Alternative Institutional Futures for Cuba’s Mixed Economy Archibald R. M. Ritter, Carleton University, Ottawa Canada ASCE 2015

Transcript Alternative Institutional Futures for Cuba’s Mixed Economy Archibald R. M. Ritter, Carleton University, Ottawa Canada ASCE 2015

Alternative Institutional Futures for Cuba’s Mixed Economy Archibald R. M. Ritter,

Carleton University, Ottawa Canada

ASCE 2015

Prelude:

Since 2010, Cuba has been implementing a redesigned institutional structure of its economy.

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The task of choosing the future type of mixed economic structure will continue. A wide variety of institutional structures are possible.

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Cuba is moving towards a number of possibilities simultaneously.

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There are a number of types of private sector that Cuba could adopt.

Objective of this presentation: To examine the institutional alternatives and weigh the relative advantages and disadvantages for each arrangement.

All alternatives will include some mixture of

• • • • •

Domestic or indigenous private enterprises; Cooperative enterprises and “not-for-profit” activities; Foreign enterprise on a joint venture or stand-alone basis; Some state enterprises (in natural monopolies for example) and Public sector

Among the alternatives:

1 . Institutional status-quo as of 2015;

2. Mixed economy with intensified

“cooperativization;”

3. Mixed economy, with private foreign and

domestic oligopolies replacing the state oligopolies;

4. Mixed economy with an emphasis on indigenous

small and medium enterprise.

25 20 15 10 5 0 45 40 35 30

40,8 Public Sector, Communal Social and Personal Services

OPTION # 1: “

Institutional Status Quo

” Institutional Structure by Employment (% of Total)

Actual 2015 32,9 Public Sector, Mainly Production of Goods 4,6 Cooperative Sector 20,9 Indigeneous Private Sector, INDIGENOUS 0,7 Private Sector, Foreign and Joint Ventures

Employment in Cuba’s Private Sector circa 2015 (

thousands

, full time equivalents)

Employment Category Number Registered Employment Microenterprises

Microenterprise unregistered employment (Guesstimate)

Service and Credit Cooperatives (CCS) Small Scale Farmers Joint Venture

Independent Arts and Crafts, registered and unregistered (Guesstimate)

Religious persons, babalu’s etc.

(Guesstimate) TOTAL

504 450 353 222 34 8 to 15 2 to 4 1,573 Sources: ONE, Anuario Estadistico de Cuba; Richard E. Feinberg, Cuba’s Economic Change in Comparative perspective, Washington D.C.: Brookings. 2013 and author’s guesstimates

1. Institutional Status-Quo as of 2015; Advantages:

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Avoidance of uncertainty of a transition;

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Maintain the possibility of “macro-flexibility”

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For the Party : Assist in maintaining political control of the citizenry; (a disadvantage from other perspectives) Continuing state control over most of the distribution of income; (a disadvantage from other perspectives.)

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Maintain good relations with North Korea;

Disadvantages:

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Vertical & centralized system obstructs horizontal communication among firms;

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Centrally controlled state enterprise leads to

 Continuing bureaucratization of production;  Continuing politicization of state-sector economic management and functioning ;  Continuing lack of an effective price mechanism in the state sector (even with monetary and exchange rate system reforms.)  Continuing perversity and dysfunctional of the incentive structure; •

Resultant damage to efficiency, productivity, and innovation

25 20 15 10 5 0 45 40 35 30

40,8 Public Sector, Communal Services 30 32,9 3 Public Sector, Mainly Production of Goods 4,6 Cooperative Sector 35 20,9 24 Private Sector, Indigenous 0,7 Private Sector, Foreign and Joint Ventures 8

OPTION 2. Mixed economy with intensified “Co- operativization” Policy Requirements

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Permit cooperatives in all areas, including professional activities;

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Open up the current approval processes;

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Encourage grass-roots bottom-up ventures;

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Provide import & export rights;

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Improve credit and wholesaling systems for coops.

OPTION 2. Mixed economy with intensified “Co-operativization”

• • •

Advantages: Incentives :

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Worker ownership and management provides powerful motivation to work hard

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Profit-sharing ensures alignment of worker and owner interests A more egalitarian distribution of income

than privately-owned enterprises.

Greater degree of flexibility

than state and even private firms; 

Income/profits payments to members can reflect market conditions

• Democracy in the work-place:  Valuable in itself;  A major advantage over both state- and privately-owned enterprise; [Workers’ ownership and control is ironic since Cuba’s political system is characterized by a one-party monopoly;]  May help propel political democratization. • “Second degree cooperatives” or “cooperative coalition of

cooperatives” or of private enterprises

 Potential for reaping organizational economies of scale (a la Starbucks, Subway, McDonalds, etc. )  Major potential for maintaining income equity;  May maintain ownership and diffused control and profit-sharing among local citizens

Difficulties: 1. Cooperatives generally have passed the survival test, but have not made huge inroads against private enterprise;

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Question: are they really more efficient? 2.

• • •

Governance and Management may be a problem:

The “transactions costs” of participatory management may be significant. Personal animosities, ideological or political differences, participatory failures, and/or managerial mistakes For larger coops, complex governance structures may impair flexibility

3. Cuba’s Actual Complex Approval process is problematic at the time: Possibility of political controls and biases 4. Certification of professional cooperatives is unclear

5. Hiring of contractual workers is problematic:

 “ Hire or Fire after 90 days” rule may curtail job creation;  10% limit on contractual labor also may curtail job creation;  Governance may be impaired if uncommitted workers have to join.

