Criticism of Cuba’s New Regulations for Private Enterprise

Cuba’s 126 pages of new regulations for private enterprise (cuentapropistas), which were published on July 10, have been criticized by U.S. economist Richard Feinberg, a professor at the University of California San Diego’s School of Global Policy and Strategy and a Fellow at the Brookings Institution. He calls them “the revenge of the bureaucrats,” who are jealous of those in the private sector who are making much more money than employees of struggling state enterprises.[1]

The new regulations contain details about potential violations, penalties and fines, oversight and performance requirements. For example, an operator of a private day-care facility must devote at least 21.5 square feet per child plus provide a detailed inventory of personal toiletry items.

These regulations also are designed to virtually guarantee that most private businesses will not grow beyond 20 employees. For example, once a private employer hires more than 20 employees, the 21st employee must be paid six times the average wage for the first 20 employees.

In short, private enterprise is fine so long as they “don’t get too rich, diversify their businesses, open branches, try to evade taxes, resort to the black market, or provide too much competition to the state sector.” Indeed, a major motivation for the regulations is to halt growing inequities between ordinary Cubans and those in the private sector.

Moreover, the new regulations do not allow “for white-collar professionals to work for themselves, . . . private entrepreneurs to directly import for their businesses, and there is no recognition of their businesses as legal entities” and no provision for the creation of wholesale markets for the private sector.

These criticisms of the regulations were echoed in a  recent Cuban public opinion poll carried out by the CubaData Project with a team of academics from Cuba, Mexico and Venezuela. 87.6% believe that Cuban professionals should be able to establish businesses and businesses within their professions. In addition, a high percentage of those surveyed believe other political parties should be permitted and that the election of the island’s president should be direct.[2]

==============================

[1] Whitefield, New Cuba regulations for private enterprise on the island have a long list of don’ts, Miami Herald (Aug. 2, 2018). See these posts to dwkcommentaries.com: Cuba Announces New Regulations for Private Business (July 10, 2018); More Details on New Cuban Regulations for Private Business (July 11, 2018); Comment: Yet More Details on Cuba’s New Regulations for Private Business (July 13, 2018).

[2]  Survey: Cubans want more autonomy for their business, political pluralism and elect president, Diario de Cuba (July 30, 2018).

Cuba’s National Assembly Approves Draft Constitution

On July 22, Cuba’s National Assembly of Popular Power approved the draft of the new Cuba Constitution. It will now go to a period of “popular consultation, August 13-November 15, and afterwards to a national referendum. [1]

In a concluding address to this session, President Miguel Diaz-Canel said, “The behavior of the economy in the first . . .[half of the year] closes with 1.1 percent growth. A tense situation remains in finance, due to several factors. This situation forces us to ensure control measures in the 2018 Plan. To achieve this we must appeal to the maximum use and efficient use of available resources. In these circumstances, the effort must be multiplied.”

Previously the Cuban government had said the country “needs up to 7 percent annual growth to fully recover and develop from the collapse of former benefactor the Soviet Union, and more recently, Venezuela. The drop in revenues has led Cuba to postpone payments to many suppliers and joint venture partners over the last two years, the government has admitted. Diaz-Canel on Sunday called on the country to work harder to improve the economy and “gradually re-establish the financial credibility of the nation.”

Therefore, we “must draw up an objective and sustainable Plan for the Economy for 2019, but one that does not renounce economic growth.”

As noted in a prior post, the draft Constitution recognizes the right to private property.

===========================================

 

[1]  No surprises, the National Assembly approves the Constitution Project of the Republic of Cuba, Diario de Cuba (July 22, 2018); Diaz-Canel: A Constitution that reflects today and the future of the Fatherland, Cubadebate (July 22, 2018); Semple, New Cuba Constitution, Recognizing Private Property, Approved by Lawmakers, N.Y. Times (July 22, 2018); Reuters, Cuba Economic Growth Weak, President Says, as Lawmakers Approve New Constitution, N.Y. Times (July 22, 2018).

