Property Liberalization and Recovery of Idle Lands and Dilapidated Properties: A Necessary Step for Initiating a Recovery Process

Posted on May 30, 2012 by

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Antonio G. Rodiles

Introduction

The centralized and planned economy is closely linked to state ownership. For a process of economic decentralization to be successful, there must be a parallel process of decentralizing property.

The Cuban government has undertaken timid reforms with the objective of restarting the economy without making fundamental transformations. The lack of integrity, the rent seeking character, and the lack of transparency are the hallmarks of these timid reforms that are clearly only in pursuit of a transmutation of power. The facts are a demonstration that one year after their implementation the impact of these reforms has been very limited. Land has been delivered to farmers in usufruct as an emergency measure to end the chronic shortage of food.[1] The result, however, has not been as expected, among other reasons because many producers are wary of an offer to work land that does not belong to them and that can be withdrawn at any time. On the other hand, for years the Cuban State has preferred to import billions of dollars worth of agricultural products, and in particular American products, instead of providing greater incentives and free markets to domestic producers.

The law governing distribution of land in usufruct allows great discretion and equally great uncertainty, as we can see reflected in some of the articles of the governing statute, Decree Law 259 [1]:

ARTICLE 6: The area to be given to each person in usufruct, be it a natural or legal person, is determined according to the potential labor force, the resources for production, the type of agricultural production for which the land will be destined, and the agricultural production capacity of the soils.

ARTICLE 14: The termination of the usufruct granted to natural persons should be for the following reasons:
c) for ongoing breach of the production contract, previously determined by specialists;
f) for acts which would defeat the purpose for which the usufruct was granted;
h) revocation for reasons of public utility or social interest, expressly declared by resolution of the Minister of Agriculture or higher levels of government.

Subsequently, the Council of Ministers also approved the sale of houses and other measures related to housing properties [2]. These measures have been well below the actual needs of Cubans because in no case do they provide the ability to generate new housing stock, which is one of the most pressing problems facing Cuban society today. Also, they have recently rented some locations in a very poor state of repair to microbusinesses.

There are great similarities between the urban and rural scenarios in our country. Havana is not full of marabou weed, but there are thousands and thousands of dilapidated properties – many are complete ruins — and large areas of unoccupied land. The State alleges lack of resources to undertake restoration and construction of the housing stock and infrastructure, but these spaces constitute a wasted frozen capital that should be handed over to Cubans as soon as possible, for its fullest use. If we add to this the vacant land nationwide, we have a large number of urban and rural properties waiting to fulfill their social function.

The process of liberalizing property use and ownership should be initiated as soon as possible, not only for idle farmland but also for urban land and properties. It is essential to end the ambiguities with respect to the character of property, because this alone generates great inefficiency and corruption; property needs real owners. While the categories of owners in usufruct and tenancies may exist, there is no reason why that should be the basis for our economic structure. The existence of a legal framework that supports private property is a necessary condition for an economy that offers real opportunities to all participants.

This article first analyzes the different methods or liberalizing property ownership that were implemented in other countries, proposes an auction program that puts frozen resources at the service of Cubans, which would be extremely helpful right now, discusses the economic environment that must accompany these transformations, and offers some conclusions.

Foreign experiences in the liberalization of property ownership and their possible application in Cuba
A process of liberalization of property ownership undoubtedly touches highly sensitive fibers of the Cuban nation, inside and outside the island, and, therefore, facts and circumstances of the past and present must be carefully analyzed to achieve a broader consensus. Although it is necessary to undertake a thorough analysis of the issue of property related to State enterprises, in this paper we focus on addressing the case of idle lands and ruined properties.

