Alberto Trejos examines ongoing changes within Cuba's government and society and their implications for the future Cuban economy. December, 2013.
>> As today, Professor Alberto Trejos. I'm going to just tell you a little bit about Alberto. Of course, we do have a bio in the program. Alberto first visited the Ford School I think in 2008--
>> As a Towsley Policymaker in Residence. The Harry A. and Margaret D. Towsley Foundation helped us to establish that program in 2002 and the intent of that program is really to bring here to the school distinguish policy leaders to engage with members of our community and to share their insights and their experience with us. Alberto certainly fits that field. He has a very varied backgrounds and a number of different types of experiences. His extensive career spans academia, as well as the public sector and the private sector. He has held appointments at a number of universities. And at the moment, he is currently on leave from INCAE which is Latin America's premiere international business school. His academic research interests are in macroeconomics, international trade and development. And some of you may have seen his research seminar in the macroeconomics workshop here in the university. Alberto also has made a number of significant contributions as a policy leader in Costa Rica, his home country. And in particular, his work on the Board of Costa Rica's National Council for Financial Supervision led to substantial improvements in Costa Rica's social security system, a major policy challenge in many, many countries around the world. As Costa Rica's Minister of Foreign Trade, he was the trade representative during the negotiations for CAFTA, the Central America Free Trade Agreement. In addition, he steered gratification of the federal trade agreement with Canada and the Caribbean Community and Common Market, CARICOM. He also helped to negotiate Costa Rica's membership into the Central America Customs Union. That breadth of experience, perhaps not at all surprisingly, has made Alberto a regular consultant to a variety of government and international organizations. And he currently sits on the Board of several Costa Rican organizations including its largest private bank. Well, the Brookings Institution recently invited Alberto to participate in a very interesting project on Cuban economy and that is what the focus of his talk will be this afternoon. I am very much looking forward to hearing more about all of the experience in the work that he has done. Alberto, I wanted to take this opportunity to thank you for all of your engagements here at the Ford School with our students, with our faculty. We have greatly benefited from all of the insights and perspective that you have offered in a variety of different venues. Before we begin, I'd like to remind our audience that if you have a question, please write it on one of the cards. You should have gotten cards as you came in through the doors. The Ford School Volunteers will begin collecting cards at about 4:40 but there--other opportunities, they will continue to circulate. Questions will be read by two of our students, Olivia Wanchet [assumed spelling] and Elliot Falk [assumed spelling] with assistance from Maria Osvelt [assumed spelling] who very recently joined the Ford School faculty. If you're watching online, please submit your questions via Twitter using the hashtag policy talks. And with that, it is my great pleasure to turn the floor over to Albert Trejos.
>> OK, Thank you very much.
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Now, so thank you very much, and thank you, Susan and the Ford School and the university for their very generous hospitality during my now third stay here. And the rules are that no matter where I am in my talk, I have to finish at 5 so there's time for questions. Rules are to be reminded to me because last time I did this, I didn't obey them. So, let's hope that I actually get to my second slide. This is--I don't know if you remember this, the matryoshkas, these Russian dolls that is a doll within a doll within doll within a doll? But it's certainly the same kind of talk, right? The title, so, just that the talk is about the Cuban economy but that is actually the smallest doll. And I'm certainly no expert on the Cuban economy, although I have been exposed to their--to their questions and their situation quite a bit during this project. This starts in a project that I--that I did with--that in which I'm involved with in which the sponsors are or the--the leaders are the Brookings Institutions entity and the University of Havana, in particular the Center for the Study of the Cuban Economy of the University of Havana. And those are not too common bad fellows, right? [Inaudible] on Cuba's main university. And there is clearly an effort to put together experiences from Latin America that have helped some Latin American countries move towards development. With perhaps the freer thinking or the more independent thinking, or more innovative branches of the Cuban government, those and certain parts of academia for which clearly some kind of reform is necessary to be discussed and necessary to be understood. So, the middle doll in this doll set would be that about the role of adviser, a role that I have every once in a while but that often leaves me with this--often leaves me with doubts. I tried to it in a different way from the way I criticize but I actually think that very often this thing of guy gets off playing, goes to hotels, starts talking, and then stops talking when he boards the plane, is not the most useful thing in the world, right? As a policy maker, I had the benefit of outside help from colleagues, from academics, from people who I had a similar experiences. But it wasn't contexts that were different. It wasn't context in which the questions were coming from the locals, right? And the language was being said by the local. And I--This project in particular led to me to rethink some of those issues and I want to put them forward. I would be the middle doll. The bigger doll, although is the one that is at the end, so if I don't rush, is the one I'm never going to get to, is about the actual content I provided or I was asked to provide for the Cuban government. The question is there. How can experiences that countries that have been very aggressive in trade policy and in the attraction of foreign direct investment and have used that towards their better--towards their development? How can those experiences be applied to Cuba? Given that Cuba is a very different place and isn't planning becoming--that's ceasing to be a very different place in the near future, but is considering reform, right? So, in that--in that tough situation, we see Cubans are considering reform but it is not that everything goes, right? Which experiences are valuable and which are not? And in particular, this experience about trade and investment on which Costa Rica, a country that maybe is similar to Cuba in some ways, or at least of Cubans seemed to have more affinity to us than to others. How can that experience be applied in their case? And that would be the bigger, the outside doll that you want. Let's be--Start talking a little bit about Cuba and where I think that the country is right now. I'm going to be very brief about this. Although I'm going to say everything I know. It's going to be very brief. First--The first point let me say is I think that this project is not emerging in a [inaudible]. It is not surprising, right? The Cuban government has given in the last year or two clear signals that some new thinking about economics has to be done, and that some reform in economics is necessary. The country I believe is interested and part of this, I think not totally, but part of this has to do with the fact that biology dictates that very soon we're going to have a politburo made of mostly of people who earned around during the revolution, right? And for those people, the attachment to all the ideas is perhaps less important than the attachment to all the ideals with that now, right? And I believe that that allows for some interesting cross pollination between Cuba and Latin America, especially a Latin America that today is a lot less distant ideologically in some ways from Cuba. And a Latin America that today without having the big major economic successes of some Asian countries actually has quite a few countries from which you can say, "Well, what do we learn from here?" is that actually you can get better by this and this and that, right? And hopefully my country is one of those. And that--And then, I believe that this is not happening by coincidence. The revolution in Cuba has certainly been successful at some things. And the moment that you forget it, that's the moment when even the most out of the box, critical of the revolution thinkers in Cuba remind you of it, right? This in not their tearing down the wall moment. I don't know if that moment will come. I'm not really not sure what I feel about that in a moment but I'm certainly clear that this is--this is not it, right? This is a group of people who feel that they have achieved certain things. At the same time, they are also fairly clear, at least those that have their eyes open, that economics is not their area of achievement, right?
