Institutions — the rules of the game — and everything associated with them, are essential for an economy to achieve and maintain a path of growth and development. Much has been written about it, however, it is common for the importance of their quality, their conditionality and dependence on objective and subjective factors to not be understood; their real scope and necessary transformation and “modernization”; their relationship of subordination and at the same time of independence from those who create them; their amplified impact on reality; the need to take care of their coherence and functionality with the defined purposes and their decisive character in the certainty or uncertainty about the mediate and immediate future.
Institutions are perhaps the most human of everything created by homo sapiens; something essential and unique that distinguishes us from the rest of the herds of other animal species.
Institutions end up generating their own defense systems, their own security guards, imposing their own borders, their own “amniotic fluid,” from which they feed and where their feeders grow.
Institutions, at least for the economy, are not the organizational structures that human beings create in the different territories/countries they inhabit; but the regulations, indications, traditions, beliefs, etc. that these structures constantly recreate with the good purpose of mediating between the members of society and helping them to live in relative — and almost always weak — harmony.
Having good institutions is not about having good buildings with many disciplined and obedient homo sapiens, equipped with modern technological instruments, willing to defend their “nurturing mother” tooth and nail and force her to produce dozens and hundreds of regulations to perpetuate themselves indefinitely and safeguard their rights. interests, jobs and privileges.
Our country, like all of them, has spent its entire existence creating, fighting and suffering for its institutions. Although I have no way to prove it, after more than 45 years patiently observing our economy and participating from time to time in some of its processes, I have the intuition that the fewer “rules of the game” there are, the more functional they will be for the purpose of growing and developing and the costs of the process — especially those of opportunity and transaction — will be lower.
But surely I am wrong and above all badly influenced by this life experience where I have seen each organizational structure pull to its side; so much so that it has sometimes led me to doubt the existence of a centralized and coordinated system.
Some examples of our reality that could illustrate this negative influence of institutions that are not very functional for their purposes are:
- The continuous marches and counter-marches of the reform process itself.
- The delay in adopting decisions that the economy has continually demanded, such as the elimination of the positive list and the adoption of the negative list of activities allowed for private work. It took more than 20 years to achieve it.
- The delay in the creation of MSMEs, ten years after the Guidelines and almost 30 since the start of the reform in the early 1990s.
- The prevalence of the orientations of the cadres, more than what the legal regulations dictate.
- The elimination for MSMEs of the tax exemption in the first year of life and the limitation of the corporate purpose; the latter in frank contradiction with what the regulation stipulates.
- The creation of a new currency, MLC (freely convertible currency), while declaring the purpose of exchange and monetary unification.
- The delay in undertaking the monetary and exchange reform.
- The survival of rules of the game, conceived decades ago when the country was experiencing another reality and that hindered and still hinder the purposes of economic growth.
- Resistance to introducing and expanding the use of support systems for people and abandoning the general subsidy for products.
- The resistance to making the foreign investment law and its regulations more flexible and the delay in adopting a regulation to undertake this process in MSMEs, when our capacity to generate internal savings is meager.
- The delay in adopting solutions to “negotiate the foreign debt” when Cuba today is recognized as one of the highest risk countries and the economy is technically in default.
- The insistence on maintaining an essentially collection tax system.
- The resistance to grant real autonomy to state enterprises.
- The reluctance to reduce the “fundamental means of production” to those that are strategic for development, national security and care for the environment.
- The prevalence of the sectoral over the territorial.
- The persistence in maintaining administrative and monopoly control over the import and export processes when reality has shown that the structures that deal with them are overflowing.
- The ministerial clinging to the tradition of “commanding enterprises” together with the culture of “asking permission” of the enterprises themselves.
- The lack of legal protection of the state entrepreneur.
The list could be much longer and even much more specific. It also covers different periods of our recent economic history. In fact, this institutional weakness largely explains the reasons why we are where we are and how we are. And why there are still problems, hindrances, obstacles that should have disappeared a long time ago.
