as possible. The first step in such a complex and deformed setting may well lead to unexpected and undesirable outcomes. That is why we should not lose sight of the present situation any more than we should forget ―e.g., in the case of the monetary and exchange rate reform and the salary/pension increase― that we have managed to strike an acceptable balance between the money in circulation and all the goods and services sold to the population at the current prices and rates. On this premise, I am not proposing to modify the total amount of money in circulation or, for now, our retail prices and rates, but only to redistribute the current money supply in favor of the most vulnerable and long disadvantaged social groups by channeling into them the same amount of money as would be deducted from the privileged sectors once a lower exchange rate is implemented.

According to the information available to us and to our own calculations, every year Cuba receives remittances valued at around 3.0 billion CUC, that is, roughly 72.0 billion CUP at a rate of 1 CUC to 24 CUP. If we throw in the equivalent of an additional 1.2-1.5 billion CUC ―directly received in foreign currency in the form of tips, payments to private restaurants and taxis and moneys paid to self-employed workers, etc.― this 1:24 rate involves another 30 billion CUP on top of the first amount, for an approximate annual average primary money supply of 100 billion CUP in circulation, the productive origin of which is almost entirely outside the country.

On the other hand, figures provided by ONEI (National Statistics and Information Office) indicate that the total amount of money paid in salaries, pensions and social security benefits totals some 35.0 billion CUP per year. If we add all payments made by state institutions and entities to private farmers and other self-employed workers, plus the loans taken out by citizens for various purposes, we are talking about a primary money supply of 80.0 to 90.0 billion CUP generated by domestic production, i.e. an amount lower than that of external origin, which is economically and socially irrational.

As to the approximate amount of 100 billion CUP that foreign currency and CUC recipients receive directly from the foreign exchange market, a reduction of the exchange rate to 1:15 entails a 37.5% drop in the yearly amount of CUPs that they receive, that is, almost 38.0 billion CUP will possibly be available for redistribution every year. Since some 35.0 billion CUP are currently paid to state employees and pensioners, we could contemplate an increase of 100% or more in salaries and pensions in the first year alone, which means paying them double what they earn today. And this could be done without increasing the primary money supply in the hands of the population or their overall real purchasing power, so there would be no reason for either inflationary trends nor supply shortages.

Perhaps the opposite will happen, because the money supply thus reallocated is currently the target of a high demand largely concentrated in a privileged minority, which brings great pressure to bear on our retail outlets, and such pressure would decrease once their solvency drops. At the same time, once that money supply is transferred to the hands of the majority, the resulting level of demand would be more extended and dispersed, that is, less intense and concentrated, and then we might witness a fall in prices as a result of the newly structured supply-and-demand relationship.

Of course, we would have to keep paying attention to the new effective supply/demand relationships, as there could be critical points in the case of certain foods and other items likely to become the object of great demand by today's underprivileged sectors, whose increased earnings might lead them to exert additional pressure on those commodities.

On the upside, however, we should take into account other possible consequences of a new official CUP appreciation, such as a fall in the number of people requesting or seeking foreign currencies ―rather than CUCs― in the black and informal market as the salary and pension increase meets their immediate consumption needs. We must also remember that, even if possessing CUCs ―which is and should continue to be legal while they are still in circulation― would nourish the black market, any direct exchange of Cuban money for foreign cash banned from circulation will be illegal and punishable by law, and, consequently, more difficult and risky, such that it should curb and hinder the existence of the said informal economy despite its eventual attempts to somehow stay alive and even grow.

Regarding possible political consequences on top of the economic fallout, we should keep in mind that the salary and pension increase would help a significant number of people compensate many ―if not all― of their losses from the exchange rate reduction, affecting those receiving remittances and, in general, CUCs from other sources (e.g. the 15 CUC to workers to compensate for the closing of lunchrooms at workplaces, the 30 CUCs on average that some employees receive as a cash incentive, the earnings of the most humble and authentic self-employed workers, etc.). 

As a hypothetical example of what the exchange rate appreciation and, together with it, the salary and pension increase suggested in this article would do, let us start from the fact that today's average monthly pension is 270 CUP, the minimum salary is 225 CUP and the average salary is approximately 740 CUP. Now, according to estimates made by some specialists, as we will see below, the remittances to Cuba add up to some 34 CUC per capita. For the purposes of this example, we will take twice that figure and assume that each person in the Island receives or earns 70 CUC per month.

A state salary earner who earns the monthly average of 740 CUP plus 70 CUC ―equivalent to 1,680 CUP at a 1:24 rate― will have a total of 2,420 CUPs every month.

Following the rate modification, that worker will get the same 70 CUC, except that then they will be equivalent to 1,050 CUP at a 1:15 rate, that is, 630 Cuban pesos less than before. However, with the salary increase suggested herein, the resulting average salary would be 1,400 to 1,500 CUP, i.e. 660 to 760 CUP more than before.

