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Cuban Economy Is Still Stagnant Despite Reforms: Cuban National

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"The United States is the ceiling of heaven," says Cuban national.

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MINYANVILLE ORIGINAL Nearly 60 years after the Cuban Revolution, much has changed: It's now legal for citizens to own and sell property, start a business, and emigrate (at least to Spain and Ecuador if not the US). This year, Cuba released numerous political prisoners, made it easier for Cubans to travel, and expanded other personal liberties as well as private sector jobs (178 private sector job categories and 350,000 licensed business owners now exist). For the first half of 2012, the island's economic growth was reported to be 2.1% -- better than what was seen in the United States. For all of 2012, its been reported that Cuba will grow a total of 3.1%, missing the government's estimate of 3.4%.

As restrictions ease, however, more Cubans are arriving in the US by various measures. The US accepts 20,000 Cubans per year via the immigration lottery; thousands more are accepted under family reunifications plans and political asylum. Via the terms of the "1995 wet-foot, dry-foot policy" amendment to the 1966 Cuban Refugee Adjustment Act, any Cuban who shows up in the US is automatically allowed entry without a visa and can apply for residency one year later. In recent years, the number of Cubans availing themselves of the Refugee Act has been between 4,000 and 5,000. Yet last year, the Miami Herald estimated that this figure had risen to 7,400 per year while other sources say that number is close to 10,000.

Probably the most perilous way to enter the US is by boat from Cuba. Last month, the
South Florida Sun Sentinel (via ABC News Univision) reported that the largest number of Cubans have tried to reach the United States this way since the financial crisis began in 2008. The US Coast Guard detained 1,275 Cubans traveling by boat in the 2012 fiscal year ending in September versus just 422 in 2010. Another 97 have been picked up over the past month and a half.

According to many experts, government reforms themselves have emboldened citizens to leave the country. Decree-Law No. 302, which goes into effect on January 14, 2013, modifies Law No. 1312, or "Immigration Law." Among other changes to immigration law, the decree lessens the punishment for those who left the country after 1990 and wish to return to visit the island. Cubans can also travel abroad more easily next year.

Minyanville spoke with a Cuban national who has been in the US about one month to find out more. The individual (identified as "he" for the sake of this article) did not want the specifics of his arrival (which is legal if he leaves shortly) revealed. However, it is well know that Cubans have come to the US through Canada, Mexico, Ecuador (where approximately 100,000 Cubans have settled), and Spain (where thousands of Cubans of Spanish descent have been allowed to move.)

The main reason Cubans are on the move, said our source, is that the local economy is stagnant. "One thing is what [the government] tells you, and another is the truth. The economy really isn't doing better. There are a lot of government programs to help improve the economy, but there are no perceptible results. There is a lot of poverty."

On a side note, Cuban-Americans who had migrated in the 1960s after Castro came to power were present during the interview, and added their own commentary mostly to complain that the source was sugar-coating answers although it's hard to believe "a lot of poverty" is painting a rosy picture.

Our source verified what Jorge Duany of the Cuban Research Institute at Florida International University said in an interview with ABC/Univision News:

[The increased number of Cubans leaving is] due to the continuing economic downturn in Cuba, which is leading a large number of people outside of Cuba. Short-term reasons for this rise could be that there are a number of people who are unemployed and looking for a job in the small private sector in Cuba who were laid off by the government and have doubts about future prospects.

Starting a Business: Try Something in Tourism

All citizens are allowed to start a small business in Cuba. Whether or not fellow citizens -- many of whom earn $20 per month -- can afford the goods and services from these enterprises is a different matter.

Our source explained how one would start a business:

In order to start a business, you need to acquire a permit from the government, but first you need to give a "contribution" to the government. The government does not question from where you receive the money. It could even be from relatives in the US. You could start a brick-and-mortar business with 10,000 to 15,000 Cuban convertible pesos, which equals $10,000 to $15,000 in Cuba, but many Cubans need money from family members living abroad in order to launch the business. Afterwards, the government does not care if you continue to receive money from outside sources [though it must be in limited amounts] and you conduct your commerce. Business owners also have to pay taxes.

To put this in perspective, a $15,000 fee would be the equivalent of 50+ years' worth of earning for the average citizen.

The government outlawed the US dollar in 2004 after former Cuban President Fidel Castro had legalized its use in 1993. Our source said that when Cubans receive US dollars from family members, they have to pay a 10% fee at banks and convert them to the Cuban convertible peso, informally called chavito. The convertible peso has an official 1-to-1 parity with the US dollar, but the conversion fee results in Cubans only receiving 0.90 convertible pesos for every US dollar. The Cuban peso, or national peso, constitutes the other form of official currency used in Cuba. One convertible peso or US dollar equals 25 national pesos.

The interviewee named the restaurant and tourism industries as two sectors doing relatively well when asked which businesses benefited the most from the small business reforms. The interviewee added later, "The best job in Cuba is tourism. The tips alone will allow you to make it."

By all accounts, including the Cuban Oficina Nacional De Estadística E Información, a little over 2.7 million tourists visited the island in 2011, and the number has steadily increased since 2007. The vast majority -- more than two million -- come from Canada and Europe. US citizens can even get a so-called "people-to-people" license (essentially claiming the trip is educational).

