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Alternate Futures for Cuba’s Emerging NonState Economic Sector
Archibald R. M. Ritter,
Carleton University, Ottawa Canada
CRI FIU
February 23, 2017
Prelude:
•
Under President Raul Castro, a redesign of Cuba’s
economic institutional structure
•
Major expansion in small enterprise sector
•
Policy environment for small enter[rise has changed
significantly, but there are still important policy
changes that need to be made
+/- 500,000
Ritter and Henken, Entrepreneurial Cuba. 2015.
In Future:
Cuba faces the task of choosing the type of mixed
economic structure that will work best for the
Cuban people.
A wide variety of institutional structures are
possible.
• Cuba is moving towards a number of possibilities
simultaneously.
• There are a number of types of private sector that
Cuba could adopt.
Objective of this presentation:
To examine the institutional alternatives for Cuba’s economic
structure and to weigh the relative merits for each.
All alternatives will include some mixture of
• Domestic or indigenous private enterprises;
• Cooperative enterprises and “not-for-profit” activities;
• Foreign enterprise on a joint venture or stand-alone basis;
• Some state enterprises (in natural monopolies for example)
and
• Public sector (health, security education infrastructure,
administration etc.)
Among the alternatives:
1. Institutional status-quo as of 2015;
2. Mixed economy with intensified “co-operativization;”
3. Mixed economy, with private foreign and domestic
oligopolies replacing the state oligopolies;
4. Mixed economy with an emphasis on indigenous small
and medium enterprise.
45
40
38.5
OPTION #1. INSTITUTIONAL STATUS QUO as illustrated by the
Pattern of Employment: Actual, 2015 [Percentages of Total]
35
32.8
30
24.4
25
20
15
10
4.4
5
0.7
0
Public Sector,
Personal &
Communal
Public Sector,
Mainly
Production of
Cooperative
Sector
Indigeneous
Private Sector
Private
Sector,Foreign
and Joint
Employment in Cuba’s Private Sector circa 2015
(thousands, full time equivalents and Percentage of Total)
Employment Category
State Sector (Total)
Number Percent of Total
3,460
71.2
1. Public Services and Infrastructure
1,865
38.5
2. State Enterprises
1,595
32.4
1,401
24.4
Non-State Sector (excluding Cooperativess and Jt. Ventures)
3.A Microenterprise (TCP) Total
499
10.3
3.B Other private
653
13.0
214
4.4
34
4,990
0.7
4. Cooperatives
5. Joint Venture
TOTAL Employed Labour Sector
100.0
Sources: C. Mesa-Lago et.al., Voces de Cambio en el Sector No Estatal Cubano. Madrid:
Iberoamericano, 2016; ONE, Anuario Estadistico de Cuba;
1. Institutional Status-Quo as of 2017;
On Track at least till 2018
Advantages:
• Avoidance of uncertainty of a transition;
• Maintain the possibility of “macro-flexibility”
• For the Party:
Assist in maintaining political control of the citizenry;
(a disadvantage from other perspectives)
Continuing state control over most of the distribution of
income;
(a disadvantage from other perspectives.)
• For Raul: Quiet life until retirement
Disadvantages:
• Vertical & centralized system obstructs horizontal
communication among firms;
• Centrally controlled state enterprise leads to
Continuing bureaucratization of production;
Continuing politicization of state-sector economic
management and functioning ;
Continuing lack of an effective price mechanism
in the state sector (even with monetary and
exchange rate system reforms.)
Continuing perverse and dysfunctional incentive
structure;
• Resultant damage to efficiency, productivity, and
innovation and living standards
OPTION #2: “PRO-COOPERATIVE” Institutional Structure by
45
40
Employment Pattern (% of Total)
38.5
Actual. 2015
Co-operative Option, #2
35
30
30
35
32.8
24.4
25
24
20
15
8
10
3
5
4.4
0.7
0
Public Sector,
Communal
Services
Public Sector,
Mainly
Production of
Goods
Cooperative
Sector
Private
Sector,
Indigenous
Private
Sector,
Foreign and
Joint
Ventures
Centro Asturiano, “Benevolent
Society”, founded: 1886
Some American Coops
OPTION #2. Mixed economy with intensified
“Co- operativization”
Policy Requirements
• Permit cooperatives in all areas, including professional
activities;
• “An Enabling Policy Environment”
• Encourage grass-roots bottom-up ventures;
• Open up the current approval processes;
• Provide import & export rights;
• Improve credit and wholesaling systems for coops.
OPTION 2. Mixed economy with intensified
“Co-operativization”
Advantages:
• Incentives :
Worker ownership and management provides powerful
motivation to work hard
 Profit-sharing ensures alignment of worker and owner interests
• A more egalitarian distribution of income than privately-owned
enterprises.
• Greater degree of flexibility than state and even private firms;
 Income/profits payments to members can reflect market
conditions
• Democracy in the work-place:
Valuable in itself;
A major advantage over both state- and privately-owned enterprise;
[Workers’ ownership and control is ironic & contradictory since
Cuba’s political system is characterized by a one-party monopoly;]
May help propel political democratization.
