Sunday, September 19, 2010

Out of the Underground or Condemned to Informality? More on Self-Employment in Cuba

Ever since Granma printed this proclamation from the Central de Trabajadores de Cuba last Monday, the blogosphere has 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-emploment, etc.) will be able, encouraged, and/or allowed to expand and absorb these workers.

For some of the more noteworthy reactions and analyses go to Cuba Encuentro.  There you can read an excellent opinion essay by Haroldo Dilla among many others posted there.  Diario de Cuba and Penultimos Dias also have great coverage.  As does The Cuban Triangle: hereherehere, and here.

Readers can also check out these stories in the U.S. media: The New York TimesCuba’s Public-Sector Layoffs Signal Major Shift; The Christian Science MonitorCuba move to cut 500,000 government jobs is biggest change in decades; and The Miami HeraldCuba's economic overhaul would require new approach, experts say

Editorials reacting to the announcement have also run in The Wall Street Journal, The Miami Herald, and The Washington Post.

El Yuma even made his debut in the NYT on Sunday in the Marc Lacey article, Cuba Resets the Revolution.

As the week wore on, 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 somewhat split 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 here, here, here, 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:

"De pleno empleo a auto empleo"
(From full employment to self-employment)

This same friend was also highly insulted at the insinuation of the Cuban government that it had been but no longer can afford to "maintain" the Cuban people.  Her sharp reply to this was:
En efecto el Estado está diciendo a los cubanos residentes que no puede seguir manteniéndolos. Pero este mensaje es ofensivo hacia los cubanos residentes y en mi opinión eso no puede obviarse.
Este discurso del Estado cubano, que no es nada nuevo, es una falta de respeto y un insulto a la inteligencia. A este discurso yo interpongo: 
¿Quién ha estado manteniendo a quién? 
En términos estrictamente económicos; sin irnos a la política. Estoy hablando de precios: porque estaremos todos de acuerdo en que el trabajo, la fuerza de trabajo, tiene un precio. Y ese precio hace mucho dejó de pagarse a los cubanos residentes asalariados. 
El gobierno cubano está tratando a los cubanos residentes como si fuesen unos vagos y unos parásitos.
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."

In a later post, I will give my own analysis of the two policy documents mentioned above.  But here, I want to share a number of documents, including some of my own, that will give readers a bit of context on the state of self-employment in Cuba from 1990-2006, when Fidel (a long-declared enemy of expanding the private sector) stepped down.

As this new process of "reorganizing" Cuba's work force begins and as we watch to see if a real growth of the small and medium sized private enterprise sector will take place, it will be good to be familiar with the opportunities and obstacles faced by that sector in the past.

My own past work on this topic 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.

If you want to grow the pie, you have to be willing the share it and trust those who make it grow.

First, I recommend that readers review any and all of the documents on self-employment linked to Phil Peters' blog The Cuban Triangle.  Start here and here.

Second, for a brief but quite comprehensive review of past policy toward self-employment written just after Raul hinted at a new expansion of the sector in early August, 2010, see Arch Ritter's, "Raul Castro and Policy towards Self-Employment: Promising Apertura or False Start?"

Finally, I have dusted off my Ph.D. dissertation, "Condemned to Informality: Cuba's Experiments with Self-Employment during the Special Period," and am posting links to a number of documents that I have extracted from it.  Remember, I finished writing this document in 2002 and it mainly covers developments between 1990-2002.  (The documents included in this previous post update that info a bit.)

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.

Compare this list of proposed reforms with the recommendations I made in my dissertation at the end of the abstract below.

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" together with the words "trabajo por cuenta propia."  Instead of "ampliar," TPCP was always seen as something to "controlar."

Indeed, Ampliar or Controlar - that is the question.  

On the other hand, the brief sketch that that document contains about the proposed new tax system for the self-employed is more worrisome.  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 works, you should begin with, "The Tax Regime for Micro-Enterprises in Cuba," a masterful analysis written by Arch Ritter for the CEPAL Review back in 2000.

Here's the abstract of my 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.
Through a review of the existing legislation that regulates self-employment, supplemented by a series of 64 in-depth interviews with self-employed workers in the food service, transportation, and housing sectors of Havana’s economy, this study seeks to understand the present role and future prospects for Cuba’s self-employed workers by asking the following questions: 
First, do self-employed workers (cuentapropistas) believe that they are beginning to lay the necessary groundwork for the eventual establishment of a small, private business sector. 
Second, how do self-employed workers currently respond to the existing legal and fiscal framework for micro-enterprise in Cuba? 
Third, how does work as a licensed self-employed worker differ socioeconomically from unlicensed, clandestine economic activity in the same three sectors?
The hypothesis is that: 
(1) current restrictions make impossible job creation or income generation significant enough to facilitate the emergence of small- and medium-sized enterprises,
(2) government regulations discourage the growth of micro-enterprises, without declaring them illegal. 
(3) However, 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 dissertation argues that 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.
Other documents of interest:

"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).

* Graph of the number of the self-employed (1993-2001)

* "Administrative organization of private and self-employed activities," "The most common self-employment occupations (June - 1999)," "Self-employment licenses by province (June 1999), and "The distribution of self-employment licenses by occupation ("Plaza" Municipality - 1999).

* "Fixed Monthly Quota Taxes for Food Service" (including paladares) (1995-2001), "Self-Employment Licenses - "City of Havana" Province - Selected Months" (1993-2000), and "Licensed Paladares – Havana and Nationwide" (1995-2001)

* "Licensed Bed and Breakfasts - Cuba (all provinces) Selected Months" (1997-2001) and "Fixed Monthly Quota Taxes for Rentals of Private Rooms and Homes" (April 1997)

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