Out of the Underground or Condemned to Informality?

Photo: Ted Henken - A combination paladar and casa particular in Havana, 2006


Ever since Granma printed this proclamation from the Central de Trabajadores de Cuba a week and a half ago on Monday, September 13, the newswires and blogosphere have lit up with 1,001 debates, polemics, and interpretations of exactly what laying off 500,000+ state workers will mean, and how and whether Cuba's miniscule and long-struggling private sector (self-employment, private agriculture, co-ops, etc.) will be able, encouraged, and/or allowed to expand and absorb these workers.


Today's Times has a perceptive article by Damien Cave that points to two key issues: First, will Cuban exiles be permitted - by both Havana's will to power and Washington's anachronistic embargo - to invest in these new micro-enterprise private ventures?  Second, will Cuban entrepreneurs come out of the underground to seek licenses for what many of them already do clandestinely, especially given the government's past reversals of policy once the economic smoke clears?


Since the CTC announcement last week, two instructive documents began to circulate through cyberspace that give us a preliminary idea about what to expect.  Many thanx to Penultimos Dias for posting/reposting them. First there was the Power Point presentation, "Proceso de reduccion de plantillas" (AP summary, also see here). Then came the 6-page policy document, "Informacion sobre el reordenamiento de la fuerza de trabajo" (see here for an initial analysis).


Observers, analysts, and critics seem to be split into two camps over what this all means.  There are those who expect these developments to be a major boon to the Cuban economy and to lead Cuban workers "Out of the Underground."  Phil Peters is cautiously optimistic about the changes and has posted many analyses on his blog describing developments in this area.  (See hereherehere, and here.) Then, there are others who are convinced based on past experience that until the Cuban regime changes (or at least until it accepts or enacts a systemic change in its economic model) that the recent announcement is more about ridding the state of its so-called "plantillas infladas" (inflated payrolls) than about expanding economic opportunity for the private sector.


One frustrated Cuban friend of mine referred to the announcement as a cynical and paternalistic move using the memorable phrase: "Hooray!  We're moving from full employment to self-employment." This same friend was also highly insulted at the insinuation of the Cuban government had been "maintaining" the Cuban people.  Her sharp reply to this was: "Who has been maintaining whom?  The Cuban government is treating Cubans as if they were a bunch of lazy parasites." In summary, instead of encouraging Cuban workers to come "out of the underground," these critics expect that these recent announcements will never materialize in a real expansion of economic freedom and autonomy for the Cuban people, leaving them "Condemned to Informality."


My own past work on this topic (I wrote my dissertation on the topic of "self-employment" in Cuba in 2002), tells me that this is a simple question of political will.  In the past, the government has never been willing to tolerate the political and ideological independence (including a legitimate class of new, relatively wealthy entrepreneurs) that is inevitably generated by more economic freedoms.  In other words, if you want to grow the pie, you have to be willing the share it and trust those who make it grow.


One note of optimism: after reading through the two policy documents linked above that are now circulating on the web, I am pleased to see that the second document has a long list of ways to achieve the "ampliacion del trabajo por cuenta propia" (expand self-employment), including:


* Eliminate the prohibition on granting new self-employment licenses.

* Expand the number/kinds of activities in which the self-employed can hire workers.

* Repeal the restriction on self-employed food service enterprises (paladares and others) from serving potatoes, sea food, and beef.

* Eliminate restrictions on the kinds of workers who can obtain a self-employment license.

* Allow the self-employed to sell their products to state enterprises.

* Facilitate access to loans and bank credits for the self-employed.


Legalizing the ability of enterprises to hire workers and creating a supply chain of inputs for the private sector (if they actually become a reality) would be overcoming HUGE practical as well as ideological barriers to future growth and prosperity.  Comparing this list of proposed reforms with the recommendations I made in my dissertation (see below) tells me that the Cuban government has identified the key obstacle to economic growth in the micro-enterprise sector: its own onerous regulations and restrictions.  But as we move forward, will the government have the political will to really do away with those regulations and actually promote and support private enterprise?  Will it also be able to do this consistently over time to begin to change the mentality among many government bureaucrats that private enterprise may be legal but is not really legitimate?


