Asymmetrical Information

Desperate measures

In today's Wall Street Journal, Maria Anastasia O'Grady has a great article on Castro's foriegn exchange shenanigans:

Castro has already cracked down on the nascent small-business community and on political dissent. This has helped squelch competition but it hasn't helped his pocketbook. That's where de-dollarization comes in. As any International Monetary Fund economist will advise, when a state is broke it can always get money from the population by manipulating foreign exchange. Latin central banks specialized in expropriation through devaluation during the latter half of the 20th century.

The new regulations do not so far make holding dollars illegal. Cubans may still withdraw dollars from bank accounts but they may not deposit them. Most importantly, the change means that dollars will no longer be accepted at stores selling imports. Instead Cubans who want to spend their remittances from the U.S. will have to exchange them at par for "convertible pesos."

Clearly, the one-to-one exchange by the government is a fraudulent claim. Castro gets a 10% surcharge for all conversions. Add to this the average 15% price increase at import stores in May, and you have the equivalent of a 25% devaluation of the purchasing power of dollar remittances in the past six months. Regular pesos, which are used to buy domestically produced goods like farm products, trade on the black market at 26 pesos to the dollar, which gives some idea of how Cubans get short-changed.