Entrepreneurship in Cuba suffocated by GAESA

Executive summary of Dossier Cuba 21  No. 5 “Entrepreneurship in Cuba suffocated by GAESA“. The research published in the Dossier Cuba 21 collection was carried out with the support of the Havana Consulting Group, the Cuban Citizen Audit Observatory and the contributions of a group of independent journalists.

What is behind MSMEs?

A valid question is why create a new category of entrepreneurs (MSMEs or MIPYMES in Spanish) instead of consolidating all existing licensed self-employed businesses (“TCP” in Cuba), allowing them to exercise the right to register their businesses as property with legal personality, to export and import directly, and even to receive investments from the US, since being genuinely private and autonomous from the State, they could be exempted from the Helms Burton Law.

Figure 1. Historical series of self-employed workers, 1993-2016.

Of more than 500,000 people who had a license to be self-employed (TCP), the country has lost two thirds of this workforce in the last 4 years. First as a result of the setbacks from the reforms in 2016, which took some 80,000 self-employed workers out of the labor market, and subsequently the pandemic and the tarea de Ordenamiento monetario made more than 139,000 entrepreneurs surrender their license or close their businesses. Finally, the multi-systemic crisis in which the country finds itself, the repression of the protests, and the migratory wave of hundreds of thousands of people that was unleashed after July 11, displaced tens of thousands of people linked to the Cuban private sector out of the country. Tens of thousands of others closed their businesses due to the impossibility of operating them. In this regard, it should be noted that the National Office of Tax Administration (ONAT) in September 2021 had detected the tax evasion of 338,200 entrepreneurs. It is most likely that many of these people have left the country and others decided to close their businesses due to the impossibility of keeping them operational.

 This disbandment of Cuban entrepreneurs is not a coincidence; it is the result of the mediocre management of the economy and the apartheid that Cubans live under to generate wealth.

Fig 2. Number of New Economic Actors in Cuba: MSMEs, CNA and approved PDL. January 2023.

The 6,161 MSMEs registered in 2023 represent only 1% of the number of entrepreneurs that existed in 2016. The range may be even smaller because out of the total number of MSMEs, 3,332 are newly created and 3,310 were pre-existing TCPs. Why then were the tens of thousands of self-employed workers that were excluded from receiving this treatment not elevated to the rank of MSMEs, including their legal privileges? Very simple.

The MSMEs are not intended to strengthen the private entrepreneur sector, but to artificially create a middle class that is dependent on GAESA, and whose “owners” are chosen among less fortunate relatives of the oligarchs, retired repressors, and members of the paramilitary rapid response brigades. This would be an “entrepreneurial” middle class (with the discreet capital of the oligarchy and its ghost companies) which Cuba’s own agents of influence in the US would try to promote. They are presented to the Office of Foreign Assets Control (OFAC) as self-employed workers and legitimate private entrepreneurs so that they would be allowed commercial, financial, and credit transactions with the US. They would sell this same fraudulent fabrication to the European Union.

The new MSMEs law was designed to redirect state-owned enterprises, creating a business structure mostly managed by oligarchs and people related to the government, with the objective of attracting foreign investment and circumventing the U.S. embargo. In other words, it is a way of capitalizing the country via small and medium-sized enterprises controlled by the oligarchy that today holds power in Cuba. Their development and growth depends entirely on the state, not on the result of any free and autonomous efforts of entrepreneurs to generate wealth. The MSMEs law is nothing more than the perfect scaffolding to create a business network designed to absorb the main state enterprises in a future process of privatization of the economy. Simply put: it is the legal framework that will regulate “the sale of the piñata.”

Until that moment arrives, the MSMEs will not be able to be treated in the same way as foreign investors. The Cuban self-employed entrepreneur is suffocated and annihilated, but the MSMEs do not have equal treatment to foreign capital investors either.

Foreign companies operating in the Mariel Special Zone (ZEDM) have 0% tax on profits for 10 years; they have 0% tax on sales or services during the first year, and thereafter only 1%; they have 0% tax for the use of labor force and contribution to local development; they have 0% customs tax for the importation of means, equipment, and goods for the investment process. On the other hand, MSMEs do not receive the same treatment as foreign entrepreneurs, no matter how closely they are linked to governmental circles. They have to pay taxes for all these elements, plus 35% on profits, 20% on exports and imports, and other fees. It is because of situations like these that when asked the question “What do you want to be when you grow up? Cuban children answer “to be a foreigner”.