^M00:10:02 And that their economy is in fairly parallels situation, consumption is very low. The international purchasing power of this monthly salary of a tenure professor with a PhD is 25 dollars. And when that is the case, that professor who by the way reads foreigner and also in foreign media and has foreign colleagues and has seen the outside, it's fairly clear to him that the economy is not doing as well as it should to say it mildly. The revolution also has failed at keeping a high enough investment pace. And you see it by the use, even overuse, of the infrastructure and the housing from before the revolution, right? So, for example, housing is something in which investment is pretty much zero, OK? And you see the same houses getting stretched and getting stretching and getting stretched with very little investing, similar with infrastructure. And that is because the flow of output coming out of this economy and this is a statement that you can make without ideologists and accounting statement, the flow of output is not enough, right, to support these things. Cubans are fond of some aspects of the revolution on the other hand--I mean, a phrase that I got from a cab driver after the second drink I bought him was, "It's more sorrow than anger." In the other ways, the very same people that tell you in Cuba, this is a failure, also tell you but these guys are the best sometimes. It also tell you, oh, but the achievements are real. But you'd only have to scratch them a little bit for them to tell you but this is a mess we cannot continue living like this. We need to change, right? But then, you do not see the see thing political environment that I've seen in other places where a more aggressive change is about to come. Another thing in the background is that in the past when the flow of funds from outside supporters has dwindled, the Cuban government has also announced, "Oh now, it's time to reform the economy." Only for the next sugar daddy to show up, the last sugar daddy was Mr. Chavez. And when the sugar daddy shows up, these attempts of reform are quickly reversed, right? So, another problem that they have with trying to do mild reform from the current state which would be what we saw in Asia with former communist countries who's opposite to some European countries, most Asian countries that had communist governments, the government stayed in place. The party stayed in place. The economy reformed. Perhaps they kept faithful to some ideas, perhaps not, that depends on the place, right? But that is not necessarily what is happening here, but their credibility if they want to do some kind of gradual or partial reform is that, well, they have tried--they have started it in the past, and then they have stopped short. Drastically short, the moment that the Russia is getting more money or the oil price goes up, or Mr. Chavez is this, or et cetera, et cetera. So, I think that is--this is perhaps it. Another interesting thing when you talk with thinkers within the regime is that they do not think that the reference point of the reform is what has been done in other forms to former communist countries. That by the way, it's very defensive when you say the word China, OK? That is the word you cannot say, OK, because immediately what they say is, "Wait a minute. These are the guys who stopped being communists in anything that one might like about communism," is there is such a thing? But that remained authoritarian and everything that you don't like about the term communism that managed to generate the prosperity but not the enjoyment of the prosperity, where the prosperity is a lot less real and the problems and distribution are lot more real? It doesn't ring their bell. And they certainly seem to be more attentive to Latin stories which is also the logic why what we're doing is putting together people who've been in academia, who've been in the government in Latin America. Unlike the US, you cannot make a lifetime in government or a lifetime in academia and most countries in Latin America is a lot were actually back and forth, right? I tend to be a professor. It doesn't mean very correlated with how I did in the election and which by the way it does--has done disasters with my research agenda. But it made an interesting life. But it does generate a group of people. Internationally trained, usually US-based trained, usually idealogically very far from the Cuban government but sentimentally not to far with whom the Cubans feel they can talk more unease than with the standard international adviser. And this is where it comes from. There are big obstacles in the process of reforming the Cuban economy. One of them is that this is central planning all the way through. And I remember Tiato's [assumed spelling] family and Castanet [assumed spelling] who was here all the way through. There was no body in the middle. This is central planning in Cuba. There is no little bit of market in the middle. Even "cuenta-propistas" which is the name that they give to the fact that the government essentially has said, "I'm going to let you work on your own given that I cannot guarantee you employment and make believe like I didn't notice if you hire somebody." That is a very small reform to be taken in the 21st century considering that this is something that the Chinese were doing like five minutes after malady. And this is something that was being done in the other side of the wall even before Soviet regime collapsed, right? Allowing to keep farmer--for farmers to keep a small surplus of their crop which by the way has raised productivity immensely for obvious reasons to anybody who knows economics. And it's also fairly recent, right? And unlike some of the other communist experiences from developing countries in which communism was sort of halfway done and halfway not, and the institutions never took hold, Cuba is a lot more like a poor version of European communist countries. The institutions of communism were actually developed, were actually established, OK? And therefore, departing from certain planning requires on the one hand try a bit more guts, and quite--and it's a much bigger step than if you actually look at say the Mozambique or Angola, or Cambodia, or what would be in North Korea, or Vietnam, or I'm going to say the word China experienced, OK? Second, the country has chosen to be isolated from the outside but it is not the only one that made that choice. When other communist countries said, "OK, we're going to reform by trying to foster exports even if we don't change anything else." And that is usually the first step, right? That was the first step in Vietnam. That was the first step in Mozambique, right? The outside world is sort of waiting for them. In this case, a country that is so close to the biggest, to what it would be its biggest trading partner that has them so isolated from the rest to the world, this is not entirely their choice, right? And then, what can you do from those conditions is particularly difficult. The limits on what industries, do they welcome FDI in and what industries do they don't? Ours is more stringent in other places. Perhaps the main obstacle is that they have multiple currencies, right? They have convertible pesos had non-convertible pesos, right? And if you try--it takes you a while even if you are good at modeling these things in theory, it takes you a while to figure out what do this--what exactly does a multiple currency do? But the multiple currencies in this case are the mechanism of expropriation, are the mechanism that makes the government books being blue rather than red, OK? And I--What separates individual productivity from individual consumption. This is troublesome for many other reasons. First of all, depending on what exchange where you operate, you're internationally competitive or not, whether you are a hypothetical private company or even a government company. Second, you can take the books of the--of the existing government companies that essentially constituted the Cuban economy and you do not know if they're profitable or not until you figure out how does the multiple currencies enter into their income and how does the two multiple current--the two currencies enter into their expenses. The exchange rate between the two currencies is 23 to 1. And they enter into the accounting one to one, the one that is convertible and the one that is not. So, it's a major expropriation mechanism. That is how the professor that makes 25 dollars a month can actually survive. Multiply it by 23 in the purchase of some goods provided by the state. Multiply it by one in the purchase of other goods that are not in the same list, right?
