In early February 2021, the Cuban government reported new measures that are inserted in the logic of the transformation of the economic model. They take up pending aspects that imply areas of confluence of popular consensus, academic criteria and political will, having been successively included, since 2010, in the most important official documents governing economic policy.
These measures entail the expansion of the spectrum of activities available to self-employed workers, taking as a reference the National Classifier of Economic Activities (CNAE). This would offer more than 2,000 options, except for work in 124 categories included in a negative list. This statement was followed by the appearance in the media of senior officials who advanced other complementary actions. In what context do these decisions take place and what can be expected of them?
This article explores some possible repercussions for the domestic private sector, in light of the information disclosed, while some unknowns remain to be cleared up.
Political and economic environment
By the end of 2020, official figures from the Cuban government indicated a drop in GDP in the order of 11%, more pronounced than the ECLAC forecasts. The numbers ended up showing the acuteness of a crisis that, beyond any statistics, has been suffered on a daily basis by the population in an arduous battle to survive, between pandemic, shortage of supply of goods and services (essentials included) and declining nominal and real income. Although for 2021 the authorities have foreseen a recovery of the product of between 6% and 7%, this growth objective becomes more complex given the permanence of the conditions that generated the crisis.
COVID-19, which ended up precipitating and exacerbating a crisis that would inevitably ensue, again expresses itself locally in 2021 with a re-outbreak of greater proportions, claiming human lives, hindering productive recovery and the normalization of tourism and travel, essential in Cuba for economic reactivation.
Externally, even when the Biden administration in Washington seems to consider a position prone to retaking the rapprochement and dismantling the most hostile measures deployed by the previous president, these remain active and continue to limit the access of the Cuban government and people to income in hard currencies, energy carriers, restrict the flow of imports and intimidate foreign investors. And in the domestic sphere, insufficiently audacious measures have been implemented, rather associated with crisis management and immediately capturing foreign currency while a coherent economic policy system, aimed at transforming the Cuban economic model and promoting the necessary growth and efficiency dynamics, has still not been deployed. The postponement of the transformations ends up reinforcing a loop that deepens the crisis and prevents it from going beyond its mere management.
At the end of 2019, 1,506,600 Cubans made up the domestic private sector, almost 33% of those employed in the economy, a space much more important than the 20% at the beginning of this century and qualitatively more diverse in terms of activities and ownership/management typologies involved. The Cuban private sector is today a heterogeneous group composed, fundamentally, by self-employed workers (the regulatory euphemism includes private medium, small and micro entrepreneurs that operate legally, but without legal status, their contracted and self-employed workers), members of agricultural and non-agricultural cooperatives and private farmers, owners or not of the land they work.
The “self-employed” are particularly notable, since they were part of the objectives of the reform implemented a decade ago,1 and because of their growth and diversification in a complex context. In 2010, a list of some 180 activities that self-employed workers could develop was published, with entry procedures relatively simple for most, along with authorization for these businesses to hire a workforce. It was the most daring opening since in 1968 the Cuban State came to control practically the entire economy in the non-agricultural sphere.
The interesting thing is that the mere authorization to work made the private sector grow from 157,000 workers registered in September 2010 (one month before the entry into force of the opening) to more than 630,000 during the first quarter of 2020. This occurs in a context of:
- Restrictions for access to wholesale markets.
- Association with the public sector and formal foreign trade channels.
- Absence of broad spectrum credits.
- Legal protection for alliances with foreign capital.
- Oscillating regulatory framework, among others.
Even so, private entrepreneurs increased fourfold based on a lot of innovation, using endogenous resources depending on their businesses and even succeeding in attracting foreign capital flows through informal channels. Altogether, the self-employed and private agricultural producers have assumed the role of net job creators during the past decade, in contrast to the process of “destruction” of jobs in the state sector, a phenomenon rigorously argued by some Cuban researchers.2
On the other hand, the expansion of self-employment also took place by internalizing negative shocks of singular force. In 2017 the granting of new licenses was canceled for 5 activities and paralyzed for 27, with no time limit foreseen for their restoration. This arbitrary decision conspired against the dynamics of competition, demolished family and individual projects, shattered the forecasted cash flow of ongoing projects, and postponed or canceled expansion decisions of local entrepreneurs and, on occasions, of their foreign partners or patrons. Morales shows a slowdown in remittance flows in recent years that he relates to the paralysis of the reform.3
In December 2018, several of the previously paused licenses were restored, but the reopening was modulated by a new regulatory specification that included additional bureaucracy for the request for authorizations and the operational capacity of the businesses, extended delivery times and maintained numerous gray areas prone to generating interpretive discretion in the already asymmetrical relationships between regulatory institutions and the private sector.
