The End of Cuba’s Entrepreneurship Boom
BY CAROLINE KURITZKES
| JULY 15, 2019, 3:36 PM
Between 2014 and 2017, just as then-U.S. President Barack Obama was working to thaw over 50 years of frozen relations between Cuba and the United States, the Havana lawyer Alfonso Larrea Barroso and his two business partners were busy making a fortune. In a span of three years, the annual revenue from Scenius, their financial services cooperative, multiplied by a factor of 10,000, skyrocketingfrom $280 to $2.8 million in total revenues. Cuban ministries and state-owned firms hired it to balance top-secret budget ledgers, U.S. Congress members and State Department officials courted them in Washington.
The good times didn’t last. In June 2017, U.S. President Donald Trump curtailed Cuba-bound travel and banned U.S. commerce with enterprises owned by the Cuban military. Later that summer, Cuban authorities abruptly shut down the thriving cooperative.
The closure was prompted by the government’s accusation that Scenius had provided unauthorized financial services. Larrea believes the charges are baseless. In the fall of 2017, the association sued the Ministry of Finance, the regulatory body that ordered the shutdown, and drew up an appeal that was eventually rejected. “When we asked to see the ruling in writing, they denied our request. They barely answered us. It became clear that it was fundamentally a political issue,” Larrea said.
The closure of Scenius was part of a more adversarial approach to nonstate enterprise that the Cuban Communist Party has adopted the last two years, after almost a decade of private-sector development. The same month Larrea and his partners lost the cooperative, the government of Raúl Castro, Cuba’s then-president, froze the issuing of new licenses for the nation’s small business owners. The move put the brakes on 2011 policy guidelines that had sparked a sizable yet regulated private-sector boom, generating an estimated 18 percent of Cuba’s gross national income.
Entrepreneurs are facing a two-front attack from a U.S. executive branch resistant to commercial and travel ties to the island, and from Cuban officials.
Castro left office in April 2018, but Cuba’s new president, Miguel Díaz-Canel, seems just as determined to decelerate the island’s economic opening. As U.S. tourism and trade recede, the Communist Party has in turn abandoned diplomatic goodwill and escalated its own private-sector crackdown, leaving small-business owners scrambling. Entrepreneurs are facing a two-front attack from a U.S. executive branch resistant to commercial and travel ties to the island, and from Cuban officials who have come to perceive the country’s small businesses less as partners in Cuba’s opening than as competition to state-owned firms.
Before the permit freeze, between early 2013 and 2017, Cuba had approved 439 nonagricultural cooperatives, authorizing these privately managed associations to provide construction, retail, transportation, and other key economic services for the first time in 50 years. Meanwhile, the number of Cuban entrepreneurs exploded by more than 37 percent, and nonstate businesses came to account for almost a third of national employment, according to government figures. The true increase was even more substantial, as thousands of Cubans not counted in official estimates also flocked to the private sector without licenses. U.S. tourism to Cuba soared from 92,000 to 618,000 annual visitors during the three-year detente, and by 2016, private businesses were raking in about one-third of the island’s annual tourism revenues, according to the Brookings Institution.
As U.S.-Cuban relations soured, so too did the Cuban government’s attitude toward the fledgling nonstate businesses. “We will take concrete steps to ensure that investments flow directly to the people, so they can open private businesses and begin to build their country’s great, great future,” Trump said in Miami during his June 2017 Cuba policy announcement. But tightening the U.S. embargo and travel controls has had the opposite effect. Though private guesthouses, boutique hotels, restaurants, and bars had multiplied to absorb the unexpected tourism deluge, once U.S. travel restrictions were back on the books, the inflow of visitors seemed likely to decline. The Cuban government backpedaled, stalling the country’s economic liberalization.
Ultimately, Larrea’s cooperative got caught in the policy turnaround. He believes the Cuban government viewed his organization’s success as a “strong threat” to the state-run economy. “Economically, we were demonstrating that there was another way of doing things … that the private sector is more efficient than the state sector,” he said.
“Economically, we were demonstrating that there was another way of doing things … that the private sector is more efficient than the state sector.”
Things grew even worse for business owners like Larrea in July 2018, when Díaz-Canel hiked up performance standards, penalties, fines, and red tape for the country’s estimated 580,000 entrepreneurs. His administration also expanded the discretionary powers of executive agencies to inspect, punish, and curtail Cuban entrepreneurship.