At the end of the 1970s, the first regulation that allowed the existence of self-employed workers and positively regulated which economic activities could be carried out was approved; only a few dozen, under strict control, not only economic but also political. Ten years earlier, all vestiges of non-state businesses had been eliminated — including shoe shiners — turning the survivors into state businesses and generating one of the biggest headaches for the state that has not yet been fully eliminated.
During those ten years and despite relations with the USSR, the deficit in the supply of goods and services grew, until it became a structural phenomenon with negative impacts on the quality of life of the population. It also generated negative incentives for productivity and, at the same time, hindered the State’s ability to adequately attend to these new activities, which demanded resources that the State itself was not in a position to offer in adequate quantity and quality.
These “rules of the game” forced the State to sustain these activities, using resources “extracted” from other “supplier” sectors by virtue of the “greater good.” Because if it belongs to the State, then the State is obliged to care for and support it!
Today, the so-called “popular gastronomy” which sometimes has very little gastronomy and even less popular is a living example of this; like the state commerce that today turns out to be the one with the most state enterprises, with 19% of the total.
This “rule of the game” has been applied consistently over decades, causing growing disincentives for “supplier” enterprises.
It responds, among other reasons, to the omnipresence of the State in all economic activity and to the resistance to concentrating what is State-owned on the strategic. Today, 389 enterprises receive subsidies from the state budget: 16% of the total. Surely a part of these enterprises, perhaps the majority, are enterprises that produce or participate in the production of essential goods and services, but why not change the rules of the game and instead of subsidizing products/enterprises, subsidize consumers who really need it?
At the end of April, there were 2,417 state enterprises in the country, according to what was explained by the Deputy Minister of Economy Johanna Odriozola in a recent Mesa Redonda program on Cuban television. Fifty-six entities generated 80% of the profit before taxes, that is, 2.3% of all state enterprises!
Of these enterprises, 321 export (16%) but 80% of the exports are concentrated in 12 enterprises. In other words, 0.4% of the total and several of them are joint ventures.
Are the 2,417 state-owned enterprises “strategic”? Should all of them be considered fundamental means of production?
If you add the enterprises that have losses (278), those that obtain a return of just two cents (309) and those that receive subsidies (389), the figure is 976 state-owned enterprises — 40% of the total suffer from a precarious state. How many of them are really strategic? Must they all be fundamental means of production?
Our economic model has been characterized by generating a duality of institutions. On the one hand, those that guarantee free access to education, to health, which has created solid foundations for the formation of skills, and fostering a kind of competitive advantage in the quality of its workforce, something that explains, at least in part, the “success” of Cuban emigration.
But at the same time, it has generated other institutions that do not promote the existence of competitive markets or develop the necessary incentives for technological change and innovation, institutions that create barriers to the entry and limitation or elimination of competition among participants; that extract a decisive part of the wealth that state-owned enterprises generate — it came to be up to 70% of the utility and is currently 60% as a contribution for the return on state investment, which comes from those same enterprises.
Institutions — rules of the game — that prevent creative destruction and slow down the creation of new enterprises; that fail to create enough confidence for potential investors — national, foreign, state, private — to risk their resources in search of future profits; that reduce incentives and raise transaction costs, interposing bureaucratic procedures and political prejudices that slow down productivity and hinder the production of wealth. Without wealth, the idea of prosperity is no more than an aspiration without real support.
These institutions work like a suction pump that feeds the vicious cycle of poverty.
They form the exoskeleton of our productive and social system, and like the exoskeleton of arthropods at a given moment in their evolution, they constrain their growth and atrophy their agility, because they do not grow at the same time as the individual who uses them. The remaining solution for these species is to get rid of that exoskeleton and create a new one; it is their only way to grow and complete their life cycle.
In order to develop and be prosperous, we have to shed what no longer serves us.
Author
Dr.C Juan Triana Cordoví