The panorama of opportunities that the rapprochement between Cuba and the United States implied was also turned upside down after the Trump administration opted for the cessation of dialogue and sanctions. Just to mention some measures of direct impact on the private sector, consider the Trump administration’s unfortunate handling of the “sonic incidents” and the withdrawal of most of the personnel from the U.S. embassy in Havana, the elimination of travel categories, the ban on cruises, restrictions on direct flights and an expectations approach aimed at discouraging the flow of travelers.
In turn, the possibility of obtaining supplies in the United States has been drastically reduced. Obtaining new visas must be done in a third country, and the granting of multiple entry visas has been eliminated. Restrictions were also added on the amounts, persons and channels authorized for sending remittances, restricting the formal means of obtaining liquidity.4
According to a study by the AUGE consulting firm, 80% of the surveyed entrepreneurs reported damages to their business as a result of the Trump administration’s policy towards Cuba,5 mainly in terms of decreased demand, increased difficulties in obtaining supplies and interruption of investments.
Impact of the pandemic
From a position of uncertainty after the aforementioned events, the private sector was shaken by the impact of the pandemic. As a consequence of the initial closure of borders, social isolation and the partial paralysis of economic activity by decree, lack of supplies or of demand, some 250,000 self-employed workers—that is, about 40% of those registered—had requested the suspension of their licenses.6 AUGE’s evaluation consistently pointed to widespread damage throughout the private sector, identifying the most affected areas and three levels of impact. Some 15 activities that group 198,000 self-employed workers (33% of the total) were among the hardest hit, mainly those directly linked to tourism or providing related services.
In a context of fiscal resources already diminished during the pre-pandemic and tensed to the limit by it (fiscal deficit of 6.2% and 20% of GDP in 2019 and 2020), the margins of government support for the private sector were limited. These included, in essence:
- The establishment of relatively simple processes for requesting the temporary suspension of operations and tax charges.
- The decrease in monthly fees for affected activities.
- The extension of grace periods for the settlement of obligations.
- The exemption from submitting an affidavit to workers who stopped working for six months or more.
- The elimination of the maximum deductible expenses.
- The increase in the minimum income subject to tax.
However, the acuteness of the crisis has once again made the ineffectiveness of the current configuration of the components of the Cuban economic model very clearly visible. The playing field where the different actors operate ends up being so rugged that none can guarantee optimal production and the national productive fabric cannot be coherently articulated.
At the height of July 2020, the authorities announced a crisis management strategy that, in addition to considering actions to respond to the imperatives imposed by short-term maneuvers, broke with immobility, strongly rescued essential notions of the 2010 reform at the level of official discourse and called for its deepening with the expansion of the private sector included.
Beyond the generation of positive expectations, and related to the peremptory need of the State to collect foreign currency, in practical terms the first measure to be implemented, in favor of the private sector, was the opening of access to formal foreign trade channels for self-employed and cooperative members. The design of the processes:
- Maintained state monopoly control of export-import in the hands of a limited set of enterprises with historical inefficiency.
- Confirmed an excessive rentier appetite by enterprises and the State.
- Reinforced the access-prior possession of foreign currency as an element of exclusion.7
- Expanded markets beyond national borders.
- Opened channels for the formal entry of foreign currency into private accounts.
- Fostered mechanisms to obtain locally non-existent capital goods and raw materials.
Expansion and limitation of options
The continuity of the reform, with an emphasis on the ownership/management binomial, has now been expressed with the announcement of the replacement of the positive list (meager in options, fundamentally naive in their quality) by a combination that implies the expansion of options for the self-employed at the CNAE level with limitations established by a negative list. A path, by the way, carefully outlined by scholars like Fernández8 in June of the previous year.
