Author Archives: The Economist

Reforms in Cuba: Seat belt, mirrors, brake; The road to capitalism does not run smooth

Posted on January 10, 2014 by Arch Ritter

Reforms in Cuba

The Economist., Jan 11th 2014 | Havana

Original here: http://www.economist.com/news/americas/road-capitalism-does-not-run-smooth

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’52 Dodge  going down La Rampa;alongside the Havana Libre Hotel, Photo by Arch Ritter, 2011

WHEN the Cuban government said in December that it intended to let the population buy modern cars without requiring permits, many suspected there would be a catch. They were right.

The cars, which can only be bought through state-owned suppliers, cost a fortune. A 2013 Peugeot 508, marketed in Europe as an affordable saloon car costing around $30,000, has a price tag of more than a quarter of a million dollars at a rundown showroom in Havana. A Chinese Geely, with more than 80,000 kilometres (50,000 miles) on the clock, is on sale for around $30,000. The average salary in Cuba is less than $20 a month. “What do they think they are selling? Aeroplanes?” jokes Erik, a handyman, as he looks at the price-list. “They don’t want to sell any cars. It’s all a show,” agrees Ernesto, a mechanic.

The prices certainly seem designed to deter purchasers. Some even wondered whether there had been a clerical error and prices had been listed in Cuban pesos, Cuba’s local currency, which is worth 24 times less than the dollar-pegged convertible peso (CUC). Another theory is that the high prices are a preview of a widely predicted devaluation of the CUC as part of the government’s commitment to unify the island’s two currencies.

A further explanation may lie in the immediate effect of the reform: the elimination of a thriving black-market trade in the permits to buy new cars. For decades these have been awarded to valued individuals such as exceptional party workers, sports stars and artists. But they had more recently become a currency themselves, swapping hands for around $12,000 each. The government says that those with permits will be first in line to buy new cars—a dubious benefit given that many have quadrupled in price since the reform.

“There could hardly be a stronger signal that this remains a controlled economy,” says one Havana-based diplomat. Since taking over as president from his brother Fidel in 2008, Raúl Castro has taken some steps to reduce the state’s economic role. He has allowed small-scale self-employment, permitted Cubans to buy houses and given private farmers more autonomy to grow and sell their produce. But he has always insisted such reforms will be “without haste”. Now there are signs that he is deliberately slowing things down.

On January 1st, the 55th anniversary of the revolution, Mr Castro gave a speech in Santiago, Cuba’s second-largest city. He made no mention of further reform, instead castigating unnamed foreign groups for attempting to introduce “neoliberal” and “neocolonial” thinking.

That day the government also enacted a law banning the resale of clothes imported from abroad. The trade of “tailor and dressmaker” is one of around 200 private occupations that were officially permitted in 2010. Since then thousands of entrepreneurs have stretched its definition, setting up small clothing stores stocked with brands from Europe and the United States.

The clothes are often imported in suitcases by Cuban travellers taking advantage of another reform, which eliminated the requirement for a permit to travel. Eva, a 27-year-old from Havana, says that since 2011 she has been flying to Madrid every two months to stock up her fashion store in the back of her apartment. Now she says she will close her business. “Every time we start to breathe a little, we know the government’s grip will soon tighten.”

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Obama-Castro handshake – a Sign of Mandela-like Reconciliation?

Posted on December 11, 2013 by Arch Ritter

The Obama-Castro Handshake: No High-five

The Economist, Americas View;  Dec 10th 2013, 15:54 by H.T. | MEXICO CITY

s1.reutersmedia.net

“ON BACKGROUND, I can confirm there was a handshake.” In such deliciously cloistered terms did aides in 2000 confirm that President Bill Clinton had shaken hands with Fidel Castro–the first time a sitting American president had ever done so with the Cuban leader. Compared with that, President Barack Obama’s quick but highly public handshake with Raúl Castro, the Cuban president (and Fidel’s brother), at Nelson Mandela’s memorial service in Johannesburg on December 10th looked like a sign of rapprochement between America and Cuba meant to be shouted from the rooftops.

Don’t read too much into it. Judging by the video footage, Mr Castro was the first in a line of leaders greeted by Mr Obama. It would frankly have been rude to rebuff him, not least at an occasion in which Mr Obama spoke movingly of Mr Mandela’s spirit of reconciliation. There were a few words exchanged, but they looked more polite than profound. Not a word, it seems, about Alan Gross, an American government subcontractor jailed in Cuba, who a few days ago appealed to Mr Obama to push for his release.

What’s more, next in line was Dilma Rousseff, the Brazilian president who has been publicly furious with the Obama administration over spying allegations. If he had given the cold shoulder to Mr Castro, she could legitimately have spurned his kiss on both cheeks.

