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Cuban Entrepreneurs: From Necessary Evil to Strategic Necessity

Wednesday, January 19, 2011

What a recent visit to Cuba reveals about that country’s past, present, and future.

Cubans are waiting in new lines at government offices these days—but not to buy rationed food, the latest Chinese appliance, prepaid cards for their cell phones, or the new booklet that previews April’s Communist Party Congress.

These are lines of would-be entrepreneurs seeking—and getting—business licenses from the socialist government.

One November morning in Havana, the line was 14  long at a neighborhood office; four officials were busy inside taking applications as curious citizens studied application procedures on bulletin boards outside. There was a similar scene in the small city of Sancti Spiritus, where an official told me that 720 licenses were issued in two weeks, with many more in the pipeline.

Newly licensed entrepreneurs are visible on the streets. In Central Havana, a laid-off night watchman has just set up shop as a bicycle repairman. In the country town of Alquizar, a baker is keeping his government job as he opens a lunch stand on his front porch with two assistants. With sandwiches of roast or braised pork, juices, and coffee, his Sunday afternoon business was brisk. Farm produce stands are springing up on country roads, manned by licensed vendors who not long ago worked illegally, ready to flee at a moment’s notice to dodge fines for violating Ministry of Internal Commerce rules.

Nationwide, Cuban media report that more than 75,000 licenses have been issued since late October—a quick 50 percent boost.

Nationwide, Cuban media report that more than 75,000 licenses have been issued since late October—a quick 50 percent boost to the entrepreneurial sector.

State media that often portrayed entrepreneurs as ingrates or pilferers are now repeatedly explaining how to apply for a license. A December 28 article in Communist Party daily newspaper Granma chided the bureaucracy for blocking the “expeditious issuing of licenses.” And Cuban President Raul Castro told government and party officials in a December 18 speech that it is necessary “to change the negative views that more than a few of us hold toward this form of private work.”

This is quite a change.

An economic reform program that has developed slowly since 2007 is finally gathering steam. Behind it are two realizations. First, that none of the government’s strategic goals for the economy—boosting work incentives, reducing income inequality, ending the dual-currency monetary system, improving fiscal and trade balances, improving international creditworthiness, reforming social subsidies—can be met if output and productivity do not rise. And, second, that economic production will only increase if Castro and his generation of leaders meet their “duty to correct the mistakes we have made in these five decades of constructing socialism.”

In all, about 1.8 million workers are to move to the ‘non-state sector’ by 2015, according to finance minister Lina Pedraza.

That means serious changes of “structures and concepts” in the Cuban economy, to use Castro’s term. And it explains why the neighborhood entrepreneur, once a necessary evil, is now considered a strategic necessity.

By spring, half of the 1 million government workers deemed by Castro to be unproductive are to be laid off. A few may find new government jobs, about half are expected to become entrepreneurs, and about 200,000 are to be absorbed in the next reform, which will convert service, retail, and light manufacturing businesses now mismanaged by the state into private cooperatives. Beyond that, a policy document announced that unprofitable state enterprises will be “liquidated.”

In all, about 1.8 million workers are to move to the “non-state sector” by 2015, according to finance minister Lina Pedraza. That would place two of five Cuban workers in private settings.

Other changes are in store. The household food ration book is headed toward elimination, opening the way to greater market-based food distribution and the withering away of the state’s food bureaucracy. Recent official statements have hinted that Cubans will be permitted to sell their homes; that would create instant equity for millions of Cubans in a new, above-ground residential real estate market.

A December 28 article in Communist Party daily newspaper Granma chided the bureaucracy for blocking the ‘expeditious issuing of licenses.’

The shift in official attitudes is unmistakable, as when Raul Castro himself explained that “we were absolutists” in bringing too much of the economy into the state’s hands. Old excuses are going out the window too: “Yes, we have the blockade, and yes, we have had hurricanes—but we have to admit that we are really bad at a lot of things, and they need to be fixed,” an official told me.

Will it all work?

Much will depend on new policies governing the expanding private sector. Some make sense: entrepreneurs can now hire employees; their business expense deductions are increased; they can rent business premises from private individuals; and they and the new cooperatives will be permitted to enter contracts with whomever they please—including the government and its joint ventures with foreign investors.

Two critical changes—creating wholesale supply stores and providing bank loans for entrepreneurs—have been promised but not delivered. A new tax system took effect recently; its design is simple for one-person businesses, less so for those with employees, and its real impact on business incentives remains to be seen. In the Catholic Church’s publications and occasionally in the official press, economists have argued that stronger reforms are needed to meet job creation and deficit reduction goals.

None of the government’s strategic goals for the economy can be met if output and productivity do not rise.

Popular attitudes are mixed. Apprehensive workers at a Havana state-run cafeteria expect the government to lay off half of them and then convert the business into a cooperative. I detected no worry at a government shop where a dozen carpenters do custom work for interior renovations, perhaps because they have plenty of contracts lined up. Two workers at a government-run sandwich stand told me they relish conversion to a private entity; they would improve and vary their product and go on to earn more than the “garbage” salary they are paid now. Around kitchen tables, Cubans see their social contract changing—government benefits are being reduced, and they are being told to accept that the “excessive paternalism” of the “daddy state” must end precisely to preserve the socialist system and its basic guarantees.

“The time we have left is short,” Castro said in a recent speech, referring to the time left to his generation to right the economy and “to leave the route plotted out” for the next generation. He has proceeded deliberately to date, surely reflecting the Cuban communist leadership’s judgment that haste and improvisation led the Soviet Union’s reform process to spin out of control. He may brake and adjust along the way, but the Cuba he will leave his successors is coming into view: one with a smaller government, a larger private sector, and citizens accustomed to fewer subsidies and more opportunities and risks.

Philip Peters is vice president of the Lexington Institute and writes the blog The Cuban Triangle.

FURTHER READING: Roger Noriega explores “Cuba Si, Honduras No?” in the president’s Latin American policy and Michael Auslin suggests “Fearing the Chavez Model” of government. Noriega also discusses “Has Obama Kept His Summit of the Americas Promises?” and asks “Does Latin America Need Another Regional Organization?”

Image by Darren Wamboldt/Bergman Group.

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