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    MSMEs in Cuba: Angels or demons

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    Mipymes en Cuba: Ángeles o demonios

    Micro, small and medium-sized companies, known as MSMEs, have been gaining relevance in the Cuban business network since their emergence. These economic actors are born under the protection of new legislation, which is committed to the participation of all sectors for the development of the country.

    Considered by some as the great drivers of the economy, capable of generating employment and wealth, others see them as the culprits of inflation and the palpable social asymmetries today.

    To learn about the role that MSMEs play in the economy and analyze the different opinions and positions that exist in this regard, Cubadebate spoke with two renowned experts on this matter. Ileana Díaz Fernández and Ricardo González Águila, professors at the Center for the Study of the Cuban Economy, who let us know their opinions on ten cardinal issues.

    With the recognition by the Constitution of new economic actors in the country, including micro, small and medium-sized companies, the business fabric in the country has changed. Many of them have arisen in an unfavorable economic context, marked by the international economic crisis and internal macroeconomic imbalances, such as high inflation. What general assessment can be made of this process up to the present?

    —Ricardo: Unfortunately, SMEs are born in a context of severe economic crisis. I think the best way to assess what they have meant is by asking ourselves how we would be today if they did not exist. Moreover, my answer to that question is unequivocal, we wouldn't be better off. Therefore, it seems to me that he was right when he opted to introduce them as a new actor in the Cuban economic model. Obviously, since they arise framed in a crisis, their potential positive effects have not fully unfolded. On the other hand, I feel that sometimes SMEs are attributed responsibilities that do not correspond to them, such as inflation (I will try to explain why later).

    —Ileana: The process of creating MSMEs has been positive for the country, 19.6% are from manufacturing activities, 12% from food and beverage production, they employ 225,000 people, of which 189,000 are new jobs. . It is a good look.

    Much remains to be corrected to achieve greater articulation between all the actors, greater integration and greater contribution to the economy, but they are part of an economy in crisis, where the conditions are more for survival than growth, in all the actors including the company State, which is the one who should draw the pattern of development.

    Some worry about the number of micro, small and medium-sized companies that have been created in a short time, since they outnumber state-owned companies. Should we consider this as a risk for the Cuban socialist model? Is the economy being privatized?

    —Ileana: In Latin America and Europe, MSMEs represent approximately 98% of all companies, however, the remaining 2% guarantee more than 80% of GDP and the majority of exports.

    In Cuba, MSMEs are around 50% (without counting self-employment that hires up to 3 workers or the family business) of the total number of productive organizations, without counting the budgeted units for special treatment, nor the mixed companies.

    As it was raised in the National Assembly, it is expected that all forms of non-state management contribute 13.9% of GDP, it could even be higher and in any case it shows that the state sector guarantees the largest proportion of GDP, in addition to the media fundamentals of production cannot be private property, therefore, how to affirm that the economy is being privatized

    Socialism is not at odds with the mixed economy, that is, the existence of different forms of property. It is pertinent that, instead of marginalizing them, they are involved in the construction of socialism, articulation with state forms is encouraged. Non-state actors today contribute to the economic and social sustainability of our socialism, but it is the state sector that must be strengthened to lead it.

    —Ricardo: I respect those who think that way, but it is an opinion that I do not share.

    Let's go by parts, conceptually speaking, privatization is associated with the transfer of ownership of a public asset to private companies; or the outsourcing of the management of certain services offered by the State, for example, public health. As far as I understand, this was not what happened in Cuba. What has been happening in Cuba –and in my opinion correctly- has been the gradual overcoming of that conceptual paradigm that told us that social progress was only possible through the exclusive use of state companies. And, as a consequence of this paradigm shift, there was an opening to the private sector, which I would still describe as discreet today. However, I insist on the following idea, that the productive model incorporates private actors is not comparable to privatizing.

    On the other hand, the fact that the number of SMEs is greater than the number of state companies does not have any special significance. I would tell you that in all other indicators (average number of employees, exports, sales, physical assets, etc.) the state-owned company far exceeds the private sector. However, even if that relationship were to start to change, it shouldn't be a cause for concern either.

    In the end, what is truly important is the institutional capacity of a State (in this case the Cuban one) to lead, design and coordinate the development of a country where different actors, state and private, must inevitably integrate and cooperate. There are the conceptual references of China and Vietnam, both countries with a vibrant private sector that has served to raise the quality of life of their population; and not to destroy their model of society. This was the case because the State did not abdicate its function as transformation strategist, as regulator and as designer and promoter of public policies. As long as Cuba does not lose that capacity, in my opinion, there will be little to worry about.

    It is also pointed out that these economic actors have high prices for some of their services or products. What opinion do you have on this aspect? To what extent does the fact of not having an exchange market influence the purchase of foreign currency?

    —Ricardo: I think it is important to structure the response by differentiating causes from consequences.

