Tag Archives: Economic Reforms

Juan Triana: “From the submerged economy to micro-enterprise, are there any guarantees for the future?”

Posted on November 27, 2012 by Arch Ritter

Dr.  Juan Triana Cordoví, Universidad de la Habana

November 15, 2012

Submerged economy, merolicos, informal workers, cuentapropistas, self employed, a “necessary evil”, are some of the qualifiers used to describe individuals who work in the independent sector in Cuba closely reflects the fluctuations and reversals to which the non-state run economy has been exposed, and which in a way have been a thermometer for the transformations of the Cuban economy.

Art Market, on the Malecon. Photo by A. Ritter

I. Some history: from the revolution to the rebirth of the independent work in 1993

As a result of the Cuban revolution in 1968, about 58,000 private businesses were nationalized, mostly small family businesses, focused on retail and restaurants. Some other small businesses worked in some kind of craft or industry, but these were generally low-tech. Some estimates put those businesses as employing between three and seven workers each. If we estimate an average of five workers per business, then the sector generated employment for about 300,000 people, out of a total population that exceeded six million.

Self-employment appeared when the different alternatives generated from the State failed to meet the demands of the population for different services and products (On July 3, 1978 Executive Order No. 14 was issued to regulate self-employment activities to be exercised by workers), but after a brief period of expansion, it languished in the absence of stimulus policies and its tacit rejection based on ideological and political considerations.

Self employment was revived in 19931 (Executive Decree 141) in response to the adjustments in the production and employment sectors generated by the crisis. It was accepted as a “necessary evil,” but not as an integral part of a development strategy destined to occupy a legitimate space to contribute to growth efforts 2.

Far from policies to stimulate and insert it in the operating dynamics of the economy, those policies helped to marginalize it, restrict it and prevent a qualitative transformation, which caused the decline of the sector (between 1996 and 2001 by 40%), its geographical concentration (especially in Havana) and concentration on the most profitable activities (food, transport and rentals)

That same policy that limited the access of new workers to the sector caused the generation and appropriation of undue rents, supported by the virtual monopoly in some market segments by those who “had come first,” into the sector and were later “protected” by the State. This was really ironic because the barriers to enter the sector that were created from the institutions that were supposed to “regulate” it, and the restrictive policies established, reduced competition in the “cuentapropista” sector, allowing the accumulation of income, not based on productivity and efficiency, as well as the expansion of informal channels of supply, some of them, hard to quantify, in many cases from state agencies, creating disincentives for improvement and innovation.

There were two big losers: the dynamics of the national economy, as an economic circuit was generated separately from the rest of the economy, and the population (clients) who debated between the government monopoly over some services, and the monopoly that almost unwittingly was exercised by portions of the self-employed over some (most lucrative) activities and services that were “unregulated”.

II. “Cuentapropismo” beyond “cuentapropismo”

 Studies of this sector in Cuba, have often given priority to its importance for the economic liberalization and decentralization, as well as its significance from the point of view of the expansion of market relations. There is another perspective on this issue that also must be addressed. Micro, small and medium enterprises are part of the skein of any economy, regardless of the degree of development. Their contribution to employment is significant, the flexibility and maneuverability that it gives the economies (even developed economies) allowing systematic adjustments is unquestionable, and in some economies, this sector even has innovation capabilities that should not be ignored.

Until not very long ago, the “cuentapropista” sector in Cuba was a marginal sector, but this has drastically changed starting on 2011, and this trend should increase in the coming years.3

Table 1. Employment Dynamics

         2008    2009      2010      2011

Total number of employed  (thousands)     4.948,2   5.072,4  4.984,5  5.010,2

State sector                         4.112,3   4.249,5  4.178,1  3.873,0

            Cooperatives                            233,8      231,6     217,0     652,1

            Private                                      602,1      591,3     589,4    485,1

            Independent workers            141,6      143,8     147,4    391,5

Source: ONEI, Anuario estadístico de Cuba 2011.

A reading of the data reveals some new features of the national economy regarding employment:

a. The total number of the employed fluctuates around five million people and it should grow significantly in the coming years.

b. The participation of the state sector continues to be decisive in total employment, but it has declined in the past two years.

c. In the non-state sector, the number of the employed decreased as a whole4, but the “cuentrapropista” sector was able to generate 244,000 jobs.

A fact that is relevant to the survival of the cuentapropista sector in the medium and long term is that it has become a significant element of employment for the country, since no other sector with so little capital is able to generate that amount of employment, so it is “socially desirable”. It is also the fastest growing sector in female employment in recent years. All these “objective reasons” give certain guarantee in the medium and long term for the existence of “cuentapropismo”. Today it is a functional sector due to the reforms undertaken in 2007 and consolidated in 2011.

A Fine New Restaurant: Paladar “Dona Eutimia”, Callejon del Chorro, Plaza de la Catedral, opened February 2010; Photo by Arch Ritter

 III. Institutionalis m and “cuentapropismo”

 Another perspective of this analysis is associated with the institutional protection that has been created to protect the independent sector.

The “modern legal network” directly associated with the expansion of self-employment was initially contained in two special issues of the Official Gazette of the Republic of Cuba published on October 25, 2011 (numbers 11 and 12, dated 1 and 8 October, respectively). They included five legislative decrees, an executive decree, an agreement of the Executive Committee of the Council of Ministers, and fourteen ministerial decisions.4 Probably due to two factors: the contraction of the foreign companies and the loans and services cooperatives.

With regards to Legislative Decree 141 of 1993, the 2011 modernization of the statute introduced obvious advantages, as it:

• Allowed commercial exchanges between “cuentapropistas” and Government entities.

• Authorized hiring a workforce, automatically converting “cuentrapropistas” into micro entrepreneurs.

• Conferred the status of taxpayers and Social Security recipients.

