Thursday, July 19, 2018

A win for the control freaks

Cuba has legalized the operation of private bars where a maximum of 50 customers can enjoy alcoholic beverages “in their natural state or in cocktails,” and there can be recorded music, or live performances as long as the artists are hired in full compliance with Ministry of Culture regulations.

This is a trivial aspect of Cuba’s new small business regulations, and like many over the years it legalizes something that has been going on already.

But it makes you think back to March 1968 when Fidel Castro railed against private bars and other businesses during his Ofensiva Revolucionaria (see speeches here and here). He professed shock that there were 955 bars in Havana. He disclosed that undercover investigations found that 72 percent of their patrons “maintain an attitude contrary to our revolutionary process” and 66 percent “are anti-social elements.” He didn’t like other private businesses either, nor the people who ran them. His speeches often included the descriptor “lumpen.”

So he closed virtually all Cuba’s remaining private businesses, tens of thousands of them, including all the bars, because of a perception that they weren’t needed and they engendered the wrong kind of thinking.

So if you root for the privados, 1968 is the low point in the Cuban government’s long struggle to figure out how much private property and private enterprise are to be permitted in the socialist system.

And 1968 is why Cuba had just a few thousand private businesses when it opened up trabajo por cuenta propia in 1993, and it’s why when Raul Castro took office a decade later and took a fresh look at the economy, he noted that the government was unnecessarily and badly running state enterprises to provide almost every service: repair services of all kinds, worker cafeterias, beauty and barber shops, etc.

No one ever made a speech that explicitly threw the thinking of 1968 out the window, but that is what happened when small enterprise regulations were significantly liberalized in 2010. Individual entrepreneurship has since quadrupled in Cuba, from about 150,000 to nearly 600,000, now comprising 12 percent of a labor force where about one in three persons is employed outside the state. These entrepreneurs are essential sources of job creation, tax revenue, and services. Their bed-and-breakfasts sustain tourism centers such as Trinidad and Vinales where hotel capacity is minimal. They are in every city and dusty small town, with the common characteristic that they improve family income, usually quite a lot.

The new regulations (linked here), a package of new norms signed by Raul Castro and various ministers between February and July, are advertised as “updating, correcting, and strengthening” trabajo por cuenta propia.

Actually, “controlling” might be a better word.

On the positive side, when the regulations take effect in 150 days they will end a one-year suspension is issuance of new licenses in 27 lines of work, including restaurants and bed-and-breakfasts. They simplify and consolidate the list of permitted lines of work. A new category appears: Computer programmers can work privately and are not restricted from hiring employees.

But overall, the regulations set new limits. They seem to respond to several impulses: the party’s declared intention not to permit concentration of wealth, a sense that parts of the self-employment experiment have gone too far and need to be reined in, and a desire to protect the state’s predominance in some services.

Hence personal trainers can work privately but can’t give students certificates for work completed, nor teach students how to play any sport, nor organize competitive games, so that the privados will not grow to overshadow the state’s sport apparatus. Private translators can translate documents, but not official documents, and they cannot do oral translations of conversations or presentations at events, thus limiting competition with the state’s agencies.

Various businesses will be limited to one person, with a prohibition on hiring employees. This will do away with several modern, successful real estate agencies. The same applies to those who teach art or foreign languages, and those who help students cram for university entrance exams.

Restaurants will be limited to 50 seats, except in Havana’s Chinatown, where different rules apply.

All these restrictions will limit growth, and in some cases cause downsizing of businesses and loss of employment – but none so much as the new prohibition on persons holding more than one business license. There are 9,657 Cubans in this category, and they will have 90 days to comply. A Cuban official explains that the “spirit” of trabajo por cuenta propia is that the license represents what its holder does all day. So, for example, it is now prohibited for a woman who creates a successful salon to hire a competent manager for that business while she starts another one. This “spirit” penalizes the resourceful and energetic, not to mention those who would benefit from the jobs they create.

The regulations do not address this sector’s main problem, one where there is common ground between the government and the entrepreneurs: the lack of a wholesale supply system, which causes theft and diversion of state resources.

These regulations will act as a brake on growth, and perhaps their effect will be attenuated by evasion. But trabajo por cuenta propia and the non-state sector are here to stay if for no other reason that the government has happily shed about one million jobs from state payrolls and shows no desire to reverse course.

The grumps won this round, to be sure. But other rounds are coming, particularly the long-promised enterprise law that could – could – give these small businesses and the cooperatives a firmer legal status and with it, an ability to import supplies and carry out other normal business functions. Something to think about while drinking in the fully legalized private bars, in groups of 50 or less.

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