Cuba's economic changes create new entrepreneurs

Posted on Sunday, 01.30.11

Cuba's economic changes create new entrepreneurs
By PAUL HAVEN
Associated Press

HAVANA -- Where some might see a rotten window frame pocked by termites,
Julio Cesar Hidalgo envisions a polished takeout counter, the rich smell
of garlic and oregano wafting out onto a warm Havana street.

In his mind's eye, the coarsely-laid concrete covering the surfaces of
his shabby living room is already a gleaming white countertop laid with
sandwiches, pastries, and balls of yeasty dough; a gas oven in the
corner bakes mouthwatering pizza.

After Cuban authorities announced last September that they were opening
the island's closed Marxist economy to a limited amount of private
enterprise, Hidalgo was one of the first to line up for a new business
license.

Ever since, the 31-year-old baker has been transforming the front of his
narrow apartment in a run-down section of Old Havana into a standup
pizza joint and cafe. In a land of modest dreams, Hidalgo says his is
simple: to be the master of his own labor.

"It's not going to make me rich," he laughs, adding that he may make
only a little more than he does now in a $12-a-month job at a state-run
bakery. "But I'll be working in my own home and I'll be my own boss."

Hidalgo and tens of thousands like him are chasing their entrepreneurial
ambitions in Cuba's year of economic change, hopeful that a sweeping
fiscal overhaul announced last year by President Raul Castro is for
real. The Cuban leader said the country would lay off half a million
state workers by March 31, while granting licenses for a broad, if
slightly random, array of businesses.

The new entrepreneurs face towering challenges in getting their
enterprises off the ground, including high taxes, a lack of raw
materials, an uncertain customer base, labyrinthine bureaucratic rules
and limited access to startup capital. Yet, their success or failure
will go a long way in determining the future of Cuba's revolution.

The Cuban state now employs 84 percent of the island's workers and
controls 90 percent of the economy in one of the world's last bastions
of Soviet-style communism. If the free-market experiment works, the
cash-strapped government could shed millions of dollars from its payroll
while boosting much-needed tax revenues and creating a new business and
consumer class. It could also legalize part of a booming black market
that provides everything from sausages to satellite television.

If the experiment fails, however, this already disillusioned and
dysfunctional country will have turned hundreds of thousands of people
out of their government jobs and into an uncertain future. All of this
in the same year that Raul Castro turns 80, and his older brother Fidel
is widely expected to step down from his final official post as head of
the Communist Party.

Through January 7, more than 75,000 people had received new licenses,
joining about 143,000 private sector workers left over from the island's
last dabble with capitalism. Government economists say they hope a
quarter of a million new entrepreneurs will eventually sign up.

Almost all the new businesses are small, operating out of homes or on
street corners. But the stakes for Cuba couldn't be higher, with the
economy weighed down by crippling disorganization, a broken
infrastructure, endemic corruption and an enormous labor force that has
become accustomed to getting paid very little - and doing very little in
return.

Among the thousands who have taken the leap into private enterprise are
Maria Regla Saldivar, a 52-year-old black belt in Taekwondo who plans to
open a gymnasium in the ruins of a destroyed laundromat, and Javier
Acosta, who has started an upscale restaurant catering to tourists.
There is Danilo Perez, a 21-year-old accountant who has gotten a license
to buy and sell bootleg DVDs in Havana's hardscrabble El Cerro
neighborhood, and Anisia Cardenas, a seamstress with a license to make
clothes.

Many others are giving manicures, painting homes, fixing cars and
driving taxis - services on the list of 178 officially-sanctioned
private activities. Some of the other opportunities are more obscure,
such as fresh fruit peeling. And some are so specific they refer to just
two people, like No. 159, which makes it legal to be part of the Amor
Dance Duo.

Even the Cuban government - in an internal document to party leaders
obtained by The Associated Press - warned that many of the businesses
will fail within a year. And many Cubans say privately that they will
wait and see if ventures such as Hidalgo's prosper before jumping into
the fray themselves.

But for now, optimism and excitement reign among the new entrepreneurs.

"We are going to be a success. I am sure of it," says Gisselle de la
Noval, 20, Hidalgo's bright-faced girlfriend, who will work the till at
the pizzeria and share in its profits. "This (economic) opening was
marvelous ... I think those who know how to take advantage of it will
have a bright future."

A DISMAL STATE OF AFFAIRS

Cuba's push to open its economy to private enterprise does not indicate
an ideological change of heart among its Communist leaders. It is based
on necessity.

The economy has been slammed by the global economic downturn, a drop in
nickel prices and the fallout from three devastating hurricanes that hit
in quick succession in 2008. Revenues from tobacco, rum and sugar have
fallen, as have remittances from Cubans living overseas.