• Authorized access to bank financing.

• Allowed the rental of government or third party premises and assets.

• Authorized the exercise of several trades by the same person.

• Removed the restriction of having to belong to a territory to exercise a trade in it.

• Dispensed with the requirement of being retired or have some employment link to access this form of employment.

• Removed the restriction on the rental of a whole house or apartment, to allow the leasing of rooms by the hour and the use property assigned or repaired by the state in the past decade.

• Allowed the leasing of homes and vehicles to people who have residence abroad or to those living in Cuba, but leaving the country for more than three months, for which they can appoint a representative.

• Increased the capacity to fifty seats in the “paladares”, removed the restriction to employ only family members, and the ban on the sale of food products made with potatoes, seafood and beef.

 As a result, a new regulatory environment has been created that exceeds the direct legal network. As part of the reform, as well as other measures authorizing the sale of houses and cars, for example, allows legal improvement to the facilities of the business, and the sale of cars which can improve the “assets” of new businesses.

In addition, the land lease policy and its recent update could facilitate the increase of supplies for those engaged in food services.

A sign that the sector considerations have changed, and that the current government wishes to convey security and transparency, is the submission to the National Assembly in the summer of 2012, of a new tax law that incorporates some additional benefits for independent workers, which include:

• The tax burden of the self employed is reduced between 3% and 7% for the segments with higher and lower income, respectively.

• A tax rate decrease for the use of labor force in the sector of self-employed workers, from 25% to 5% in the term of 5 years. It also maintains this tax exemption for the self-employed, individual farmers and other individuals authorized to hire up to 5 workers.

 To these considerations we should add the “ideological and political institutionalization” of the sector, whose best expression is reflected in the words of President Raul Castro:

“The increase in the private sector of the economy, far from being an alleged privatization of social property, as some theorists claim, is destined to become a facilitating factor for the construction of socialism in Cuba, as it will allow the State to focus on raising the efficiency of the basic means of production owned by the people and release the management of nonstrategic activities for the country … we must facilitate the management and abstain from generating stigma or prejudice towards them and demonize them” ….. and later added “This time there will be no return”.

 Soon, a new regulation for the operation of cooperatives in the agricultural sector will be released, which will enrich the environment in which the self-employed sector operates, will introduce new competitive challenges and make the economic fabric of the country more complex, generating new production chains.

Certainly, there is still a long way to go. Eventually it will be necessary to formally take the step from “cuentapropismo” to micro, small and medium enterprises. The time has come to consider legislation regulating a negative list (much smaller than the current listing of allowed work) of jobs that cannot be exercised privately. The time has come to incorporate offices and university professionals in jobs directly related to their careers to prevent their loss by emigration or non-use, and/or the waste of human potential unquestionably created in recent years, who have proven to be highly competitive in “other markets “. At some point, it will be necessary to incorporate into the Constitution of the Republic these new realities to begin to delineate a new economic model, but also to begin to draw a new model of development for the country, in which productivity gains and efficiency cannot be expected to only come from the state sector.

1 (*) Professor of the Centro de Estudios de la Economía Cubana, Universidad de la Habana.

(**) Cuentapropista used interchangably with self-employed in translation.

In 1993 it was established who could be self employed: state enterprise workers, retirees, the unemployed who receive subsidies from the State.10 and housewives11, and what activities, especially manual could be included, limiting access to those who could compete with the state.

2 Services that can be offered are limited and are prohibited in some geographic areas, there is no access to bank loans, workers cannot be hired as such (only allowed family work), and a high tax system is applied to independent activities … This regulation determines that the production costs must be assumed by the “cuentapropistas”.

3 In fact, the space gained by some of these “modalities” has ignored certain issues such as the “tourism extra hotels network” always considered inside the state sector but one of the weaker of the government enterprises. Today there are in Havana more than 370 private restaurants and possible more than half of them have appeared since 2011.

Mercado Atesanal, on the Malecon, photo by Arch Ritter

Bibliography.

Castro R. Periódico Granma, 20-12-10

Gaceta Oficial de la República de Cuba, No. 12, Edic. Extraordinaria, 8-10-12.

Vidal P. y Pérez O. Entre el ajuste fiscal y los cambios estructurales: se extiende el cuentapropismo en Cuba, Espacio Laical No. 4, 2010.

Fuentes, I. Cuentapropismo o Cuentapriapismo: Retos y Consideraciones Sobre Género, Auto-Empleo y Privatización, Cuba in Transition, ASCE, 2000

Ritter A. El régimen impositivo para la microempresa en Cuba, Revista de la CEPAL No. 70, 2000, Naciones Unidas CEPAL, Santiago Chile.

Peter P. “Cuban Entrepreneurs: From Necessary Evil to Strategic Necessity” http://www.american.com/archive/2011/january/cuban-entrepreneurs-from-necessary-evil-to-strategic-necessity

Gonzáles A. “La economía sumergida en Cuba” Revista Investigación Económica, No.2, April-June 1995, INIE.

Suárez L. M. “Cuba: nuevo marco regulatorio del trabajo por cuenta propia” en www.evershedslupicinio.com

Cuenta Propista and Artisan, Photo by Arch Ritter, November 2008

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Antonio Romero “Cuba: Reformulación del Modelo Economico e Inserción Externa”

Posted on November 5, 2012 by Arch Ritter

From the Cuba Study Group, Desde la Isla, 5 de Noviembre de 2012

Antonio Romero, Universidad de la Habana

From the Island, Issue 13, November 5, 2012

 I.              Economic Growth and Development in Cuba: some conceptual challenge s.

 The set of economic and social guidelines adopted at the Sixth Congress of the PCC (Havana, April 2011) cover a wide range of policies, sectors and areas of action. The application of these guidelines will determine substantive changes for the country’s economic, social and political life. However, it is convenient to think of an analysis that defines strategic foresight—from the experience gained and the economic and social problems currently facing Cuba, which are the basis of the transformation process—a medium and long term vision for the country that is wanted and can be built. It should consider the restrictions on existing national political space, and the basic political consensus, economic and social rights of the Cuban nation.

