MR. KOJO NNAMDINearly two years ago, Cuba's President Raul Castro introduced a series of reforms to slash public payrolls and boost entrepreneurship on the island. After years of living in an economy dominated by government enterprises, Cubans responded with enthusiasm. They set up their own restaurants, snack bars, repairs shops and taxi stands. In fact, the private sector has grown a whopping 145 percent since those reforms were announced. But steep new taxes on goods coming into Cuba have thrown a curveball at the island's budding business people.

MR. KOJO NNAMDIAnd hundreds of thousands of people coming off state payrolls are finding limited job options. So are these just the growing pains of one of the last Soviet-style economies in the world? Is Cuba's plan enough to get it on its feet? And how could these moves contribute to a thaw in U.S.-Cuba relations? Joining us in studio to discuss this is Tomas Bilbao. He is executive director of the Cuba Study Group which is a D.C.-based organization of Cuban business and community leaders engaged in Cuba policy and development. Tomas Bilbao, thank you very much for joining us.

MR. TOMAS BILBAOThank you for having me. It's a pleasure.

NNAMDIAlso with us in studio is Philip Peters. He is vice president of the Lexington Institute in Arlington, Va. He's also an advisor to the Cuba Working Group in the U.S. House of Representatives. Philip Peters, good to see you.

MR. PHILIP PETERSThanks for having me.

NNAMDIPhilip, almost two years ago, we mentioned Cuban President Raul Castro introduced a series of measures to slim down the state payroll, allow more freedom for Cubans to run businesses. Can you give us an idea of what's happened since then, maybe starting with some cold hard data?

PETERSWell, yes. Raul Castro has made very clear that he would like to see the Cuban economy improve, that the state sector's very unproductive, and he set out a pretty ambitious reform agenda that carries a whole plan that goes all the way through 2015 to reduce the state sector and to build up a private sector. And he's got a good start on that.

PETERSThey cut 110,000 public employees in 2000 -- they plan that this year. They cut 140,000 public employees last year. And they've added, since the end of 2010, about 220,000 to the private sector in the form of small scale private entrepreneurship. So they've made a good start.

NNAMDITomas, what does all this private entrepreneurship look like when you're walking down the streets of Havana?

BILBAOWell, actually, it's probably one of the most shocking things for people who have been to Cuba in the past. When you go to Cuba now, you're shocked immediately by the fact that you walk down a street and you're able to see, sometimes dozens on the same block, small businesses, mainly in the food services industries but also folks selling CDs, DVDs, clothes, very simple shops. But it's a reflection of the fact that the Cuban people have been, you know, desperate for the opportunity to make their own way in an economy that has failed them for half a century.

NNAMDIFor contrast, what did it look like when you walked down the street five years ago?

BILBAOWell, in the past, you'd walk down the street, and you'd see a lot of people standing in front -- or sitting in front of their home unproductive, people who you would wonder -- of working age, who you'd wonder what they're doing in the middle of a day of a work week. You'd see people trying to -- what they --the word they use is resolver, to resolve, people trying to barter with their neighbors. I'll give you some chicken, and you help me find the vegetables that I need.

BILBAOPeople would frequently spend a large amount of a portion of their day just trying to come together with the basics to feed their family, whereas nowadays it's much easier to find some of the basic necessities. There's still of course shortages, but just about on every other corner, at least in Havana -- the same probably isn't true for the rest of the country -- people are able to secure at least, maybe even substitute some of the basic needs that they have.

NNAMDI800-433-8850 is the number you can call to join this conversation. Have you visited Cuba lately? What were your impressions of the country's economic life? 800-433-8850 or you can send email to kojo@wamu.org or simply go to our website kojoshow.org. Join the conversation there.

NNAMDIPhilip, what's happening in Cuba right now may remind some of us of what happened, oh, in the early 1990s when Cuba seemed to open to foreign investment, build up tourism and undertake some small scale entrepreneurship. Remind us of what the Castro government did then and how it differs from what's happening now.

PETERSWell, that's a good question. It's a good comparison to make. In the 1990s, the -- Cuba had lost their support from the Soviet bloc. The Soviet bloc had provided about a fourth of their GDP through subsidies, and their economy -- the Cuban economy went into a gutter. And it -- people suffered greatly. Their diet went down. The food supply went down. Factories closed. They didn't have spare parts for anything because their economy was built so much to fit the Soviet bloc. So they went into a tailspin.

