Friday, December 27, 2013

Currency Unification - Causes and Limits

Currency Unification: Causes and Limits / Dimas Castellano
Posted on December 27, 2013

The road to exit the crisis is clear; what is lacking is the political
will to travel it. Among the partial reforms the government of Raul
Castro announced was the enforcement of a timeframe for measures to
eliminate the dual currency, implemented following the loss of Soviet
subsidies. A look back at the topic helps to identify some of the causes
and limitations of the announced timeframe.

In the period between the two great wars of independence that took place
in the second half of the Cuban 19th century, the Island became the
first country to exceed a million tons of sugar, of which more than 90%
was exported to the United States. That permitted the neighboring
country to impose on Spain the reciprocal trade agreement known as the
McKinley Bill, through which was established the free entry of Cuban
sugar into that nation.

At the same time there was a high concentration of land ownership,
especially in American companies. In that condition of economic
dependence, at the end of Spanish domination, the occupation government
introduced the dollar as the basic monetary standard, which was imposed
until the disappearance of the other currencies (French, Spanish,
Mexican), which explains the presence of the dollar in the first years
of the Republic born in 1902.

In that context, with the nationalist purpose of diminishing the
dependence with respect to the American dollar, the government of
General Mario Garcia Menocal dictated in 1914 the Law of Economic
Defense, which gave birth to the national currency. That law established
a gold standard as the monetary unit with the same weight and purity as
the dollar. So, from a nationalist decision emerged the first version of
dual currency in Cuba, which lasted until the '50's of the last century.

In a different way, in 1991, the disappearance of the Soviet Union
provoked the loss of the enormous subsidies based on ideological
relations, which overlapped decades of inefficiency of the Cuban model.
That fact, united with the depression in sugar prices, drove the country
to a profound structural crisis baptized with the euphemism Special
Period in Times of Peace. In answer to the crisis, the Cuban government,
instead of undertaking a profound reform aimed at achieving a proper and
efficient economy, defined a strategy aimed at saving the model and
maintaining power. With that goal it introduced several contingency

In 1993 the Basic Units of Cooperative Production were created, by which
a beneficial interest in idle state land was given to workers; farmers
markets and self employment were authorized; tourism and foreign
investment were introduced; family remittances from abroad were
admitted; possession of the dollar was decriminalized, and, in 1994, its
free circulation was authorized, giving rise to the current dual currency.

As one might appreciate, the dual currency introduced in 1914 was
motivated by reasons diametrically opposed to what happened in 1994. The
first created the introduction of a national currency parallel to the
dollar, the second legalized the dollar as a parallel to the national

The road and political will

The causes that led to the dollarization in 1994 have their roots in the
first revolutionary measures, whose declared goal was the disappearance
of all commercial relations and, with them, the disappearance of money.
In 1960, all domestic and foreign banking entities that existed in Cuba
were nationalized, in 1961 they were centralized in the hands of the
State, while the direction of those activities was placed in the hands
of the revolutionaries from the armed struggle.

The same thing happened with figures whose conception of the economy
differed from those of the leader of the revolution, as happened with
the economist Felipe Pazos Roque, founder and first president of the
National Bank of Cuba since its foundation in 1948, who in spite of
abandoning that responsibility because of his position against the Coup
of 1952 and being named again as head of that institution in 1959 was
replaced some months later by commander Ernesto Guevara.

The course of the process was more or less the following: the dollar was
introduced in 1994; the convertible peso (CUC), a second national
currency as an alternative to the dollar and the same value as the
dollar, was created; in 2004 the circulation of the dollar was
eliminated; then a tax of 10% was imposed on the dollar, and the CUC was
re-valued relative to the dollar by 8%; in March of 2011 the original
one-to-one value was resumed but the 10% tax remained. In summary, the
duality was maintained thanks to which Cuba is the only country in the
world with two national currencies, neither of which is really convertible.

The dollarization and the dual currency, besides magnifying social
differentiation, increased the loss of value that the Cuban peso already
had, one of whose manifestations was the expressed inflation in prices
on the black market, the drop of wages and the discouragement of production.

Cuban currency, a representation of money, lost or reduced its functions
as a means of value, an instrument for acquisition of goods, a means of
accumulation of wealth, an instrument of liberation from debt and a
means of payment. That's why monetary unification, even if it
constitutes an essential step for the current or for any other
Government, will not resolve the current structural crisis, due to the
fact that Cuban currency is not backed by the Gross National Product,
that is to say, by the sum of goods and services that permit it to
resume its functions and to be compared with foreign currencies.

The way out is in prioritizing productive efficiency, for which domestic
and foreign investment is required, which would provide the country with
capital, technology and markets, which in turn demands a new Law of
Investments and the elevation of current salaries, which do not manage
to cover more than one-third of basic necessities. But as one can only
distribute what is produced, the Government faces a complex
contradiction: without increases in salaries, Cubans are not ready to
produce, and without production, it is impossible to raise salaries,
which will make monetary unification by itself futile.

In short, a comprehensive project that includes the decentralization of
the economy, permits the formation of a middle class, removes the
obstacles that stop production and restores citizens' rights and
liberties is missing. The road is clear, what is lacking is the
political will to travel it.

Translated by mlk.

Taken from: Diario de Cuba
17 December 2013

Source: "Currency Unification: Causes and Limits / Dimas Castellano |
Translating Cuba" -

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