Cuba’s Castro faces tough choices on the island’s fledgling economy

As the Trump administration rewrites the rules on Cuba’s economic sanctions, President Raul Castro and other senior officials addressed Cuba’s National Assembly on the economic challenges their country faces. Castro reviewed progress on the “lineamientos,” or guidelines on Cuban economic reforms he launched after he was elected president in 2010. The guidelines are a document of the Cuban Communist Party proposed by himself and other top party leaders to rescue the Cuban economy from the Marxist-Leninist orthodoxy imposed by former president Fidel Castro that replicated the economic system of the former Soviet Union.

With the dissolution of the Soviet Union and the end of its subsidies to Cuba, the failure of that model became apparent. The election of President Hugo Chavez in Venezuela in 1998 brought a new patron and delayed the inevitable abandonment of the Soviet model. As Venezuela endures its own crisis, it has cut oil shipments in half and abandoned economic joint ventures between the two countries.

{mosads}The guidelines allow private Cubans to own and sell their personal residences and cars, and to become self-employed in a number of blue-collar and service jobs, but not professions. The formation of private companies was not authorized, although successful self-employed restaurant, beauty salon, and other business owners hired employees to help them. This business creation was viewed suspiciously by the party, but it was tolerated. Later, Cuba authorized the formation of “cooperatives” at former state-owned companies.

Some farmers were authorized to cultivate small plots and to sell their produce at market prices, although citizen complaints of rising prices led to the imposition of price controls. Cuba’s fledgling economic changes coincided with the easing of restrictions on travel and remittances by Cuban Americans during the Obama administration. Seeing a new source of relatively affluent customers, many self-employed Cubans positioned themselves to supply services to these new customers and prospered. The vast majority of Cubans continued to be employed directly by the Cuban government or by state-owned enterprises at salaries under $25 a month.

The authorization for the sale and purchase of personal residences in 2011 created an opportunity for Cubans to draw on the capital from their homes to start businesses, and it attracted investment from Cuban Americans in residential real estate. Although only Cuban citizens residing on the island were authorized to purchase homes, hundreds of millions of dollars flowed from Cuban Americans into the market through close relatives in Cuba who acted as the legal owners of these properties. Many of these properties were turned into private lodging businesses facilitated by Airbnb and similar services.

For decades the only route to economic security and social standing in Cuba was through the Communist Party. Even star athletes and entertainers had only modest earnings and limited housing options. Suddenly, a new class of Cubans with modest jobs or small businesses had incomes several times those of party bureaucrats. These newly affluent Cubans are exhibiting consumption patterns that make them the envy of their fellow citizens. They own personal vehicles, frequent restaurants and clubs, and have purchased and remodeled residences. This appears to have caused a backlash among the Communist Party rank and file.

In his speech to the National Assembly on July 14, Castro rebuked the restaurant owner who had branched out to operate five restaurants in Havana, own several automobiles, and frequently travel abroad. “Where did this money come from?” he demanded. Although Castro defended his reforms, calling it absurd that the state should run a three-chair barbershop, he acknowledged that he and other leaders had made mistakes.

As an example, he said the state had authorized small construction cooperatives, but suddenly these had proliferated in response to the residential real estate boom. He admonished his government to proceed cautiously with implementing economic reforms to avoid these types of problems. He also quoted from an update on the guidelines warning that “the concentration of property and material and financial wealth will not be allowed to go against the principles of our socialism.”

Ironically, in reviewing the government budget, Finance Minister Lina Pedraza pointed to the positive impact of increased revenues coming from taxes on the self-employed and private businesses, despite tax evasion. She also described the continuing drain on the budget of money-losing state enterprises due to inefficiency and corruption.

Here lies the contradiction in Cuba’s economic reforms. People are permitted to work independent of the state, as long as they do not become too successful. The generation of wealth, and the associated employment and consumption, challenges the role of the Communist Party as the ultimate arbiter of the distribution of economic benefits to the citizens. Private workers and business owners are now asking themselves what exactly constitutes “wealth.” Meanwhile, plans to expand are on hold and purchases are deferred.

A new generation of Cuban leaders will take office in 2018, following the retirement of President Castro. They will face the dilemma of allowing the private sector to grow the economy and produce revenues to support government services, or to maintain the failed state-dominated economy that cannot support the basic needs of the citizens. Either way, the Communist Party will see its total control challenged.

Permitting the private sector to grow will allow Cuba to evolve as a modern Latin American state along the lines of Chile or Uruguay. Following the increasingly unpopular Marxist-Leninist model will require an even more repressive state that will make a much more difficult transition to the 21st century. As the U.S. revises its rules on Cuba, we should be doing everything possible to support Cuba’s nascent private economy.

John Caulfield is the former chief of mission of the U.S. Special Interests Section in Havana and co-founder of the Innovadores Foundation, an American nonprofit that supports private sector technology and design entrepreneurs in Cuba.

The views expressed by contributors are their own and are not the views of The Hill.