CNBC/AP on Cuba's new entrepreneurs

This is a rich, extensive article on the 1,001 ways that Cubans are reacting to the new self-employment regulations.

Cuba's economic changes create new entrepreneurs
The Associated Press | January 27, 2011

When Julio Cesar Hidalgo looks past the rotten window frame and the coarsely-laid concrete, he envisions his shabby living room as a standup pizza joint, with the rich smell of garlic and oregano wafting out onto a warm Havana street.

He sees a gleaming white countertop laid with sandwiches, pastries and balls of yeasty dough; a gas oven in the corner bakes mouthwatering pizza.

After Cuban authorities announced last September that they were opening the island's closed Marxist economy to a limited amount of private enterprise, Hidalgo was one of the first to line up for a new business license. In a land of modest dreams, the 31-year-old baker says his is simple: to be the master of his own labor.

"It's not going to make me rich," he laughs, adding that he may make only a little more than he does now in a $12-a-month job at a state-run bakery. "But I'll be working in my own home and I'll be my own boss."

Hidalgo and tens of thousands like him are chasing their entrepreneurial ambitions in 2011, Cuba's year of economic change, hopeful that a sweeping fiscal overhaul announced last year by President Raul Castro is for real. The Cuban leader said the country would lay off half a million state workers by March 31, while granting licenses for a broad, if slightly random, array of businesses.

The new entrepreneurs face towering challenges in getting businesses off the ground, including high taxes, a lack of raw materials, an uncertain customer base, labyrinthine bureaucratic rules and limited access to startup capital. Yet their success or failure will go a long way in determining the future of Cuba's revolution.

The Cuban state now employs 84 percent of the island's workers and controls 90 percent of the economy, in one of the world's last bastions of Soviet-style communism. If the free-market experiment works, the cash-strapped government could shed millions of dollars from its payroll while boosting much-needed tax revenues and creating a new business and consumer class. It could also legalize part of a booming black market that provides everything from sausages to satellite television.

If the experiment fails, this already disillusioned and dysfunctional country will have turned hundreds of thousands of people out of their government jobs and into an uncertain future. All of this in the same year that Raul Castro turns 80, and his older brother Fidel is widely expected to step down from his final official post — head of the Communist Party.

Through January 7, more than 75,000 people had received new licenses, joining about 143,000 private sector workers left over from the island's last dabble with capitalism. Government economists say they hope a quarter of a million new entrepreneurs will eventually sign up.

Almost all the new businesses are small, providing services such as manicures, house-painting and taxis. But the stakes for Cuba couldn't be higher, with the economy weighed down by crippling disorganization, a broken infrastructure, endemic corruption and an enormous labor force that has become accustomed to getting paid very little — and doing very little in return.

Even the Cuban government — in an internal document to party leaders which was obtained by The Associated Press — warned that many of the businesses will fail within a year. And many Cubans say they will see if ventures such as Hidalgo's prosper before jumping into the fray themselves.

But for now, excitement reigns among the new entrepreneurs.

"We are going to be a success. I am sure of it," says Gisselle de la Noval, 20, Hidalgo's bright-faced girlfriend who will work the till at the pizzeria and share in its profits. "This (economic) opening was marvelous ... I think those who know how to take advantage of it will have a bright future."

A DISMAL STATE OF AFFAIRS
Cuba's push to open its economy to private enterprise is based not on an ideological change of heart, but on necessity.

The economy has been slammed by the global economic downturn, a drop in nickel prices and the fallout from three devastating hurricanes that hit in quick succession in 2008. Revenues from tobacco, rum and sugar have fallen, as have remittances from Cubans living overseas, many of them in recession-hit South Florida.

Prevented from borrowing from international monetary institutions by the 48-year U.S. trade embargo, Cuba was forced to reduce food and other imports from its main trading partners by 37 percent.

The economy grew by just 1.4 percent and 2.1 percent respectively in 2009 and 2010, a terrible performance for a small, developing country.

"My fear is that the Cuban state is completely broke," says Uva de Aragon, a Cuba expert at Florida International University, who is watching the reforms closely. "I don't want to think about what will happen, even in the medium-term, if it doesn't work.

"Shortages are everywhere: in the sparse shelves at state-run supermarkets; along the unlit city streets and empty, rutted highways; in the antiquated factories on the outskirts of cities and in the tractorless farms dotting the countryside, many still relying on oxen to till the earth.

The state pays workers about $20 a month in return for free health care and education, and nearly free transportation, utilities and housing. Every citizen gets ration books for food at heavily subsidized prices.

The salaries are so low that stealing from state-owned companies is endemic, a major perk of having a job, and a frightening loss for those about to be laid off.