Cuba Announces New Regulations for Private Business

On July 10, Cuba announced new regulations, effective December 7, 2018, designed to allow new private restaurants, bed-and breakfasts and transportation services.[1]

The new regulations are designed to control such growth and to collect more tax revenue from these businesses by requiring them to move all of their cash through state-run banks. A related objective is to reduce tax evasion and illegal purchase of stolen state materials.

The government also recognized that the work of the self-employed workers (TCP) has increased the supply of goods and services to the population with acceptable levels of quality, together with the payment of taxes, which are a source of income for the municipal budgets in pursuit of local development. In addition, the TCP sector has facilitated the reordering of the national labor supply and the reduction of inflated staff in the state sector and freeing the State of some productive activities and non-strategic services for the development of the country.

Cuba’s Deputy Minister of Labor and Social Security, Marta Elena Feitódo Cabrera, said, “there is no going back on work on its own; we must preserve this economic activity, but in an orderly manner.” She noted that while there were 157,351 registered self-employed workers in 2010, now there are 591,456, which constitutes 13% of the country’s employment.

========================================

[1] Yudy Castro, Tax adjustments: Official Gazette publishes new regulations on self-employment, Granma (July 9, 2018); Yudy Castro, What changes with the new rules? (+ Videos), Granma (July 9, 2018); Update, correct . . . strengthen self-employment (July 9, 2018); The government decrees new taxes for the private sector in Cuba, Diario de Cuba (July 10, 2018); The authorities will lift the ban on the most coveted licenses of the Cuban private sector, Diario de Cuba (July 10, 2018); Issue New Provisions for Self-employment (+ PDF), Cubadebate (July 10, 2018); Assoc. Press, Cuba unfreezing growth of private tourism businesses, N.Y. Times (July 10, 2018).
Previous posts about Cuba’s private sector are listed in the “Cuban Economy” section of List of Posts to dwkcommentaries.com—Topical: CUBA.

Is Cuba Concealing Bad Economic Data? 

The Cuban government  has not yet released 2016 data on the country’s gross domestic product, exports, money supply and debt even though in June-July 2017 it did release other statistical information. The government even failed to respond to a Reuters question in January 2018 as to when this 2016 information would be released. [1]

Many speculate that this omission is deliberate to facilitate the Cuban government’s claims in late December 2017 that the economy grew in 2017 by 1.6%[2] when Moody’s and the Economist’s Intelligence Unit had projected that the Cuban recession continued in 2017, while the Economic Commission for Latin America and the Caribbean (ECLAC) had projected Cuba would have for 2017 an anemic growth of 0.5%.

“The abnormal delay in macroeconomic indicators for 2016 casts doubt on the official estimate of GDP growth in 2017,” said Carmelo Mesa-Lago , professor emeritus of economics at the University of Pittsburgh and author of numerous books on Cuba’s economy. This opinion was echoed by an anonymous Cuban economist, who said, “Whenever things are bad the response from the government is to hide information.”

=======================================

[1] Frank, Cuban economy even more opaque as data omitted from 2016 accounts, Reuters (Jan. 15, 2018); Havana omits economic data in its 2016 accounts, Diario de Cuba (Jan. 15, 2018); ONE, 2016 Statistical Yearbook of Cuba.

[2]  Cabrisas: The Economy grew 1.6% despite ‘adverse situations,’ Diario de Cuba (Dec. 21, 2017).

Another Perspective on Cuba’s Current Elections 

A friend has provided me with an illuminating article on Cuba’s current round of elections and the upcoming transition from the Castro brothers presumably to Miguel Diaz-Canel, that was written by William LeoGrande, a professor of government in the School of Public Affairs at American University in Washington, D.C. and a noted author and commentator on Cuba.[1]

LeoGrande emphasizes that the elections come “at a delicate political moment. Castro’s ambitious economic reform program, the “updating” of the economy, is still a work in progress and has yet to significantly raise the standard of living of most Cubans. Moreover, it is encountering resistance from state and party bureaucrats who are loath to lose control over the levers of economic power and the perks those provide. The economy has also been struggling because of declining oil shipments from Venezuela, which sells oil to Cuba at subsidized prices, helping to ease Cuba’s chronic shortage of hard currency. . . . The resulting energy shortage has forced Cuba to impose drastic conservation measures and pushed the economy into a mild recession last year.”