^M00:20:03 So, it's in--it creates a very confusing economy where one wouldn't know if it was--if one wasn't entrepreneur and suddenly got allowed to be there, one wouldn't know where to start because the signals from the price are very confusing. And that's everywhere where there's multiple currencies, there is a huge benefit from the arbitrage between the two, OK? If you can buy in 1 and sell at 23, that's by far the most profitable thing you can do. So, that's the activity that attracts talent, right? There's a big problem in Venezuela today. There's a big problem in any--anywhere that has multiple currencies has always been--I don't understand why all these things still exist. They are now and having a serious problem which is in a place where private employment is essentially forbidden. Government is not automatically hiring any newcomers to the labor market which is just asking for trouble. And also internally the evidence that others in Latin America that were just doing better is too strong, is too clear to ever present in the minds of the people who have to plan what to do here. So, we started trying to build these bridges. And the building of those, bridges of course you run into the common questions like what do I know? What do I know? My policy experience is painted by the fact that all I can do, need is to pass to congress, needs to pass the next election. That is the extra constrain when I'm trying to run the equations in my head of what can be my next policy. These guys don't have that. At the same time I'm thinking of prices. I'm thinking of private incentives. I'm thinking of business executing things. My role as government is to influence how to--how does a private economy operate. That's not how they do things. How do I know, OK? And how do I make sure that I gain some trust? How do I make sure that I would believe what I say? And this is something that has emerged little by little. And to tell you the truth, in this project, we've had a quite a few outsiders that have come in the very beginning. Second sentence out of their mouth, what happens is dialogue stops, OK? The Cubans feel that either they're not authorized to speak their language or more to the point that they're offended by that language, right? And at some point we had--I had a colleague--Cuban colleague tell one non-Cuban colleague, "We're not trying--we're not coming here to discuss what do we do after somebody kills me, or here to discuss what do I do?" In my reality, without a counterrevolution, without a change in regime, right? And if you cannot provide that advice, then maybe we should be providing advice in Miami but not now, right? And I think that one's role is therefore not only how can one validate that one's reality has enough comparison to the reality of those that want advices, but also how can one generate enough trust and enough empathy, right? And that is why I tried to avoid the danger that this dangerous role of the outsider, right? Acknowledging that whether or not one would wanted is a different thing. And again, I think that the jury in my head has not come back yet, right? But we are not discussing what happens the moment that the regime crumbles. We are discussing what can the regime do, stay sort of loyal to what it thinks. If you feel that it is better not to give advice than if you give advice in that--in those circumstances, fine. Don't give advice. But the advice that is being asked, the dialogue that is being opened is precisely that one, that one. The party is not committing suicide in that sense. Yet, these guys need help and they're openly saying, "We need help." They're openly saying, "We can see that this requires some extra work." And then the next stage in this process of empathy and trust is trying to convince somebody else that, well, my experience in this different planet, I live in a different planet from you, in a very different reality. The country I come from is very different from yours. My experience is somehow relative--relevant to you, OK? In Africa, this is usually when Latin Americans do well and African policy makers don't want to listen to Americans. They certainly don't even see the Europeans, and they look at the Asians and they figure, "This guy comes from a different planet. It's a different species. He doesn't have my political problems. He doesn't have my geographical problems. He doesn't have my historical problems. Take him away from me." And then this messed up Latin clearly more educated than the--than the usual policy maker in Latin America, clearly with a bit more experience then has gone a little bit farther but hasn't hit the home run, OK? This guy that pushed Ohio State to the last play of the game but didn't win the game, right? That is the guy that comes over from a similar place where they can identify with and certainly there's an empathy that you can build on. So, much in what I tried to do when I--not so much when I wrote the paper or rather when I presented the paper and other things, and Cuba was trying to say, "We're not that different." Even though Costa Rica and Cuba couldn't look more different, right? We're not that different in several ways. Number one, our key competitive strength is human capital for different reasons, right? The usual logic of the development economist or the macroeconomist of why is education key for growth was not behind the thinking in Cuba about increasing the investment in health care and education. It was a different type of thinking. It was more of a distributional type of thinking than a wealth-creating type of thinking, OK? However, whatever the reason, they--considering the real--their real income and considering their level of development, that island is a lot more educated and lot healthier than it would've had. That is their one success, by the way not a small one. That is their one success and that is what characterizes their--them [inaudible] the rest of world. That is the resource on which they're won out, human capital. These are not very different from Costa Rica. Perhaps the origins, the timing, the reasons, why Costa Rica happens to also be relatively wealthy in healthcare and education, maybe completely different, but the reality is that. We are this piece of volcanic rock with no minerals, no place to do extensive agriculture, no oil, no this, no that, chock full of healthy educated people. And that determines our comparative advantage. That says what are we going to be exporting stuff and what are we going to be importing stuff. So, the first point to them is what you're going to bring to the market is what we bring to the market. Actually, that'd be a good reason for me also to not provide advice to the Cuban government from a competition point of view but then again--then again, right? Second, although we were never a communist country, we actually went quite a bit down the path of being a centrally-planned economy. And we have been walking that one backwards over the years. In Costa Rica, the government maintains some monopoly on anything oil-related, the distribution of electricity, the core of telecoms, water, anything in the subsoil, many forms of infrastructure and for reasons that absolutely [inaudible] me, the production of alcohol. It does not have a monopoly but it has a very strong market share in banking or government banks are have--have the banking sector, 80 percent market sharing insurance, 85 percent on electricity generation, 80 percent and falling quickly in mobile services and internet. So, now, I was telling a friend of mine who is in the communist party in Costa Rica about this project partly because I wanted to rub in but it's me and not them advising the Cuban government. But anyway, we were very good friends. And she's says, "Come on. You've been trying to dismantle this thing and then you go to the Cubans and you brag about it?" And I said, "I'm not saying it is good. I'm saying we've come from a similar place," which is true. In Costa Rica, cooperatives and other market, yet non-market institutions are relatively large. And in Costa Rica, while the government unions are very traditional unions, in fact [inaudible] if anything. The private sector union movement is very different and is based on a lot of things in the law that induce profit sharing or equity sharing, or some other forms of joined participation between the union and the company. That has led to quite interesting things. Mystery in my life is why is that experience is not studied more, OK? But then, yeah, you don't come--I don't come from a purer market economy, either, is my point, OK?
