One drastic cut and various promises

On the 1st August 2017, the Official Gazette of the Republic of Cuba (Gaceta Oficial de la República de Cuba) published Resolution no. 22/2017 by the Ministry of Labour and Social Security (the MTSS). The purpose of the new rules embodied in this resolution is to amend, to a certain extent, the inconsistencies that the authorities have identified during the implementation of their policies for the past nearly 7 years, as also observed by the Cuban society. The President of the Council of State and of the Council of Ministers himself addressed it to the National Assembly of People’s Power (the ANPP) during its Ninth Period of Ordinary Sessions.

According to the information released by the island’s Ministry of Labour and Social Security, the number of Cubans involved in self-employment was 567 982 during the first semester of 2017. More than 68 000 young people are associated to these non-state economic practices on the island, a figure that shows young people´s preference towards this economic alternative.

Since 1959, private property – and self-employment in particular – have been severely limited. This form of ownership and economic management is far removed from the political and economic system that is being built on the island, and has been therefore restricted by the authorities for more than half a century. The first opening in this economic sector happened during the 1990s, with the practice speeding up as a part of the so-called Process of Updating Cuba´s Economic Model, first in 2010 and futher expanding in 2013.

This opportunity of generating an alternative economy to the state structures (at least formally) has contributed to a supply of goods and services with acceptable quality standards, sometimes even with a quality superior to the one that could be offered by the state apparatus. This development has diminished the reach and impact of the economic output by the state, which 25 years ago accounted for around 85% of the nation’s economic activity.

For more than two decades, inconsistencies have appeared during the implementation of the policies approved in order to allow for these new economic activities. This has made it necessary to design measures aimed at improving the activities in general. Despite of this, an increased amount of people making use of these alternative activities and the results they have achieved are an indisputable proof of the validity of this form of economic management as a worthy option of employment on the island.

According to the Ministry of Labour and Social Security[1], “the most recent evaluation of this sector´s performance has, among other things, shown that raw materials and materials and equipment of illicit origin are being used; that non-compliance in tax obligations occurs and income is often under-declared; that there is a lack of confrontation and a lack of timely problem-resolution; that there are inadequacies and uncertainties that occur during checks; and that there are deficiencies in the procurements of services or the supply of products between legal entities and private individuals.” The new rules embodied in the Resolution approved on 1st August 2017, mentioned above, are meant to correct these problems.

According to the authorities on the Cuban island, these new norms “do not constitute a setback to the development of the activities; they are rather meant to consolidate the organizational structure and to allow for a proper control of self-employment, in order for it to continue advancing in an orderly and efficient manner.”

The new rules allow for a temporary suspension of issuance of a number of business licences (twenty-seven in total[2]) until the process of “perfecting” is concluded by the authorities, with the final aim being the construction of a “different” economic model, adjusted to the needs of the nation.

In addition, the issuance of licences of five (5) activities are suspended permanently[3]. It is further clarified that all workers who are currently already licenced to the activities mentioned above can continue to exercise them.

This legislation is being published in all the media and it is to be mentioned in all the official speeches. Those active in the sectors mentioned above and the Cuban society in general are being informed about the intention to change certain elements identified by the authorities as obstructing an effective practice of the activities. This includes the following changes:

  1. Related activities will be grouped, seeking to reduce the existing dispersion and improving the scope of activities:
    1. Seven self-employment activities are integrated: barbers, make-up artists, masseurs, manicurists, hair-dressers, hair-dressers making braids and a traditional hair-dressers.
    2. The activity of “selling food and beverages through gastronomical services in restaurants” will be divided into two: “gastronomical service in restaurants” and “services in bars and of recreation”, where the name and scope will be precisely defined in published regulations.
    3. The holder of the license will be authorized to contract workers and, in need of a leave of absence due to a long illness of them or of their family members for whom they hold responsibility, or due to travels abroad, they will be alowed to authorize one of the contracted workers to assume the fulfillment of their duties.

During the most recent meeting of the Congress of the Communist Party of Cuba (the PCC), documents have been released that define the private economic activity as a complementary one to the development of the nation. The will to construct a socialist society and economy continues and the decision to allow for self-employment is in line with past statements.

The successes of the non-state sector are gradually spreading to all the various activities and sectors of the economy where it is allowed to be employed; it is increasingly common for Cubans and foreigners to prefer goods and services generated by self-employed persons as opposed to goods and services from the state sector, which is deemed inefficient and corrupt.