I am encouraged by one other thing: In all my years researching Cuba's past policy toward the private sector and in all the official documents I reviewed, I never once remember seeing the word "ampliar" (expand) together with the words "trabajo por cuenta propia" (self-employment).  Instead of "ampliar," self-employment was always seen as something to "controlar" (control).  Indeed, ampliar or controlar, that is the question.  True independence or mere abandonment?  One significant difference this time around is that the government has publicly announced numbers and deadlines for the transfer of state workers to the private sector and done so as part of its overall economic development strategy guided by the more pragmatic, methodological Raul, with ideological, charismatic Fidel left to make proclamations about international affairs.    


On the other hand, Canadian economist Arch Ritter makes the point here that beginning to lay off state workers before redesigning and shoring up the self-employed sector places the cart before the horse.  Ritter suggests that it would make more "socialist" sense to do this in the reverse order.  Furthermore, the brief sketch the above document contains about the proposed new tax system for the self-employed worries me.  It projects the creation of three new kinds of taxes on the self-employed in addition to the extremely regressive one already in place.  


To understand how the current tax system for micro-enterprise works, you should begin with, "The Tax Regime for Micro-Enterprises in Cuba," a masterful analysis written by Ritter for the CEPAL Review back in 2000. You might also take a look at Ritter's overview of past policy toward self-employment written just after Raul hinted at a new expansion of the sector in early August, 2010, "Raul Castro and Policy towards Self-Employment: Promising Apertura or False Start?"  Finally, I also recommend any and all of the documents on self-employment linked to Phil Peters' blog The Cuban Triangle, beginning here and here.


If that doesn't give you enough material to review, I have dusted off my dissertation, "Condemned to Informality: Cuba's Experiments with Self-Employment during the Special Period," and provide a link below to a pair of documents that I have extracted from it.  Remember, I finished writing this in 2002 and it mainly covers developments between 1990-2002.  (The documents included in this previous post  at El Yuma update that info a bit.)


Here's part of the abstract of the dissertation:

The recent growth of self-employment (trabajo por cuenta propia) in Cuba has expanded opportunities for employment, income, professional development, and the provision of goods and services, while simultaneously increasing individual economic autonomy and exacerbating socioeconomic inequalities.

However, current restrictions make impossible job creation or income generation significant enough to facilitate the emergence of small- and medium-sized enterprises.  Government regulations discourage the growth of micro-enterprises, without declaring them illegal.  As a result, self-employed workers will continue to respond to current prohibitive government restrictions either by “hedging” on their licenses (underreporting their incomes and engaging in economic activities not included in their license) or by “informalizing” their private operations (operating underground without a license), not by ceasing to practice them.

The current legal framework discourages the growth of licensed micro-enterprises, drives many entrepreneurs out of business or underground, provokes tax evasion, and encourages operators to develop deeper links with the informal sector. A small number of large-scale operations tend to thrive, while the majority of micro-enterprises are condemned to informality (clandestine operation). 

Permitting the hiring of employees, extending enterprise rights to currently prohibited areas and markets, allowing for the deduction of one’s actual expenses, and ending the monthly quota tax would have the positive effect of increasing competition, productivity, tax revenue, and legal employment, while simultaneously reducing prices, exaggerated incomes, tax evasion, and clandestine economic activity.

Here's the list of the 157 legalized self-emploment occupations as of 2002 (before the 40 of those occupations were eliminated).  Also included here is my timeline of the private sector under the revolution from 1959-2002. 


"List of the legalized 157 self-employment occupations with tax rates" and "A timeline of the private sector under the revolution" (Compare with the list just posted at Penultimos Dias).