Small businesses struggle 2 years into Cuba's free market experiment

A man getting his hair cut is reflected in a mirror on the wall of a private hair salon run by Maleidy Blanco in Havana, Cuba, Thursday, Dec. 26, 2013. (AP / Ramon Espinosa)

HAVANA, Cuba -- The dented metal pizza trays are packed away, so too the old blender that never worked when it was needed. Gone is the sweet smell of rising dough that infused Julio Cesar Hidalgo's Havana apartment when he and his girlfriend were in business for themselves, churning out cheesy pies for hungry costumers.

Two years on the front lines of Cuba's experiment with limited free market capitalism has left Hidalgo broke, out of work and facing a possible crushing fine. But the 33-year-old known for his wide smile and sunny disposition says the biggest loss is harder to define.

"I feel frustrated and let down," Hidalgo said, slumped in a rocking chair one recent December afternoon, shrugging his shoulders as he described the pizzeria's collapse. "The business didn't turn out as I had hoped."

The Associated Press recently checked in with nine small business owners whose fortunes it first reported on in 2011 as they set up shop amid the excitement of President Raul Castro's surprising embrace of some free enterprise.

Among them were restaurant and cafeteria owners, a seamstress and taekwondo instructor, a vendor of bootleg DVDs and a woman renting her rooms out to well-heeled tourists.

Their fates tell a story of divided fortunes.

Of the six ventures that relied on revenue from cash-strapped islanders, four are now out of business, their owners in more dire financial straits than when they started. But the three enterprises that cater to well-heeled foreigners, and to the minority of well-paid Cubans who work for foreign businesses, are still going and in some cases thriving.

While the sample size is small, the numbers point to a basic problem that economists who follow Cuba have noted from the start: There simply isn't enough money to support a thriving private sector on an island where salaries average $20 a month.

"Clearly, there is a macroeconomic environment that does not favour the private sector or the expansion of demand that the private sector requires," said Pavel Vidal, a former Cuban Central Bank economist.

Vidal has long called on Communist authorities to adopt a huge stimulus package or more aggressively seek capital from foreign investors. Now a professor at Colombia's Javeriana University, he says one has only to look at the trends since 2011 to see the private sector economy is nearly tapped out. After a surge of enthusiasm, the number of islanders working for themselves has stalled for the past two years at about 444,000 -- or 9 per cent of the workforce.

Even in developed countries where entrepreneurs have access to capital, loans and a wide pool of paying customers, startups are risky ventures. According to the U.S. Small Business Administration, about half of all new establishments in America close within five years, and two-thirds are gone within a decade. The failure rate of Cuban entrepreneurs followed by AP was 44 per cent in less than two years, and worse if one considers only those that relied primarily on Cuban customers.

"There's not enough money circulating in the economy in the hands of everyday people," said Ted Henken, a professor of Latin American studies at Baruch College in New York and author of an upcoming book on private enterprise in Cuba. "You're all competing for the same customers, most of whom are poor and have very limited disposable income."

Economists have criticized the Cuban government for a series of measures to crack down on what it sees as illegal activities -- including banning private movie cinemas, taxing the import of hard-to-get products in travellers' luggage, and banning the sale of imported clothing. But on Saturday, Castro came down firmly in favour of increased regulation, sternly warning entrepreneurs that "those pressuring us to move faster are moving us toward failure."

Henken and Vidal said Cuba must find a way to raise state salaries, expand state-funded microcredits and create a functional wholesale market to service the new businesses. They also noted that for a relatively well-educated society like Cuba's, there are remarkably few white collar jobs on the list of nearly 200 activities that have been legalized.

Still, not every entrepreneur is struggling.

High-end bars and glamorous new restaurants have become common in Havana, with shiny state tour buses disgorging photo-snapping travellers to sample lobster tail and filet mignon at upward of $20 a plate. Private rooms and homes that rent to foreigners can go for $25-$100 a night, less than most tourist hotels. Cubans with the means, and the business sense, to tap into the gravy train can do very well.

