Capitalism thrives in Cuba, now employing 35% of the population, as the government economy falters

Jun 24, 2023 | 11 comments

A woman shops at the private business “Bodegon 21” in Havana, on June 5. Small and medium sized enterprises, approved only in 2021 in Cuba, are flourishing, displacing the state-owned businesses that are becoming emptier by the day.

By Nora Gamez Torres

Over the past two years a new kind of revolution has been quietly taking place in Cuba: Private businesses, banished from the island by Fidel Castro more than 60 years ago, are making a strong comeback, employing more people than state enterprises, gaining trust from foreign creditors and helping put food on Cubans’ tables at a time of widespread scarcity.

In news that would have shocked communist hardliners just a few years ago, Cuba’s economy minister, Alejandro Gil, said during a recent address to the National Assembly that the private sector is on track to buy over a billion dollars in goods by the end of the year — outpacing the government as the country’s largest importer.

On the streets, private grocery stores are taking the place of the empty-shelf government supermarkets, and all sorts of businesses are filling the space once monopolized by the state.

Some restaurant owners are now opening chains or franchises. Others are entering partnerships with cash-strapped local enterprises owned by the state and paying in foreign currency for the supplies needed for their production lines. In provinces like Holguín, Pinar del Río and Sancti Spíritus, private businesses buy flour abroad that they then resell to local government bakeries that sell to the population.

And the whole sector is thriving mainly outside the state financial system, meaning less money goes to government coffers.

It is a development Cuban leaders have long resisted because it aims at the heart of the state-controlled Marxist economy. They’ve had no choice but to allow it amid the most severe economic crisis since the end of Soviet subsidies in the early 1990s. And despite the many government controls and restrictions in place — and efforts to avoid references to capitalism — the private-sector boom is making Cuba look less like the highly centralized socialist economy once devised by Castro and more like a country in transition, where a nascent business community coexists with inefficient state companies — at least for now.

In a warehouse in Havana, packages of Ocean Spray cranberries stand close to boxes of Country Barn waffle mix, Lipton tea and other products from brands that can be found in U.S. supermarkets. Cuban private businesses are importing food from the United States and other countries at a scale not previously seen.

“It is an unprecedented change, a paradigm shift in Cuba,” said Oniel Díaz Castellanos, founder of Auge, a private business in Havana that offers accounting, design and other corporate services to private companies. “The vision that in Cuba economic activity could only be developed or controlled by the state has been put to an end, and with that, the idea that everything that was out of their control was either illegal or not socially accepted.”

To Díaz, this is an economic transformation with social and political implications, he says, because “now you have a group of people in the country who carry out their economic activities outside the purview of the state.”

Thousands of new companies
The new small and medium-sized private enterprises, first allowed by the government in August 2021, “are now scaling businesses to a degree that was unimaginable just a couple of years ago,” said Ricardo Herrero, the executive director of the Cuba Study Group, a Cuban American organization that helps train entrepreneurs on the island.

In recent trips to Cuba, he said, he has encountered “a sense of despair and lack of hope, and everybody’s leaving — but you have a growing number of individuals who are finding an opportunity to do something unprecedented on the ground that is very different from anything that came before.”

These entrepreneurs, Herrero added, “share similar value sets with entrepreneurs here in the United States. These are people who want the government off their backs and want to see better relations between the United States and Cuba, particularly between Cuba and the diaspora. They see the diaspora not only as their natural partners but also their natural market.”

Discreetly and “away from political polarization,” some Cubans living in Miami are even owners or partners in some of these private companies, Díaz, the Auge founder, said. Cuban legislation allows Cubans who live outside the country but who have not lost their permanent residence on the island to register small and medium-sized businesses.

“I know several, and it is increasingly common to see how Cubans who reside in Miami, in the United States, in Panama, in Spain, although they no longer have their permanent life in Cuba because they live in another country, have decided to take advantage of this opportunity,” Diaz said. “And that’s a change.”