Nor is it the first time Mr Obama has shaken hands with a Latin American antagonist. When he warmly greeted the late Venezuelan leader Hugo Chávez in 2009, it was reported as an attempt to usher in a new era of friendship between the two countries. Nothing of the sort happened. Nor, for that matter, did it after Mr Clinton’s handshake with Fidel.   Better, then, to look for real signs of a thaw. The half-a-century-old American embargo of Cuba still exists, and diplomatic ties have been severed since 1961.

However, Mr Obama’s government has shown some signs of flexibility. Cuban-Americans can travel and send money to Cuba more easily, and postal restrictions have been relaxed. Last month Mr Obama told a group of Cuban-Americans that the United States should “update its policies” towards the Caribbean island.

Then again, in his speech at Mr Mandela’s memorial, Mr Obama also took a swipe at repressive regimes, presumably including Cuba’s. “There are too many leaders who claim solidarity with Madiba’s struggle for freedom, but do not tolerate dissent from their own people,” he said.

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With Dilma Rousseff

FIDEL-CASTROAn Earier Handshake! No trace on the Web of the Clinton-Fidel Handshake.

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Economic Reform in Cuba: A Private Affair

Posted on June 28, 2013 by Arch Ritter

Hesitantly, wholesale markets are becoming more established

FROM the Bay of Pigs to Che Guevara’s mausoleum, there is plenty for revolutionary tourists to see in Cuba. For economic junkies there should soon be a new item on the itinerary: Cuba’s first privately run wholesale market in half a century.

At present it is a nondescript warehouse of green-painted concrete near Havana’s airport. It is unmarked, and so few locals know about it that your correspondent drove past several times before finding it. But state media say it will open on July 1st. It is a source of excitement for those who will occupy it, because it will replace the muddy scrubland where drivers of hundreds of old trucks have been gathering on the outskirts of Havana to sell fruit and vegetables in bulk, always concerned that at any moment their makeshift trading post could be shut down.

They see the new premises as a further step on Cuba’s hesitant path towards freeing up wholesale markets and loosening the state’s control of food distribution. A farmer, sitting under a banana tree next to his cargo, proudly displays a handful of permits that he has recently paid for, covering everything from selling crops to owning and driving a delivery truck. He says that in the past, when the police caught him trying to drive produce to Havana without a licence, they would seize it and give it to a nearby hospital. “They can’t stop me now,” he says.

However, his ability to sell a broader selection of crops remains stymied by a shortage of seeds and fertilisers, supplies of which will not be available in the new market. Such inputs are still controlled by the state, he says, stroking his chin in a gesture that is meant to resemble Fidel Castro’s beard. The only way for a farmer to acquire more than he is allotted is via the black market.

The benefits of burgeoning wholesale trade are evident in a stroll through the back streets of Old Havana. Handcarts owned by private traders overflow with ripe mangos, avocados and limes, whereas government outlets nearby contain a few tired-looking pineapples.

Although wholesale produce is becoming more widely available, the government is only gingerly broadening wholesale trade to other supplies. Restaurant owners, for example, want to be able to buy flour, cooking oil, beer and soft drinks in bulk. Only a few shops provide these. The same is true of construction materials. “We don’t have anything like a Costco, where you can buy 20 crates of beer,” says Omar Everleny, a Cuban economist.

Partly to put such concerns to rest, the government announced in early June that it would gradually permit a variety of wholesale goods to be sold to state-run and privately run businesses, apparently building on an experiment started three months earlier on Isla de la Juventud, an island in western Cuba where Fidel Castro was imprisoned before his revolutionary victory in 1959. A pilot project to sell equipment to private farmers is also said to be taking place on the island. More than helping businessmen, the government’s priority in promoting such changes appears to be to raise output. So far, however, the reforms have been too half-hearted to achieve that.

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The Economist: “A tale of politics, corruption and golf”

Posted on May 31, 2013 by Arch Ritter

 

May 25th 2013 | HAVANA |THE ECONOMIST

AFTER the 1959 revolution Fidel Castro declared that golf was a “bourgeois” hobby, unsuitable for communists. Most of the island’s courses were built on, and no new ones have been developed since. But the government has just given the go-ahead to a new golf resort, in what it claims is “the start of a whole new policy to increase the presence of golf in Cuba”. In the same week it pressed ahead with the prosecutions of several foreign businessmen for corruption. The developments, which seem to be linked, show how Cuba is changing its attitude to business.

