Cuba Country Forecast Update

Public-sector Reforms Advance

President Raúl Castro has confirmed his intention to launch a significant shakeup of the state sector by announcing a plan to ease hiring restrictions on small private businesses and to issue more permits for new private enterprises.  The announcement signaled plans to move forward with a long-anticipated program to cut loose hundreds of thousands of state employees, the first 500,000 by March 2011.
A central principle of Cuba’s socialist economic model is to ensure full employment, which the Communist Party has accomplished with uncontrolled public-sector hiring.  The state now employs fully 85% of the labor force, thereby producing a bloated, inefficient, unmanageable bureaucracy, impeding efforts to boost the productivity of state enterprises, and creating an unsustainable drain on the government’s financial resources.
Layoffs will begin in the state bureaucracy—with public school officials expected to be among the first to receive pink slips—before they are extended to public-sector business enterprises.  An additional 500,000 jobs will be eliminated by the end of 2015.
The government is fully aware that doing this in such a short period of time is a risky endeavor.  This was evident from its careful preparations for launching the reform, including several months of close consultations with unions, youth, and various other economic and social interest groups.  The fact the unions have been identifying workers that will be laid off first, a strategy that will reduce the danger of igniting generalized unrest.
Officials count on the easing of private-sector business restrictions to spur a large and rapid expansion of new job openings for displaced state workers.  The government has set a very ambitious target of issuing 250,000 new business permits to create 465,000 jobs in 2011.  The types of businesses permitted to date, mostly personal service, cannot expand at such a pace without creating intense competition that drives down wages and threatens business survival.  Probably for that reason, the government has discussed the possibility of transferring responsibility for delivering some state services to the private sector.
The regime has also stepped up efforts to attract foreign investment in key economic sectors, especially tourism, where a significant rise in investment would generate rapid growth of construction jobs in the near term, while also creating the potential for many permanent jobs in a variety of enterprises catering to foreign travelers.  Toward that end, President Castro issued a decree extending the maximum length of leases for state land to 99 years (from 50), and the Ministry of Tourism is preparing to initiate negotiations with foreign property developers to construct more than a dozen golf courses with luxury housing facilities.
The scope of the reforms and the numerous personnel changes have added to the appearance that a momentous transition is about to get under way.  However, President Castro has taken pains to dispel any notions that the changes represent either the embrace of capitalism or a first step in the dismantling of the socialist system.  Rather, they have been presented as steps to “modernize” the socialist model, with the aim of ensuring its survival.
All of which suggests that the government will closely control the process, and is prepared to reverse course if the reforms unleash social pressures that threaten the position of the PCC.  That said, if the private sector proves capable of absorbing laid off state workers and can offer its workers wages that generate increased demand for more private services, and if the taxes collected from private businesses and their employees become a reliable revenue stream, then the government would have a clear incentive to create additional room for market-based institutions.