Cuba in Transition

1
Cuba in Transition?
2
Criteria for Classifying Economic Systems

• Property rights
• public versus private ownership of the means of
  production
• Decision-making structure
• centralized versus decentralized decision making

3

• Information structure
• centralized versus decentralized flow of
  information
• Motivation structure
• material versus moral incentives
• Coordinating structure
• market versus plan

4
The Three Economic Systems

• Capitalism
• Factors of production privately owned
• Decentralized decision making
• Decentralized information
• Primarily material incentives
• Coordination by markets

5

• Market socialism (cooperative model)
• Non-labor factors state owned
• Enterprises cooperatively owned by the workers
• Decentralized decisions
• Decentralized information
• Primarily material incentives, but frequent use
  of moral incentives
• Coordination by markets

6

• Planned socialism
• Non-labor factors state owned
• Centralized decision making
• Centralized information
• Primarily material incentives with heavy use of
  moral incentives
• Coordination by plan

7
Characteristics of Transition from Planned
Socialism to Capitalism

• Substantial and sustained denationalization of
  property
• Substantial and sustained decentralization of
  decision making and information structures

8

• Elimination of socialist propaganda
• Elimination of central planning and development
  of market institutions

9
Are These Institutional Changes Occurring in Cuba?

• THIS IS WHAT YOU WILL BE LOOKING FOR WHILE YOU
  ARE IN CUBA!!!!

10
Toward a Market EconomyLuis Locay

• Locay focuses on development of markets
• Markets are social arrangements by which people,
  either as individuals or as parts of larger
  organizations, exchange goods and services.
• The exchange itself directly increases wealth by
  transferring goods and services to those who
  value them most

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• Market exchange is costly
• costs of market exchange called transactions
  costs
• Institutional structure of markets determines
  magnitude of transactions costs
• Development of markets requires reform of market
  institutions to reduce transactions costs
• reduced transactions costs means more trade means
  more value

12
Institutions of Markets

• Private ownership
• Rule of law
• well developed contract law
• independent judiciary
• police force to enforce commercial laws as well
  as maintain social order
• Monetary and banking system
• Intellectual property rights

13

• Planned socialist economies
• outlaw most private ownership
• have rule by decree
• no contract law
• judiciary not independent
• police force to maintain social order only
• limited monetary system
• banking system limited to planning and control
  functions
• no intellectual property rights

14
Cuba

• Are reforms since 1993 transition or socialist
  band aids?
• Locay investigates the major reforms
• legalization of foreign currency
• legalization of self-employment
• foreign investment
• agricultural reform

15
Legalization of Foreign Currency

• Legalized in 1993
• Domestic currency (peso) maintained
• Certain goods purchased with pesos at low
  (administered ) prices
• Any good imported or assembled primarily with
  imported parts must be purchased with dollars

16

• Brings in hard currency needed to import goods
  into Cuba
• But it has had major negative impact on
  distribution of income
• Maintenance of dual system highly distortionary
  and costly

17

• Permits continuation of direct allocation and
  distribution to those without access to dollars
• Leaves door open to outlawing foreign currency
  holdings after crisis
• Locay concludes that this is not true market
  reform but a temporary accommodation to crisis

18
Legalization of Self-Employment

• Crisis meant that government unable to support as
  large a workforce as it did under Soviet
  subsidies
• Laid-off workers would have entered some sort of
  informal self-employment just to survive

19

• Allows government to charge very high licensing
  fees and taxes
• government consistently cracks down on
  self-employment when too successful
• paladares
• Legalization of self-employment clearly forced on
  government but stands ready to eliminate
  self-employment as soon as possible

20
Foreign Investment

• Law permits foreign ownership of firms, even up
  to 100
• 100 ownership rare to non-existent
• normally 50-50
• Investment in most sectors not permitted

21

• Approval case-by-case
• Subject to extremely strict and arbitrary
  regulation
• Subject to extremely high profits tax
• Profits can be repatriated but at exchange rate
  specified by government

22

• Labor must be contracted through government
• investor cannot hire own workers
• government charges very high fee for labor but
  pays labor at very low rate
• Not the actions of a government wanting to create
  a private sector
• Very little foreign investment outside of tourism

23
Agricultural Reform

• Replaces some of state farm sector with
  cooperatives
• Farmers allowed to lease small plots for their
  own production
• Individual incentives no better on cooperatives
  than on state farms
• workers work very few hours relative to true
  private sector
• No serious reform

24
Conclusion

• Locay concludes that reforms do not represent a
  movement toward a market economy
• Legal code arbitrary and punishes success
• Conclusion consistent with statements of
  leadership