Economic Transformations, Property Rights, and Cuba’s Current Constitution

Posted on May 16, 2011 by

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May 16, 2011
Antonio G. Rodiles

Introduction

The Sixth Congress of the Cuban Communist Party just concluded, leaving a trail of questions to be clarified. Most of the televised debates turned into semantic discussions, while a few dealt with practical mechanisms to achieve stated objectives. Listening to the speeches, which at some moments were limited exclusively to mentioning desires, I had the impression that they referred to the construction of some kind of Frankenstein, full of patches, fixes and half-measures, and not to a socio-economic system of in the 21st century. The Congress definitely fell far short of the expectations generated by the government itself.

It was surprising to observe that issues of vital importance, such as the international context, the flow of information and knowledge, Cuba’s inclusion in the global economy, internet use in our country, the role of Cubans from the diaspora in the future of the country, were completely ignored. The issue of the legal framework, which must support any economic transformation, was another of the notable absentees. The phrase “property rights” was never mentioned, nor was the immediate need to make transparent the “process of privatization” which is implicit in the economic plan.

For years in our country a process of privatization has been occurring which falls principally on specific corporate groups. These groups operate under a market system and sell their products and services in hard currency. While they lack ownership titles, they enjoy broad autonomy. However, Cuban citizens lack necessary information about these corporations and their economic dynamics. It is very important to note that in creating these corporate groups, both national and joint ventures, political loyalties have played an essential role, along with ties of family and friendship.

I think, as a first step, we have to put all these issues on the table in order to understand and discuss in great depth this moment in which we are living as a nation. Any transformation process must be undertaken with the greatest transparency and social consensus.

In this article I address the issues of property rights, privatization and the legal framework that must support transformations in the short, medium and long term. I compare the existing Constitution with the Economic and Social Policy Guidelines for the Party and the Revolution (“Guidelines”), dated April 2011 and publicly released in May of that year, in advance of the Sixth Party Congress. The 41-page Guidelines contain 313 numbered points addressing health, education, sports, culture, agriculture, industry, tourism, transport, housing and other issues.

At the end of this paper, I also look at the experiences of Vietnam, China and the former Soviet Union, and finally I offer some comments and conclusions.

Property Rights, the Constitution and the Guidelines

The Universal Declaration of Human Rights[1], to which Cuba is a signatory, speaks of property rights as a basic human right. The statement reads:

Article 17.1: Everyone has the right to own property alone as well as in association with others.
We must not forget that when we speak of property rights this implies:
1) Control of the use of the property.
2) The right to any benefit from the property, including rent.
3) The right to transfer or sell the property.
4) The right to exclude others from the use of the property.

In the case of the Cuban Constitution property rights are mentioned, but with clearly defined limitations subordinate to the socialist character.

After the fall of the Berlin Wall in the 1990s, the exact meaning of the term “socialism” was no longer clear. Traditionally, socialism is understood as: a system with a centralized and planned economy in which the State has ownership of the means of production and the common goods. In socialism “private” property has a meaning distinct from that accepted in liberal democracies, because the “owners” cannot exercise all the prerogatives mentioned above.

Due to all the changes that have taken place in our country in the last two decades, and the evident contradictions between the traditional definition of socialism and the current situation, we must ask ourselves: What does the current Cuban government mean by “socialism”? It is important to remember that it is this core concept of the Constitution in force since 2002.

The Constitution of the Republic of Cuba [2] states:

ARTICLE 14. In the Republic of Cuba rules the socialist system of economy based on the people’s socialist ownership of the fundamental means of production and on the abolition of the exploitation of man by man.
In Cuba also rules the principle of socialist distribution of “from each according to his capacity, to each according to his work.” The law establishes the provisions which guarantee the effective fulfillment of this principle.

ARTICLE 15. Socialist state property, which is the property of the entire people, comprises:
a) the lands that do not belong to small farmers or to cooperatives formed by them, the subsoil, mines, mineral, plant and animal resources in the Republic’s maritime economic area, forests, waters and means of communications;
b) the sugar mills, factories, chief means of transportation and all those enterprises, banks and facilities that have been nationalized and expropriated from the imperialist, landholders and bourgeoisie, as well as the factories, enterprises and economic facilities and scientific, social, cultural and sports centers built, fostered or purchased by the state and those to be built, fostered or purchased by the state in the future.
Property ownership may not be transferred to natural persons or legal entities, save for exceptional cases in which the partial or total transfer of an economic objective is carried out for the development of the country and does not affect the political, social and economic foundations of the state, prior to approval by the Council of Ministers or its Executive Committee.

