Cuba's economic overhaul would require new approach, experts say

Posted on Tuesday, 09.14.10
Cuba's economic overhaul would require new approach, experts say
BY JUAN O. TAMAYO
jtamayo@ElNuevoHerald.com

Cuba's announcement that it will try to shift nearly 500,000 workers
from state payrolls to the private sector has raised an obvious
question: Can the island's communist system really do that?

Maybe, if Cuban ruler Raúl Castro abandons the onerous controls, taxes
and other fees that blunted previous attempts to grow private economic
activity under Fidel Castro, several analysts said.

``In the past, self-employment and private enterprise was always viewed
by Fidel as a necessary and temporary evil, so it was highly
regulated,'' said Ted Henken, a Baruch College professor who studied a
previous Cuban effort to encourage privately owned restaurants known as
paladares.

``This time, Raúl's approach sounds different in that the state is
essentially saying we can't and won't take care of you anymore and
you'll have to take care of yourselves,'' Henken said.

The plan is clearly Raúl Castro's most radical effort yet to overcome
Cuba's economic crisis by cutting government spending and broadening the
role of market forces in the communist-run country -- though it falls
far short of dealing with his complaint in April that state payrolls
contain more than one million excess workers.

``We have to erase forever the notion that Cuba is the only country in
the world where one can live without working,'' said Castro, whose
government controls 95 percent of the island's economic activity.

Under the plan announced Monday, Castro hopes to cut the state's 5
million-person payroll by 10 percent by April 1 -- about 500,000 jobs --
and shifting those workers to the private sector.

About 200,000 jobs would be generated by turning small state enterprises
into private cooperatives run by employees. Another 250,000 jobs would
be created by allowing more ``self-employment'' -- mostly one-person
jobs such as plumbers, flower salesmen and piano tuners.

Potential problems are many, however, and even a government document
circulating in Havana concedes that the new cooperatives would face a
tough road.

``Many could go bankrupt before the end of the year'' because of
problems such as obtaining raw materials and lack of experience running
an independent business, the document noted.

On the self-employment front, the government may be its own worst enemy.

Cuba opened the doors to self-employment after the end of massive Soviet
subsidies in the early 1990s threw its economy into a tailspin, and the
number of licenses hit a peak of 209,000 in 1996.

As the economy improved, however, Fidel Castro tightened controls.
Scores of paladares, for example, closed under the relentless scrutiny
of health inspectors, tax auditors and police checking whether their
food came from the black market.

Today, Cuba has just 143,000 licensed self-employed, and the rejection
rate for new applications runs at about 60 percent, said Archibald
Ritter, a Canadian economist who studies Cuba.

If the government were to approve more licenses, however, it could
quickly meet its goal, Ritter said. He noted that in 2001, 97,000 Cubans
applied for self-employment licenses in the city of Havana alone; only
23,000 were approved.

An estimated one million Cubans already have illegal side jobs because
either they were refused licenses, don't want to pay the high taxes, or
use materials pilfered from the government.

Tight state controls also undermined another of Cuba's post-Soviet
experiments with the free market -- private cooperative farms carved out
of the highly inefficient state farm collectives in the 1990s.

The government decided the cooperatives' crops and prices and where they
could sell their products, and too often failed to deliver items such as
fertilizers and transportation. The cooperatives wound up being as
inefficient as the collectives.

Those are the kinds of controls that Raúl Castro will have to lift or
ease if he really wants private enterprise to flourish, Henken said.

``The devil is in the details of policy implementation, and in how the
government deals with the pressure for political autonomy that greater
economic freedom inevitably brings,'' he noted.

Carmelo Mesa Lago, a University of Pittsburgh expert on the Cuban
economy, called the plan a good one, though he said he thought the
six-month timetable for the 500,000-job cut was too drastic. Cutting the
jobs would spark a ``virtuous circle'' that would lead to increased
salaries and productivity in a country where the official average
monthly salary is just $20.

``In Cuba there's always a conflict between the government's desire to
control, to extract taxes, and the others who say they want the most
economic freedom possible,'' he said.

Still, he warned that the plan also contemplates new taxes and fees that
could eat into profits and force private enterprises to either close
down or go underground.

According to the government document circulating in Havana leadership
circles and posted on the Penultimos Dias blog, the government is
contemplating a ``new tax system . . . more rigurous.'' The
self-employed will have to pay taxes on personal income, sales and
employees, as well as social security fees.

``In Cuba there's always a conflict between the government's desire to
control, to extract taxes, and the others who say they want the most
economic freedom possible,'' Mesa Lago said. ``If the government tries
to impose the same tax burdens and financial obstructions of the past,
this will not work.''

Maybe it would be better for the government to delay collecting taxes
and social security payments until the new cooperatives and
self-employed are well-established, he added.

Castro's government already has reported some successes and shortcomings
in its small experiments in private enterprise over the past year.

The government leased fallow state lands to more than 100,000 new
private farmers starting last year, but half the land remains idle and
the country's agricultural production in fact dropped in the first half
of 2010 in part because of shortages of gasoline, tractors and other
supplies, Mesa Lago noted.

While China and Vietnam lease land to farmers for indefinite periods,
Cuba leases it for only 10 years, he added. It remains unclear who would
own a house built by a farmer on the land if his lease is cancelled.

Some barbers who were recently allowed to rent their formerly state-run
barber shops are complaining that their rents, taxes and social security
payments are far too high.

On the success side, Transportation Minister César Arocha told the
Trabajadores newspaper this week that the government income from each
state-owned Havana taxi recently rented to its driver for flat daily
fees had risen from 529 pesos to 17,000 pesos. Arocha did not say
whether those amounts were daily, weekly or monthly.

But even if the 450,000 new jobs are indeed created, Castro will still
have have to deal with the other 550,000 excess state employees that he
acknowledged in April.

http://www.miamiherald.com/2010/09/14/v-fullstory/1825330/cubas-economic-overhaul-would.html