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In Cuba, free market proves easier said than done

Daily for the past five months, Yusdany Simpson has been at her street-side cafeteria doing her part in Cuba's economic makeover by churning out mayonnaise sandwiches at 12 cents a pop.
Image: usdany Simpson collects water in her home in Havana, Cuba
Yusdany Simpson collects water in her home in Havana, Cuba. The 35-year-old single mother opened a cafe hoping to make a little money while staying at home with her 2-year-old son, but says the venture ended up costing her what little savings she had built up from remittances sent from abroad. Franklin Reyes / AP
/ Source: The Associated Press

Daily for the past five months, Yusdany Simpson has been at her street-side cafeteria under its gleaming white parasol, doing her part in Cuba's economic makeover by churning out mayonnaise sandwiches at 12 cents a pop.

Not any more. The other day, she headed to a Labor Ministry office in a crumbling old Havana mansion to relinquish her business license and receive a letter freeing her of tax liability. With that, the 35-year-old single mother closed her door on the government's attempt to add a capitalist spark to its ailing economy.

She was hardly the first. When she turned in her license, she says, the clerk behind the desk "just stared at me with a look of surprise on her face and said, 'Oh no, not another cafeteria closing down!'"

Although adamant that Cuba is simply fine-tuning socialism, not shifting to capitalism, President Raul Castro has spearheaded changes that allow Cubans to work for themselves in 178 approved activities, hire employees and rent out rooms and cars. The Cuban leader has said the measures are crucial to rescue the island's perennially weak economy from the abyss, and he has warned his countrymen that there is no Plan B.

New tax code
But less than a year into the overhaul, interviews with Cuban tax authorities, government officials and more than a dozen aspiring new business owners in Havana reveal a darkening landscape for those who took up the free market challenge. They say they face competitors offering similar products, dependent on customers who have little or no disposable income, cut off from credit or startup capital, and undone by a new tax code they say is overly burdensome.

While the government says it has moved boldly to meet these problems, a basic fact of the free market still needs to sink in on this island of 11.2 million people: that most businesses fail, even in developed countries like the U.S. where startups can get loans, buy wholesale, rent commercial space and conduct market research.

"Welcome to the wonderful world of dog-eat-dog capitalism," said Ted Henken, a professor at Baruch College in New York who has extensively studied Cuba's economy.

"Cuban entrepreneurs have the added obstacle that Cuban capitalism is still quite deformed ... and it is still based on a fundamental distrust of business owners," he said. Cuban leaders, he said, are hung up on the idea that nobody should be getting rich.

Simpson says she had no dreams of gold dust. She opened her cafe hoping to make a little money while staying at home with her 2-year-old son Liuber, but says the venture ended up costing her what little savings she had built up from remittances sent from abroad.

She says she paid 330 pesos ($13) a month in taxes, and also set aside money to pay a year-end 10 percent levy on sales, leaving her little or no money left for herself. Some months, such as July, ended up costing her money.

"I gave it a shot but I didn't get the results I wanted," she told The Associated Press. "I realized I was spending my own money, that I got from other means ... That's not how it should be."

'The market has a limit'
While success stories still abound — the chic restaurants catering to deep-pocketed foreigners, the popular gay cabaret that opened in December, the spa that offers face masks and foot massages — most Cuban entrepreneurs lack the capital to even dream of opening such businesses.

And for those who have opened the hundreds of street-side cafes, DVD stalls, shoe repair stands and tailor operations that dot many of Havana's streets, the reality has begun to bite.

Vladimir Regueiro, the vice chairman of Cuba's tax administration, acknowledged in an interview with AP that cafeterias, licenses for which are the most popular since the reforms began in October, are having a particularly tough time.

"It is one of the activities which has suffered the most closings," he said. "People think it will be easy, so you see them everywhere you go, but the market has a limit."