The $350m Carbonera Club, near the beach resort of Varadero, is to be developed by Esencia, a British company. A few days before the project was approved, Esencia had staged a golf tournament which was won by Mr Castro’s son Antonio. The development will include residential properties available for purchase by foreigners. Other big tourism projects are under way. The government has given the go-ahead to the construction of a 1,300 berth marina, also in Varadero, which would be the largest in the Caribbean. The island’s airports are to be upgraded too, with help from Brazil’s development bank.

Raúl Castro, Fidel’s brother, has slowly begun to open Cuba’s economy since becoming president in 2008. Cubans may now buy homes and cars, and small businesses such as restaurants and bars have proliferated. But Raúl has been at pains to stress that his intention is to “update” Cuba’s socialist model, rather than reintroduce full-blown capitalism. Perhaps to make that clear, foreign businessmen on the island have had a particularly hard time under his watch. Several have been held without charge for almost two years, ostensibly for corrupt practices. Now, in a move which could be a precursor to their release, they are about to go on trial.

Sarkis Yacoubian, a Canadian of Armenian origin who ran a transport and trading company, will probably be first in court. In July 2011 state security officers raided his office and took him to Havana’s notorious detention centre, Villa Marista, where he apparently admitted paying bribes to state employees (all of whom, from labourers to managers, earn about $20 a month). Some officials were slipped a few ten-dollar notes, or a dinner. At least one was given $50,000.

Mr Yacoubian’s confession soon triggered further arrests. In September 2011 authorities detained his business partner turned rival, Cy Tokmakjian, a fellow Canadian-Armenian. His company, Tokmakjian, had the lucrative sole concession to import Hyundai vehicles to Cuba, and also supplied heavy machinery to the nickel industry.

A month later Amado Fahkre, a managing partner of Coral Capital, a British fund with property and art investments on the island, was arrested. The following year Coral’s chief operating officer, Stephen Purvis, was taken into custody, too. Many other foreign investors fled following the crackdown. Those who stayed complained that it had become much harder to meet Cuban officials.

By announcing the new golf investments at the same time as ending the legal limbo of the jailed foreigners, Raúl may be signalling that once again the island is open for business. The trials and the more relaxed attitude to investment are part of the same process, says one Western diplomat: “After two years of indecision, something is happening.”

Something has to. Cuba’s economy has long been propped up by Venezuela, which provides most of Cuba’s oil in return for tens of thousands of Cuban doctors and security advisers. Nicolás Maduro, Venezuela’s new president, has pledged loyalty to Cuba. But his narrow, disputed election victory last month, and Venezuela’s nosediving economy, mean that Cuba needs other options. Much as Fidel may disapprove, it seems that the sport of stockbrokers is part of the plan.

A Game for Revolutionaries?

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Cuban Politics : All Talk. The government fails to promote new leaders—even though hard times loom

Posted on February 10, 2013 by Arch Ritter

Jan 26th 2013 | HAVANA

Original Article here: Cuban politics : All Talk

The Gerontocracy

RAÚL CASTRO, Cuba’s 81-year-old president, has long said his country should have a younger leadership. During the island’s most recent Communist Party congress he proposed ten-year term limits for future presidents. Rather pointedly, given that his brother Fidel served for 49 years, he called Cuba’s failure to groom a new political generation “an embarrassment”.

But Raúl has done little to promote political renewal either. During that same congress, he chose two ageing party veterans to fill vice-presidential positions. Most senior officials are still “históricos”, who fought with the Castro brothers before the 1959 revolution—originally known for the vigorous youth of its leaders.

On February 24th Cuba’s National Assembly, its nearest equivalent to a parliament, will gather for its twice-yearly meeting. Its 612 delegates are expected to re-elect Raúl to another five-year term. His 86-year-old brother will already have been reconfirmed as a member of the Assembly.

But the meeting will also remind Cubans that some of the regime’s most familiar faces are leaving the stage. Ricardo Alarcón, the president of the Assembly for the past 20 years, will not attend—not because he is 75, but because of suspected tensions with Raúl. His assistant, Miguel Álvarez, was arrested last year and is being held on suspicion of corruption and spying. In 2008 a video of Mr Alarcón struggling in a question-and-answer session with students was leaked to the foreign press. His justification of Cuba’s travel restrictions—because more travel would lead to too many planes in the skies—was ridiculed.

Replacing Mr Alarcón might let Raúl pass symbolic power to the next generation. Possible candidates include Bruno Rodríguez, who was recently promoted to the politburo, and Marino Murillo, the economics chief. Both are in their 50s. But they may have reservations about being portrayed as future leaders. In 2009 two previous high-flyers were secretly recorded at a boozy barbecue mocking Fidel as doddery and out of touch, in a sting co-ordinated by state security. They were soon dismissed.