In many countries, in recent decades, there have been processes of liberalization of property ownership, some with very encouraging results, while in others corruption, nepotism and patronage predominated. In the former Soviet Union, the process of liberalizing property ownership converted many members of the old government elite and dishonest individuals into new millionaires, creating great discontent and disillusionment among the population.
It is very important to understand the problems that have appeared in previous experiences and to evaluate the best options for our case. In the Eastern European countries, and in China and Vietnam, various mechanisms were applied; among the most popular were:

1) Restitution or compensation
2) Sale to the public
3) Sale to the employees
4) Sales en masse

As a first step it is essential to create institutions and rules to govern this complex process. To restart an economy in ruins, like ours, it is essential to guarantee a system of legitimate ownership. This will not be possible if a system of restitutions or compensations to the many owners who lost their properties due to unjust confiscations is not implemented in advance.

How did the process of claims function in the Eastern European countries?

“In East Germany two million claims were filed, cluttering up the courts for years and holding up thousands of construction projects and businesses because of the uncertainty of legal claims. Some restitutions occurred in the majority of the Central European countries, particularly of land and real estate, while restitutions for medium and large businesses were avoided.” [3]

In Hungary the law did not offer restitution, and primarily used compensation through government bonds that could be used to acquire shares in state enterprises as they were sold. [4]
Poland, for example, preferred compensation over restitution. Poles living abroad were eligible for restitution or compensation in the form of state bonds only if they adopted Polish citizenship and returned to Poland permanently to administer the reclaimed businesses and/or land. [5]

Each country had its own characteristics, and in our case it is very important to evaluate the great deficit in the housing stock and the majority of the population’s lack of capital to be able to participate in the purchase process. The issue is not only to liberalize property ownership, principally ruined and underutilized properties, but that this process truly yields a clear benefit and grows the economy of the country.

The experience of other countries tells us that these sales culminate in a short period, as people realize that this will be the only way to acquire properties relatively cheaply.

Let’s analyze each of these methods of privatization in more detail and look at how they could operate in the case of Cuba.

1) Restitution or compensation

The issue of restitutions in our country is controversial and unavoidable. For years there has been great controversy surrounding the claims and devolutions of the properties to owners whose ownership predated the year 1959. Gradually, some consensus is appearing, to shed light on a sensitive and delicate point.
We can separate these claims into two groups. The first group is those properties currently occupied by families, and the second is those properties that remain in the hands of the State.
As suggested by Professor Antonio Jorge:

“The right of permanent occupation for urban residential properties should be recognized in favor of the occupants or current residents. However, the former owners, as in the cases of other property, should be compensated” [6].
Teo A. Babun similarly agrees:
“Fortunately, most expatriate groups have recognized that the return of homes or residential properties is not feasible. The discussion can be restricted to non-residential properties. Looking beyond returning the properties, this simply means that any litigation would be limited to issues concerning the validity of the claims and the value of what was lost, and the compensation, if appropriate.” [7]

The economist Oscar Espinosa Chepe recommends:
“With respect to the return of property to former owners, we believe that the Cuban reality suggests different methods. First, in the case of dwellings, we are in favor of the mass granting of property, with all the responsibilities inherent in this, to those who are either the current lease holders or the people who enjoy the use of the property today without paying rent.

“With regards to the former owners, we agree that from the moral point of view the fairest approach would be to return these properties to their former owners, but given the time that has passed and the transformations in these properties, some of which no longer in exist, the best solution would be to pay these people, which could be done with bonds that could be used to purchase legal properties.” [8]

For his part, the economist Jorge Sanguinetty considers:
“The restoration of property rights in Cuba has two closely related aspects, restitution or compensation of old properties to their rightful owners and the creation of new properties. Both parts of the process represent the two poles of the recreation of the private sector of the economy, which would include the opening of new businesses and privatization of the state investments created by the revolutionary government, which were never private.
“This is a highly complex problem that ideally requires good prior preparation and a large administrative and executive capacity to permit rapid resolution of outstanding claims. If this problem is not resolved, the recovery of the Cuban economy could become significantly delayed because it would not have created the right environment to attract new investment to expand the productive capacities of the country and revive its economy.
“A group of properties that presents a special challenge is that of urban real estate, especially homes that were used for rental housing or housing direct for its owners that are now occupied by other families or individual tenants. It is obvious that the transition government cannot put all these people in the street at the time when it takes over an impoverished and indebted economy, and therefore one of the solutions that could be contemplated to recognize the property rights of prior owners is to provide instruments of debt, bonds or tax exemption certificates negotiable in the financial markets.” [9]

