Economic effects and social implications of a dual currency and exchange rate system: A study of the Cuban case
Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
In 1994 the Cuban regime started a gradual introduction of a new currency, the convertible peso (CUC), which could be exchanged for USD at par. In the beginning the circulation of CUC was limited, but in 2003 the CUC replaced the USD in state owned enterprises and in 2004 the USD was replaced by the CUC in all transactions made by the population and foreigners in Cuba. Two exchange rates also exist between these currencies, one for the population (unofficial exchange rate of 24:1) and one for companies and institutions (official exchange rate of 1:1). Both currencies suffer from a lack of convertibility and have created an unusual and segmented monetary environment in Cuba.
The aim of the study is to analyze the effects of the dual currency and exchange rate in the economy in terms of economic costs and in terms of how the capabilities of the population are affected. In order to do this, a Minor Field Study was conducted in Havana where different agents of the Cuban economy were interviewed and available data collected.
The results show that the dual monetary system creates several distortions in the Cuban economy. The dual exchange rate implicitly subsidizes imports and at the same time creates an indirect tax on exports. A system of converting both domestic currencies to one “unique currency” further complicates calculation of the productivity and profitability of state owned companies. Additionally, capital controls and segmentations of markets weaken the connections between foreign and Cuban companies and also decrease much needed inflow of foreign currency. Capital controls also leads to Cuban companies being restricted diachronically in the use of their capital in that way hampering necessary investment.
Furthermore, the dual monetary system affects the Cuban people’s capabilities, which to a large extent depend on the direct access to CUC. Direct access to CUC in turn does not depend on productivity but on factors outside of a person’s control, such as having family abroad or being self-employed. Cuban’s with only a salary in CUP and without access to CUC has difficulties reaching a reasonable standard of living. This creates the perception that someone with direct access to CUC is richer than someone without, which leads to rent-seeking activities with people trying to work in the CUC sector even if they are highly educated and qualified for important occupations in the CUP sector.
Place, publisher, year, edition, pages
2011. , 52 p.
Cuba, dual currency systems, dual exchange rate systems, economic development, Minor Field Studies, dollarization, centrally planned economies, monetary duality
IdentifiersURN: urn:nbn:se:liu:diva-113817ISRN: LIU-IEI-FIL-A--12/01274--SEOAI: oai:DiVA.org:liu-113817DiVA: diva2:784895
Subject / course
Master Thesis in International Business and Economics Programme (Business Administration)
Estibill, Juan CarlosVidal Alejandro, Pavel