Raul Castro's Shock Therapy for Cuban Economy

HAVANA, Cuba Nov. 8, 2010— -- Cuba approved a dozen new laws in recent weeks that portend dramatic changes in the every day lives of islanders, as the government orders state-run companies to slash jobs even as it opens the door to private business and employment.

For the first time since Fidel Castro's 1959 revolution jobs or income are no longer guaranteed and the stigma of entrepreneurship and employing others is lifting.

Decree law 276 puts an end to the practice of prioritizing employment over performance, orders state companies to "permanently look for new forms of organization and downsize those processes that do not reach expected levels of profitability as well as those that have lost competitiveness… laying off employees as needed."

The self employed, often a euphemism for small business, can now hire labor, rent store fronts, do business with the state and seek bank credits, among other novelties contained in Labor Ministry resolution 32, which the Communist party newspaper Granma said was a move to "distance ourselves from those conceptions that condemned self-employment almost to extinction and stigmatized those who decided to join it, legally, in the 1990's."

Another decree law establishes a labor tax on private businesses based on how many employees they, have up to more than 15. Still another regulates the hiring of labor by private farmers, remarkable in a land where Article 21 of the constitution states one's "personal and family property and means and instruments of work can not be used to obtain earnings from the exploitation of the labor of others."

Self employment covers everything from carpenters, gardeners, artisans and animal trainers to small businesses such as home-based bed and breakfasts, rental property, restaurants, pizzerias and snack shops.

When self-employment was first allowed in the 1990s, then-President Fidel Castro termed it a concession to capitalism and proceeded to limit licenses and over regulate them.

Resolution 35 from the Labor Ministry mandates that state workers be let go based on job performance, not length of service.

Cuba Creating New Labor Market

"People who used to stay home if they or their kids had a sniffle are going to work for fear they might loose their job," a family doctor in Havana said.

Cubans must now seek state employment, start a business, or work for small businesses and farms or lease land to till. In effect, these measures create a rudimentary labor market for the first time since the 1960s.

Lines have formed at local government offices across the country as Cubans seek information about the new opportunities.

"They are giving people forms to fill out and appointments within 15 days to legalize their status as self-employed," a government source in eastern Holguin province said in a telephone interview, asking his name not be used. "The plan is for each of the country's 69 municipal offices to process 20 people per day."

Unemployment benefits have been slashed, the price of subsidized utilities and services are going up and near gratuities such as a monthly food ration are gradually being phased out, nudging those who might prefer hanging out at home or the beach to seek work.

The government estimates some 500,000 workers will be laid-off in the next six months and a similar number after that, some 20 percent of the state labor force, resulting in a 5 percent increase in productivity in 2011.

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.

"Those who continue working on their own without papers, or do not pay the required taxes will feel the weight of the law imposed upon them by those mandated to enforce it, the National Tax Office," Granma warned in a recent article on the new tax code.