Cuba Import Tax Hike | Biting the hand that feeds
In our recent article concerning the introduction, then slow winding back of liberties in Cuba, we offered evidence that Raul Castro was simply opening the door (again) due to the Pope´s visit. Much like his brother did a decade earlier. The door snapped shut about 1 year after the Pope had left in Fidel’s case. Raul has barely let 6 months pass and already the budding entrepreneurs and pseudo self employed Cubans are seeing the start of the roll back.
You see, to run any business everyone knows you need raw materials, products or items to assist in providing services. A restaurant needs, for instance, vegetables, meats, fish or pasta to offer whatever is on the menu. It also needs plates, cutlery, napkins, etc. Somebody offering cell phone repairs needs diodes, chips and specialist equipment while, the lady doing women’s nails from home, needs the acrylic nails, polish and other things. Most of you reading this will say, “So what - big deal” they can go to the wholesaler and buy them, right? WRONG
You guessed it, in Cuba the wholesaler is Mr. Raul Castro and the entities he runs. There is no “alternative” type of free enterprise so, you buy from a “Raul Inc” operated store or you buy nothing at all.
The perverse angle of Cuba´s latest “freedoms” is that, in order to set up the business, buy the materials and start the enterprise, the newly self employed must spend all their money at a Raul Castro run store at 240% (or more markup), guaranteeing these mentioned “freedoms” be a financial windfall for Cuba´s cash strapped government.
But, what’s these whispers we here from Cuba´s council of ministers? There´s a drawback? One that the government overlooked?
Yes, and its being addressed this week with new and draconian import taxes of up to 12 USD a kilo (yes they are charging by the kilo!).
Looking back to just before the Pope´s visit, handing out more “freedoms” seemed pretty cut-and-dry for the government. They probably debated - Let´s use the Pope´s visit to erect some smoke and mirrors that allow people to open small businesses, get them to ask/beg for money from family abroad to do it. They then walk into our (government) stores where everything is at astronomical margins and we calculate the windfall. Alas, as any economist (outside of Cuba) could have predicted, what really happened was the nascent free market, allied to the extremely low disposable income of Cubans (measured in 10´s of dollars a month not 100´s), dictated that Cuban entrepreneurs needed to find basic materials at a better price. Better said, they needed to acquire the things they wanted for their new business at more acceptable market prices than the government’s 240% markup and, as such, the market dictated the explosion of “Mule” sector. In other words, people traveling to Cuba with goods under the request or preorder basis of these newly self employed individuals.
The Cuban governments reaction has been swift and, for some devastating. Just like in medieval times, sieging the fortress of the enemy often produced the desired results. Closing down the inhabitant’s access to food usually meant surrender… In much the same way, Monday´s massive tax hike on items brought into the country will serve to destroy the nascent private sector and force those who try and continue to return to government stores and, the exorbitant margins. While others who operate special sectors, in which, the items they need are simply not even sold to the general public, will now be doomed. Their lifeline with the outside world severed overnight by the $12 per kilo charge introduced this week.
Economists will agree, it’s truly quite ingenious, instead of revoking licenses and making things hard for new businesses, as was the case a decade ago. This time, the newly self employed have been dealt a blow of financial warfare, right below the belt.