Cuban Government Describes as Ineffective and Harmful the 30% Profit Cap on Sales from the Private Sector to the State

Economist Pedro Monreal points out that this measure “entails the risk of corrupt markets.”

The sale of imported flour by private parties has, on many occasions, allowed the state sector to have bread. / Escambray

14ymedio bigger14ymedio, Madrid, 28 June 2024 — Cuba’s private sector will be able to obtain a maximum profit of 30% on the goods and services it sells to the State as of July 1. This Thursday, the Cuban Government made public a resolution – dated Tuesday – in which this limit is established with the objective of “containing the expenses of state entities in their economic relations with non-state forms of management.” The measure is, as economist Pedro Monreal summarizes, a variant of “price caps,” which not only have not shown their effectiveness, but can even be harmful.

“State entities, in the process of economic contracting with non-state methods of management for the acquisition of goods and services, agree on prices and rates whose maximum profit rate does not exceed thirty percent (30%) of the total of costs and expenses, as well as the amount corresponding to the application of taxes on Sales and Services,” details the resolution published in the Official Gazette.

The text, which emphasizes the containment of inflation as its goal, urges lower-level administrations (provincial and municipal) to approve the maximum prices and rates of the goods and services they select based on the needs of each territory.

Private sector retail sales account for just 4.1% of those of the country as a whole. Although it is not known what part of them end up at the state sector

The impact of the measure, provided it works, would be more than limited. As Monreal points out, private sector retail sales account for only 4.1% of those of the country as a whole. Although it is not known what part of these sales ends up in the state sector, the percentage is too negligible to have any type of significant consequence.

“In addition to the fact that the base of ‘savings’ in state expenditures by limiting the rate of profit on non-state sales acquired by state entities does not appear to be very large, experience indicates that ‘price caps’ are not effective to reduce inflation,” the expert indicates.

The Cuban economist insists that the way to contain inflation, which has not stopped growing exponentially since the entry into force of the so-called Ordering Task (2021), is expense reduction. The largest State budget items go to Health (19%) and Education (17%), but both are essential for the Government, in addition to being “problematic” – Monreal describes – for society, which is why the specialist suggests the cuts in the next largest sector, Public Administration and Defense (16%).

“Prices must essentially be fashioned in the market (even in regulated markets). Replacing this function of the market with ‘powers’ of local officials not only restricts market prices, but also entails the risk of ‘corruption markets’, Monreal concludes in an X thread in which he has recorded his analysis of measures.

Replacing that market function with ‘powers’ of local officials not only restricts market prices, but also risks ‘markets of corruption’

The publication of the information in Cubadebate has generated an avalanche of comments in a few hours in which, in general terms, distrust is perceived regarding the measure. “With knowledge of the facts, it will mean a new brake on many activities. For example, tourism, which, in order to be able to provide services relies on many private companies. Imagine now, with the crisis of ITH [marketing company for the sector] not being able to supply its clients and, starting July 1, applying that measure, are we prepared?” a reader points out.

Others have seen, immediately, how corruption is going to run rampant. “Profit rate = Income – (costs + expenses). In other words, a high price can be perfectly justified by saying that the costs or expenses were high; no one can control that for an individual. We are kicking as we drown.”

Some readers point out that the measure is correct or that the 30% profit is already too much and the margins should be tightened even more, comments that are appreciated by the Ministry of Finance and Prices itself, which intervenes in the debate. However, a large group of users agree that the Government is insisting on a path that has never been successful.

“Although the price cap is considered counterproductive by many economists, practice has demonstrated its inefficiency in the best of cases, plus its counterproductive effect in the majority of cases. So, here we are, continuing to stumble over the same stone. Tripping over a stone is not bad if you do it for the first time, but in Cuba we do it so many times that we end up falling in love with them.”


COLLABORATE WITH OUR WORKThe 14ymedio team is committed to practicing serious journalism that reflects Cuba’s reality in all its depth. Thank you for joining us on this long journey. We invite you to continue supporting us by becoming a member of 14ymedio now. Together we can continue transforming journalism in Cuba.