In the case of retirees who receive the average monthly pension of 270 CUP and an additional 70 CUC per month (equivalent to 1,680 CUP at a 1:24 rate), they will have 1,950 CUP per month to meet their needs.

With the 1:15 rate and the proposed pension increase to a minimum of 1,000 CUP per month, those retirees will see their situation change as follows: for the same 70 CUC, now they will receive 1,050 CUP, that is, 630 CUP less than before. Nonetheless, the pension increase from 270 to 1,000 will bring them at least another 730 CUP, so all in all they will have 2,050 CUP per month, i.e. 100 CUP more than before.

Accordingly, state employees and pensioners who receive a monthly average of around 70 CUC worth of remittances or additional earnings or less will be better off with, rather than hurt by, this proposal. And this social group should constitute the vast majority of those who will benefit from remittances and other sources of CUCs in Cuba.

About this, we should take the following into account:

Although at some point, and as a result of their recirculation, some CUCs find their way into the hands of almost everyone in the country, estimates have it that around 65% of the population benefits from direct remittances. And most of them do not live on that money, which is only a supplement ―insufficient at times― to cover their minimum needs to eat and survive.

If we keep in mind that 65% of a population of 11,2 million is 7,3 million people, and that the remittances received in Cuba every year are around 3 billion, then every recipient benefits from 410 CUC per year, that is, 34 CUC per month, or some 816 CUP at the 1:24 rate.

Besides, around 540,000 people are classified as self-employed (from peanut vendors to MSME owners and their employees), i.e. just 4.8% of the total Cuban population, 7.6% of the working population, and 11.8% of the people in employment. These are the ones who receive, directly or through recirculation, the highest number of CUCs that form part of the money supply.

If we deduct 25% from that figure those licensed as employees of other self-employed workers (SEWs) (around 140,000) then the so-called "entrepreneurs" of the private sector would only add up to some 400,000 (around 3.6% of the total population, 5.6% of the working population, and 8.6% of people with jobs). And from that figure we would have to subtract as well the private individual workers, which would leave us with a net figure made up of MSME owners, who are a tiny minority of the population and yet end up with the largest amount of foreign currency and CUCs in circulation. This sector will certainly be the worst hit in terms of their current income. [1]

To this minority, the damage will undoubtedly come as a certain, albeit relative, "shock therapy", but in my opinion it is as necessary as it is advisable. The change is intended to favor and bring a modicum of equity to the most vulnerable majority of our working population ―who has endured for years a critical and chronic "shock therapy"― as well as an incentive to boost the production and productivity levels required for economic growth and the reproduction and renewal of social consensus in such a way that our socialist project becomes more and more prosperous and sustainable, as proclaimed in our nation's vision of the future.

By way of compensation and in return for the harmful effects of the new exchange rate on the MSMEs and self-employed workers, this proposal also advises to take immediate measures to give the nonstate sector in general more freedom of action and support, namely:

  • Provide MSMEs with the legal status already announced for them.
  • Give the nonstate sector more flexibility and increase the number of activities it can carry out. These should not be part of a fixed, a priori list sent from above, but one based on free initiatives that emerge at the grassroots level and, of course, are subject to analysis and approval by the relevant decision-makers.
  • Speed up the creation of wholesale supply outlets that sell at lower prices than the current ones when they buy their consumables from retailers or "under the table".
  • Authorize and organize the import of resources that they need to produce, which they currently get irregularly and insufficiently through illegal or semi-illegal channels, e.g. using "mules".
  • Promote and organize possible investments by this sector from profits obtained from their business and other sources that they access or could access, including through partnerships with the state sector and production and service chains with economic actors of the public sector. This should be done without trying to restrict their growth and concentration of wealth, as this would prevent them from reinvesting their earned surplus and force them to the simple reproduction of their goods and services, which is totally absurd and pointless.
  • Review and adjust the tax system to the new situation by placing progressive taxes on their capital gains and not on their income, insofar as it is possible.

Any excessive concentration of wealth must certainly be supervised and controlled to avoid contradictions with our socialist objectives, but only with reasoned regulations and mainly economic and fiscal mechanisms so that this sector can play its role in the country's economic development as envisaged in the Conceptualization document.

We should give a similar treatment and all kinds of incentives to those who have leased agricultural land, are already producing significant amounts of food for the population and can make a great contribution to import substitution in this sector.

Besides, the nonstate sector should be organized differently from how it is today.  Currently, both employers and employees, whose interests are obviously at odds, are members of the same labor union. Nonstate sector employers should have organizations like ANAP (National Association of Small Farmers) that can carry out political work with their members and let them voice and discuss their concerns and interests before the established authorities, at the same time as they encourage and facilitate their active engagement in their local communities and, in general, in attaining the goals of our socialist project.

Unfortunately, some of the latest measures announced and taken in the nonstate sector are unfortunate, despite all reasons and arguments that we hear about attempts to right past wrongs and prevent new errors and shoddiness.

