Cuba's Economic Desperation

Raul Castro's government has lost control of its attempts at market reform.

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.

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