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Dateline: Havana, Cuba

Is Cuba Going Capitalist?

Why you should care

Because Cuba might be able to teach Russia a thing or two about moving away from a state-owned economy.

Cuba’s new business leaders are as different from the 1950s’ legendary bearded guerrillas as an all-electronic Tesla is from the vintage gas-guzzling Chevys that still cruise the streets of Havana.

In post-Soviet Russia, ambitious bureaucrats connived to purchase state-owned oil and gas companies. In Cuba today — emerging from five decades of socialist central planning — the state is not selling off public assets, at least not yet. Instead, the government is allowing enterprising Cubans to open their own small-scale firms. As a result, ambitious Cubans are busily abandoning public employment to seek their fortunes in newly promising businesses.

Ambitious Cubans are busily abandoning public employment to seek their fortunes in newly promising businesses.

The new class is springing from those with personal savings — successful artists whose films and paintings have hard currency in international markets; professionals, including doctors, diplomats and engineers, who earned money serving overseas; or workers in the tourism sector who gained access to euros and Canadian dollars. Some entrepreneurs are blessed with relatives overseas willing to donate, lend or invest their capital in island startups. There is no access to bank finance: Cuban banks are accustomed to lending only to state-run firms, and U.S. economic sanctions block access to international capital.

But as in Russia and other postcommunist societies, first movers can score big wins. Where competition is thin, profits can be outsized. And in Cuba, there is the added factor of two currencies, a valuable dollar-equivalent currency for most business transactions and a nearly useless currency paid to employees. So for example, a private restaurant can earn $30 by serving just one meal — more than it will pay a waiter (in the heavily discounted local currency) for an entire month of service. In this badly distorted environment, quick-witted investors can hope to fully recoup their risk capital in two years or less.

The bright new faces on Cuba’s entrepreneurial landscape are vast and varied…

Cuban peanut seller Lysset Perez sings in a street of old Havana, on October 17, 2013. Perez sings the famous Cuban song 'El manisero' while voicing her wares. Raul Castro´s economics reforms brought back the hawkers to the streets of Havana.

Source: Adalberto Roque/Getty

Cuban peanut seller Lysset Perez sings in Old Havana; October 17, 2013

Today in Cuba, 201 self-employed occupations are permitted, and there are about 450,000 registered self-employed in small businesses in the country. The bright new faces on Cuba’s entrepreneurial landscape are vast and varied, ranging from forward-thinking leaders in construction to retail to food services to artisan crafts.

Ricardo Veranes: Construction Cooperative

Strong and good looking, and a “National Hero of the Republic of Cuba,” Ricardo Veranes seized the opportunity when the Minister of Construction asked his foremen who might be interested in creating a private cooperative. A natural leader widely respected throughout his hometown of Santiago de Cuba — he even served a term as deputy in the National Assembly — Veranes quickly selected 35 of the town’s best builders and carpenters and smartly named his new cooperative after a revolutionary martyr.

Having seen up close the shortcomings of the communist labor system — a lumbering state bureaucracy and the faded ideology of Ernesto “Ché” Guevara — Afro-Cuban Veranes had plans for his workers’ cooperative: no money wasted on redundant administrators placed by the Communist Party, and incompetent workers are penalized or dismissed. Profits are distributed unequally, according to measures of labor performance and discipline. Not to be optimized as in a purely capitalist firm, Veranes’s co-op will offer discounted prices to clients with less capacity to pay.

Enrique Guerra: Repair Shop

After spending years in a state-run firm, electrical engineer Enrique Guerra got himself assigned to accompany a medical mission in Venezuela, a transfer which enabled him to save enough to open his own electronic appliance repair shop. His biggest problem in Cuba’s scarcity economy is finding the parts to fix his clients’ electronic gadgets. A resourceful improviser, Guerra goes so far as to order parts on the Internet from China and has them delivered via DHL, working with friends abroad who make the payments.

Rafael Rosales: Restaurant

Rafael Rosales, a well-known film director, owns a popular tapas bar, Café Madrigal, in a residential district of Havana. Artistic wall hangings laden with historic references and images of Hollywood celebrities draw an older, relaxed crowd of both Cubans and foreigners. Rosales explains his business model: “I was among the first to recognize that the freeing up of economic forces is growing the middle class. My very first weekend, I watched actors, screenwriters, business owners, tour guides [and] the families of employees in joint ventures flock to the café.”

Will these spring shoots of emergent capitalism in Cuba be allowed to flower into a full-blown capitalist class?

Claudia: Retail Handicrafts

In Old Havana, a prime tourist location, university-educated Claudia parlayed her political connections to rent state property to open a retail shop, Piscolabis (the ancient Spanish word for ”delicate snacks”) which features high-end handicrafts. The artisan crafts, and the store’s interior design and furniture, are entirely “made in Cuba with Cuba ideas,” Claudia proudly asserts. Together with her two associates, a designer and an architect, Claudia has written up a formal business plan projecting expansions into other product lines and locations. Despite serious obstacles — no equipment to accept credit cards and a burdensome tax system that quickly slaps a 50% tax on profits — Claudia is on course to meet her financial goals.

Claudia Piscolabis, owner of high-end handicraft store, Piscolabis, in Havana, Cuba.

Source: Courtesy of Richard Feinberg

Claudia, owner of a high-end handicraft store, Piscolabis, in Old Havana

Not all in the government are comfortable with private enterprise, which sometimes competes with state-run shops. Authorities recently announced a crackdown on merchants selling imported secondhand clothing and cheap goods illegally imported from Asia. Nevertheless, at a major international conclave of Latin American leaders in Havana at the end of January, Cuban negotiators approved language saluting “the valuable contributions of private business and civil society,” the importance of foreign investment in development, and even called for strengthening — not abolishing — the international financial system.

Will these spring shoots of emergent capitalism in Cuba be allowed to flower into a full-blown capitalist class? Paradoxically, that decision remains in the hands of the leadership of the Cuban Communist Party. But President Raúl Castro, 82 years old, and his aging associates surely foresee that many of the new business leaders will be their own children and grandchildren. And if their offspring are denied opportunities at self-realization, they will simply exit the island — made easier by the recent welcome relaxation of travel restrictions — for more hospitable, business-friendly climates, as so many of them have already done.

Richard E. Feinberg is a professor at the School of International Relations and Pacific Studies, University of California, San Diego, nonresident senior fellow with the Latin America Initiative at Brookings, and is the book reviewer for the Western Hemisphere section of Foreign Affairs magazine. His government service includes stints in the White House, Department of State and U.S. Treasury. His most recent publication is Soft Landing in Cuba? Emerging Entrepreneurs and Middle Classes (Brookings Institution, 2013).

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