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Restructuring Cuba's Economy

Cubans at an opening party for a private spa. CBS/Portia Siegelbaum

HAVANA -- Fiscal austerity has not been part of the Cuban Revolution's lexicon but since President Raul Castro officially began calling the shots in February 2008 the island has slowly begun a political U-turn in an effort to pull the economy out of recession.

Sociologist Aurelio Alonso says the latest measure laying off 500,000 civil servants and other state employees by March 2011 is nothing less than "a process of restructuring the Cuban socialist economic system."

Before Castro took the knife to the bloated public sector this month, the salaries of some 5 million people -- over 85 percent of the Cuban labor force -- were coming out of the national budget. Last April, the President announced up to a million unproductive workers would get axed.

Inevitably, Alonso, a researcher at the Center for Sociological and Psychological Studies in Havana, says these changes are creating "uncertainty" among the population, raising "fears of losing their jobs". He adds that the government's new opening for the private sector could be the opportunity to better their lives.

The Government, meanwhile, he says, has to deal with the crossover between the formal and informal economies.

Official statistics show there are 143,000 workers currently registered as self-employed, but Alonso believes the number of people involved in the informal economy is three to four times higher. There could be as many as 500,000 people working for themselves either full or part-time, without licenses, either because the government stopped issuing permission for self-employment in their fields or because they want to avoid paying taxes.

There are at least two reasons for the boom in the informal economy and the black market it feeds off of: 1) the inability of the state to meet all the demand for a wide variety of services; and 2) the state's inability or unwillingness to keep prices in convertible currency (many items are simply not available in the non-convertible Cuban pesos in which Cubans are paid) at affordable levels (such as cement, paint, wall tiles).

Anyone in Cuba who has remodeled their kitchen or fixed their roof or needed a car mechanic knows there exists an army of competing construction workers, house painters, carpenters, plumbers, electricians and others offering their services and the vast majority of them are unlicensed. You may have to put yourself on a waiting list for them as they are often booked months in advance. The same is true for catering services.

Apart from the 143,000 people with licenses to be self-employed, there are another 448,000 registered to work in the private sector primarily on family farms.

Reforms set into motion by Castro in September 2008 put nearly 2.5 million acres of fallow State-owned land into the hands of already existing private farmers, individuals who wanted to try their hand at it, as well as cooperatives.

In all 110,000 farmers received the right to cultivate though not the ownership of the land. The plots are expected to begin fully producing within two years which would provide a major relief to the government which spent nearly $100 million on food imports for the population last year.

And the government announced last Friday that it will issue 250,000 new licenses for trabajo por cuenta propia or self-employment.

Another 200,000 government jobs will be converted into worker-run cooperatives or leasing deals. An experiment in this began months ago with the leasing of taxis to drivers and premises to barbers and beauticians formerly employed by the State who now run their operations as private businesses. Similar conversions from State to cooperative-run enterprises will probably take place on the level of local industries such as furniture making and upholstery.

Alonso describes what is taking place as a change in the "vision of socialism". The new view is that the State shouldn't dominate everything, run everything. The role of the State, he says, should be to establish controls and taxes but it doesn't have to manage every little corner food stand and every grocery store.

"The State gains nothing by running a national system of grocery stores (where Cubans buy their state-subsidized monthly food rations). It gains nothing by distributing the food to these state shops. This method is supposed to control theft but it still exists.

On Sept. 24 Granma also published a list of 178 types of work that will be legalized as of next month ranging from home appliance and car repairs, to carpentry, massages, home caretakers, animal groomers and park attendants.

One entirely new job description opened is for accountants. Presumably they will be needed by the new businesses and cooperatives which will be required to keep books for tax purposes.

Without giving the long explanatory speeches for which his older brother, former President Fidel Castro is known, Raul Castro has quietly chipped away at the Revolution's long held vision of the welfare state and launched a series of painful spending cuts.

Gone are the subsidies for many basic food items -- like potatoes and peas -- that customers once bought for pennies as part of a monthly ration. Gone are most of the items that used to make up a food basket capable of taking families to the end of the month -- they are now lucky if they last a week to 15 days. Gone are the virtually free lunches that until a few months ago, were provided at every business, factory, office and construction site.

The State's once model childcare system has shrunk to the point where it can no longer meet the needs of many working women.

Primary and secondary schools, despite great efforts can no longer provide truly nutritional or even filling lunches for students. Talk to any parent and they'll tell you that they pack something, even if only a hard boiled egg, to supplement the meals served in the school lunchroom.

Free government boarding schools in the countryside for the upper grades have been closed down as there is no longer cash to cover food, electricity, and transportation to and from what was once heralded as a revolutionary experiment in teaching adolescents to work and study at the same time. It should be mentioned here that both parents and children were more than happy to bid farewell to a failing system -- failing to a great extent because teachers were no longer willing to work under the poor conditions for inadequate salaries and left the profession. Classes were pre- videotaped and distributed to all the schools. Televisions replaced teachers.

Omar Everleny of the University of Havana Center for the Study of the Cuban Economy says that despite the reality of bloated state payrolls there are still government jobs to be filled: in teaching, particularly on the primary and secondary levels; in agriculture, construction, and the police. But he says it remains to be seen if someone who for years held the post of a mechanical engineer will want to work in construction.

