New Internationalist

The Great Dollar Chase

Issue 301

The great dollar chase
Market reforms and growing inequality...

Capitalism has come to Cuba, warts and all. The question is how much its impact can be buffered. Ever the pragmatist, President Castro himself has admitted that some movement towards the market economy is ‘the only alternative for saving the Revolution and socialism’. And indeed the country has introduced a bundle of free-market measures over the past six years – from lifting the laws against self-employment to bringing bottom-line business practices to state-run companies. But there have been other radical changes, too.

Window shopping: crowds check out what's on offer at this state-operated 'dollar store' in Santiago de Cuba.
photo by WAYNE ELLWOOD

Take foreign investment. President Castro once said that relying on foreign capital to build Cuba’s economic future would be ‘like curing cancer with mercurochrome’. Well, times change. Today foreign investment is seen as a quick fix.

In the last few years investment rules have been loosened to allow 100-per-cent foreign ownership. Investments are fully protected and companies allowed to repatriate profits in hard currency. Joint ventures with the State are encouraged (though no outside investment is allowed in health- care or education). In the last two years the State has begun to develop a classic Third World plan to attract foreign capital: free trade zones (FTZs). Currently there are three zones under development in the Havana region and another is planned for Cienfuegos on the south coast.

Silvia Castañer, one of the designers of the free-trade policy, is convinced the island will benefit from the move. She is a tall, no-nonsense bureaucrat with tired-looking eyes, and this morning she appears slightly harrassed. Somehow the Press Centre has neglected to confirm our interview and she obviously has ten other things to do. Still, she agrees to continue. We settle down to the customary cups of Cuban coffee and she begins: ‘We studied free-trade zones in more than 30 different countries, especially in Latin America and the Caribbean and I think we’ve come up with the best possible law.’ Government planners hope the FTZs will boost trade, stimulate local business and spin-off some badly needed jobs. Castañer believes the initiative could create 20,000 new positions over the next decade.

But it is clear from the details of the policy that the big winners will be foreign companies. Goods brought into the zones from within Cuba or from abroad are duty free. Investors also get a generous tax holiday: for manufacturers there are no taxes on profits or labour for the first 12 years with a 50-per-cent reduction for five years afterwards. Che Guevara, an implacable opponent of foreign capital, must be spinning in his grave.

Both investors and the Government benefit from the labour deal. The State acts as a broker supplying workers under contract to companies in the zones. Cuban workers are by Latin American standards highly trained and educated. They are also tightly controlled. Strikes are illegal. According to Silvia Castañer, workers in the free-trade zones will receive an average wage of 150-200 pesos ($6.50-$8.70) a month for a 51/2 day week. Investors negotiate wages with the Government from $1.10 to $6.00 an hour depending on the job. All the dollars end up in State coffers; the workers are paid in pesos. The Government can afford to give away the shop and it still comes out ahead.

But the change which had the biggest immediate impact on living standards was the legalization of the dollar. Before August 1993 it was a crime for Cubans to hold dollars despite the fact that up to $450 million flowed into the country from exiles living abroad, largely in the US (recent figures from the Latin American Economic Commission peg the figure at around $800 million a year). Rather than shunt dollars into the black market the Government in a brilliant tactical move decided to capture this hard currency to help pay for scarce imports.

The upshot is that Cuba now has two legal economies: one in pesos and one in dollars. You can see the results all over the country. One of the first things the State did was to set up a chain of 600 ‘dollar shops’ where people can buy consumer goods like clothing, pens, TVs, radios, sweets and other items unavailable elsewhere.

You can identify a dollar store by the boisterous crowds queuing up to get inside, anxiously clutching their greenbacks. In contrast, stores selling goods for pesos are desultory places with little on offer and few customers. I awake one morning in the old city of Santiago de Cuba at the south-east end of the island to a huge crowd milling around outside my hotel. Thinking there had been a robbery or an accident I poke my head out the window only to discover the source of the hubbub. A shipment of flashy, plastic digital wall clocks has arrived and the word has spread fast. At six dollars each they are clearly a bargain and people are snapping them up.

