Americas
7:00 am
Mon October 28, 2013

Cuba's Currency Correction: Will Castro Fall Short Again?

Cuban leader Raul Castro (middle) recently with other senior members of the Communist Party elite.
Cuban leader Raul Castro (middle) recently with other senior members of the Communist Party elite.
Credit Flickr

Last year I spoke by phone with a frustrated woman in Santiago, Cuba, who was trying to start a seamstress business. It’s the sort of small private enterprise that Cuban leader Raúl Castro claims to be encouraging as part of free-market reforms meant to salvage the island’s threadbare, communist economy. (But don’t dare say Raúl is copying China’s communist-capitalist system. That makes him mad.)

The woman rattled off a litany of obstacles, from burdensome taxation to Marxist red tape. But the biggest headache, she said, was not having access to the hard currency she needed to buy things like sewing equipment and bulk cloth. She envied fellow entrepreneurs lucky enough to have relatives living in Miami – the kind who send their kin back in Cuba more than $2 billion a year in remittances – and who could get the wholesale and imported products businesses so often need to run.

“I’m happy the government is letting us have our own businesses,” the woman told me. “But too many of us are operating with our arms tied behind our backs because we have to use a worthless currency.”

The coin in question is the Cuban peso – which is worth 25 times less than Cuba’s other currency, the dollar-denominated convertible peso. Foreigners use the latter to buy lobster that regular Cubans can’t eat, at resort hotels that regular Cubans can’t frequent. Last week Castro announced he plans to eliminate Cuba’s two-tier currency system, integrate the Cuban and convertible pesos and create one simpler form of legal tender.

Deeper Economic Reform

That should be good news for Cubans like the woman in Santiago. And if it’s good news for her, it should be good news for Cuban economic reform. Ditto for the island’s free-market future. Right?

Yes and no. And mostly no, say Cuba-watchers, if Castro doesn’t complement the currency transition with a host of other necessary economic changes.

Let’s start with the yes. Cuba created the convertible peso, or CUC, in 1994, at the height of the country's post-Soviet economic crisis. Used mainly for tourism and foreign trade transactions, the CUC has helped bring desperately needed hard currency to a socialist economy that has obstinately refused to liberalize a la China and Vietnam.

So why is Castro’s decision to scuttle that complicated set-up a boost for the Santiago seamstress? Because, while the new single currency won’t be as strong as the convertible peso, it’s bound to buy more than the current Cuban peso.

But it also helped spawn a two-class structure in Cuba’s classless workers paradise: Those who had access to dollars and the CUC, and those who had only the lame Cuban peso, or CUP, which pays most Cubans’ salaries. (Most Cubans earn only about $20 a month as a result.) Critics have called it an economic apartheid (that charge also makes Raúl really mad) that at the same time has made Cuban finances a chaotic mess.

So why is Castro’s decision to scuttle that complicated set-up a boost for the Santiago seamstress? Because, while the new single currency won’t be as strong as the convertible peso, it’s bound to buy more than the current Cuban peso.

“Many small enterprises that don’t have access to the convertible pesos will be able to buy inputs like bulk wholesale items,” from flour for pizzerias to spark plugs for mechanics, says Tomás Bilbao, executive director of the Cuba Study Group in Washington, D.C. And that stands to facilitate more self-employment on an island where Castro is having to lay off about a million state-employed workers.

Emilio Morales agrees. Morales was director of the state-owned CIMEX, one of Cuba’s largest conglomerates, until he came to the U.S. in 2006. “Raúl’s currency change is one of those legs that had to be put in place if he wants to keep his economic reform table from falling over,” says Morales, now president of the Havana Consulting Group in Miami and author of Cuba: A Silent Transition to Capitalism? “The first phase, giving average Cubans and especially small business owners more buying power, should be positive.”

Access To Capital

But both Morales and Bilbao see a host of snags ahead as well. The first is a Catch-22 of sorts. Even if grassroots entrepreneurs do get more access to capital, the reality is that there still isn’t much capital in Cuba to get access to – and there won’t be until Cuba becomes more productive, which won’t happen until the economy has more capital. “The currency reform,” says Bilbao, “doesn’t create more available money, no matter what you call the coin, until Cuba increases productivity.”

Says Morales: “If Castro wants this to make a positive difference, he has to open Cuba’s markets much further.” One example, he says, is opening major industries like sugar to the same sort of private investment tourist hotels accommodate. Or allowing private businesses to import and sell foreign goods, which is still solely the state’s purview.

But the 82-year-old Raúl – and especially the old communist guard around him – aren’t likely to get that bold. And even if they were, given the usual molasses pace of change in Cuba, the return to a one-currency system could take years to complete successfully.

Which gives seamstresses in Santiago one more thing to grouse about. And politicians in Washington one more reason to drop the 51-year-old U.S. trade embargo against Cuba – so American business has a better chance of giving Cuban business the help it can’t get from Raúl.