On Castro's Dual Currency Scheme (Scam)

Tuesday, January 21, 2014
Justin Rohrlich has a thoughtful article in Vice about his experience with Castro's dual currency system.

Here's an excerpt:

Millions of Cubans May Lose Their Life Savings This Year

"Fucking cops in Cuba are always busting everybody’s balls."

A man mutters this to me in perfect English as I walk down the once-elegant Calle 23 in downtown Havana. He is the very last customer waiting in a Kafkaesque line that wraps around the block and doubles back on itself twice. The afternoon is stiflingly hot. Two police officers are hassling a nearby teenager because he took off his T-shirt.

"But that’s why things here are so safe," the man continues, much louder this time. I’m confused until I realize another cop is standing behind me. He wandered over after spotting a Cuban nacional talking to me—an American gusano. "Very safe, very safe. You know, because the police do such a good job!"

The officer gives him a long, hard stare, then wanders away. I take my place at the end of the line next to my new buddy, who says his name is Yaniel.

Along with several hundred other Cubans, Yaniel and I are waiting to get into Coppelia, the iconic ice cream parlor created in 1966 by order of Fidel Castro and named for his then-secretary’s favorite ballet. Located across the street from the Habana Libre hotel, a one-time Hilton from which Fidel directed the revolution for three months in 1959, Coppelia has been called the "ultimate democratic ice cream emporium." But, as I quickly find out, that isn’t exactly true.

When the Cubans around me spot a foreign tourist standing with them in the endless queue, they’re quick to inform me that the line we're in is for people using Cuban Pesos—which is to say, most Cubans. As a woman in curlers and a tube top explains, people holding Convertible Pesos, the country’s other currency, aren’t forced to endure such Socialist indignities. Foreigners, like me, carry Convertible Pesos.

She then points to a tiny building surrounded by a well-kept patio and leafy trees offering respite from the blistering mid-summer sun. There is no line at this Coppelia stand and, sitting in the shade are several happy, relaxed-looking people, enjoying their ice cream.

This, in a nutshell, is what having two currencies has done to the already dysfunctional Cuban economy for the past 20 years. The good news is that the government is finally attempting to fix it. The bad news is that millions of Cubans could lose their life savings in the process [...]

In Cuba, economic decisions aren’t made based on supply and demand, and "the market" as Adam Smith knows it does not exist. Instead, reforms are made with the stroke of a pen, so the government could simply, say, change the exchange rate between the CUC and the CUP from 24-to-1 to 12-to-1. This would instantly halve the life savings of countless Cubans who’ve spent two decades socking away CUCs, to say nothing of the Zimbabwe-like inflation that could strike the economy after such a move.

Or, the government may just take everyone’s savings outright.

"My guess is that when the government does the reform, it will expropriate some part of the population’s wealth accumulated in CUCs," says economist Daron Acemoglu, co-author of Why Nations Fail.

Raúl Castro has declared that the transition will not hurt holders of either CUCs or CUPs. But the concept of protecting individual wealth has no place in Cuba—a fact specifically stated in the Cuban Communist Party's Lineamientos (Guidelines). And as Mauricio Claver-Carone, executive director of the right-leaning Cuba Democracy Advocates points out, the Cuban government could really use the money.

"The Castro regime seems to undertake these currency operations when it's suffering from a hard-currency crisis," he explains. "The anticipated currency swap is simply another episode in a long series of asset confiscations by the Castro regime."

Expropriations and nationalizations of private property have occurred repeatedly since the beginning of the Castro era. People leaving the island in the early days of post-Revolutionary Cuba were forced to give up their property and assets in addition to their rights as citizens. Those who stayed were soon relieved of 42 percent of their wealth in a top-down currency revaluation. In recent years, the CUC has been devalued in pursuit of stabilizing government debt, and hard currency accounts have been periodically frozen and restricted when it has suited the regime.

The economy of Cuba’s main benefactor, Venezuela, is thought by many economists to be in the midst of collapse. Just as the Soviet Union's was 20 years ago.

Read the whole thing here.