The transfer of other property rights to state enterprises and other entities authorized to fulfill this objective will be prescribed by law.

ARTICLE 24. The state recognizes the right of citizens to inherit legal title to a place of residence and to other personal goods and chattels.

The land and other goods linked to production in the small farmers’ property may be inherited by and only be awarded to those heirs who work the land, save exceptions and as prescribed by law.
The law prescribes the cases, conditions and ways under which the goods of cooperative ownership may by inheritance.

ARTICLE 25. The expropriation of property for reasons of public benefit or social interest and with due compensation is authorized. The law establishes the method for the expropriation and the bases on which the need for and usefulness of this action is to be determined, as well as the form of compensation, taking into account the interest and the economic and social needs of the person whose property has been expropriated.

In the Guidelines [3], the issue of private enterprise and properties is addressed as follows:
General Guidelines section

1. The socialist planning system will continue to be the main national management tool of the national economy. Its methodology and organization and control must be modified. Economic planning will influence on the market and take into account its characteristics.

2. The management model recognizes and encourages socialist State-owned companies – the main national economic modality – as well as the foreign investment forms described in the law (e.g., joint ventures and international association contracts), cooperatives, small farming, usufruct, franchisement, self-employment and other economic forms that may altogether contribute to increased efficiency.

3. In the forms of non-State management, the concentration of property in the hands of any natural or legal person shall not be allowed.
Section on Cooperatives

25. Grade 1 cooperatives shall be established as a socialist form of joint ownership in various sectors. A cooperative is a business organization that owns its estate and represents a distinct legal person. Its members are individuals who contribute assets or labor and its purpose is to supply useful goods and services to society and its costs are covered with its own income.

26. The legal instrument that regulates the cooperatives must make sure that this organization, as form of social property, is not sold or otherwise assigned in ownership to any other cooperative or any non-State organization or any natural person.

27. A cooperative maintains contractual relations with other cooperatives, companies, State-funded entities and other non-State organizations. After satisfying its commitment with the State, the cooperative may pursue sales operations free from intermediaries and in accordance with the business activity it is authorized to perform.

28. Subject to compliance with the appropriate laws and after observance of its tax and contribution obligations, each cooperative determines the income payable to its employees and the distribution of its profits.

29. Grade 2 cooperatives shall be formed and the partners of which shall be Grade 1 cooperatives. A Grade 2 Cooperative shall represent a separate legal person that owns assets. The purpose of this cooperative is to pursue supplementary related activities or conduct operations that add value to the goods and services of its partners (such as production, service and marketing operations) or carry out joint sales and purchases for greater efficiency.

In the points above it is necessary to clarify certain aspects such as:

a) Under what criteria would the formation of new company be permitted and who would be in charge of the selection and decision process?

b) There is a strong contradiction between maintaining central planning and permitting the development of the market. What will be the practical mechanisms to implement central planning without dismantling market dynamics? Do such mechanisms exist?

c) Will a system of consultation be created, citizen directed, to review contracts with domestic and foreign business groups?

d) Is it contemplated to include investments from Cubans living outside the island among the possible investments?

e) Will the issue of confiscations from Cubans who were not corrupt and who were not large landowners — who obtained their possessions and property as their fruit of their own or their family’s labor — be addressed?

f) How will the criteria forbidding the accumulation of property be applied? Are joint venture or national corporate national groups such as Cimex, Habaguanex, Cubatabaco, Gaviota, Cupet, among others, contemplated within the restrictions regarding the accumulation of property and capital?

The constitution defines the economic dynamic in the following terms:

Article 16: The state organizes, directs and controls the economic life of the nation according to a plan that guarantees the programmed development of the country, with the purpose of strengthening the socialist system, of increasingly satisfying the material and cultural needs of society and of citizens, of promoting the flourishing of human beings and their integrity, and of serving the progress and security of the country.
The workers of all branches of the economy and of the other spheres of social life have an active and conscious participation in the elaboration and execution of the production and development plans.

Article 17: The state directly administers the goods that make up the socialist property of the entire people’s, or may create and organize enterprises and entities to administer them, whose structure, powers, functions and the system of their relations are prescribed by law.

These enterprises and entities only answer for their debts through their financial resources, within the limits prescribed by law. The state does not answer for debts incurred by the enterprises, entities and other legal bodies, and neither do these answer for those incurred by the state.

Meanwhile in the Guidelines we read:

5. Planning shall include State-owned companies, the Government funded entities, the international economic associations, and also regulate other applicable forms of non-State management. Planning shall be more objective at all levels. The new planning methods will modify economic control methods. Territorial planning shall take into consideration these transformations.