"The salaries," he says, "do not motivate people to take these jobs."

Everleny believes the transition will be rough going and "there are going to be losers in the initial stage" but that in the end things could be better for people.

There are those who haven't waited for Raul Castro to enact change.

A private spa offering waxing, massages and sauna was recently inaugurated in a typical Havana neighborhood. A mother-daughter team of entrepreneurs paid a builder to put up a structure in their large back yard to house their business.

Several dozen Cubans attended the reception featuring wine, food and live music. The guests were all people who run some form of private business-- either rent rooms in their homes to tourists, or run beauty parlors, or paladars (home restaurants). They represent the type of person who will have the money to pay for the spa's services.

The beauty products on display, as well as the massage table, had been brought in from the United States by the owner's son who lives in Miami. The modest spa far from being a Golden Door spa nevertheless represents a considerable cash investment in the Cuban context.

One item stood out: the towel covering the massage table was clearly stolen property from one of the major Spanish hotel chains prominent in Havana.

This highlights one of the great problems raised by the layoffs and the opening to self-employment and cooperatives. Where are these new businesses supposed to get their supplies?

Economy Minister Marino Murillo Jorge admitted in last Friday's edition of the Communist Party newspaper Granma that the country was in no condition to establish the wholesale outlets for "the next few years". He further confessed that state-run retail shops did not at present have sufficient inventory to meet the newly emerging private sector's demand for supplies and equipment.

The self-employed will therefore have to buy their supplies at the same stores and at the same prices as the rest of the population. Just how much of a profit will they be able to make without their prices driving away customers? How much will a private restaurant owner be able to charge for a can of beer that both he and the public buy for one convertible peso in a supermarket?

The lack of wholesale suppliers for the self-employed is not a new problem. People were first granted licenses to work for themselves back in the 1990s when Cuba faced a catastrophic economic crisis and major unemployment for the first time since 1959.

"Many activities that were legal during this period have always had to turn to the black market to find supplies at lower prices, so that they could make a profit and not price themselves out of the market," notes Everleny.

Resorting to the black market has become such an accepted part of life in Cuba that people openly speak about it to the foreign press.

Ildelisa, a single mother and housewife, sells soft drinks and pastries from her home in the densely populated Centro Habana neighborhood. For several years she has a government license for her business but she took it a step further by organizing a virtual cooperative with several of her neighbors who pitch in to make the desserts.

She's worried that with more people going into business for themselves (and 80 percent of those who are self-employed today either operate gypsy cabs or are in some form of food services) it might become more difficult to obtain the ingredients she needs. "If there are more people buying sugar and flour, the prices on the black market may go up," she said. Prices outside the black market often have a 200 percent mark up and purchasing items in state-run stores would be ruinous to her business she says.

Dissident Vladimiro Roca, son of a leader of Cuba's first Communist Party, says nothing has changed, that the apparent reforms are nothing more than the same old, same old. Without really opening up and giving private business access to goods at wholesale prices, he asks, how can the private sector thrive?

There are many other unanswered questions. A call to the Ministry of Labor and Social Security produced the response that people would have to wait for the regulations to be published in the Official Gazette but they couldn't say when that would be.

Especially worrying to the self-employed is the issue of taxes. Clearly the State expects everyone to pay taxes on earnings. Private businesses in certain categories that will be allowed to hire workers will have to pay an added tax for the right to have employees. As well, all the self-employed will have to pay into the national social security fund and employers will have to contribute to it for their employees.

Rumors are rampant as to the amounts to be paid. An alleged Communist Party document leaked to the media says taxes on gross income will range from 10 to 40 percent, plus another 25 percent toward social security but this could not be confirmed.

Everleny suggests that the State needs to avoid putting a very high tax on certain activities that would impede their development. "When the State wants to promote an activity that has not been embraced with enthusiasm by people, it will lower the taxes [on that business], and that will not be a step back," he said. In order to encourage the self-employed to take up certain less desirable occupations, the State could considerably drop taxes on them. But, he said he could not say which jobs would fall into this category until people start requesting licenses.

Both Everleny and Alonso are convinced that Cuba is better prepared than it was in the 90s to implement an efficient tax collection system and that the taxes to be applied now have been more thoroughly thought out.

Alonso notes that in the past someone with a room in their home to rent to tourists was obligated to pay a standard monthly tax whether or not they actually had a guest. Now he believes the tax will be geared to their actual earnings. But he is convinced that taxes must be paid.

One of the new categories of job to be legalized is that of a domestic worker, a job which in reality is already widespread.

"At the moment earnings are totally disproportionate," says Alonso. "A domestic worker earns much more than a transplant surgeon." In his opinion, cleaning women should be well paid, but he believes they should have to pay taxes to redress this imbalance in society.

Hopefully, say both Alonso and Everleny, the State will now run only those industries of national importance such as mining and petroleum, electricity production, health care and education and let the private sector, including cooperatives, take on all the rest as the experience of the past five decades has shown the State can�t do it all.

Most people are going to wait and see, but as the pink slips are handed out, the newly unemployed will have to find some way of feeding their families. That just may be the impetus needed to jump start the Cuban economy.

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