'Bright future' ahead? Cuba's economic changes create new entrepreneurs HAVANA - Where some might see a rotten window frame pocked by termites, Julio Cesar Hidalgo envisions a polished takeout counter, the rich smell of garlic and oregano wafting out onto a warm Havana street. In his mind's eye, the coarsely-laid concrete covering the surfaces of his shabby living room is already a gleaming white countertop laid with sandwiches, pastries, and balls of yeasty dough; a gas oven in the corner bakes mouthwatering pizza. Franklin Reyes / AP, file Julio Cesar Hidalgo takes a break after preparing pizza at his newly opened Baldoquin's Cafeteria, run out of his home, in Havana, Cuba. After Cuban authorities announced last September that they were opening the island's closed Marxist economy to a limited amount of private enterprise, Hidalgo was one of the first to line up for a new business license. Ever since, the 31-year-old baker has been transforming the front of his narrow apartment in a run-down section of Old Havana into a standup pizza joint and cafe. In a land of modest dreams, Hidalgo says his is simple: to be the master of his own labor. "It's not going to make me rich," he laughs, adding that he may make only a little more than he does now in a $12-a-month job at a state-run bakery. But I'll be working in my own home and I'll be my own boss. Hidalgo and tens of thousands like him are chasing their entrepreneurial ambitions in Cuba's year of economic change, hopeful that a sweeping fiscal overhaul announced last year by President Raul Castro is for real. The Cuban leader said the country would lay off half a million state workers by March 31, while granting licenses for a broad, if slightly random, array of businesses. The new entrepreneurs face towering challenges in getting their enterprises off the ground, including high taxes, a lack of raw materials, an uncertain customer base, labyrinthine bureaucratic rules and limited access to startup capital. Yet, their success or failure will go a long way in determining the future of Cuba's revolution. The Cuban state now employs 84 percent of the island's workers and controls 90 percent of the economy in one of the world's last bastions of Soviet-style communism. If the free-market experiment works, the cash-strapped government could shed millions of dollars from its payroll while boosting much-needed tax revenues and creating a new business and consumer class. It could also legalize part of a booming black market that provides everything from sausages to satellite television. If the experiment fails, however, this already disillusioned and dysfunctional country will have turned hundreds of thousands of people out of their government jobs and into an uncertain future. All of this in the same year that Raul Castro turns 80, and his older brother Fidel is widely expected to step down from his final official post as head of the Communist Party. Through January 7, more than 75,000 people had received new licenses, joining about 143,000 private sector workers left over from the island's last dabble with capitalism. Government economists say they hope a quarter of a million new entrepreneurs will eventually sign up. Almost all the new businesses are small, operating out of homes or on street corners. But the stakes for Cuba couldn't be higher, with the economy weighed down by crippling disorganization, a broken infrastructure, endemic corruption and an enormous labor force that has become accustomed to getting paid very little - and doing very little in return. Traveling to Cuba is now easier for Americans and Cuban exiles because the government has relaxed years of restrictions on who can visit. Among the thousands who have taken the leap into private enterprise are Maria Regla Saldivar, a 52-year-old black belt in Taekwondo who plans to open a gymnasium in the ruins of a destroyed laundromat, and Javier Acosta, who has started an upscale restaurant catering to tourists. There is Danilo Perez, a 21-year-old accountant who has gotten a license to buy and sell bootleg DVDs in Havana's hardscrabble El Cerro neighborhood, and Anisia Cardenas, a seamstress with a license to make clothes. Many others are giving manicures, painting homes, fixing cars and driving taxis - services on the list of 178 officially sanctioned private activities. Some of the other opportunities are more obscure, such as fresh fruit peeling. And some are so specific they refer to just two people, like No. 159, which makes it legal to be part of the Amor Dance Duo. Even the Cuban government - in an internal document to party leaders obtained by The Associated Press - warned that many of the businesses will fail within a year. And many Cubans say privately that they will wait and see if ventures such as Hidalgo's prosper before jumping into the fray themselves. But for now, optimism and excitement reign among the new entrepreneurs. We are going to be a success. I am sure of it," says Gisselle de la Noval, 20, Hidalgo's bright-faced girlfriend, who will work the till at the pizzeria and share in its profits. This (economic) opening was marvelous ... I think those who know how to take advantage of it will have a bright future. Judy Gross, whose husband Alan has been in a jail in Cuba for two years, talks about his conviction and the struggle to bring him home. Dismal economy Cuba's push to open its economy to private enterprise does not indicate an ideological change of heart among its Communist leaders. It is based on necessity. The economy has been slammed by the global economic downturn, a drop in nickel prices and the fallout from three devastating