Regueiro said the government has responded by declaring a moratorium on payroll taxes, eliminating social security payments for elderly business owners, lowering the fixed tax rates many must pay each month, raising the amount of deductibles and slashing bulk prices.

"The system of taxes is not closed. We must be always monitoring and studying it," he said. "The idea is not to force the self-employed to close down, but rather to make it possible for them to triumph and generate enough value to support themselves and society in general. That is our way forward."

Business owners interviewed by the AP said one sign of the state's sincerity is how little contact they have had from government inspectors who caused problems and demanded bribes in past economic openings.

But the government's best efforts might not be enough.

According to statistics released in July, 178,000 people have received businesses licenses since October, joining about 147,000 that had won the right to work for themselves following a previous opening in the 1990s. That's 325,000 in a state where 80 percent are government-employed.

Regueiro and other officials have hailed the results as extraordinary and noted the government has granted more licenses than it had forecast for all of 2011.

But the pace seems to be slackening. The government's July figure for new license holders was virtually unchanged from April, with no explanation given.

And the official total does not count those opting to return their licenses. While no official statistic exists for these failed businesses, Vice Labor Minister Jose Barreiro told AP in April that around 30,000 licenses had been returned up to that point. The figure is surely higher now.

Of the entrepreneurs AP has been following since December, Simpson and Danilo Perez, a 21-year-old bootleg DVD salesman, have already closed down, and others say they too are considering throwing in the towel.

Anisia Cardenas, a seamstress, set up a stall in a neighbor's patio that she rented for 50 pesos ($2) a day. Unable to meet costs, she says she gave up on the stall in March and now works out of the steamy kitchen of her boxlike apartment in the working-class El Cerro neighborhood.

Cardenas charges as little as 10 pesos (40 cents) to take in pants and as much as 300 pesos ($12) to make a woman's blouse from scratch. She must pay about 475 pesos ($19) a month in taxes, social security and other government levies, most of which are due regardless of what she earns. She says even working seven days a week, often assisted by her teenage daughter, her monthly taxes outstrip her earnings.

"Last month I had to pay the license fee and my social security payment, and it was a terrible month for business," she said. "I had to dip into my savings to pay all those things, which is to say I had to pay even more than I made. I lost money."

Cardenas says she has noticed a huge dip in business in the past few months, which she blames on rising competition. Also, she said, raw materials are costly, forcing her to charge prices customers can't afford.

"I'm going to give it two more months, but I am thinking of turning in the license," she said. "It will be a very sad day if I do."

Even entrepreneurs who have had some success say they are working much harder than they anticipated, with relatively little to show for it.

Javier Acosta, who opened an upscale restaurant called Parthenon and employs four waiters and cooks, said business has been so-so, with one table of diners one night, two or three the next. He said the government's decision to implement a moratorium on payroll taxes has meant a reduction in taxes from 8,000 pesos ($320) a month to 3,625 pesos ($145.) The change has not meant increased riches, but "it's an important reduction," he said. "At least now I don't have to use my savings to pay the taxes, like I did the previous month."

Julio Cesar Hidalgo, who along with girlfriend Gisselle de la Noval opened a pizzeria in the front of his aunt's apartment, and was at one point churning out 40 pies a day, says they are lucky to sell 20 a day now.

"People just don't have the money for luxury items like pizza," he said.

Hidalgo said he must pay 1,800 pesos ($72) a month in taxes, regardless of earnings, and that he, de la Noval and his aunt must split profits.

In July, they earned just 700 pesos ($28) each, not much more than the average Cuban salary of 500 pesos ($20), and less if one considers that most Cubans supplement their incomes by stealing items from their workplace.

"I can't steal from myself," Hidalgo said with a chuckle.

When asked if he would do it all over knowing what he knows now, Hidalgo said he needed time to think about it. But both he and his girlfriend were adamant that they would not close down.

"We will not surrender," said de la Noval. "We've swum too far to die on the shore."


Associated Press writers Andrea Rodriguez and Anne-Marie Garcia contributed to this report.