We’ve been here before

HAVANA – On July 10, 2018, after 11 months and 10 days, Cuba’s Official Gazette published numerous new rules that include: 5 decrees-laws, one decree, and 14 resolutions, covering a grand total of 129 pages of changes in the relevant regulatory framework for the country’s self-employed. This new episode in the endless zigzag around the private sector was announced under the suggestive label of “Policy for the Perfection of Self-Employment.”

The overwhelming majority of the changes introduced constitute new restrictions on the exercise of these activities. We may recall that in 2010 it was decided to resume “cuentapropismo” (as self-employment is known on the Island), despite the fact that in the 2000s a policy begun in 1993, when the country’s economy hit rock bottom during one of its worse economic crises in decades, was reversed. That step back caused many personal and family projects to be postponed or to be truncated forever. 

In other words, we’ve been here before — and to no one’s satisfaction. The best example of this is that it was resumed with new vigor as the key ingredient of the current reform. But today, as then, it is difficult to understand the step backward, unjustifiable except for reasons very alien to the development needs of a country like Cuba.

The new course taken has negative repercussions at the socioeconomic level. In an economy facing a precarious fiscal scenario, millions of pesos were lost in taxes not collected when the State stopped issuing new licenses on August 1, 2017. Cuentapropistas pay an array of taxes which include a sales tax, and taxes for the labor force, personal income and social security. And although data is not available that shows the amount of their contributions, it can be assumed that it represents an overwhelming part of the personal income taxes paid, based on the explosive growth of taxpayers until 2017; numbers that had tripled since 2009. And yet, budget revenues (personal income tax) grew more than 4.8 times. On this basis, we can estimate a minimum loss (given that other taxes have not been considered) in the order of 900 million pesos. To put it in perspective, this amount is almost equivalent to what was spent on community projects and personal services in 2016.

The issuance of the new licenses is scheduled for December 7, 2018, after a 16-month moratorium. Its affect is expected to be permanent since many of the new measures are meant to deter, and those who already possess licenses will be even more cautious before investing additional resources in a situation of great uncertainty.

Another greatly affected area is employment. There was a potential loss of thousands of jobs when the opening of new businesses was stopped. At the same time, it created much uncertainty for businesses that were already operating. The imposition of new barriers affects new applicants. It also grants dubious preferences for those already in business. Those already in business will likely face less competition weakening incentives to improve efficiency or innovation.

Less competition not only creates an undesirable effect on prices. In most cases, the public sector does not have the capacity to replace the goods and services produced by this sector. It therefore helps to increase prices and helps erode the purchasing power of the citizenry. Another negative factor is that in this type of market the tax rate increase is passed on the final consumer via higher prices, which only exacerbates the circle described.

The reduction of the possibilities of productive reinvestment of the surpluses not only conspires against the supply, it also tilts the balance towards the search for other more profitable alternatives in the informal sphere, or in activities of lower creation of value but high possibility of capture of rents, like speculation with assets such as homes and cars. Informality itself is the source of countless undesirable effects, including the fact that it exacerbates inequalities. The additional limits to links with state enterprises undermine the internal integration of the economy, one of the historical weaknesses of the Cuban economy.

In any case, the resulting framework clarifies the priorities of the current economic policy. In the absence of capital, Cuba is betting on two things for the implementation of private small- and medium-sized enterprises. One is the resumption of negotiations to open new markets for professional services, especially health services. The international environment has improved slightly, given that the increase in the price of oil improves the fiscal position of countries with which close relations are maintained, together with other very dynamic economies. This type of agreement results in appreciable short-term revenues, which can be used quickly by the government.

The other variant has to do with foreign capital. Although the regulations and the business environment in the country have a long way to go to reach the best international standards, there is an increasingly explicit recognition of the importance of attracting foreign capital, which is attributed greater capacity to to alleviate the current balance of payments’ crisis and to give greater dynamism to the economy in the medium and long term. All this at a lower political cost in relation to domestic private capital.

However, investors will always seek at least a minimum level of certainty and credibility. And if self-employment has suffered a setback, why not foreign investments also, they might ask. These decisions become convoluted. If there is no clarity here, it is more difficult to convince others that this will be the case in their particular area of interest.

Anyway, it would be necessary to look carefully in the annals of modern economic historiography to search for a strategy of growth and development where foreign capital is so clearly favored over the national. If we find it, surely it will not have finished very well. Since it does not transcend.

There is no indication that there is a long-term vision for self-employment, or the private sector in general, although it was recognized in the “Conceptualization” adopted in 2017. The lack of confidence shown in its implementation has significantly affected it. And the argument that there have been deviations is hard to sustain. 

Surely there are problems, and there will always be problems. But the solution is not a return to the starting point. Perhaps the biggest problem is facing young people in Cuba. It is hard to imagine how this can be seen as a good idea that projects a future of progress on the Island, which only adds to the grave and unsustainable problem of the drainage caused by emigration. 

The emergence of a private sector, as demonstrated in the Cuban experience, is a requirement for the development of the productive forces. Those who examine the historical evidence in detail will immediately notice that the evidence is overwhelming in the sense that in the long run the advance of the productive forces is the decisive criterion that determines the success of one model over another. The rest of the factors can be grouped in accelerators or retarders of this essential line. Of course, this contradiction does not have to be solved in the short term, not even within the prudential period of a generation. I’m just not sure if we have the time.

Ricardo Torres is a Cuban economist who lives in Havana.