Cuba’s state companies have been inefficient for years: initially because of their uncritical application of the Soviet model, and later because of government-imposed restrictions (the so-called Direction and Planning System for the Economy, or SPDF in Spanish). Only since 2013 has the Cuban government attempted to reform these state enterprises, but always within the framework of the central planning system. This leads to an irresolvable contradiction.
Recent reforms have introduced a new corporate structure, whereby companies are under new bureaucratic organizational entities and new forms of executive direction beyond the purview of the Ministry, as well as expanded taxation. At the same time, new regulations allow for a certain autonomy with regards to financial indicators, product surplus, and idle inventory, the creation of voluntary reserves, depreciation of profits, and workers’ training and salaries.
According to the Cuban state press, these reforms have led to a general rise in salaries (by a 1/3 on average), a reduction in red tape, the growing availability of goods in high demand, a fifty-percent reduction in defaulted accounts (unpaid bills), and a 6.7% rise in labor productivity. These improvements notwithstanding, the government has acknowledged that state companies are still far from achieving the sustained growth that the overall economy needs.
In the following, I outline remaining limits on growth, and demonstrate the impossibility of overcoming them under the current framework that ties state enterprises to central planning.
Macroeconomic planning stifles microeconomic growth
State-owned companies, which comprise most productive activities, cannot guarantee strong financial growth because they depend on a macro-equilibrium that is imposed on them, and which determines the resources allocated to them. Here are several examples of this problem:
- State companies depend on projected levels of consumption and resources that are often unstable. A raise in production to meet demand, for instance, is only approved by central authorities if it does not require additional resources.
- Investments are decided and administered centrally, according to annual guidelines from the Ministry of Economy and Planning (MEP). Financing is often unpredictable and responds to institutional culture rather than actual needs in the productive chain. As a result, executives neither rely on a financial system nor achieve productive growth.
- Companies may only use a portion of their profits (under 50%) for contingent investments, but require approval from the overseeing organizational entities. Any purchase of equipment or foreign technology must be included in the Annual Plan ahead of time, provided items are listed in the rooster of approved imports, and provided they will not lead to higher energy consumption. As a result, company executives tend to consider both a developed financial system and productive growth to be unnecessary.
- Foreign investment constitutes its own economic sector, and only companies that require high investment volumes have access to it. Even those companies for which foreign investment is approved often encounter a scarce and unstable source of well-prepared professional personnel. The availability of supplies, particularly if imported, is often too unpredictable to guarantee investment projection and evaluation.
- The work force is organized according to centrally-designed employment categories, rather than productivity. Company executives cannot change their organizational structures without authorization from the top governing bodies.
Lack of executive incentives represses risk and therefore stiffens growth
Reforms so far have failed to stimulate innovation and risk. They have curtailed companies’ relative autonomy and have strengthened a top-down organizational structure, eliminating the labor flexibility and participation in networks that stimulate innovation. For instance, there has been little attention to technology. Direct investment in the knowledge sector is barely a 2% of the total or a .57% of the Gross National Product (GNP), which is below Latin America’s mean. Companies have increased their financing to activities related to innovation and development, but the ratio of domestic patents is still very low while dependency from foreign inventions keeps increasing.
At the same time, even though salaries have risen in all sectors, their overall purchasing power has fallen. As qualified individuals search for well-compensated prospects, the pool of qualified executive personnel is small and shrinking. In the end, corruption and illegalities are hard to eradicate at state companies, and only last year they resulted in losses of over 267 million Cuban pesos.
Restrictive policies allow for the state company’s survival but not for growth, as they also limit the rise of dynamic and creative executives. As the central planning system controls the market, economic agents’ are limited in their actions. To give an example: executives must devote most of their efforts to fulfilling annual plans that focus on production under monopoly conditions. Moreover, executives lack data on the market, as little information is publicly available, and particularly on consumption. That renders difficult the adjustment of supply where necessary, the effective management of distribution, and the future adjustment of investments. The existence of a dual currency economy only complicates matters.
Conclusion
The lesson to be learned from this analysis is that the market must be acknowledged as a regulatory agent in itself, and that autonomous decisions by companies must be made on the basis of its behavior, and not the other way around. State regulation must be directed at fulfilling the needs that the market fails to serve. In Cuba until now, we have proceeded in the opposite way. We have used regulatory frameworks to fulfill the market’s work, and have opened market mechanisms in order to correct the negative effects of state policies. In my view, this is the root cause of the Cuban state company’s inefficiency.
All images by Ariana Hernandez-Reguant.
Cover: Magazine advertisement for CubaExport, a socialist state company.
International advertising for a state company: Cubana de Aviación. Designed by Ernesto Padrón (1977)
Photo: “Material Incentives” store for “vanguard and diligent workers and managers.” El Cobre (2006).