In Cuba, free market proves easier said than done

August 3

In Cuba, free market proves easier said than done
PAUL HAVEN,Associated Press

HAVANA (AP) — Daily for the past five months, Yusdany Simpson has been
at her street-side cafeteria under its gleaming white parasol, doing her
part in Cuba's economic makeover by churning out mayonnaise sandwiches
at 12 cents a pop.

Not any more. The other day, she headed to a Labor Ministry office in a
crumbling old Havana mansion to relinquish her business license and
receive a letter freeing her of tax liability. With that, the
35-year-old single mother closed her door on the government's attempt to
add a capitalist spark to its ailing economy.

She was hardly the first. When she turned in her license, she says, the
clerk behind the desk "just stared at me with a look of surprise on her
face and said, 'Oh no, not another cafeteria closing down!'"

Although adamant that Cuba is simply fine-tuning socialism, not shifting
to capitalism, President Raul Castro has spearheaded changes that allow
Cubans to work for themselves in 178 approved activities, hire employees
and rent out rooms and cars. The Cuban leader has said the measures are
crucial to rescue the island's perennially weak economy from the abyss,
and he has warned his countrymen that there is no Plan B.

But less than a year into the overhaul, interviews with Cuban tax
authorities, government officials and more than a dozen aspiring new
business owners in Havana reveal a darkening landscape for those who
took up the free market challenge. They say they face competitors
offering similar products, dependent on customers who have little or no
disposable income, cut off from credit or startup capital, and undone by
a new tax code they say is overly burdensome.

While the government says it has moved boldly to meet these problems, a
basic fact of the free market still needs to sink in on this island of
11.2 million people: that most businesses fail, even in developed
countries like the U.S. where startups can get loans, buy wholesale,
rent commercial space and conduct market research.

"Welcome to the wonderful world of dog-eat-dog capitalism," said Ted
Henken, a professor at Baruch College in New York who has extensively
studied Cuba's economy.

"Cuban entrepreneurs have the added obstacle that Cuban capitalism is
still quite deformed ... and it is still based on a fundamental distrust
of business owners," he said. Cuban leaders, he said, are hung up on the
idea that nobody should be getting rich.

Simpson says she had no dreams of gold dust. She opened her cafe hoping
to make a little money while staying at home with her 2-year-old son
Liuber, but says the venture ended up costing her what little savings
she had built up from remittances sent from abroad.

She says she paid 330 pesos ($13) a month in taxes, and also set aside
money to pay a year-end 10 percent levy on sales, leaving her little or
no money left for herself. Some months, such as July, ended up costing
her money.

"I gave it a shot but I didn't get the results I wanted," she told The
Associated Press. "I realized I was spending my own money, that I got
from other means ... That's not how it should be."

While success stories still abound — the chic restaurants catering to
deep-pocketed foreigners, the popular gay cabaret that opened in
December, the spa that offers face masks and foot massages — most Cuban
entrepreneurs lack the capital to even dream of opening such businesses.

And for those who have opened the hundreds of street-side cafes, DVD
stalls, shoe repair stands and tailor operations that dot many of
Havana's streets, the reality has begun to bite.

Vladimir Regueiro, the vice chairman of Cuba's tax administration,
acknowledged in an interview with AP that cafeterias, licenses for which
are the most popular since the reforms began in October, are having a
particularly tough time.

"It is one of the activities which has suffered the most closings," he
said. "People think it will be easy, so you see them everywhere you go,
but the market has a limit."

Regueiro said the government has responded by declaring a moratorium on
payroll taxes, eliminating social security payments for elderly business
owners, lowering the fixed tax rates many must pay each month, raising
the amount of deductibles and slashing bulk prices.

"The system of taxes is not closed. We must be always monitoring and
studying it," he said. "The idea is not to force the self-employed to
close down, but rather to make it possible for them to triumph and
generate enough value to support themselves and society in general. That
is our way forward."

Business owners interviewed by the AP said one sign of the state's
sincerity is how little contact they have had from government inspectors
who caused problems and demanded bribes in past economic openings.

But the government's best efforts might not be enough.

According to statistics released in July, 178,000 people have received
businesses licenses since October, joining about 147,000 that had won
the right to work for themselves following a previous opening in the
1990s. That's 325,000 in a state where 80 percent are government-employed.

Regueiro and other officials have hailed the results as extraordinary
and noted the government has granted more licenses than it had forecast
for all of 2011.

But the pace seems to be slackening. The government's July figure for
new license holders was virtually unchanged from April, with no
explanation given.

And the official total does not count those opting to return their
licenses. While no official statistic exists for these failed
businesses, Vice Labor Minister Jose Barreiro told AP in April that
around 30,000 licenses had been returned up to that point. The figure is
surely higher now.

Of the entrepreneurs AP has been following since December, Simpson and
Danilo Perez, a 21-year-old bootleg DVD salesman, have already closed
down, and others say they too are considering throwing in the towel.

Anisia Cardenas, a seamstress, set up a stall in a neighbor's patio that
she rented for 50 pesos ($2) a day. Unable to meet costs, she says she
gave up on the stall in March and now works out of the steamy kitchen of
her boxlike apartment in the working-class El Cerro neighborhood.

Cardenas charges as little as 10 pesos (40 cents) to take in pants and
as much as 300 pesos ($12) to make a woman's blouse from scratch. She
must pay about 475 pesos ($19) a month in taxes, social security and
other government levies, most of which are due regardless of what she
earns. She says even working seven days a week, often assisted by her
teenage daughter, her monthly taxes outstrip her earnings.

"Last month I had to pay the license fee and my social security payment,
and it was a terrible month for business," she said. "I had to dip into
my savings to pay all those things, which is to say I had to pay even
more than I made. I lost money."

Cardenas says she has noticed a huge dip in business in the past few
months, which she blames on rising competition. Also, she said, raw
materials are costly, forcing her to charge prices customers can't afford.

"I'm going to give it two more months, but I am thinking of turning in
the license," she said. "It will be a very sad day if I do."

Even entrepreneurs who have had some success say they are working much
harder than they anticipated, with relatively little to show for it.

Javier Acosta, who opened an upscale restaurant called Parthenon and
employs four waiters and cooks, said business has been so-so, with one
table of diners one night, two or three the next. He said the
government's decision to implement a moratorium on payroll taxes has
meant a reduction in taxes from 8,000 pesos ($320) a month to 3,625
pesos ($145.) The change has not meant increased riches, but "it's an
important reduction," he said. "At least now I don't have to use my
savings to pay the taxes, like I did the previous month."

Julio Cesar Hidalgo, who along with girlfriend Gisselle de la Noval
opened a pizzeria in the front of his aunt's apartment, and was at one
point churning out 40 pies a day, says they are lucky to sell 20 a day now.

"People just don't have the money for luxury items like pizza," he said.

Hidalgo said he must pay 1,800 pesos ($72) a month in taxes, regardless
of earnings, and that he, de la Noval and his aunt must split profits.

In July, they earned just 700 pesos ($28) each, not much more than the
average Cuban salary of 500 pesos ($20), and less if one considers that
most Cubans supplement their incomes by stealing items from their workplace.

"I can't steal from myself," Hidalgo said with a chuckle.

When asked if he would do it all over knowing what he knows now, Hidalgo
said he needed time to think about it. But both he and his girlfriend
were adamant that they would not close down.

"We will not surrender," said de la Noval. "We've swum too far to die on
the shore."

___

Associated Press writers Andrea Rodriguez and Anne-Marie Garcia
contributed to this report.

___

Paul Haven can be reached at www.twitter.com/paulhaven"

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