Any young hopefuls might prefer to wait and see how the regime handles what could be the island’s hardest test since 1991. Hugo Chávez, the Castros’ closest ally, has spent the past month in Havana receiving treatment for cancer, missing his own inauguration for a third six-year term as Venezuela’s president. Cuba now gets almost all the oil it needs from Venezuela, in exchange for sending doctors.

Even while treating Mr Chávez, the Cubans may be looking at back-up plans in case he or his subsidies fail to survive. During the past few years, representatives of oil-rich nations have been generously feted in Havana. Sonangol, Angola’s state oil company, is exploring for oil and gas near the island’s shores. Lavish homes in the capital have been reserved for Angolan officials. In November Cuba awarded a contract to invest in and manage sugar production, which has long been off-limits to foreigners, to Brazil’s Odebrecht. The firm is also part of an $800m project to build a container port at Mariel, just outside Havana, and is looking at making ethanol.

Most Cuban officials were already in charge during the collapse of the Soviet Union, the country’s previous benefactor. That led to harsh austerity. If it happens again, at least Cuban leaders can say they have seen it all before—and survived.

Asamblea Nacional December 2012

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Cuban health care: Nip and tuck in

Posted on November 16, 2012 by Arch Ritter

Cuban health care: Nip and tuck in

Nov 17th 2012, The Economist

SET in a former naval academy overlooking the Florida Straits, the Latin American School of Medicine (ELAM) is supposed to symbolise Cuba’s generosity. Founded by Fidel Castro in 1999, the school’s mission was to provide free training to medical students from all over the world. But these days, visiting foreign dignitaries are given a sales pitch along with their campus tours.

As part of President Raúl Castro’s attempt to stem his brother’s spending, many nations that send students to the school are now expected to pay. Just how much isn’t entirely clear, but the rates are high enough to cause embarrassment to some of the customers. John Mahama, Ghana’s new president and a staunch ally of Cuba, has been obliged to defend what looks like a pricey deal he signed with ELAM as vice-president.

Cuba’s government has never been coy about the sale of its medical services abroad. Official figures show that professionals working overseas—largely in medicine—bring in around $6 billion a year (though the doctors themselves receive only a small fraction of the revenue). Most of that comes from Venezuela, which trades subsidised oil for legions of Cuban health workers. But reports in Namibia suggest that prices for services there are rising, too.

In Cuba itself, meanwhile, private medicine is readily available to paying foreigners and well-connected locals. The two best hospitals in Havana, Cira García and CIMEX, are run for profit. Both are far better than normal state hospitals, where patients are often obliged to bring their own sheets and food.

But health care is now also available on the buoyant black market. A current vogue for breast implants is providing extra income to many surgeons (whose state salary is around $20 a month). The director of one of Havana’s main hospitals was recently detained for running a private health network on the side. Alongside the new restaurants that are opening in the capital, as a result of Raúl Castro’s partial easing of economic restrictions, doctors are now less shy about selling their services. One private dental practice in the Vedado district is notably well-equipped with a snazzy dentist’s chair and implements.

These medical entrepreneurs run the risk of prosecution. If caught, they may be tempted to argue that they are simply following the government’s example.

Cira Garcia (Hard-Currency) Hospital, Mainly for Foreigners

Latin American School of Medicine

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The Economist: “Cuba, Indecision time: Never rapid, Raúl Castro’s reforms seem to be stalling”

Posted on September 14, 2012 by Arch Ritter

From The Economist: September 14, 2012.

The original article in The Economist is here: “Cuba, Indecision time: Never rapid, Raúl Castro’s reforms seem to be stalling”

Sep 14th 2012,

WHEN Raúl Castro, Cuba’s president, gave his latest big speech, to a meeting of the National Assembly in July, he repeated his stock response to those who urge him to move faster with reforms to his country’s stagnant state-run economy. Change, he said, would progress “without haste, but without pause”. But many on the island are questioning whether the reforms—officially called “updating”—have indeed paused.

The changes Raúl has instigated since taking over from his ailing brother, Fidel Castro, in 2006 are significant. Many restrictions on private business, some of which had been in place since the 1960s, have been lifted. Cubans can now buy and sell houses and cars, and employ people. Over 200,000 of them have become self-employed since October 2010. Farmers can lease idle land from the state. Private eateries are now free to serve what they like to as many diners as they like, leading to hundreds of new restaurant openings. Havana’s wealthier residents are rediscovering a long-forgotten pleasure: trying out a new place to eat.

