It Is Time to End Subsidies in Cuba
- Submitted by: admin
- Business and Economy
- 09 / 07 / 2009
Likewise, until the end of the 1980s it was possible for households to purchase several products at “affordable” prices on the parallel regulated market. Moreover, most sporting events, entertainment and cultural performances were offered free of charge.
Consequently, for a long time this situation was not a problem thanks to the existing level of prices of goods and services in the country. In large part, this was the result of the advantageous trade relations that the island sustained with the former socialist countries of Eastern Europe, particularly the ex-Soviet Union.
These were also times in which almost all goods and services could be purchased in Cuban pesos, the basic source of individual income was one wages, and practically the entire working-age population was employed in the state sector.
The economic crisis occurred in Cuba after the collapse of the socialist camp as the country lost its principal trade partner, and with it the revenue the island had obtained from the export of sugar to the USSR.
As a result, the volume of overall supplies in the economy fell considerably. This was due both to the contraction of national production, given Cuba’s dependence on imported raw materials and other inputs, and because of the reduction in imports, owing to the lack of hard currency.
Inflation Battered Workers Buying Power
During those difficult years of the early 1990s, workers continued receiving their wages even though the level of economic activity contracted drastically. Due to the fact that there was a decreasingly smaller supply of goods and services for the same volume of wages, inflationary pressures were induced in the Cuban economy.
In this context, the government undertook a series of reforms that included the reorganization of domestic finance directed at collecting excess money circulating in the country. It decided to put an end to the free provision of some goods and services and to begin to reduce the existing level of subsidies.
In the 1990s, the wages of Cuban workers lost considerable purchasing power, a situation that continues to constitute a problem today. This fact, together with the diversification of sources of income - legal ones (linked to self-employment, family remittances, and others) as well as illegal ones - resulted in significant segments of the population beginning to lose interest in working in the formal sector of the economy.
This past December, the then minister of Economy and Planning, Jose Luis Rodriguez, said that on the island there existed “189,000 people of working-age who neither study nor work; however, they parasitically enjoy all of the country’s social benefits. It will be necessary to face this situation using the appropriate methods to resolutely eliminate that form of exploitation of those who work or are studying by those who contribute nothing to society.”
In 2005, authorities took steps aimed at eliminating some of the existing subsidies. In this way, the prices of goods such as coffee and utilities like electricity were increased.
Generally, when these types of measures are applied across the board, they have a more severe impact on lower-income households. At the same time, discreet salary increases were made, but they did not completely compensate for the price hikes.
This partly negates the effect of the measure, because while nominal wages increased, purchasing power decreased.
Why Eliminate Subsidies If It Increases Cost Of Living
In recent years, one of the issues around which greater attention has been paid is that of workers being unable to cover their expenses based on their wages. Why then eliminate the existing levels of subsidies and make the cost of living for workers even more expensive?
This is a dilemma that must be solved because there clearly exits certain parts of the population who either rely on additional revenue that does not come from formal employment or who live without working and contribute nothing to society, though they enjoy virtually the same benefits as people who work - which is completely unfair.
Naturally all subsidies cannot be eliminated in one fell swoop, which is why it will be necessary to look for gradual solutions.
A first measure which could be pursued is the reduction in subsidies while increasing the incomes by the same amount for working people, retirees and protected sectors of the population.
However, eliminating the subsidy on products and compensating for this change through increased wages or other forms of income might seem to be the same thing, in practice it would not be.
One of the subsidies that most benefits the population - and which dates back to the beginning of the Revolution - is the one on rationed food products. Through these, for at a very moderate price, the island’s population can purchase a number of food products that cover a certain percentage of their daily recommended nutritional needs. Nevertheless, to meet their monthly food requirements, people presently have to go to other higher priced markets as well.
According to several studies, Cuban families dedicate between 60 and 70 percent of the family budget to food. To abruptly eliminate subsidies on food would exacerbate this situation. However, one could continue to gradually reduce the subsidies on certain products while simultaneously increasing the population’s purchasing power, as mentioned.
The following is a graphic example of how this could be implemented. The table below first takes some selected products as references; an estimate is then made of the magnitude of the subsidy that the State grants for each of these products, and from this the total subsidy per person is calculated.