Inside the shop, business is booming. Women in sandals and hair curlers are flipping through the garment racks, casting a discriminating eye at eight dollar blue jeans from China and six dollar blouses from Pakistan. A few aisles over a young couple is sizing up a Korean ‘boom box’. Near the exit a modern cooler shelters imported soft drinks, beer and mineral water: four young sophisticates sit at one of the two available tables, an island of calm in the midst of a maelstrom, clutching cold cans of Danish lager.

Necessary or not, the legalization of the dollar has driven a huge wedge into socialist notions of equality. Cubans who have access to dollars are clearly better off than those without and resentment is growing among those left out.

Holding American currency used to carry an anti-revolutionary stigma. You couldn’t be loyal both to the Revolution and to the dollar. When that changed the most dedicated Government supporters suddenly looked like fools. Your value and well-being are no longer determined by your social contributions as a citizen but by how many dollars you can corral in a month. Policy-makers recognize the growing inequality as a big problem for the Government. But the only solution being offered is to make more dollars available to more Cubans.

Alfonso Casanova Montero, the country’s Vice-Minister of the Economy and Planning is unapologetic about the move. He points out that US dollars were already in circulation and the Government simply made the trade legal. Casanova is a clean-shaven, dapper man in his early forties with a precise, professorial manner. We are sitting across from each other at an enormous, polished wood table in the Ministry’s third- floor meeting room, a tray of foil-wrapped chocolates between us. He clasps and unclasps his hands slowly as he speaks, his scribbled notes to the questions I’d already submitted at the ready.

'Feels a bit soft to me': bargaining for tomatoes in one of the new farmers' markets.
photo by WAYNE ELLWOOD

‘Legalizing the dollar has brought some undesirable social and economic stratification,’ he says in the careful technocratic tones of an economist. ‘But it is also inevitable. The alternative, a devaluation of the peso, would have been even worse. It would have triggered severe inflation at a time when we were trying to attract foreign investment. With the few options we had, the legalization of the dollar seemed to be the most positive.’

Officials estimate that 50 to 70 per cent of Cubans have access to dollars in one way or another, whether through the tourism industry or via remittances from abroad. The Government has also introduced a ‘dollar incentive’ plan for workers in foreign joint ventures or export industries like fishing or mining. The more they produce, the more dollars they can earn.

Take the 1,680 workers at Sherritt International’s nickel mine in Moa on the Atlantic coast near the eastern end of the island. The Toronto-based Sherritt corporation is the single biggest foreign investor in Cuba, with money in nickel, oil and tourism. Miners at Sherritt’s Moa operation earn around 330 pesos ($14.35) a month, already a hefty salary by Cuban standards. But they can also earn up to $100 a month in production bonuses, putting them among the wealthiest in the country. These incentives were introduced to staunch the haemorrhage of workers into the dollar economy. But they rarely apply to white-collar workers or civil servants where the inequalities are even more glaring. A taxi driver can earn 10 times more than a brain surgeon, a tour guide 20 times more than a teacher or a nurse. The State has plans to claw back dollars through taxation, though at this point that is still wishful thinking. Meanwhile, those living a peso lifestyle look with envy on their dollar-flush neighbours.

The notion of social equality lies at the heart of the Revolution and is the reason why the majority of Cubans still support Fidel Castro and his administration. But, as Marxists would say, the contradictions are growing and the Government’s legitimacy on this issue is looking increasingly threadbare.

Along with changes in foreign-investment policy there have been reforms to stimulate food production. Private farmers’ markets were set up with prices determined by supply and demand rather than by government planners.

Like the dollar stores, these open agropecuarios were an immediate success. There are now hundreds across the country including most small towns. All the markets I visit whether in Santiago, Guantánamo or Havana are packed with energetic buyers and sellers haggling in time-honoured fashion. And the range of produce is impressive – pineapples, oranges, papayas, bananas, tomatoes, lettuce, rice, beans, yucca, garlic, slabs of freshly-butchered pork and much more. All for sale in pesos.

‘These agropecuarios have helped a lot,’ says Pedro, a 23-year-old customs worker. It is the middle of a busy Tuesday afternoon in the market in Miramar. I am puzzling over which papaya to buy and seeing my consternation, he’s offered advice. ‘Before there was only the black market,’ he explains. ‘There wasn’t as much food and it was expensive and illegal. This is better. The people have more choice and there is more food.’