But there are plenty of catches. Cubans can only buy second-hand cars; no new-car dealerships have been allowed. The rules on house purchases are proving so complicated that many people are still doing what they have always done: swap homes and pay each other under the table. Perhaps the biggest stumbling block is that private wholesale markets, long-promised, have yet to be authorised. So restaurants and other businesses have to buy their supplies at retail prices from supermarkets or, more often, the black market. The 181 permitted categories of self-employment include trades, such as plumbing, but still exclude professions. The state remains the sole importer of food. Agricultural output remains below its level of 2007. Flagship projects involving foreign investment, such as several much-touted golf resorts, have been quietly put on hold.

In addition, there have been some seeming U-turns on the road towards a freer economy. A particularly unpopular measure, imposed on September 3rd, dramatically raised the duty payable on excess baggage (above a limit of 30kg per person). This tax used to be paid in the local Cuban peso. Now it must be paid in the “convertible” peso, which is worth 24 times more. So the cost of bringing in goods such as televisions and music systems has soared from a few dollars, to hundreds of dollars.

The government said the change was to reduce queues and increase efficiency. Certainly, since President Barack Obama in 2009 removed almost all restrictions on visits to the island by Cuban-Americans, Havana airport has struggled to cope with the half-a-dozen daily flights that now arrive from the United States. Baggage carousels creak under the weight of everything Cuba lacks: flat-pack furniture, children’s toys, LCD televisions, computer games and the like. Many of the imports are brought in by professional “mules”, usually Cuban-Americans who travel back and forth from Florida several times a week. It is—or was—a profitable business.

The rise in duty will hurt private businesses, whose owners had been assured by state media that, unlike under Fidel Castro’s watch, they are a welcome part of Cuba’s new economy. Many depend on imports. “Nothing is available in Cuba, so what are we supposed to do?” complains Walter, who obtained a licence to be a “car electrician” last year, and runs a flourishing business installing imported music systems in cars. He says he will try to find a way round the increased duties, but if he fails, he will hand back his licence.

“Everything seems on hold,” says a Havana-based European businessman. One theory behind the impasse is that Raúl Castro, who is 81, lacks the energy to overcome resistance to change within the ruling Communist Party. The ghostly presence of Fidel Castro remains an obstacle to reform. And Fidel’s health is again the subject of distracting speculation. His previously verbose “Reflections” on current affairs published in state media fell away to a few, somewhat tangential, sentences before petering out completely in June. He has not been seen in public since March.

Raúl Castro’s crackdown on corruption is another dampener. Malpractice and fraud have been discovered in every industry examined by investigators. Dozens of Cubans and several foreigners have been jailed. The latest probe, in which the president’s son, Alejandro Castro, played a role, concerned a project to expand a nickel-processing plant, a joint-venture with Canada’s Sherritt International. After a brief trial, 12 officials, including three deputy ministers, were jailed last month. In their defence, the officials said that all their talks with foreign partners were held openly. As evidence, Sherritt provided contracts, some signed by Fidel Castro.

One of the defendants, Antonio Orizón de Los Reyes, who served as a deputy minister of industry for 19 years, gave an impassioned speech to the court arguing that he was a scapegoat, and that it was inconceivable that his superiors did not know the details of all deals. His speech was met with impromptu applause. He was sentenced to eight years in jail. “In this atmosphere, everyone is lying low,” says the foreign businessman. “No one is making decisions.” But raising hopes of change only to dash them may prove a dangerous business for the regime.

 

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The Economist, Special Report on Cuba, March 24, 2012

Posted on March 28, 2012 by Arch Ritter

 

The Castros, Cuba and America; On the road towards capitalism

Change is coming to Cuba at last. The United States could do far more to encourage it.

The Economist has produced one of its excellent surveys, this time focusing on Cuba.

Below are a set of hyperlinks to the various chapters of the Cuba Report. The chapter on the economy is presented following the Table of Contents.

Hyperlinked Table of Contents

  Revolution in retreat; Revolution in retreat

Under Raúl Castro, Cuba has begun the journey towards capitalism. But it will take a decade and a big political battle to complete, writes Michael Reid

  Inequality; The deal’s off

Inequalities are growing as the paternalistic state is becoming ever less affordable

Population; Hasta la vista, baby

The population is shrinking, ageing—and emigrating

The economy: Edging towards capitalism

Why reforms are slow and difficult

Politics; Grandmother’s footsteps

With no sign of a Cuban spring, change will have to come from within the party

Cuban-Americans; The Miami mirror

Cubans on the other side of the water are slowly changing too

After the Castros; The biological factor

Who and what will follow Raúl?