^M00:30:02 And like you, we care about weird things. So all these don't generate empathy but they may generate admiration at least. 120 years of democracy. 60 years with armed forces of any kind, 150 years without having fought for a foreign war. I think we can argue that we are the most environmentally concerned country in the world, plus not--the issues I just mentioned about worker's rights, human capital, et cetera. Here's another thing, a natural--an interesting example. If you go and measure the income of Costa Ricans, you'll find that our market income has a Gini coefficient of 0.45 which is very similar to the US, a very unequal economy. In fact, the ratio of the 10 percent riches to the 10 percent poorest people is 31 to 1. Actually, worst than the United States, more unequal than the United States. Well, that is the market income before the social transfers, before taxation and expenditure, before universal healthcare, before universal education, before the safety net. After the safety net, the Gini coefficient is a lot more European like, 0.32. And the difference between the top and the bottom, 10 percent, is actually a much better than the rest of Latin America, less than 7 to 1. So, we do not have a government commander economy that generates an ex-ante egalitarian income distribution. But here, we don't have that. We actually have a system of this, the social institution that generates an exposed much more egalitarian institution. This is important by the way because FQ is going to do some reform, then they're going to generate a little bit of inequality in the left column which they don't have today. Because they don't have it today, they don't have the middle column. And if they don't generate the middle column, then they're going to start showing inequality in the right column which is where you don't want to have it, right. One can argue that the growth process in the last 30 years has been--has enhanced the middle class. That's all the stuff that we have done in the environment it's just amazing and here's perhaps the best proof. The forest coverage of the country went from 21 percent in 1987 to 51 percent last year--last measure, right. Only three countries didn't--the foreign coverage forest didn't fall. So, to be one of those three and to actually achieve an increase of the size I think is quite remarkable. Like them, where we fail, not fail but we get a C minus, is in economics. And that is the affinity that essentially I'm trying to build on, right? In the early 80s, we went into the Latin American debt crisis with no breaks head on, right? We embraced the crisis. If the rest of Latin America hadn't had a crisis, we would have, right. Just like even if they had--nothing had happened in the world, the Greeks would be in trouble right now. Well, that's us 30 years ago. So, we needed to stabilize our macroeconomy. Meaning, we needed to fix our public finances and fix our balance of payment which by the way in Cuba they don't look broken because of the expropriation happening through the multiple currency regime. If you fix it, well, the multiple currency regime, you immediately have a fiscal problem and amounts of paying problem, right? So, this is something I would wish, even if it's coming from very different point, they have to think about it, right? Second, we have to let market function. As you can see, well, we didn't go too far in the dismantling of the state entrepreneur, right? The garment still owns quite a bit of production facilities. But the parts of the--the parts of the productive sector that are not public are private in a market economy and honest to God, on market economy, and we had it to change control into regulation in that period. And finally, the one thing we did--we did well is we went for a very close economy to a very open economy, to an economy where exports play a very tangential role to an economy where export growth and foreign direct investment play a very central role, right? And the fact that we could do this and at the same time, some of the numbers that I showed before about distribution and environment didn't weakened during that time, but rather strengthened during that time also means, OK, you can play with this and you're not giving away some of the things that have you the most concern. And I guess that--I mean, for the moderate amount of success that Latin America has had in the last few years, we do have some right to speak. Second highest growth in the continent, it says between the debt crisis and the global recession. I would say also a more inclusive and sustainable growth on the one that has been enjoyed by countries that are rich in raw materials. The funding in which poverty rate you look at, we are either the second or the fourth country that cut the poverty rate the most in that period. And since it's sort of universally-accepted that everything else we did wrong, it's got to be from the fact that one thing we were consistent on during this 30 years ended right. And that is the effort to open the economy, diversify it, have export growth, have some export sophistication, right? Exports grow by 80 multiplied by 18 between the debt crisis and the great recession. From a--I grew up in a place where the weather in Brazil will determine whether there was Christmas or not. You're not dependent on the weather. You depend on somebody else's weather. That's something [inaudible], right? Because the price of coffee determined whether or not we would make a living, right? So, when I see what our exports are made of today, I see not only many is licensed but some of these are industries in which we're happy to be now with a 10,000 per capita income level. And we would be happy to still be there if we ever get to 20,000, 30,000, 40,000 per capita income level, right? Some of our key exports are electronics, medical equipment, tourism, BPOs, in general. Things, industries that make up much better economy than simply coffee and then coffee and more coffee, and some people growing bananas on the edges of the country. Another way of saying this is we look at our exports--manufacturing exports from two moments in time and notice the 1994 [inaudible]. And we tried to distinguished, OK, what is the key competitive driver in the industry in question? And we go from industries where nature is nearby or labor is cheap representing 60 percent of the exports to representing 30 percent of the exports. And meanwhile, industries where science, human capital, technology, the ability to generate quality to generate standards, et cetera, go from 24 to 53. Again, a change in the composition