Small private businesses like the restaurants known as paladares and home rentals for tourists have been allowed since the 1990s. Still, they were not legally recognized as companies but as “self-employment” activities. That changed in 2021 when the government authorized Cubans to create and own “micro,” small and medium-sized private companies, a historic decision reversing a decades-long ban on private property. The government also authorized the new companies to import and export goods, using state companies as intermediaries.

Oniel Díaz Castellanos, 42, founder of Auge, a private business in Havana that offers accounting, design and other corporate services to private companies.

Cuban authorities strictly limited what activities could be privatized and kept control of key areas like banking, telecommunications and the energy sector. The government also provided little financing, capped the number of a company’s employees at 100 and imposed heavy tax burdens on the new businesses. And yet a whopping 7,842 private companies have already been registered with the Ministry of Economy as of the end of May.

Most are in the food, services, transportation, construction and software-development sectors, though the private businesses are filling various other needs, from elderly care to pet grooming to design and music studios, event planning, delivery services and the resale of renewable energy equipment.

The private sector now employs around 35% of Cuba’s work force, about 1.6 million workers, surpassing the 1.3 million employed by state enterprises, according to Cuban economist Juan Triana, a professor at the Center for the Study of the Cuban Economy at the University of Havana.

From cafeterias to wholesale
Many of the new businesses have filled the void left by the cash-strapped government and have stepped up as major importers of food and other necessities when the country faces severe shortages. And foreign suppliers, who for decades sold to state-owned enterprises, are now increasingly working with private-sector importers because they pay on time.

These importers sell supplies not only to private cafeterias, restaurants and other small food-producing companies, they also compete with government stores, selling directly to the population in pop-up stores in the streets, private grocery stores, warehouses, WhatsApp groups and online stores hosted abroad. Many keep their inventories in warehouses leased from local governments.

Some of these businesses started as cafeterias under the self-employment category, and very quickly their owners became importers and wholesale distributors, like a Cuban entrepreneur interviewed by the Miami Herald, who described how he goes about selling a cargo container’s worth of chicken legally bought in the United States (the U.S. embargo against Cuba includes exceptions that authorize the sale of food and medicines.)

“Let’s assume I have a warehouse with a refrigerated container full of chicken. If I want to sell wholesale, I will contact other private sector members, such as restaurants, cafeterias and food manufacturing businesses that need chicken,” he said. “If I’m going to sell retail, I can sell on WhatsApp groups, I can put up a specific point of sale to sell chicken, or I can sell it in my warehouse.”

Gil, the economy minister, said private companies, the self-employed and cooperatives — referred to as “‘non-state actors” — were responsible for more than $270 million in imports so far this year through the end of April. That figure accounts for 61 percent of the country’s total imports, according to estimates by Pedro Monreal, a Cuban economist who works at the United Nations Educational, Scientific and Cultural Organization and closely tracks the government’s economic policies.

The incipient capitalism in Cuba has not gone unnoticed in Washington. A U.S. State Department official told the Miami Herald that the growing cargo-container traffic between the United States and Cuba confirms the private sector is getting a boost on the island and added that the Biden administration is working on new regulations to assist Cuban independent entrepreneurs.

“We have a critical window of opportunity here to support the growth of Cuba’s private sector,” the official said. “As the government’s ability to provide basic goods and services falter, we see the private sector stepping into that gap. Looking at the container traffic between the United States and Cuba, a few years ago pretty much all of that container traffic was going to the Cuban government, which controlled distribution around the island. But we’re seeing close to half of that actually going to the private sector, which indicates to us that a lot more space and autonomy are being created for the private sector.”

The official said the administration is working on regulations to expand access for small business owners in Cuba to the internet, e-commerce platforms, micro-financing and training.

Government distrust: Dissidents’ warnings
Whether this nascent market economy will take root on the island is still uncertain, as private entrepreneurs face daunting challenges and have already been the target of attacks both from the government and from the opposition.