• “Second degree cooperatives” or “cooperative coalition of
cooperatives”
Potential for reaping organizational economies of scale (a la Starbucks,
Subway, McDonalds, etc. )
Major potential for maintaining income equity;
May maintain ownership and diffused control and profit-sharing among
local citizens
Difficulties:
1. Cooperatives generally have passed the survival test, but have
not made huge inroads against private enterprise;
•
2.
Question: are they really more efficient?
Governance and Management may be a problem:
• The “transactions costs” of participatory management may be
significant.
• Personal animosities, ideological or political differences, participatory
failures, and/or managerial mistakes
• For larger coops, complex governance structures may impair flexibility
3. Cuba’s Actual Complex Approval process is problematic at the
time: Possibility of political controls and biases
4. Certification of professional cooperatives is unclear
5. Hiring of contractual workers is problematic:
“Hire or Fire after 90 days” rule may curtail job creation;
10% limit on contractual labor also may curtail job creation;
Governance may be impaired if uncommitted workers have to
join.
6. What will be the role of the Communist Party?
Will the Party keep out of cooperative management?
Party control would subvert workers’ democracy and deform
incentives structures.
But in more distant future, the Party will not be there – I hope
and expect.
OPTION # 3: “WIDE OPEN” FOREIGN INVESTMENT
45
40
Approach; Institutional Structure by Employment (% of Total)
38.5
Actual 2015
35
30
30
Wide Open DFI Option
32
32.8
28
24.4
25
20
15
10
5
5
4.4
5
0.7
0
Public
Sector,
Communal
Social and
Personal
Services
Public
Sector,
Mainly
Production
of Goods
Cooperative
Sector
Indigeneous
Private
Sector,
INDIGENOUS
Private
Sector,
Foreign and
Joint
Ventures
OPTION # 3 Wide Open Foreign Investment Approach;
i.e. “Walmartization”
Character:
• Rapid Sell-off of State Enterprise to Deep-Pocket Purchasers
i.e. Large purchasers in US, China, Europe, Brazil, or elsewhere; i.e. the
Walmarts. Lowes, Subways Starbucks of this world;
• Sale of current state oligopolies to single foreign purchasers
“Walmartization” of Cuban economy
• A strong possibility if existing state oligopolies (e.g. CIMEX &
Gaviota’s Properties) were to be privatized in big chunks;
Policy Requirements:
• Promote rapidity in privatization;
• Indiscriminate Direct Foreign investment.
Advantages:
• Major and immediate revenue receipts for Cuban
government;
• Major and rapid transfers into Cuba of
Financial resources;
Entrepreneurship and managerial talent;
Physical capital: machinery and equipment and constructions
Most modern technology embedded in machinery and
equipment;
Personnel where and when necessary;
• Result:
Rapid productivity gains;
Higher-productivity work; ambiguous employment implications
Rapid GDP gains
Disadvantages:
1. Profit outflows, ad infinitum
2. Income concentration:
 Profits to foreign owners (e.g. the Walton family of Arkansas)
 Profits to oligopolistic domestic owners;
3. Oligopolistic economic structures damaging in the long run
4. Strengthened probability of lucrative employment and
ownership for the civilian and military Nomenclatura;
5. Blocks or inhibits development of Cuban entrepreneurship;
6. “Walmartization” of Cuban culture; dilution of Cuban
uniqueness
8. Further reduction of the potential for diversified
manufacturing in Cuba (e.g. due to the Walmart/China
mass-purchaser/mass-supplier symbiotic syndrome).
9. Probably blocks export diversification.
OPTION # 4: “INDIGENOUS” PRIVATE SECTOR Approach
Institutional Structure by Employment (as% of Total)
50
45
38.5
Actual
40
35
35
44
Indigenous Approach
32.8
30
24.4
25
20
12
15
10
3
5
4.4
7
0.7
0
Public
Sector,
Communal
Services
Public
Sector,
Mainly
Production
of Goods
Cooperative
Sector
Indigeneous
Private
Sector
Emploument
Private
Sector, DFI,
Joint
Ventures
OPTION # 4: Basic Policy Requirements
1. Required: “enabling environment” for micro,
small and medium enterprise:
• A reasonable and fair tax regimen;
• End discrimination against domestic Cuban
enterprise
• Reasonable regulatory regime
• Establishment of unified and realistic monetary and
exchange rate systems
• Property law and company law
2. Release Creativity, Energy and Intelligence of
Cuban Citizens:
Liberalize micro-, small and medium enterprise:
Open and automatic licensing;
Opening for professional enterprises;
Open up all areas for enterprise – not only the “201”
Permit expansion to 50 + employees in all areas;
Implementation of wholesale markets for inputs,
Open access to foreign exchange and imported inputs,
Full legalization of “intermediaries”
Permission for advertising.
