> Posted by Josh Goldstein, aka Mr. Provocative

With up to one million state workers moving off the government payroll in the next year,  President Raúl Castro and the Cuban leadership seem committed to strengthening the microenterprise and small business sector—with self-employment now the certain future of so many Cuban workers.  Could remittances from the United States play a key role in providing finance to these new start-up enterprises, in the absence of private or public banks in a position to lend?

On January 19th, the Center for Financial Inclusion, in conjunction with the Cuba Study Group sponsored the “Cuba Small Business Summit,” which was hosted by the Council of the Americas, at its headquarters in New York. The summit focused on the outlook for profound change in the employment picture in Cuba in the wake of a new commitment to economic reform announced in September 2010 by the Cuban government.  One question was on everyone’s mind. Were the newly enacted economic reforms beginning to make a difference in the lives of ordinary Cubans?

The answer from the panel of experts, many of whom had recently visited Cuba, was a confident, if anecdotal, yes. Most compelling was the consensus finding that the government was doing everything it could to expedite the issuing of business licenses to the growing number of people wanting to establish micro-businesses—up to 75,000 since October. Whatever the number, more and more entrepreneurs are seen hawking their wares and services in the streets, and unlike in the past, the state media is no longer excoriating them for being “ingrates” and “pilferers,” but speaking of them with respect, if not reverence. This represents a sea change in the official view and the sixth Communist Party Congress in April will focus on the need for economic change and may go even further in endorsing the growth of private enterprise. (Already, the government has lowered remittance transaction costs.)

Fortuitously, on the eve of the summit, President Barack Obama used his executive authority to open the way for a vast expansion of remittances to the island—even now approaching more than $2 billion a year in hard currency and another $2 billion in merchandise remittances.  Residents of the United States will for the first time be permitted to remit to nonrelatives up to $500 per quarter, per recipient—with no limit on the number of possible recipients. At least in theory, remitted money could serve as a source of working capital for legions of new micro- and small businesses. Remittances could answer in the short term one of the greatest challenges of creating a microenterprise and small business sector from scratch in Cuba—the lack of financial capital. Merchandise remittances might also provide access to some key goods at near wholesale prices—the lack of wholesale markets being identified as a huge obstacle to business creation on the island.

And remittances will certainly increase in importance for the newly self-employed by cushioning the transition from cradle-to-grave social welfare (however meager) provided by the Cuban state, to a scary new world where the safety net is full of holes.

It is important to emphasize that most of the remittances flow to white Cubans on the island from their white relatives in the States.  Meanwhile, few members of the very large (possibly majority) Afro-Cuban population receive remittances, so this important group may have the most to lose if the economic reforms and privatization are successful. (For example, those not working for the state lose free childcare.) Race and class issues have clearly deepened over the last 15 years.

There are a number of obvious objections to an unorthodox remittance-fueled route to financing microenterprises that do not have easy answers:

1.    Remittances would come in the form of grants, not loans, and would therefore not wean Cubans from the habit of dependency.

2.    In other countries it has proved difficult to mobilize remitted money for productive purposes, as it is most often used for immediate consumption.

3.    The likelihood of unacceptably high and growing income inequality between the haves and the have-nots, who do not benefit from remittances, is not a small one and could spark understandable resistance to needed reform from low-income people, especially if there are racial issues underlying the differences. The solution might be the creation of a dedicated pool of remittance money by the Cuban Diaspora and others, targeting vulnerable populations.

Surely, the preferred alternative would be the rapid emergence of a well-regulated banking sector providing quality credit and savings products customized to the Cuban market. But this is unlikely to happen anytime soon, and it will certainly not happen overnight. In the meantime, $2 billion plus in remittances may be an indispensable driver of a new private sector in Cuba, however imperfect.