Compensations is a very useful method through which the government can make up for the damage to many original owners. Clearly, in our country, this method cannot be implemented without delays, given the serious economic constraints in which we live. But as the Cuban economy begins to open up there will be major opportunities to realize such compensations. However, there are methods such as exemption from taxes that could be effective in some cases, particularly where the investor is a former owner stripped of their property.

2) Sales to the public

Direct selling has two basic objectives. First, to increase State revenues, which currently are strongly depressed. Second, to immediately attract investors interested in jump-starting these underutilized assets, and bringing the know-how to do it.

It’s important to appreciate that Cubans living on the Island do not possess sufficient capital to buy property at current prices. Given that at the moment when sales begin there will be a lot on offer in an environment of scarce capital, prices should not reach very high levels, enabling many citizens to become owners of new spaces.
In this situation it is essential to contemplate the issue of corruption. In the former socialist block, foreigners and other buyers with suspect capital, such as corrupt officials, organized crime and new “men of business,” had the largest sums of money to participate in such sales.

Another important issue is the efficiency of the process, because the proceeds from the sales should never report more losses than gains to the government. The valuation agency created by the German government collected DM 50 billion through sales, and spent no less than DM 243 billion in the privatization process. [3] In that case the sales were heavily concentrated in businesses in the former East Germany.

3) Sales to employees

The sale of commercial space and services to employees at preferential prices is an option that is a priori attractive. However, it can create serious problems of corruption, especially when managers or executives are associated with some group in power that allowed them to obtain these personal benefits.
From a political standpoint this variant is popular among the population. But there are also some disadvantages, as the companies often have deficient management, given that the new conditions of a market economy differ radically from those of a centrally planned economy. The property rights may become diffuse and could be usurped by the directors.

In some countries, this was an administratively quick method of sale, but on the other hand the workers and directors blocked the process.

There are different possibilities, like that applied in Russia, where 20% of the shares were given to the directors, 40% to the employees, and the other 40% sold directly. [3]

4) Sales en masse

This method is implemented through the distribution of bonds or “vouchers,” for free or for a nominal price, which can be exchanged for shares of the companies or properties sold. This allows rapid sales, not only of medium but also large-sized businesses, and offers citizens the possibility to become new owners, which was widely accepted.
This form of release facilitates a major distribution of direct sales. However, due to the dispersed ownership, obstacles appeared in the direction and management of the companies.

In countries such as the Czechoslovakia investment funds were created, which were still closely linked to the State-owned banks making null, to a large extent, the final result of the process.
Proposal to release idle lands and ruined properties

Our proposal seeks to make available as soon as possible spaces that represent frozen capital and that have been reduced, for years, to mere ruins, tenements full of rubble, or vacant land covered with marabou weed. These properties should have Cubans as the main beneficiaries, principally those living on the Island, although clearly they should be part of the attraction for foreign investors. Their exploitation will allow many other sectors to receive a strong impetus from the market that would be generated.

The cornerstone of the proposal is to auction all the vacant lands, as well as dilapidated or underutilized urban properties. The auction process can be planned in three consecutive steps:

a) Sale to nationals living in the country
b) Sale to nationals not living in the country
c) Sale to foreigners

Note: This method ends up being a mix of mass and direct sales.
Let’s look at some of the practical procedures it will be necessary to define:
1) Create the appropriate committees, charged with organizing and executing this auction process.
2) Develop a clear definition of the properties to be auctioned.
3) Prepare a census of all the properties, tenements and land that may be subject to auction.
4) Publish the properties and lands with their characteristics and minimum prices.
5) Establish periods for each one of the three stages.
6) Establish a limit, for the number of properties to acquire, and their dimensions and values.
7) Publicize the date, as well as all the information related to the auctions. They will be hosted by municipalities and announced a minimum of 30 days in advance.
8) Offer a special price to all those who now hold lands under usufruct.
9) After the sale a database must be prepared with all the information regarding the sales and final price at auction. All this information should appear in physical copies as well as on the Internet.
10) The entities responsible must keep control of all the income derived from the sales and the use of these funds in their communities.