Keeping in mind that some provisions (like baby food, milk or soymilk) are distributed to certain special-case categories of the public, these will not be considered in this analysis. Nor will we consider a number of other subsidies: these include meat products, which are not distributed in a stable or consistent manner; those subsidies on products whose distribution is in function of the composition of the family unit; or those subsidies that are provided to accommodate special medically ordered diets.
Nevertheless, for putting this proposal into practice, consideration must be taken of other products in order to move towards the elimination of the subsidy.
The State subsidizes 67.55 pesos per person in these products alone. If these subsidies were eliminated each person would have to pay 67.55 more pesos for the products identified.
Taking in consideration the previously mentioned elements relating to the reduced purchasing power of wages, to implement this measure without affecting real wages it would be necessary find a way to increase incomes by 67.55 pesos for each worker, retiree or person belonging to any vulnerable sector (young students and people with disabilities, etc.).
If the level of income of these people were increased by this amount, macroeconomic imbalances would not be expected to take place because it is a mere transfer of resources from subsidies into wages.
To apply this measure it would be necessary to increase all wages and pensions by 67.55 pesos. In addition, the State would have to pay that same amount (through checks, stipends, vouchers or some medium) to the parents or legal guardians of all youth under 17 (children and young people below the working age).
n the case youth 17 or older who are not employed but who are studying in high school (college prep or vocational education), this allowance could be extended until such time they complete the summer vacation of their final academic year.
Once this stage is concluded, these young adults could choose from three alternatives: begin working, in which case they would receive the increase in their wage; enlist for military service, where their pay would be increased by 67.55 pesos; or simply abstain from either studying or working. In this latter instance, those who have made this decision would have to pay higher prices for regulated products, which would not be a concern of the State.
Social Assistance Payments Would Have to Increase Correspondingly
Another group of people who might see themselves affected by the potential harm of this measure are those with physical or mental disabilities that prevent them from working. Currently - thanks to work carried out over the last several years by social workers - practically all of these individuals are beneficiaries of the Cuban social welfare system. Their social assistance payments would therefore automatically increase, just as in the cases of wages and pensions.
Nevertheless, some mechanism would have to be created to identify people in need who are not protected by the existing welfare system. This identification could possibly be performed by those same social workers. People in need could then receive the corresponding assistance to compensate for the price increases.
A measure such as the one proposed here would require a prior study to identify each group of persons and the compensatory measures needed for application.
This proposal would achieve:
* The elimination of subsidies on certain of products whereby the State would cease providing benefits to people who do not work;
* The reinforcement of the role of wages in making one’s living, as well as the bolstering of the socialist role of the State as a force that enforces the principle of distribution in accordance with work, and a reduction in the State’s paternalistic role;
* Their could be a reduction in the demand for products based on people only buying what they will really consume, which would imply a decrease in the demand for rations and, in some cases, a consequent reduction in imports that the country currently makes to fulfill its commitment.
So that one might have an idea of the economic impact that a measure such as this would mean for revenue, a few simple calculations suffice. According to the 2008 Economic Panorama by the Cuban National Statistics Office, 3,950,300 people work in jobs connected to the State sector, while the total economically active population is 5,027,800. This means that 1,077,500 people do not work or are engaged in non-State economic activities (such as self-employment, cooperatives and others).
This segment would not receive the increase in State payment since they are not tied to the State sector. For that reason, supposing that each one of them acquires the products related to paying 67.55 pesos more, the State would collect an additional 72.7 million pesos per month, or an extra 873.4 million pesos a year, which is equal to 1.8 percent of the 2009 budget and is almost a quarter of this year’s projected deficit.
Breaking the Vicious Circle
To gradually eliminate other subsidies, an increase in the real income of workers, retirees, and others is required. It is well known that it is impossible to increase nominal wages without an effective increase in the production of goods and services.
It is here where the situation becomes a vicious circle: greater production is required to increase wages, but there exist multiple factors that work against a growth in production. Among those that can be pointed to are the technological backwardness in some industries, the lack of necessary inputs to carry out specific activities, wage levels that are insufficient to serve as an incentive for greater productivity, and others.
If the contradictions can be overcome it would allow the population’s income to gradually increase, and - at the same time - eliminate existing subsidies for those who contribute nothing while enjoying the same benefits as those who create the country’s wealth.
Source: Havana Times