Monetary duality. Situation in which two currencies coexist and legally share, to some extent, the functions of money in the national economy. That is, they are used as a means of payment, a measure of value (expression of the prices of goods and services that are marketed, debts and records of economic values) and as a means of hoarding (bank deposits and cash ).
Generally, the appearance of monetary duality is associated with situations that severely affect the production system and prevent the national currency from preserving the functions of money.
Summary
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- 1 Emergence of monetary duality
- 2 Characteristics of monetary duality in Cuba
- 3 Main economic problems faced
- 4 Monetary duality and purchasing power
- 5 Moving towards monetary unification
- 6 Bibliography
Emergence of monetary duality
The disappearance of the socialist camp meant an extraordinary impact for the Cuban economy. Between 1989 and 1993 the Gross Domestic Product (GDP) suffered a fall of the order of 35%; More than 80% of foreign trade was lost, fuel consumption fell by more than 50%, and external sources of financing disappeared almost entirely.
The United States government tightened the blockade and approved two laws aimed at hindering Cuba’s financial and commercial reintegration process in the new circumstances of the international economy: The Torricelly Law (1992) and the Helms-Burton Law (1996).
Despite the abrupt drop in the country’s economic activity, employment and wages were preserved, with the intention of reducing the social cost of the crisis. However, it was impossible to avoid the excessive growth of the amount of money in the hands of the population between the years 1990 and 1993 , at a time when the supply of goods and services contracted as a result of the aforementioned economic adversities.
This led to significant growth in prices and the deterioration of the functions of the national currency in an environment where the informal economy proliferated, governed by the laws of supply and demand . This situation generated a significant loss of purchasing power of the national currency and an environment of economic instability. The dollar begins to be used on a large scale for transactions between the population, as a consequence of the increasing presence of tourists in the country and the entry of remittances through different channels.
At this juncture, a partial dollarization of the Cuban economy was unavoidable , a name that places the type of monetary duality prevailing in that period in its proper measure.
Starting in 1993, the possession of foreign currency was decriminalized, a decision that was complemented by other measures such as the authorization to open savings accounts in dollars; the implementation of a network of money exchange offices (CADECA) throughout the country that enables the internal convertibility of the national currency for the population ; and the establishment of a retail network in dollars, with the function of raising foreign exchange.
In this way, a situation that has been increasing since the beginning of the special period is made official : the informal possession and circulation of the dollar within the monetary circuit of the population; and the first important step in the reorganization of the national monetary environment was carried out, seeking to officially incorporate these monetary flows into the country’s economy.
Characteristics of monetary duality in Cuba
Despite all of the above, the town continued to receive essential services, including health and education free of charge. The operation of the social assistance system was guaranteed according to the possibilities. Basic services, such as electricity, water and gas, did not suffer significant changes in their prices and continued to be charged in national currency . This policy was also applied for a group of basic food products that continued to be distributed at highly subsidized prices.
In the business sector it was necessary to introduce new forms of economic management, which led to the division of the economy into two large groups:
- The one characterized by its operations in dollars and an expansion of foreign investment. Numerous joint ventures , representations of foreign firms and even Cuban mercantile companies that worked under different self-financing schemes in foreign currency emerged .
- The one made up of the rest of the companies and budgeted units of the national economy that continued to operate in Cuban pesos and that depended on centralized foreign currency allocations.
All this in a scenario that was distinguished by its marked decentralization and the incorporation of certain market elements , without the necessary technical preparation and institutional maturity to incorporate them into our planning methods and mechanisms.
Main economic problems faced
The loss of purchasing power of wages largely eroded their mobilizing capacity of the productive forces , ceasing to be the fundamental mechanism for the distribution of goods and services created by society , deteriorating the direct relationship between the standard of living and the results of the work .
New forms of income appeared, including illegal ones , which accentuated inequalities. In these new circumstances, those who receive significant income in dollars or national currency that does not come from wages, have equal access to highly subsidized products and services, which gives them the harmful privilege of excessive purchasing power and is socially and economically harmful.