8. The increase in the powers vested upon entity managers shall be associated with their higher responsibility for efficiency, effectiveness and for their control of labor utilization, financial and material resources, coupled with the requirement on the executives to account for their decisions, actions and omissions that lead to economic damages.
Section on the Business Sector

14. The internal finances of companies shall not be intervened by any unrelated entity. This intervention shall only occur in compliance with legally established procedures.

16. Each enterprise shall control and manage its working capital and capital expenditures within the limits allowed by the plan.

17. The State-run companies and cooperatives that steadily post losses and insufficient working capital in their balance sheets or are unable to meet their obligations with their assets, or whose financial audits render negative results, shall be subject to liquidation or converted to any other form of non-State organization in compliance with the regulations on this matter.

19. Subject to observance of their commitments with the State and compliance with the existing requirements, the companies may use their after-tax profits to create funds for development, investments and incentive payments to their workers.

21. Each company and cooperative shall pay to the Municipal Administration Council with jurisdiction over its business operations, a territorial tax, that will be set centrally according to the specific characteristics of each municipality, as a contribution to local development.

Section on Cooperatives

25. Grade 1 cooperatives shall be established as a socialist form of joint ownership in various sectors. A cooperative is a business organization that owns its estate and represents a distinct legal person. Its members are individuals who contribute assets or labor and its purpose is to supply useful goods and services to society and its costs are covered with its own income.

26. The legal instrument that regulates the cooperatives must make sure that this organization, as form of social property, is not sold or otherwise assigned in ownership to any other cooperative or any non-State organization or any natural person.

27. A cooperative maintains contractual relations with other cooperatives, companies, State-funded entities and other non-State organizations. After satisfying its commitment with the State, the cooperative may pursue sales operations free from intermediaries and in accordance with the business activity it is authorized to perform.

28. Subject to compliance with the appropriate laws and after observance of its tax and contribution obligations, each cooperative determines the income payable to its employees and the distribution of its profits.

29. Grade 2 cooperatives shall be formed and the partners of which shall be Grade 1 cooperatives. A Grade 2 Cooperative shall represent a separate legal person that owns assets. The purpose of this cooperative is to pursue supplementary related activities or conduct operations that add value to the goods and services of its partners (such as production, service and marketing operations) or carry out joint sales and purchases for greater efficiency.

Territories

35. The Provincial and Municipal Administration Councils will discharge State duties and will not intervene directly in the management of any business.

36. The state functions exercised by provincial and municipal sectorial offices will be defined in relation to the functions discharged by the Central Government Bodies, and the applicable scopes of competence, links, operating rules and working methodologies of each authority will de identified.

37. The implementation of local projects by Municipal Administration Councils, in particular for food production, is a work strategy for municipal food self-reliance. Mini-industries and service centers must be promoted on the principle of financial sustainability as a key feature that must be harmoniously consistent with both the municipal goals and the objectives of the national economic plan. Upon their completion, the local projects will be managed by organizations based in the municipality.

Within the articles and the policy guidelines quoted above are apparent contradictions. For one thing, it becomes apparent that there is a need to end the process of centralization and nationalization that has produced high indicators of inefficiency in the Cuban economy. But in parallel, due to the desire of the nation’s leadership to maintain economic control, affirm that there could be a new form of central planning adapted to the new context. That is, the Guidelines speak of the need to take the market into account, but at the same time reject it. This ambiguity will create discretion in applying the law, becoming one more stimulus for corruption.

Any modern economy must have a basis in clear and transparent rules, which encourage the entrepreneurial spirit in society, and not on arbitrariness. This thesis, which is very simple, is the basis of any modern functioning society. It is essential that an atmosphere of trust and confidence exists for both domestic and foreign investments. As well explained by the Peruvian economist Hernando de Soto, there is a strong correlation between the clear establishment and enforcement of property rights, the rule of law, and efficiency in the functioning of free markets [4].
Unfortunately, in our country only select business groups, many of them associated with the Revolutionary Armed Forces (FAR) and the Ministry of the Interior (MININT), enjoy the benefits of operating under a market economy, creating monopolies that control the entire Cuban market.

In contrast, the ordinary Cuban is allowed to open only small cafes, tiny businesses almost medieval and artisan in nature, stalls selling all sorts of trinkets, to which the regime applies exorbitant taxes and a series of limitations that don’t permit any growth. In these stunted freedoms, professional services – a sector vital to any modern economy – remain excluded.

Experiences of Vietnam, China and the former Soviet Union

As a point of comparison it is very important to analyze the processes occurring in these countries with similar experiences, as they can offer us invaluable lessons.