In turn, the expansion of options would be complemented by the elimination of the current “scope of activity.” In the new context, a self-employed person’s approved project would guarantee him a license with ease to perform in multiple allowed activities. Also with the establishment of a single window that would facilitate the procedures for the application and obtaining of licenses, the generalization of the delivery of an affidavit by all the self-employed workers, the transit of payment of fixed fees in the simplified regime at quarterly percentages on income, as well as readjustments in the fixed monthly amounts to be paid based on the activities to be performed.
From what has been announced, the most important thing is the potential expansion that the private sector can experience. Even considering the negative list, the use of the CNAE and the establishment of licenses that allow room for business performance greatly broadens the spectrum of options available to the self-employed and favors a more complex and diverse development of the productive fabric and services, this time on a formal basis. To cite just two examples in areas of importance, very depressed in the country: there is a wealth of options available in section F (Construction) of the CNAE, without prohibited classes on the negative list, and in section C (Manufacturing Industries), even though 24 classes appear banned to self-employed workers.
In a country where the contribution of the manufacturing sector to the GDP at constant prices is around 11%, the increasing incorporation of private effort to the production of goods is essential, and the CNAE definitely multiplies opportunities, even more if the narrowness of the current list is taken into account.
It should also be considered that, as occurred in a narrower framework, private enterprises will develop innovative and surprising projects that will be inserted in the most varied loopholes offered by the CNAE. The use of this entity is an invitation to creativity within formal spaces and, in many cases, it will avoid the use of the current “coverage” licenses that keep in tenterhooks a large group of entrepreneurs who have tried to bet on legality even in the context of current regulatory precariousness.
However, the new policy decision, like the previous one, regarding access to foreign trade, was born with shortcomings and disconnected from other actions necessary to guarantee the deployment of the full potential of the private sector.
Lack of formal business structures
As a major absentee of the announcement, both in the public notes on the approval in the Council of Ministers9 and in the subsequent appearance of officials in the media,10 is any reference to the transformation by the current “self-employed” into formal business structures. Nothing has been said about the project of recognition of micro, small and medium-sized enterprises that the Cuban government itself mentioned as part of the changes to come.
The fact that the new regulations are still in preparation and that they will be implemented within an unknown period, and the usual long periods for the publication of measures of this caliber, suggests that access to legal status will be delayed. Meanwhile, the option of non-agricultural cooperatives, a possible means of access to legal status, remains a cottage and experimental area.
The postponement of the possibility of wide access to legal status for private parties seriously conspires against recovery in the midst of the current disaster. Production synergies arising from the transition from a weak category such as “self-employment” to formal business forms, whose additional contribution to GDP has been estimated between 1.5% and 1.7%, would be renounced. In practice, the legal status would offer the private parties a greater capacity for institutional dialogue to negotiate a fluid and equal access to foreign trade, foreign investment, wholesale markets, and could provide them with an organizational quality and probable volume of physical and financial assets to face the objective barriers and subjective prejudices that are now banned by CNAE areas.
The negative list
Precisely, although it is a draft, a notable set of restricted activities in the negative list made public, shows the presence of contradictions with the expansionist spirit of the speech of the minister of economy and the minister of labor, who expressed that “the economy is a single one”…and the need for “the country to count on all the economic actors based on the common good.” The exclusion criteria to determine which activities “should not be carried out by the self-employed workers” were not made transparent by the authorities and are not obvious. Not even notions of scale or formal organizational arrangements are applicable to all banned activities, many of which occur today in practice.
The selection of banned areas distills, in the best of cases, ignorance of the productive fabric and services that in fact already exist, and a condescending vision regarding the potential for scale and sophistication achievable by the private sector. Unfortunately, it is probable that the exclusion criteria also respond to atavisms in the design, implementation of policies, of rentier inspiration and a control cult, which guarantee artificially created monopoly spaces for state enterprises.
The case of a group of activities restricted to the private sector in the area of tourism is extremely remarkable. For example, the activities of travel agencies and tour operators (classes 7911 and 7912) and reservation services and related activities (7990) remain banned, which would prohibit or make extremely complex the participation of national private ventures:
- Activities of agencies mainly engaged in selling travel, organized travel, transportation and accommodation services to the general public and commercial clients (7911).
- Organization of travel service packages for sale through travel agencies or by tour operators themselves that may include elements such as “transportation, accommodation, meals, visits to museums, historical or cultural places and attendance at theatrical and musical shows, or sports events” (7912).