At any rate, a policy that needs a change is the regular, timely and sufficient restocking of the aforesaid TRD outlets in order to maintain a stable supply of items in high demand. That is not the case today. It used to be done properly and routinely, though, when retail store enterprises managed their foreign currency in a decentralized manner, but things changed for the worse ever since the allocation of foreign currency to meet this requirement became centralized. We do not know whether there is sufficient awareness that these are quick-turnaround outlays with a high markup and profit margin.

The consequence has been a rise in remittances in kind ―with the resulting disruption to airports and customs operations― to the detriment of monetary transfers and, consequently, a loss of foreign currency revenues and profits that Cuba would have otherwise secured if our markets had been kept duly supplied.

Admittedly, a downside of the 1:15 rate at the CADECAS is that it would make retail purchases by tourists and other foreigners more expensive. However, our retail market for tourists and visitors, consists mostly of private restaurants, taxi drivers, homes for rent and an assortment of self-employed manufacturers of handicrafts and other providers of certain services. Prices and rates in this market segment are based on supply and demand, so it is to be expected that their levels will adapt freely to the new situation, which is why I think the measures that I propose will not curtail the influx of tourists and visitors.

In the case of state-owned retail markets, those coming on tour packages, who account for the majority, mostly consume commodities from hotel shops: expensive beverages, toiletries, beach items and souvenirs, whose prices could be centrally reduced if need be.

In the so-called TRD stores or shopping (as they are popularly known in Cuba), the main foreign customers are temporary or permanent residents, such as diplomats, businessmen, technicians and, to some extent, individual tourists and cruise ship passengers in specific areas of the cities that they visit. This is a minor group of solvent consumers, partly captive ―especially the residents― or briefly passing through, who make minor purchases and, in my opinion, will not stop doing so or buy much less just because the prices are relatively and momentarily higher. Furthermore, foreign residents can always turn to the private sector to buy what they need at prices governed by supply and demand.

Be that as it may, it would be risky to deal with or try to solve the situation with specific measures. Keep in mind that the new relationship of the effective supply-demand structure in the bulk of the population could lead to gradual price reductions for certain goods without sending demand sky-high and causing long lines.

Other measures that I will not dwell on but seem to be in the offing are, for instance: achieve a greater and real decentralization of governmental decision-making powers from the central level in favor of the municipalities. Also, a more astute and adequate interrelation between the different state and nonstate economic subjects, based on flexible governmental permits and provisions, and letting the market play its supplementary role to realize more effective production chains and the growth that we need.

Likewise, foreign investment should continue to grow and develop even more dynamically and with less bureaucracy in the approval, contracting and start-up procedures. The new rates will foster foreign investment as potential national partners run a clearer and more transparent accounting system and joint ventures strike a better balance between the foreign investor's contribution in hard currency and what the Cuban partner contributes today in CUCs or CUPs, where comparisons and relative values are based on a non-real monetary parity.

In summary, as stated above, these suggestions imply as a whole the design of an integral program for the systemic implementation of the major changes envisaged in the approved Conceptualization document, beginning with steps to untie the main Gordian knots of the present system.

Cuba's official decision-making and statistical bodies have a more accurate and reliable knowledge of the relevant data and figures needed to implement each subset of measures. And should they need more information, they have the authority and the means to obtain it and reach the best possible conclusions and/or disprove all or some of the suggestions that I make here, which are based on the information that I have available.

The ultimate purpose is to find a way along the process to update our model, such that we can solve our serious current problems of economic inefficiency, growing socioeconomic inequality and insufficient incomes that can be earned legally by most workers of the country's main and more important productive entities. These problems breed dejection, spur the exodus of skilled labor and become a breeding ground for today's widespread corruption, all of which hamper our economic growth and development and our advance towards achieving the socialist goals of our project.

Again, we need to take these measures in order to grow, not after we grow. It would be convenient to count beforehand on enough financial resources ―either internal or borrowed as soft or semi-soft loans from external sources― and high growth rates of production, exports and supply, but we are faced with difficulties that cannot go unresolved any longer.

If we wait for a steady average annual GDP growth of 5-6%, an annual rate of capital investment above  20% of GDP, real foreign investment of 2.4-2.5 billion USD annually, a 2-3% rise in imports for each 1% growth in GDP, making good our long overdue foreign debt payments, etc. ―said to be prerequisites for our families to see any results on their tables and for some of the key steps and measures laid down in the Conceptualization document― hell will freeze over before we can enjoy any prospect of improving and advancing towards the prosperous and sustainable socialism that we aim to attain, and the motivation and political support for the ongoing process by the masses and, particularly, by our youth, might be seriously impaired as a result.

Notes

[1] Estimates based on figures published in the yearbook of ONEI at the end of 2016

 

[1] Micro, Small and Medium-sized Enterprises

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