PETERSThey put some reforms in place, but it was under Fidel Castro. And I think they were sort of holding their nose the whole time. They opened up private agriculture a bit, and that was successful. They opened up small scale entrepreneurship a bit, and they also brought in some foreign investment. Come the late 1990s, they sort of stalled on that. And for about the decade before Raul Castro took over, the number of small entrepreneurs stayed stagnant, about 150,000. It was regarded as a necessary evil.

PETERSNow, because they've got a much more ambitious plan to fix the economy and because Raul Castro has said very, very clearly that they've got to reduce the state sector, they need this private sector to grow for the plan to work. Because if they don't build up private sector employment, not just in these little micro-enterprises but also in private cooperatives, which are the next thing, if they don't do all that, there's no place for these excess government employees to go. So it's quite a different set of measures.

NNAMDITomas, when the Cuban government says it wants to reduce its state sector employees by 110,000 this year alone, as Philip pointed out earlier, and many of these people may not want to go into business for themselves, what are the other options for laid-off workers?

BILBAOWell, that's a very good point, and, in fact, one of the sad realities about Cuba is that many people, those who are fortunate enough to have family living abroad, have relied in great part on remittances sent from family members abroad. I think what's different now is, given the reforms that are taking place, people can now take these remittances and instead of using them to make ends meet on a day-to-day basis, use them to actually invest in a small business.

BILBAOOf course, not everyone is a -- can be a successful entrepreneur, and not everyone has the desire or the risk tolerance to start their own business. So many of these people may not start their own businesses, but because the new regulations allow these small businesses to hire other individuals, they can also incorporate into the private sector without being business owners themselves.

NNAMDIIs there a sense of optimism among Cubans about all these changes, or are people taking a wait-and-see approach?

BILBAOWell, I think it depends who you speak to. I think, in general, in Cuba people tend to have a negative outlook on the future. But I think that that's changing slowly. I think that most people would agree that the reforms that are taking place now are irreversible -- or to a large extent are irreversible. And I think part of that is because the government has taken the unusual step of recognizing that their system has failed and that this is necessary.

BILBAORaul Castro has given some speeches where he's very clearly outlined that the bureaucracy and everyone else must step in line and help facilitate this process of a growing private sector, and I think that Phil does a great job in a recent report that he released on entrepreneurship, which you can find on his website, I assume, on the Lexington Institute website, about -- with specific quotes about how the government has been almost forced from the top to implement these reforms. So I think it's a slow process, but, you know, so far so good.

NNAMDIIn case you're just joining us, we're talking about economic reform in Cuba and inviting your calls at 800-433-8850. Do you have friends or family in Cuba? How have their lives changed or not under Raul Castro's government? 800-433-8850. You can also send email to kojo@wamu.org. We're talking with Tomas Bilbao. He is executive director of the Cuba Study Group, a D.C.-based organization of Cuban business and community leaders engaged in Cuba policy and development.

NNAMDIAlso joining us in studio is Phil Peters. Philip Peters is vice president of the Lexington Institute. He's also an advisor to the Cuba Working Group in the U.S. House of Representatives. Phil, the Cuban government seemed to put what some people think is a monkey wrench into some of this budding entrepreneurship last month with an announcement that, starting in September, Cubans who come in and out of the country more than once a year will have to pay the equivalent of $4.50 per pound or more for imports.

NNAMDIThat, for some people in Cuba, is a fortune because salaries there don't average much higher than $20 a month. The new tax also applies to non-Cuban residents of the island, as well as Cuban-Americans visiting relatives. And in their case, it's not multiple trips. It's any time they enter the country, period. What is behind this move, and what effect do you think it will have?

PETERSWell, we'll see. It goes into effect Sept. 1. And my first take on it is that it's quite negative. It's a -- it looks like a big tax hike, although I must say when I try to read the fine print, it's kind of hard to figure out what the exact rates are. I've heard recently that the actual rates might not be as bad as they seem. I heard from somebody in the business in Miami that people who are sending flat screen TVs, for example, that the tax that has to be paid on that, the customs duty that has to be paid on that is going to be about eight bucks. So that's not bad at all. Hopefully, it'll turn out to be that way.

PETERSBut if the taxes are stiff, as it seemed at first reading, then, certainly, it'll affect some -- not all, but some of the entrepreneurs that rely on supplies coming in from the outside. It's, frankly, a mystery to me why the Cuban government doesn't open up its own Walmart or Home Depot under whatever name they want to call it. But there's a huge opportunity for them to create a retail and a wholesale network to supply all these entrepreneurs and to actually take business away from all the stores in Miami that are selling all this stuff and shipping it.

NNAMDIWell, the report, that Tomas referred to earlier, you published late last month about Cuban entrepreneurship that had a fascinating section about the problem of supplies for small businesses.

