Neither Socialismo Nor Muerte – Cuba Moves Beyond Defunct Adage

1 Feb 2011

Cuba faces an uncertain future as Raul Castro’s ambitious, if flawed, reform package is implemented. Although the most dramatic effects are likely to be seen in the economy, modest decentralization measures may be its most important legacy for the Cuban people.

"We either make corrections or our time skirting the precipice will run out, and we will sink ourselves and the efforts of entire generations ." Raul Castro, Meeting of the Cuban National Assembly, December 2010.

In September last year, the Cuban government's announcement of mass public sector layoffs sent shockwaves through a society used to political inertia. To absorb the external page500,000 public sector workers dismissed by March 2011, and the 1.3 million - a quarter of the total workforce - over the next three years, the state aims to create 465,000 jobs in the private sector, drawing on a new list of 178 professions eligible for cuenta propismo or self-employment licenses. However, while in the short term hopes to solve rising unemployment rest on this newly invigorated and 'destigmatized' private sector, the reforms will come at the cost of real job creation, improved productivity and sustained growth. Worse, it will increase poverty and inequality in a society already riddled by complex social stratification.

Private sector to the rescue?

Analysts both external pageon and external pageoff the island argue that the reforms will be too strong a shock to the system and that in their current form they will be insufficient and unable to absorb dismissed state employees, failing to put Cuba on a path of real growth.

First, there is simply not enough demand to make hundreds of thousands of new small businesses viable. In 2009, there were 143,000 registered cuenta propistas in Cuba and many more working illegally on the black market, meeting much of the current demand for low-skilled services.

Second, on the supply side, the mostly low-skilled professions permitted under cuenta propismo do not correspond with the skills of dismissed white-collar state sector employees, or the educational level of recent university graduates who continue to suffer from the highest rate of unemployment. Additionally, the lack of knowledge-intensive professions on the list means that licenses will mostly be granted for low-skilled, one-man professions with no multiplier effect on hiring and growth.

Third, entrepreneurs face a serious lack of incentives and significant hurdles to set up shop. They will have difficulty accessing resources, as wholesale markets will be slow to develop because of import and credit scarcity that resulted from the lack of liquidity in Cuban banks. In the medium to long term, Brazil and the EU have offered to provide microcredits in support of these reforms, though the Cuban government's acceptance is not a given due to political sensitivities. Moreover, high taxes (between 25 and 50 percent for income, 25 percent for hiring), explicitly designed to prevent the accumulation of capital, will deter potential entrepreneurs and promote continued non-compliance in the black market. Once their shop is up and running, the government will set prices, irrespective of market forces.

On the whole, although Raul Castro's government seems more favorable to true private sector development than Fidel's in the 1990s (when many businesses were shut down and licenses withdrawn without warning), small businesses are unlikely to solve Cuba's increasingly dire unemployment situation.

The layoffs have been met by widespread fear, reinforcing the dividing line between the "haves" and the "have-nots" in Cuban society, already riddled by growing inequality, poverty and the emergence of new social classes that range from the urban poor to the nouveau riche.

With the Revolution embodying these contradictions, the "haves" - those that receive remittances from family abroad, or earn incomes in convertible currency in the tourism industry or a private business - have the potential to gain from these openings. The "have-nots" - women, particularly single mothers, the rural and urban poor, as well as most of the Afro-Cuban population who do not have access to remittances - are the most vulnerable to losing their meager state salaries averaging $18 a month. As more staples are cut from the ration book and prices in the open market are often 20-fold, in losing their job, many will also lose access to their last survival mechanism: supplementing their incomes by selling or bartering goods accessed at the workplace on the black market. With no savings or access to external financing (such as remittances) or credit, the "have-nots" in Cuban society face a bleak future.

The necessity of reform

Despite these overwhelming challenges to implementing a viable private sector, the Cuban government's economic reform process - as well as its political future - hinges on its success. Published in December 2010, the lineamientos or guidelines for economic and social policy- the first coherent outline of the government's reform strategy - shows how a newly invigorated private sector is supposed to serve the government's primary objective: reducing pressure on the state budget.

Focused on eliminating government subsidies to state enterprises, decentralizing decision making and liberalizing rules for foreign investment, the aim of the lineamientos is clear: to break the vicious cycle of paralyzed productivity that has emptied state coffers by subsidizing inefficient industries; forced the island to import basic goods and over 80 percent of its food; and contributed to a foreign debt that today accounts for 50 percent of GDP. In effect, over the last two decades, the Cuban government has relied on its workforce to finance the island's growing fiscal deficit, watching its real wages and pensions decline by 70 percent.

Unlike the 1990s, when Cuba was able to weather the crisis brought on by the collapse of Soviet subsidies without fundamental changes to its economic system, the country today no longer has the reserves to support unproductive industries and an inflated workforce. To ensure its political survival, Raul Castro's government cannot continue to exhort its workforce to keep on making sacrifices in the name of a Revolution that has undercut the purchasing power and diminished the livelihoods of the majority of Cuba's population, and visibly increased inequality.

Instead, as the government seeks to reallocate funds to more productive sectors, generating not only new sources of income but also new actors outside of the state system, it is forging a distinctly Cuban model of non-state sector development. The choice of wording in the 36 page lineamientos shows that state planning will remain paramount, keeping a firm eye on the priorities: "savings" are quoted 11, and "discipline" and "efficiency" 32, times.

Although much international attention has been focused on the potential for improved livelihoods afforded by a revitalized private sector, the most significant changes brought about by the reforms may be more intangible. As state planning becomes more indirect, emphasizing regulation rather than determining production plans, industries will be free to choose their own resources and enter into contracts across sectors. Local governments will work with and eventually be held accountable to their communities as they reach decisions on food provision and other resource allocations.

By allowing both cooperatives and the private sector to step in where state enterprise has underperformed, the relationship between state and society will be reconfigured. As economic decision making is decentralized, social control will diminish and bottom-up participation will grow. As the Cuban Communist Party ratifies these lineamientos at its Congress in April 2011 - likely the last for Raul Castro and the historic generation that has led the island since the Revolution - participation in local economic decision making may be its most important legacy for the Cuban people.

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