Once citizens have the title deed of the property in their possession, they can sell the property acquired if they wish. This will allow them to obtain some capital immediately, which can be reinvested or used at their convenience.
Compensation must be established for all those whose were deprived of their properties unjustly, and the most effective methods for this process must be considered, assessing the economic conditions of the country. This compensation, as suggested by some experts, could range from cash to the granting of bonds and shares.

Environment for the full operation of the process

The creation of an enabling economic environment is a key factor to ensure that the process of releasing property has the desired effect. A new system of property ownership does not, in itself, constitute a guarantee of success for such transformations. Other factors are needed to guarantee that the market mechanisms function efficiently. To mention some of them:

1) Legal framework

The first aspect that must be prioritized is the creation of a legal framework that guarantees full rights of ownership. It should create mechanisms for the quick transfer of property titles. Another aspect that should be given special attention is not to allow the process to become, in one way or another, a piñata used by influential groups, such as government officials, leaders of the Cuban Communist Party (PCC), or chiefs of the Cuban military apparatus.
Laws must also be established that guarantee a competitive market. It is important that the new entrepreneurs can fully develop the potential of the newly acquired properties.

2) Financial market

The creation of a financial market is an essential element for the development of a modern economy. It is important to create an agency charged with the sales process that displays each transaction in a transparent way, as well as the final destination of the funds received by the government.
It is necessary to begin with the granting of credits to new microenterprises. State companies should not provide soft credits, which hinder the growth of the incipient private sector. The use of soft credits could encourage alarming levels of inefficiency and corruption.

3) Infrastructure

The State must free up the issuance of licenses for manufacturing, and end its monopoly on the production of construction materials, which would ensure that the real estate sector would take off. It must end the monopoly on imports and exports and liberalize these sectors. This would allow a new market to be supplied with products lacking in the national market, materials which are indispensable to jump-start construction.
On the other hand, it is important to stress that this entire process must be undertaken with due respect for the norms of urban planning.

The liberalizing of these resources would be an initial step to begin to reverse the state of deterioration suffered by an immense number of buildings throughout the country. There is an urgent need to at least halt the advanced state of destruction of the national infrastructure. The resources acquired by the State in this sales process should be used immediately for this purpose.

4) Transparency

Transparency has become an essential element of contemporary societies. It is vital that citizens have full knowledge of and participation in a process of such transcendence as a change in the structure of ownership. Mechanisms should be created so that citizens have all the data on the properties and lands sold.
The use of new technologies is a recourse that can play a very important role in this transparency. Unlike 20 years ago, when there was no Internet, today it is possible to consult, from a private computer, all the data pertaining to governments and their institutions; this, without a doubt, greatly reduces the levels of corruption.

5) Tax system

A modern tax system is an essential element that guarantees not only that the State can receive the necessary resources to maintain its social obligations, but also that it will not put the brakes on the growth of the new entrepreneurial sector.

The taxes must be reasonable and easy to pay, and tax evasion must not become the norm. An interesting example of a tax system was implemented in Estonia after its separation from the former Soviet Union, when it adopted a uniform tax of 26%.

Conclusions

The cornerstone of any reform in our country should be the transition to a democracy and the reestablishment of all individual rights. The economic transformations should be directed to stimulate private initiative. It is essential to prevent small corporate groups from being able to exercise a monopoly on the Cuban market, which would accentuate the exhaustion and pessimism within Cuban society, risking a worsening of the grave social problems already facing us.
Every entrepreneur should be able to use the tools of a free market economy, otherwise the failure of the reforms is predestined. To think of a transformation in the style of China, in which political rights are of no importance, makes no sense in our country. Cuba should not be seen as a maquiladora – a country of off-shore factories employing low cost labor.

