Point/Counterpoint: Cuba’s pause on the private sector

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Fruit and vegetable vendors push a cart through the streets of Old Havana. Photo by Matias J. Ocner.

Cuban President Raúl Castro’s decision to “perfect” the country’s burgeoning private sector by stopping the issuing of new business licenses has caused concern on and off the island. Cuba Trade Magazine asked two prominent Cuban economy experts to share their diverse perspectives on this policy.

Make Haste Not Waste: Pausing new licenses for Cuba’s private sector permits slows momentum

By Dr. Ted A. Henken, Professor of Sociology and Latin American Studies, Baruch College, New York, New York

President Raúl Castro has long been fond of assuring the public that Cuba’s economic reforms will move forward “sin prisa, pero sin pausa” (without haste but without pause). 

Nevertheless, today’s announcement that the government is suspending the issuance of new licenses for a long list of the most lucrative private occupations has, at least briefly, changed his slogan to “sin prisa, pero sí pausa” (without haste but with pause). The Cuban government said it won’t issue the licenses until the cuentapropista sector can be properly “perfected.”

By hitting pause on further growth of the island’s surging self-employed private sector (it reached 567,982 by the close of June 2017), the government is throwing a bucket of cold water over the rising expectations of the Cuban entrepreneurial class.

Many entrepreneurs recently expected the government to announce that some of the island’s larger, more lucrative businesses might be given legal status as small- and medium-sized businesses. 

In order to root out what Castro described as “violations and irregularities” among cuentapropistas, the government published a long list of more than 25 occupations where the issuance of new licenses will be indefinitely suspended.

However, many of the illegalities common in the private sector originate with cuentapropistas trying to survive under an onerous tax system where neither the government nor most private sector operators trusts the other to play fair, resulting in the vicious cycle of under-reported income on the one hand and fixed tax payments unrelated to actual earnings on the other.

Moreover, irregular or black-market sourcing by the private sector is directly related to their almost universal complaint that even after six years the government has failed to set up a legal, affordable wholesale supply chain or provide access to credit or investment.

Among these frozen activities are the popular activities of running a private paladar (restaurant), operating a bed-and-breakfast, or working as a private computer programmer, real estate agent, private contractor, or building contractor. On top of this, the government completely eliminated new permits for the occupations of carretillero (produce peddler), wholesale and retail produce vendor, and CD and DVD vendor, among others. Those already holding these licenses will be allowed to continue working.

Could the weekly circulation of el paquete, an underground digital media package typically distributed by CD and DVD vendors, be the real reason for eliminating this employment category? Or could it be that Cuba finally respects U.S. IT and copyright law under the administration of President Donald Trump?

What remains clear in Cuba, is that economic logic is always subject to veto by political logic.  Especially when the growth, size, and prosperity of the private sector is involved.

A gardener hoses down the entrance to a private bed-and-breakfast in Varadero. Photo by Matias J. Ocner.

It’s a Process: Cuba’s new private sector needs time to regulate

By Dr. Emily Morris, Economist and Honorary Research Associate at University College London’s Institute of the Americas 

The Cuban government’s Aug. 1 announcement that there would be a pause in the issuance of new licenses for non-state enterprises was no surprise. Recent reports in the official press had clearly signaled that a review of the functioning of the sector was under way, and that new rules would be emerging from the pipeline.

The announcement gave examples of a few of the measures that would be taken in the process of ‘adjusting the trajectory’ of the private sector. They were unremarkable. There will be a single category for servicios de belleza (beauty services) rather than the existing six categories of hair dresser, barber, manicurist, masseuse, makeup artist, and trainer, enabling service providers to diversify with less onerous paperwork. Regulations for restaurants will be more clearly differentiated from those for bars. Formal provision will be made for business owners who are absent for any reason, including sickness and travelling abroad so that their work can be delegated to a colleague. Systems of inspection and control will be streamlined, and there are new regulations for providers of transport services, including inspections of vehicles, drivers’ records, rationalization of routes, and a new pilot scheme for management of Havana’s collective taxis.

These measures tackle only a few of the many anomalies in the sector. The system of taxation evidently requires review to continue the endless task of trying to make it fairer by removing regressive elements, tightening loopholes, and improving compliance among a population unfamiliar with tax obligations. Moreover, for as long as Cuban markets continue to be distorted by different sets of prices, regulators will struggle to mitigate the inevitable diversion (from state supply chains) of products from markets in which prices are artificially low (due to administered prices and exchange rates) to higher market-priced ones.

The process of economic “updating” that the government of Cuba is seeking to manage is therefore an extremely complex one. The creation of new private enterprises and markets requires the development of new systems of regulation, taxation, and enforcement. In “market” economies these systems have evolved over a long time, but still continue to be constantly debated and reviewed. In Cuba’s case, the task has been to develop them from scratch to suit Cuba’s unique and very difficult conditions, while continuously adapting them to emerging and rapidly-changing challenges.

In this context, the government announcement that there will be a temporary suspension of the issuance of new licenses for some activities while new regulations are drafted is undoubtedly a pause in the creation of new private businesses in those sectors. However, the expansion of existing businesses is uninterrupted, and the growth and consolidation of the sector continues.

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