Even with Price Rollbacks, Can the Regime Control Inflation Caused by Currency Reform?

Marino Murillo, Cuba’s so-called Reform Czar.

14ymedio biggerElías Amor Bravo, Economist, 5 February 2021 — It seems the subject of prices continues to be one of the main problems stemming from the recent currency unification reforms. A problem for which the the communist model, with its emphasis on economic planning and state intervention in the economy, is incapable of setting prices for the goods and services it provides at an adequate level. The state-run newspaper Granma has echoed authorities’ statements about their decision to initiate a “review process” to prevent excessive price increases from affecting the public’s purchasing power. That it has done it, is doing it, and will do it is a story that is not over. What does this “review” sound like?

The reasons behind the explosion in wholesale and retail prices, which is creating public alarm, are many and complex. Some have a medium and long-term impact (such as the lack of monetary control and government debt) while others have their origin in the currency unification process and the disparate, controversial measures that the authorities had wanted to apply this past January.

Clearly, there are problems with price controls. There have been very few instances in which communist authorities’ goal of setting maximum allowable price ceilings on consumer products has been met. This suggests that, if prices rise between 2% to 5%, they will have reached this cap. And this will happen either because all the calculations required by the producers have not done things correctly, or alternatively, because some consumers are willing to pay the highest prices.

In other words, supply does not respond to lower prices unless demand justifies it. And that is why, despite controls and ceilings set by the regime, there has been an increase in consumer prices. This has become a social problem only because more and more sectors of the population have taken note of the growth in speculative pricing and the subsequent surge of price gouging.

Once the government officials became aware of the problem, economics minister Marino Murillo announced they would be reviewing everything, using the political argument that economic inefficiencies cannot be passed along to consumers in the form of higher prices.

Since Murillo is the person responsible for the guidelines, the first thing one might ask him would be what inefficiencies does he believe are being passed along to consumers. There are some clues. It is worth noting that these inefficiencies were not present before currency unification. This is not to say that prices were not going up before January, just that they were not doing so with same intensity as they are now. That is why the public was not openly expressing its discontent back then.

These inefficiencies must, therefore, have something or a lot to do with the way currency unification was implemented, and possibly with two key measures of the process that were not well considered by those responsible for the economy.

First of all, the devaluation of the Cuban peso has seriously impacted the business sector — making imports more expensive and domestically produced alternatives without a positive impact very hard to find — without having a positive effect on exports. This has disrupted the market for wholesale goods and will continue to do so for the rest of the year. The government has yet to determine a stable exchange rate, though the current unofficial rate provides some idea of where it might eventually settle, and further devaluations can be expected.

Secondly, the elimination of subsidies and grants only leaves vulnerable sectors of society, which rely on them to augment their meager salaries and pensions, helpless. Meanwhile, some providers of goods and services — mainly state-owned companies and organizations which are financed by these subsidies — have taken advantage of currency unification to raise prices beyond what is legally allowed, causing inflation.

Price adjustments have been made to grants and subsidies for the Family Aid System, restaurant and food workers and postal rates, and are under review for water utility rates, the school snack program and other goods and services. The review the regime is conducting of its own companies aims to determine whether the standards were was correctly applied or not.

Under this scenario, an enterprise that manages to achieve a high profit margin will trigger a review, the reason being that the regime does not want to give the impression that the profitability of their own companies is dependent on prices, regardless of the organizational, administrative and underemployment problems they may have. Like robbing Peter to pay Paul. In this way, the issue of the quality-price ratio of government grants and subsidies remains unresolved, keeping the potential threat of upward pricing pressure alive.

It is clear that the effects of devaluation have not been enough to halt traditional policies such as price controls and centralized planning. It is one thing to impose them under normal economic conditions but another to prevent market forces from responding to changes in pricing during a period of devaluation

Authorities have demonstrated that the more many anti-inflationary measures they put in place — including price controls on high-end products and services, and limits on free-market wholesale prices — the more unit production costs increase. If they do not pass along the costs of higher wholesale prices, their companies risk serious capital shortfall and insolvency.

Initially, the regime responded by unfairly blaming private sector business owners for the rise in prices, launching a wave of inspections, levying increased fines and sanctions, and trying to turn public opinion against retailers who provide services to consumers. Later, in what seemed like a timeout in a boxing match when one fighter is being pummeled by another, it acknowledged in Granma that “it is inevitable that prices will rise.”

The regime’s only aspiration is “for prices, as well as costs and expenses associated with them, to be applied correctly.” The all powerful communist regime, with full power to intervene in the economy, has taken away Cubans’ property rights to the means of production and stigmatized the free market as a tool for assigning resources, acknowledging that it can do nothing to fight inflation caused by currency unification.

At a time when economic forces are interrelated and decision makers are hoping for balanced solutions through prospective actions, the communist government is falling back on the old, reactionary paradigm of price and cost controls. These are inefficient and do not even come close to solving the problem. It’s throwing in the towel.

To say that “due to strong public sensitivity, the pricing policy adopted as part of currency unification will undergo a process of review and analysis in order to reconcile how companies make their profits with how to offer acceptable prices for the income level of the population” is to say nothing. It is an acknowledgement of the failure of an economic system and its policies.


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