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    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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