Tuesday, September 28, 2010

Restructuring Cuba's Economy

September 27, 2010 3:25 PM
Restructuring Cuba's Economy
Posted by Portia Siegelbaum

HAVANA -- Fiscal austerity has not been part of the Cuban Revolution's
lexicon but since President Raul Castro officially began calling the
shots in February 2008 the island has slowly begun a political U-turn in
an effort to pull the economy out of recession.

Sociologist Aurelio Alonso says the latest measure laying off 500,000
civil servants and other state employees by March 2011 is nothing less
than "a process of restructuring the Cuban socialist economic system."

Before Castro took the knife to the bloated public sector this month,
the salaries of some 5 million people -- over 85 percent of the Cuban
labor force -- were coming out of the national budget. Last April, the
President announced up to a million unproductive workers would get axed.

Inevitably, Alonso, a researcher at the Center for Sociological and
Psychological Studies in Havana, says these changes are creating
"uncertainty" among the population, raising "fears of losing their
jobs". He adds that the government's new opening for the private sector
could be the opportunity to better their lives.

The Government, meanwhile, he says, has to deal with the crossover
between the formal and informal economies.

Official statistics show there are 143,000 workers currently registered
as self-employed, but Alonso believes the number of people involved in
the informal economy is three to four times higher. There could be as
many as 500,000 people working for themselves either full or part-time,
without licenses, either because the government stopped issuing
permission for self-employment in their fields or because they want to
avoid paying taxes.

There are at least two reasons for the boom in the informal economy and
the black market it feeds off of: 1) the inability of the state to meet
all the demand for a wide variety of services; and 2) the state's
inability or unwillingness to keep prices in convertible currency (many
items are simply not available in the non-convertible Cuban pesos in
which Cubans are paid) at affordable levels (such as cement, paint, wall

Anyone in Cuba who has remodeled their kitchen or fixed their roof or
needed a car mechanic knows there exists an army of competing
construction workers, house painters, carpenters, plumbers, electricians
and others offering their services and the vast majority of them are
unlicensed. You may have to put yourself on a waiting list for them as
they are often booked months in advance. The same is true for catering

Apart from the 143,000 people with licenses to be self-employed, there
are another 448,000 registered to work in the private sector primarily
on family farms.

Reforms set into motion by Castro in September 2008 put nearly 2.5
million acres of fallow State-owned land into the hands of already
existing private farmers, individuals who wanted to try their hand at
it, as well as cooperatives.

In all 110,000 farmers received the right to cultivate though not the
ownership of the land. The plots are expected to begin fully producing
within two years which would provide a major relief to the government
which spent nearly $100 million on food imports for the population last

And the government announced last Friday that it will issue 250,000 new
licenses for trabajo por cuenta propia or self-employment.

Another 200,000 government jobs will be converted into worker-run
cooperatives or leasing deals. An experiment in this began months ago
with the leasing of taxis to drivers and premises to barbers and
beauticians formerly employed by the State who now run their operations
as private businesses. Similar conversions from State to cooperative-run
enterprises will probably take place on the level of local industries
such as furniture making and upholstery.

Alonso describes what is taking place as a change in the "vision of
socialism". The new view is that the State shouldn't dominate
everything, run everything. The role of the State, he says, should be to
establish controls and taxes but it doesn't have to manage every little
corner food stand and every grocery store.

"The State gains nothing by running a national system of grocery stores
(where Cubans buy their state-subsidized monthly food rations). It gains
nothing by distributing the food to these state shops. This method is
supposed to control theft but it still exists.

On Sept. 24 Granma also published a list of 178 types of work that will
be legalized as of next month ranging from home appliance and car
repairs, to carpentry, massages, home caretakers, animal groomers and
park attendants.

One entirely new job description opened is for accountants. Presumably
they will be needed by the new businesses and cooperatives which will be
required to keep books for tax purposes.

Without giving the long explanatory speeches for which his older
brother, former President Fidel Castro is known, Raul Castro has quietly
chipped away at the Revolution's long held vision of the welfare state
and launched a series of painful spending cuts.

Gone are the subsidies for many basic food items -- like potatoes and
peas -- that customers once bought for pennies as part of a monthly
ration. Gone are most of the items that used to make up a food basket
capable of taking families to the end of the month -- they are now lucky
if they last a week to 15 days. Gone are the virtually free lunches that
until a few months ago, were provided at every business, factory, office
and construction site.

The State's once model childcare system has shrunk to the point where it
can no longer meet the needs of many working women.

Primary and secondary schools, despite great efforts can no longer
provide truly nutritional or even filling lunches for students. Talk to
any parent and they'll tell you that they pack something, even if only a
hard boiled egg, to supplement the meals served in the school lunchroom.

Free government boarding schools in the countryside for the upper grades
have been closed down as there is no longer cash to cover food,
electricity, and transportation to and from what was once heralded as a
revolutionary experiment in teaching adolescents to work and study at
the same time. It should be mentioned here that both parents and
children were more than happy to bid farewell to a failing system --
failing to a great extent because teachers were no longer willing to
work under the poor conditions for inadequate salaries and left the
profession. Classes were pre- videotaped and distributed to all the
schools. Televisions replaced teachers.

Omar Everleny of the University of Havana Center for the Study of the
Cuban Economy says that despite the reality of bloated state payrolls
there are still government jobs to be filled: in teaching, particularly
on the primary and secondary levels; in agriculture, construction, and
the police. But he says it remains to be seen if someone who for years
held the post of a mechanical engineer will want to work in construction.

