Private self-employment under reform socialism in Cuba.

Author:Gonzalez-Corzo, Mario A.
  1. Introduction

    The expansion of private self-employment is one of the principal economic reform strategies implemented by the Cuban government to "update" the country's socialist economy. In spite of being tightly regulated, private self-employment has been tolerated and used cyclically in periods of economic recessions since the 1959 Cuban revolution (Jatar-Hausmann 1999; Perez Villanueva and Vidal Alejandro 2012). It was one of the principal economic reform measures implemented to cope with the economic crisis caused by the fall of the communist bloc (Carranza Valdes, Gutierrez Urdaneta, and Monreal Gonzalez 1996; Jatar-Hausmann 1999; Mesa-Lago 1994; Perez Villanueva 1998, 2010; Ritter 2004), and this sector has experienced an unprecedented revival since 2010. Unlike past attempts, which tolerated some limited forms of private self-employment in a few economic activities, the reform measures implemented since 2010 represent a deeper transformation of this vital sector of the Cuban economy. As Perez Villanueva and Vidal Alejandro (2012) note, this process has been driven by the need to reduce inflated state payrolls and by increased official acceptance of private self-employment as a viable alternative to employment in the state sector. The reduction of the state's share of total employment, combined with the implementation of policy measures to promote private-sector self-employment and to gradually transform other areas of the Cuban economy, suggest the transition from the excessively paternalistic and centralized classical socialist model to a uniquely Cuban form of reform socialism.

    This paper analyzes the recent evolution of self-employment under reform socialism in Cuba. Section 1 discusses the principal characteristics of reform socialism, with a particular emphasis on private-sector expansion, reforms to improve the performance of state-owned enterprises, and the gradual modification of the price system. Section 2 examines the evolution of Cuba's emerging self-employment sector since the reforms in 2010 and the principal challenges confronted by these workers. Finally, section 3 presents the study's conclusions and discusses future prospects for private self-employment as the Cuban economy continues to transition from classical to reform socialism. II.

  2. Principal Characteristics of Reform Socialism

    The transition from bureaucratic to market coordination that took place in reforming socialist countries (e.g., Hungary and Poland) after the de-Stalinization of their economies in the late 1950s and early 1960s was initially based on the "conception of reform as a mix of plan and market within the State sector" (Stark and Nee 1988). In the case of Hungary, the process, commonly known as "reform socialism," expanded with the introduction of the New Economic Mechanism (NEM) in 1968, paving the way for "a conception of reform as the transition to a mixed economy of public and private property forms with implications for the emergence of new social groups and autonomous social organizations" (Stark and Nee 1988).

    According to Stark and Nee (1988), under this reconceptualization of reform socialism,

    The socialist state would control the commanding heights of the economy, regulating the market mechanism by manipulating investment credits, amortization rates, depreciation allowances, interest rates, prices, wage structures, and other macroeconomic controls. With the correct mix of plan and market, the market mechanism would not generate spontaneous economic processes but instead would serve as an instrument to reduce the transaction costs of central planning. In short, early reformers believed that the most efficient governance structure for socialist economies was a combination of market and central planning. Kornai (1992, 2008) defines "reform socialism" as "regimes that differ from the Stalinist model of classical socialism in several important aspects" and have "made some steps towards liberalization in the political sphere, somewhat decentralized the control of their State owned sector, and allowed some larger scope for the private sector." Under reform socialism, however, the fundamental attributes of the socialist system are preserved: the Communist Party retains absolute political control and does not share its power with any other political actors; the state retains ownership of the fundamental means of production; and bureaucratic, centralized planning remains as the principal coordinating mechanism, even though market-oriented mechanisms are introduced in some sectors of the economy (Balcerowicz 1989; Chilosi 1992; Kornai 1992; Nove 1989; Shleifer and Vishny 1994).

