Informacion economica sobre Cuba

Property Liberalization and Recovery of Idle Lands and Dilapidated

Properties: A Necessary Step for Initiating a Recovery Process / Estado

de Sats

Antonio Rodiles, Estado de Sats / State of Sats, Julio Alega, Manuel

Cuesta, Wilfredo Vallin Almeida

By Antonio G. Rodiles, Julio Alega, Manuel Cuesta, Wilfredo Vallín

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does not belong to them and that can be withdrawn at any time.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.

This building collapse in Havana killed 3 and left one more vacant site

in the capital. Source: www.hispanicallyspeakingnews.com

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).

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