Chef-owner Javier Acosta sank more than $30,000 into Parthenon, a private restaurant catering to tourists and diplomats. He struggled at first, telling the AP back in 2011 that there were nights when nobody came in and he and his four waiters just sat around.

But the restaurant slowly gained a reputation, in part because Acosta makes a potent Cuban mojito and offers a special suckling pig that can feed up to five people for $50.

These days, Acosta is expanding. He recently added tables in a new room decked out with mosaic tiles and faux Greek pillars, and plans to build a roof deck. He even has started advertising, paying $300 a year to have his establishment included in a tourist magazine.

"I haven't yet managed to recover my initial investment and the other money we've put into the place," the 40-year-old said. "But in two or three more years maybe I can."

Even more humble operations can do well, as long as they have some access to foreign money. One woman who rents an apartment to foreigners for $25 a night in the upscale Vedado neighbourhood says her business provides a stable income that supports her and allows her to help her son and granddaughter.

Two women who sell $1.25 box lunches to Cubans and foreigners in a building in Old Havana with many international firms and consular offices have managed to stay afloat despite a sharp drop in customers following the departure of several companies, and what they say has been a steady rise in prices of key ingredients like black beans, rice, cooking oil and pork.

"This has become difficult," said Odalis Lozano, 48. "But we're still here, because we can always make some money."

For those without access to that foreign cash line, the results have been grim. Besides, the failed pizzeria, a DVD salesman, seamstress and street-side cafe owner who allowed the AP to tell their stories shut down after less than a year in business, citing high monthly taxes, a lack of customers and limited resources and business sense.

The only two operations that rely on everyday Cubans for revenue which remain in business are gymnasiums. One is run by Maria Regla Zaldivar, who in 2011 was giving taekwondo classes to children in Nuevo Vedado and dreamed of converting a ruined dry cleaning factory into a proper gymnasium. The factory remains a crumbling shell, but Zaldivar said her business continues. She declined to grant a formal interview, but said in a brief phone call that she had rented a small space near her apartment and continued to give classes.

The other success story belongs to Neysi Hernandez, the mother of Julio Cesar Hidalgo's girlfriend. Hernandez opened a simple gymnasium for women in the courtyard and garage of her home in Havana's La Lisa neighbourhood, charging the equivalent of $5 a month for membership. Two years later, she has 25 paying clients and ekes out a small profit.

Hernandez says her customers are loyal, despite the fact the gymnasium lacks basic amenities like a shower room, lockers and towels. Unable to afford imported equipment, Hernandez uses sand-filled plastic water bottles for weights. Her three exercise bicycles and mechanical treadmill are creaky and aging.

"My gymnasium is modest, but they like it," Hernandez said, adding she has dreams of one day installing a small massage room and sauna. "A little bit at a time."

For the pizza man Hidalgo, however, the experience with private enterprise has been a bitter one. He says he lost between $800 and $1,000 on the pizzeria. He is appealing a $520 fine levied by tax authorities who accuse him of understating his profits, even though the business failed.

He has had bouts with illness, and has been unemployed since the pizzeria closed in April.

Hidalgo says he has not given up on the idea of opening a new business one day. But he is also setting his sights beyond Cuba's shores.

"What I wanted was to work and make money so that I could live a normal life, have money to buy myself shoes, eat, and go out with my girlfriend," Hidalgo said, punctuating each modest desire with a flip of his hand and a rueful smile. "I hope that kind of work materializes in my country, but if the opportunity presents itself to work somewhere else, I won't turn it down."

Recently, Hidalgo's girlfriend, Gisselle de la Noval, 25, took out a license to operate a nail salon in the space once occupied by the pizzeria. The salon has been open a matter of weeks and it is too soon to know if it will do well. But she says she is content, charging about 40 cents for a manicure and slightly more for a pedicure.

"I don't miss the pizzeria, but I am sad it wasn't a success," she says with a shrug. "But I am young, so whatever. Now I'm dedicated to this."

Associated Press writers Michael Weissenstein in Havana and Paul Haven in Mexico City contributed to this report.