BACKWARD REFORM THROUGH PRICE CONTROLS

C O N F I D E N T I A L SECTION 01 OF 03 HAVANA 000790

SIPDIS

DEPT FOR WHA/CCA

E.O. 12958: DECL: 10/02/2018
TAGS: ECON EAGR PGOV PREL CU
SUBJECT: BACKWARD REFORM THROUGH PRICE CONTROLS

REF: A. HAVANA 752

B. HAVANA 593

Classified By: COM Jonathan Farrar for reasons 1.4 (b) and (d)

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SUMMARY
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1. (C) The Government of Cuba's (GOC) September 29 decision
to regulate prices and quantities in private farmers' markets
highlights the regime's instinct for control and stability
over flexibility and reform. If this new regulation becomes
more than a temporary measure, the price controls will reduce
the incentive for another new GOC initiative - permission for
private farmers and cooperatives to use idle land with the
goal of increasing domestic food production. While the new
rules are officially intended to put a stop to alleged price
gouging and hoarding, we expect this "emergency" measure to
exacerbate food shortages, drive supplies to the black
market, threaten the existence of the private markets, and
limit the ability of churches and other relief organizations
to purchase food and other supplies locally. End Summary.

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PRICE CONTROLS: A POPULAR (POPULIST) REFORM
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2. (SBU) This week's announcement represents the first time
since the GOC starting permitting private "supply and demand"
markets in 1994 that the government has regulated prices.
The GOC "provisionally" set maximum prices for 16 products
(three types of bananas, taro root, sweet potato, yucca,
three types of garlic, onion, tomato, cabbage, rice, and
three types of beans). According to the GOC, limits
represent the prices that existed before the hurricanes. The
GOC also set limits on the quantities that each person could
purchase for four categories of products (rice, beans, root
vegetables, and garlic). In addition, the Consumer
Protection agency provided a digital scale for each market so
that customers could compare the weight quoted by the vendors
and identify cheaters.


3. (C) The initial Cuban reaction to the price controls was,
not surprisingly, positive. As the monthly government
provided ration of food usually lasts only one week, Cubans
have to look elsewhere to feed their families for the
remainder of the month. State-run stores and markets provide
some cheaper goods, but private markets provide a better
quality and variety of goods at a slight premium. Following
the hurricanes, prices at the private markets rose
substantially for many goods (100 to 300 percent) due to the
limited availability of products, higher transportation costs
after a September 8 GOC increase in the price of fuel (Ref
A),and the more dubious actions of some opportunistic
suppliers and vendors. Even before the new regulation, the
GOC had unleashed its propaganda machine to blame the price
increases and shortages entirely on profiteering vendors and
speculating middlemen. In addition to price controls, the
GOC has promised swift prosecution of anyone caught stealing,
hoarding, or engaging in price gouging. These government
measures were initially well received by consumers who were
already dealing with the unexpected costs of recovering from
the hurricanes. It appears very little thought was given to
how these price controls would further affect supplies.

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SHORTAGES AND MORE SHORTAGES
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4. (SBU) Even before the hurricanes, shopping at the private
markets was never a predictable affair. The markets were
usually packed with vendors selling a variety of goods,
although the selection might change from week to week. One
day you may find an abundance of sweet potato but not see any
again for the next month. Most shoppers visit several
markets before they find all they are looking for. Those who
are able often purchase the less consistent products in bulk.
This phenomenon is even worse in the Fall, just after
hurricane season, when farmers are in between harvests.


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5. (SBU) Immediately after the most recent hurricanes, the
markets were filled with products like bananas that had
fallen from trees and would soon spoil. The official media
ran public service announcements on the health benefits and
options for cooking with avocados because they were so
abundant. Meanwhile, other products were quickly
disappearing. First tomatoes, eggs, and onions, then
cabbage, garlic, and fruits. By the time the GOC implemented
price controls, nearly half of the regulated products were no
longer available. Three days later, most markets are empty
and some are completely shut down.


