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Analysis: Monetary reform in Cuba — lessons from Vietnam

Analysis: Monetary reform in Cuba — lessons from Vietnam
By Pavel Vidal Alejandro

Since 2010, the Cuban economy has entered a new period of economic
reform, officially labeled as an "update of the economic model."

In order to weigh the extent of the visible contents of the Cuban
monetary and exchange rate reform and obtain lessons from international
experiences, this analysis takes some elements of the Vietnamese reform
as points of comparison.

The starting point of the Cuban reform has many differences compared to
Vietnam. The principal significance and benefit of looking at Vietnam
lies in the similarities between the problems that Cuba is facing today
in relation to those faced by Vietnam since 1986, when the country
launched the Doi Moi reform. Both starting models share many
characteristics of the Soviet-style system.

However, the state sector in Vietnam was smaller than in any other
reforming socialist economy. Large-scale state enterprises formed only a
small part of its economy. Dollar (1993), Perkings (1993) and Riedel and
Comer (1995) conclude that the structure of the Vietnamese reform was
convenient for responding to a "big bang" liberalization in the late
1980s. When small units are the majority, it is easier to make the
market system work. Therefore, the Vietnamese economy was in a better
position to respond to the incentives provided by market-oriented reform
than is the current dominant big state sector in Cuba.

Low inflation is an important advantage of the current Cuban reform
compared to the reform of the early 1990s, and also compared to Vietnam
in the 1980s. However, the ongoing liberalization process could put
price stability under risk. Like Vietnam, Cuba will experience
inflationary pressures; first, coming from the unavoidable exchange rate
devaluation, and second, because of the shift from officially-set prices
to market prices. If Cuba's government is able to implement the planned
labor adjustment and the fiscal restraints together with the opening to
the non-state sector, then the risk of high inflation will be certainly

Early indications show that Cuba's monetary and exchange rate reform
will focus on the unification of the dual currencies, the development of
an interbank market, the opening of personal credit and loans for the
non-state sector, and the improvement of the strategy for monetary
policy management through greater coordination and the establishment of

The first step in the monetary reform, which took place in December 2011
– credit and banking services for the new private sector – seems very
positive because it amplifies the role of banks, credit and monetary
policy, and also because it signals the real acceptance of new actors
within the Cuban economic model.

Taking into account Vietnam's Doi Moi reforms, and the changes that
would seem necessary to achieve the very goals of the Communist Party's
Guidelines for the 2011-2015 period, there is a group of absences in
monetary and exchange rate reform in Cuba. They include the emission of
government bonds, the entry of foreign banks, greater competition among
banks and more flexibility in interest rates, as well as issues related
to the transparency of monetary policy.

It seems that there is no special monetary and exchange rate policy for
socialist markets economies. Therefore, the sooner the Cuban Central
Bank starts developing the conditions for conventional monetary and
exchange rate strategy the better. Cuba's exchange rate adjustment in
the 1990s was incomplete, since it took place only in the household
sector. To eliminate the exchange rate and monetary duality, Cuban
authorities must now extend the devaluation of the Cuban peso to
state-owned enterprises, joint venture companies and government
institutions. They have to decide whether to do it gradually or by using
a "big bang" approach, as in Vietnam. The large gap between exchange
rates in Cuba (2,300 percent) speaks against a sudden devaluation of
that magnitude, but also against the other extreme alternative of a
too-slow adjustment that would require another 20 years of bearing the
costs of monetary duality.

Devaluation of the exchange rate for state-owned enterprises, joint
venture companies and government institutions is unavoidable. It should
be done more gradually than in Vietnam, because the high share of medium
and large state enterprises in the Cuban economy makes it less prepared
to respond to exchange rate incentives. Devaluation of exchange rates,
fiscal restraints, labor adjustment and liberalization are pieces that
would fit together if a suitable balance and proper time orchestration
is achieved; otherwise, high inflation will rebound in the Cuban
economy. Liberalization should not only focus on agriculture and
microenterprises, but extend the opening to a non-state sector of a
larger scale and foreign direct investment, in order to boost
productivity and take advantages of the high level of social
development, especially education.

A matter that arises from the overall analysis of the Cuban reform is
the inefficiency of focusing the liberalization only on microenterprises
and agriculture without taking advantage of the enormous amount of
resources invested in education during the last five decades. It seems
far better for sustainable economic growth, based on productivity gains,
to extend the opening to the non-state sector on a larger scale,
including a renewed aperture to foreign direct investments.

Monetary and exchange rate reform combined with a more comprehensive
liberalization process will facilitate the finding of new engines for
export and economic growth and overcome the domestic financial crisis.
It is not intended that the changes occur all at once, overlooking the
particular initial conditions of the country and, as a consequence,
fracturing macroeconomic and institutional stability. As can be seen
from Vietnam, even applying a "big bang" approach in some periods, the
reform took several years to complete significant transformations of the
economic system. Yet Cuba should try everything possible to speed up its
process to recover lost time.

Pavel Vidal is an economist with the University of Havana's Centro de
Estudios de la Economía Cubana (CEEC). This is a condensed version of a
larger analysis, which can be found at:

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