Perestroika 2012? Cuba's Zany Capitalist Transition

The reforms that Mikhail Gorbachev introduced in the Soviet Union a quarter of a century ago or so ultimately put its demise into motion. Authoritarian regimes have thus been wary every since of following the USSR's fate. Certainly, China's more deliberate pace of adopting market reforms has succeeded in creating a form of market socialism that seems to be reasonably durable. Hence the familiar notion that market reforms should not happen faster than the political system's ability to cope with them for those keen on retaining a grip on power during this transition.

When Raul Castro took the reins of power in Cuba due to his (marginally) older brother Fidel's increasingly poor health, he too brought about a set of reforms including availing of consumer goods from abroad sold through private retail channels. Unfortunately for him, state-owned enterprises--or at least what passes for them in Cuba--have borne the brunt of shifting tastes as many SOEs offered consumer products and services:

Retail sales by Cuban state-run businesses declined significantly over the last two years, the government reported this week, as privately imported goods and a growing "non-state" sector took their toll. The report, which would be shocking in any other economy as it would signal a drastic fall in consumer spending, in the case of Cuba reveals the difficult balancing act of Cuba's communist leaders as they attempt to reduce the state bureaucracy and encourage private sector growth in a major transformation of its centrally planned economy. Retail sales fell 17 percent, or from 11 billion pesos in 2009 to 9.3 billion last year, the National Statistics Office said in its 2011 statistical year book, which is gradually being released on its Web Page (www.one.cu).

Actually, consumer spending is not caving in as it appears through official statistics. Rather, the influx of Cuban-Americans bringing consumer goods with them obviously purchased from elsewhere and traders from nearby Latin American nations have meant a lot of domestic demand is now met by what we used to call the "grey market": Unrecorded imports and goods sold under the rather that while not strictly "illegal" are not recorded in the official statistics:

The most dramatic decline came in durable goods, from 1.2 billion pesos in 2009 to 266 million last year, as Cuban Americans brought in flat-screen TVs, video game and DVD players and other domestic appliances for relatives and sale after U.S. President Barack Obama lifted all restrictions on interaction with their homeland. Hygiene and cleaning products fell from 920 million pesos in 2010 to 338 million in 2011 as the Cuban Americans joined thousands of Cubans who took advantage of lax visa regulations to move to Ecuador in recent years, where some set up trading schemes to move clothing, personal hygiene and other products to the island for sale through informal networks of door to door distributors and the mom and pop businesses like those in central Havana...

Up until this month, when import duties were drastically increased at airports, ports and post offices [on "grey market" products], presumably to slow the decline in retail sales, the informally imported goods were cheaper and often of better quality than those at the state-run stores, chipping away at sales.

A walk along Neptuno or San Rafael streets in Central Havana, one of the busiest areas in the city, tells at least part of the story. Dozens of private makeshift shops in people's doorways and living rooms, which began opening over the last two years, sell privately imported clothing, under-garments, hardware and other items right next door to state-run stores with similar goods. 

Meanwhile, reform continues apace--especially in the money-losing state services sector where privatization is afoot. Alike in the USSR all those years ago, they are being asked to become self-sustaining:

As part of an overall reform of Cuba's Soviet-style economy, the Communist Party loosened regulations on small, retail service-related businesses in 2010 and began moving thousands of state-run outlets into the "non-state" sector. This resulted in a boom of private cafeterias and restaurants, presumably responsible for a fall in state food service revenues from 14.1 billion pesos in 2010 to 12.7 billion pesos last year, according to the government report.

Cuba is gradually moving state-run retail services, such as barber shops, appliance and other goods repair and small cafeterias, into a new system where employees rent the premises, set their own prices, pay taxes and compete with small, privately owned businesses. Most of these state establishments have always operated at a loss, due to fixed prices, theft and the expense of controlling them, so less revenues in this case could translate into more money for the state through rent and taxes.

So, is Cuba going to go the way of the USSR or modern-day China? The Castros likely wish it would go in the latter direction obviously, but the dynamics of a large informal sector sitting uneasily alongside the formal one are eerily familiar. Either way, the gales of creative destruction are certainly passing through the island nation.