The Economy: Edging towards capitalism

Why reforms are slow and difficult

GISELA NICOLAS AND two of her friends wanted to set up an events-catering company, but that is not one of the 181 activities on the approved list for those who work por cuenta propia (“on their own account”), so in May 2011 they opened a restaurant called La Galeria. With 50 covers, it is a fairly ambitious business by Havana standards. They have rented a large house in Vedado and hired a top chef and 13 other staff who are paid two to three times the average wage, plus tips. The customers are mainly foreign businesspeople and diplomats, Cuban artists and musicians and visiting Cuban-Americans.

“This opportunity means a lot to us,” says Ms Nicolas, who used to work for a Mexican marketing company. “But they haven’t created the conditions for a profitable business.” There are no wholesalers in Cuba, so all supplies come from state-owned supermarkets or from trips abroad. Reservations are taken on Ms Nicolas’s mobile phone. Advertising is banned, though classified ads in the phone book will soon be allowed.

Across Cuba small businesses are proliferating. Most are on a more modest scale than La Galeria. Fernando and Orlandis Suri, who are smallholders at El Cacahual, a hamlet south of Havana, can now legally sell their fat pineapples and papaya from a roadside stall, along with other produce. Orlandis plans to rent space on Havana’s seafront to sell fruit cocktails and juice. In Santa Clara, Mr Pérez’s wife, Yolanda, sells ice-cream from their home. Having paid 200 pesos for a licence and 87 pesos in social-security contributions, she earns enough “to buy salad”. The streets around Havana’s Parque Central heave with vendors hawking snacks and tourist trinkets. Many of them are teachers, accountants and doctors who have left their jobs for a more lucrative, if precarious, life in the private sector.

No reason to work

This cuentapropismo is only the most visible part of Raúl Castro’s reform plan. “The fundamental issue in Cuba is production,” says Omar Everleny, a reformist economist. “Prices are high and wages are low because we don’t produce enough.”

Cuban statistics are incomplete, inconsistent and often questionable. But in a lifetime’s detective work, Carmelo Mesa Lago at the University of Pittsburgh has calculated that output per head of 15 out of 22 main agricultural and industrial products was dramatically lower in 2007 than it had been in 1958. The biggest growth has come in oil and gas and in nickel mining, largely thanks to investment since the 1990s by Sherritt, a Canadian firm. But output per head of sugar, an iconic Cuban product, has dropped to an eighth of its level in 1958 and 1989. Capital investment has collapsed. Raúl Castro has repeatedly lamented that Cuba imported around 80% of the food it consumed between 2007 and 2009, at a cost of over $1.7 billion a year.

The American embargo is an irritant, but the economy’s central failing is that Fidel’s paternalist state did away with any incentive to work, or any sanction for not doing so. So most Cubans do not work very hard at their official jobs. People stand around chatting or conduct long telephone conversations with their mothers. They also routinely pilfer supplies from their workplace: that is what keeps the informal economy going.

The global financial crisis in 2007-08 also took its toll. Tourists stayed away, the oil price plunged, and with it Venezuelan aid. Hurricane damage meant more food imports, just when world food prices were rising and those of nickel, now Cuba’s main export, were plunging. All this coincided with the political infighting in which Mr Lage was ousted, during which “all financial and budgetary discipline was blown away”, according to a foreign businessman. Having repeatedly defaulted on its foreign debt, Cuba has little access to credit. Instead of devaluing the CUC, which would have pushed up inflation, in January 2009 the government seized about $1 billion in hard-currency balances held by state-owned enterprises (SOEs) and foreign joint ventures. It did not finish paying them back until December 2011.

The guidelines approved by the party congress contain measures to raise production and exports, cut import demand and make the state financially sustainable. This involves, first, turning over idle state land to private farmers; second, making the state more productive by transferring surplus workers to the private sector or to co-ops; and third, lifting some of the many prohibitions that restrict Cuban lives, and granting much more autonomy to the 3,700 SOEs.

The grip of the state on Cuban farming has been disastrous. State farms of various kinds hold 75% of Cuba’s 6.7m hectares of agricultural land. In 2007 some 45% of this was lying idle, much of it overrun by marabú, a tenacious weed. Cuba is the only country in Latin America where killing a cow is a crime (and eating beef a rare luxury). That has not stopped the cattle herd declining from 7m in 1967 to 4m in 2011.

In 2008 Raúl allowed private farmers and co-ops to lease idle state land for ten years. By December last year 1.4m hectares had been handed out. The government has now agreed to extend the lease-period to up to 25 years, allow farm buildings to be put up and pay for any improvements if the leases are not renewed.

Credit and technical assistance also remain scarce, says Armando Nova of CEEC. Farmers suffer in the grip of Acopio, the state marketing organisation. It is the monopoly supplier of inputs such as seeds, fertiliser and equipment and was the sole purchaser of the farms’ output, but its monopoly is being dented. Farmers can now sell surplus production of all but 17 basic crops themselves. Under a pilot programme in Artemisa and Mayabeque provinces, near Havana, new co-ops will take over many of Acopio’s functions.

