CUBA

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.

C.P. CHANDRASEKHAR
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.

CHRISTOPHE LOVINY/GAMMA
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 commodities.

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.

CHRISTOPHE LOVINY/GAMMA
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.