Castro's economic model insists on failure

Castro economic model insists on failure

Castro's economic model insists on failure. Exports and imports in Cuba: the failure of the Malmierca model.

HAVANA, Cuba. ─ Since August 2020, the so-called Malmierca model of export promotion for private agents has been operating in Cuba. To date, no official data have been provided on its impact on the foreign sector. There is only fragmentary information on contracts and sales.

It should be recalled that the model arose for two reasons. First, to alleviate the shortage of foreign currency in the economy as a result of the paralysis of tourism. Second, to place the State as an agent to control the foreign trade activities of private agents, a way to limit enrichment.

The Malmierca model establishes procedures for exports and imports by the so-called "non-state management forms", based on the mandatory provision of foreign trade services through specialized companies dependent on the State. 

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This method is based on a series of resolutions, including Resolution 315 of the Ministry of Foreign Trade, which published the regulations for commercial relations between entities authorized to carry out foreign trade activities and non-state management forms, as well as Resolution 112 of the Central Bank of Cuba, which established the procedure for the opening and operation of current accounts in freely convertible currency (MLC).

The model establishes a distribution in the foreign trade business where 80% of the foreign currency income goes to the exporter, while the remaining 20% is delivered by the State in local currency. This model was opened from the very beginning to all types of private entities, cooperatives and self-employed workers; also to all forms of non-state management, in a broad sense, such as small farmers who are not cooperative members or usufructuaries of state lands, artisans or creators. Anyone can export under this model as long as state mediation and the sharing of business profits are respected.

The experience since then, in the absence of official data, does not show that foreign trade in the non-state sector has increased, much less that the services and goods to be exported have diversified. And this, in spite of the substantial devaluation of the currency (2300%) as a consequence of the "Tarea Ordenamiento".

The Malmierca model was quickly integrated into what is called the 2030 national development plan and the economic strategy for the post-COVID-19 recovery. However, like the stores in MLC, it seems to be the type of measure that will disappear as soon as the foreign exchange uptake in the economy is normalized.

Nevertheless, the regime tries to make things look different. Thus, for example, Granma highlights the 42 state-owned companies that have emerged (they started out as 36) to mediate in the export and import business in Cuba. According to the official version, these state agencies help "not to leave private agents helpless, and even less so when it comes to support for their connection with contracts abroad", when it is just the opposite of what they demand.

To justify the supposed success, they cite the 2,457 contracts signed with state companies to facilitate the export and import of their goods and services, a figure that, by all accounts, seems ridiculous when compared to the number of self-employed workers in the country, more than 600,000 according to the National Office of Statistics and Information (ONEI). In fact, there are many more who come to find out about the conditions of the model for exporting, and when they are known, more than half of them withdraw and put aside their desire to open up to foreign trade.

On the other hand, what has worked in the aforementioned set of contracts has been imports, since 95% of the contracts have been signed to bring products to Cuba from abroad. Just what the authorities do not want, but at least they receive the commission for the intermediation and the corresponding foreign currency.

The control of exports and imports by private agents under the Malmierca model has been accompanied by successive regulations aimed at facilitating access to foreign trade for the non-state sector, seeing that the plan did not give the expected results in terms of export promotion and diversification, effective import substitution and obtaining resources through trade credits. A good example of the scant attention paid by the private sector to the Malmierca model can be found on the non-agricultural cooperatives front, which have hardly shown any interest in this formula to date.

One of the regulations that have attracted the most attention because of its control has been the so-called "territorial map of non-state management forms" identified as having export potential, on which ministry officials have been working, and on which there are technical doubts, but, above all, political ones, when it comes to determining who can become part of this map of exportable supply. Observing the results of the map in provinces such as Pinar del Río, Granma and Las Tunas, it can be seen that not all those who are there are not all those who are there.

However, there is evidence of the failure of the model that goes beyond political considerations. No official data is disseminated, but it seems evident that the objective of promoting services with exportable quality from the State ─and that the process is done quickly and implemented efficiently─ has not been fulfilled, nor have imports been more rational and that linkages with the productive fabric are achieved.