- Provision of other travel-related reservation services: reservations for transportation, hotels, restaurants, car rental, entertainment and sports activities, etc.; sale of tickets for plays, sports competitions and other amusement and entertainment activities; provision of visitor assistance services; provision of travel information to clients, tour guide activities; tourism promotion activities (7990).
Beyond the obvious lessors and gastronomic establishments marked for foreign visitors, the domestic private sector took advantage of the 2010 opening and the heyday of the rapprochement between Cuba and the United States and threw themselves into the creation of a competitive, flexible and innovative offer, which contributed to the diversification of the State’s “sun and beach” model. Before the pandemic, an immense and interrelated group of lessors, transporters, discos, bars, cafes, restaurants, food processing, transport and accommodation managers, artists, farm owners and workshops that have created conditions to receive guests in their facilities, comprehensive planners of stays and activities, guides with standardized or highly specialized offers, etc., was operating and satisfying demanding market segments.
Hinders existing legal activities
The exclusions in the current negative list even give a margin of interpretation to hinder the work of occupations that are already officially exercised, of accommodation managers, transport managers and the promotion of any formal activity related to tourism. If that is not the intention of the authorities, at least it remains at the level of discretion.
In the case of the roles of travel agencies, including planning and guide services, the exclusion is stark. An unfortunate situation while the state effort remains focused on an oversized housing construction effort without the capacity and incentives to massively develop an attractive non-hotel offer. It also highlights a dimension of discrimination, since countless large, medium and small foreign travel agencies have fluid formal operations and offices in the market.
Induces covering up and informality
Maintaining the restriction of access to private parties involved in these activities or with entry projects impoverishes the national offer as a whole, destroys the dynamics of competition, induces fiscal trickery and encourages the continuity of concealment practices through coverage licenses in some cases and absolute informality in others.
On the other hand, the monopolistic appetite clouds the authorities’ vision regarding the possibilities of a post-pandemic tourism recovery context, marked by a new rapprochement with the United States and by the increase in the flow of U.S. visitors, prone to interaction with the private sector by affinity and by the requirements of the current regulatory framework. The participation of the private sector in multiple areas, especially in the frontline of attention to tourism, makes them interlocutors with the capacity to offer revenues to all parties and magnify the positive effects in a new scenario of bonanza.
Another notable exclusion has been that of professional, scientific and technical activities, which would offer an infinite universe of options to the highly qualified local workforce. The negative list once again leaves out legal activities, accounting—except bookkeeping—, architecture, engineering and research, among others in an extensive list. These restrictions contain multiple negative aspects. In terms of expectations, an important group of Cubans, eager to develop their professional skills in their own ventures, are hard hit.
At the same time, it is somewhat superficial to continue banning licenses for these activities when, in practice, businesses of growing importance in practically any area of the CNAE will demand accounting, legal, and even research services…which will end up being carried out by the owners of the business or those they hire, informally or through “coverage” licenses located beyond the necessary regulatory and supervisory processes.
Lack of wholesale trade
The possibility of wholesale trade is also very restricted, thus denying the possibility of private enterprises entering as participants/suppliers in an area in which, as a group, the self-employed have very limited access options, controlled by the State: they are not a priority. Furthermore, exclusion ignores the complexities and dynamism of business practice, in which from one moment to another, for multiple reasons, volumes of inputs or means of production of national or imported origin, may cease to be useful for a certain business and need to be sold in any format to guarantee liquidity and the sustainability of cash flows.
In addition to the expansion of activities and the restrictions in the negative list, two other elements of interest were voiced in the package of measures: the concentration of the processes of application, processing and granting of licenses in a single window located in the municipal labor departments (with the exception of transporters, who would go to authorized Ministry of Transportation entities) and tax modifications.
The single window is supposedly easy and time-saving as it reduces the number of institutions to visit to obtain the license. However, the response time for the approval of the presented projects is not clear (checking the place where the project will be carried out suggests there will continue to be significant delays for certain activities, as is the case today), if protections for applicants will be included in case of the usual delays in approval.
In addition, if the civil servants in charge of receiving and approving projects will be instructed to assume a receptive posture to innovation (which will surely reach them in considerable amounts) or if the prohibitions of the negative list will be used to label everything that has the least relationship with it in the proposals received.
