Alternative Institutional Futures for Cubas Mixed Economy Archibald

Alternative Institutional Futures for Cuba’s Mixed Economy Archibald R. M. Ritter, Carleton University, Ottawa Canada ASCE 2015

Prelude: Since 2010, Cuba has been implementing a redesigned institutional structure of its economy. • The task of choosing the future type of mixed economic structure will continue. A wide variety of institutional structures are possible. • Cuba is moving towards a number of possibilities simultaneously. • There a number of types of private sector that Cuba could adopt.

Objective of this presentation: To examine the institutional alternatives and weigh the relative advantages and disadvantages for each arrangement. 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

Among the alternatives: 1. Institutional status-quo as of 2015; 2. Mixed economy with intensified “cooperativization; ” 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. 8 OPTION # 1: “Institutional Status Quo” Institutional Structure by Employment (% of Total) 40 35 32. 9 Actual 2015 30 25 20. 9 20 15 10 4. 6 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

Employment in Cuba’s Private Sector circa 2015 (thousands, full time equivalents) Employment Category Registered Employment Microenterprises Microenterprise unregistered employment Number 504 (Guesstimate) 450 Service and Credit Cooperatives (CCS) 353 Small Scale Farmers 222 Joint Venture Independent Arts and Crafts, registered and unregistered (Guesstimate) Religious persons, babalu’s etc. (Guesstimate) TOTAL 34 8 to 15 2 to 4 1, 573 Sources: ONE, Anuario Estadistico de Cuba; Richard E. Feinberg, Cuba’s Economic Change in Comparative perspective, Washington D. C. : Brookings. 2013 and author’s guesstimates

1. Institutional Status-Quo as of 2015; 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. ) • Maintain good relations with North Korea;

Disadvantages: • Vertical & centralized system obstructs horizontal communication among firms; • Centrally controlled state enterprise leads to üContinuing bureaucratization of production; üContinuing politicization of state-sector economic management and functioning ; üContinuing lack of an effective price mechanism in the state sector (even with monetary and exchange rate system reforms. ) üContinuing perversity and dysfunctional of the incentive structure; • Resultant damage to efficiency, productivity, and innovation

45 40 OPTION #2: “PRO-COOPERATIVE” Institutional 40. 8 Structure by Employment Pattern (% of Total) Actual. 2015 35 30 30 32. 9 Co-operative Option, #2 35 24 25 20. 9 20 15 10 3 5 8 4. 6 0. 7 0 Public Sector, Communal Services Public Sector, Mainly Production of Goods Cooperative Sector Private Sector, Indigenous Private Sector, Foreign and Joint Ventures

OPTION 2. Mixed economy with intensified “Co- operativization” Policy Requirements • Permit cooperatives in all areas, including professional activities; • Open up the current approval processes; • Encourage grass-roots bottom-up ventures; • Provide import & export rights; • Improve credit and wholesaling systems for coops.

OPTION 2. Mixed economy with intensified “Co-operativization” Advantages: • Incentives : üWorker ownership and management provides powerful motivation to work hard ü 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; ü Income/profits payments to members can reflect market conditions

• Democracy in the work-place: üValuable in itself; üA major advantage over both state- and privately-owned enterprise; [Workers’ ownership and control is ironic since Cuba’s political system is characterized by a one-party monopoly; ] üMay help propel political democratization. • “Second degree cooperatives” or “cooperative coalition of cooperatives” or of private enterprises üPotential for reaping organizational economies of scale (a la Starbucks, Subway, Mc. Donalds, etc. ) üMajor potential for maintaining income equity; üMay 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: ü“Hire or Fire after 90 days” rule may curtail job creation; ü 10% limit on contractual labor also may curtail job creation; üGovernance may be impaired if uncommitted workers have to join. 6. What will be the role of the Communist Party? üWill the Party keep out of cooperative management? üParty control would subvert workers’ democracy and deform incentives structures. üBut in more distant future, the Party will not be there – I hope and expect.

45 OPTION # 3: “WIDE OPEN” FOREIGN INVESTMENT 40. 8 Approach; Institutional Structure by Employment (% of Total) 40 35 30 30 Actual 32. 9 2015 Wide Open DFI Option 32 28 25 20. 9 20 15 10 5 5 4. 6 5 0. 7 0 Public Sector, Communal Social and Personal Services Public Sector, Mainly Production of Goods Cooperative Sector 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 üFinancial resources; üEntrepreneurship and managerial talent; üPhysical capital: machinery and equipment and constructions üMost modern technology embedded in machinery and equipment; üPersonnel where and when necessary; • Result: üRapid productivity gains; üRapid GDP gains üHigher-productivity work; üAmbiguous employment implications

Disadvantages: 1. Profit outflows, ad infinitum 2. Income concentration: ü Profits to foreign owners (e. g. the Walton family of Arkansas) ü 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; 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/masssupplier symbiosis). 9. Probably blocks export diversification;

50 45 40. 8 OPTION # 4: “INDIGENOUS” PRIVATE SECTOR Approach Institutional Structure by Employment (as% of Total) 40 35 Actual 44 Indigenous Approach 35 30 32 25 21 20 15 12 10 4. 6 7 3 5 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 [Now: 10 yr. tax holiday + 12% profit tax thereafter for Foreign firms vs. 50% at 167. 00 per month for Cuban micro-enterprise. ] • An enabling regulatory environment; • 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: üOpen and automatic licensing; üOpening for professional enterprises; üOpen up all areas for enterprise – not only the “ 201” üPermit expansion to 50 + employees in all areas; üImplementation of wholesale markets for inputs, üOpen access to foreign exchange and imported inputs, üFull legalization of “intermediaries” üPermission for advertising.

Advantages of Indigenous Private Sector Approach 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 2015; 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 ASCE REFERENDUM #1 OPTION #1. Institutional Status-Quo as of 2015; 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? ASCE REFERENDUM Option #1. Institutional Status-Quo as of 2015 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? ASCE REFERENDUM Option #1. Institutional Status-Quo as of 2015; 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? ASCE REFERENDUM Option #1. Institutional Status-Quo as of 2015; 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? ASCE REFERENDUM Option #1. Institutional Status-Quo as of 2015; 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? ASCE REFERENDUM Option #1. Institutional Status-Quo as of 2015; 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? ASCE REFERENDUM Option #1. Institutional Status-Quo as of 2015; 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? ASCE REFERENDUM Option #1. Institutional Status-Quo as of 2015; 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

45 40. 8 40 Ritter’s Preference: “INDIGENOUS” PRIVATE SECTOR Plus COOPERATIVE Approach (as% of Total) Actual 35 35 Indigenous Approach 32 30 30 25 20 20 21 15 10 10 5 5 4. 6 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 Recommendation for a future government: • Utilize effectively Cuba’s abundant resource: welleducated, innovative, strongly-motivated entrepreneurship; üPromote indigenous private sector; üPromote indigenous Cuban economic culture; • Use Cooperatives and “Coops of Coops” where possible • Avoid “Walmartization” & homogenization of Cuban economy; • Utilize an activist policy towards direct foreign investment

Thank You Very Much !

And Thanks Again!