Cuba's Economic Desperation

Cuba's Economic Desperation
Sean Goforth
July 31, 2012

Earlier this month, Cuba's parliament rubber-stamped several reforms
tied to Raul Castro's program, announced almost two years ago, to grow
the country's private sector. If all goes according to plan, Cuban
officials expect roughly half of the economy will be reborn in the
private sector over the next five years. In theory, steep taxes on small
businesses and privatized co-ops will bolster state coffers, and
regulation will keep state-owned enterprises insulated from competition.
In practice, the government is losing control of the privatization program.

For the most part, the hundreds of thousands of small-business licenses
handed out so far by the government pertain to low-skilled services and
nonessential industries, including restaurants, car-repair shops and the
like. Entrepreneurial Cubans have improvised solutions to prohibitions
against most forms of advertising by painting the side doors of their
cars and leafleting window shields. Another major hitch to the expansion
of private enterprise, access to wholesalers, is being resolved in part
by the Obama administration's 2009 decision to allow greater freedom of
travel to the island by Cuban Americans.

According to some estimates, roughly $1 billion a year in goods enters
Cuba in this fashion. Despite the kinks, the nascent private sector is
outcompeting the state. Last week, the Miami Herald reported that the
Castro government is raising fees on goods imported by Cuban Americans,
"apparently trying to force émigrés to send badly needed cash instead,
to control the trade in imported items and counter the drop in sales of
those types of goods at state-owned stores."

If the specter of better private-sector goods at lower prices seems bad
for the government, the alternative may be more troubling. What if
people try to keep state jobs while peddling their services and wares in
the informal economy? Cubans have decades of experience—often expressed
in terms of "resolve"—in getting by this way. This may explain an
apparent lull in interest to join the private sector. According to a
recent New York Times article, Havana planned to move 170,000 people off
the government payroll in 2012, but from January through May it issued
only 24,000 licenses for self-employment.

Then there's Cuba's relatively large class of skilled professionals,
people highly trained at government expense, who need to be kept in
state employ. Yet at $20-a-month salary, many Cuban doctors are leaving
the profession to work as taxi drivers or waiters, while others have
taken to prioritizing patients willing to pay extra for care.
Consequently, health care, the one indisputable achievement of the Cuban
Revolution, is faltering.

To these and other problems, the government still could reassert its
control, as it did under Fidel in the mid-2000s. In the aftermath of the
Soviet Union's collapse, Cuba's economy contracted, then stagnated.
Fidel kept the Cuban economy afloat in the officially sanctioned
"special period" by allowing use of the dollar, rationing hundreds of
additional foodstuffs, permitting some small businesses to operate and
encouraging tourism to the island. Relief eventually came when Hugo
Chavez, having solidified his control over Venezuela's oil industry,
began pumping billions of dollars of aid into Cuba, thereby allowing
Fidel to reverse many of the compromises he'd been forced into making in
the 1990s.

Now facing a serious challenger in the presidential election later this
year and an unknown cancer status, Chavez's future looks more uncertain
than that of the geriatric Castros.

Communist Cuba's salvation this time around was expected to come in the
form of massive offshore oil and gas deposits. The Economist last year
called the Scarabeo 9, a rig built and shipped from China by the Spanish
oil firm Repsol in order to skirt the U.S. embargo, "Cuba's main hope of
economic independence." China, Russia and other countries eagerly
courted Raul as the rig moved into place, each vying for a sizeable
concession or servicing contract, and each probably rather pleased by
the potential side effect of sticking in Washington's craw.

Then, after spending over $100 million in the endeavor, Repsol decided
in late May to stop exploring off Cuba's coast. Four of the five wells
it drilled didn't turn up any oil. In turn, Raul's visit to China,
Vietnam and Russia earlier this month—almost certainly scheduled before
the Repsol announcement—didn't result in any breakthrough commitments
for investment in Cuba.

Of course, Cuba still may become an oil-rich nation in time; already a
Malaysian outfit plans to explore a separate offshore bloc. But that's
scant consolation for the communist government, which desperately needs
the influx of international credit that would accompany a significant
oil strike. In more stark terms, Cuba needs a new sponsor, and just who
that might be is now in doubt given the recent reticence of the Chinese,
Brazilians and others to having greater sway over the island's future.

The bad news about oil also makes it harder to envision the Cuban
economy transitioning to a state capitalist system. Meanwhile, those in
the privatized economy are thrashing out wholesale markets via the
informal sector, largely at state expense. For the first time since Raul
ushered in his seemingly methodical economic reforms, the aging autocrat
faces a pressing "from, to" dilemma.

Sean Goforth is author of Axis of Unity: Venezuela, Iran and the Threat
to America.


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