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Cuba's elusive underground economy provides important goods and services
CubaNews / October 2004

By Larry Luxner

From watch repairmen in Holguín and ice-cream vendors in Sancti Spíritus to locksmiths in Matanzas and prostitutes selling themselves along Havana’s Malecón, Cuba’s so-called “underground economy” is evident nearly anywhere you look.

Yet trying to get a handle on its size or economic impact is extremely difficult, given the scarcity of reliable Cuban government statistics and the reluctance of those operating outside the official economy to talk about their sometimes illegal activities in detail.

Archibald R.M. Ritter is a professor of economics and international affairs at Carleton University in Ottawa. A former Canadian ambassador to Cuba, Ritter conducted an informal survey of self-employment in Cuba between Feb-ruary and April 2003, and presented his findings at the recent Association for the Study of the Cuban Economy (ASCE) meeting in Miami.

“Conventional measures of the underground economy are nearly impossible, given publicly available information,” he said. “Only direct observation and generalization from anecdotal evidence is possible at this time. But Cuba’s underground economy is so obvious that it’s frequently observed by tourists and journalists.”

In the United States, he told ASCE delegates, the “shadow economy” constitutes only 8.7% of total GDP — a percentage that rises to 15.8% for Canada, 18% for Western Europe and an astounding 41% for Latin America.

“In most countries, policymakers view the underground economy negatively, but not in Cuba’s case,” he said. “The underground econo-my produces a lot of relatively low-cost goods and services for the Cuban people, and it evades direct taxation, but not indirect taxation.”

Ritter added: “Like other countries, Cuba has an underground economy, but it includes enterprises that are legal everywhere else.” These include household activities like child-rearing, cooperative work around the home and the barter of legal goods and services. The underground economy also encompasses “private economic activities embedded within the state sectors, like manicurists and elevator repairmen who will provide service if you give them a bonus,” as well as criminal activities such as the selling of stolen goods. Among factors that promote the growth of any nation’s underground economy: the intensity of regulations; the burden of tax and social-security contributions; social transfers that permit individuals to work unofficially; a very high tax on such transfers should the individuals graduate from the underground economy into the formal economy; forced reduction of official working hours; early retirement, and high unemployment rates which push people into the informal economy.

There are also social and psychological factors at work, especially if people feel the government is treating them badly.

“All these factors exist in an extreme way in the case of Cuba. The tax system is excruciating for cuentapropistas,” said Ritter, lamenting the fact that “all of this entrepreneurship is being frittered away.”

“A reasonable policy would be to legalize these activities, but that’s not going to be done for some time,” he said. “Many activities that are normally permitted elsewhere are prohibited entirely in Cuba, or limited through the refusal to grant licenses to applicants, who then must operate clandestinely if they are to exist at all.”

In 1996, according to official figures, 82.3% of the 46,248 applications for self-employment licenses were granted. By 2001, only 23,531 of the 97,687 applicants got their cuentapropista licenses, translating into an approval rate of just 23.9%.

Phil Peters, vice-president of the Lexington Institute, has spent several years researching Cuba’s self-employment sector.

In an informal survey of 61 cuentapropistas — 31 of whom operate in pesos and 30 in dollars, Peters found that the average self-employed Cuban had been in business for six years and two months. Of those operating in pesos, average profits came to 1,409 pesos — more than five times the average monthly salary in the state sector — while the average monthly tax paid was 676 pesos.

Of those operating in dollars, the average monthly profit was $301, and the average tax was $137. Typical cuentapropistas charging pesos for their services included a tire repairman, a watch repairman, a pedicurist who had been in business for over 40 years, and a woman who sells herbs used in santería rituals.

In the dollar sector, cuentapropistas were generally taxi drivers, painters, artists, booksellers and owners of casas particulares, or rooms for rent in private homes.

Yet the government feels threatened by these self-employed Cubans, says Peters.

“This sector has been weeded out. It’s only the strong who are surviving,” he explained at the ASCE conference. “Remember that they started in 1993, and the peak of 209,000 was reached in 1996. At that point, the government revived the income tax, so that obviously had an impact, taking out a certain part of those who were marginal. At the same time, there was also an increased effort to enforce regulations.”

Some of those regulations would hardly be considered objectionable in a capitalist country, i.e., imposing sanitary regulations for street food vendors; others are quite objectionable, like not letting owners of paladares (private restaurants) serve beef or shrimp.

Yet many cuentapropistas operate without any serious problems to speak of.

“They have a simple business, the regulatory scheme is simple, and their business is not in competition with the state,” Peters explained. “For instance, I met a guy in Cabar-ien, a tire repairman who’s also an evangelist. His tax is only 80 pesos a month, and he clears nearly 2,000 pesos. I also spent time in the apartment of a family who had a very successful lunch stand, selling roast pork sandwiches and making 2,600 pesos a month. Another example is a woman in Vedado who sells ice cream with help from two assistants.”

Overall, said Peters, the conclusions he reached in 1999 are still basically true when it comes to self-employment in Cuba.

“The cuentapropia is a way for people to leave state employment and work on their own,” he said. “A major problem is the lack of inputs and supply. While some can get their supplies legally, many resort to black-market supply relationships to keep themselves going. There continues to be capricious regulatory enforcement.”

Interestingly, those involved in renting out their rooms to tourists are doing quite well, despite the “harassing new tax law” which was recently imposed on casas particulares. “Those who get themselves listed in Lonely Planet are golden. They’re even passing off clients to others. There’s lots of ingenuity in this sector.” Likewise, he said, “you can hire moving companies — people with their own trucks and crew — even though it’s totally outside the law.”

And such activities are likely to remain totally outside the law as long as Fidel Castro is in power.

Ted Henken, a professor at Baruch Col-lege, has outlined four distinct stages in the Castro regime’s changing policies toward the Cuban private sector:

The first (1959-70) saw the rapid and near-total eradication of the private sector, with Cuba’s last 58,000 small businesses nationalized in 1968. The second stage (1971-85) saw the gradual reintroduction of material incentives and small-scale private enterprise.

The third stage (1986-89) marked the “rectification process” and the eradication of private markets and material incentives. The fourth and current stage (1990-2004) is characterized by the re-emergence and unprecedented importance of the private sector.

Yet overshadowing everything in Cuba is the “recurring tug-of-war between radical communist ideology on one side and economic pragmatism on the other,” says Henken.

“Radical Guevarist ideological campaigns that target the private sector have often been carried out as ends in themselves, regardless of their impact on the economy,” he said. “If there is a hidden agenda behind the ideological justifications of anti-market campaigns, it is not economic but rather political. The growth of the private sector has correctly been seen as a threat to centralized control.”

Indeed, says Peters, the pendulum is swinging back.

“The government has promulgated a resolution and a new set of regulations that will affect cuentapropia. They’ll continue to allow 107 lines of work but will stop granting licenses in 22 occupations. The most notable is that of food vendors and paladares, where the state wants to resume its role. So they’ll let those who are in business continue, but allow the rest to disappear through attrition.”

Despite the risks of getting caught, those operating in the underground economy are obviously willing to take the chance.

“These people are certainly happier running businesses than working as a clerk in the Ministry of Transport,” he said. “But the lack of a proper small-business law that lets people exercise some private initiative — whether they’re carpenters, music teachers or software engineers — is a terrible loss.”

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