Entrepreneurship in Cuba in 2021: A race with obstacles

Entrepreneurship has always been an option in Cuba. It has always been there, sometimes discreetly. The current state of the country’s economy suggests that it is time for entrepreneurship to become a more important actor. The measures announced over the last few months, in addition to those to come, indicate that it has a major role to play and that necessary change should not be delayed any longer. How do the new measures affect entrepreneurs? How do they deal with a dollarized economy? How do they integrate with the rest of the players in the economy? Undoubtedly, the year 2021 will help define the path entrepreneurial ventures will take, and the impact and contribution these will have on improving the Cuban economy.

A cyclical overview of self-employment

Thirty years ago, we Cubans were plunged into one of the most complex economic periods in our history. The collapse of the socialist camp led to the beginning of the Special Period and the economic and social debacle it presented. Its effects are still felt today and are extremely visible in the impoverishment of the country’s industrial and business sectors. These sectors have been marked by major decapitalization, workforce inflation that directly impacts the productivity of companies, and rampant white-collar corruption (José A. Rodríguez, 2018).

One of the solutions carried out in those years was to open the Cuban economy to foreign markets by means of foreign investment and tourism. This opening presented a lifeline that, little by little, contributed to the improvement of the country’s economic conditions through a recovery of vital areas of the industry and the arrival of fresh foreign exchange.

Fast-forward to this year, and the Cuban economy finds itself again in an extreme situation, with a structural and systemic crisis that once again prompts us towards economic flexibility. This situation is complemented by an economic and financial blockade by the United States, which increasingly limits the nation’s margins of movement, and a coronavirus pandemic that has triggered public spending and increased the budget deficit.

Just as tourism was one of the country’s lifesavers in the past, private entrepreneurship and the liberalization of productive forces today seem like the keys to fundamental changes in restructuring the business sector and the economy. Although several steps have been taken in this direction, there is still a long way to go before the business sector adjusts and functions efficiently.

The last 10 years and testing what’s possible

Entrepreneurship in Cuba did not emerge in 2010, rather there have long been examples of openings towards entrepreneurship, such as in 1979 and in the 90’s. However, it was not until 2011 that self-employment emerged with force and became both an alternative for employment and a search for quality of life for a significant part of the Cuban population.

Ten years have passed since it was authorized as a form of employment, and in those ten years it has left a trail of distinguishable elements, above all the potential it has to contribute to the development of the Cuban nation.

Among the most notable elements were the almost 600,000 people with self-employment licenses in 2019, which, according to the economist Pedro Monreal, accounts for 27% of national employment (April 2020, Twitter). Another element to consider is its impact on the country’s budget, which in 2017 amounted to 11% of total income (Ileana Díaz, December 2020). In addition to this data, there is ample capacity through specialization or productivity to integrate into national supply chains and contribute a greater value to the goods and services that are offered today.  

Since the approval of self-employment licenses, businesses have visibly complemented national goods and services. Hostels and restaurants have played and still play an important role to Cuba as a tourist destination. Private transportation offers a fundamental support to the mobility of the country, and contractors and construction cooperatives have an increasing presence in the construction processes of public and private works. Despite the limited social scope that self-employment licenses have been granted, their positive impact on generating value for the Cuban economy is palpable.

Another part of the economy is represented by farmers and the country’s agricultural production. Cooperatives and independent farmers are responsible for around 80% of the country’s agricultural production (István Ojeda Bello, 2019). These are the primary growers of the few foods that are still produced on our lands, despite the inefficiency of the collective model, the uncompetitive prices paid, and above all, the accumulated accounts that the State has pending payment with producers.

The coronavirus pandemic and the absence of sound public policies

The impact of SARS-COV-2 in the country has pushed the capabilities of private businesses to the limit. Undoubtedly, a large portion of businesses must reinvent themselves in order not to perish. The coronavirus pandemic caught this sector completely defenseless because the country has no public policies outlined to deal with situations of unemployment and business closures. This includes financial support plans that never existed for affected people and businesses and the lack of an integrative perspective toward the sector.

This is in stark contrast to many countries where rescue plans were immediately activated for businesses, particularly for MPYMEs (micro, small, and medium-sized enterprises). In Cuba’s case, reality was contrasted by the absence of an orderly and flexible policy to support the sector. The Ministries of Labor and of Finance and Prices limited their help to allowing businesses to temporarily suspend licenses and defer tax payments. But this process was not without misunderstandings and tensions as analysis and understanding of the difficult reality businesses were experiencing was lacking.

Contract workers were one of the most impacted sectors of self-employment. By the end of 2018, they represented about 26% of licensed entrepreneurs and were the largest group within the sector (René Tamayo, 2018). This means that at least 156,000 people were left vulnerable during the shutdown of activity due to the pandemic. How many businesses had to lay off their employees to keep running? How many lost their savings trying to safeguard their employees and protect them from financial helplessness? If something positive has come out of the pandemic, in a sense, it is the urgency to organize public policies to protect MPYMEs. There can be no looking back on this era without recognizing the need for clear social and financial protection policies formulated by the banking system, the Ministry of Labor and Social Security, and the Ministry of Economy and Planning.

The legislative schedule and unfulfilled promises

Our economic reality has shown that the implementation of reforms for the private sector cannot continue to be postponed. The year 2020 brought small doses of change that made the actions of the sector more flexible, but in the absence of an adequate legal framework, the ability to start new businesses and link to national enterprise is limited.