Advantages
1.
Oligopoly power more curtailed;
2.
More competitively structured economy with all the
benefits this generates;
3.
Permits further flourishing and evolution of Cuban
entrepreneurship, with the possibilities this permits
4. Permits development of a diversified range of
manufacturing and service activities
5.
Permits diversification of exports
Advantages
6. Reduced role for “Nomenclatura;”
7. Decentralization of economic and thence political power
• Reduced power for government to exert political influence through
economic control
8. More equitable distribution of income among Cuban
citizens and among owners;
9. Profits remain in Cuba;
10. Stronger maintenance of Cuban culture.
Disadvantages
• No massive and immediate cash infusion to
Government from asset sell-offs
• Or is this an advantage? [more effective use of incoming revenues]
• Slower macroeconomic recuperation;
• Slower inflows of technology, finance,
managerial know-how – but more domestically
controlled.
Which of the Alternative Futures is
OPTIMAL for Cuba?
Option #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-Cooperate” Mixed Economy.
OPTION #3. “Wide Open” Foreign Investment
Approach in Mixed Economy
OPTION #4. Indigenous Private Sector in a Mixed
Economy
Plus Options #5, #6 and #7.
Which is OPTIMAL?
You decide…….. via CRI- FIU REFERENDUM #1
OPTION #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-Cooperativization” Mixed economy.
OPTION #3. Indiscriminate Foreign Investment/Joint
Venture Approach in Mixed economy
OPTION #4. Indigenous Private Sector in a mixed
economy
Plus OPTIONS #5, #6 and #7.
Which is OPTIMAL for Cuba?
CRI FIU REFERENDUM
Option #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-cooperativization” mixed economy.
OPTION #3. Indiscriminate Foreign Investment/Joint Venture Approach in Mixed economy
OPTION #4. Indigenous Private Sector in a mixed economy
Which is OPTIMAL for Cuba?
CRI FIU REFERENDUM
Option #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-cooperative” mixed economy.
OPTION #3. Indiscriminate Foreign Investment/Joint Venture Approach in Mixed economy
OPTION #4. Indigenous Private Sector in a mixed economy
Which is OPTIMAL for Cuba?
CIU FIU REFERENDUM
Option #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-cooperative” mixed economy.
OPTION #3. “Wide-Open” Foreign Investment
Approach in Mixed Economy
OPTION #4. Indigenous Private Sector in a mixed economy
Which is OPTIMAL for Cuba?
FIU REFERENDUM
Option #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-cooperativization” mixed economy.
OPTION #3. Indiscriminate Foreign Investment/Joint Venture Approach in Mixed economy
OPTION #4. Pro- Indigenous Private Sector in a
mixed economy
Which is OPTIMAL for Cuba?
CRI FIU REFERENDUM
Option #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-cooperativization” mixed economy.
OPTION #3. Indiscriminate Foreign Investment/Joint Venture Approach in Mixed economy
OPTION #4. Indigenous Private Sector in a mixed economy
OPTION #5 Some Other Hybrid Combination
of #2, #3, and #4
Which is OPTIMAL for Cuba?
FIU REFERENDUM
Option #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-cooperativization” mixed economy.
OPTION #3. Indiscriminate Foreign Investment/Joint Venture Approach in Mixed economy
OPTION #4. Indigenous Private Sector in a mixed economy
OPTION #5 Some Hybrid Combination of #2, #3, and #4
Option #6. None of the Above
Which of the Alternative Futures is OPTIMAL for Cuba?
FIU REFERENDUM
Option #1. Institutional Status-Quo as of 2017;
OPTION #2. “Pro-cooperativization” mixed economy.
OPTION #3. Indiscriminate Foreign Investment/Joint Venture Approach in Mixed economy
OPTION #4. Indigenous Private Sector in a mixed economy
OPTION #5 Some Hybrid Combination of #2, #3, and #4
Option #6. None of the Above
OPTION #7 A Spoiled Ballot
Optimal structure?? “INDIGENOUS” PRIVATE SECTOR
45
40
38.5
Plus COOPERATIVE Approach (as% of Total)
Actual
35
35
Indigenous Approach
37.5
32.8
30
24.4
25
17.5
20
15
10
5
5
5
4.4
0.7
0
Public
Sector,
Communal
Services
Public
Sector,
Mainly
Production
of Goods
Cooperative
Sector
Indigeneous
Private
Sector
Emploument
Private
Sector, DFI,
Joint
Ventures
Conclusion:
For Cuba’s future economic institutional structure:
1. Utilize effectively Cuba’s abundant resource: well-educated,
innovative, strongly-motivated entrepreneurship;
• Promote indigenous private & cooperative sector;
• Promote indigenous Cuban economic culture;
2. Use Cooperatives and where possible
3. Avoid “Walmartization” & homogenization of Cuban
economy;
4. Utilize an activist policy to Manage direct foreign investment
Thank You Very
Much !