Such a medium and long term view would necessarily have to include in economic terms, the requirement to achieve high and sustainable growth rates in Cuba. This is key to guarantee expanded reproduction, increased living standards and the welfare of the population, a necessary condition, although not exclusive, for development.

Considering the growth rate of gross domestic product as an indicator of little relevance in economic terms—as it was believed by some in recent periods in Cuba’s economic history—reveals serious limitations in understanding the processes that lead to the development of a country. The development is always a path of sustained growth in the context of the dynamic interaction of capital investment, the accumulation of knowledge applied to production, structural change and institutional development. Key in this strategic vision—in economic terms—would be the discussion and definition of the spaces needed in that process of change:

i)                    the non-government property sector and within it, the private sector;

ii)                  monetary-commercial relationships and their link to national economic development;

iii)                decentralization of the management and direction of the national economy, and what degree of autonomy derived from it would be allowed to economic agents;

iv)                the role of economic stimulus to encourage production and reward the efforts and social contributions of people and the institutions in which they work; and

v)                  the degree of acceptable distributive inequity—and buffer policies—under such a scenario in the medium and long term.

Obviously, such a strategic vision would include other elements, but the five dimensions outlined above would be central to the understanding and to consistency of the process of transformation of the development model for the country.

Progress in terms of development, also involves in the case of small economies like Cuba, the adoption and implementation of a strategy of specialization relatively concentrated in a limited number of export activities that will ensure the country international insertion and that would be beneficial to sustained expanded reproduction.

This is so because small island economies are not able to establish a “closed loop” for operation, since they cannot internally guarantee all conditions that are required for economic growth.

The limited size of the domestic market, the requirements of economies of scale that characterize contemporary technology, and the limitations on labor and financial and productive resources, determine a relatively narrow specialization in the case of small economies like Cuba.

The complete essay:  Antonio Romero, Cuba, Reformulation of the Economic Model  and External Insertion

Antonio Romero, CIEI, Universidad de la Habana

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National Geographic, November 2012: “Cuba’s New Now”

Posted on October 31, 2012 by Arch Ritter

After half a century under Fidel, Cubans feel a wary sense of possibility. But this time, don’t expect a revolution.

 By Cynthia Gorney

 Original Article here: Cuba’s New Now

Photo Gallery for Article: Cuba Photos

Onions for Sale, Spring 2010 

“I want to show you where we’re hiding it,” Eduardo said.

Bad idea, I said. Someone will notice the foreigner and wreck the plan.

“No, I figured it out,” Eduardo said. “You won’t get out of the car. I’ll drive by, slowly, not so slow that we attract attention. I’ll tell you when to look. Be discreet.”

He had borrowed a friend’s máquina, which means “machine” but is also what Cubans call the old American cars that are ubiquitous in the Havana souvenir postcards. This one was a 1956 Plymouth of a lurid color that I teased him about, but I pulled the passenger door shut gently, the way Cubans always remind you to, out of respect for their máquinas’ advanced age. Now we were driving along the coast, some distance from Havana, into the coastal town where Eduardo and nine other men had paid a guy, in secret, to build a boat sturdy enough to motor them all out of Cuba at once.

“There,” Eduardo said, and slowed the Plymouth. Between two peeling-paint buildings, on the inland side of the street, a narrow alley ended in a windowless structure the size of a one-car garage. “We’ll have to carry it out and wheel it up the alley,” he said. “Then it’s a whole block along this main street, toward that gravel that leads into the water. We’ll wait until after midnight. But navy helicopters patrol offshore.”

He peered into his rearview mirror at the empty street behind him, concentrating, so I shut up. Eduardo is 35, a light-skinned Cuban with short brown hair and a wrestler’s build, and in the months since we first met last winter—he’s a former construction worker but that day was driving a borrowed Korean sedan and trying to earn money as an off-the-books cabdriver—we had taken to yelling good-naturedly and interrupting each other as we drove around La Habana Province, arguing about the New Changing Cuba. He said there was no such thing. I said people insisted there was. I invoked the many reports I was reading, with names like “Change in Post-Fidel Cuba” and “Cuba’s New Resolve.” Eduardo would gaze heavenward in exasperation. I invoked the much vaunted new rules opening up the controlled economy of socialist Cuba—the laws allowing people to buy and sell houses and cars openly, obtain bank loans, and work legally for themselves in a variety of small businesses rather than being obliged to work for the state.

But no. More eye rolling. “All that is for the benefit of these guys,” Eduardo said to me once, and tapped his own shoulder, the discreet Cuban signal for a person with military hardware and inner-circle political pull.

What about Fidel Castro having permanently left the presidency four years ago, formally yielding the office of commander in chief to his more flexible and pragmatic younger brother, Raúl?

“Viva Cuba Libre,” Eduardo muttered, mimicking a revolutionary exhortation we’d seen emblazoned high on an outdoor wall. Long live free Cuba. “Free from both of them,” he said. “That’s when there might be real change.”

Cuba, New Now, National Geographic

Private Parking Agent for City Parking Authorty 

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The Economic Implications for Cuba of Relaxing Restrictions on the Freedom of Movement

Posted on October 17, 2012 by Arch Ritter

By Arch Ritter, October 16, 2012

Cuba’s relaxation of its much-loathed travel regulations, to come into effect on January 14 2013,  is welcome news as it will improve the freedom of movement for Cuban citizens considerrably– one hopes .  It is certainly to be welcomed warmly.