Certain problems exist with the practice, for sure, and they have been reported by the self-employed as well as by the public in general; these have mostly been victims of badly applied policy. However, instead of correcting these imperfections that prevented the correct functioning of the activities, the authorities rather limit them or eliminate their practice all together.

The problem remains a systemic one. The instability of the economic policies on the island generates an environment of uncertainty that affects the nation’s economy. Entrepreneurs lose confidence in these practices and perceive them as risky.

The whole issue brings into mind the practice known as the “carrot and stick” approach. A limitation to the advancement of the alternative economy and prosperity on the island is identified, but instead of focusing on it, a future promise of modifications to difficulties that are in fact no so essential is presented. These subjective difficulties are not being diminished in importance, however, it is essential to understand that there are other issues of a greater scope that prevent an effective, stable and systematic development for self-employed workers in Cuba.

Among the identified difficulties, we can point out the following ones:

There is a list of 201 activities classified as simple businesses and of low professional qualification, which are less knowledge-intensive and do not allow for taking advantage of the full human capital. In addition, the list of the permitted activities is rather closed, rigid and narrow.

Self-employed workers lack the possibility to purchase products they need to carry out their activities on a wholesale market, as required by law. For this reason, they are limited to retail markets (which usually experience shortages) or they have to opt for the “black market” option.

There is no market that facilitates access to purchase various machines, heavy machinery, spare parts and other technical and technological components for their activities and operations necessary to sustain this type of non-state activity.

Foreign investments aimed at promoting these new forms of ownership and management within the Cuban economy are prohibited.

The financial system experiences liquidity problems and the two national currencies have limitations concerning their convertibility to foreign currencies.

The creation of SMEs (small and medium-sized enterprises), with the possibility of their integration into the national productive sector on a larger scale, is not allowed.

Possession of an export or import license is prohibited. Concerning imports: the inputs, machinery and other tools used can be only those that are imported to the country and placed on the market on a regular basis[4]. The entrepreneur can also choose to leave the country and bring things in personal baggage or as additional cargo, but only provided that these are allowed according to the strict regulation of the General Customs of the Republic of Cuba. Concerning exports, the exit of goods and products is limited, including the possibility to join the international market and compete with products there.

In the current tax system, the imposed taxes can at times be too large for businesses that have just started their activities. Also, the cost percentages recognized by ONAT that can be used as tax deductions for personal incomes are too low. Defining an initial period of tax exemption would be beneficial for the promotion of new businesses. The current tax system for self-employed workers establishes a tax on sales and services, a tax on the use of the labor force, a contribution to social security, a fee for commercial advertisement and propaganda, and a personal income tax ranging from 25% to 50%, depending on the type of activity performed.

Another obstacle to a creation of new micro-businesses is the slow economic growth that the country experiences. The supply of goods and services of the self-employed workers also needs a demand. With economic stagnation and a population rise, it is difficult to imagine a sufficient demand from families or state enterprises.

The authorities should show a bigger interest and ownership of these core issues related to strengthening of the different forms of management and ownership within the Cuban economy. They should avoid partial measures which complicate the issues further and often create new tensions.

[1] Marta Elena Feitó Cabrera, First Deputy Minister of Labour and Social Security of the Republic of Cuba.

[2] Rentals of homes, rooms and other spaces that are an integral part of households; cafeterias offering light meals; panel beaters; private contractors; food and beverage vendors in restaurants (Paladares); food and beverage vendors at fixed points of sale (Cafeterias); food and non-alcoholic beverage vendors with home delivery; mechanics for car equipment; assistants to fill-up vehicles on stations; managers of house purchases, sales and swaps; managers of accommodation for houses or rooms that are leased; blacksmiths; sports trainers; tailors or fashion designers; recreational equipment operators; party planners for 15th birthdays, weddings and other activities; oxy-fuel welding and cutting operators; producers or sellers of footwear; producers or sellers of various household items; teachers of shorthand writing, typing and languages; professors of music and other arts; computer programmers; repairmen of electrical and electronic equipment; reamers; jewellery repairers; bijou repairers; and services of construction, repair and maintenance of real estate.

[3] Wholesale sellers of agricultural products; retail sellers of agricultural products; sellers of agricultural products without a fixed post; buyers and sellers of CDs and vinyl disks; and operators of recreational equipment (for rustic equipment).

[4] This process is realised on the national level through socialist planning. In this way, the state performs different balances to estimate the demand for a specific period, usually one year.