The measures were issued as part of Díaz-Canel’s first policy proclamation, though many were approved under his predecessor. They reduced the number and scope of occupations authorized for private-sector activity. Private real estate brokers, sports coaches, and art, music, and language instructors are explicitly forbidden from hiring employees and forming academies or agencies. Entrepreneurs must open bank accounts with three months’ worth of taxes on deposit and provide affidavits and other paperwork demonstrating the sources of their investment.
“The new legislation is complicated, to the extent that it’s almost impossible to comply. … No one understands why you need to maintain a quota of three months’ taxes eternally in the bank,” an Airbnb landlord in Havana’s upscale neighborhood of Vedado told me. Yet for those who fail to meet the requirements, the punishments are steep. Local ministries, not courts, now have the power to seize private property and confiscate licenses. They can also levy fines of thousands of dollars.
Stringent record-keeping mandates could also wipe out supply chains or push underground entrepreneurs who, due to routine shortages, stock their businesses through friends and relatives abroad, often in violation of Cuban restrictions against the resale of foreign imports. Entrepreneurs found their wholesale supply further constricted in April, when the Trump administration announced new controls on remittances to the island, on top of a second round of travel restrictions and a cruise ship ban in June that will only further eviscerate a dwindling U.S. tourism base. U.S. sanctions blocking oil shipments from Venezuela, Cuba’s longtime patron, have made matters even worse. Already pressed for hard currency, Havana has been forced to cut back imports of foodstuffs and other essentials in order to purchase fuel from new trading partners.
The effects are visible. Food scarcity became so acute this May that Cubans waited in five-hour lines for rationed chicken and went weeks at a time without eggs. Bakeries and cake shops were shuttered for lack of flour from early December through New Year’s Day. In Havana, locating basic provisions often involves a trek of 100 blocks or more. Such trials are onerous not only for the self-employed, but also for state-sector workers, who are forced to compete for consumer goods in the same stores as entrepreneurs stocking their businesses.
“Sometimes there’s no toilet paper. Suddenly, without flour, there is no bread; there’s no ham, cheese, or milk. But when you find any of this, it’s very expensive too,” said the Airbnb landlord, describing how she procures breakfast for her clients amid chronic supply shortages. “By the time you arrive at the store, it could be gone.”
There is some reason for hope. A controversial July 2018 restriction limiting entrepreneurial activity to one license per person was scaled back in December after public outcry. The move showed that the government was somewhat responsive to popular pressure and recognized that the private sector will continue to play a necessary, though tightly regulated, role in the Cuban economy.
Parts of the legislation that were kept in place include important employee rights and protections and anti-discrimination clauses, a response to public misgivings that the private sector’s revival has also exacerbated income inequality and racial prejudice. “Taxes, the control of funding for your business, the control of contracts … that’s something you can call a benefit of the new legislation,” Seida Barrera Rodríguez, a commercial lawyer, professor, and researcher at the University of Havana, told me. “License owners are complaining that it’s more work for them. But it protects their workers, who are the weakest right now.”
Still, with Venezuelan oil sales on the decline and new austerity measures and rationing schedules on the books, shortages are intensifying by the week, and the future looks rather bleak for the country’s self-employed. Now more than ever, entrepreneurs and public employees alike depend on small businesses for living wages and vital staples. Outrage swept the island this spring when a high-profile commander proposed on national television raising ostriches, Caribbean rodents known as hutias, and crocodiles for human consumption, rather than building up private-sector alternatives to staggering production shortfalls.
Yet on balance, Cuban officials seem less fazed by public discontent than they are by the prospect of entrepreneurs amassing outsized financial and political power.
Small-business owners are finding it increasingly difficult to withstand government-led opposition to private-sector activity. “The challenge of running [a nonstate business] in Cuba, fundamentally, is self-preservation, let alone growth,” said one of Larrea’s co-founders at Scenius. “Growth is always dangerous. … Because there’s always restriction, because there’s always control. … The challenge is to stay alive.”
So long as U.S. officials continue their stranglehold on travel and trade, Cuba can expect a future where reactionary sectors of government are given greater influence, and the country’s financial recovery is collateral damage to the party’s survival. With a sense of foreboding and unmet urgency, Cubans can only wait while the lines get longer and the accordion of reform and counter-reform plays on.
Reporting for this story was supported by Yale University’s Gordon Grand Fellowship and Henry Hart Rice Foreign Residency.