The current legislative calendar has the passage of an Enterprise Law, a Mercantile Societies Law, and an Associations Law, pending for 2022. This date is far too distant for the economic urgency present in the country today. These laws possess the foundations needed to strengthen the capacity of private and State companies to build a better economy and country. It is imperative that these laws are moved up on the calendar. Otherwise, we will continue dragging along the same mistakes that have brought us to the current situation.

In recent years, local governments have promoted the creation of local development projects. In most cases, they have created opportunities for private businesses to pivot and expand parts of their social reach. However, this option continues to suffer from an important deficiency: an adequate legal framework for its operation.

Each local development process experiences a high dependence on permits and freedoms granted by their respective local governments. This is what happens when an enterprise turned into a local development projects seeks to obtain financing for capital investments, or when it tries to directly impact its own community. These levels of dependency should not be negotiated but rather understood within the framework of the law and the conduct of the business itself.

Reforming self-employment required it to be recognized as a legal entity capable of interacting with any other type of organization and with the rights and responsibilities recognized in the Commercial Code. Without adequate recognition, any form of organization is limited in its actions and capacity for development.

There is a pending list of prohibited activities that offer the private sector a broader and freer social purpose [editor: until now, Cuban law has defined which private sector activities are permissible]. This allows the infinite imagination of the human being—and in our case, the creativity of Cubans—to become a reality.

Both the Enterprise Law and the list of prohibited activities are fundamental steps in unblocking self-employment and therefore unleashing an important part of the country’s economy. Business reform in the state sector must also be addressed and developed, which is also a fundamental part of unlocking the country’s productive forces.

The regulatory task: its impact on private enterprises

In recent months, a battery of new measures has been presented that have a direct or indirect impact on Cuban self-employment. Many of them are disconnected from requests for legislation that promise more operational guarantees to the private sector. However, the facilitation of foreign trade, the recognition of 100% of expenses and justification of 80% of those expenses, and the increase in the exempt minimum to 39,000 CUP for private businesses should be applauded.  

It remains to be seen how these elements will impact others, such as an increase in minimum wages, an increase in electricity rates, price signals within the economy, and the sale of foreign currency. The latter is of vital importance due to the high level of dollarization that is being experienced, as well as the emigration of many goods and services to the dollar as a way of maintaining supplies.

It is worth noting that a significant part of the market that supplies many businesses remains informal. Resource scarcity in formal channels, as well as dollarization, do not lead to a 100% legal economy. This is one of the most important obstacles faced by entrepreneurs in Cuba, since not all businesses seek to be integrated into foreign commerce. Though the national market is highly undersupplied, there continues to be a market opportunity for any company.

Several important challenges will arise for entrepreneurs in 2021. One of them will be adjusting to rising costs, which also implies an increase in their prices. However, the limits for these increases are not clearly defined, nor are the administrative measures that will attempt to stop them. Both history and economics have shown that these processes are combatted with greater supply and not with measures that are alien to market principles. Other challenges include access to formal supply chains, the transfer of collections and payments to banks, and access to financing.

The latter is of paramount importance since a development of productive and commercial activities cannot be conceived without due financial support. The entrepreneurial community desires the creation of specialized banks to facilitate business capitalization. Many of the businesses that exist today began with their own means; specialized banks can be an option for others. A decrease in the minimum allowed amounts of direct foreign investment is expected to be linked to a part of the private sector, bringing not only higher quality technology and supplies, but also integration with the demands yet to be met in the country.

A pending dream

On the other hand, it is necessary that the discourse around national products support domestic creation. This must be a basis for public policies and especially for foreign trade. It is essential to enhance the value we give to Cuban products by mobilizing the national and international vision that exists around them today. We should be motivated to consume quality products, but it is even better if they are nationally manufactured products.

National product marketing systems, chain stores, MAIs and others are highly underserved. In many cases, the presence of imported products is of little use to the population. Why not fulfiill part of this offer with products from Cuban enterprises? The State should stop experimenting with isolated cases and instead link private businesses to the national supply system with public, sustainable, and transparent policies.

Conclusions

Without a doubt, the coming sessions of the National Assembly of People’s Power, as well as the VIII Congress of the Communist Party of Cuba, will provide unique moments to approve many of the measures that for more than 10 years have been part of the political, economic, and social discourse of the country. A substantial part of the legislation still pending approval must be defined during these government meetings.

Too much time has elapsed, and the economy is showing signs of tremendous wear and tear. Policies should no longer serve as temporary solutions or half-measures. Rather, they should all be integrated as a total reform of the country’s economic system, laying the foundations for all the development potential that exists in the hands of Cubans, so that we can all contribute to creating a more open, connected, and fairer country. 

Cuba’s private sector in Cuba has a long way to go. 2021 seems to be a prelude to the rupture of what has limited the sector, and this can serve as a foundation for the future impact it can offer our nation. It is up to the Cuban State to draw up public policies for the sector, in tune with the economic reality it faces. It is up to the Cuban private sector to serve as a catalyst to become one of the engines of development and well-being of our people.

Riury Rodríguez Lorenzo is a professor, business consultant and entrepreneur. He has a Master’s in Business Administration and is a member of the Proyecto CubaEmprende Business Incubator. His writings on entrepreneurship have been published in magazines such as El Toque, Temas, and Cuba Business Report. He has participated in conferences and exchanges on entrepreneurship hosted by universities and institutions in Mexico, the USA, the Kingdom of the Netherlands, and the United Kingdom. He is an active member of the entrepreneurial community in Havana.