    In Cuba there is an ongoing inflationary process for which SMEs are not responsible. This must be said and explained clearly. As long as the fiscal deficit and other quasi-fiscal emission sources are maintained; inflation will not stop, there are SMEs or not. Some very valuable colleagues from the Ministry of Economy and Planning have estimated that close to 100 billion pesos a year are entering circulation through these sources. This considerable figure feeds a large monetary mass that finds no counterpart in goods and services, an imbalance that ends up being expressed not only in the private sector; but also on the state sector, although in a different way.

    In the state sector, as their prices are rigid because they are directly regulated by the State, imbalances are expressed through increased scarcity, difficulty in accessing critical productive resources, and shortages; and this explains -in part- the growing difficulties of the sector to place a supply of goods in consumer markets. In the private sector, the monetary imbalance is expressed through price increases.

    I stress the fact that both effects (shortages and inflation) are consequences of the same underlying cause noted above.

    Having clarified the point that MSMEs are not the cause of inflation, it must be said that inflationary contexts are propitious for all kinds of policy deviations and unwanted business effects, such as, for example, obtaining extraordinary profits by fixing of excessive prices. Anyone with a bit of intuition in economics would think, correctly, that SMEs could be reflecting part of these undesired effects.

    However, I make three observations in this regard. First, these effects have nothing to do with the fact that there are MSMEs in marketing (the same would happen if they did not exist). Second, if there were indeed extraordinary business benefits, it would be necessary to identify which specific company/activity is obtaining it and regulate those activities with pinpoint precision; thus avoiding hasty generalizations about the sector as a whole. Third, and being consistent with the true cause; If we really want to control these undesired effects, the best way is to control the sources of monetary issue mentioned at the beginning, instead of questioning the existence of SMEs, a story that has been installed in public opinion that I observe with particular concern.

    —Ileana: MSMEs have high prices in most of their offer, which must be contextualized:

    After the pandemic, the world registers price increases in its goods and services, which has been reflected in the increase in prices in the state sector

    The monetary order generated price increases in the state sector, more than what was designed in the proposal.

    Both elements affect the non-state sector, but the non-existence of an official exchange market exacerbates inflationary pressure even more. MSMEs are forced to go to the informal market with high exchange rates known to all. The acquisition of currency in that market forces them to establish prices in cups of their goods and services that allow them to close the cycle, that is, to be able to buy currency again.

    Another way to obtain foreign currency is through exporting, it is not easy to export and not all of them produce exportable goods or services, but those that do, their export earnings enter their accounts in MLC, a currency that only has national purchasing power, not It is used for international transactions. So, once again, the informal market is the means to obtain the necessary foreign exchange.

    MSMES need foreign currency like the entire productive sector of the country of any form of property and much more in the current circumstances when the supply of the state company is very depressed.

    MSMEs are not responsible for inflation, the deep and demystified analysis of this matter is very important to explain it to the populationOthers believe that micro, small and medium-sized companies are mainly focused on the marketing and resale of imported products, which contributes to inflation. Is this true?

    —Ileana: 4.6% of MSMEs in the country are commercial and there are 19% state-owned commercial companies, which means that every country needs this economic activity. What is happening today is that the state economy is very depressed and the supply of goods and services from MSMEs does not face competition, at the same time there is a high demand (which is not satisfied), this implies price increases, it is manual.

    The less commercial MSMEs there are and the State Enterprises do not produce, the demand is not satisfied, the competition is little and the prices rise.

    Incentives could be applied to the commercialization of certain products, make alliances, etc., to drive that commercialization. It is a mistake not to let the number of MSMEs that trade grow, since it concentrates the power of the market.

    Why focus on marketing? It is difficult to make the production of goods sustainable in Cuba, many raw materials must be imported, for this you need foreign currency, but the recovery time is longer. This in the midst of the crisis leads to focus on activities with shorter recovery cycles and more profitable given the scarcity of goods in the market.In the networks, it is strongly emphasized that MSMEs should focus more on the people and lower their prices.

    First and foremost, there may be those who are taking advantage to enrich themselves and under-report (it must be the tax administration that identifies these behaviors), but they are not all and all include even those who do not resell.

    Second, the MIPYME is not responsible for the fact that retirees and that in general the population has income with very low purchasing power, prices have risen in the state and private spheres, due to the effect of the regulation, international price increases and other distortions.

    Third, it must be understood that companies operate to produce, sell and recover their costs, whether private or state, that is how they should operate. MSMEs participate and contribute to GDP, employment and may carry out social responsibility actions, but the weight of the economy and the social project is held by the state sector, for which it must rely on the rest of the actors

    It is of vital importance that state companies fulfill their role and for this the exchange market is essential as a step to finish integrating the economy.

    —Ricardo: I will emphasize an idea that I slipped into the previous answer. Where there are prices that report extraordinary benefits to companies (whether state-owned or SMEs); the State has the duty and the obligation to regulate them. This represents its commitment to society, and very particularly, to workers and pensioners. There are different ways of regulating (and thousands of pages written about it), ranging from the implementation of specific taxes to the creation of regulatory frameworks based on the promotion of inter-business competition. I insist and vindicate the functions as regulator of the State. Markets are good instruments, but very often they fail; and a State is needed that systematically calibrates the solution they provide.

