Cuba's Emerging Middle Class And Growing Private Sector

A client looks for clothes in a privately-owned shop in Havana, on October 4, 2013. Cuban Labor Vice Minister Marta Elena Fei
A client looks for clothes in a privately-owned shop in Havana, on October 4, 2013. Cuban Labor Vice Minister Marta Elena Feito said Tuesday that the private traders who sell imported goods will be fined. AFP PHOTO/Yamil LAGE (Photo credit should read YAMIL LAGE/AFP/Getty Images)

Yes, you read the headline correctly. Cuba has an emerging middle class. And it continues to grow and prosper. It may even be the factor that most affects a transition from a socialist state to a more open, democratic society.

A new report released by the Brookings Institution, Soft Landing in Cuba? Emerging Entrepreneurs and Middle Classes, confirms that any way you cut it, almost “40 percent of the islands occupied labor force (totaling 5.01 million in 2011) would fall within the middle class.” Richard Feinberg, the author, suggests that this expansion of the self-employed workers, coupled with the greater economic openings that took place once Raul Castro took over as head of state, all point to a potentially positive basis for political transition.

As Feinberg put it, “the old narrative – that Fidel and Raul Castro had to pass from the scene before real change could occur – has been discredited by these current trends.”

The rebirth of private business

The rebirth of private business took place in 2008. Raul Castro made a pragmatic decision to enlarge the private sector as a way to absorb a bloated public sector, and also a way to reach disaffected youth.

Private sector employees, “trabajadores cuenta propia” or TCPs are now permitted to work 201 types of jobs that qualify for government licenses. Municipal authorities issue the licenses. Among the authorized categories are such standard positions as barber or locksmith, but there are also more humorous ones like “operator of children’s fund wagon pulled by pony or goat,” to “habaneras” (women posing in colonial attire).

There is also a robust informal sector of repairmen and vendors who do not want to deal with government licenses or tax collectors. While they run the risk of getting shut down, the resiliency of these workers is clear as this sector continues to attract workers every day. Together with the TCP group they represent a large swath of the employed workers in the country.

State owned enterprises (SOE), the main form of competition to these new workers, are also being granted more autonomy from ministries. Today the government acts more as a holding company. In 2014 the report notes that SOEs will be allowed to retain up to 50 percent of their profits, and set some investment priorities and wage rates. This is a far cry from the old Communist planned economy of the past.

Who is Cuba’s middle class?

Official Cuban statistics state that 1 million people already work in the private sector, or 20 percent of the employed workforce of 5 million.

What makes some of these workers middle class is based on per capita daily income. The threshold income for this ranking is $10 per day, according to the World Bank. Latin America and the Caribbean now have more than 152 million people that fall in this category. And while Cuba is not a member of the World Bank, the Brookings study extrapolates data that would place 30 percent of Cubans as middle class by their calculations.

But the Brookings report goes even further arguing that the number of middle class Cubans is really around 40 percent since the figure must be adjusted to acknowledge the very low rate of income inequality on the island. This is not the case for the rest of Latin America.

The down side of being part of the Cuban middle class is that they are not consumers because of the lack of “stuff.” They still live in a socialist society and a partially controlled economy that has limited access to consumer goods, mainly due to the U.S. embargo.

Cubans still aspire to owning a computer, having access to the internet, or have their own cell phones. In this respect, they do not resemble the consumers of Brazil, Mexico, or Peru’s rising middle income groups. But that could change once a transition gets underway. And of course, the black market for goods is thriving in Cuba.

Funding private businesses in Cuba

Where is the money that is helping new private enterprise development? It is not coming from the state.

There is little evidence that Cuban banking is working as a source of credit to the new entrepreneurs. But there is an important and hopeful development in terms of access to funds that is going untold. It offers a glimpse into the changing nature of remittances to Cuba.

There is a growing reconciliation taking place among families once divided by Revolution. Those who left Cuba are coming back to support those who remained behind. And rather than send Uncle Jose a couple of bucks each month, Cuban-Americas are making larger investments in small business start ups of family members in Cuba. They are the primary source of investments dollars the rising Cuban middle class businesses.

There is now a flow of private capital from families arriving daily (more than 400,000 Cuban Americas have visited the island since the Obama administration changed the policy for family visits in 2009). Since 2011 non-family members have also been allowed to send as much as $500 every three months to non-family members for a total of $2,000 yearly to “support private economic activity.” While these do not end the policy of embargo, they are creating an important resource for those seeking to open up the economy.

Why does this matter? Because when a nation has a middle class they can become an important force for modernization. They will demand more open and transparent government. They will also seek better government services for their families and their businesses.

Ultimately, middle classes in Latin America and globally are considered to have strong pro-democracy preferences. While there is no guarantee that an emerging middle class will result in pressure for greater democracy in Cuba, there is evidence that the trend could certainly auger positive change in the years to come.

So will the rise of the much feared “petty bourgeoisie” that Fidel worked hard to prevent become a reality in the new Cuba? For the time being, those who have taken on self-employment by official channels and registration, or those who work informally, are leading the way out of an economic morass and can open a path to the end of the island’s isolation.

This is an important step, but the process of transition will take time.

The hope however is no matter when such a change occurs these new member of the middle class will opt for a “soft landing” as the Brookings report advocates, rather than violence and social unrest.

Ultimately, helping Cuba return to the community of American states will take more than small businesses. But these changes are significant are will unlikely be reversed any time soon.



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