Cuba’s hidden tax on workers mocks socialist ideals

Cuba's hidden tax on workers mocks socialist ideals
Published: Feb 21, 2015 2:44 p.m. ET

Dual currency system increases income inequality in socialist paradise
By BARRY WOOD

HAVANA, Cuba (MarketWatch) — American visitors arriving in Cuba should
be aware that the communist island has two currencies of widely
divergent values circulating simultaneously. The more brightly colored
convertible peso (CUC) is exchanged at 1 to 1 with the U.S. dollar.

However, most Cubans live with the lowly national peso (CUP) that trades
at 24 to the CUC. An average monthly wage is CUP 480 or $20.

The CUC was created in 1993 when the Cuban economy was in deep crisis
from the sudden loss of subsidies from Russia. Desperate for foreign
currency, the Cubans sought to capture the foreign exchange that
tourists were spending by forcing them to buy pesos at an inflated
price. They've been stuck with two currencies ever since. Visitors will
notice that prices are listed in CUCs and CUPs.

Cuba's foreign-managed hotels are a case study of how unfair the system
is. Tourists pay dollars to the hotels, which then set aside in CUCs
(1:1 to the dollar) the wages owed to employees. That money goes to the
state employment agency that actually pays the workers.

Now the catch. The state entity pays the workers in CUPs and pockets the
difference, which goes to the government. With a 2,000% disparity
between the currencies, the windfall is huge. A worker typically gets
only 480 CUPs ($20) from the 480 CUCs ($480) the hotel set aside for
his/her salary. This indirect tax nets the government $460. On every
transaction.

Augusto de la Torre, the World Bank's chief economist for Latin America,
calls this practice a huge tax on labor that is offensive to socialist
ideals. De la Torre, a former central bank chief in Ecuador, has
co-authored a paper on how Cuba can unify its two exchange rates.

Aware that the dual money system is unfair and inefficient, the Cuban
authorities have said for years that they're going to change it and have
just one currency. But unifying them is a complicated task and, not
surprisingly, they don't know how to do it.

Anders Aslund, a researcher at Washington's Peterson Institute for
International Economics which hosted a recent forum on the Cuban
economy, says unless the currency transition is done skillfully there
could a run on the banks and runaway inflation. He emphasizes that no
one knows what the actual peso-dollar exchange rate should be. Cuba is
broke and thus has no hard -currency reserves to back up whatever
exchange rate is eventually fixed.

The partial normalization of Cuban-U.S. relations is likely to mean that
hotel maids, waiters and cab drivers will see their incomes rise because
American travelers tend to leave generous gratuities. This, says John
Kavulich of the U.S. Cuba Trade and Economic Council, will widen income
inequality in the communist state.

Sen. Jeff Flake, the Arizona Republican who is a strong advocate of
normalization and a frequent visitor to Cuba, says the Raul Castro
government faces huge economic challenges. Noting the absence of modern
cars on the island, Flake joked at the Cato Institute this month, that
"the Cuban regime is traveling the last mile to communism in a 1957
Chevrolet."

This month the Cuban authorities began issuing high-denomination CUP
notes, saying the move is preparation for the long-delayed currency
unification. The central bank said it expects CUPs to be more widely
used and thus 200, 500 and 1,000 CUP notes are needed. Monetary experts
say the move probably suggests that the Cuban authorities are expecting
a big uptick in inflation.

Cuba may be considering applying for membership in the International
Monetary Fund, a potential source of money and equally important
technical advice. Cuba was a founding member of the financial
cooperative but after refusing to pay its foreign debt the Castro
government withdrew in 1964.

Some years earlier the Argentine-born revolutionary icon Che Guevara
headed the Cuban central bank. His image adorns the tattered three-peso
CUP, but he's not present on the much more valuable three-peso CUC.

Barry D. Wood, a frequent writer on economic transitions, visited Cuba
In January.

Source: Cuba's hidden tax on workers mocks socialist ideals -
MarketWatch -
http://www.marketwatch.com/story/cubas-hidden-tax-on-workers-mocks-socialist-ideals-2015-02-21