of the economy that we find not only consistent with growth and development but also consistent with keeping a good income distribution and keeping an economy that has some other traits we want. And that is what leads here. You got to this point with 10 minutes left. That's wonderful. So, essentially, what I've been telling them is while some of the obstacles are obvious, and while you hate that I am making a parallel with the China's and the Vietnam's, and the Cambodia's, and so forth and so on. The fact to the matter is that shifting from a very close economy to a very--to a more open economy, giving export growth, giving foreign direct investment attraction a higher priority is a natural first step in a process of reforming Cuba. Even though it's undoing some of the key principles of what we are today, it's undoing them in a less--so various of them, I'm going to use the word because again this is not my first language, whatever the word is, you know, in a way, disruptive. You know, less disruptive manner than some other steps that others would put to first, OK? And so, the story is how did we do it? And to each of these, how did we do it? I prepared this like little couple of slides where the thing on the left is what is it that we did? The thing on the right is what did we learn about how it could have been done better? How do we done it again? And the thing in the bottom is does this apply to you or is it impossible in Cuba to do such a thing, right? It is something that would--in which Cuba being who it is actually enhances you doing this or neutral, or actually no, no. This part, you cannot do in Cuba unless you really undo things that these guys don't want to undo. One of those matters is human capital. Again, our key strength when we started out, although now we are running into--in Costa Rica, we're running into serious human capital problems first of all because the stock and the flow don't match.
^M00:40:09 So, we've been growing out of the fact that we had a wealth in human capital from people that have been educated before and currently. When we run out of the stock of the people before, when those people have moved from the old economy to the new economy, the pace at which we're training the new generation is not catching up with the demand. And that is becoming a problem, a problem that is augmented by the fact that we seem to want to educate people in one thing and the people and their employers seem to want them to be educated in a different thing, right? And that's a problem that occasionally happens in less free education and on university systems in the US, right? Now, the partners of our experience about human capital is a wonderful resource to bring to the international--to international trade, a wonderful trade to international trait applies to Cuba I believe very nicely. Second thing we did is unilateral opening. Our average star went from 100 percent to 2 percent. And what we thought was in our industrial policy had to be abandoned which I think is benefiting itself. And so--And change for a different type of industrial policy that wouldn't go against the grain of keeping essentially an open economy. I think we've learned a little bit about the fact that while most of the industrial policy we were doing was terrible, not every industrial policy had to be discarded, right? I mean, we needed a little bit more smarter activism by government. I was left to--and troubled telling these to Cubans on the other hand because the more I think about it, the less I understand what does a tariff mean in an economy where the guy that collects the tariff, the government, is the one that owns the company, the government, right? Without a significantly more private economy, tariffs are useless instrument in Cuba, right? And by the way, the multiple exchange rate regime is the mother of all tariffs, right? It's a 2,300 percent tariff equivalent on whatever the government chooses to put in the wrong list, right? So, OK, some things are going to be more difficult to do there than here, here, meaning in Costa Rica. We have been very good in negotiating market access. Right now, we have free trade agreements with partners that are up to 90 percent of our trade. In addition to we're hyperactive in the World Trade Organization. We've learned some lessons about how to do this differently. I'm not going to go into that right now. Here's a problem. Because this is not only--this would require Cuba changing position on which it has been very loud so far, problem number one. And number two, it takes two to tangle and the second one needs to change position as well, right? Without some change of the US position--the US strategy towards Cuba. The whole discussion about market access is actually quite more, right? And that is something I'm going to come back in a moment. I talked about the role that exchange rate stability, real exchange rate stability played in our strategy. Something that we learned along the way, but the main thing I've learned especially in the last couple of years that have been very difficult is I should have fought harder for the old system to be kept a little bit longer because the new system, I don't like. Anyway, the old system provided results that I think--that I think are interesting and some of those lessons are relevant to Cuba. Now, that is relevant to a Cuba, again, with one currency not with two. And this thing about cook and the coups has to be fixed somehow else or we are not talking about anything. But on the other hand, our old recipe about once we unified the exchange rate, how did we handle it, might actually just fit to what they need to do, to do that. I talked about the creation of investments and activities for promotion, especially of FDI. Some of the lessons we learned in the past, right--well, I think that the first subsidy's mechanism was brilliant. I'm also very proud to have been the minister that says we're not doing this anymore. And I never signed one of those checks. I'm very happy about that. That forced us to create smarter programs, different programs. Here, we can probably start where we are, where the rest of us are in the 21st century rather than going through this learning experience that all of us had during the 80s and 90s. I think that Cuba can bring FDI. I don't think that there's anything contradictory even with their current regime and we have to go to Asia to realize this. But I don't think that this kind of incentives work if you don't provide some, promote some kind of local initiative. FDI will not substitute a Cuban entrepreneur. FDI is a little bit easier to tolerate for them ideologically than the Cuban entrepreneur but tough, whatever it is that you say. It doesn't work that way. For these things to work, they need to empower locals. I could go a little bit deeper of free trade zones, about the promotion institutions for trade, big discussion of industrial policy, business climate, FDI, but I can see the clock jumping on top of me so I'm just going to go to the closing here. First, the quick fix of let's keep the current communist economy and build in it small enclaves where FDI is allowed, which would be an unfair--an unfair description over the Chinese are doing now but it's not a crazy description of what the Chinese were doing in the 80s and 90s, right? I don't think that concept, right? It is not sufficient. It is not sufficient for a place that does not attract FDI with for example a raw material wealth. It is not sufficient for them to attract FDI. They need to have an economy where people can launch their own businesses and can