PETERSRight.

NNAMDICan you share the story of the hardware store in Havana and the huge discrepancy you found in prices there?

PETERSOh, right. There's a -- this is actually a story of some progress because, in western Havana, I came across a hardware store that was not big, but it had plenty of stuff so that if you were in business for yourself as a carpenter or a painter or a plumber, a lot of those trades -- or engaging in home repair, they had a lot of things there for you, just about everything that you would need.

PETERSAnd a lot of the prices were normal or even low. A lot of the Chinese imports, the pliers, the, you know, the hammers, the wiring, the electrical supplies, things like that were, I think, reasonably priced. Some of the things I saw from Europe, the paint was, like, 20 bucks a gallon or something like that.

NNAMDIHow about if I wanted an indoor ladder, maybe, a five-step indoor ladder?

PETERSI don't remember the price of that. I remember...

NNAMDIA hundred dollars.

PETERSOne thing that stuck out -- is that what I wrote? One thing that stuck out to me was a plastic garbage can...

NNAMDIYes.

PETERS...that was about $70 or $80.

NNAMDIEighty-five.

PETERSOkay. Eighty-five dollars, which was just completely off the chart, so obviously nobody's buying those. But it was -- but it's progress.

NNAMDITomas?

BILBAOYeah. I was going to the say that I think that it's important for the listeners that we, you know, we also share some of the concerns we have in some of the limitations of these reforms. Phil's referring to one of them now, the lack of a wholesale market. That, coupled with an importation tax, is sure to cause inflation, especially it's already being seen by a lot of people purchasing vegetables, for example, for their private restaurants and what not.

BILBAOBut if you add to that an import tax, 'cause a lot of these people receive the goods that they sell from family members who are traveling or people who are traveling from abroad...

NNAMDIYeah. I was wondering about that because what I was reading is that Cubans with permission to travel often fund their trips by acting as mules, coming back with bags stuffed with clothes, electronic goods, diapers and other things that are hard to find on the island. And I suspect the government might be trying to put a stop to that?

BILBAOWell, no. I don't think they're trying to put a stop to it. I think that the Cuban government, which is facing a huge liquidity crisis is obviously trying to get their hands on some cash. But I think the more important part is, yes, these reforms have been positive in many ways, and they've been limited in many ways. I think we need to remember that the government that we're dealing with here is a government whose primary objective is to stay in power.

BILBAOAnd so we also need to understand that the government isn't monolithic, and, as they embark on this process of economic reforms, you're going to have people, hardliners within the government, who obviously are more hesitant to support the economic reforms because of fear that people may enrich themselves and reduce their dependence on government and in some way have a power shift from government to, you know, successful entrepreneurs. And then you have reformers within the government who understand the need and who want to see those reforms succeed.

BILBAOAnd so that oftentimes leads to poor policy or controversial -- policies that contravene earlier policies. And so I think that the wholesale market and this import tax is an example of that. And I think that the Cuban government needs to realize that what may mean some revenue in the front end may result in, you know, hyperinflation in the back end.

BILBAOAnd at the end of the day, if what they're trying to do is insure that they have higher salaries, reduce government spending and what not, and they create a situation where people now can't afford to purchase anything, then, in essence, they're shooting themselves in the foot by being overly cautious or appeasing hardliners who are hesitant to implement the reforms.

NNAMDIBefore I go to break, however, Phil Peters, with Raul Castro's recent visits to China, Russia, and other parts of Asia, is Cuba trying to, I guess, hedge its bets more widely on the international stage, or are these mainly missions to learn how other countries move toward market economies?

PETERSI think they're both. I think that Cuba over the years has learned, and especially has learned a very bitter lesson when the Soviet Union collapsed, that it's dangerous for Cuba to have all its eggs in one basket, in its international relations, in its international economic relations. So they've diversified their international economic relations and the support they get from Venezuela, China, Vietnam, export relationships with a lot of countries around the world. So there's that.

PETERSThere's that diversification which is more secure for them, but I think it's also to learn, as you said. And we see in the Cuban media now they cover Vietnam and the reforms that are made in Vietnam. They covered with some detail -- when the Vietnamese communist party chief came to Cuba a few months ago, they published in some detail his views about Vietnam made the reforms and his comments about where Cuba is, almost saying that, you know, we were there -- we were at the point that you were at, and what you guys really need to is bite the bullet and jump in more deeply to the reforms.

