Raising the salaries or pensions of 2.75 million Cubans comes with the possibility of higher inflation and widening budget deficits. As with Cuba’s broader economic reforms, the accompanying intensification of market mechanisms presents risks for the country’s socialist planned economy, but these are necessary concessions given renewed US aggression and deteriorating international conditions, writes Helen Yaffe (University of Glasgow).
“Today is Cuban workers’ day!” a Cuban friend told me in late June, beaming at the news that all employees of the island’s “budgeted” state sector would receive significant salary rises, starting from 1 July 2019.
Cuba’s budgeted sector incorporates organisations and entities which operate with a state budget and mostly provide services free to the population without returning revenue to the state. This includes public health, education, culture and sport, public administration, community services, housing and defence.
Every one of the 1,470,736 workers in this sector will receive the pay rise, at a cost to the Cuban state of over seven billion Cuban pesos annually. Simultaneously, 1,281,523 pensions will rise, costing an additional 838 million pesos a year and taking the number of direct beneficiaries to over 2.75 million Cubans.
Understanding the budgeted state sector pay rise
Announcing the salary rise and outlining a set of economic reforms to follow, Cuban President Miguel Díaz-Canel and other government ministers have framed the measures in relation to several factors.
First, aggressive steps by the US Trump administration to strangle the Cuban economy by strengthening the US blockade, particularly through the spring 2019 implementation of “Title III” of the Helms-Burton Act, under which US citizens can sue Cuban and foreign interests who “traffic” (engage in any way) in properties they, or their predecessors, owned prior to the nationalisations carried out by Cuba’s revolutionary government from 1960.
Second, a determination not to return to the hardships suffered by the Cuban population during the Special Period of economic crisis in the 1990s. Díaz-Canel referred to creative measures taken in that period which are currently under study.
Third, the demand from Cubans and their organisations for a pay rise, communicated directly to the President and ministers during their regular tours of Cuban provinces, in recent Congresses of the Cuban Workers’ Confederation and the National Association of Cuban Economists, as well as during public debates over the new constitution approved in February 2019.
Fourth, the measure acknowledges the loyalty and commitment of workers who have stayed in state employment, often in the lowest paid jobs, defending the “conquests” of Cuba’s socialist revolution in health, education, culture, sport, and community and social welfare, providing essential services for all Cubans.
Finally, the salary rise is a step towards a broader economic restructuring, comprising changes to the way salaries and prices are set, more flexibility in the planning process with greater initial input from workers, the elimination of the dual currency, more cooperation between state enterprises and non-state entities or foreign investors, and greater financial autonomy for state enterprises. These measures aim to boost national production and improve Cuba’s balance of payments, so as to withstand the onslaught of US imperialism by advancing the national development plan through to 2030.
Who benefits and how?
Cuba’s state sector employs over 3 million workers, compared to some 1.4 million in the non-state sector, which consists of cooperatives, private farmers, usufruct farmers (who use state land under rent-free loan), the self-employed and small businesses. Of the state sector workforce, 52 per cent – or 1.6 million workers – are in the “enterprise sector”, consisting of productive and commercial entities which sell, trade, and receive revenues.
Since 2014, many workers in the enterprise sector benefited from incentives to increase production, linking pay to performance, removing salary caps, and providing payment in hard currency (Cuban Convertible Pesos are received by 60 per cent of workers in the sector). The new salary rise does not apply to them, but to the 48 per cent of state sector workers in the budgeted sector.
Some groups of workers in the latter, including healthcare workers, received a pay rise in recent years, but others, including the education sector, were left behind. Workers in the political organisations of People’s Power and a group in public administration had not received a pay rise since 2005.
The new salary scale both raises the incomes of the lowest earners (the minimum monthly salary rises from 225 pesos to 400, up from 125 in 2005) and expands the wage differential between these and the highest earners from between 2.9 to 7.5 times.
This aims to “invert the pyramid” so that jobs of greater complexity and responsibility, requiring higher qualifications, receive substantially higher remuneration and provide an incentive to work towards leadership positions. The average monthly salary in the budgeted sector has risen from 634 pesos in June, to 1065 pesos in July; above the 2018 average salary in state enterprises, which was 871 pesos (up from 600 in 2014). Salaries in the budgeted sector are capped at 3,000 pesos; only those earning over 2,500 pay individual income tax.
All employees will now pay towards social security: 2.5 per cent for those earning less than 500 pesos and five per cent for those above. Social security payments, including some pensions, were last raised in November 2018. Pensions were raised again to a minimum of 280 pesos and all those with pensions under 500 pesos see incomes rise.
Facing the challenges: avoiding inflation and increasing national production
While celebrated, the salary rise provokes two issues of immediate concern: the danger of inflation (rising prices) and the need to meet the additional costs to the state without exceeding the previously planned deficit (spending above revenue).
Inflation would undermine the positive effect of the pay rise, increased purchasing power, to the detriment of all Cubans, not just the beneficiaries. In a market economy, inflation is caused by increasing the supply of money without a concomitant increase in the value of the goods and services produced. Economy Minister Alejandro Gil explained that in Cuba’s planned economy the salary rise should not cause inflation because:
- the budgeted sector provides free goods and services, so increased salaries cannot push up non-existent sale prices
- most retail trade is under state control and subject to administrative controls; that is, fixed or capped prices
- the state is not raising wholesale or retail prices, taxes, or other payments
Consequently, said Gil, the non-state sector had no excuse for raising prices. Prices in all sectors will be closely monitored and the public was urged to report “irresponsible” and “opportunistic” price rises to authorities to prevent abuses and speculation.
