• Submitted by: manso
• Business and Economy
• 05 / 08 / 2011

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Reforms approved, but experts worry they're not enough

By: Frances Robles McClatchy Newspapers. Knoxville News Sentinel. Posted May 8, 2011 at midnight

MIAMI - Ernesto is a 26-year-old mechanical engineer turned entrepreneur.

Laid off, he chose a new profession among the list of nearly 200 new private businesses legalized by the Cuban government.

He decided to become a locksmith, because a relative recently brought the required machine from Italy. But he still needed cash to buy blank keys.

"When you start a business, you need money," said Ernesto, who spoke by phone from Havana. "Money is something not too many people in Cuba have."

Ernesto borrowed $50 from two friends, tapping into an informal credit economy that is surging as the backbone of massive new reforms the Cuban government hopes will help it shed 1.8 million workers in the next three years.

But experts say there's only so far fundamental changes to the Cuban economy can go as long as small-business owners have to rely on friends and family to finance their endeavors. A lack of access to capital, crushing taxes and improvisation from the government on a system it has little experience testing are among the daunting list of challenges that test Cuba's economic future.

"The Cuban government started off with a statement by saying, 'We have to lay off 500,000 people,' " said economist Carmelo Mesa-Lago, a professor at the University of Pittsburgh. "They should have begun by saying, 'We are going to create 500,000 new private jobs,' then, once successful, announce the layoffs. They put the solution before the problem."

The Cuban Communist Party met last month for the first time since 1997 and just the sixth time in its history. Nearly 1,000 delegates from around the country met in Havana to tinker with a long list of so-called "guidelines" aimed at fixing a troubled economy.

Back-to-back hurricanes, falling commodities prices and a bloated work force to tap into what it had long avoided: a market economy. Nearly 180 new businesses were approved, and for the first time made it legal for Cubans to hire employees.

The party congress made changes, but the revisions have not yet been published. Among the details experts are waiting for are updates to item No. 51, which says the Cuban government will create a credit system for new businesses, considered key to the program's success.

"I guess loans would be welcome here, but you would have to know if your business is going to pay off," Ernesto said. "There are a lot of new businesses and a lot of competition. Are we going to make enough to pay the loans back - with interest?"

The informal loans he received were interest-free favors.

A lot is at stake. The Cuban government doled out huge swaths of unproductive land to peasants in the past few years, but acknowledges that much of that land is still idle. Farmers faced too many unexpected obstacles, including being unable to purchase required supplies.

"This is a major issue," said Gary Maybarduk, a former U.S. diplomat in Havana. "The tiny guy on the street maybe doesn't need a lot of capital, and they say there's a lot of money under mattresses in Cuba. But if you want to do anything significant - make something, hire five people - it takes money."

Although the Cuban government's party guidelines said it would "provide necessary banking services," it did not say how.

"Where are they going to get the money for this?" Mesa-Lago said. "They did not say when they are going to do this, or how."

The European Union, Spain and Brazil have offered to finance micro-lending projects, but the Cuban government hasn't said whether it will accept the offers, Mesa-Lasgo said. The Cuba Study Group, a U.S.-based organization that advocates better relations between the two countries, recently announced a plan to raise $50 million for a micro-loan fund - if the Cuban government ever allowed such a thing.

"It's not possible under Cuban law to distribute the money, so no sense having it pile up in banks," said Carlos Saladrigas, who heads the Cuba Study Group. "We believe it's more important than ever to assist the Cuban entrepreneur. Given the lack of liquidity, the mortgages process will likely be slow and fraught with problems."

A recent report commissioned by the group suggested websites such as http://www.kiva.org - where people donate or loan money to small-business owners around the world - could provide the solution. It also suggested that the Obama administration further increase the amount of money Americans can send to people on the island, currently capped at $2,000 a year.

Americans send $1 billion a year to Cuba, and much more financing is expected during the 380,000 visits that U.S. residents make there annually.

Cuban business owners also lack the training in accounting, financing and marketing to make their ventures work, he said.

Mesa-Lago stressed that financing may not be the most serious of the new business owners' problems. The proposed guidelines levied several different taxes and fees on the self-employed at rates that increase as the number of employees grows.

"That's killing the goose before it lays the golden egg," Mesa-Lago said. "It's clear to me that taxes are very high, must be studied and corrected."

Cuban economist Pavel Vidal Alejandro, a professor at the Center for the Study of the Cuban Economy in Havana, said he and other colleagues had recommended fewer taxes and a grace period to pay them.

Speaking at a recent conference in New York, Alejandro noted that there could be more minefields ahead. About two-thirds of the 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 soon be out of a job.

"If those business licenses were intended for people who are now getting laid off, and they are being occupied by people who did not have jobs," he said, "then you could have a gap there."

The Cuban government has said the changes may have to be delayed for up to three years to work out the kinks.

"This started three months ago; all these things can't be answered yet," Cuban economist Omar Everleny Perez said at the City University of New York Graduate Center conference. "But there's a decision to change the country, and that's what's important."

 2011 Knoxville News Sentinel.
Source: /www.knoxnews.com/news/2011/may/08/cuba-seeks-to-jump-start-economy