“This transformation — in a country where for decades the private sector was prohibited and seen as a characteristic of a type of society that the Revolution tried to overcome — obviously cannot be exempt from contradictions, criticism and discussion,” Díaz said.

The high prices of the products offered by private businesses are a source of resentment among Cubans who don’t receive remittances from abroad to pay for products or have other access to dollars. Government officials, including Gil, the economy minister, have blamed the private sector for the island’s skyrocketing inflation, although critics say he is deflecting from the real reason: His mishandling of a currency-reunification scheme on January 2021 that resulted in the devaluation of the local currency, the Cuban peso, and a hike in prices.

Cuban economists point out that the private sector has been forced to operate in a distorted economy with significantly low state salaries, different currencies, and high commodity prices. For example, the medium state salary is $25, or 4,896 Cuban pesos. Yet private enterprises have to pay for supplies at market prices in dollars, resulting in prices that few state workers can afford.

And yet, even with high taxes, higher salaries and the extra cost of conducting financial transactions abroad without access to the international banking system due to U.S. sanctions, private companies can offer better prices than those found at government stores, said a Cuban entrepreneur in Havana who spoke to the Herald and who asked not to be named to discuss his business model. As an example, he said, he can sell a can of beer at 30 cents less than its price at government stores.

Some activists and economics experts say these businesses exacerbate inequalities and point out that many are operated by the sons and daughters of the government elite or by people who are connected to the government. Owners who openly oppose the government have suffered harassment, and some have been forced to close their businesses and leave the country.

Other critics have described the new businesses as a Trojan horse, a power-grabbing scheme by communists trying to secure economic power in a future political transition.

“It is the famous ….‘piñata’ in which the economic actors who are closest to the circle of power are those who reach the ‘candy,’” wrote Dagoberto Valdés, a Catholic activist in Cuba and editor of the independent magazine Convivencia. Because “loyalty to ideology and power is the guarantee to their survival,” these businesses cannot be regarded as seeds for a truly independent civil society, he concluded.

Díaz disputed this characterization, saying it is “mathematically impossible” that the nearly 8,000 private companies are all run by relatives of government officials.

‘Growth of the private sector is irreversible’
Despite the challenges, Herrero believes that strengthening ties between Cuba’s private sector and American businesses is a way to create “a new reality” in Cuba.

“That doesn’t mean that the old one disappears; this is not going to democratize Cuba on its own,” he said. “But it introduces a new economic dimension on the island in which the private sector becomes a primary actor despite whatever the government may claim, and that’s something different we should help shape.”

The biggest source of uncertainty for the future of private businesses right now is the Cuban government itself. Factions within the government disagree on how to move forward: Whether to allow these businesses to grow in a way that begins to resemble a free-market economy, or to copy Russia’s model of oligarchic capitalism, in which the military retains significant control over the economy.

Recent international developments, in which Cuba has bolstered ties with Russia and sought advice on how to handle the private sector, point to the latter possibility. Reports that Cuba and China are negotiating to expand intelligence and military cooperation, a deal that could potentially provide Cuban authorities with billions of dollars, have added to fears that members of the Cuban military want to keep the country afloat by leaning on traditional political allies, instead of allowing capitalist market reforms.

The Cuban government has also delayed regulations clarifying terms of foreign financing and investment in private companies. “Uncertainty couldn’t be higher,” the private business owner who spoke to the Herald said. He noted that the Cuban government is no longer “a monolith,” and that officials in some ministries favor supporting private enterprises, while other government agencies and Communist Party officials oppose any opening to free markets.

His fears are rooted in recent history, which has seen “moments of reforms and then a paralysis or even a setback,” he said. “We are talking about a major change in terms of economic flows, and that always creates problems.”

Still, the Cuban entrepreneur said, he believes the country’s dire economic straits will ultimately mean that free markets are here to stay: “The growth of the private sector is irreversible.”
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Credit: Miami Herald

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