Cuba reins in entrepreneurs who take free enterprise too far

JULY 31, 2017 12:25 PM

A Coral Gables business consultant watched one day in June as Cuban authorities carried out chairs, tables, plates, sound systems and bottles of imported liquor from a popular private restaurant near the U.S. Embassy in Havana.

“They took everything except the drywall and loaded it into a green truck,” said Saul Cimbler, president of U.S.-Cuba Business Advisory. He happened upon the scene outside El Litoral — a stylish paladar known for its high-end cuisine and customers — just as officers from the Technical Department of Investigations were carting off its fixtures.

Neighboring business owners told him the restaurant got in hot water because of money-laundering allegations. Also problematic, they said, was that the liquor didn’t seem to come through official government channels and the restaurant was paying some of its employees off the books. El Litoral diners also noticed that the restaurant seemed to play a little loose with the rules. Servers sometimes told them: If you don’t have CUCs (Cuban convertible pesos), we’ll take dollars. Greenbacks aren’t legal tender in Cuba.

Two other private restaurants — the nearby Dolce Vita, an Italian restaurant with water views, and Lungo Mare, another Italian restaurant a little farther along the seaside Malecón — also were cleared and shut down in an apparent crackdown on entrepreneurs who have taken the definition of free enterprise too far.

Several other Havana paladares and at least two in Camagüey province in central-eastern Cuba also have reportedly been closed.

At Havana’s Lungo Mare, all the tables are gone from the covered terrace where patrons once sat under a red-and-white-striped awning and ate pizza, arugula salad and pasta they swore had to be imported from Italy. AlaMesa, a dining app developed by a group of young Cuban entrepreneurs, now lists both Italian restaurants as “fuera de servicio” (out of service).

The public face of El Litoral and also the reputed owner of Lungo Mare and Dolce Vita is Alejandro Marcel Mendivil, who neighbors say has been arrested. The independent Cuban digital publication 14ymedio, however, reported that the name on the license for El Litoral is Mendivil’s mother, Nardis Francisca Mendivil, who denied ownership of the other two restaurants.

Owning a few restaurants wouldn’t be a big deal in most places. But in a recent address to the National Assembly of People’s Power, Cuban leader Raúl Castro made it clear that rules will be enforced, and anyone who hopes to start a mini-empire with multiple private businesses is mistaken. New regulations, he said, would be forthcoming.

The National Assembly, Cuba’s parliament, passed updated economic guidelines during its recent session that said a “concentration of property and financial and material wealth” wouldn’t be permitted in the non-state sector.

Even though many Cuban cuentapropistas (the self-employed) had hoped for an expansion of permissible business activities, the restaurant closures are a cautionary tale for others in Cuba’s nascent private sector. About 543,000 licenses have been issued to self-employed workers, and there are 2,000 private restaurants and around 22,000 rooms being offered in Cuban casas particulares (private bed and breakfasts).

This sign is an indication of a room for rent in a private home. Running a casa particular is popular among Cuba’s self-employed workforce.
Mimi Whitefield
The crackdown and the possibility of a raft of new regulations are “surprising and unfortunate,” said Ted Henken, a Baruch College professor and co-author of the book “Entrepreneurial Cuba: The Changing Policy Landscape.” “This is exactly what the private sector doesn’t need, and it runs counter to the economic needs of the country, too.

“This is a big bucket of cold water for the cuentapropistas,” he said. “Entrepreneurship is about being creative, innovative, creating new product lines, not more rules.”

Castro didn’t mention the closed restaurants by name during his July address to the National Assembly, but it was clear he was talking about owners of private businesses who the government thinks have crossed a line.

“Malfeasance has been committed; there is information about cases where the same person already has two, three, four and even five restaurants — not in one province, but in several,” Castro said. He also mentioned an entrepreneur who had traveled more than 30 times to different countries.

“Where did he get the money? How did he do it?” Castro asked.

Cuban leader Raúl Castro takes part in an event celebrating Revolution Day in Pinar del Río on July 26, 2017.
Alejandro Ernesto AP
But despite the problems in the non-state sector, Castro said they shouldn’t be used as a pretext to criticize a just decision to allow self-employment.

Cuba began a small experiment in self-employment in 1978, but it was pretty much over by the mid-1980s. After the collapse of its old benefactor, the Soviet Union, Cuba went into an economic tailspin and it brought back self-employment on a limited scale and allowed private restaurants and bed-and-breakfasts in the 1990s to sop up some of the unemployment.

But then as the economy improved, it pulled back on its flirtation with the private sector. In 2010, Raúl Castro once again embraced cuentapropismo as a way to move hundreds of thousands of people off bloated state payrolls and deliver a greater variety of goods and services to Cuban consumers.

While Castro said Cuba doesn’t plan to roll back self-employment, he also emphasized in his speech that it is “essential to respect the laws, consolidate advances, make the positive aspects — of which there are more than a few — more widespread, and resolutely face the illegalities and other deviations.”

“What I see are mixed signals where the government wants to position itself as open and receptive to the private sector but to remind everyone that at the end of the day their livelihoods depend on the state and it can control the growth of their businesses and make sure legal requirements are upheld,” said Ted Piccone, a senior foreign policy fellow at the Brookings Institution.

“The government feels a need to keep the private sector on a short leash,” he said. It’s all part of “the fundamental battle between those in Cuba who want the status quo and those who want change.”

“Cuba is the only country in the world that persecutes wealth and not poverty,” said Omar Everleny Pérez, a Cuban economist. But he added: “I don’t think the new regulations will be so harsh that they’ll be a disincentive to private business.”

Last October, the Havana provincial government temporarily suspended licenses for new private restaurants, stepped up restaurant inspections and then called in 129 restaurant owners to discuss irregularities in their operations, such as exceeding a maximum of 50 seats, evading taxes, buying supplies on the black market, disturbing neighbors by staying open past 3 a.m., and running bars/nightclubs disguised as restaurants.

The rooftop bar of El Cocinero is a popular stop before dining in this private restaurant. In October, the Havana provincial government temporarily stopped issuing licenses for new paladares — private restaurants.
Mimi Whitefield
Private taxi drivers also simmered this past winter after the government imposed price control measures on set routes.

In his speech, Castro also took aim at experimental non-agricultural cooperatives. Initially, the government allowed beauticians and barbers who were state employees to take over and run their own shops as private cooperatives. Later the concept was expanded to include construction and other types of cooperatives.

But approvals for private cooperatives stalled at 498. As of June, 403 private non-farm cooperatives were operating, said Pérez.

Josefina Hernandez cuts a customer’s hair next to a poster of Fidel Castro hanging in a barber shop in Old Havana in 2010. That was the year Cuba began turning over some formerly state-run barber shops and hair salons to the employees who work in them.
Castro said in the haste to set up these new cooperatives, proper preparations weren’t made and errors were committed. He singled out construction cooperatives as problematic.

“The state construction companies are being left without workers because the construction cooperatives pay more. They have become competition for the state,” Pérez said.

Among other issues with the cooperatives discussed at a recent Council of Ministers meeting was cuentapropistas’ use of raw materials, goods and equipment pilfered from state enterprises or obtained by other illicit means. But without a workable wholesale network where the private sector can obtain supplies at reasonable prices, Henken said, “it creates an environment that forces people into the black market and to commit other irregularities.”

The dueling messages that the government is sending out, said Henken, are that it wants more prosperity for the non-state sector, “but it doesn’t want real prosperity that would challenge authority and control.”