Monday, January 2, 2012

Cuba stacks up the building blocks of a new economy

Posted on Sunday, 01.01.12

Cuba's Year of Change

Cuba stacks up the building blocks of a new economy

The pace of economic reforms has picked up as Cuba seeks to move more
people off government payrolls in an effort to boost its economy.

It has been nearly four years since Cuban leader Rául Castro announced
plans for a series of reforms to raise Cubans' living standards and tie
personal gain to individual work and initiative. Change came at a
glacial rate for the first few years.

But in the months since the Communist Party of Cuba held its Congress in
April, the pace of economic reforms designed to wean workers from their
dependence on state employment and create their own jobs has quickened.

Castro has said he wants to furlough more than 1 million superfluous
state workers, although that is proving more difficult than anticipated.
Still, the economic reforms and new decree laws kept coming in 2011.

In December, Cuban authorities announced the government would rent out
state-owned workshops where jewelers, carpenters, locksmiths and other
budding entrepreneurs could set up shop, and 500 bank branches across
the Communist island began processing business loans for cuentapropistas
— the term for self-employed workers, and those who want to build or
repair their homes.

While Cuba has fallen far short of its original goal of removing 500,000
excess workers from state payrolls by last year and despite miscues
along the road to reform, the changes are starting to reach critical mass.

More than 357,000 Cubans have applied for licenses to start businesses,
and the signs of change are everywhere: mom-and-pop pizzerias, stands
near the University of Havana selling pork sandwiches,
bed-and-breakfasts appear on Internet booking sites, former state-run
beauty shops now operated by erstwhile employees, garage shops offering
clothes and housewares, and new business placards touting services from
shoe repair to home repairs to homes for sale.

"It does start to give meaning to government claims that they want the
private sector to grow,'' said Phil Peters, a vice president at the
Lexington Institute who has followed the reforms. "They have broken down

. But the question remains: Are enough building blocks in place so a
mom-and-pop operation can be transformed into a successful small business?

One of the more significant reforms is Cubans' new ability to buy and
sell homes, rather than to swap dwellings of supposedly equal value. Not
only does the move cut down on under-the-table dealings but it could
allow Cubans to free up significant capital, and unleash a wave of home
building, renovation and other entrepreneurial activity.

But analysts say Cuba must still deal with severe shortages of building
materials as well as address financing and mortgages before the reform
can really bear fruit.

"The economy is still capital-starved,'' said Ted Piccone, a senior
fellow at Brookings Institution.

This year, the government removed a number of other obstacles to doing
business as well as steps to encourage the development of small
businesses and increase food production. Among the measures:

• Soon government offices in need of repairs, transportation, cleaning
and other services will be able to contract with small businesses
instead of relying on government work brigades that often experienced
long delays in getting tasks done.

• In addition to applying for loans, small businesses and small farmers
can now open commercial accounts — a necessary step in doing business
with the government.

• The price on bulk items such as cooking oil and mayonnaise as well as
tools, roof tiles and some other construction items has been lowered to
support newly independent workers who don't have a wholesale market for

• Farmers can sell directly to state-run hotels and other tourist
facilities. They also will soon be able to lease up to 67 hectares
(around 166 acres) of land for 25 years and build homes on the leased
property, according to a recent Reuters report.

• The government opened up more of the retail services sector Sunday ,
allowing appliance repair, carpentry shops and locksmiths, for example,
to lease their shops. In another change, small private businesses can
also hire their own workers.

• Cubans and foreign residents can now buy, sell and donate their used
cars. During the first two months of the reform, which went into effect
in early October, 4,304 cars changed hands and 14,630 registrations for
car transfers were issued, according to Granma, the official newspaper
of the community party.

Unlike the flirtation with free enterprise of the 1990s that came in the
wake of the collapse of the Soviet Union — then Cuba's main benefactor,
most analysts say the current changes are here to stay. After the
economy improved, Havana rolled back a number of free-market reforms it
instituted in the 1990s.

"It doesn't feel tentative this time,'' said Peters. "In the 1990s, they
undertook a limited number of measures and were half holding their noses
as they were announced. Now that's not the case.''

With the economy limping along in recent years — the government pegged
2011 growth at 2.7 percent, this time there doesn't really seem to be
much of an alternative.

The government hopes to save money not only by having fewer workers on
state payrolls but also by collecting taxes from the newly self-employed
and on transactions such as the sale of a car, which carries a 4 percent

An indication of the commitment to the changes is a section called Sin
Pausa (Without Pause), on the website of Trabajadores, the newspaper of
the government-controlled national trade union. It's a collection of
articles on the changes and what the new decree laws mean with
information on everything from how to get titles for properties before
selling them to information on government plans to deal with the
shortage of construction materials.

During a meeting of the National Assembly, Cuba's parliament, in August,
Castro expressed impatience at the pace of reform, saying: "Don't forget
that the first decade of the 21st century has passed and it's time.''

But there are still issues on the table — and Cuba must try to make
changes against the backdrop of a creaky, inefficient bureaucracy and
too many citizens who have learned to survive by stealing from the
state. Castro alluded to these problems during his speech to the
National Assembly, saying the biggest obstacle "is the psychological
barrier formed by inertia, inflexibility, pretense or double standard,
indifference and insensibility.''

Another matter that hasn't been addressed is whether to allow
professionals to be self-employed. If, for example, a Cuban who is
building or repairing a home wanted to hire an architect or engineer to
draw up plans, would such professionals be allowed to work on their own?

And Havana must find the proper balance between a desire to increase
revenue through taxation and not taxing so much that it squelches
fledgling private businesses, said Peters.

While most analysts agree that economic reforms are too far along to be
reversed, the rebuilding of the Cuban economy is definitely a work in

"It does seem like the jury is still out on which of the changes will
really take hold. I would characterize the process as slow, gradual and
wait-and see,'' said Piccone. "It's very much an experiment as it goes

And as envisioned by Cuba's aging leadership, the free-market changes
aren't designed to do away with Cuban communism but rather to ensure its
survival after current leaders are gone.

It's also a learning process for the new cuentapropistas who must deal
with taxation, where to get their raw materials, competition and
businesses that sometimes operate at a loss. "I think we'll see a
substantial portion that will fail but for natural reasons, such as
oversupply of certain types of home-based businesses,'' said Peters.

But one thing the reforms are doing is shifting people's attitudes about
their role in the economy. Their new ability to buy and sell homes and
cars also is increasing their mobility to move across the country.
Exiles' monetary contributions to businesses being started by friends
and relatives are giving them a stake in Cuba's future economy, too.

At this point, where it will all lead and what political implications
there might be remain unclear. But Peters said, "There is no doubt these
changes are creating more independence for Cubans.''

This is the second of two parts. The first — how Cuba loosened the
handcuffs on commerce while remaining authoritarian as ever politically
— appeared in Sunday's Herald and can be seen at cuba.

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