NNAMDIGot to take a short break. When we come back, we'll continue this conversation on economic reform in Cuba. If you have called, stay on the line. If you haven't yet, we still have lines open at 800-433-850. Should the Obama administration loosen travel restrictions further on Cuba? 800-433-8850. I'm Kojo Nnamdi.

NNAMDIWelcome back to our conversation on economic reform in Cuba. We're talking with Tomas Bilbao. He is executive director of the Cuba Study Group, a DC-based organization of Cuban business and community leaders engaged in Cuba policy and development, and Philip Peters, vice president of the Lexington Institute. He's also an advisor to the Cuba working group in the U.S. House of Representatives. I'd like to go directly to the phones. He's is Rick in Clarksburg, Md. Rick, you're on the air. Go ahead, please.

RICKYes. I was curious is they intend on returning any of the stolen businesses back to the previous owners, like some of the sugar cane fields, some of the wineries or liquor producer, et cetera.

NNAMDIIt's been, what, 53 years since 1959? I don't know if that's in the cards. Phil Peters?

PETERSWell, it's not something that's discussed as part of this economic reform program. When Cuban officials are asked that, what I've heard them say is that they have negotiated agreements with many, many countries around the world, including U.S. allies, where they had expropriated properties and they paid a certain amount to satisfy those claims and that they're willing to talk to the United States. They also say that the United States is responsible for damages because of U.S. economic sanctions and that they would have that...

NNAMDIThe embargo.

PETERSYeah, the embargo and all the other economic sanctions, and so that would be part of the discussion. So the issue has basically gone nowhere, as you can imagine.

NNAMDIRick, thank you for your call. Here is Carol Ann in Bethesda, Md. Carol Ann, your turn.

CAROL ANNHi, Kojo. Thanks for having this program. I was in Cuba in February with one of these People-to-People missions, but more focused on bringing pharmaceuticals to the -- actually the Jewish communities in Havana, but they distribute them to other people, the poor, needy people through their pharmacy in one of the Jewish centers there. But we traveled all over the island as part of the tour and to -- it was quite interesting. The Cuban travel industry, as I understand, it is getting bigger and bigger.

CAROL ANNWe had difficulty -- we were moved around from hotel to hotel because we as Americans get lower priority in terms of our, you know, where we were allowed to stay by the government. So they were, you know, people from Canada and Europe get higher priority, so we were moved around out of our hotels, but we saw a wide range of hotels. And we were actually in...

NNAMDIWhat were your general impressions of economic activity?

ANNYeah. Well, I -- you know, I saw the variety. I saw in one wonderful town I didn't see in (word?), we saw vendors on the street. It seemed to me that they were doing, you know, private enterprise, along with -- I went into a couple of government stores where you wait in line to get into the store to be able to shop. That was fascinating. It felt like, you know, what I remember reading about Russia...

NNAMDICarol Ann, thank you sharing your impressions. I mention that only because we're running short on time, and we got an email from Ann that is related to your question. Ann asks, "What is the state of U.S. to Cuba tourism? Can anyone go or only if you have a relative or government-approved reason to go there?" Tomas?

BILBAOYes. So tourism, as we commonly conceive it, is not permitted to Cuba. The U.S. government has a comprehensive set of sanctions against Cuba, which we all know and you originally referred to as the embargo. There are exceptions, though. And President Obama a few ago took advantage of executive power to facilitate especially travel -- unlimited travel between -- for family members, people visiting their family.

BILBAOIn addition, what Ann refers to as the People-to-People, or what Carol Ann referred to People-to-People are a series of license exceptions for people participating in sports and education and in cultural events.

NNAMDIJournalism, too.

BILBAOJournalism is actually under a general license.

NNAMDIThat's how we went, yes.

BILBAOSo the question is, why does the United States government need to be in the business of choosing who is a good traveler and not a good traveler, or a purposeful traveler and what is not a purposeful traveler?

NNAMDIAnd the answer to that question would be?

BILBAOThat there's a very strong lobby, mainly by Cuban Americans and representatives in Congress to maintain this status quo, and they use the typical arguments of, you know, facing a dictatorial and tyrannical regime and what not, all those things that may be true. But the reality is that we didn't impose travel restrictions on other places and that it was Ronald Regan who even encouraged travel to the Soviet Union.

BILBAOSo I think that those -- to use conservative talking points in order to limit the individual liberties of American citizens is kind of a fool's errand, and I think that, to the extent that Cuba relies more on the United States and on assistance and tourism from the United States, the better off we'll be. The more they rely on Venezuela and other not-so-friendly nations, then the worse off U.S. interests will be.

