Raul Castro's Shock Therapy for Cuban Economy

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The measures amount to the most important reform to date by President Raul Castro, who took over from his ailing brother a few years back pledging to modernize Cuba's indebted and stagnant economy.

The layoffs and increased cost of living will impact every family on this Caribbean island of 11.2 million residents.

The state controls some 90 percent of all economic activity in Cuba and employs 85 percent of the 6 million member labor force.

As the state retreats from minor economic activities some jobs will simply be switched over to new arrangements where workers lease the tools of their trade from it, for example taxis, while others will be given the option of turning their workplaces into cooperatives, for example bankrupt furniture repair shops. Workers will also be offered employment in agriculture, construction or other areas where it is available.

Cuba Has Last Soviet-Style Economy on Planet

Cubans who refuse the new arrangements or a job will have their unemployment benefits stopped, benefits which another law reduced from practically indefinite to one to five months depending on length of service.

Some western diplomats likened the measures to neo-liberal shock therapy carried out by bankrupt capitalist countries, though Communist authorities insist no one will be left to fend for themselves as free healthcare and education are guaranteed and mortgages are based on 10 percent of the top bread winner's income.

"The laws signal the reform process has gotten underway in earnest and there is no turning back," a local economist said, asking his name not be used.

"These changes were inevitable and aim to improve efficiency so there will be more funds to pay the wages of those who work and less for those who do not as we move forward," he said.

Since President Raul Castro took over from his older brother in 2008 he has repeatedly said Cuban socialism needs a "structural and conceptual" makeover and fostered debate over its inefficiencies.

Cuba's soviet-style economy is one of the last on the planet, as other Communist ruled nations such as Vietnam and China have long since switched to mixed systems with both state and private business.

Raul Castro now wants to move Cuba's decades-old paternalist system of collective work and consumption to one based more on individual effort, reward and consumption, while maintaining the state's strategic economic position and targeted welfare,.

A new tax code, Finance Ministry resolution 286, increases deductibles for business expenses from 10 percent to up to 40 percent and includes a new 10 percent sales tax and 25 percent social security tax, also deductable before payment of a graduated income tax that ranges from 25 percent to 50 percent of earnings.

Local and foreign analysts expect some people will continue to higher out their skills to others and run small businesses on the margins of the law, as they do today.

They say the number of reports and monthly and quarterly payments remain onerous in a land where most transactions are in cash, supplies are limited, there are few cars and phones, no real mail service or electronic banking, and no business or tax culture.

Nevertheless, the government appears confident, forecasting the private sector will pay more than a billion pesos in taxes next year, compared to an estimated 250 million pesos in 2010.

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