Prevented from borrowing from international monetary institutions by the
48-year U.S. trade embargo, Cuba was forced to reduce food and other
imports from its main trading partners by 37 percent.

The economy grew by just 1.4 percent and 2.1 percent respectively in
2009 and 2010, a terrible performance for a small, developing country -
and figures many economists dismiss as fantasy anyway, since Cuba counts
state spending on social programs when calculating economic growth.

Even state-run newspapers have been filled with stories of extraordinary
inefficiency, with dozens of "watchmen" paid by the state to guard
fallow fields, or 30 emergency workers at a hospital standing idle
because all have been assigned to a single ambulance.

"My fear is that the Cuban state is completely broke," says Uva de
Aragon, a Cuba expert at Florida International University, who is
closely watching the free enterprise experiment. "I don't want to think
about what will happen, even in the medium-term, if it doesn't work."

Shortages are everywhere: in the sparse shelves at state-run
supermarkets; along the unlit city streets and empty, rutted highways;
in the antiquated factories on the outskirts of cities and in the
tractorless farms dotting the countryside, many still relying on oxen to
till the earth. The country of 11.2 million people has the lowest
Internet penetration in the Western Hemisphere.

The state pays workers salaries of about $20 a month in return for free
health care and education, and nearly free transportation, utilities and
housing. At least a portion of every citizen's food needs are sold to
them through ration books at heavily subsidized prices.

Getting by on those salaries is such a struggle that stealing from
state-owned companies is endemic, a major perk of having a job, and a
frightening loss for those about to be laid off. The thievery is also a
huge cost to the government, one of the reasons the country finds itself
in such dire economic straits.

Since taking over from his ailing brother Fidel in 2006, - first
temporarily, then permanently - Raul Castro has been whittling away at
the subsidies.

In recent months he's cut free workplace lunches, removed potatoes,
peas, cigarettes, soap, detergent and toothpaste from the ration book,
and suggested the whole system must eventually be scrapped.

Just how bad things had gotten became apparent in September, with a
red-letter headline in the Communist Party newspaper Granma that the
state would lay off a tenth of the island's work force, while opening up
the private sector. Days later, authorities published the list of 178
activities in which new licenses would be issued.

The list steers clear of activities that could present a threat to the
state's monopoly on most economic activity. There are no licenses for
independent lawyers, bankers or engineers, nor for Cubans to work
privately in strategic sectors such as mining or hotel management.

Still, there is no overestimating the scope of the change.

For the first time since the 1960s, Cubans will be able to hire
employees. They may rent out their homes and cars more freely, and hope
to one day get business loans from state banks. Raul Castro has even
called a rare Communist Party Congress, scheduled for April 16-19, in
which the reforms will be enshrined as the country's only way forward.

THE NEW ENTREPRENEURS

Hidalgo is a round-faced man with a permanently amused look in his eyes.
Unlike most Cubans, he has been down the free enterprise road before -
with disastrous results.

Cuba last opened up to some private enterprise following the collapse of
its Soviet benefactor in the 1990s, which ushered in an era of extreme
hardship known as the "Special Period."

In 1997, a 17-year-old Hidalgo and an older cousin opened a pizza joint
in the same dingy apartment, only to find it was impossible to buy the
cheese, flour and tomato paste they needed in state-owned shops.

They turned to the black market, and ran into trouble.

"The inspectors would show up ... sometimes once a week, sometimes twice
a week," Hidalgo says. "They demanded receipts, and when I couldn't
provide them they confiscated everything. They forced us to close."

In those days, Fidel Castro decribed the reforms as a necessary evil and
quickly scaled them back once the crisis had ebbed. From a high of
209,000 license holders for private enterprise in 1996, Cuba's tiny
entrepreneurial class had dropped by a third by 2010.

Raul Castro has vowed it will be different this time around, telling
Parliament in December that "the life of the revolution is in the
balance." The government has pledged an initial investment of $130
million to purchase the raw materials new businesses will need, and
Hidalgo pointed to a stack of unopened boxes of white tile he purchased
for $8 a box in a state-owned shop.

Still, the path to self-employment promises to be tough.

Hidalgo has already invested $700 in the pizzeria, largely with a gift
from a cousin in Atlanta.

Given the price of ingredients, Hidalgo thinks he'll have to charge
upward of 20 pesos ($1) for a personal-size pizza with olives and
oregano - a small fortune for anybody living strictly on a Cuban
government wage. And he's already got competition: Two neighbors on his
rundown street have licenses to open cafes.

The government has made it easier for Cubans to rent space to each
other, but there is no retail property available for private citizens,
and few would have rent money even if there was. Most people either must
carve out part of their home, or come up with creative ideas to get
around the real estate shortage.