BILBAOBut I think the main argument here is, what do Cuban dissidents, those fighting for democracy in Cuba, believe? And, you know, a few years ago, they signed a letter, the majority of all the leadership of Cuba's dissident movement, calling on the U.S. government to lift all travel restrictions to Cuba. That's a letter that can be found at letterby74.org.

NNAMDISpeaking of dissidents, last month Cuba lost one of its most prominent dissidents, Oswaldo Paya, in a car crash. I know he was a friend of yours. Could you tell us about his work and the legacy he leaves behind?

BILBAOYeah. Oswaldo was a, you know, a brilliant man who was able to achieve something in Cuba that perhaps no other ordinary Cuban citizen has been able to in the last 50 years. And that's because of, you know, a testament to his character and his values and his leadership. His Varela Project was able to collect an unprecedented number of signatures to call for a referendum, using existing Cuban law to try to move the needle on personal and individual liberties. Unfortunately, Oswaldo and Harold Cepero, another young dissident lost their lives in a car accident a few weeks ago.

NNAMDIAbout which there is some question?

BILBAOWell, as everything -- as with everything in Cuba, there's always question because it's a very closed country. Also, Oswaldo and Harold were, as most Cuban dissidents, are subject to routine harassment by the government. In this case, it seems to have been a traffic accident, and there are people who suggest otherwise.

BILBAOI think that, of course, until the statements are made -- until all the statements are made, it's hard to have a conclusive answer. But I think that, unfortunately, too much of the focus has been on whether or not this was an accident and not enough focus on the wonderful lives of Harold Cepero and Oswaldo Paya.

NNAMDIPhil Peters, I'd like to get your thoughts on a mysterious article published last week that reported that Cuban bank assets deposited in foreign financial institutions showed a stunning plunge of $1.55 billion or 24 percent in the last three months of last year. No one seems to know where Cuba has put this money. Can I ask for your hopefully informed speculation about what's going on here?

PETERSWell, you could ask, but I don't think I'm going to get -- make it any less mysterious. That's a report about Cuban financial assets that are in a certain set of banks, and we see these reports from time to time. And the balances go up, the balances go down, and it's really not knowable by those of us outside of Cuba what causes that. And I don't think that those -- that the fluctuations coincide -- rather, I don't see that they coincide with the fortunes of the Cuban economy.

PETERSThey jumped a lot just a few years ago. There was a big fuss about it, but it didn't coincide with any big change in the Cuban economy, and nor does this decline. I think it's just a matter of them moving money around from one set of banks to another. Some speculate that maybe they're moving money to banks in China or elsewhere because it puts them out of reach of U.S. sanctions. Who knows? But it's not a -- they don't explain it. They're not about to explain it, and it's not really knowable.

NNAMDITomas, can you offer any explanation, any hypothesis?

BILBAOWell, I mean, I can also speculate, as Phil has done and other people have done, and I think it's probably a combination of things. It's probably them moving assets from banks that are currently in -- you know, could be affected by U.S. sanctions, or also could be that they're moving away from banks that they feel in Spain and other countries who currently have economic problems into somewhere that they feel maybe more safe, like in China.

BILBAOBut it also may be that Cuba's using some of that money to pay down, you know, private and public debt that they -- in order to position themselves better to take advantage of a foreign investment. And -- but, again, they may be using it to finance food imports. All this is speculation. I would -- my guess would be that it's probably a combination of these things.

NNAMDIAnd we got an email from Sandra in Bowie, Md. who would like to know if the Cuban government is still committed to supporting arts and music groups that they have been supporting in the past. Any idea about that?

PETERSI think so. I think that the Cuban government takes great pride in the education that they provide in the area of the arts, and they have great elite schools. And they also have, I think, good arts education throughout their educational system, so I don't see any...

NNAMDIChange in the...

PETERS…any sense of -- any change in that, no.

NNAMDIPhilip Peters is vice president of the Lexington Institute. He's also an advisor to the Cuba working group in the U.S. House of Representatives. Phil Peters, thank you for joining us.

PETERSThank you.

NNAMDITomas Bilbao is executive director of the Cuba Study Group, which is organization of Cuban business and community leaders engaged in Cuba policy and development. Tomas Bilbao, thank you for joining us.

BILBAOThank you. It's been a pleasure.

NNAMDI"The Kojo Nnamdi Show" is produced by Brendan Sweeney, Michael Martinez, Ingalisa Schrobsdorff, and Tayla Burney with assistance from Kathy Goldgeier and Elizabeth Weinstein. The managing producer is Diane Vogel. The engineer is Timmy Olmstead. Natalie Yuravlivker has been on the phones. Thank you all for listening. I'm Kojo Nnamdi.