Implementing small- and medium-sized businesses

HAVANA – While the governing documents of the Party long ago set the tone, some of the many contenders in the debate on current reform — including non-economists, economists and anti-economists — still settle discussions in the public space. The main points have focused on policy options and the analysis of their possible impacts. The sequence and ways of executing those policies have generally been less present. So how do we restart the train? How do we boost, evaluate, correct… 

Implementation mechanisms are called for… the ‘how’ marks the urgency.

From the start the economy’s Update process has had several essential axes. Two of them, the decentralizing reform of the management of state property and the diversification of forms of property, constitute the central nucleus. In theory, both should be undertaken with relative simultaneity to mitigate undesirable imbalances in the workforce on the one hand and, on the other, to unleash the enormous potential of linkages between them.

However, the situation forces daring adjustments to the time sequence. Given a known combination of factors — exhaustion of the internal development model, reinforcement of the restrictions imposed by the United States government, and the forceful external shock derived from the epidemic — the country is entering a severe economic crisis with inevitable social impacts. The generation of internal sources of sustainable supplies of goods and services — not just food — and the creation of the available employment options that manage to absorb an enormous mass of workers, or interruptions that would be unaffordable for the social security budget, cannot wait for the public (State) sector experiment. We must find a solution as soon as possible.

Authorizing the development of private ventures based on the formalization of small- and medium-sized (SMEs) companies, approved in the Conceptualization of the Model, to undertake activities of national interest and without any alienation of state assets, is among the things whose implementation should not be deterred. The question is how to do it.

Implementing SMEs with the National Classifier of Economic Activities

There is a method that’s stood for a long time internationally that groups the total universe of possible economic activities carried out in a country. The United Nations Statistical Commission recommends the use of the International Standard Industrial Classification for the national accounts compendium, which in turn is used by most multilateral organizations.

To help bring it in harmony as contextualized by the Cuban needs, and to function as an accounts guide on the Island, the National Office of Statistics and Information (ONEI) has developed the National Classifier of Economic Activities (CNAE), the most recent version was issued in March 2020. This tool groups into 421 classifications almost the entire universe of economic activities, which encompasses about 5,900 practices. For example, unpaid domestic work, which adds value to one’s home life, has its assigned classification.

We can start there. Let’s use this CNAE to order all the activities that could be eventually developed by the private sector, and design their implementation in stages.

The CNAE bases its order on the detailed disaggregation of production processes and is applied just to classify companies, establishments and entities of any nature. In addition to allowing the compilation of statistics —which, by the way, will be essential to evaluate the results and design policies applied to the private sector—, this classification is increasingly used internationally for administrative purposes such as tax collection, the issuance of commercial licenses, the classification of income and expenses, among others.

The logical first step would be to identify, in the CNAE, economic activities where the participation of the private sector is not compatible with the objectives of the construction of Cuban socialism. These activities would constitute the list of what, in principle, the private sector will not be allowed to do under any circumstances. This inventory, protected against the potential discretion of the compilers, should be carried out taking as fundamental references the Constitution of the Republic and the Conceptualization of the Economic Model. Incidentally, this method is an excellent tool to at once solve the age-old problem of the lack of definition of the fundamental means of production.

Among activities that could be prohibited, for example, would be those related to public administration and defense, education, healthcare, social assistance, public utilities, financial and insurance activities, exploitation of mines, among others.

Once this is done, the path will be cleared. The rest of the activities not prohibited would emerge as formal ventures willing to provide goods or services that help solve unmet demands or needs, both for final and intermediate consumers. Note that in no case does the proposal imply the alienation of state assets. The state sector must be wholly preserved and soon subject to a similar energetic transformation.

Of course, implementation would be complex. It must still overcome extraordinary obstacles; it will be necessary to legislate on various aspects. First, these SMEs should be required to operate under a system of accounting standards that governs the rest of the companies, perhaps with adjustments. Second, the mechanisms of access to supply markets should be oiled, which is already legal through the sale of productive surpluses by state companies and using the infinite potential for importation in dollars through state chains currently operating. Third, no new step can be taken in the private sector without deep reflection on how labor rights are going to be guaranteed considering the existing inequalities. Laws are required that adequately regulate what would be required of them, including tax and labor obligations, as well as how workers’ rights are to be guaranteed. In addition, laws must be established that clearly define what the differences are between a small / medium private company, and a self-employed person.

On the other hand, a determining factor of success rests on the capacity of the institutions to quickly handle the volume of requests and respond efficiently. For this, it is essential to organize execution of the plan gradually, but with a public guideline, shielding the process from unforgivable reversals such as the one experienced over the last five or six years of the economic Update.

Implementation in stages

For a first phase, we could identify in the CNAE a relatively small set of about 40-50 kinds of activities that are currently a priority for the country’s economy, and in which private enterprises can contribute decisively. For starters we can look at agriculture, livestock, forestry and fishing, also manufacturing. Once the mechanism is functioning, the remaining allowed classes could begin opening.

For the creation of a small business, its owner should outline the types of economic activity contained in the CNAE. The enterprise should be able to request its incursion in as many classes as it wishes, as long as they are allowed at the corresponding phase. The authorities must make clear what is required to operate in each class; for example, sanitary licenses, environmental licenses, safety rules at work, urban regulations, etc. The tax system can be set by type of economic activity, as well as a common general tax based on profit.

In no case should the authorization of SMEs be made on a discretionary basis, as occurred with the Non-Agricultural Cooperatives, or as was done with the provincial and municipal commissions that operated during the reopening of self-employment last year. This only produces serious distortions, including administrative corruption that should be avoided at all costs. Clear laws, transparent requirements and automatic authorization processes should be established — once compliance with all requirements has been verified. No official or group of officials at any level should have the prerogative to authorize (or not) the establishment of an SME, other than ones which are in non-compliance with public requirements.

With the aim of concentrating efforts on new challenges and avoiding overloads in related institutions, the legal framework that regulates Self-Employment today could remain unchanged in the first stage. Some of the current self-employed workers may find incentives to modify their small business status, while others would prefer to stay in their current form.

The mid-term vision should convert licenses, currently authorized for self-employment, to the classes described in the CNAE, whereby the list of activities allowed today would disappear. In the future, all private activity should be ordered and regulated under this Classifier, establishing as the only difference the status of company that grants legal personality, from the nature of independent worker that many entrepreneurs would retain.

President Díaz-Canel has called for the deployment of innovative thinking that will transform the country under the current circumstances. The pressure and responsibility is monumental, and it should not lead to haughty solutions, or ones that cripple the process. A clear route, a shared path with an explicit arrival point that will be respected by the authorities, constitutes the best formula for implementations that require progress in phases. This is one of those cases.

Reaching “the productive transformation that the country needs at the moment, that guarantees processes with more efficiency, productivity, utility and income, that satisfies internal demands, that gives us export possibilities, and that also fosters well-being, development and prosperity,” as affirmed Díaz-Canel, must be achieved by awakening dormant domestic potentials. The limitations imposed on the development of private enterprises are part of these. This is a proposal to get us started.