exercise property rights. This implies distributional challenges they haven't face until now. That require perhaps institutions to the redistributing expose like we do rather than [inaudible]. But I--They can do that, right? And otherwise, this process I don't think is going to have the legitimacy or the strength. The multiple exchange rates are--or I think I've already talked about that, but this is the trick to how consumption is kept down, how the surplus of the state is extracted, how the public finances had up, how the balance of payments doesn't collapse. I think from the--I mean, when you actually escape a little bit and start walking the streets of all the Havana and get in a bar and people notice you're a foreigner which means you could probably buy a beer and start talking. People are very aware that the multiple exchange rates are exactly how their productivity gets [inaudible]. There's a tax. The multiple [inaudible] are just a very cruel tax. And while this is the time that countries do--the kind of things that the countries do in very dire financial troubles, the Greeks had to be stopped from doing something that mathematically was note very different from this. And this is not how you run the economy for 20 years in a row. And this is something that has to be fixed. Third, the whole issue of international market access and I'm almost done, has to be rediscussed. My opinion is that everybody would be better off, not only on the Cuban side obviously, but also in the US side. If the attitude that the US had towards China which is let's lure them into reform will work better than the current attitude of let's punish them into reform. If anything because the current attitude has lasted 50 years now, so we sort now it doesn't work, right? Now, at the same time, this not only require some change in the point of the United States. It also requires some change in the point of Cuba and it requires a dialogue that are coming from both sides, and then leaves from international economics of which I know to international politics of which I know a very little. But there's a key aspect to the whole thing, right? And I believe that in this moment in which reform is being thought, the attitude also coming from the outside has to be how do we make it a little bit more in the interest of these guys to do reforms that reduce the animosity, rather than the other way around? And the final--the final closing point is I do not think that these guys have too many false starts in the reform process left. They had a false start when the Berlin Wall crumbled. They had another false start when the terms of trade began to worsen. And both times, the moment that a sugar daddy showed up in the horizon, they reversed the reform.
^M00:50:00 In one of these cases, we're quite a bit a couple of political crackdown as a consequence, right. So if you're--this guy is thinking about putting your lifetime savings and endeavors into following reform, you need a signal that is credible. And I don't--and that the more times they reverse these intentions, the less credible it's going to be. And the more that were going to be put in a path in which things have to end ugly. For the point of view of a Latin American with no beef over that straight of what are that separates you from them, the main objective for us is essentially that this doesn't end ugly. And that's what I have to say. So, I'm going to open now to your questions and comments, and hopefully not too many criticisms.
[ Applause ]
>> Thank you, Professor Trejos. Our first question is should the US list of economic sanctions and [inaudible] isolation of Cuba? And if it were to do so, would Cuban economic reforms would be easy or are there other more formidable obstacles?
>> OK, the first question, yes. I think that the embargo should be lifted. If for no other reason because the embargo provides an excuse. I mean, even if you don't want to look at it from any point of view other than the point of view of Washington. The embargo provides an excuse. Of course they failed. They are suffering economic aggressiveness by from the biggest country in the world that is just X miles away, right? So, in that sense, it's already about [inaudible]. Now, once the embargo is removed, the current set of Cuban economic policies do not lead to a full--to any kind of taking advantage over an embargo removal. And essentially among--the two basic things, I can do a one huge thing. The currency thing has to go. It they don't fix the currency thing, removing the embargo doesn't do anything. And if they don't generate some kind of private market for some things, removing the embargo doesn't do a thing. But if they do their immense job, then the removal of the embargo could actually lead everybody to a convergence which is or perhaps we should all be aiming. Yeah?
>> Thank you, Mr. Trejos. Thank you. My name is Elliot Falk. I'm a senior here at the university majoring in international studies, particularly in political economics. This next question, it's a two part question concerning exchange rates. So, what changes do you foresee now that Cuba has announced that it will be eliminating its tool currency system? And if multiple exchange rates now deter trade, could in different multiple exchange rates promote trade?
>> I don't think that what they--I don't think they have announced that they moved to a unified currency system. What they announced is that they have--they would be--stopping the non-convertibility of all the short end of the stick. So, right now, the way it works is although in the--in the official accountings, they count as one, there's a non-convertible form of currency that you cannot buy dollars with it or foreign currency with it at any price, legally. And there is another one that can be taking to the currency market in certain situations. That gap in the convertibility is the one that would be ending. As long as I--as I, the central bank run the exchange rate, I can always say, I sell or buy at this price, and if I have enough pesos and enough dollars, that's the market price because nobody would want to sell for less or buy for more. I can also go and say, if you belong to this list or doing this transaction or have this form, or whatever requirement, I buy and sell at this price, and if you don't, I buy and sell at this other price, right? And then, you can maintain two exchange rates in the market with a huge temptation to arbitrage. But because the arbitrage is limit--difficult, the arbitrage is not going to make the two prices converge, right? The latter thing is a step forward from what they have but you don't have to look very far in Latin American history to know that it's a big, big mistake to sustain that, right? So I do hope that they actually do take the complete step of not only allowing convertibility, the convertibility not be a difference between the two currencies but also eliminating the participation of the central bank in the market in a manner that generates multiple official exchange rates. And I think that--I mean, if you want an example where that that work badly, where is that working badly today, you don't have to look further in Venezuela. If you want a historical example, every country in Latin America, including us at some point try--attempted it and failed. And I don't think that multiple currencies held by a--run by a--exchange rates run by a central bank in the post Bretton Woods system that there is a positive example to show which perhaps is the most telling argument, right? Is it has been tried 60 times and it failed 60 times. Don't try it. Olivia?