Saldivar, the martial arts black belt, beamed with excitement as she
walked through the skeleton of a building that was once an industrial
laundry in Havana's Nuevo Vedado neighborhood. She is petitioning the
government to turn over title to the property so she can transform it
into a gymnasium, and meanwhile, is using a small park nearby to hold
fitness classes.

The building has no roof or walls, and the oil-stained concrete floor is
littered with truck-sized pieces of rusted machinery, but Saldivar is
not deterred.

"I'll fix it up," she insists. Her bigger worry is that authorities have
not included martial arts in the list of acceptable activities. Saldivar
says she will either have to limit her classes to aerobics, or
"inventar," a Cuban specialty that roughly translates as "to improvise."

"I don't plan to give Taekwondo classes," she deadpans. "I'm teaching
the kids 'Quimbumbia'," Saldivar's word for a discipline remarkably
similar to Taekwondo.

CHALLENGES AND OPPORTUNITIES AHEAD

Another challenge facing the private sector is taxes, which can be as
high as 50 percent, not including social security. Many prospective
entrepreneurs say the taxes will make it difficult for new businesses to
break even, and could also scare many people already making a living on
the black market from becoming legit.

One woman, who has legally rented out rooms in Havana's trendy Vedado
neighborhood since 1994 and describes herself as a strong supporter of
the revolution, complained the new system significantly increases her
taxes: She will pay double the current $108 per room, per month.

"I'm thinking of turning in my license," she says, asking that her name
not be used for fear of attracting the attention of authorities. "What
will be left for us after we pay the government?"

The burden will not be as high for some, however. For cafes, gymnasiums
and many other activities, business owners will pay a fixed monthly fee
of somewhere between 100 and 350 pesos ($5-$17), plus social security
and payroll taxes.

At the end of the year, most will be asked to declare their income under
oath and pay a percentage of the profits. But in a nearly all-cash
economy, few are expected to give an honest account.

Phil Peters, a specialist on the Cuban economy who is vice president of
the Arlington, Virginia-based Lexington Institute, says the government
must walk a thin line between zealously policing the private sector for
tax dodgers and black marketeers, and sucking the life out of the
economic opening before it gets off the ground.

He says the government must make good on its pledge to create a system
of wholesalers, and find a way to extend microcredits to small
businesses. Eventually, employee-owned "cooperatives" could take over
inefficient state enterprises.

"If the government is serious about laying off half a million
unproductive workers, then it has a very strong interest in making the
entrepreneurial sector work," Peters says.

Already, there are signs that the other major prong of the reform effort
- the layoffs - are going more slowly than anticipated. Four months
after the cuts were announced, it is unclear how many people have
actually lost their jobs.

Midlevel managers told AP that workers' commissions set up to decide who
is expendable have been slow to hand over names. Cubans familiar with
deliberations in several ministries and state-owned companies say
leaders - including some Cabinet members - have been reluctant to shed
thousands of their employees.

"It is a difficult and dangerous process, particularly if it is not
handled well, or if there is favoritism or corruption," a worker on one
of the commissions told AP, speaking on condition of anonymity for fear
of losing her job.

Perhaps the strongest warning that the reforms do not go far enough has
come from two prominent economists at the state-run Center for Cuban
Economic Studies.

In a rare opinion piece published in a small Catholic magazine, Pavel
Vidal Alejandro and Omar Everleny Perez warned that there are not enough
approved free-market activities to absorb half a million laid-off state
workers, and not enough white-collar jobs for an educated population.

They said it was hard to imagine that illiquid state banks could make
good on the government's pledge to extend microcredits, and urged the
state to reach out to foreign investors.

On a small scale, such investment is already happening. Several
entrepreneurs said they had received seed money from relatives overseas,
most of them in the United States. A recent decision by the Obama
Administration that allows any American to send up to $2,000 a year to
Cuba could make such loans easier.

Even if these new businesses get off the ground, it remains to be seen
whether they will have enough customers, with so many newly unemployed.
But entrepreneurs such as Hidalgo are riding a wave of hope.

Hidalgo waits as a van pulls up carrying a gas oven, a loan from his
girlfriend's mother. He says he expects to be open for business by the
end of February, and plans to call the pizzeria "Baldoquin," after his
grandfather. After more than a decade fantasizing about his own
business, Hidalgo says he can hardly contain himself.

"Just imagine it!" he gushes, thinking of that first pizza out of the
oven. "It will be the realization of a dream I have held onto forever."
Associated Press reporters Anne-Marie Garcia and Andrea Rodriguez
contributed to this report.

http://www.miamiherald.com/2011/01/30/v-fullstory/2041688/cubas-economic-changes-create.html