hurricanes that hit in quick succession in 2008. Revenues from tobacco, rum and sugar have fallen, as have remittances from Cubans living overseas. Prevented from borrowing from international monetary institutions by the 48-year U.S. trade embargo, Cuba was forced to reduce food and other imports from its main trading partners by 37 percent. The economy grew by just 1.4 percent and 2.1 percent respectively in 2009 and 2010, a terrible performance for a small, developing country - and figures many economists dismiss as fantasy anyway, since Cuba counts state spending on social programs when calculating economic growth. Even state-run newspapers have been filled with stories of extraordinary inefficiency, with dozens of "watchmen" paid by the state to guard fallow fields, or 30 emergency workers at a hospital standing idle because all have been assigned to a single ambulance. "My fear is that the Cuban state is completely broke," says Uva de Aragon, a Cuba expert at Florida International University, who is closely watching the free enterprise experiment. I don't want to think about what will happen, even in the medium-term, if it doesn't work. Shortages are everywhere: in the sparse shelves at state-run supermarkets; along the unlit city streets and empty, rutted highways; in the antiquated factories on the outskirts of cities and in the tractorless farms dotting the countryside, many still relying on oxen to till the earth. The country of 11.2 million people has the lowest Internet penetration in the Western Hemisphere. The state pays workers salaries of about $20 a month in return for free health care and education, and nearly free transportation, utilities and housing. At least a portion of every citizen's food needs are sold to them through ration books at heavily subsidized prices. Getting by on those salaries is such a struggle that stealing from state-owned companies is endemic, a major perk of having a job, and a frightening loss for those about to be laid off. The thievery is also a huge cost to the government, one of the reasons the country finds itself in such dire economic straits. Since taking over from his ailing brother Fidel in 2006, - first temporarily, then permanently - Raul Castro has been whittling away at the subsidies. In recent months he's cut free workplace lunches, removed potatoes, peas, cigarettes, soap, detergent and toothpaste from the ration book, and suggested the whole system must eventually be scrapped. Just how bad things had gotten became apparent in September, with a red-letter headline in the Communist Party newspaper Granma that the state would lay off a tenth of the island's work force, while opening up the private sector. Days later, authorities published the list of 178 activities in which new licenses would be issued. The list steers clear of activities that could present a threat to the state's monopoly on most economic activity. There are no licenses for independent lawyers, bankers or engineers, nor for Cubans to work privately in strategic sectors such as mining or hotel management. After decades of rule under Castro, citizens of the communist island nation are enjoying new freedoms such as buying property, owning businesses and openly participating in religious gatherings. TODAY's Natalie Morales reports from Havana. Still, there is no overestimating the scope of the change. For the first time since the 1960s, Cubans will be able to hire employees. They may rent out their homes and cars more freely, and hope to one day get business loans from state banks. Raul Castro has even called a rare Communist Party Congress, scheduled for April 16-19, in which the reforms will be enshrined as the country's only way forward. The new entrepreneurs Hidalgo is a round-faced man with a permanently amused look in his eyes. Unlike most Cubans, he has been down the free enterprise road before - with disastrous results. Cuba last opened up to some private enterprise following the collapse of its Soviet benefactor in the 1990s, which ushered in an era of extreme hardship known as the "Special Period." In 1997, a 17-year-old Hidalgo and an older cousin opened a pizza joint in the same dingy apartment, only to find it was impossible to buy the cheese, flour and tomato paste they needed in state-owned shops. They turned to the black market, and ran into trouble. "The inspectors would show up ... sometimes once a week, sometimes twice a week," Hidalgo says. They demanded receipts, and when I couldn't provide them they confiscated everything. They forced us to close. In those days, Fidel Castro decribed the reforms as a necessary evil and quickly scaled them back once the crisis had ebbed. From a high of 209,000 license holders for private enterprise in 1996, Cuba's tiny entrepreneurial class had dropped by a third by 2010. Raul Castro has vowed it will be different this time around, telling Parliament in December that "the life of the revolution is in the balance." The government has pledged an initial investment of $130 million to purchase the raw materials new businesses will need, and Hidalgo pointed to a stack of unopened boxes of white tile he purchased for $8 a box in a state-owned shop. Still, the path to self-employment promises to be tough. Hidalgo has already invested $700 in the pizzeria, largely with a gift from a cousin in Atlanta. Given the price of ingredients, Hidalgo thinks he'll have to charge upward of 20 pesos ($1) for a personal-size pizza with olives and oregano - a small fortune for anybody living strictly on a Cuban government wage. And he's already got competition: Two neighbors on his rundown street have licenses