With inflation “repressed”, the danger is that as beneficiaries buy more they will quickly exhaust the retails goods currently available, generating scarcity. Already in May 2019 some new limits were introduced for purchases of basic foodstuffs following scarcities blamed on the tightening US blockade.
To prevent either inflation or scarcity, the Cuban economy must expand the supply of goods and services to the population. Minister Gil revealed plans to develop new and diverse services, like national tourism, which had grown 13 per cent since the start of the year, eating out, and communications, including internet access and phone credit.
Although currently excluded from the salary rise, workers in the state enterprise sector can increase their incomes, said Gil, by producing more, but not by charging more. Local development will be fostered on the basis of local resources to meet demand without increasing imports (which bleeds much needed hard currency).
Other measures are being designed to retain the hard currency which Cubans receive as pay or remittances, and which often leaves the country, as for example when individuals travel abroad to purchase goods to bring back to Cuba. Instead of prohibiting this, the economy will be directed to meet the demand for such goods and services domestically. New financial products are being created to encourage saving.
But the cost of the salary and pension rise for one year is greater than the social security budget of 6.4 billion pesos for 2019 and the planned budget deficit at 6.1 billion pesos. How can the state cover the additional cost without increasing the deficit?
The ministers talked in general terms about redirecting investment funds from unimplemented projects and said planned budgets to all entities will be reduced by some ten per cent, obliging them to prioritise their spending. Meanwhile, all social programmes will be preserved. Some Cubans immediately responded to the news by seeking (re)employment in the state sector, but ministers warned against a return to inflated state sector payrolls, stating that only essential workers should be recruited.
Cuba’s broader economic reforms
The broader economic strategy seeks to strengthen national production and state enterprises, the diversity and quantity of exports, import substitution, productive linkages, self-sufficiency in the municipalities, local development projects, investments, retail trade circulation, agricultural production, food sovereignty, and implementation of the housing policy.
Díaz-Canel talked about overcoming the obstacles and bureaucracy which Cubans refer to as the “internal blockade” and breaking the pattern of relying on imports. Cuba’s principal imports are food and fuels, which drain billions in hard currency.
A critical solution is to increase agricultural production and use of renewable energies. Moving Cuba towards food and fuel sovereignty is a political necessity given the aggressive, extraterritorial imposition of the US blockade. Gil said that the new measures aimed to “break the pattern of turning to imports to foster our national industry”; nothing should be imported that could be produced domestically. Cuban workers had long complained about this, he said.
To achieve this, state enterprises will be given more independence in planning, financing, investment, collaboration, and incentives for workers. In turn they must eliminate budget deficits and stop using budgets without proper cost assessments.
The ministers talked about replacing “administrative controls” with “financial and economic mechanisms”. That is, increasing individual material incentives for workers to expand domestic production, exports, and import substitution, essential both to save hard currency and to balance the books. Where surpluses rise, bonuses can take workers’ pay up to five times the average salary (currently capped at three times).
These measures mean a shift from rigid planning which discourages innovations outside of the plan. “Anything that increases efficiency must be evaluated for incorporation into the plan”, said Gil. Decentralising the plan implies decentralising access to resources, and so increased autonomy for state enterprises.
State enterprises whose exports exceed the plan will retain all or part of the extra hard-currency earnings (after meeting obligations to the state) and can use those funds for essential imports or to pay other national producers. Similarly, non-exporting state enterprises can retain surplus revenues, after payments due to the central fund, and decide how to invest those, including in projects with domestic non-state enterprises and foreign companies.
Restrictions on relations between these entities will be removed. Cuban enterprises which supply domestic products and services to foreign businesses operating in the Mariel Special Development Zone will be permitted to retain 50 per cent of their profits. State enterprises will be allowed to sell excess production over their plan in the domestic market. Non-state enterprises may be facilitated to export through arrangements with state entities.
The aim is to keep hard currency in the country and foster productive chains in the domestic economy. Other incentives will foster municipal self-sufficiency and increased agricultural productivity.
FINATUR, an existing financial institution in the tourism sector, will provide investment credit directly to enterprises, outside of allocations from the Central Fund, to reduce delays and bureaucracy in funding investments. Accordingly, enterprises will be responsible for paying off their own debt to FINATUR. Given US persecution of Cuba’s use of the US dollar, the utility of adopting a crypto currency for commercial transactions is also being evaluated. To prevent the ongoing theft of fuel, GPS devices will be placed on fuel transporters and the use of digital cards for the purchase of fuel will be extended.
By introducing more extensive market mechanisms into the Cuban economy, the reforms present risks to Cuba’s socialist planned economy, but they are necessary concessions in the context of renewed US aggression and deteriorating international conditions. Díaz-Canel recognises the risks and the importance of popular support.
“In the most difficult times, Fidel and Raul always went to the people.” This was the essence of the revolution, he said, as the people were the source of wisdom and creation.
• The views expressed here are of the authors and do not reflect the position of the Centre or of the LSE
• This is a slightly modified version of an article first published by Counterpunch
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