>> Forgive me for not introducing myself before. My name is Olivia Wanchet and I'm a junior at the Ford School.
>> And by the way, they're both my students which I--
>> True. The next question is about foreign direct investment in Cuba. And the question is, can increase in private FDI such as that of the role of Sherritt International who has 60 percent of the FDI in Cuba play a role in Cuban economic reform?
>> I think so. I think a big direct role and in not--not to be dismissed in direct role. The direct role is you would have a little piece of the resources of the Cuban economy working with better technology in an actual firm generating a flow of income that probably would be higher than otherwise, absorbing resources that now the state is not being able to absorb, and generating fresh honest to God sustainable foreign currency, probably also generating a source of--a source of taxation. And again, once they fixed the currency thing, both the balance of payments and the fiscal numbers are OK, so this is important. It doesn't fix--it's not the final step because I don't know of any economy in the world, even us, the world champion in attracting FDI, where FDI is a majoritary stake of the interesting part of the economy, right? So, it's an--it's a very good icing for the cake. It is not the cake, right? And in particular, without a corresponding Cuban entrepreneurship to compliment, that I don't think it is going--that it's going to be--is going to be enough. But it is feasible and it also delivers as I was saying before this indirect benefit which is that politically people make the comparison, begin to understand things. There are parts of knowledge and part of the culture that are not just productivity that also get transferred. I always--every time I kind of--I quote this number because I think it's really, really cool. A colleague of mine, Ricardo Monge, made a poll of new exporting companies in Costa Rica. The year in where he did--in where he did this poll, 60 percent of these companies, the immediate previous job of the entrepreneur was as a supplier or as an employee of a multinational in the same sector. So, that's often where the idea comes from, where the culture comes from, where the initiative comes from, where the money comes from, where the linkages come from. So, there's a lot of intangibles coming up with FDI but they are not enough to transform an economy into a mixed economy, will have chance to real growth.
>> OK. The next question, in Costa Rica, you highlighted the connections between academia and policy leaders. In Cuba, you're working with academics, faculty from the University of Havana. How are Cuban academics related to those making policy decisions? Can you tell us more about your Cuban partners?
>> Some limit actually, contractual limits on answering too much on this--on the last part of the question, but not too many. Let me see if I walk around it. It is clear to me that in the case of Cuba, and perhaps just because of the size, Costa Rica is a really small country, right? That the distance between the players in those two worlds is bigger than in our case. At the same time, some of the academic, we're talking about advice government, at least one that I know of sits up in the--sits in the second row in the politburo meets than the first row, but in the second row. At least a couple of actual policy makers have been present in our talks. What we are doing is certainly not secret in Cuba on the country. They have this traditional, so that when--when they want people to think out of the box, there are certain places within academia where--that are encouraged to do that, right?
^M01:00:00 Our counterparts in the Cuban academia--well, I'm going to say it in the words that--in the way that it warms my heart the most, had read my papers, are exposed to international discussion. Now, can they influence policy makers in which--in the way in which, you know, in a much smaller environment like Costa Rica that happens? I have little basis to make an assessment there but my impression is that is less than now.
>> So, in this individual experience, Cubans are eager to engage themselves in employment at the [inaudible] in many ways, renting rooms to tourist in their homes, opening restaurants, selling arts and crafts, but the government taxes, these are such high rates as to make them unprofitable ultimately causing them to fail. So, the question is, how can you persuade the Cuban government not to stifle these small businesses and to let them operate freely when they want to control all of the economic activity?
>> Well, I think that if they--if they're going to have cuenta-propistas under such a short reign that they are very exceptional, very few, and not very prosperous, they didn't do reform then, right? I'm going to change your being grounded to you have a curfew at 5 p.m. it doesn't change things, right, for your teenage child--a terrible analogy. But anyway, if they just enable this in a way in which the enablement doesn't have consequences, then what they did is not do reform. You move around in Havana and one thing that you feel is that more than they do is they are taxed. A big problem--the bigger problem in my mind is the list of activities in which cuenta-propistas can enter and the list of activities in which they cannot. Idealogically it's a very difficult thing to argue. Once I say that it's OK for people to have to work for themselves, then how do I justify that is only in A and not in B, right? It's a difficult--it's a difficult selling point. It's a list of activities that get changes, gets changed regularly and that is a source of conversation, discussion, controversy, and so forth. And there's a list of activities that is clearly being done by a government that is trying to look for a scape bulb [phonetic] but only a scape bulb, not a reform step. Hopefully, either because the situation clearly weren't said or simply because eventually idea is permeated and there is enough generational change. They're going to actually state these at things as steps and not only as attempts of having a scape bulb.
>> Great. The next question, what are the implications in your eyes of the almost complete closure of the Cuban interest section in the US to be?