Although the core of the changes in these countries was the liberalization of the economy coupled with the emergence of new forms of property, it is clear that the processes of privatization have been problematic. Nepotism, bribery, the lack of job guarantees for workers, violations of environmental rules, among other ills, have been common factors in the transformation processes of these countries.

At the starting point for the economic changes in these nations, collective and state property took priority. In the case of Vietnam, after reunification in 1976, the government gave itself the task of eliminating all forms of private property, an approach it corrected after facing a profound crisis. One of the first steps in the later economic reforms was to break the state monopoly on property. This occurred in 1986 when restaurants and shops were allowed to open. As early as 1995, in the admission document to the World Trade Organization, we can read:
“State-owned, collective, private individual, private capitalist, state capitalist and foreign investment property are all equal before the law. All businesses operating legally in the territory of Vietnams and/or under its laws are recognized and protected under its laws, including protection against nationalizations.” [5]
In the case of China, the privatizations began in 1979 when the collective communes were replaced by family farms.[6]

Local businesses also appeared, managed by the component governments themselves. Within the latter there were different categories:
1) Private but registered as collectives, popularly called “using the red cap.”
2) Those which were authorized but had to pay a bonus to the authorities at the end of each year.
3) Those over which the authorities exercised fierce control.

The use of soft credits on the part of state-owned enterprises has been one of the common problems of the Asian giant. It’s been said that in socialism with Chinese “characteristics,” the “characteristics” have worked but not the socialism.

The case of the former Soviet Union and its controversial process of privatization also offers us an instructive example.[6] As it began the transformations toward a free market, one of the primary problems was the almost complete absence of a definition of property rights. As a consequence, there were no clear rules on the use of property and businesses, resulting in high levels of corruption. In other cases, disputes between various actors trying to make use of the same property resulted in no one’s being able to take advantage of it, and left the involved companies directionless.

At the moment of privatizations there were various protagonists involved in the process:
1) Workers
2) Managers
3) Ministries
4) Local Governments
5) Central Government

However the managers and bureaucrats within the ministries exercised a strong influence through the strategic management of the companies and were able to count on networks of connections that allowed them to take control over production and marketing.

As the process of decentralization advanced the ministries could no longer dictate the policies the companies must follow. The planned economy, the fulfillment of the plans and the assignment of resources collapsed, while the sale of products in the free market was gaining ground. The managers gained autonomy and control over what they produced, and at what prices and to whom to sell their products, the latter based principally on their personal relationships.
On the other hand, the ministries tried to maintain control over imports and exports through the issuing of licenses. This new economic design was in the hands of the Party nomenklatura, military elites, and the new oligarchs who competed for power with the old elites.

The State tried to maintain control of the most profitable sectors, only accepting privatization when it believed it would exercise control over the companies. Local governments gained power in the management of their pieces of land, exercising control over vital public services such as water and electricity, among others, which they used to exert a strong influence over firms and they began to demand their share, reaping huge benefits from the process of privatization.

One of the strategies, taking advantage of the lack of transparency, was the creation of parallel firms or cooperatives, even within a single firm. Such private firms or cooperatives bought the production at low or controlled prices and sold it according to supply and demand. This allowed the managers to garner personal earnings, and in turn to provide wage increases for the workers.

All these maneuvers were possible because of the laxity of the laws and because the local authorities colluded with the central government. The managers received funds from other businesses or commercial banks with which they could buy their own companies at low prices. In this modality, known as “spontaneous privatization,” consistent elements included bribery, the use of political and economic alliances, the use of public funds and the returning the benefits to many Party cadres.

In some cases this process was hampered by conflicts of interest between different actors. Conflicts between local governments and managers were common, because the former saw the possibility of managing these businesses from the State and taking their own profits.

Another very popular form of privatization was through the use of bonds, as conceived by the American economist Milton Friedman. This method was more common in the case of small enterprises [7] and was also known as mass privatization. The method consisted in issuing check to the population for the value of the companies; it was a quick process and achieved a more equitable distribution. However, the problem with this method was that it was impractical for the future management of the companies, because the property was dispersed and very difficult to govern. With this method it was initially possible not to divide the companies among small groups, but in some cases certain tricks to hold onto the companies were used later. Among these was to bankrupt the companies, so as to be able to buy the stock at very low prices.

Other methods of privatization were:

1) Open sales
2) Restitution
3) Settlement

All these methods had their own advantages and disadvantages corresponding to the conditions that characterized each country. But the key lesson is that whatever method is applied it must take into account a knowledge of the specific conditions of each place and there must be a basic consensus for its application. A complex process should never become a piñata that ends with the discredit of the political system and institutions.

