Micro, small and medium-sized companies, known as MSMEs, have been gaining relevance in the Cuban business network since their emergence. These economic actors they were born under the protection of new legislation, which supports 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 social asymmetries palpable today.

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

With the recognition by the Constitution of new economic actors in the country, including micro, small and medium-sized businesses, the business fabric in the country has changed. Many of them have emerged 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 to date?

—Ricardo: Unfortunately, SMEs are born in a context of severe economic crisis. I think the best way to value what they have meant is to ask ourselves how we would be today if they didn't exist. And my answer to that question is unequivocal, we would not be better off. Therefore, it seems to me that he was right when he decided to introduce them as a new actor in the Cuban economic model. Obviously, as they arise framed in a crisis, their potential positive effects have not been fully deployed. On the other hand, I feel that SMEs are sometimes 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, employing 225 thousand people, of which 189 thousand are new jobs. It's a good look.

There is still much to correct to achieve greater articulation between all actors, greater integration and greater contribution to the economy, but they are part of an economy in crisis, where the conditions are more one of survival than growth, in all actors including the company. state, which is the one who should set the tone for development.

Some worry about the number of micro, small and medium-sized businesses that have been created in a short time, as they outnumber state-owned businesses. 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 total companies, however, the remaining 2% guarantees more than 80% of GDP and the majority of exports.

In Cuba, MSMEs are around 50% (not counting self-employment that hires up to 3 workers or the family business) of the total productive organizations, not counting the budgeted special treatment units, nor mixed companies.

As stated in the National Assembly, it is expected that all forms of non-state management will contribute 13.9% of the GDP, it could even be higher and in any case it shows that the state sector guarantees the largest proportion of the GDP, in addition the means Fundamental production cannot be private property, therefore, how can we 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 contribute today 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 in parts, conceptually speaking, privatization is associated with the transfer of ownership of a public asset to private companies; or to the outsourcing of the management of certain services offered by the State, for example, public health. As far as I understand, this is 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 meaning. I would tell you that in all other indicators (average number of employees, exports, sales, physical assets, etc.) the state company far exceeds the private sector. But even if that relationship started 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 because the State did not abdicate its function as a strategist of transformation, as a regulator and as a 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 noted 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 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 remain; Inflation will not stop, whether there are SMEs or not. Some very valuable colleagues from the Ministry of Economy and Planning have estimated that from these sources nearly 100 billion pesos are entering circulation annually. This considerable figure feeds a large monetary mass that does not find compensation in goods and services, an imbalance that ends up being expressed not only about the private sector; but also about the state sector, although in a different way.

In the state, 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 in placing supply of goods in consumer markets. In the private sector, the monetary imbalance is expressed through price increases. I underline the fact that both effects (shortages and inflation) are consequences of the same underlying cause noted above.

Having clarified the point that SMEs are not the cause of inflation, it must be said that inflationary contexts are conducive to all types of policy deviations and unwanted business effects, such as, for example, obtaining extraordinary profits through fixing of excessive prices. Anyone with a little intuition in economics would think, correctly, that SMEs could reflect part of these unwanted effects.

However, I make three observations in this regard. First, these effects have nothing to do with the fact that there are SMEs 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 millimeter 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 unwanted effects, the best way is to control the sources of monetary issuance mentioned at the beginning, instead of questioning the existence of SMEs, a story that has been established 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 regulation 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 further exacerbates inflationary pressure. MSMEs are obliged to go to the informal market with high exchange rates known to everyone. The acquisition of currency in that market requires establishing cup prices for their goods and services that allow them to close the cycle, that is, to be able to buy currencies again.

Another way to obtain foreign currency is through export, it is not simple to export and not all of them produce exportable goods or services, but those that do, their export income enters their accounts in MLC, a currency that only has national purchasing capacity, not It is suitable for international transactions. So, again the informal market is the means to obtain the necessary foreign currency

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

MSMEs are not responsible for inflation, the in-depth and demystified analysis of this issue is very important to explain it to the population

Others believe that micro, small and medium-sized businesses focus mainly 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% of state commercial companies, which means that every country needs this economic activity. What happens today is that the state economy is very depressed and the supply of goods and services of MSMEs does not face competition, at the same time there is a high demand (which it does not satisfy), that implies an increase in prices, it is textbook.

The fewer commercial MSMEs there are and state companies do not produce, demand is not satisfied, competition is little and prices rise.

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

Why focus on marketing? It is difficult to make the production of goods in Cuba sustainable, many raw materials must be imported, this requires currency, but the recovery time is longer. This in the midst of the crisis leads to focusing on activities with a shorter recovery cycle and more profitable due to the shortage of goods in the market.

On the networks it is greatly emphasized that MSMEs must have a more focus on the people and lower their prices.

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

Second, MSME is not responsible for retirees and the population in general having incomes with very low purchasing power, prices have risen at the state and private levels, due to the effect of the regulations, international price increases and other distortions

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

It is vitally important 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 provide companies with extraordinary benefits (whether state or SMEs); The State has the duty and obligation to regulate them. This represents their commitment to society, and very particularly, to workers and pensioners. There are different ways to regulate (and thousands of pages written about it), ranging from the implementation of specific taxes to the formation 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 they very often 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 conditions of production and marketing. In Cuba in 2023, these conditions are very unfavorable for both sectors, state and SMEs. The latter carry 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, their costs must also be analyzed. They are two sides of the same coin. There are those who tell me that in any case these prices are not justified because fuel and electricity costs 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 sufficient to generate extraordinary benefits, which I repeat, is the key to the matter. And you have to be clear about it, if we intervene on SMEs and it turns out that their prices are reflections of unfavorable conditions and not 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 chains in the Cuban business network. Has this really been achieved? To what extent could public-private alliances help the country's development?

—Ileana: A distinction must be made between public-private chains and alliances. Chains are the logical process of productive activity, every business needs another to produce. Chains establish these relationships in a lasting way with the aim of satisfying the identified demand. Chains have been achieved, not all of them are needed for multiple reasons, among others, the state company has little to offer, the organizational culture of each form of ownership is different, 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 there must be a contract, are not about buying and selling, but about defining the terms of the alliance with a win-win approach, to manage premises, to produce even at 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; The links established are far from approaching the ideal.

To advance virtuous chains between the private and state sectors, an issue that seems key to me in 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 is not only understood as the sales price, but also as salaries, 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 hidden in these transactions. Unifying both systems in a coherent and articulated way, so that prices emit undistorted signals to companies is a first-instance action 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 non-state forms of management, he said that they had generated $4,788,500 in exports and $270,294,100 in imports. Is this a deformation?

—Ileana: Our economy is deformed in general, in Cuba more has always been imported 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 that import is 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 country's development. Could micro, small and medium-sized businesses 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 needs, for this it is necessary for the economy to function 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 businesses from paying taxes, whether they originate from a reconversion of Self-Employed Workers (TCP) or are completely new, with the objective of increasing tax collection. Could this measure hinder the creation of new micro, small and medium-sized businesses? Could you encourage underreporting?

—Ileana: It is a mistake to eliminate exemptions, every business needs an accommodation period to start and also TCPs to reconvert. Tax collection is increased further by promoting the expansion of the tax base. The approach that has prevailed in the tax regime of MSMEs is rentier, totally tax-collective and not at all equitable. Encourages underreporting.

Although there are still no figures to demonstrate 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, along with the rest of the actors, are fundamental for the development of the territories, they mean production, employment, etc., but their participation should be conducted.

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

Despite this whole scenario, is there optimism regarding the future of this type of actors in the economy?

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

Source: Cubadebate