6. W hat will be the role of the Communist Party?

 Will the Party keep out of cooperative management?

 Party control would subvert workers’ democracy and deform incentives structures.  But in more distant future, the Party will not be there – I hope and expect.

25 20 15 10 5 0 45 40 35 30

40,8 30

OPTION # 3: “

WIDE OPEN

” FOREIGN INVESTMENT Approach; Institutional Structure by Employment (% of Total)

Actual 2015 32,9 Wide Open DFI Option 32 5 4,6 5 20,9 Public Sector, Communal Social and Personal Services Public Sector, Mainly Production of Goods Cooperative Sector Private Sector, INDIGENOUS 28 0,7 Private Sector, Foreign and Joint Ventures

OPTION # 3

Wide Open

Foreign Investment Approach; i.e. “

Walmartization

” Character:

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Rapid Sell-off of State Enterprise to Deep-Pocket Purchasers

• i.e. Large purchasers in US, China, Europe, Brazil, or elsewhere; i.e. the Walmarts. Lowes, Subways, Starbucks of this world;

Sale of current state oligopolies to single foreign purchasers “Walmartization” of Cuban economy

• A strong possibility, if existing state oligopolies (e.g. CIMEX & Gaviota’s Properties) were to be privatized in big chunks;

Policy Requirements:

• Promote rapidity in privatization; • Indiscriminate Direct Foreign investment.

Advantages:

• • •

Major and immediate revenue receipts for Cuban government; Major and rapid transfers into Cuba of

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Financial resources;

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Entrepreneurship and managerial talent;

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Physical capital: machinery and equipment and constructions

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Most modern technology embedded in machinery and equipment;

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Personnel where and when necessary; Result:

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Rapid productivity gains;

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Rapid GDP gains

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Higher-productivity work;

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Ambiguous employment implications

Disadvantages:

1. Profit outflows, ad infinitum 2. Income concentration:

  Profits to foreign owners (e.g. the Walton family of Arkansas) Profits to oligopolistic domestic owners;

3. Oligopolistic economic structures damaging in the long run 4. Strengthened probability of lucrative employment and ownership for the civilian and military Nomenclatura; 5. Blocks or inhibits development of Cuban entrepreneurship; 6. “Walmartization” of Cuban culture; dilution of Cuban uniqueness

8. Further reduction of the potential for diversified manufacturing in Cuba (e.g. due to the Walmart/China mass-purchaser/mass-supplier symbiosis).

9. Probably blocks export diversification;

30 25 20 15 10 5 0 50 45

40,8

OPTION # 4: “INDIGENOUS” PRIVATE SECTOR Approach Institutional Structure by Employment (as% of Total)

Actual Indigenous Approach 44

32 3 4,6 7 21 Public Sector, Communal Services Public Sector, Mainly Production of Goods Cooperative Sector Indigeneous Private Sector Emploument 12 0,7 Private Sector, DFI, Joint Ventures

OPTION # 4: Basic Policy Requirements

1. Required: “enabling environment” for micro,

small and medium enterprise: •

A reasonable and fair tax regimen;

• End discrimination against domestic Cuban enterprise [Now: 10 yr. tax holiday + 12% profit tax thereafter for Foreign firms vs. 50% at 167.00 per month for Cuban micro-enterprise.] • • An enabling regulatory environment; Unified and realistic monetary and exchange rate

systems;

• Property law and company law.

2. Release Creativity, Energy and Intelligence of Cuban Citizens: Liberalize micro-, small and medium enterprise:

 Open and automatic licensing;  Opening for professional enterprises;  Open up all areas for enterprise – not only the “201”  Permit expansion to 50 + employees in all areas;  Implementation of wholesale markets for inputs,  Open access to foreign exchange and imported inputs,  Full legalization of “intermediaries”  Permission for advertising.

Advantages of Indigenous Private Sector Approach

Oligopoly power more curtailed; More competitively structured economy with all the benefits this generates; Permits further flourishing and evolution of Cuban entrepreneurship, with the possibilities this permits Permits development of a diversified range of manufacturing and service activities Permits diversification of exports

Advantages

6. Reduced role for “Nomenclatura;” 7. Decentralization of economic and thence political power

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Reduced power for government to exert political influence through economic control 8. More equitable distribution of income among Cuban citizens and among owners; 9. Profits remain in Cuba; 10. Stronger maintenance of Cuban culture.

Disadvantages

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No massive and immediate cash infusion to Government from asset sell-offs

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Or is this an advantage? [more effective use of in coming revenues]

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Slower macroeconomic recuperation;

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Slower inflows of technology, finance, managerial know-how – but more domestically controlled.

Which of the Alternative Futures is OPTIMAL for Cuba?

Option #1. Institutional Status-Quo as of 2015; OPTION #2. “Pro-Cooperate” Mixed Economy. OPTION #3. “Wide Open” Foreign Investment Approach in Mixed Economy OPTION #4. Indigenous Private Sector in a Mixed Economy Plus Options #5, #6 and #7.

Which is OPTIMAL?

You decide

…….. via ASCE REFERENDUM #1

OPTION #1. Institutional Status-Quo as of 2015; OPTION #2. “Pro-Cooperativization” mixed economy. OPTION #3. Indiscriminate Foreign Investment/Joint Venture Approach in Mixed economy OPTION #4. Indigenous Private Sector in a mixed economy Plus OPTIONS #5, #6 and #7.