Castro's Cosmetic Economic Reforms

Sunday, August 14, 2011
By Mary Anastasia O'Grady in The Wall Street Journal:

Going Capitalist?

Its economic reforms are mostly an attempt to tax black market transactions.

Who says dictators don't have a sense of humor? Cuba's Castros have an undeniably comic side, as evidenced by the regime's announcement earlier this month that it plans to provide agricultural advice to 14 Venezuelan states. It sounds like a bad joke. Would you take technical assistance from a government that has turned the chicken into an endangered species in its own country?

This raises the question of how seriously we ought to take Raúl Castro's announcement that he is about to "reform" the Cuban economy.

The American press seems convinced. "Cubans Set For Big Change: Right to Buy Homes," the New York Times screamed on its front page on Aug. 2. "Now open in Cuba; Business isn't exactly booming as free enterprise expands, but the slumbering entrepreneurial spirit is starting to stir," said the Los Angeles Times on Aug. 7.

It sounds like a capitalist revolution. But is it really time to get in on the ground floor in Cuba?

History may provide some guidance. This is not the first time we have been told that the communist economy, paralyzed since 1959, is on the verge of a reversal.

In 1986, as Fidel Castro convened the III Communist Party Congress, the Miami Herald reported that "dramatic changes are sweeping Cuba," including, the story said, permits to own homes. It is true that the regime officially blessed "home ownership." But those houses could not be sold, only exchanged. And Cubans never actually had legal rights to them, as became apparent when the state discovered that enterprising Cubans were making money by trading houses for profit under the table. A wave of confiscations followed.

The end of Soviet aid provoked another crisis, and by 1994 the regime was again promising economic liberalization. There was some. Taxi businesses and in-home restaurants sprang up. But as soon as some Cubans began to acquire wealth, Castro got nervous, because he understands that economic power translates into political power. Prices for licenses went up sharply, making it so costly to operate in the formal economy that many start-ups disappeared again.

In 2008, three hurricanes and the global financial crisis took a sharp toll on tourism and nickel prices, two of the island's most important sources of hard currency. Food shortages became more acute and the existing housing stock, which was in ruins, shrank. Raúl decided it was time to talk again about reform.

It took a while but Cuba finally made it official earlier this year: 178 tasks have been legalized. By the beginning of next year the government has also promised to make the housing market legal. Property rights and private enterprise are keys to economic development and the idea that Cuba would allow both suggests that the revolution is breathing its last. Yet is this time any different?

There are no details about what it will mean when Cubans are allowed to "buy homes." But given the arbitrary power of the state, it is reasonable to question the certitude of the property right. The real reason the regime wants to formalize the housing market probably concerns the national purse. 

Right now Cubans are allowed to trade houses but since it is rarely an even exchange, there are also dollars—provided by the exile community—that flow in the black market. Castro, being short of foreign exchange, most likely wants to get in the middle of this transaction so that he can take a cut.

The strapped government also is looking for ways to unload part of the state work force. To ensure that laid-off employees don't starve, it wants to give them business "opportunities." But in a paper delivered at the annual meeting of the Association for the Study of the Cuban Economy here 10 days ago, former International Monetary Fund economist and ASCE founder Joaquín Pujol noted that at the end of 2009, "there were already 143,000 licensed, self-employed, although thousands more worked for themselves illegally." He also pointed out that "171,000 new business licenses granted so far this year went to people who were already out of work, suggesting that the vast reforms may not be enough of a safety net for the half-million people who are expected to be soon out of a government job."

This problem is exacerbated by the fact that since not everyone has an entrepreneurial nature, job creation by the gifted few will be important. Yet an effective tax rate for micro-enterprises that "could reach and exceed 100%," according to Mr. Pujol, will discourage hiring. Mr. Pujol also noted that despite Cuba's investments in education, there is no private "knowledge intensive" work that is legal, ruling out growth in the sectors of the economy that offer the most potential.

Free prices, property rights and incentives for innovation would signal real change. But those things would also put the regime's grip at risk. So instead it is trying to formalize and tax black market transactions to create jobs for state workers and raise revenues. The idea that this is capitalism would be funny too, were it not so sad.