The economic transformations should be directed to create a new sector of micro, small, medium and large enterprises. It is unacceptable to continue to live in conditions or penury and ruin, when the country has the necessary potential to be a prosperous and thriving nation. The economy has to be immediately open to the productive sector and to make this happen the property ownership system needs to be fully implemented.

To ensure a greater distribution of wealth it is essential that Cubans hold their respective titles, which creates the possibility of granting credits among other benefits. In parallel, it is necessary to create a financing system that allows taking advantage of the process of liberalization. This, by itself, does not guarantee economic growth if the appropriate economic environment is not developed.

If Cubans do not have the opportunity to acquire these dilapidated properties, empty tenements and idle lands, we can expect that in a not-too-distant future they will be negotiated in a non-transparent way with large businesses without any bidding process. In this case we will see a vast majority of Cubans playing the role only of spectators, left completely outside the scheme of property ownership. Experiences elsewhere show that in these cases the bribery of state officials ends the legitimate yearnings of the population to possess some capital or property, to enter the new market reality, and this can lead directly to a failed transition.

On the other hand, the type of social dynamic that the current government is generating in the short, medium and long terms should be looked at with particular concern. The currently authorized forms of “self-employment” only allow Cubans to participate in marginal third-world-style activities such as street hawking, food preparation, kiosks selling schlock goods, and other micro-enterprises. With the exception of bed-and-breakfasts and small family restaurants – which do serve tourists, but at the margin – none of these activities link to any of the profit centers of the economy, nor are they supported by wholesale markets, and they do not have connections of any kind to global commerce, all of which remain in the hands of the State and, significantly, in the hands of the Revolutionary Armed Forces.

Furthermore, street vending and similar “professions” are an extension of the existing informal sector – i.e. black market – already overdeveloped as a survival strategy in our country. It is important to bet our future on well-developed fully established businesses that can support an entrepreneurial class and a broad tax base, rather than grow an army of tax evaders.

Thus, the current track is an extremely negative policy, designed to keep Cubans permanently at the margins of the country’s economy. Studies in other countries demonstrate the deleterious impacts of this type of economy.[10]
We should all be very aware that whatever path is followed at the current moment will generate the economic structure of our economy for years to come. We have the resources and the human capital to have a “first-world” economy, why shouldn’t we create one?

Bibliography
1) Decree Law 259. Official Gazette No. 024. 2008.
2) Decree Law 288. Extraordinary Official Gazette No. 035 of November 2, 2011.
3) Aslund, Anders. Building Capitalism. Cambridge University Press.
4) Property Compensation Law to take effect in Hungary, BNA International Business August, 1991.
5) Sariego, Jose M and Gutierrez, Nicolas J. Righting Wrongs Old Survey of Restitution Schemes for Possible Application for a Democratic Cuba to. April 2, 1989, p.1.
6) Jorge Antonio. Privatización, reconstrucción y desarrollo socioeconómico en la Cuba post-Castro (Privatization, reconstruction and economic development in post-Castro Cuba).
7) Babun, Teo A. Preliminary study of the Impact of the Privatization of State-owned Enterprises in Cuba.
8) Espinosa Chepe, Oscar. La situación actual de la economía cubana y la posible utilización de la experiencia eslovaca en el tránsito a una economía de mercado (The current situation of the Cuban economy and the possible use of the Slovak experience in the transition to a market economy).
9) Sanguinetty, Jorge. Cuba realidad y destino (Cuba reality and destiny). Editorial Universal.
10) Perez Calderon, Rebecca. Algunas consideraciones sobre el comercio informal en la Ciudad de México (Some thoughts on informal trade in Mexico City).