The obligatory signing of contracts for the provision of services has been another factor that has not worked due to the costs associated with operations and bureaucratic delays. The same can be said of the requirement that private agents have current accounts in freely convertible currency, as well as accounts in Cuban pesos. To this must be added the small number of banks that offer these services.

When consulted by some private agents who have been interested in operating with this model, they point out as the main obstacle the need to reach agreements between the parties; that is, on the one hand, the communist State with its intermediary agent, on the other hand, the private operator interested in trading abroad. The difference in power between the two is so great that it conditions the outcome of the agreement between the parties, in advance, with a take it or leave it. The reference required to fix the value with respect to the prices of international competition is also useless because it is alien to the reality of the Cuban economy.

It is true that Malmierca said back in August last year, when he launched his model, that only "a small commercial margin for the state enterprise" would be deducted from the income received from exports and that the expenses associated with the operation would have to be subtracted. According to some informants, in certain cases this "small margin" is close to 40% of the operation, which leaves the private operator with no interest in the business. It should be noted that after the deduction of commissions and expenses, in addition, only 80% is allowed to be retained in foreign currency, being mandatory the deposit in the account of the non-State form (being subject to the situation of shortage of foreign currency and the certificates of deposit that immobilize the funds), while the rest would go to the accounts in CUP. Something similar happens with imports.

So that the foreign exchange income from the operation that goes to the private agent for financing or development is so small that it is not worth the business. In fact, to acquire foreign currency the model indicates that it can only be obtained with the export itself and the percentage that is retained, through bank transfers in freely convertible currency from abroad or from Cuban banks, where there are accounts with liquidity, including Visa and MasterCard. Over time, tariff margins for imported goods have also been reduced, but the measure is still insufficient.

In addition, the magnetic cards issued to private operators with reference to MLC accounts can only be used to make cash withdrawals of local currency, but not to withdraw freely convertible currency, since the aim is to make the process as bankable as possible and to prevent the currency from circulating in cash.

Finally, another example of the failure of the Malmierca model has to do with its poor relationship with foreign investments in Cuba. To begin with, there are clear conceptual problems in treating foreign trade as an activity independent of the entry of foreign capital into the national economy. Trying to deal with each process by going through different places, and with uncoordinated policies, is a serious mistake. And this is more or less what is happening in Cuba.

The attraction of foreign capital for national development has been slowed by the COVID-19 crisis. Some unofficial information puts the drop in foreign investment at more than 40% during 2020. The fact that foreign investment arriving in Cuba cannot directly formalize operations with private agents is a factor that conditions the relationship between foreign capital and commercial relations. It is enough to look at the so-called "portfolio of opportunities" that the regime offers to foreign investors to see the absence of operations with private agents. The Malmierca model has failed to stimulate foreign capital. And this is because Cuban non-state entities, despite their desire to get involved in the creation or design of foreign investment projects, are not authorized by the regime to participate, trying to drain any process of private enrichment.

On the other hand, foreign capital companies that have been operating on the island for a long time have not benefited from the Ordinance Task, since their activity not only depends on a possible elimination of the distortions present in the economy, but also on the real facilitation of their business with the free hiring of qualified workers or the automatic repatriation of profits to the parent companies. This is the case of imports made by these foreign companies from their headquarters, which will have to assume a much more complicated exchange rate after the devaluation of the peso.

Elias AmorAuthor: Elias Amor.

Economist. Author of the blog http://cuba-economia.blogspot.com. President of the Cuban Liberal Union and of the Cuban Observatory of Human Rights (OCDH). My wish for Cuba to be free and democratic.

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Cubanet is a non-profit digital media, dedicated to promote the alternative press in Cuba and to inform about the reality of the island. CubaNet's support for alternative journalism and civil society in Cuba is based on our conception that in any type of regime, civil society is the most effective instrument for individuals to exercise their rights and make a greater contribution to their community, while seeking greater personal well-being. Citizens need to organize themselves in solid institutions to balance the power of government, the most structured social institution.

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