Tackling vulnerabilities with dogma-proof boldness

New store openings in freely convertible currency grabs headlines these days after the July 16 announcement of the “economic-social strategy.” However, expansion of a partial dollarization system — which had already been tacitly assumed as the policy option since October of last year, and which now causes such a stir because of the inclusion of certain foods and hygiene products — does not constitute the nucleus of this revival strategy, although it may condition it.

Management decentralization of state-owned companies, and the expansion and formal recognition of the private and cooperative sectors, are the two main axes of an essential reform of the model that —started almost 10 years ago— has suffered many implementation countermarches. Both have now reappeared in the sights of the Council of Ministers.

Fostering a private sector that contributes in helping to solve the economic and social problems facing Cuba is relatively simple, even when you consider how capriciously suspicious they may be seen. There are laudable proposals on the table that can be applied now. But the most complicated calculation is the one that hangs over the state business sector, and that is what defines the game.

Reclassify companies or end up shipwrecked in an incomplete autonomy

The debate centers on the definition of who is empowered to undertake the decisions that involve any business management process. This includes determination of varieties, qualities and production quantities; price fixing; choice of suppliers and customers; definition of investments; foreign trade powers; decisions on working capital; approval of job templates and organizational structure; hiring of workforce; determination of wages; election of management positions; decisions on distribution of profits; possibility of transferring or acquiring assets; among other things. The Minister of Economy has stated: “In the ministries or the upper levels of government we do not have to be making decisions that correspond to the business person. The business person must be clear about his/her mission and he/she must have the elements to be able to fulfill it.” But this discussion is endless because it carries a basic distortion: the classification of companies.

Giving the required autonomy to companies implies that these companies —and not the State— assume responsibility for their failures, as well as benefiting from their successes. It implies a strict commitment on the part of the State to not save them, and thereby ending the era of “weak financial restrictions” systematized by Kornai. On the other hand, there is a group of companies in charge of providing certain essential or strategic goods and services that could never be abandoned in the event of an eventual insolvency, or that even owe their insolvency to social commissions. To avoid this, since it is not possible to subject all of them to the same rules of the game, what can be expected is that they be granted a type of half-autonomy whereby the State continues to administer and mediate its successes or failures. It would be agreeing to change more of the same.

But there is a different option. There is a very important definition that precedes the discussion on the degree of decentralization of companies orphaned by the current situation: the need to reclassify state economic entities based on the optimization function that society assigns to them. That is the first task of the Planning stage — understood as a way of leading society — from the very moment that the formal socialization of the means of production is undertaken, and it does not end even if sixty years have passed.

The debate on decentralization, bogged down because of the aspiration to find a single business management model with a system of rules that adjusts to all entities without considering an essential difference in its optimization function, is little less than a utopia. This type of economy needs companies that respond to certain purchases, even at the cost of economic irreplaceability, and, at the same time, it needs companies that — subject to conditions of social responsibility — pursue profit maximization and competitive insertion as its fundamental goal in domestic and international markets.

Proposal to reclassify state economic entities

Currently in Cuba two types of state entities are generally recognized: companies and budgeted units. Although there is no clear criterion that explicitly establishes the requirements to belong to one or the other group, the idea that companies are those that are dedicated to the production of goods and merchant services and the budgeted units are those that provide social services. Another parallel logic seems to understand as companies those that have the capacity to cover their expenses with income they produce, and budgeted units are those that cannot do so and their expenses must be covered by the state. However, multiple cases emerge that confront these two criteria and lead the authorities to decide them case by case, even to modify the classification of the same entity several times in a short period of time. The existence of these regulatory gaps is resolved based on someone’s discretion.

In summary, this taxonomy is not appropriate, since, for example, there are budgeted units that are allowed to market certain goods or services and are thus able to generate profits, while there are companies that, due to the strategic nature of their production, their activities would never be stopped, even if their economic conditions generated systematic losses. They would be rescued by the state. Then what occurs is what has been described in the first part. It is not clear what the rules of last resort are and the companies all have the expectation of being rescued, and the State does not have an instrument to discriminate between them — other than ‘discretion.’

On the other hand, there is a great distortion around the category of “socialist state company,” which is supposed to be profitable and efficient, but at the same time take on social or political missions regardless of the costs involved. With this, the company is not conceived as an optimizing organization, but a compliant one, which destroys — from its own conception — a large part of the incentives for innovation and its constant development.

It is necessary to establish clear, stable and safe rules that consistently send the business the appropriate signals and incentives for the development of their functions. For this, it would be convenient to classify the entities by defining what objectives constitute their optimization function, what is their set of restrictions, and therefore how their regulatory framework is constructed. A first proposal could value three types of entities:

1. Market entities

These would be profit-maximizing entities subject to public welfare restrictions. Its fundamental mission would be to obtain the greatest amount of net benefits possible, combining a short-term perspective with sustainability and long-term growth. Its results would be measured by the volume of benefits obtained and the dividends contributed to the State as owner. They would operate under market conditions, with full autonomy over all decisions by the company’s management, with full powers of foreign trade. They would be bound by socially responsible production standards like the rest of the productive actors. As a principle, physical productions would not be regulated, nor should material goods be assigned to them, although they may be required — as commissioned by the State — a certain level of production of some specific line of national interest, provided that it only compromises a part of their productive capacities. The State does not protect them from bankruptcy.

2. Social entities

These would be entities dedicated to the social welfare. Its fundamental mission in the economy would be to maximize public welfare, expressed in the production of highly sensitive goods or services for the development of the country, although they are not necessarily profitable. Its function would not lie in seeking the maximum possible profitability, an aspect that distinguishes it from the first group. It would be subject to certain profitability goals — to plan and negotiate a priori — with which they may or may not be profitable. Society will not terminate them, even if they cause sustained economic losses. The State can partially or totally finance its activities, an aspect that could vary from one period to another.

3. Public administration entities

These would correspond only to the administrative apparatus of the State. They are the only ones that would subordinate themselves economically to the ministries. Its economic functions would be reduced to the operational administration of the entity. Its fundamental mission is to optimize compliance with their assigned public administration function. They would completely depend on the State budget.

Classifications like this could be the basis for implementing truly autonomous practices in the management of a group of companies, under a gradual and minimal risk process. Currently, all economic entities operate under the rigors of the second or third group. One could start by identifying a relatively small group of some 50 to 100 entities, which clearly classify in what we have defined here as Market Companies or Entities, and design an advanced regulatory framework, and an adequate incentive system that allows them to operate with full powers, including access and use of currencies in a partial dollarization environment.

This would not imply losing patrimonial control, but it would offer total freedom to the management teams to manage their development. Once an initial term has expired and the adjustments have been made, this group of Market Companies may continue to expand to cover all the entities that consider themselves falling under this function. An optimal structure of these types of entities could promote the desired levels of productivity, while guaranteeing the sustainability and development of non-profitable social goals through the market.

Nine years later, the country’s leadership once again speaks of autonomy for the state-owned company, this time with an energy that appears irreversible. The private sector seems increasingly viable in the official discourse, and the efforts of some State institutions to articulate projects and alliances for the common benefit are highly commendable. We are not exactly under the best of circumstances, but the only way out of this enormous vulnerability we’re under is to approach it with dogma-proof boldness.