Property Liberalization and Recovery of Idle Lands and Dilapidated Properties: A Necessary Step for Initiating a Recovery Process

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does not belong to them and that can be withdrawn at any time.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