    Reform socialism permits some degree of political liberalization but maintains the Communist Party's political monopoly (Chilosi 1992; Kornai 1992; Nove 1989). Likewise, it allows the introduction of some market-based performance metrics (e.g., profits, and material incentives) to improve enterprise efficiency, and the reduction, but not the complete elimination, of centralized decision making. It also allows the introduction of decentralized prices in some sectors of the economy, as well as the creation of alternative spaces to facilitate the nonstate sector's gradual expansion. Nevertheless, reform socialism, in its various manifestations, retains core elements from the classical socialist system (Balcerowicz 1989; Nagy 1989; Nove 1989). These include "pervasive price controls, bureaucratic restrictions of enterprises' entry into new markets, massive inter-enterprise redistribution of financial means via the budget, and (the presence of) Party-State "nomenklatura" with respect to the managers of enterprises, banks, etc." (Balcerowicz 1989). In other words, despite the alleged benefits of some private instruments, the absence of externalities in consumption and production, relatively low information costs, and the provision of private goods rather than public goods, reform socialism prioritizes public or social property forms over privately owned property.

    Reform socialism allows the introduction of market-based coordination mechanisms to complement bureaucratic, centralized, planning in order to improve or "perfect" the classical socialist model (Brus 1972; Nove 1989; Kornai 1992; Weisskopf 1996). As Brus (1972) indicates, under the reform socialist model "the means of production (capital) are publicly or collectively owned, and the allocation of resources follows the rules of the market." To improve economic efficiency, reform socialism tolerates the existence of collective property forms, managed according to market principles (Brus 1972; Balcerowicz 1989; Lange 1938; Nagy 1989). The proponents of reform socialism believe that collectively owned property ensures equitable resource distribution, while market-based coordination mechanisms contribute to economic efficiency, improvements in total factor productivity, and the rational use of the factors of production and other economic resources or inputs (Lange 1938; Lerner 1944). Even though collective (social) ownership is considered as the principal property form under reform socialism, other property forms (e.g., individual or joint property, cooperatives, and mixed enterprises, including joint ventures with foreign-owned firms) are permitted under reform socialism (Brus 1972; Lavigne 1989; Nagy 1989; Szamuely 1989; Fischer and Gelb 1991).

    The private center's emergence from the shadows to center stage is another important characteristic of reform socialism (Brus 1972; Fischer and Gelb 1991; Kornai 2008; Stark and Nee 1988). Prior to the reform process, most economic measures in socialist countries focused on increasing state-owned enterprise (SOE) autonomy and on introducing limited "material incentives" to improve their efficiency and profitability (Hinds 1991; Kornai 2008). Although some small-scale, peripheral, private-sector activities were permitted or tolerated (many times reluctantly) under the classical socialist system, the emergence and evolution of the private sector, and its growing share of economic activities, are among the main characteristics of reform socialism (Kornai 1992, 2008).

    The majority of private-sector activities under reform socialism take place in agriculture (Nee 1989; Kornai 1990). Notable examples include China's "family responsibility system" (implemented in 1978); agricultural production and sales from privately owned family plots in Hungary, Yugoslavia, Poland, and Vietnam; and more recently, in the case of Cuba, agricultural production and direct sales of agricultural products by nonstate entities (e.g., cooperatives and private farmers) under Decree-Law 259 (passed in 2008) and Decree-Law 300 (passed in 2012). Private (nonstate) activities also expand in other areas of the economy--such as construction, retail trade, transportation, and personal services--under reform socialism. In many instances, these activities are performed to supplement employment (and earnings) in the state sector in the form of "moonlighting" and "do it yourself' work (i.e., economic activities that are typically associated with the small-scale forms of self-employment tolerated by the state) (Dallago 1989; Davis 1988; Grossman 1977; Kornai 2008; Pomorski 1988). Renting out private homes and apartments, and deriving income from other "rental activities" such as private car rentals, as well as a wide range of small-sale, service oriented, entrepreneurial activities are also allowed by the government under this package of measures (Dallago 1989; Davis 1988; Grossman 1977; Kornai 1990; Kornai 2008; Pomorski 1988).

    Once state-imposed restrictions are eliminated and the official discourse formally accepts the private sector's existence and the market's role (albeit limited) as an alternative allocation mechanism, the private sector's expansion under reform socialism occurs spontaneously (Kornai 2008; Stark and Nee 1988). Economic actors are attracted by the higher...

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