Hurricane Irma has been another major problem for Cuba. According to LeoGrande, it inflicted “several billion dollars’ worth of damage as it tracked along the north coast before turning toward the Florida Keys. The storm hit some of Cuba’s most lucrative tourist resorts, cutting into the one sector of the economy that has enjoyed sustained growth in recent years. Most of the major hotels predicted they would reopen for business quickly, but the storm did enormous damage to the power grid, leaving large swaths of central Cuba in darkness.”

All of these problems have fueled “popular discontent over the economy and impatience with the slow pace of improvement . . . . In an independent opinion poll taken in late 2016, 46 percent of Cubans rated the nation’s economic performance as poor or very poor, 35 percent rated it as fair, and only 13 percent rated it as good or excellent. Solid majorities reported not seeing much economic progress in recent years for the country or themselves, and they had low expectations for the future.”

Moreover, Cuban people have “become more vocal in expressing . . . [their] discontent. The expansion of internet access, the ability of Cubans to travel abroad without state permission and Raul Castro’s own calls for more open debate about Cuba’s problems have fueled an increasingly robust public sphere.”

This discontent, however, faces major hurdles in electing candidates with these views. They have “formidable obstacles. First, no overt campaigning is allowed, so it is hard for candidates to run on an alternative policy agenda. In the absence of a formal campaign, people learn about candidates by word of mouth.” And the Communist Party of Cuba has the ability “to influence elections by mobilizing its members against candidates it regards as dissidents.”

Nevertheless, the next president, presumably Diaz-Canel, will face the challenge of balancing “the need for economic reform with the fear of change prevalent within key sectors of the political elite.”

=================================

[1] LeoGrande, Cuba After Castro: The Coming Elections and a Historic Changing of the Guard, World Politics Review (Oct. 17, 2017). A previous post set forth an overview of Cuba’s elections in 2017-2018.

 

 

Cuba Pays $60 Million of Indebtedness to Major Creditor Nations     

The week of October 15 Cuba paid $60 million of indebtiness to 14 wealthy creditor nations. Last year Cuba paid $40 million to the same group. The total debt is $2.6 billion after the creditors in 2015 forgave $8.5 billion of $11.1 billion upon which Cuba had defaulted through 1986 plus charges.[1]

These creditor nations known as the Club of Paris are the following: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Italy, Japan, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom.

Under the 2015 agreement, Cuba agreed for the first time to grant the creditors equity in development projects, in areas like manufacturing and agriculture, in exchange for a portion of their debt holdings. Many of these restructuring agreements include the establishment of so-called counter-value funds, under which a percentage of debt is discounted in exchange for the potential profits stemming from participation by a creditor country’s firms in Cuba joint-development projects.

The counter-value funds have an estimated combined value of around $750 million of the $2.6 billion owed. Japan, Spain, France and Italy – Cuba’s largest Paris Club creditors – are furthest along in negotiating swaps.

  • For example, a $46 million French project to develop cattle ranching and dairy products in central Camaguey province is ready to sign, according to France’s ambassador to Cuba, Jean-Marie Bruno.
  • Another example is Spain which has a project ready to manufacture cardboard and another aluminium structures for construction capable of resisting earthquakes and hurricanes, both involving Spanish companies.

This access to Cuban development projects gives the European countries and companies an advantage over U.S. companies who are banned by various U.S. laws from such projects.

This payment happened during dire economic times for Cuba due to the political and economic crisis in its ally Venezuela, declines in Cuban exports and tourism due, in part, to the damages caused by Hurricane Irma.

Cuba’s payment in these circumstances showed the importance Cuba attaches to the 2015 agreement with this group of major creditor nations.

==============================================

[1] Reuters, Cash-Strapped Cuba Makes Debt Payment to Major Creditors-Diplomats, N.Y. Times (Oct. 18, 2017); Chow, Cuba Reaches Deal to Pay $2.6 Billion in Arrears to Paris Club, W.S.J. (Dec. 12, 2015); Paris Club, Agreement on the Debt Between Cuba and the Group of Creditors of Cuba (Dec. 12, 2015).