Wednesday, April 27, 2011

Loans and taxes may prove daunting for Cuba economic reforms

Posted on Tuesday, 04.26.11
Cuba economy

Loans and taxes may prove daunting for Cuba economic reforms

The Cuban government's massive economic overhaul is hinged on taxes and
access to capital.
By Frances Robles

Ernesto is a 26-year-old mechanical engineer turned entrepreneur.

Laid off, he chose a new profession among the list of nearly 200 new
private businesses legalized by the Cuban government. He decided to
become a locksmith, because a relative recently brought the required
machine from Italy. But he still needed cash to buy blank keys.

"When you start a business, you need money," said Ernesto, who spoke by
phone from Havana and asked that his last name not be published. "Money
is something not too many people in Cuba have."

Ernesto borrowed $50 from two friends, tapping into an informal credit
economy that is surging as the backbone of massive new reforms the Cuban
government hopes will help it shed 1.8 million workers in the next three

But experts say there's only so far fundamental changes to the Cuban
economy can go as long as small business owners have to rely on friends
and family to finance their endeavors. A lack of access to capital,
crushing taxes and improvisation from the government on a system it has
little experience testing are among the daunting list of challenges that
test Cuba's economic future.

"The Cuban government started off with a bomb by saying 'we have to lay
off 500,000 people,'" said economist Carmelo Mesa-Lago, a professor at
the University of Pittsburgh. "They should have begun by saying, 'we are
going to create 500,000 new private jobs,' then, once successful,
announce the layoffs. They put the solution before the problem."

The Cuban Communist Party met last week for the first time since 1997
and just the sixth time in its history. Nearly 1,000 delegates from
around the country met in Havana to tinker with a long list of so-called
"guidelines" aimed at fixing a troubled economy.

Back-to-back hurricanes, falling commodities prices and a bloated
workforce finally forced the Castro regime to tap into what it had long
avoided: a market economy. Castro approved some 178 new businesses, and
for the first time made it legal for Cubans to hire employees.

The party congress made changes, but the revisions have not yet been
published. Among the details experts are waiting for are updates to item
No. 51, which says the Cuban government will create a credit system for
new businesses, considered key to the program's success.

"I guess loans would be welcome here, but you would have to know if your
business is going to pay off," Ernesto said. "There are a lot of new
businesses and a lot of competition. Are we going to make enough to pay
the loans back — with interest?"

The informal loans he received were interest-free favors.

A lot is at stake. The Cuban government doled out huge swaths of
unproductive land to peasants in the past few years, but acknowledges
that much of that land is still idle. Farmers faced too many unexpected
obstacles, including being unable to purchase required supplies.

"This is a major issue," said Gary Maybarduk, a former U.S. diplomat in
Havana. "The tiny guy on the street maybe doesn't need a lot of capital,
and they say there's a lot of money under mattresses in Cuba. But if you
want to do anything significant — make something, hire five people — it
takes money."

Although the Cuban government's party guidelines said it would "provide
necessary banking services," it did not say how. The cash-strapped Cuban
government already has a heavy debt load.

"Where are they going to get the money for this?" Mesa Lago said. "They
did not say when they are going to do this, or how."

The European Union, Spain and Brazil have offered to finance
micro-lending projects, but the Cuban government hasn't said whether it
will accept the offers, Mesa-Lasgo said. The Cuba Study Group, a
U.S.-based organization that advocates better relations between the two
countries, recently announced a plan to raise $50 million for a
micro-loan fund — if the Cuban government ever allowed such a thing.

"It's not possible under Cuban law to distribute the money, so no sense
having it pile up in banks," said Carlos Saladrigas, who heads the Cuba
Study Group. "We believe it's more important than ever to assist the
Cuban entrepreneur. Given the lack of liquidity, the mortgages process
will likely be slow and fraught with problems."

A recent report commissioned by the group suggested web sites such as — where people donate or loan money to small business
owners around the world — could provide the solution. It also suggested
the Obama administration further increase the amount of money Americans
can send to people on the island, currently capped at $2,000 a year.

Americans send $1 billion a year to Cuba, and much more financing is
expected during the 380,000 visits that U.S. residents make there
annually. But that dependence on relatives abroad could pose problems
for the island's large Afro-Cuban population, which has far fewer family
members in the United States.

"Blacks have the most to lose as government subsidies dry up,"
Saladrigas said.

Cuban business owners also lack the training in accounting, financing
and marketing to make their ventures work, he said.

Mesa-Lago stressed that financing may not be the most serious of the new
business owner's problems. The proposed guidelines levied several
different taxes and fees on the self-employed at rates that increase as
the number of employees grows.

"That's killing the goose before it lays the golden egg," Mesa-Lago
said. "It's clear to me that taxes are very high, must be studied and

Cuban economist Pavel Vidal Alejandro, a professor at the Center for the
Study of the Cuban Economy in Havana, said he and other colleagues had
recommended fewer taxes and a grace period to pay them.

Speaking at a recent conference in New York, Vidal noted that there
could be more minefields ahead. About two-thirds of the 171,000 new
business licenses granted so far this year went to people who were
already out of work, suggesting that the vast reforms may not be enough
of a safety net for the half-million people who are expected to soon be
out of a job.

"If those business licenses were intended for people who are now getting
laid off, and they are being occupied by people who did not have jobs,"
he said, "then you could have a gap there."

The Cuban government has said the changes may have to be delayed for up
to three years to work out the kinks.

"This started three months ago; all these things can't be answered yet,"
Cuban economist Omar Everleny Perez said at the City University of New
York Graduate Center conference. "But there's a decision to change the
country, and that's what's important."

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