* Goal is to increase productivity, boost economy
* Measures use capitalism to defend socialism
* Government took similar steps in 1990s, backtracked (Adds quotes, background)
By Jeff Franks
HAVANA, Sept 24 (Reuters) - Cuba's economic reforms began taking shape on Friday as the government said it would allow or expand private enterprise in 178 activities ranging from watch repairs to massages, to help assure the survival of socialism.
Cubans will be able to open restaurants, repair homes and cars, train animals, sell wine, provide transportation, work as clowns and open many other businesses, some currently prohibited by the communist-led government.
The plan, outlined in Communist Party newspaper Granma, said the government was considering providing bank credits to the new entrepreneurs, who will be able to hire employees for the first time since small businesses were nationalized in 1968. [ID:nN24233327]
While the measures steal from capitalism, the key goal of the reform is to "defend, maintain and continue perfecting socialism" by increasing productivity, Granma said.
Self employment, it said, gives a worker "another way of feeling useful with his personal effort."
Similar steps were taken in the 1990s as Cuba struggled to survive when its economy collapsed after the fall of the Caribbean island's key benefactor, the Soviet Union.
In 1996, the number of self-employed peaked at 209,000, but when the economy improved, the government, in the name of ideological purity, backed off the reforms and restricted the issuance of new licenses. Cuba currently has 143,000 licensed self-employed.
With its economy struggling again, Cuba has said it will lay off 500,000 workers from state payrolls and, starting in October, issue 250,000 licenses for self-employment to help create private sector jobs for them.
Another 200,000 government jobs will shift over to employee-run cooperatives and leasing arrangements.
More than 85 percent of the Cuban labor force, or over 5 million people, worked for the government at the close of 2009, according to official figures.
TIRED OF SCRAPING BY
The moves are the biggest so far by President Raul Castro as he tries to permanently cure what ails Cuba's economy. For the most part, they are welcomed by cash-strapped Cubans tired of scraping by on an average monthly salary equivalent to $20.
"Raul has done in a few years what Fidel should have done long ago," restaurant worker Luis Alberto Noa, 44, told Reuters, referring to former Cuban leader Fidel Castro.
"That they're looking for new work formulas proves that the state cannot do everything."
But, he added, the reforms will only be effective if the government "does not tax the new businesses too heavily."
A Cuban economist told Reuters he was optimistic about the island's financial future for the first time in a long time.
"The changes are all about increasing productivity, which is what we've been saying for years," he said, asking not to be identified.
But one office worker, who also did want to be named, said the reforms would achieve nothing because Cuba's economy is too far gone.
"You can't revive the dead, and that's what we have here. They screwed everything up in 1968," the worker said.
Other changes in the plan call for the expansion of private restaurants, known as "paladares," both in number and size. They will be able to have 20 seats, up from the current limit of 12, although it is already widely ignored.
Cubans in the country and those living abroad with the government's permission will also be able to rent out their homes while they are away.
Granma said Cuba's central bank was studying the possibility of providing financial credits to help the self-employed get their businesses up and running.
Many are expected to get start-up money from relatives living abroad, especially in the United States.
Previously leaked Communist Party documents have said the self-employed will pay taxes ranging from 10 percent to 40 percent on their gross income, depending on their business, plus another 25 percent for the national social security program.
Granma said the stiff taxes will increase government revenues and help achieve their "adequate redistribution," but skeptics fear they show the state will keep a tight rein on the new businesses. (Editing by Kieran Murray)