Cuba: New President, New Economy?

Updated July 20, 2018—It took 60 years for the Castros to hand over power, but it took Cuba’s new president, Miguel Díaz-Canel, less than three months since his installation to announce a new Constitution and revamped regulations for a private sector left in limbo since August 2017. The new measures are a product of work begun under his predecessor Raúl Castro, who remains head of the Communist Party*, and who first kicked off a series of private-sector reforms after taking the reins from his brother Fidel. Known as the Lineamientos, the 2011 reform package intended to update Cuba’s economic model and boost GDP growth to an average 4 percent a year. But the reality has been closer to about 2.4 percent annual GDP expansion from 2008 to 2017, with the Cuban government forecasting 2 percent for 2018.

Now, Díaz-Canel’s regulatory measures and constitutional reform aim to rebuild the ailing economy. Here’s a look at what’s changing in the island’s current economic context.

Changes to the Constitution: Codifying the economy

Between July 21 and July 23, the National Assembly will vote to replace Cuba’s 1976 Constitution with a new document in the works since 2014. Among the 87 new articles, the new Magna Carta creates a role of prime minister to oversee the Council of Ministers, creates provincial governors, limits presidential terms to two consecutive five-year installments, recognizes new forms of private property, and acknowledges the importance of foreign investment in the economy.

The last two items are a significant step forward for the country’s nascent private sector. While the sale of property first became legal in 2011, the proposed Constitution would codify the right into law, and offer investors greater certainty in their business.

Raúl Castro first worked toward attracting foreign direct investment (FDI) with a 2014 law meant to diversify Cuba’s economy and bring in $2 billion in FDI a year. The government said it surpassed that goal last year, securing $2.3 billion after its annual international trade fair in Havana. But Cuba expert Richard Feinberg notes in a Brookings report that the island has classically underperformed when it comes to investment, attracting half of the average of Latin American and the Caribbean overall when looking at the percent of FDI to GDP ratio. Among the stopgaps, says Feinberg, are the regulatory obstacles imposed by “the ‘control’ obsession of Cuban authorities.” While it remains to be seen whether the added layers of governance in the new Constitution would contribute to the bureaucracy, there’s no doubt the regulatory changes specific to the private sector will do so.

Changes to privately-owned businesses: From frozen to stifled

A change to regulations that unfreeze the government’s suspension of new business licenses arguably counts as more anticipated than a constitutional reform. In August 2017, the Cuban government stopped issuing new licenses to cuentapropistas, or microbusiness entrepreneurs, citing widespread violations among the sector.

With roughly 567,000 cuentapropistas as of 2017—accounting for 12 percent of the island’s workforce—Cuba plans to increase the private sector’s contribution to the economy to between 40 and 45 percent. Most licenses are concentrated in services, with casas particulares (private homes for rent), taxis, and restaurants catering to a growing number of tourists. The increasing amount of dollars entering the private sector has spiked inequality between these workers and the majority of Cuban state workers, who make an average $25 a month, prompting the government to heavily regulate the sector.

“Cuba’s private sector has shown tremendous innovation and growth over the past few years and has the potential to play a much larger role in Cuba’s development and economic growth model,” says Alana Tummino, AS/COA senior director and head of the Cuba Working Group. “Yet increased oversight and regulations dampen entrepreneurs’ potential and limit the ability of the state to capitalize on this sector to absorb former state workers in the future.”

First published on July 10 in Granma, Cuba’s official newspaper, the 20 new legal norms go into effect December 7. In some ways, the regulations are a step forward in legitimizing and institutionalizing the private economy; in other ways, they create more hurdles. Moreover, the changes ignore some of the most problematic issues facing cuentapropistas and ones many hoped would finally be addressed.

On the upside, the new measures require worker contracts, punish discriminatory practices, and increase the limit on deductible business expenses from 10 percent to 40 percent.

The downsides are numerous. For one, cuentapropistas will be limited to one license per person, meaning a restaurant owner cannot also operate bar, nor can an Airbnb owner also drive a taxi, for example. That would affect entrepreneurs like Julia de la Rosa y Silvio Ortega, who rent out the rooms in their house in Havana and spoke to AS/COA in a podcast interview about their aspirations for providing car services as well. Restaurant owners—eager to recuperate from a drop in American visitors after the Trump administration changed a handful of regulations—will also have the burden of limiting their capacity to 50 seats. Entrepreneurs who violate the rules now face new fines and repercussions, including suspension of licenses and confiscation of property.

Other particularities prohibit subcontracting in certain areas like academics or real estate, therefore a math tutor cannot work in conjunction with another professor, and real estate agencies are forbidden. Musicians and artists, meanwhile, cannot receive pay unless they are registered under that profession with the government.

Moreover, the procedure for applying for a business license was made longer and more complicated, requiring aspiring cuentapropistas to submit affidavits stating the origin of their financing, as well as investment plans. These will be reviewed by committees at the municipal and provincial levels and finally approved after an onsite inspection. No entrepreneur will be allowed to sell his or her services to foreign businesses.

A greyer area is the consolidation of the 201 previously allowable activities to 123, along with a new tax structure that requires the business owner to pay a 25 percent social security tax for each employee. Before, cuentapropistas were exempt from the labor tax until they had more than five employees, and though the new rule will greatly increase the government’s tax revenue, it will also reduce the hiring incentive. Most cuentapropistas will also be obligated to open bank accounts through which they can directly pay their taxes. This would take care of the widespread tax fraud in a country where people are not necessarily accustomed to paying taxes, as one entrepreneur told AS/COA Online earlier in the year.

But the elephant in the room is the government’s silence on some of the cuentapropistas’ biggest grievances: the lack of a wholesale market and the ability to file their business as legal corporate entities. The absence of both in the new regulatory framework means Cuban entrepreneurs will continue to lack supplies and access to goods they need to either feed themselves or the more than 4 million tourists arriving every year.

What’s more, some of the licenses eliminated included those for vendors of agricultural goods, while keeping cuentapropistas from being able to import these items.

These restrictions threaten to limit the country’s productivity, which has declined across nearly all goods-producing sectors, per a 2018 Cuba Study Group report that also notes that exports plummeted 29 percent in 2016. 

*Correction: An initial version of this article erroneously stated that Raúl Castro is still head of the military. Instead, Castro has the highest military rank, but is no longer in command.