Cuba's vow to boost private sector won't be easy, experts say

El Nuevo HeraldSeptember 15, 2010 

MIAMI — 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 shift 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.

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 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 canceled.

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.

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