Cuba's Dual Currency System Complicates Needed Reforms

Che Guevara, the global icon whose revolutionary image adorns millions of tee shirts, was governor of the Cuban central bank from 1959 to 1961. While stopping short of his fanciful notion of abolishing money, the Argentine-born communist did nationalize all farms and industries, a measure that bedevils the island 55 years later.

Cuba’s economy is a wreck. Most of the island’s 13 million inhabitants are impoverished, earning the equivalent of $20 a month. Food is in short supply with rice, beans and coffee rationed. Meat is a rarity for many. Cuba is broke, with foreign debts it is unable to repay.

Living standards according to researchers at Washington’s Brookings Institution have stagnated for two decades.  Even Fidel Castro admits the failure of socialism, declaring in 2010, “the Cuban model doesn’t even work for us any more.”

The 2014 Index of Economic Freedom from the Wall Street Journal and Heritage Foundation ranks Cuba as second to last in its assessment of 178 countries.  The three lowest ranked countries are Zimbabwe, Cuba and North Korea.

When the Soviet Union collapsed in 1991 Cuba lost its financial benefactor.  Desperate for foreign exchange, Fidel Castro opened Cuba to tourism, an industry he had denounced as parasitic during the previous three decades. Sun-seeking European, Latin American and Canadian tourists flocked to the island bringing with them the hard currency Cuba so badly needed.  Cuba today couldn’t survive without tourism.

In 1994 Cuba unveiled a two-tier currency system that remains operational. Tourists are compelled to convert their money at the artificial rate of one dollar to one convertible peso. Ordinary Cubans meanwhile use the national peso whose exchange rate is not 1:1 but a more realistic 25:1.  Two legal currencies, the convertible peso and national peso, freely circulate.

The dual currency system has led to immense distortions. Since remittances from abroad total $2 billion annually, if you’re getting dollars from relatives in Miami you can live well because that cash becomes convertible pesos. In a form of economic apartheid, shops with the scarce consumer goods that people want accept only convertible pesos.

As was the case in communist Eastern Europe, those with access to foreign currency—hotel maids, bellboys, drivers-- do well while the masses suffer with national pesos. A common complaint is the absurdity of being paid in national pesos while needing convertible pesos to buy goods you need.

During a seven-day visit to Cuba some years back, I experienced the anomalies of the two-currency system. Using public transport to travel the ten miles from downtown Havana to Ernest Hemingway’s home in San Francisco de Paula, I paid the bus fare in national pesos, less than one US cent.  At the Hemingway museum the $3 entrance fee had to be paid in convertible pesos.  Inside staff furtively cajoled visitors to buy with dollars Che Guevara commemorative coins. Later dining in a private home permitted to serve tourists, the owner disclosed that he earned more in one night than he did in a month in his job as a veterinarian.   

Not surprisingly the dual currency system is deeply unpopular and Raul Castro, who succeeded his brother in 2006, promises to phase it out. But how can this be done without triggering social unrest? No one knows what the Cuban peso is really worth.

Two bicyclists I met on the Havana waterfront who had grown up in communist East Germany had an insightful perspective on the Cuban revolution.  They had traveled three weeks cycling the entire circumference of the island.  They were shocked at the poverty they witnessed but said that everywhere people retained pride in the long ago revolution. Cubans, they said, were justifiably proud of their achievements in health care and education.

I think the normalization of US Cuban relations poses significant risks for the island’s communist rulers.  For decades they pointed to the US economic embargo as the reason living standards remain low. That argument will fall away and the authorities will be left with the dysfunctional system they created.

Can Raul Castro manage the kinds of market-based reforms essential for Cuban economic growth? His record thus far suggests he can’t.  Since taking power he has zigged and zagged, trying one thing, then another, never following through.

In 2011 Raul Castro said half a million workers would be dismissed from money losing state enterprises. It hasn’t happened. Cubans can now own cell phones and use the tourist hotels that were previously off limits. So what, if the police state apparatus remains intact?  The media is still tightly controlled.  Promised moves on property rights and private business have been tentative.

 Cuba is a big deal in the Caribbean and Latin America. With 11 million people and a landmass greater than the other Caribbean islands combined, Cuba could be a regional powerhouse.

As Canadian Prime Minister Stephen Harper observes, normalization of US Cuban relations is long overdue. Fundamental change at last appears to be underway but Cuba’s future is very uncertain.