The new policy abolishes the requirement to have a foreigner make an invitation and pay $224.00 (CDN in 2009) for an exit visa (non-refundable even if the permit is refused.) It also permits Cubans to remain outside the country for 24 months, extendable, rather than the current 11 months, without having their property in Cuba confiscated.

There are a number of unknowns in the new policy however.

  • Restrictions or controls apparently will remain on professionals . How broad these are is not clear.
  • Will the restrictions still apply to independent professionals such as pro-democracy critics such as Oscar Chepe or Yoani Sanchez?  Will they still require exit permits?  Will they then be free to return to Cuba?

Dimas Castellanos, Miriam Celaya, Reinaldo Escobar and Yoani Sanchez; Will Cuba’s Pro-Democracy Bloggers now be able to exit Cuba freely and – one hopes – to return freely as well?

 TheEconomic Consequences of the New Travel Regulatoions

 Increased Emigration?

Easier exit and 24 months – extendable – absence may lead to more emigration and the  loss of “human capital.”  Already annual net emigration is high, reaching 38,165 in 2010 (ONE 2011 Table 3.21). Those who emígrate are disproportionately better education and entrepreneurial and ready to face the challenges of starting over in a new country. Such population loss is especially onerous in view of Cuba’s declining population and the prospect of accelerated decline as an aging population becomes a dying population .

Or Decreased Emigration?

Greater freedom to exit and re-enter Cuba may in fact reduce emigration as Cubans in Cuba are able to leave more freely.

Perhaps increased numbers of Cubans will remain in Cuba if they are free to visit abroad for lengthy periods ot time and also to return.

For some Cubns such as musicians oir major league Cuban baseball players in the United States and Canada,  spending part of the year in the US but returning for some months to Cuba each year would be an ideal situation. Would some such professionals ultimately  return to live in Cuba part-time?

Declining or Increasing Revenues for the Government?

The Cuban Government will lose the revenues from the very high exit permit fees. (These were an extortionarte $ US 224.00 for each person in 2009 when I tried to invite two  Cubans, Miriam Celaya and Yoani Sanchex to visit Canada in a prívate capacity. The payments were non-refundable.)

But will increased foreign travel lead to higher government tariff revenues from the increased volumes of products imported by air passengers?

 Increased Remittance Payments from Migrants?

Will more Cubans leave Cuba to work abroad but support their families at home in Cuba and revisiting often? The result would then be increased inflows of hard currency to Cuba.

In summary, the economic implications of the relaxation of the travel restrictions are ambiguous and not yet clear – as is the detail of the legislation itself at this time.

However, the government perhaps is to be congratulated for renouncing some easy forms of hard currency income from the elimination of the exit permit fee and facing the risk of increased emigration.  Over time, the crass monetary aspects of the improvement in peoples’ freedom of movement should be more positive in terms of government revenues and National economic gains.

 Currency Inconvertibility and Monetary Dualism as Limits on Freedom of Movement

The most serious violation of the freedom of movement of Cuban citizens results from Cuba’s monetary and exchange rate system.  Cuba’s currency has been inconvertible for 50 years and the dual monetary and exchange rate system has prevailed for the last 20 years. Currency inconvertibility means that citizens can not routinely change their earnings for foreign currencies in order to travel freely. Instead, from 1961 to 1992 they have had to get permission from the Government to exchange their earnings in Moneda Nacional pesos into a foreign currency. This meant that for the average citizen travel was highly restricted unless one could find a foreign sponsor to pay the bills.

The economic powerlessness of most Cuban citizens was further intensified when the dual monetary system came into play in the early 1990s,. With the collapse of the value of the “old peso” (Moneda Nacional) vis-a-vis the US dollar (and then the convertible peso or “CUC”) the purchasing power of earnings in the official economy also collapsed.

At the exchange rate for Moneda Nacional to the US dollar at around 26 to 1, the average monthly income is somewhere around US$ 20.00. It is not easy to travel outside – or inside – Cuba independently with this level of income!

In sum, Cuba’s exchange rate and monetary systems impoverish Cuban citizens in terms of the international transferability of their earnings from work.

Only when Cuba establishes a normal exchange rate and monetary system will greater freedom of movement become a realistic possibility for the average Cuban citizen.

 

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Ricardo Torres: “Cuba Needs to Be Bold and Creative”

Posted on October 11, 2012 by Arch Ritter

Patricia Grogg’s interview with Ricardo Torres.  The original article, from IPS, the Inter Press Service news agency,  is located here:  “Cuba Needs to Be Bold and Creative”

HAVANA, Oct 11 2012 (IPS) – Cuba has been steeped in a profound economic crisis over the last 20 years, and no short-term solution to the accumulated problems can be expected, says Cuban professor and researcher Ricardo Torres.

Whoever expects overnight success from the “Economic and Social Policy Guidelines” of the country’s ruling Communist Party, the document that serves as a virtual road map for the reformsthat are being implemented by President Raúl Castro, “knows nothing about the social sciences, and is sending the wrong message,” Torres says in this interview with IPS.

Prof. Ricardo Torres, Centro de Estudios sobre la Economia Cubana

Q: Is the pace of reform slow solely due to a government decision, or is it also because of other internal and external factors?

A: I do not totally agree with the opinion that the pace of change is slow. It depends on how you look at the process.

If we understand that everything stemming from the Party “Guidelines” is a process of social change, then we have to remember that the guidelines are less than two years old, which is not a long time in these cases.

If we are judging from the standpoint of the needs and aspirations of the great majority of Cubans, I would even say of the government, then yes, it might be slow. There are elements of the internal process that are delaying the changes enormously, and the first of these is inexperience in dealing with unprecedented changes.

Q: What internal factors are hindering these changes?

