Cuba Business

Castro’s largesse troubles economists

Posted May 04, 2005 by Cubana in Cuba Business.

By Marc Frank in Havana. Financial Times, UK, May 3 2005

Cuban President Fidel Castro recently sent a team of economists on a secret mission as part of his campaign to put a brake on growing poverty and social stratification in what was once one of the world’s most egalitarian societies.

Their orders? To report back the minimum monthly income needed to survive in Cuba’s state-dominated economy, where healthcare and education are free and a basic food ration, utilities and services are subsidised.

According to a well-placed source, their verdict was 300 pesos - five times the minimum 55 pesos pension and three times the 100 pesos (2.50, $4.80, 3.70) monthly minimum wage.

Shortly after receiving their report, Mr Castro announced increases to the minimum monthly pension - to 150 pesos - and the minimum wage - to 225 pesos - to take effect this month.

The peso is currently worth a bit less than $0.05 at government money exchanges.

“The two measures will benefit 3,602,344 people receiving the lowest income, for which the revolution will dedicate 2,255,683,370 more pesos to the annual budget,” said the official trade union weekly, Trabajadores, adding that the nation’s average monthly wage would therefore increase to 312 pesos from 282 pesos.

Some Cuban economists are not as enthusiastic. “There is no similar increase in domestic production to justify increasing demand. It is inflationary,” a Cuban economist said.

While the Caribbean island’s service sector is doing relatively well, what was its most important industry and employer, sugar, has virtually collapsed. The worst drought in a century is eating into agricultural output and recentralisation of the economy is slowing some activities.

According to the UN Economic Commission on Latin America, the gross domestic product increased 10 per cent from 2001 to the end of 2004, reaching 33.8bn pesos.

The budget deficit went from 3.3 per cent of GDP in 2002 to 4.3 per cent last year. Recent government figures seen by the FT show pesos in circulation and in bank accounts increased 25 per cent during the same period, topping 14.5bn pesos last year.

Mr Castro, 77 and in power for 46 years, believes closer ties with China and a strat-egic alliance with oil-rich Venezuela provide firm ground to repair and move forward his tattered socialist project.

He has a new tool for his desire to level the social playing field at the same time: control over monetary policy.

Cuba’s reserves increased by $1.5bn last year, in large part due to cash taken in when the dollar, which had circulated side by side with the peso, was replaced with the locally printed equivalent, the convertible peso. Cubans rushed to exchange horded greenbacks before a 10 per cent surcharge, slapped on the US currency for good measure, went into effect.

Mr Castro last month used his newfound power over foreign exchange to revalue the convertible peso 8 per cent against all other currencies, making the country that much more ex-pensive for visitors and Cubans holding foreign exchange.

“If you can’t produce, take from the rich and use some of the money to import for all instead,” a foreign banker said in describing how Mr Castro hoped to avoid inflation and strengthen the peso even as he increased the budget deficit and printed more money.

Mr Castro also announced recently that Cuba’s chronic power problems are all but solved and the state will sell at cost in pesos hundreds of thousands of imported Chinese electric burners, rice steamers and other appliances.

Member Comments

On May 05, 2005, waldo wrote:

Financial Times obviously does not know all of that is going on with Cuba, perhaps because it is getting most of their statistics from non-Cuban sources. Their numbers appear off, specially since 2004 and would know even less of what will be going on with Cuba in the next 2-5 years.