From the tax point of view, the recognition of 100% of the disbursements, investment expenses and increases in the exempt minimum (which from the current 10,000 pesos increases to 39,120 CUP) have been instituted with the aim of reducing the tax burden and favoring the transparency of economic facts. The impact in terms of an actual income statement will also depend on how the progressive scales are configured. Today they very quickly put the taxpayer in a position to pay 50% of the additional income as taxes. Due to the evolution of the exchange rate of the CUP versus USD in the informal market, and given the deterioration of the purchasing power of the CUP, an “anchor” will be necessary to effectively help measure when it is in a position to pay the maximum tax burden.
In any case, the scheme must be attractive to the private sector, because in a context in which the tax burden is widely considered excessive, the option of under-reporting will remain entrenched.
In general, fundamentally positive effects can be expected from the stated measures:
- They give continuity to the economic reform undertaken.
- They touch transcendental planes of the economic model.
- They constitute the largest expansion of the domestic private sector that the Cuban government has promoted.
They also support spaces for the action of the private sector. They will be more difficult to dismantle in the face of possible policy “lurches” that may occur in the future.
However, despite the importance of the last two packages of measures that are primarily of interest to the private sector—access to foreign trade/expansion of activities through CNAE—, there is evidence of the permanence of design flaws in which there is a predominance of administrative atavisms, excess rentism and artificial creation of reserves for the state monopoly based on criteria that are not sufficiently founded or, simply, that are not explicit.
In turn, implementation processes take too long, to the point in which:
- Essential changes such as the possibility of transforming part of the current “self-employed” sector into formal business structures.
- The review of the conditions of access to foreign trade.
- The possibility of formally agreeing with formal flows of foreign capital.
- A redesign of the credit policy that guarantees generalized access to formal sources of financing, among others.
They do not appear in dialogue with the current measures, but rather wait for their turn to arrive. In some cases, it seems even unlikely.
When measures are accumulated that by means of their design castrate their own potential, and with temporary delays in their approval, the potential benefits are diluted and the speed or even the totality of the access to a path of growth and development that the country urgently needs is canceled. In the same way, other essential aspects of the reform are left out, such as the monetary reorganization: if part of the sought benefits is the resizing of the state productive structures, the absence of a robust private sector conspires against the necessary absorption of the surplus workforce in the state sector.
The private sector has demonstrated resilience, capacity for innovation, potential for generating employment and contributing to the transformation of production and the satisfaction of unsatisfied demand niches, both in the state and non-state productive areas and in the final consumption of the population, as well as the channeling of foreign resources even in contexts of non-existent ownership rights.
Prolonging the permanence of marginalized spaces does not make sense. The authorities must consider that the recent measures still under analysis should be approved quickly, stripped of restrictive obstacles, and coherently complemented with other essential ones. A flexible regulatory framework that is more oriented to the deployment of potentials to contribute to the country’s development than to the exclusionary restriction is today the most pressing need of the private sector in Cuba.
Notes and consulted sources:
1 The measures that represented the first major expansion of activities available to self-employed workers and the possibility of hiring a workforce were published in October 2010. Ministry of Justice, 2010.
2 Monreal, P. (April 28, 2020). “El establecimiento de PYMES en Cuba pudiera aumentar el Producto Interno Bruto entre 1,5 y 1,7%,” in El Estado como tal.
6 Alonso, R. et al, (June 11, 2020). “Gobierno cubano informa sobre medidas para la recuperación tras la epidemia de la COVID-19,″ Cubadebate.
7 Pajón, D. J. (September 15, 2020). “Comercio exterior y sector no estatal en Cuba: apertura que da para más” IPS.
8 Fernández, O. (June 4, 2020). “Implementar las PYMES: un posible cómo,” Progreso Semanal.
9 Puig, Y. (February 6, 2021). Council of Ministers: “En la senda de perfeccionar el proyecto social y económico cubano,”Granma
10 Alonso, R. et al (February 9, 2021). “¿Cuáles son las nuevas disposiciones para el trabajo por cuenta propia en Cuba?” Cubadebate
Colina, H. (2020). “Trabajo por cuenta propia en tiempos de la COVID-19,” Alma Mater.
Ministry of Justice (October 8, 2010). Gaceta Oficial de la República de Cuba (012 Ext. Especial).
This article was originally published in the magazine Horizonte Cubano and has been replicated by OnCuba with the express authorization of the author.