Is Cuba Going Capitalist?

Is Cuba Going Capitalist?
Reforms are mostly attempt to tax black market
Mary Anastasia O'Grady
August 15, 2011

Who says dictators don't have a sense of humor? Cuba's Castros have an
undeniably comic side, as evidenced by the regime's announcement earlier
this month that it plans to provide agricultural advice to 14 Venezuelan
states. It sounds like a bad joke. Would you take technical assistance
from a government that has turned the chicken into an endangered species
in its own country?

This raises the question of how seriously we ought to take Raúl Castro's
announcement that he is about to "reform" the Cuban economy. The
American press seems convinced. "Cubans Set For Big Change: Right to Buy
Homes," the New York Times screamed on its front page on Aug. 2. "Now
open in Cuba; Business isn't exactly booming as free enterprise expands,
but the slumbering entrepreneurial spirit is starting to stir," said the
Los Angeles Times on Aug. 7.

It sounds like a capitalist revolution. But is it really time to get in
on the ground floor in Cuba?

History may provide some guidance. This is not the first time we have
been told that the communist economy, paralyzed since 1959, is on the
verge of a reversal. In 1986, as Fidel Castro convened the III Communist
Party Congress, the Miami Herald reported that "dramatic changes are
sweeping Cuba," including, the story said, permits to own homes. It is
true that the regime officially blessed "home ownership." But those
houses could not be sold, only exchanged. And Cubans never actually had
legal rights to them, as became apparent when the state discovered that
enterprising Cubans were making money by trading houses for profit under
the table. A wave of confiscations followed.

The end of Soviet aid provoked another crisis, and by 1994 the regime
was again promising economic liberalization. There was some. Taxi
businesses and in-home restaurants sprang up. But as soon as some Cubans
began to acquire wealth, Castro got nervous, because he understands that
economic power translates into political power. Prices for licenses went
up sharply, making it so costly to operate in the formal economy that
many start-ups disappeared again.

In 2008, three hurricanes and the global financial crisis took a sharp
toll on tourism and nickel prices, two of the island's most important
sources of hard currency. Food shortages became more acute and the
existing housing stock, which was in ruins, shrank. Raúl decided it was
time to talk again about reform.

It took a while but Cuba finally made it official earlier this year: 178
tasks have been legalized. By the beginning of next year the government
has also promised to make the housing market legal. Property rights and
private enterprise are keys to economic development and the idea that
Cuba would allow both suggests that the revolution is breathing its
last. Yet is this time any different?

There are no details about what it will mean when Cubans are allowed to
"buy homes." But given the arbitrary power of the state, it is
reasonable to question the certitude of the property right. The real
reason the regime wants to formalize the housing market probably
concerns the national purse.

Right now Cubans are allowed to trade houses but since it is rarely an
even exchange, there are also dollars—provided by the exile
community—that flow in the black market. Castro, being short of foreign
exchange, most likely wants to get in the middle of this transaction so
that he can take a cut.

The strapped government also is looking for ways to unload part of the
state work force. To ensure that laid-off employees don't starve, it
wants to give them business "opportunities." But in a paper delivered at
the annual meeting of the Association for the Study of the Cuban Economy
here 10 days ago, former International Monetary Fund economist and ASCE
founder Joaquín Pujol noted that at the end of 2009, "there were already
143,000 licensed, self-employed, although thousands more worked for
themselves illegally." He also pointed out that "171,000 new business
licenses granted so far this year went to people who were already out of
work, suggesting that the vast reforms may not be enough of a safety net
for the half-million people who are expected to be soon out of a
government job."

This problem is exacerbated by the fact that since not everyone has an
entrepreneurial nature, job creation by the gifted few will be
important. Yet an effective tax rate for micro-enterprises that "could
reach and exceed 100%," according to Mr. Pujol, will discourage hiring.
Mr. Pujol also noted that despite Cuba's investments in education, there
is no private "knowledge intensive" work that is legal, ruling out
growth in the sectors of the economy that offer the most potential.

Free prices, property rights and incentives for innovation would signal
real change. But those things would also put the regime's grip at risk.
So instead it is trying to formalize and tax black market transactions
to create jobs for state workers and raise revenues. The idea that this
is capitalism would be funny too, were it not so sad.

http://americasforum.com/content/cuba-going-capitalist-reforms-are-mostly-attempt-tax-black-market