A: This is something that has been referred to many times, but it doesn’t hurt to mention it again. People’s minds are the hardest thing to change, and if they have done something a certain way for 50 years, it is not easy for them to agree to do it differently in a short amount of time. In fact, in some cases, that learning process will be impossible.

There is also the question of interests. The changes are affecting certain groups and segments of the population, which, therefore, are going to oppose them, using whatever resources they have within their reach to prevent or at least hinder their progress. It is a natural reaction by people to protect themselves against whatever may affect them.

Q: Is the external context also a factor? How?

A: From an international standpoint, there are many aspects that are holding back change in Cuba. The first is U.S. foreign policy, which is not helping the Cuban people, because it is based on the false assumption that the only good and positive thing for this country is regime change as they (the U.S. authorities) understand it.

That is an assumption that is valid for Washington but not for the lives of the Cuban people. This country needs to change everything that should change, but it will do so to serve its own interest and to benefit society, not because a foreign government thinks it is important for us to do this or that.

The way that U.S. policy is currently designed, it does nothing to favour this process of transformations that the island is going through, and it is creating resistance among certain groups in the government and in the population. Moreover, it is hindering economic and social development, because it puts Cuba at a disadvantage for competing in the international market.

A: I’m an economist, not a politician, and what I can say responsibly is that the U.S. blockade is having an adverse effect on Cuba’s economy and society, which is impossible to ignore.

Every year, it is costing the Cuban people money and quality of life.

What we cannot say is that all of Cuba’s problems are because of the U.S. blockade. And the blockade is not responsible for all of the bad decisions that we have made in the last 50 years in certain areas.

Q: The situation is difficult for the Cuban population. Many say they are pessimistic, and don’t see the light at the end of the tunnel. How can a consensus be maintained under these types of circumstances?

A: I see a way out, and this is a very personal opinion. For us, the key is to be bold and creative. It could be the case that we see ourselves locked into a vicious circle that requires an unexpected, radical decision, which may seem to break the consensus. If it is in the country’s long-term interest, it will have to be done and explained.

I am thinking about our relationship with the United States, our attitude toward private enterprise, effective and real decentralisation of decision-making, and the way that national or international economic relations are sometimes coordinated or governed in general. All of this requires a major change in mentality.

Q: Do you think that Cuba has the conditions needed for development?

A: Yes, of course, for growing and developing. What is needed is strategy, a vision for the future, and a break with many dogmas that are ever-present in most cases.

Q: Would you say political will exists for that?

A: Yes, I think it does, and there is also the legitimate aspiration of the entire Cuban people. Proof of that political will is that we are seeing a new, more pragmatic vision today, one that is more in keeping with reality and more flexible in decision-making and that takes the island’s real conditions more into account.

In addition, academia is playing a more important role in decision-making. I think this is a felicitous initiative of this process of change. Of course, we are not always satisfied with the level of participation that we have, and we want more.

Given that we devote ourselves full-time to investigating certain issues that are important to Cuba, we want that knowledge to be used, because in the end, our interest as economists — as I see it, the majority of us — is for our country to progress and for all of its inhabitants to have more comfortable, fuller lives.

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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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Emilio Morales and Joseph L. Scarpaci, “Bring on the [Cuban] college graduates!”

Posted on September 3, 2012 by Arch Ritter

Original Essay from the Morales Scarpaci  Havana Consulting Group web site here: “Bring on the [Cuban] college graduates!”

The Cuban government slammed on the brakes when it recently scrapped plans to allow private wholesaling and let skilled workers strike out on their own.

 Vice-Minister of Work and Social Security, José Barreiro’s announcement last week signals a strong reversal of reforms that began in 2010. He also stated that jobs that had been previously off limits to private workers –auto-body repairers, floor polishers, aluminum product vendors, rust removers, welders, and confectioners—are now legal trades.

But what about software engineers, tutors and teachers, and other skilled workers?

The new announcement shows resistance to change and the lack of a strategic plan. Both moves are intolerant of free-market competition among the island’s emerging private sector.

President Raúl Castro’s recent trips to China and Vietnam show concern about adapting the magic formula from these two key allies. The Asian answer was simple but it is only part of a recipe for success: open up to foreign capital, liberalize all economic sectors, and let skilled, professional workers earn a living either on their own or in small enterprises.

Vice Minister Barreiro described the ‘new’ changes this way: “[they] are designed for urban cooperatives, a different kind of organization compared to self-employment, [but the cooperatives] will have greater flexibility and work like the state-run beauty shops did where the shops were passed on to its workers.”

We argue that this move is bound to fail. The track record speaks for itself: the classic failures of both the sugar-cane and non-sugar cane UBPCs (a type of cooperative) should not be forgotten by the Cuban government.

Unexplainable contradictions.

A priority two years ago was the plan to shed 2 million workers from public payrolls over the course of five years.  One hundred eighty-three private trades were approved by the Cuban Communist Party to absorb downsized workers. However, the limitations of private-sector work, inflexible laws, high taxes, the continuation of a dual currency system (pesos and CUCs), and poor conditions to acquire inputs have thwarted these efforts.  So how can the government send layoff notices to 2 million workers if it cannot nurture a private sector to employ them? The Nanny State is unwilling to cede economic space that it has dominated for more than 50 years.

A work break in a private sector barber shop, Havana, March 2011, photo by Arch Ritter

How can you build a private sector without private wholesalers?

This is a major weakness of the Cuban model. No country can develop a sustained private sector without wholesalers. Failure to do so will further the pattern of stealing from public institutions and stimulate the black market.

While the mindset of Cuban workers needs to change to adapt to these new measures, both the laws and thinking of the Cuban governments must also adjust if real reform is to take root.

We suspect these observations are not lost on the Cuban leadership because in recent years, hundreds of high-level Cuban scholars have been traveling around the United States, Asia and Europe to gather first-hand observations about what constitutes successful development. They file reports to myriad agencies when they return. Are the polítcos and decision makers reading these reports?