[image, unknown]
photo by DAVID GARTEN

Both the legalization of the dollar and the new farmers’ markets have helped put a brake on the black market which was expanding rapidly in the early 1990s and threatening the economic stability of the country. Driven by serious shortages, the ‘unofficial’ price of food and other basics like kerosene, cooking oil and cement had skyrocketed. At the same time demoralized workers were diverting more and more foodstuffs and other controlled consumer goods from the state-run supply system into the black market. By one estimate in 1994 a third of the food destined for Havana from state farms disappeared into the black market. The Cuban peso began to sink like a stone, bottoming out at 160 pesos to the dollar in mid-1993 as more and more business took place outside the ‘official’ economy.

With the arrival of dollar stores and the agropecuarios people finally had a place to spend both their dollars and their accumulated pesos. And there were a lot of loose pesos floating around. Normally, when production falls in a market economy there are fewer things to buy and inflation increases. But not in Cuba. Basic foodstuffs on the libreta continued to be sold at fixed, affordable prices; salaries were guaranteed and continued to be paid. The only problem was that, apart from monthly rations at the bodega, there was almost nothing to buy.

The result was what economists call a monetary ‘overhang’ – lots of cash piling up and nowhere to spend it. Now Cubans could convert their pesos to dollars and spend them in the dollar stores or they could spend them directly on meat and vegetables in the new markets.

Within a year a pound of black beans fell from nearly 50 pesos on the black market to 10 pesos; a pound of pork which sold for as much as 300 pesos fell to 25 to 30 pesos a pound. And most black market foodstuffs were available in the farmers’ markets for only a few pesos more. As a result of these reforms the national currency slowly regained value, reaching a high of 23 pesos to the dollar last November.

The gradual availability of more food in the cities also gave some much-needed elbow room to the Government. But the problem of food security has not disappeared. There are still food shortages and many people are just scraping by. Average nutrition levels, which dropped by a third in the early 1990s, have rebounded. But protein consumption has still not regained UN-recommended minimum levels. That being said, there is not the crippling hunger visible elsewhere in Latin America. Despite the shortages, no-one is starving.

There are no children with the distended bellies of poverty. That alone makes Cuba unique. Considering both the external pressures and the dramatic changes the country has experienced in recent years it is an amazing accomplishment.

DIY jobs
Manuel Rodriguez is one of Cuba’s new self-employed. He sells used books from a street stall on the Plaza de Armas in Havana Viejo, the beautifully restored colonial centre of the city.

‘I graduated as an electronics technician but I gave that up a few years ago,’ Manuel says. In his hand he is cradling a couple of morocco-bound volumes dating back to the 1830s, which he is eager to show me. He also has a selection of old periodicals, all of which he sells for dollars, mostly to Spanish and Italian tourists.

‘When I quit the factory I was earning 265 pesos a month and the exchange rate was 160 pesos to the dollar. It was impossible. Now it’s a dignified living,’ he says, handing me a 1958 copy of Life magazine. ‘I pay $22.50 a month plus 100 pesos to the State for my licence and I pay to rent space on the street. I make enough to pay my expenses and buy what I need for my family. This suits me because I love books and it is legal.’

But not all of the new self-employed are as content as Manuel. The Government’s opening to small business has been reluctant and there are lots of complaints. For example, the State now allows small private restaurants called paladars, a relief for visitors since Government-run eateries are usually over-priced and poorly supplied. But no paladar is allowed more than 12 chairs, employees must be family members or relatives only, licence fees are stiff and all inputs must be purchased in dollars. Inspectors make surprise visits and receipts must be kept for proof of purchase.

Manuel also says he must show statements on a weekly basis to a state inspector to account for his sales and he’ll have to pay a ten-per-cent tax on profits at year end. But that doesn’t seem to bother him. He seems to be revelling in his new-found independence. ‘Now I’m trying to analyze my market,’ he confides. ‘I want to find out what appeals to people. I need this market sense to get ahead.’

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