Business, Finance & Economics

Cuba thought a two-currency system would solve its economic woes. It didn't

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Credit:

Desmond Boylan/Reuters

Cuban pesos are seen at at vegetable stall at a market in Sagua La Grande, in the province of Villaclara in central Cuba, some 149 miles east of Havana on March 11, 2012.

In the 1990s, Cuba had a to find a way to deal with the influx of black market American dollars showing up on the island.

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(This story is based on a radio interview. Listen to the full interview.)

They created an interesting economic fix: just add another currency.

The convertible peso was born, with a fixed value relative to the American dollar; it was only for use in the tourist section of town. All other Cubans would continue using the national peso, worth about five cents.

The plan didn't work.

The stronger convertible peso created a division. Quality items could only be bought with the convertible peso. So the majority of the country naturally shifted toward the convertible peso.

"About 85 percent of the country is using the convertible peso," says the BBC's Sarah Rainsford in Havanna. "And 20 percent of the country, the poor, are still using the national peso. So it created this glaring inequality in a society that is meant to be egalitarian."

About 20 years after the first convertible peso entered the market, the Cuban authorities have decided the expriment is over. President Raul Castro said he'll scrap the two-currency system. Economists say bringing the two currencies back together will take time. Cuba wants to make the move carefully, so it's new curency has value.

But how they'll do that, whether it's entirely a new currency or a revalued version of the national peso, remains to be seen.

The Telegraph's Hannah Strange reports the unified currency is all part of Raul Castro's plan to revive the island's economy:

In July, Mr Castro declared that the dual currency was “one of the most important obstacles to the progress of the nation”. He has embarked on a series of economic reforms — such as allowing Cubans to run private businesses and buy and sell property — that he says are intended not to dismantle socialism but ensure its future on the island.

But that future has socialism looking more and more like capitalism.

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