Since taking over from his ailing brother Fidel in 2006 — first temporarily, then permanently — Raul Castro has been whittling away at the subsidies. In recent months he's cut free workplace lunches, removed many items from the ration book, and suggested the whole system must eventually be scrapped.

Just how bad things had gotten became apparent in September, with a red-letter headline in the Communist Party newspaper Granma that the state would lay off a tenth of the island's work force, while opening up the private sector. Days later, authorities published a list of 178 activities in which new licenses would be issued.

It includes some rather obscure jobs, such as fresh fruit-peeling, while steering clear of anything that could present a threat to the state's economic monopoly — there are no licenses for independent lawyers, bankers or engineers, nor for Cubans to work privately in strategic sectors such as mining.

Still, there is no overestimating the scope of the change.

For the first time since the 1960s, Cubans will be able to employ one another, rent out their homes and cars more freely, and hope to one day get business loans from state banks. Raul Castro has even called a rare Communist Party Congress for mid-April in which the reforms will be enshrined as the country's only way forward.

THE NEW ENTREPRENEURS
Hidalgo is a round-faced man with a permanently amused look in his eyes. Unlike most Cubans, he has been down this free enterprise road before — with disastrous results.

Cuba last opened up to some private enterprise following the collapse of its Soviet benefactor in the 1990s, which ushered in an era of extreme hardship known as the "Special Period.

"Back then, a 17-year-old Hidalgo and an older cousin opened a pizza joint in the same dingy apartment in 1997, only to find it was impossible to buy cheese, flour and tomato paste in state-owned shops. They turned to the black market, and ran into trouble.

"The inspectors would show up ... sometimes once a week, sometimes twice a week," Hidalgo says. "They demanded receipts, and when I couldn't provide them they confiscated everything. They forced us to close."

In those days, Fidel Castro described the reforms as a necessary evil and quickly scaled them back once the crisis ebbed.

Raul Castro has vowed it will be different this time. The government has pledged an initial investment of $130 million to purchase the raw materials new businesses will need, and Hidalgo pointed to a stack of unopened boxes of white tile he purchased for $8 a box in a state-owned shop.

Still, the path to self-employment promises to be tough for budding entrepreneurs.

Given the price of ingredients, Hidalgo thinks he'll have to charge upward of 20 pesos ($1) for a personal-size pizza with olives and oregano — a small fortune for anybody living strictly on a Cuban government wage. And he's already got competition: two neighbors on his run-down Old Havana street have licenses to open cafes.

The government has made it easier for Cubans to rent space to each other, but there is no retail property for private citizens, and few would have rent money even if there were. Most people must either carve out part of their home, or come up with creative ideas to get around the real estate shortage.

Maria Regla Saldivar, a 52-year-old black belt in Taekwondo, beams with excitement as she walks through the ruins of a destroyed industrial laundry. She is petitioning the government to turn over title to the property so she can transform it into a gymnasium, and meanwhile is using a small park nearby to hold fitness classes.

The building has no roof or walls, and the oil-stained concrete floor is littered with truck-sized pieces of rusted machinery, but Saldivar is not deterred.

Her bigger worry is that authorities have not included martial arts in the list of acceptable activities. Salazar says she will either have to limit her classes to aerobics, or "inventar," a Cuban specialty that roughly translates as "to improvise."

"I don't plan to give Taekwondo classes," she deadpans. "I'm teaching the kids 'Quimbumbia'," Salazar's word for a discipline remarkably similar to Taekwondo.

CHALLENGES AND OPPORTUNITIES AHEAD
Another challenge facing the private sector is taxes, which can be as high as 50 percent, not including social security. The taxes could make it difficult for new businesses to break even, and could scare many people already making a living on the black market from becoming legitimate.

Perhaps the strongest warning about the reforms come from two prominent economists at the state-run Center for Cuban Economic Studies.

In a rare opinion piece published in a small Catholic magazine, Pavel Vidal Alejandro and Omar Everleny Perez say there are not enough approved free-market activities for half a million laid-off state workers, and not enough white collar jobs for an educated population. The greatest worry, they wrote, is that new businesses will not have enough customers with so many newly unemployed.

"What is needed is a positive 'shock' to boost demand, but the economy ... is not in any condition to provide it at this time," they say.

Still, would-be entrepreneurs are riding a wave of hope they say has been dormant far too long.

Hidalgo waits as a van pulls up carrying the gas oven, a loan from his girlfriend's mother. He says he expects to be open for business by the end of February, and plans to call the pizzeria "Baldoquin" after his grandfather.

After more than a decade fantasizing about opening his own business, Hidalgo says he can hardly contain himself.

"Just imagine it!" he gushes, thinking of that first pizza out of the oven. "It will be the realization of a dream I have held onto forever."

Associated Press reporters Anne-Marie Garcia and Andrea Rodriguez contributed to this report.