Comments and Conclusions

As can be seen, many of the proposals contained in the Guidelines are similar to the dynamics discussed above. Some of them operate unofficially, that is they are quasi-legal, while others operate “illegally.” Thus, we have more than a few problems of corruption which have touched the senior management of companies.
As Cuban citizens, we do not have mechanisms that allow us to use our own resources, or to manage the finances of firms or companies. Despite the recently created position of Controller General of the Republic, citizens do not have access to the reports and audits of this government agency.

Specific cases remain murky and demonstrate to us the urgency of undertaking real changes that guarantee the transparent use of our resources. Notable examples include: General Acevedo, who was in charge of Civil aviation and who was charged with selling businesses cargo space on commercial airlines and pocketing the money; former Minister of the Food Industry, Alejandro Roca Iglesias, sentenced to 15 years for corruption; the Chilean businessman Max Marambio, sentenced in absentia to 20 years in prison for corruption associated with his Rio Zaza company; Pedro Alvarez, former head of the state food company Alimport who, on being investigated for corruption, sought refuge in the United States; Manuel Garcia of the cigar company Habanos, jailed for large-scale graft; and the wholesale arrest of the directors of the Moa nickel plant, among many others.

I think it is opportune and necessary to point out the mistake we make when we speak of subsidies on the part of the Cuban State. While there is no clear definition of the concept of property, the Cuban State must equitably share all of its resources. It would be an invitation to many — starting with president Raul Castro who, on multiple occasions, has referred to the State as an abstract entity, generator and provider of goods and wealth, followed by vice president Ramiro Valdes, who speaks of the Daddy State as one might speak of Santa Claus, and continue through several lower level functionaries who repeat manufactured phrases – to understand the first socialist Constitution in our country, which established the whole people as the ultimate owner of all goods and property.

If the Cuban State, with Raul Castro at the head, wants to be done with the so-called egalitarianism, it should take the first step to establish property rights in the Constitution, otherwise we will continue with a system that supports the collective use of wealth but which, in the end, allows its use and enjoyment by only a few.

I would like to pose some questions to which — as a citizen of this country with all the rights granted to me under the Constitution – I do not have answers and which show the ambiguity of socialist property.

• Who knows the real budgets of the Revolutionary Armed Forces (FAR), the Ministry of the Interior (MININT) and their groups of companies?
• What citizen can review the investments and earning of the Office of the Historian of the City or of the Cuban Export-Import Corporation (CIMEX)?
• Where can one review the finances of the telecommunications company ETECSA?
• Where are the data about the income received by Immigration from the exorbitant and unjust costs imposed on citizens?
• Does anyone know the location of all gold and silver objects bought from citizens – at terribly low prices – or what the proceeds from their sale are invested in?
• How much will we invest in golf courses and now will their profits be managed?

These questions and many others are in clear and urgent need of answers. Legal mechanisms also need to be created that allow us as citizens to establish legal responsibilities, from the President of the Republic to the simple public official, when there is a mishandling of our assets and resources.
In a society where there are no clearly defined property rights, the necessary transparency to manage the society’s wealth and resources is lacking. If we want to end the egalitarianism and undertake a process of privatization in any one of its variants as a necessary measure to emerge from the crisis and stimulate our economy, this must be accomplished with total transparency and within the appropriate legal framework and with the participation and consensus of Cubans.

It is also necessary to be able to examine and review, retroactively, all existing contracts, otherwise corruption will continue to grow to unimaginable levels.

The Constitution must be changed, along with the corresponding laws consistent with the real interests of the nation and the global context in which we live. The constitutional structure and respect for property rights, as well as the legal framework to support and encourage the establishment of private enterprise are necessary and indispensable elements to emerge from the profound crisis that assails us. Any transformation that takes as a priority interests other than the immediate improvement of the overall situation of the nation, will be completely insufficient and only postpone the changes which, in one form or another, must occur.

References:
1) Universal Declaration of Human Rights – English version from un.org
2) Constitución de la República de Cuba – English version from http://www.cubaverdad.net/cuban_constitution_english.htm
3) Lineamientos de la política económica y social del partido y la revolución – English version from www.cubaminrex.cu: THE GUIDELINES OF THE ECONOMIC AND SOCIAL POLICY OF THE PARTY AND THE REVOLUTION, April 18, 2011
4) De Soto, Hernando. El otro sendero.
5) WTO, Vietnam.
6) G. Rodiles, Antonio. Una rápida Mirada a las transformaciones en China.
7) Aslum, Anders. Building Capitalism. Cambridge, University Press.