Economic reforms without professionals and technology: Mission Impossible The National Statistics Office (ONE) in Havana claims there are 6.8 million working-age Cubans, of which, about one-fifth are college graduates. So why doesn’t the state allow them (about 1.5 million workers) to work in trades that maximize their skills and training? White-collar and skilled workers drive economic development, and failure to engage them will doom the Cuban economic model.

Remember the fiber-optic cable laid between Cuba and Venezuela? Well, it has been idle for over a year even though it –along with other infrastructure and reforms—could play a key role in creating high-tech work and jump-starting the economy.

Cuban college graduates are needed in housing construction, agriculture, selling automobiles, supply-chain management and distribution channels, tourism development, the food industry, and a plethora of service-sector jobs.

Tapping into college-trained workers will require a change in the mindset of the Cuban leadership. Triggering this new thinking is the main dilemma in changing the economic model. Failure to do so will only produce a “light” version of the economic reforms spelled out in last year’s VI Cuban Communist Party meetings and attendant laws that have been approved in recent years.

Let the college grads work!

___

The authors are principals at The Havana Consulting Group LLC and authored Marketing without Advertising: Brand Preference and Consumer Choice in Cuba. Scarpaci chairs the Marketing and Management Department in the West College of Business at West Liberty University, West Liberty, WV.

 

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An Up-Date on Cuba’s Small Enterprise Reforms: “Ups and Downs of Self-Employment”

Posted on August 16, 2012 by Arch Ritter

August 14, 2012 . Fernando Ravsberg. HAVANA TIMES

Original: Avances y vicisitudes de los trabajadores autónomos en Cuba

he Deputy Minister of Labor and Social Security, Jose Barreiro, explained to us that self-employment in Cuba is a “measure adopted while thinking of people coming from the overly staffed government sector as well as others who are not occupationally engaged.”

He was referring to those people who are laid off or are currently unemployed, though government officials always avoid using those terms. Nor do they like to deal with the issue of low wages, even though most people and President Raul Castro consider this a crucial issue.

Barreiro talked about greater flexibility in permitting activities that were previously banned and new approaches, such as urban cooperatives, but he confirmed that self-employment by university graduates will continue to be prohibited.

The deputy minister recognizes that the lack of products and supplies for the self-employed leads to black marketing and theft from the state. This is why he assures that supplies will continue to grow in stores, though they still haven’t opened wholesale markets – which he believes “would be ideal.”

According to Barreiro, the labor market structure will change over the coming years to an economy with “fewer government employees as they feed into the ranks of the non-state sector (as members of cooperatives, independent tenant farmers and self-employed workers).”

Slow growth

Deputy Minister Barreiro explains that “the main object (of self-employment) is that this becomes an employment alternative,” adding that “since October 2010 this sector has grown by 240,000 workers, bringing the total to 390,000.”

According to Barreiro, the growth in the number of autonomous workers is due mainly to “new permits being issued and the hiring of employees; currently there are 62,747 such employees,” a figure that indicates the success of some “self-employed workers.”

Among the independent workers, “Sixty-nine percent had no employment relationship at the time of applying for a license,” with that figure including the unemployed, pensioners and self-employed workers who exercised their trades illegally when those activities were prohibited.

The deputy minister said that though they lack reliable statistics, the fact is that only 31 percent of the self-employed come from government businesses or institutions. This situation is slowing the rate of layoffs, which needs to eventually lay off one million workers.

Barreiro asks for caution when people look at “the number of reduced personnel (layoffs), because in the ministry we believe that it is a sustained, attentive and organized process. Sometimes downsizing is associated only with the availability of workers (the number of laid off/unemployed workers) but this can also happen through increasing production without increasing personnel.”

More reforms

Barreiro agrees that the absolute number of self-employed workers “has not stopped growing, but the rate of growth is less” than in the beginning. He added that because of this, “self-employment will continue to become more flexible, within the country’s legal, zoning and health standards.”

“Now we’re working on designing structures for urban cooperatives, a form of organization that is different from that of the one for self-employed individuals (…) it will have much more flexibility (…) adopting a similar approach to that of the beauty parlors and barbershops that were transferred over to workers management.”

“There are many services that are currently provided by the state but that could be much more profitable if they were run by cooperatives, they would have much more room for success. We see a place for them in the economy,” explained Barreiro. But then he cautioned that this could not happen right away because “first you have to experiment so that when you advance you’re doing things right.”

He assured us that soon new models of independent work would also be initiated, ones that were previously prohibited. Among those authorized will be “sheet metal workers, iron workers, floor polishers, vendors of aluminum articles, flame-cutters, founders and marble masons.”

Scarcity and crime

The issue of the materials and supplies is the most serious one for self-employment. Authorization was given for independent carpenters, but wood isn’t sold to them. Sheet metal workers work without permission in front of everyone, despite it being known that they use oxygen and acetylene stolen from the government.

Barreiro maintains that “we must end this situation of illegal operations by creating legal mechanisms for purchasing products – for example, the types of gas used by sheet metal workers. Still, he insists that there will be no wholesale markets, though he recognizes that this would be ideal.

He claims that, “We’re clear that the solution is to increase supply,” adding that “now there are materials and inputs in stores; though these are not everything that people need, the supply is increasing. This will continue until the conditions exist for the transition to wholesale markets.”

The other major obstacle that’s confronted is the lack of start-up capital, since banks hardly ever make loans to stimulate business development. According to Barreiro, the main problem is that they still haven’t found ways to ensure that people will pay back their loans.

