Will Stealthy Privatization Rescue the Cuban Economy?

Will Stealthy Privatization Rescue the Cuban Economy?<1> Luis R. Luis Privatization is a key element of the transition of communist economies towards the market.  This comes about from the need to achieve better allocation of investment and consumption while enhancing growth prospects and the well being of the population.  We take it from repeated statements by Raul Castro and other high officials that Cuba is not intent on restoring capitalism and thus it need not worry about following the well treaded transition paths of Poland, Hungary, Vietnam, China or other countries toward a greater role for free markets. CUBA: PRIVATIZATION INDICATORS - %                      Indicator2011201220132014 Private Employment/Total Employment18.520.521.623.1      Self-Employment /Total Employment7.88.38.69.7 Private Source Consumption/Total Consumption20.621.323.425.4 Source: Oficina Nacional de Estadística e Información, “Empleo y Salarios” and “Cuentas Nacionales”. Cuba’s movement towards privatization, including an important head start in slashing state employment in 2010-2012, and a greater role for the market is correspondingly contained in the five years since the updating of the economic system announced by party leaders.  Private employment as a share of total employment, excluding cooperatives, in 2014 accounted for 23% of employment as against 18.5% in 2011 (please see table).  The self-employed or cuentapropistas were 483,000 in 2014 and reached 496,400 at the end of 2015 or some 10% of employment.<2>  An alternative indicator, consumption from private sources rose from about 21% of total consumption in 2011 to 25.4% in 2014 according to ONEI data.  Our own calculations which take into account output of joint ventures with foreign investors in areas such as nickel mining and tourism place the private share of output at somewhat over 26% in 2014. Importantly, excluding a handful of foreign joint ventures with Sherritt and tourism sector companies, private activity in the island consists largely of small firms or the self-employed.  There has been no large scale privatization.  To make the point clear amidst President Obama’s visit to Havana in March 2016 a high Cuban foreign investment official, Deborah Rivas, said in a Granma interview that “we are not in a process of accelerated  privatization of the Cuban economy”.<3> Indeed the fall in state employment has slowed considerably since 2012 after Raul Castro’s announcement of an initial half a million cut in the state payroll and the number of registered cuentapropistas has steadied. To be sure there is some data and considerable anecdotal evidence suggesting that official data underestimates the range of private activity in the island. Cuban labor ministry data for 2015 indicates that 17% of cuentapropistas also earn a state salary.<4> Anecdotal evidence in Havana and other towns confirm that many employees of state offices and companies have outside employment in service activities or are active in lodging, retail trade and crafts beyond formal status as cuentapropistas. Such employment is mostly unrecorded in official statistics and neither is the value added estimated in the national accounts.  While some of this activity is tourism related the bulk likely takes place among island residents. We can only speculate as to the size of informal or parallel market activity in the island.  Complicating any assessment is the multiple currency nature of informal markets which make take place in convertible pesos or CUCs, dollars as well as in Cuban pesos or CUPs.  A plausible minimum level based on the size of foreign remittances in cash and in kind as well as an assumption of 10% of tourist expenditure devoted to the parallel market yields a figure of around 4% of GDP.  This does not encompass the solely domestic component of informal activity where it is difficult to even guess the extent of value added produced. A sizable rise in real money balances for both M1 and M2 measured in CUPs in 2014 is chiefly linked to government finance and possibly substitution for CUCs in circulation.<5>  Inasmuch as informal activity is substantial, it impacts on the demand for currency and may be reflected in the monetary aggregates. While significant parallel private activity means an underestimation of overall output, it is not sufficient to propel the economy towards steady and broad growth.  Informal activity is undercapitalized, cut-off from credit and unable to reach the size to operate efficiently. The nature of informal markets make price discovery more difficult as information is restricted.  Market segmentation  deprives consumers of opportunities for competitive pricing. Nonetheless parallel activities enable  families to complement meager salaries and for many to attain adequate levels of consumption while providing needed goods and services.  Bringing forth and expanding the range of activities now allowed under current legislation would help strengthen the open rise of private activity.  Privatization and opening of medium and large sized firms  to private investment would boost prospects for the economy. ­ <1> I am indebted to Ernesto Hernandez Catá for insightful comments on privatization, monetary policy and other topics. <2> “Menos trabajadores por cuenta propia en Cuba”, 14 y Medio, 1/12/2015. <3>“ Inversion extranjera, puntal para el desarrollo”, Granma, 4 de marzo de 2016. <4> 14 y Medio, op. cit. <5> M1A went from 26.2% in 2013 to 31.6% of GDP in 2014 while M2A rose to 49.2% from 41.7% according to ONEI.  There are no published statistics on the CUC money supply.