In a number of citizens a pernicious concept was generated: to fight to obtain all the material means that are possible for him and his family , regardless of their contribution to society, without establishing in their mind any link between their duty to contribute to the society and their right to receive. The latter is particularly harmful in cases where authority over material wealth is held, since it becomes a primary factor in the exercise of corruption and fraud.
Productive entities that departed from the corporate purpose for which they had been created , stimulated by the possibility of obtaining income in freely convertible currency.
Productive entities that generated an excessive tendency to import and insufficient financial management and contractual negotiation in the conception of commercial operations abroad. All this limited the availability of foreign exchange and the ability to articulate policies in which the national interest prevailed.
The non-existence of an official exchange rate that objectively reflects the real value of our national currency and allowed its internal convertibility, prevented a rational integration of the state sector of the economy in itself, and as a whole with the rest of the world.
Monetary duality and purchasing power
It is common that the cause of the low purchasing power of wages is attributed to the double monetary circulation and the CADECA exchange rate, a perception that stimulates the growing popular demand to eliminate monetary duality, as a magic and definitive solution to this problem. In this sense, a comprehensive understanding of the current situation is required, as an indispensable premise to stimulate participation, the conscious participation of all in the solution – which will not be quick and easy – of this and other challenges that we must face.
The fundamental causes that propitiate the loss of purchasing power of wages , and weaken its role as a fundamental source for the distribution of goods and services created by society, are linked to the organization, efficiency, and level of labor productivity in the economy. , as well as the effectiveness of the distributive and redistributive processes of the wealth created.
The elimination of monetary duality will contribute to the best measurement of economic efficiency and will be a positive factor in promoting the economic development of the country, but it is not a measure that creates new wealth in itself. It is not an end. It’s a medium.
In order to avoid an unmanageable monetary imbalance, there must be a certain balance between salary and other payments that the State makes to the population and the income that comes to people from abroad, on the one hand, and the products and services that they are offered by state entities, on the other.
All of the above allows us to conclude that the elimination of monetary duality cannot be achieved by substituting the Cuban peso for the convertible peso at the one-for-one rate. This will be achieved when the Cuban peso is the only currency that circulates in our country with a single exchange rate, but the latter and the purchasing power of that single currency (the Cuban peso) does not depend or depend on an administrative decision, but on the level of strengthening and efficiency of our economy.
Moving towards monetary unification
- Eleven years after the decriminalization of currency holdings, the circulation of the Cuban peso and the US dollar predominated in our monetary environment. The convertible peso, introduced in 1994 with an exchange rate against the dollar of one by one, was used in a very limited way by our population.
- In July of 2003 the monetary system Cuba underwent a major transformation Going convertible pesos transactions between companies of the state and its dollar accounts. This eliminated the circulation of the dollar among Cuban state companies.
- In October of 2004 the collection was established in convertible pesos from sales of goods and services by the retail segment of the network that previously operated in dollars, and a tax of 10% was applied to change dollars. This was applied in response to the actions taken by the US government to intensify the blockade imposed on our country, trying to prevent foreign banks by threats and economic sanctions, so that our country could deposit abroad the dollars collected by Cuban establishments …
- In the first four-month period of 2005 , national currencies were revalued and the de-dollarization process was reinforced, which was extended to people’s deposits in banking institutions. The Cuban peso was revalued 7% in relation to the convertible peso and the latter by 8% in relation to the dollar.
- Additionally, Resolution 92 of the Central Bank of Cuba was implemented , aimed at strengthening control over the use of the country’s foreign exchange resources, ordering the monetary and financial relations of the state sector of the economy and reinforcing exchange control measures with the objective of giving a higher level of rationality and ordering to financial and commercial relations with the exterior.
At the end of February of 2008 the savings of the population maintained the following structure by currency: 58.9% in Cuban pesos, 35.9% in convertible pesos and only 5.2% in dollars, which shows the confidence of the population in the currencies issued by the Cuban monetary authorities.