The reformers want to see Acopio go. More surprisingly, so does Joaquín Infante Ugarte at the National Association of Economists and Accountants (ANEC): “It’s always been a disaster. We should put a bomb under it.” But in around 100 of Cuba’s 168 municipalities the economy is based on farming, so Acopio is a big source of power and perks for party hacks, and its future is the subject of an intense political battle. That makes farmers nervous. A year ago the 30 or so farmers in the Antonio Maceo co-op in Mayabeque leased extra land, got a loan and planted bananas, citrus and beans. The administrator says output is up, but “it will take time to see a real difference.” And with that he clammed up.

Official data suggest that output of many crops fell last year; the price of food rose by 20%. That may be partly because farmers are bypassing the official channels. Granma, the official—and only—daily newspaper, reported in January that a spontaneous, self-organised and regulated wholesale market in farm products has sprung up in Havana. That looks like the future.

Letting go is hard to do

Reducing the state’s share of the economy has been even more contested. Raúl originally said the government would lay off 500,000 workers by March 2011 and a total of 1.1m by 2014. That timetable has slipped by several years because the government has been reluctant to allow sufficiently attractive alternatives for workers to give up the security (and the pilfering opportunities) of a state job. But including voluntary lay-offs and plans to turn many state service jobs into co-ops (as has already happened with small barber’s shops, beauty parlours and a few taxi drivers), some 35-40% of the workforce of 4.1m should end up in the private sector by 2015, reckons Mr Everleny.

Raúl sees corruption as politically incendiary at a time of rising inequality

By October 2011, he says, some 338,000 people had requested a business licence, 60% of whom were not leaving state jobs, suggesting that they were simply legalising a previous informal activity. As happens to small businesses the world over, many fail in the first year. Few of the cuentapropistas have Ms Nicolas’s business experience. Many clearly find it hard to distinguish revenue from profit. ANEC is organising training courses. But the government has stalled an attempt by the Catholic church to set up an embryonic business school.

If cuentapropismo is not to be a recipe for poverty, the government will have to ease the rules. Mr Everleny wants to see private professional-service firms being established: architects, engineers, even doctors. Already the taxes levied on the new businesses have been cut, but they are still designed to produce “bonsai companies”, in the words of Oscar Espinosa Chepe, a dissident economist.

Lack of credit is another obstacle. Start-up capital for new businesses comes mainly from remittances. In a pilot scheme the government approved $3.6m in credits in January, nearly all for house improvements. As for deregulation, Raúl has taken some simple and popular steps, lifting bans on Cubans using tourist hotels and owning mobile phones and computers, and last year allowing them to buy and sell houses and cars.

But reforming SOEs is far more complicated. They have been told to introduce performance-related pay. The boldest step was last year’s abolition of the sugar ministry. In principle, SOEs that lose money will be merged or turned over to their workers as co-ops. But a planned bankruptcy law is still pending. So is the elimination of subsidies and the introduction of market pricing. Mr Ugarte of ANEC thinks much of this will happen this year, along with a new law to introduce corporate income tax.

The pace of change has picked up since the party congress set up a commission with 90 staff under Marino Murillo, a Politburo member and former economy minister, to push through the reforms, says Jorge Mario Sánchez at CEEC. “By 2015 there won’t be the socialist economy of the 1990s, nor the same society.” But there are several gaps.

For one, the government seems undecided what to do about foreign investment, a key element in the rapid growth in Vietnam and China. It has cancelled some of the joint ventures it had signed (often in haste) during the Special Period, and such new agreements as it is entering are almost exclusively with companies from Venezuela, China and Brazil. Odebrecht, a Brazilian conglomerate, has reached an agreement under which it will run a large sugar mill in Cienfuegos for ten years. Many foreign companies are keen to invest in Cuba but are put off by the government’s insistence on keeping a majority stake and its history of arbitrary policy change.

Officials worry that foreign investment brings corruption. Raúl has launched an anti-corruption drive with the creation of a powerful new auditor-general’s office. Several hundred Cuban officials, some very senior, have been jailed, as have three foreigners. Raúl rightly sees corruption as politically incendiary at a time of rising inequality. But he is tackling the symptoms rather than the cause. “People who were making $20 a month were negotiating contracts worth $10m,” says a foreign diplomat.