(*) An authorized translation by Havana Times from the Spanish original published by Cartas Desde Cuba

Bicitaxis

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Foreign Business in Cuba: Beware the Dangerous Embrace: Havana is at the same time attracting and terrifying entrepreneurs

Posted on August 16, 2012 by Arch Ritter

by Nancy Macdonald and Gabriela Perdomo

Original Article is located here: Maclean’s Magazine, August 8, 2012

Until this spring, Stephen Purvis had it all. The British architect, who’d helped launch the Saratoga, Cuba’s poshest hotel, was one of the more prominent figures in Havana’s business community. As chief operating officer of Coral Capital, one of Cuba’s biggest private investors, he was overseeing a planned $500-million resort in the sleepy fishing village of Guanabo. The Bellomonte resort, which would allow foreigners to buy Cuban property for the first time, was part of Havana’s ambitious, multi-billion-dollar plan to attract high-end tourists and badly needed foreign exchange. Everything he touched seemed to turn to gold. The musical Purvis produced in his spare time, Havana Rakatan, had a run at the Sydney Opera House last year before moving on to London’s West End. But in April, the 51-year-old was arrested on suspicion of corruption as he prepared to walk his kids to school in Havana.

Purvis’s arrest could have been anticipated. Coral Capital’s British-born CEO, Amado Fakhre, has been held without charges ever since his arrest in a dawn raid last fall. The investment firm is being liquidated, and both men have faced questioning at Villa Marista, Cuba’s notorious counter-intelligence headquarters. They are not alone. Since last summer, dozens of senior Cuban managers and foreign executives, including two Canadians, have been jailed in an investigation that has shocked and terrified foreigners who do business in the country.

Since replacing his brother Fidel as president in 2008, Raúl Castro has painted himself as a reformer, and Cuba as a place where foreign businesses can thrive. Over the last year, he has relaxed property rights, expanded land leases and licensed a broad, if random, list of businesses—everything from pizza joints to private gyms. And he’s endorsed joint venture golf courses, marinas and new manufacturing projects. Canadians are chief among those heeding Raúl’s call to do business with Havana. Hundreds have expressed interest in the Cuban market in the last year alone, according to Canada’s Trade Commissioner Service. Flattering reports in Canadian media have praised Raúl’s efforts. Yet they seem to overlook troubling signs that Cuba appears to be moving backwards.

Raúl’s sweeping changes were meant to pave the way for massive foreign investment in Cuba. The country, which was forced to lay off 20 per cent of its public workforce last year, is barely as developed as Haiti, and will need an influx of foreign cash to stay afloat. There is urgency to the project. Time is running out for Venezuelan President Hugo Chávez, Cuba’s benefactor, who funds the country to the tune of $10 billion a year, says José Azel, a University of Miami research associate. At home, Chávez, who is sick with cancer, is also fighting off a tough challenge from Henrique Capriles in presidential elections slated for October. His successor will almost certainly cut Cuba’s generous aid package to deal with Venezuela’s own needs.

So a strange incongruity exists in Cuba today: Havana is bending over backwards to attract foreign currency at the same time it is imprisoning some of its biggest Western investors. For all Cuba’s reforms, this Castro appears to be as intent on maintaining an iron grip on the country as the last one.

Few are more keenly aware of the pitfalls of doing business in the new Cuba as a pair of Canadians sitting in jail in Havana. It has been more than a year since Sarkis Yacoubian, the president of Tri-Star Caribbean, a trading firm with headquarters in Nova Scotia, was detained in the Cuban capital. And September will be the one-year anniversary of the arrest of Cy Tokmakjian, the president of a trading company based in Concord, Ont. He and Yacoubian have both been imprisoned without charges. Their assets now belong to Cuba. No trial date has been announced.

Both Yacoubian and Tokmakjian ran well-established businesses in Cuba, had years of experience in the country, and multi-million-dollar contracts with several government ministries. Yacoubian imported the presidential fleet of BMWs. Tokmakjian, who’d been in Cuba for more than 20 years and did $80 million in annual business there, had the rights to Hyundai and Suzuki, which are used by the country’s police.

So far, Raúl has scared off more joint ventures than he has attracted, jeopardizing the investment Cuba needs to succeed. Spanish oil giant Repsol quit the country in May. Canada’s Pizza Nova, which had six Cuban locations, packed its bags, as did Telecom Italia. The country’s biggest citrus exporter, BM Group, backed by Israeli investors, is gone. A Chilean who set up one of Cuba’s first joint enterprises, a fruit juice company, fled after being charged with corruption last year. He was convicted in absentia. Shipping investors are pulling out, even as Cuba prepares to open a new terminal on the island’s north coast.

Experts say Raúl’s crackdown is an attempt to reassert control. By targeting the biggest names in the business community, he’s sending a message, says Azel. “Raúl doesn’t want to be Gorbachev,” the Soviet statesman who brought down Communism in the former Soviet Union. “He wants to be the guy who makes socialism work.”

Yet as detentions pile up it remains unclear what exactly the jailed Canadians and Britons have done, or what the regime means by clamping down on corruption. “Cuba’s version of what is legal and proper is different from the rest of the world,” says Ted Henken, president of the Washington-based Association for the Study of the Cuban Economy. Even sales commissions are viewed as corrupt, says Yoani Sánchez, a Havana-based journalist. Foreign companies can’t pay their Cuban employees any more than the standard wage, about $20 a month, says Sánchez—barely enough for two weeks’ living in poor conditions with a poor diet. Many foreign bosses routinely top up pay with bonuses and commissions, which Havana considers bribery. For years, says Henken, corruption was the grease that made wheels turns. “You got what you needed to live from what was thrown off the back of the truck.”

It is not clear whether the detained Canadians are facing charges for salary top-ups, for example, or for legitimate corruption allegations. Canada’s Foreign Affairs department would only confirm that “consular services are being provided to two Canadian citizens detained in Cuba.” Executives at Tri-Star Caribbean and members of the Tokmakjian family declined comment, citing the “extremely sensitive” nature of the situation.