to open cafes. The government has made it easier for Cubans to rent space to each other, but there is no retail property available for private citizens, and few would have rent money even if there was. Most people either must carve out part of their home, or come up with creative ideas to get around the real estate shortage. Saldivar, the martial arts black belt, beamed with excitement as she walked through the skeleton of a building that was once an industrial laundry in Havana's Nuevo Vedado neighborhood. She is petitioning the government to turn over title to the property so she can transform it into a gymnasium, and meanwhile, is using a small park nearby to hold fitness classes. The building has no roof or walls, and the oil-stained concrete floor is littered with truck-sized pieces of rusted machinery, but Saldivar is not deterred. "I'll fix it up," she insists. Her bigger worry is that authorities have not included martial arts in the list of acceptable activities. Saldivar says she will either have to limit her classes to aerobics, or "inventar," a Cuban specialty that roughly translates as "to improvise." "I don't plan to give Taekwondo classes," she deadpans. "I'm teaching the kids 'Quimbumbia'," Saldivar's word for a discipline remarkably similar to Taekwondo. Making life-long dreams come true? Another challenge facing the private sector is taxes, which can be as high as 50 percent, not including social security. Many prospective entrepreneurs say the taxes will make it difficult for new businesses to break even, and could also scare many people already making a living on the black market from becoming legit. One woman, who has legally rented out rooms in Havana's trendy Vedado neighborhood since 1994 and describes herself as a strong supporter of the revolution, complained the new system significantly increases her taxes: She will pay double the current $108 per room, per month. "I'm thinking of turning in my license," she says, asking that her name not be used for fear of attracting the attention of authorities. What will be left for us after we pay the government? The burden will not be as high for some, however. For cafes, gymnasiums and many other activities, business owners will pay a fixed monthly fee of somewhere between 100 and 350 pesos ($5-$17), plus social security and payroll taxes. At the end of the year, most will be asked to declare their income under oath and pay a percentage of the profits. But in a nearly all-cash economy, few are expected to give an honest account. Phil Peters, a specialist on the Cuban economy who is vice president of the Arlington, Virginia-based Lexington Institute, says the government must walk a thin line between zealously policing the private sector for tax dodgers and black marketeers, and sucking the life out of the economic opening before it gets off the ground. He says the government must make good on its pledge to create a system of wholesalers, and find a way to extend microcredits to small businesses. Eventually, employee-owned "cooperatives" could take over inefficient state enterprises. "If the government is serious about laying off half a million unproductive workers, then it has a very strong interest in making the entrepreneurial sector work," Peters says. Already, there are signs that the other major prong of the reform effort - the layoffs - are going more slowly than anticipated. Four months after the cuts were announced, it is unclear how many people have actually lost their jobs. Midlevel managers told AP that workers' commissions set up to decide who is expendable have been slow to hand over names. Cubans familiar with deliberations in several ministries and state-owned companies say leaders - including some Cabinet members - have been reluctant to shed thousands of their employees. "It is a difficult and dangerous process, particularly if it is not handled well, or if there is favoritism or corruption," a worker on one of the commissions told AP, speaking on condition of anonymity for fear of losing her job. Perhaps the strongest warning that the reforms do not go far enough has come from two prominent economists at the state-run Center for Cuban Economic Studies. In a rare opinion piece published in a small Catholic magazine, Pavel Vidal Alejandro and Omar Everleny Perez warned that there are not enough approved free-market activities to absorb half a million laid-off state workers, and not enough white-collar jobs for an educated population. They said it was hard to imagine that illiquid state banks could make good on the government's pledge to extend microcredits, and urged the state to reach out to foreign investors. On a small scale, such investment is already happening. Several entrepreneurs said they had received seed money from relatives overseas, most of them in the United States. A recent decision by the Obama Administration that allows any American to send up to $2,000 a year to Cuba could make such loans easier. Even if these new businesses get off the ground, it remains to be seen whether they will have enough customers, with so many newly unemployed. But entrepreneurs such as Hidalgo are riding a wave of hope. Hidalgo waits as a van pulls up carrying a gas oven, a loan from his girlfriend's mother. He says he expects to be open for business by the end of February, and plans to call the pizzeria "Baldoquin," after his grandfather. After more than a decade fantasizing about his own business, Hidalgo says he can hardly contain himself. "Just imagine it!" he gushes, thinking of that first pizza out of the oven. It will be the realization of a dream I have held onto forever.