On the Failures of Central Planning in Cuba

The bad condition of the buildings and the ruins of the city are among the favorite snapshots that foreign tourists love to take as a souvenir — and are among the many failures of a centrally planned economy. (14ymedio)

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14ymedio, Elías Amor Bravo, Economist, 28 October 2020 – I do not think I am wrong in saying that, in Cuba at this point, there are still those who believe in the feasibility of central economic planning, even after 61 years of continuous failures.

Central planning means giving the state superior power to direct, according to its political criteria, the decisions of economic operators, thus breaking with market efficiency as an instrument for resource allocation. The ethics of centralized economic planning are unacceptable. This even, thinking that its chances of success increase, since there are no private property rights in Cuba.

Between the two extreme positions, central planning and market, there are countless points where a favorable result can be achieved in terms of well-being and quality of life.

But in Cuba it is still thought that the comprehensive transformation of the development management system can be successfully undertaken through central planning as its main element. This idea, rooted in the revolutionary principles of communist orthodoxy, refuses to use other instruments of economic policy, such as regulation, public policy management, governance or economic control, among others.

Perhaps that is why planning was established as a benchmark in the so-called Conceptualización del Modelo [Conceptualisation of the Cuban Socio-Economic Socialist Development Model], approved during the seventh Communist Congress. It was approved, that the planning-based management system should establish a mandatory relationship between the Plan Nacional de Desarrollo Económico y Social [National Economic and Social Development Plan], the State Budget and the monetary and financial balance, all in line with fiscal, monetary, exchange rate, credit, wage and price policies.

The Cuban economy, under such conditions, does not depend on the free and motivated action of private and public economic operators, but rather is centralized under absolute control of the state, which, moreover, owns most of the resources and means of production. Contrary to official doctrine, which considers this scenario to be a strength, it makes sense to think just the opposite, considering what the results of planning have been at all levels.

If in the free market economy the adjustment between the decisions of the operators is made in the market, through supply and demand, in Cuba this process goes through the hands of bureaucrats holed up in a government “ministry,” who make decisions based on their alleged superiority over the rest of the citizens and companies.

While the market produces efficient results, despite its failures, the second is a scenario of failure, and one after the other. And the bad news is that the Cuban communist authorities cling to planning, as if it were the only thing that can help overcome the serious obstacles of the economy.

Centralized planning is the source of numerous problems, because it limits, conditions, and, in some ways, coerces the behaviors of the economic operators of consumption, investment, savings, production, etc. Decisions that in any economy of the world are freely made by their stakeholders, in Cuba are directed “from above” and there is no room for your questions. Then, when what is planned doesn’t come to pass, no one is answerable for their failures. And it all begins again.

Over the years, the Cuban communist experience in centralized economic planning has served to prove the real impossibility of a state or government efficiently conducting its economy. The enormous centralization of decisions in the Cuban economy and the total absence of democracy in the processes, determine that the population is facing problems in order to exercise their role as consumers, investors, savers or simply to devote hours to leisure. Centralized economic planning intervenes in micro space, where operators maximize their well-being with income constraints, and therefore the Cuban economy is systematically distorted.

For example, central planning explains why bankrupt state-owned enterprises, which produce at very high prices, and therefore need state budget subsidies to adapt prices to the low purchasing power of the population, are kept in operation. Numerous examples of investment, foreign trade operations and even decisions on what to produce and how could be cited. Those responsible for central planning in Cuba have never negotiated to achieve a consensus, but have imposed their decisions, setting objectives that, most of the time, were simply impossible to meet.

By identifying central planning as the central axis of the economy, together with the key role given to state-owned enterprises, the Cuban communist régime regresses 50 years, to positions that in the global and modern digital world and in transition to the Fourth Industrial Revolution, are unthinkable, and which will eventually cause its own demise. The foundations of this model of economic organization, based on numerous failures and mistakes, are weaker than the authorities think and at any moment, the house of cards will fall apart completely.

Could monetary and exchange rate be the setting for the crisis of the model? Of course it could. As now planned, with a central role of the state in controlling the wage and price process after the devaluation of the Cuban currency, anything can happen. Without the need for “shock therapies” or avoiding “leaving anyone helpless,” the tensions that will occur after the devaluation and the effects on prices, wages and consumption will make it very difficult to anticipate the results, no matter how much planning is done.

Companies fear that they will not be able to pass their higher costs on through prices, consumers fear that they will not be able to buy the products they want to consume because of their insufficient wages and pensions, commodity producers do not know the impact of the devaluation on their supply, the export options are unknown, the utilization of installed production capacity remains low. The uncertainty and risks ahead are so high that many wonder, what’s the point of centrally planning the economy, when there is no confidence in the authorities in charge of its leadership.

Translated by: Hombre de Paz


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