6. (SBU) In order to streamline supply and limit the number
of markets to be controlled, the GOC closed some markets and
started directing trucks to other state-run markets as they
left farms and entered the cities. The private vendors have
refused to buy many of the products that make it to their
markets, complaining that they are unable to make a profit at
the new state-controlled prices. In just a few short days
after the announced price controls, many vendors are choosing
to stay home rather than take up their stalls to sell goods
at a loss. What few goods are available are sold in
state-run markets, while the future of private markets is at
risk. International media has compared this situation to the
1980's when the government put an end to free market farming,
although the GOC has denied this intention.


7. (SBU) One traditional outlet for past shortages has been
the black market. However, the GOC has called for extra
vigilance from every citizen to help stop those who are
"putting their own interests above the collective interests."
Our contacts have told us that the GOC campaign appears to
be working - for now. The official media has publicized
enough stories about police arresting vendors, middlemen, and
even consumers for illegal transactions that most Cubans are
wary of using even their most trusted sources for products
"por la izquierda". Those same contacts, however, admitted
that the black market will probably pick up again after a few
weeks. In the meantime, the previous shortages caused by the
hurricanes are compounded by shortages caused by the heavy
hand of the Cuban state. While most international media has
focused on shortages at the most popular markets in Havana,
civil society contacts report that shortages are much worse
in provinces hit hard by the hurricanes like Holguin and
Pinar del Rio.

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REFORMS - ONE STEP FORWARD, TWO STEPS BACK
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8. (SBU) One of the many ironies of the new GOC regulation
is that it seems to work against the stated goal of providing
more incentives for greater domestic production of food.
Post hurricanes Gustav and Ike, the GOC allegedly sped up
implementation of a new law permitting the delivery of idle
government land to private farmers, cooperatives, and state
corporations for farming and grazing, while maintaining
strict government control (Ref B). First published in July
and further explained in August, the GOC began accepting
applications for this initiative on September 17. According
to official statistics, only 45 percent (7.4 million acres)
of Cuba's agricultural land is currently cultivated. The GOC
claims that 19 percent (3 million acres) is idle and 36
percent (5.9 million acres) are "natural pastures". (Note:
Most analysts consider the natural pastures, where grass or
other vegetation grows naturally, as idle land. Thus, at
least 55 percent of the agricultural land is truly idle.
There is no estimate available for how much of the officially
cultivated land is actually under-cultivated. End Note.)


9. (SBU) According to official sources, the GOC received
over 16,000 applications for 509,000 acres (17 percent of all
idle land) after the first three days. One of the benefits
for the successful applicants is that once they cultivate the
land and meet their government quotas (approximately 90
percent of their output at state-determined prices) they can
sell the remaining products in the local markets. Long-term
price controls at the private markets reduce the incentive to
maximize production or even to apply for the idle land in the
first place. In addition, new reports of GOC officials
directing private farmers to sell to the state markets rather

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than the better paying private markets will further
discourage food production.

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PUTTING A DAMPER ON RELIEF
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10. (C) Another side effect of the post-hurricane shortages
and regulations is the difficulty churches and other relief
organizations are having as they attempt to purchase food and
supplies locally. The U.S.-based non-governmental
organization (NGO) ACCESSO reported that Cuban NGO Caritas
has explained the challenges in purchasing relief supplies
locally (NOTE: On October 2, Caritas publicly asked the GOC
for "genuine collaboration" with relief agencies for the
delivery of post-hurricane assistance. END NOTE) A local
contact with the Baptist Church told us that because of
limits on how much food each person can purchase they have to
travel from store to store to gather their supplies and are
worried that their purchasers could be arrested as
speculators. There is no exception for relief organizations.
And those are the sanctioned organizations. Other groups,
associated with dissidents, are banned from providing any
kind of post-hurricane assistance.

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COMMENT
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11. (C) Some analysts saw the September 17 commencement of
the delivery of land as a sign that the hurricanes would
force Raul Castro's government to speed up its economic
reforms. However, strict market regulation, a crackdown on
the black market, emphasis on government control, and an
appeal for more hard work and discipline better characterize
the regime's instinctive reaction to the devastation caused
by hurricanes Gustav and Ike. While initially popular, the
quick market reaction that resulted in further food shortages
may cause many to think twice about this week's government
intervention. Fidel's latest "Reflection" article on October
3 called for cutting consumption of gasoline and electricity.
Stay tuned for further shortages.
FARRAR