The controversial Say’s Law, devised by the French economist Jean-Baptiste Say, proposes that supply creates its own demand, but Miguel Díaz-Canel and his Economic Minister, Alejandro Gil, argue that it is demand that creates supply.
Hence, they have decreed a rise in wages and pensions amounting to more than 7 billion pesos annually, which entails flooding the country with a wave of money, which is supposed to substantially boost demand, in order to "increase production"; absurd, but true.
If many economists think that in some respectsSay was wrong, of the two Castroist leaders mentioned, it must be said that they are truly placing the cart before the horse, because another economic law, well proven in practice, demonstrates that wages cannot be increased if there is no increase in labor productivity and in production and services.
It is simple.The increase in the amount of money in circulation raises demand and, if there is no more production, or more imports, prices skyrocket, devour wage increases, and reduce the purchasing power of money.
In Cuba the only fair and reasonable way to increase meager socialist salaries and to get the horse in front of the cart is by liberating the country’s productive forces, but the dictatorship refuses to do so. In addition, in no way can the Government obtain from the State’s productive sector the additional billions of pesos needed to pay for these salary and pension increase, which will spawn a greater budget deficit, and an increase in the national debt.
Normal countries have a monetary policy according to which central banks raise or lower interest rates to contract or increase liquidity; that is, the cashin people’s pockets, access to credit, and the money deposited in banks that their owners can withdraw at any time. They do so that there is a certain balance between supply and demand, and to keep inflation under control. This, in Cuba, is unthinkable, and it is not even known.
Economist Pedro Monreal, a resident on the island, predicts that for the second half of 2019 the salary increase will mean extra demand for food amounting to 2.55 billion pesos (CUP), which will bring about a 50% increase in the sales of food with respect to the same period in 2018. For the salary increase to not generate inflation, Cuba would have to increase its food production by 50%, or import it, but with what currency?
Populism to quell popular discontent
This pay raise sounds nice, but it is a fraud. It is implemented without giving the private sector more freedom. And that, although the "president" may dislike the word, is populism, a political-psychological tactic to assuage the growing popular discontent due to the new "Special Period" .
Between 1993 and 1995 there was a lot of money in circulation in Cuba, without the necessary supply of goods and services. The peso’s loss of purchase value was so dramatic that Fidel Castro, in July 1993, legalized the circulation of the dollar, reopened farmers’ markets, and took other measures. I remember that for the newly legalized fula (dollar) one had to pay 150 pesos or more.
Given that experience, Diaz-Canel himself had refused to raise wages. He argued that there was no material counterbalance to assimilate an increase in the money supply. And now, for political reasons, he is putting into circulation billions of pesos in wages and pensions for almost three million people who do not produce consumer goods, all without the State having more funds to import food and goods, due to the crisis in Venezuela.
The proof that the regime is not going to grant greater economic freedom is that, while in Havana the wage increase was announced, in Holguin BismarRodríguez, one of the largest pork producers in Cuba, was sentenced to ten years in prison for his economic success.
In order to "avoid inflation", the Finance Ministry published the mandatory price list that is to govern the State and private sectors, yet another expression of its ignorance in economic matters, an ill suffered by many on the Island after so many years of Communism.
In general, the population in Cuba believes that putting a ceiling on prices is a good thing. False. Price caps cause the opposite effect: they aggravate shortages because they reduce supply, and prices rise on the underground market, and, eventually, on the official market as well.
A Shortsighted Decision
And it is logical. Producers, seeing their profits fall due to the price cap, to the point that they often do not even cover their costs, produce less, or do not produce, as a form of pressure, to get the caps lifted. Many will hide what is produced to sell it on the black market, but more expensive, as they must pass on the higher price of their supplies, equipment, raw materials, etc., and also compensate for the risk they run of receiving fines, or even prison time. That is, everyone loses, because the black market is the country’s main one.
This increase in the minimum wage to 400 CUP ($16.60) and the average salary to 1,067 CUP ($44.40), which has so pleased many, is, as they say in Spanish, "bread for today, but hunger for tomorrow."
If the private sector is not lent a helping hand, there will be more shortages, and high inflation, which will affect all consumers, but particularly those who earn minimum wages, and those on pensions. The common peso and the convertible peso be devalued. People will have a little more money, but it will be almost worthless, as they will be able to buy little with it, whether because there is nothing to buy, or because it is too expensive.
Worst of all here is that the new minimum wage, of $16.60 per month, is still below the level of extreme poverty established by the World Bank (WB). In 2015, the World Bank increased its daily earnings limit from $1.25 per day to $1.90 in its identification of extreme poverty. The Cuban minimum wage is below this dramatic threshold.
On a par with Sub-Saharan Africa
The overall average salary of 44.40 dollars is just around 1.90 dollars a day, and basic groceries cost almost double that amount, according to independent journalists. In terms of wages today, Cuba is on a par with Sub-Saharan Africa, but 61 years ago it ranked among the nations with the highest salaries in Latin America, and the world, according to the International Labor Organization (ILO).
The average salary of a Cuban industrial worker in 1958 was $130, and a dollar then amounted to almost nine dollars in 2019. That is, the Cuban worker’s grandfather, six decades ago, earned about $1,130 today, 25 times more than his blue-collar grandson who does the same things, even in the same factory as his grandfather.
Not to mention retirees on the island, who will continue to receive an average pension of ten dollars a month (242 pesos). The question for the "revolutionary" Raúl Castro: how can one live on ten dollars a month?
And, everything can get worse. If the purchasing power of the CUP peso is already very low, now, by increasing the money in circulation, it will fall even more and become a chavito, worthless money, with hardly any purchase value.
But, the general and his Military Junta want to buy time with this measure of the most barefaced populism. They hope that "negotiations" will dislodge Maduro from Miraflores, but leave real power in the hands of chavista military brass and civilians, and that Donald Trump will lose the elections in 2020.