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Capitalizing on Cuba

With Raul Castro relaxing the communist government's grip on the economy, it's time for Washington to end the trade embargo and open the door to U.S. investment.

September 15, 2010

Cuban President Raul Castro has been moving slowly but steadily over the last couple of years to relax his government's grip on the country's ailing economy, yet it is the news that half a million state workers will get pink slips in the coming months and will be expected to find jobs in the private sector that has created a front-page buzz in the United States. Change is underway in the Cuban economy. It is time for Congress to end the archaic and ineffectual U.S. trade embargo and get out of the way of U.S. investment in Cuba before American firms lose out to those from Europe, Brazil and elsewhere.

Cuba's centralized economy has never been self-sustaining, especially in the face of the embargo that was imposed nearly 50 years ago. The education, healthcare and near-full employment hailed as achievements of the Cuban revolution were subsidized first by the Soviet Union and later by President Hugo Chavez of Venezuela. Now, in the midst of the global downturn, even Chavez can't support Cuba's bloated state payroll and inefficient enterprises.

The government employs more than 5 million people, or about 95% of the Cuban workforce. For the last year, Castro has been saying that is a million too many, signaling the layoffs. This spring, the government divested itself of state-run barber shops and beauty salons, converting employees into entrepreneurs who could, in turn, hire up to three workers. It also allowed farmers and small restaurants run out of homes to set their own prices and sell directly to customers, paying a 15% tax on revenues.

Now, as he releases workers into the marketplace to look for jobs or to start their own businesses, Castro is expanding the options. Apparently there will be no limits on the number of people a business can employ, or on the amount of "wealth" an entrepreneur may accumulate after paying a 5% sales tax and 25% payroll tax. It is not yet clear which sectors of the economy might be off-limits, but it appears that the sale of most goods and services will be open to entrepreneurs, many of whom have access to startup cash and merchandise from relatives in the United States since President Obama relaxed restrictions on travel and remittances.

Raul Castro's big brother, Fidel, introduced modest free market reforms in the 1990s, only to roll them back. Theoretically, that could happen again this time; Cuba is not abandoning "socialism," nor does it seek any more political liberalization than China and Vietnam have. But practically, it's not likely to do so this time. The government also has lifted restrictions on foreign ownership of real estate and is hungry for foreign investment. Cuba expects to issue 250,000 new licenses for self-employment by the close of 2011, almost twice the current number, and create 200,000 other nonstate jobs. The U.S. embargo should be lifted, so American businesses can go to Cuba and get busy.

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