>> I mean, Florida is a swing state, in your eyes have the weirdest of electoral systems. And your policy vis-a-vis the closest relatively sizable neighbor with whom you don't have a physical border is determined by the viewpoint and interest of a group of people in one state. That cannot be the optimal strategy, right? That can simply cannot to be the optimal strategy. I think that the US should be trying to engage rather than disengage. I think that you have the blueprint. Hell, you are able to do it with Vietnam. Next indeed, with China. This country has not been--presumably does the--does the excuse when you approach the Saudis, or whatever horrible people sell you the oil, right? The whole point is I can have a dialogue and a constructive relation with somebody I don't agree with. And that is how I avoid bad things from happening. I think that that is the wise policy to have and I don't see why there should be one country in the world that is an exception to that policy, right? So, I think that from the US point of view, I think that the policy is actually quite destructive. You also have the problem of demonstrating affecting Latin America which is I mean that I've done this abundantly where--I mean, the Communist Party is second in the polls according to the poll--to the poll that came in yesterday. So, I'm going to have to be talking about this a lot when I come--when I get back home. But whenever you try to counterargue these guys, the answer is always, "Well, yeah, but you are comparing--you're using a reference point, Cuba, that is under aggression." I would love for that local Communist Party not to have that argument. And I think the US referred to that too. And finally, somebody's going to run Cuba. If you have a very aggressive policy, chances are the guys are going to--they are going to prevail are the guys farthest from you. And if you actually tend bridges, chances are the guys you are empowering with those bridges are the guys with whom you have more constructive dialogue to build. These are two very different countries. These are two countries. Well, in the case of Cuba, if you want to be critical, there's a lot of very bad things that one can point at to be very critical. If you want to be exulting, there's a lot--there's a handful of really good things to point at too, right? It wasn't--not that far from that phrase by the way. And I think that the current policy is destructive to everybody except those that think that property rights can be put in a time machine and taken back 60 years which by the way you can't in a market economy either.
>> Considering your experience in Cuba, how much training is being imported so to speak into the country and what are the limitations and opportunities for a professional--
>> How much what? I'm sorry?
>> How much training is being imported so to speak into the country, and what are the limitations and opportunities for professional international exchanges such as these?
>> The limitations are huge, right? You have to--first of all, because the practical limitations of the travel are important. Great cars don't work. Cuban officer in the customs doesn't stamp my passport because he knows I'm in trouble next time I come here if there's a Cuban stamp in my passport. And my passport has Zimbabwe stamps and Cambodia stamps. And I--And Congo stamps, right? But no, there's one stamp that would put me in trouble, that one, right? Things are not very free there. Things are not very free here regarding there. So, it's a difficult thing to do. Cuba is exporting a lot of training. In two ways, first of all, people in Cuba that acquire exportable skills are very tempted to immigrate. And second, the one sustainable export that Cuba seems to have right now in the current regime to the rest of Latin America is the sending of doctors and teachers. And that on the one hand speaks to how much training and education they have done but also speaks to the very limited opportunities that they have generated domestically and the kind of relationship that this leads to. I don't think that there's a big tray. I wouldn't imagine there's a big trade of training in the other direction. You walk the streets of Old Havana. In the middle of the--all these buildings before--that are from before 1959 that haven't gotten a single nail or a single coat of paint in 60 years, where more people on the original design for are living, you find--you find the level of poverty that is not unusual in developing countries. Yes, a distributional balance that is better than in most developing counties. I'm not even going to say, "Oh." But you also find that those people and those dire conditions are unusually educated. Then you'd think of what they did in college, right? So, it is natural that this is something that they're going to export. I'm guessing that I would have been an export in a different way in my country if the policy had been different. I would have stayed here. We export talents in a different--in a different sense which is we produce products that requires talented people to make and that's what we sell, right? So, in a way, the Cubans are--this is a comparative advantage. This is what they should to be exporting. They should be exporting the fruit of training.
^M01:10:00 Not in the form of a doctor that gets into Venezuela, not in the form of a baseball coach or a piano teacher that gets into Costa Rica, but rather in the form of products that require human--high human capital to be made that are then exported from there to the world. This is what they should be doing but in a different way.
>> All right, this is our final question. What is the best advice you could give to someone who wants to pursue a career in policy negotiation particularly at the international level?
>> I once watching a talk--watching a talk with Margaret Thatcher and somebody asked her what you--what did it feel to be a female prime minister and she answered, "Well, I don't have anything to compare it to," because she had never been a male prime minister. So, the problem with that question is you head back to your own experience, right? I entered to--into policy through academia, OK? I'm an academic in a field in which some policy questions are natural questions within my field of study. And that means that as an academic, I had a dialogue with policy makers and I had a dialogue with politicians. And again, with my country being small enough, at some point I realized that, hey, if I cross the street in this corner, it's only one step to cross it. I crossed it, I learned a lot. I'm proud with--of many other things I did. I learned a few lessons. But then, again, that's the only--the only advice I can give. I am very distrustful of people who wanted a policy for doing policy's sake rather than wanting to do policy for policy's sake, right? I've been in politics and off to have met, I don't know, how many dozens of kids that at 15 knew but they've already know how to brush their teeth but they know they want to be president. And then you meet those guys when they're older and you're thinking, "Jesus Christ, this guy wanted to be president before he knew why he wants to be president," right? I preferred people whose answer to why do you want to be minister? Why do you want to be president? Why do you want to be in the central bank? Why do you want to do this? Why do you want to be an adviser, is contingent to the moment. I think this should be done. This is the time to do it. I can help, rather than it looks like a really cool world I want to be there, right, which is the answer that many people I don't like give. So, my advice would be make yourself useful in policy and all of the things if you have experience as you acquire in other walks of life and jump into policy when you think that the world is needing you, know when you think that it's a [inaudible] to that. Well, that may release more to a better world than to a better career, so I should say it with care. Thank you very much.
[ Applause ]
>> I wanted to thank all of you for joining us this afternoon. I hope we--I hope you'll stay and continue the conversation out in our Great Hall. We have a reception with Cuban inspired cuisine. And so, as we think about all of the ways, all of the policy challenges that we have, I think it's clear that Alberto is very motivated by trying to make the world a better place and not just for doing of it, but actually the accomplishments. And so, please join us to continue that important conversation and also please join me in a final round of thanks for--
>> Thanks very much.
>> Professor Alberto Trejos.
>> Thank you.
[ Applause ]
I was very glad. Thank you.