Tourism's pay is so strong that it has attracted individuals from unexpected sectors of the economy. Our source told us about two surgeons who left their positions to become taxi drivers because the tips earned from tourists exceeded their salaries as surgeons. A musician earned significantly more from his tips working at a hotel than a dentist earned from his salary. Many medical professionals only earn 625 national pesos, or $25, per month.

Food: Small Entrepreneurs Have the Edge

Once in Cuba, not surprisingly, tourists need to eat. In this area, the small business owner is at an advantage and many privately run restaurants have done well largely because of their connection to the tourism industry.

According to our source, a Cuban national would have to pay the equivalent of a month's salary or more to eat a single meal at one of these establishments. A meal can cost 4 convertible pesos, and many Cubans only eat at restaurants when relatives from abroad visit and pay for their meals. (The situation was similar with other goods, not just food. Our source talked of living in a town with only one store carrying clothing virtually inaccessible to the average Cuban as purchasers needed convertible pesos to afford them.)

Our source noted that the large, state-owned restaurants cannot compete with the smaller, privately run restaurants, which offer better service and better food. In fact, at least according to an AP report (via Huffington Post), the government may begin renting state-owned restaurants in hopes of improving the quality of the restaurants. The Communist Party newspaper Granma published an article in which the Interior Commerce Vice Minister Ada Chavez Oviedo said that a pilot program will begin on December 1 in three of Cuba's fifteen provinces: Artemisa, Villa Clara, and Ciego de Ávila. State-owned restaurants suffer from theft of food by the workers. The renters will be responsible for the maintenance, the repairs, and the utilities of the restaurant. The government has also started similar policies for beauty salons and barber shops.

Our source elaborated on the business structure of a private restaurant:

Restaurateurs can either grown their own food or purchase food from farmers. All farmland is state owned, and the government only leases pieces of government registered land to individuals such as farmers or restaurants owners. The government calls this "Uso Frutus Gratis," or free use of the fruit of you labor. The land is never yours, though. Plus, a contribution (a sort of tax) from the harvest must be paid to the state for the funding of institutions such as hospitals and schools. [The government may begin experimenting with new land cooperatives.]

Despite the possibility of renting land, most restaurants owners have to purchase produce from farmers in the marketplace. Those who sell food in the marketplace can charge whatever price they want, making their oferta de mando, or offer of demand. Problems occur because the lack of a fixed price allows sellers to charge whatever price they wish and constantly change prices. When you go to a market, farmers will begin competing on price, constantly undercutting each other."

Our source's description of the interactions in a local market indicated that market mechanisms may still seem alien to some Cubans.

When asked about any popular restaurants in the country, our source said that no restaurant franchises existed and restaurants varied from city to city. On the topic of available, affordable food, our source called the US "the ceiling of heaven" and frequently referenced the prevalence and proliferation of McDonald's (NYSE:MCD) and Starbucks (NASDAQ:SBUX).

Rationing and the Black Market

Our source reasoned that the government allowed a black market to exist out of fear of civil unrest if the people's basic needs are not met. The government will step in, though, if it believes a person has become reckless or too conspicuous with one's wealth, he said.

The state-run rationing system provides little for the average Cuban. Similar to starting a business, one needs money to acquire anything other than basic necessities. Our source said, "Every head of the household gets a rationing booklet from the government that covers essentials. The book lists what may be collected from the government throughout the year. For example, Cubans may only get one pair of underwear and one pair of shoes per year from the government. However, the shoes may be the wrong size."

Frequently, the government will run out of a particular good. The US-Cuba Trade and Economic Council in its "Report for Calendar Year 2011" states that ration cards are supposed to supply food for 30 days, but may only provide 14 days worth of food.

Ironically, would-be entrepreneurs can find themselves on both sides of the black market with the same business, and our source related the following story:

One family, which rented a small piece of land, went from living in poverty to operating a registered car dealership. Through working the land and bartering or selling the remainder of harvest after taxes, the family saved enough money to purchase a small car. The car provided access to different markets in different towns because the family members could transport the food and goods, such as heavy bags rice, to areas that lacked these items. The individual with the car transported food and goods from the interior of the country to the urban areas like Havana and made a killing. Urban residents have a rough time acquiring food from the countryside, though, many urban gardens exist in cities like Havana.

The family purchased additional cars with the profit from sales and sold more goods in multiple areas. However, selling food and goods outside of the family's town was illegal, making the family a group black market dealers.

Eventually the family collected a small fleet of cars and asked the government for permission to become a car dealer. The family registered the business with the government and paid taxes, making the business legitimate again. Entrepreneurs in Cuba constantly walk the line between legal and illegal commerce.

Overall -- and despite accusations that he was going easy on Cuba -- our source expressed disappointment with the results of the changes Cuban President Raúl Castro has introduced and tremendous disillusionment. While there have been various reforms, many of which were implemented since 2010, it's made little difference day-to-day. Asked if the government was likely to make other major political reforms, the individual simply responded, "No."

Twitter: @ChrisWitrak
No positions in stocks mentioned.
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