    However, we have to differentiate excessive prices from those that are high because they reflect objective production and marketing conditions. In the Cuba of 2023, these conditions are very unfavorable for both sectors, state and SMEs. The latter charge not only a much higher exchange rate; but also with financing conditions, salaries and inputs that are several times higher than what a state company pays.

    Therefore, when analyzing the prices set by SMEs, it is also necessary to analyze their costs. They are two sides of the same coin.

    Some people tell me that in any case these prices are not justified because the costs of fuel and electricity are being "subsidized" by the State. It is an interesting point, which in any case does not change the conclusion, knowing if these subsidies are enough to generate extraordinary benefits, which I repeat, is the key to the matter. And you have to be clear about it, if you intervene on SMEs and it turns out that their prices are a reflection of unfavorable conditions and not of excessive prices; the consequence can aggravate the general situation of the economy instead of helping to improve it.

    One of the fundamental aspects to achieve the development of the country is to establish true linkages in the Cuban business network. Has this really been achieved? To what extent could public-private partnerships help the development of the country?

    —Ileana: A distinction must be made between linkages and public-private alliances. Chaining is the logical process of productive activity, every business needs another to produce. The chains establish these relationships in a lasting way with the aim of satisfying the identified demand. Chains have been achieved, not all of which are needed for multiple reasons, among others, the state company has little to offer, the organizational culture of each form of property is different, the times also differ (in the state company they are long, many permits to request), the legislation protects the state company more, etc.

    Public-private alliances, although a contract must be mediated, is not about buying and selling, but about defining the terms of the alliance with a win-win approach, to manage premises, to produce even with low prices, etc., where For example, social objectives are guaranteed while the business does not lose.

    Ricardo: Although transactions between the state and private sectors have increased since SMEs emerged; established links are far from ideal.

    In order to advance in virtuous linkages between the private and state sectors, an issue that seems key to the future development of the country, it is necessary to advance in the integration of the price system used by both productive circuits. The price system does not mean only the sale price, but also wages, exchange rates, interest rates, and the price of productive inputs. Today there is a considerable gap between both systems and very high levels of distortion that prevent us from knowing the reality behind these transactions. Unifying both systems in a coherent and articulated way, so that prices send undistorted signals to companies is an action of the first instance to promote effective public-private alliances.

    Recently, the Minister of Economy of Cuba, Alejandro Gil Fernández, informed Parliament that micro, small and medium-sized companies had imported around 166 million dollars in the first four months of the year. When detailing the foreign trade operations of the forms of non-state management, he said that they had generated 4,788,500 dollars in exports and 270,294,100 dollars in imports. Is this a warp?

    —Ileana: Our economy is deformed in general, Cuba has always imported more than what is exported in goods. For every 1% of GDP the country needs more than 30% of imports. MSMEs are part of that economy that does not produce.

    What stands out is that much of this import is a finished product and not raw material to produce, something was stated in a previous question about this

    The economic blockade is the main obstacle to the development of the country. Could micro, small and medium-sized companies be a way to overcome it?

    —Ileana: The population has believed that MSMEs would solve the problems of scarcity in the economy, in fact, a good part of the current supply of goods is marketed by MSMEs, with high prices as stated above. However, they are not enough to solve all the needs, for this it is necessary that the economy works as a whole, integrated, not in a fragmented way, which does not allow taking advantage of the unblocked advantages of MSMEs, for the entire national economy.

    The Ministry of Finance and Prices has announced that it will stop exempting newly created micro, small and medium-sized companies from paying taxes, whether they originate from a conversion of Self-Employed Workers (TCP) or if they are completely new, with the goal of increasing tax collection. Could this measure hinder the creation of new micro, small and medium-sized companies? Could you encourage underreporting?

    —Ileana: It is a mistake to eliminate the exemptions, every business needs a period of accommodation to start and likewise the TCP to reconvert. Tax collection is further increased by promoting the expansion of the tax base. The focus that has prevailed in the tax regime of MSMEs is rentier, totally tax-collecting and not equitable. Encourage underreporting.

    Although there are still no figures that show the real impact of these actors on the economy, it can already be said that little by little they are having an impact at the territorial level. How important are they for the development of the municipality? Do you think there has been a lack of better coordination between local development priorities and their creation?

    —Ileana: MSMEs, together with the rest of the actors, are essential for the development of the territories, they mean production, employment, etc., but their participation should be managed.

    Requests are made through an online platform, it is difficult to align it with the needs of each territory. However, depending on its development strategy, each territory can promote, help, advise the creation of MSMEs in the areas of interest.

    Despite this entire scenario, is there optimism regarding the future of this type of actor in the economy?

    Ileana: These actors are there and must continue to be there, they give dynamism to the economy, but it is necessary that they be more integrated into the economy, that together with the state sector they contribute to our society.