"The salaries," he says, "do not motivate people to take these jobs."

Everleny believes the transition will be rough going and "there are
going to be losers in the initial stage" but that in the end things
could be better for people.

There are those who haven't waited for Raul Castro to enact change.

A private spa offering waxing, massages and sauna was recently
inaugurated in a typical Havana neighborhood. A mother-daughter team of
entrepreneurs paid a builder to put up a structure in their large back
yard to house their business.

Several dozen Cubans attended the reception featuring wine, food and
live music. The guests were all people who run some form of private
business-- either rent rooms in their homes to tourists, or run beauty
parlors, or paladars (home restaurants). They represent the type of
person who will have the money to pay for the spa's services.

The beauty products on display, as well as the massage table, had been
brought in from the United States by the owner's son who lives in Miami.
The modest spa far from being a Golden Door spa nevertheless represents
a considerable cash investment in the Cuban context.

One item stood out: the towel covering the massage table was clearly
stolen property from one of the major Spanish hotel chains prominent in

This highlights one of the great problems raised by the layoffs and the
opening to self-employment and cooperatives. Where are these new
businesses supposed to get their supplies?

Economy Minister Marino Murillo Jorge admitted in last Friday's edition
of the Communist Party newspaper Granma that the country was in no
condition to establish the wholesale outlets for "the next few years".
He further confessed that state-run retail shops did not at present have
sufficient inventory to meet the newly emerging private sector's demand
for supplies and equipment.

The self-employed will therefore have to buy their supplies at the same
stores and at the same prices as the rest of the population. Just how
much of a profit will they be able to make without their prices driving
away customers? How much will a private restaurant owner be able to
charge for a can of beer that both he and the public buy for one
convertible peso in a supermarket?

The lack of wholesale suppliers for the self-employed is not a new
problem. People were first granted licenses to work for themselves back
in the 1990s when Cuba faced a catastrophic economic crisis and major
unemployment for the first time since 1959.

"Many activities that were legal during this period have always had to
turn to the black market to find supplies at lower prices, so that they
could make a profit and not price themselves out of the market," notes

Resorting to the black market has become such an accepted part of life
in Cuba that people openly speak about it to the foreign press.

Ildelisa, a single mother and housewife, sells soft drinks and pastries
from her home in the densely populated Centro Habana neighborhood. For
several years she has a government license for her business but she took
it a step further by organizing a virtual cooperative with several of
her neighbors who pitch in to make the desserts.

She's worried that with more people going into business for themselves
(and 80 percent of those who are self-employed today either operate
gypsy cabs or are in some form of food services) it might become more
difficult to obtain the ingredients she needs. "If there are more people
buying sugar and flour, the prices on the black market may go up," she
said. Prices outside the black market often have a 200 percent mark up
and purchasing items in state-run stores would be ruinous to her
business she says.

Dissident Vladimiro Roca, son of a leader of Cuba's first Communist
Party, says nothing has changed, that the apparent reforms are nothing
more than the same old, same old. Without really opening up and giving
private business access to goods at wholesale prices, he asks, how can
the private sector thrive?

There are many other unanswered questions. A call to the Ministry of
Labor and Social Security produced the response that people would have
to wait for the regulations to be published in the Official Gazette but
they couldn't say when that would be.

Especially worrying to the self-employed is the issue of taxes. Clearly
the State expects everyone to pay taxes on earnings. Private businesses
in certain categories that will be allowed to hire workers will have to
pay an added tax for the right to have employees. As well, all the
self-employed will have to pay into the national social security fund
and employers will have to contribute to it for their employees.

Rumors are rampant as to the amounts to be paid. An alleged Communist
Party document leaked to the media says taxes on gross income will range
from 10 to 40 percent, plus another 25 percent toward social security
but this could not be confirmed.

Everleny suggests that the State needs to avoid putting a very high tax
on certain activities that would impede their development. "When the
State wants to promote an activity that has not been embraced with
enthusiasm by people, it will lower the taxes [on that business], and
that will not be a step back," he said. In order to encourage the
self-employed to take up certain less desirable occupations, the State
could considerably drop taxes on them. But, he said he could not say
which jobs would fall into this category until people start requesting

Both Everleny and Alonso are convinced that Cuba is better prepared than
it was in the 90s to implement an efficient tax collection system and
that the taxes to be applied now have been more thoroughly thought out.

Alonso notes that in the past someone with a room in their home to rent
to tourists was obligated to pay a standard monthly tax whether or not
they actually had a guest. Now he believes the tax will be geared to
their actual earnings. But he is convinced that taxes must be paid.

One of the new categories of job to be legalized is that of a domestic
worker, a job which in reality is already widespread.

"At the moment earnings are totally disproportionate," says Alonso. "A
domestic worker earns much more than a transplant surgeon." In his
opinion, cleaning women should be well paid, but he believes they should
have to pay taxes to redress this imbalance in society.

Hopefully, say both Alonso and Everleny, the State will now run only
those industries of national importance such as mining and petroleum,
electricity production, health care and education and let the private
sector, including cooperatives, take on all the rest as the experience
of the past five decades has shown the State can't do it all.

Most people are going to wait and see, but as the pink slips are handed
out, the newly unemployed will have to find some way of feeding their
families. That just may be the impetus needed to jump start the Cuban


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