The guidelines involve only microeconomic reforms. Raúl’s macroeconomic recipe has so far been limited to austerity: he has managed to trim the fiscal and current-account deficits. The trickiest reform of all will be unifying the two currencies, by devaluing the CUC and revaluing the peso. It would help if Cuba were a member of the IMF and the World Bank and had access to international credit, but so far the government has shown no interest in joining. Mr Vidal of CEEC points out that for devaluation to provide a stimulus, rather than just generating inflation, the economy would have to be far more flexible. That will require a political battle.

 

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“The Economist” on Taxes in Cuba: Get used to it

Posted on September 15, 2011 by Arch Ritter

The Castros’ subjects get acquainted with that other sure thing

Sep 17th 2011 | HAVANA | from the print edition

Half your monies are belong to us

WHEN Raúl Castro, Cuba’s president, announced last year that the government would cut its payroll by up to 20% and promote self-employment, state media hailed the birth of a “tax culture”. As most Cubans had never paid income tax, the Communist newspaper published a guide to the concept. Government economists predicted a 400% increase in tax revenue from individuals.

The experiment has been bumpy. Last October Cuba published a tax code for workers in its 181 newly authorised occupations, ranging from furniture repairer to professional clown. As in the early 1990s, the last time Cuba tried economic liberalisation and taxation, the rates were punitive: 10% on turnover, 25% for social security and up to 50% on income. Such levies discouraged some people from risking self-employment. By May applications for job licences were tailing off.

Moreover, Mr Castro failed to beef up the National Tax Administration Office (ONAT), which was soon overwhelmed by filings. That has delayed revenue collection, and allowed both intentional and inadvertent tax cheats to go unpunished. “They seem even more confused about this than we are,” says Ernesto, an engineer who obtained a licence to set up a plumbing business in March. He admits that he simply guesses how much he has earned each month and declares a tenth as much.

But Mr Castro seems more flexible than his brother and predecessor Fidel, who blamed the self-employed for sowing inequality and happily taxed private firms out of existence. Eager to find jobs for up to 1m public workers he plans to fire, he has carved out exemptions from the social-security tax and twice increased the scope for deductions. He has also ordered ONAT to retrain its staff and hire new inspectors. “There certainly is an element of making up the rules as they go along,” says one European diplomat based in Havana. “But Raúl seems totally determined to make this work.”

Further reforms are on the way. By the end of 2011, Cubans will be allowed to buy and sell homes and cars. It remains to be seen how long they will accept taxation without representation. “They happily take our taxes,” says Michel, a barber who recently founded a business. “But they still keep their secrets.”

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“The Economist” on Cuba’s Housing Market

Posted on February 10, 2011 by Arch Ritter

Swap shop: Where a beach-front house can be (almost) yours for a snip

Feb 3rd 2011 | HAVANA

CUBA’S government likes to crow that over 85% of Cubans own their homes. The claim is technically correct. However, there is a catch: holding title to a property does not give you the right to sell it. The only legal way to move in Cuba is by swapping residences—a slow, bureaucratic and often corrupt process known as the permuta (“exchange”), which requires finding two roughly similar properties and getting state approval. To avoid this hassle, some Cubans prefer to marry the owner of a property, transfer the deed, and divorce.

Because there is no incentive to build new homes, Cuba suffers from a dire housing shortage. Many buildings have been repeatedly subdivided. In some families three generations share one bedroom.

After replacing his brother as president in 2008, Raúl Castro has legalised and taxed bits of Cuba’s informal economy, like pirated DVDs and used furniture. Now he has turned to housing. In 2010 the government relaxed rules on forming building companies and buying building materials. It is preparing to let foreigners buy property in tourist zones. And in April the Communist Party Congress is expected to allow Cubans to “buy, sell, or swap” their homes.

Havana’s Housing Market, circa 2002: Arranging “Permutas” on Paseo del Prado, Photo by Arch Ritter

The effect of these measures may be limited. Most permutas already involve money under the table—ranging from a few thousand dollars to $40,000 for a smart three-bedroom flat. The market will be heavily regulated: officials say they will ban the (as yet undefined) “accumulation” of property. And buyers may be discouraged if they have to prove that their money did not come from the vast black market.

Even so, allowing selling is risky. It will raise tax revenues, but could belie Cuba’s myth of material equality. If too many luxury homes pop up, the poor may further doubt that America’s trade embargo is the cause of their misery. Already a cluster of sea-front houses west of Havana, acquired via permuta by pop stars and foreigners, is getting its first lick of paint in decades.

The market will probably benefit from Barack Obama’s loosening of the embargo. He has relaxed most limits on visits and remittances, which should increase demand for Cuban homes and the amount buyers can pay. Some Cuban-Americans are even considering returning for retirement. “Now is the time to move”, says Ada Fuentes, who recently came back to Havana after 49 years in New Jersey. “If you have money, life’s good here”.

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