Azel’s advice to potential Canadian investors? Stay away. “You’re defenceless. There’s no independent judiciary to adjudicate any kind of claim,” he says. “Doing business with Cuba is a very risky proposition.”

So then why all the new resorts and planned golf courses? Why do so many Brits and Canadians take the personal and business risk? Because it’s widely believed that the days are numbered for the U.S. travel ban on Cuba, which has barred Americans from visiting the island for almost three decades. Predictions for tourism growth are off the charts—up to six million annual visitors, from two million today, says Gregory Biniowsky, a Canadian consultant who’s lived in Cuba for two decades. Cuba’s boosters believe the country, with its vast, undeveloped white sand beaches, just 45 minutes by plane from Florida, could come to rival Jamaica or the Dominican Republic as a tourist draw. “It’s just a matter of time before things boom here,” says Biniowsky. Five billion barrels of oil lie under Cuba’s waters, according to the U.S. Geological Survey. To some, getting in on the ground floor is worth the risk. But foreign investors who lose sight of the dangers could find themselves in serious trouble.

The old Royal Bank of Canada Building in Havana. The interior of the building is below.

Photos by Arch Ritter, April 2012

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Cuba: When Bureaucrats Attack

Posted on July 31, 2012 by Arch Ritter

Cuba: When bureaucrats attack

The abrupt closing of a popular Havana business tests Raul Castro reforms.

Ulises Aquino

Original here:  Cuba: When Bureaucrats Attack

Nick Miroff, July 31, 2012 08:44

HAVANA, Cuba— In the new Cuba, the one President Raul Castro and his team of reformers say they’re building, the hard-working entrepreneur is a patriotic figure, a job-creator who’s helping to lift up the island’s feeble economy.

That’s the Cuba where Ulises Aquino thought it would be a good idea to start a business.

With funds earned abroad as an award-winning opera singer, Aquino opened a restaurant and cabaret last year where the company he founded, Opera de la Calle (Opera of the Street) could perform.

He called it “El Cabildo” (roughly, the “meeting place”), transforming a trash-strewn lot into a lively entertainment venue, with an open-air stage, restaurant and bar. Aquino offered free children’s theater and other community activities on weekend mornings, and kept his prices low, charging $2 admission to Opera of the Street shows that feature as many as 80 singing-and-dancing performers.

Aquino was a good socialist businessman too, sharing profits with his 130 employees and paying wages that were three or four times the $20 average monthly Cuban government salary.

More from GlobalPost: Cuba mute in the time of cholera

El Cabildo was so innovative that Aquino and his new model of socialist enterprise were featured in a July 12 Reuters article titled “In Cuba, an opera singer builds an empire.”

And that’s when the bureaucrats attacked.

“It may have been the last straw,” said Aquino, of the article. “But they had their eye on me for a while.”

The following Saturday night, on July 21, a team of city government inspectors arrived at El Cabildo and interrupted the show, “like a team of commandos,” said Aquino, a barrel-chested bulldog of a man, who trembled with anger as he re-told the story.

 

The inspectors ordered Aquino off the stage as the audience looked on in shock. Then they shut down the kitchen and froze the cash register for a four-hour inspection.

By the following Monday El Cabildo was closed and Aquino had an order from local Havana officials stripping him of his business license for two years.

The inspectors had determined El Cabildo to be in possession of “more chairs than the permitted number,” and “products whose origin could not be determined” – ie lacking receipts. Two prep cooks who Aquino says were there on a trial basis were found to be “illegal workers.”

Worst of all, Aquino was accused of “enrichment” because he was charging a $2 cover “for personal benefit,” something he was not specifically authorized to do—even though entertainment venues all over Havana routinely charge $5 to $10 at the door.

There was no fine, no appeals process, no legal recourse. It didn’t seem to matter that Aquino had more than $100,000 of his savings invested in the business, or that 130 families would lose their income.

This was the old way in Cuba, where bureaucrats rule.

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Aquino, for one, doesn’t blame Raul Castro. “This goes completely against everything that the government has been telling us,” he said.

“The people who are behind this are the mid-level bureaucrats who know the status quo is endangered by all these new opportunities that offer a change from all the old taboos and prohibitions,” said Aquino.

On Monday, officials from Cuba’s Ministry of Culture issued a statement offering their support for Aquino’s Opera company and its ability to continuing performing at El Cabildo. But they said nothing about his dispute with city authorities and the fate of the businesses that make Opera of the Street possible.

“This place is dead right now,” said Ruben Rodriguez, the opera company’s choreographer, covering up the sound board and lighting controls opposite an empty stage. “Everything’s paralyzed.”

The fate of El Cabildo will be closely watched in Cuba, where Raul Castro’s economic reform process has lost momentum in recent months and Cubans’ initial enthusiasm for starting small businesses has faded.

Officials announced a new pilot program last week that will convert state-run companies into employee-run cooperatives, but the experiment will be limited to just 222 firms.

Meanwhile, a vast state apparatus of government officials who produce nothing of value remain ready to prey upon those who do.

Castro and other Cuban officials have repeatedly said that recalcitrant bureaucrats will not be allowed to stand in the way of economic change. If they intervene to help re-open El Cabildo, they will send a clear signal that Cuba’s new small businesses deserve encouragement, not strangulation.

But if El Cabildo stays closed, it can send a different message about Cuba’s incipient capitalism in Cuba: that new entrepreneurs here should not be too ambitious with their plans or too proud of their success. And any business, no matter how big, can be shut down on a whim, if a local official orders it so.

In that case, Aquino said, “the loser here won’t be me. It’ll be our country.”

Opera de la Calle

See also Havana Times July 27, 2012,  Cuba Closes ‘Street Opera’ Project

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