In this scenario, the policy of alleged engagement with the Cuban people that the Biden Administration has been pursuing comes up against the colossal barrier of the non-existence of a true private sector on the island.

Cuba is a market where there is no entrepreneurial freedom, where the market is centrally dominated by a mafiocracy that controls the country in all areas: imports, exports, pricing policy, labor contracting, land ownership, ports, airports, storage infrastructure, landline and cellular telephone services, air, land and maritime transportation, the media, advertising, education, health services, etc.

Under this reality, it is a great waste of time, resources, and efforts to try to draw up an engagement policy with the objective of empowering the Cuban people by trying to empower a private sector that does not exist.

To achieve true engagement with the Cuban people, the regime would have to change its policies pivoting 180 degrees, so that a transition to a market economy can flow quickly and successfully. This change would be facilitated by the proximity to the most developed market on the planet, where the Cuban diaspora has played a fundamental role, specifically in the State of Florida, only 90 miles from the island.

In order for the Diaspora to play an immediate and prominent role in the reconstruction of the country, the indispensable conditions for this purpose must first be created in Cuba. Vision, financial and human capital are all ready for investment ventures when the conditions are right to materialize the opportunity. In just three to four years, the island could regain the economic leadership in the Caribbean that it had before the Revolution.

GAESA in 2016, during the Obama Administration, launched the offensive against entrepreneurs

It was the late Luis Alberto López Calleja, the CEO of GAESA, who put the brakes on reforms and began deliberately stifling the entrepreneurial sector in 2016 – before Trump won the US presidency – following its sweeping and dizzying growth in several market segments. Their buoyancy caused a considerable drop in the revenue streams of the military-owned monopoly holding companies operating in tourism, transportation and the dollarized retail market.

In 2016, when the Cuban regime blocked economic reforms in Cuba, there were 535,000 licenses to exercise self-employment (TCP). In other words, more than half a million people were working in the private sector through these official licenses, but from that point on, the entrepreneurial sector began to decline.

Within just 7 years, the growth of the private sector had been enormous: the lodging capacity grew 268% in those 7 years compared to the poor 3% growth of the state sector. By 2016, the private sector had 59,612 rooms. Meanwhile, in the hands of state-run hotel chains, including those of GAESA, it had a capacity of 66,973 rooms. GAESA’s CEO understood that the situation was quickly getting out of control, so this citizen entrepreneurship movement had to be stopped outright.

Figure 3. Tourism sector. Comparison of the number of rooms in the state sector vs. private sector, 2010-2016

In that same time period, the Cuban private sector operating in the gastronomy sector grew by an enormous 427%, while within the state-run sector there was a reduction of 38.54%. In September 2016, there were 57,678 active registered licenses for exercising the activity of food processing and sales in its various modalities. It should be noted that 1,712 were restaurants (paladares) and 7,909 were cafeterias, for a total of 9,612 units.

Figure 4. Gastronomy Sector. Comparison of the number of gastronomic units of the State sector vs. private sector, 2010-2016.

In 2016, the state sector had 3,295 cabs and 7,840 buses to cover the demand for passenger transportation on the island. In addition, it had on its payroll some 8,500 rental cars for tourism, an insufficient number for the high demand in the market. In the case of cabs, it is worth noting the 123% growth of the private sector during the 2010-2016 period was higher than the 25.2% growth of the state sector. In 2016, the number of cabs in the private sector (14,034) exceeded 3.4 times that of the state-owned companies (4,125).

Figure 5. Transportation Sector. Comparison of the number of units in the State Sector vs. Private Sector, 2010-2016.

Already by 2017, around 48,000 Cubans traveled abroad on average 11.5 times a year to make purchases, which showed a commercial activity with high dynamics and a fast turnover of merchandise. Undoubtedly, the merchandise sold was in high demand and very well accepted in the market. For the commercial departments of the large Cuban chain stores operating in the dollarized market (95% of them belong to GAESA), each with a team of perhaps 10 specialists in charge of purchasing abroad, it was impossible to compete with an army of more than 48,000 buyers specialized in different product niches, and who covered a good part of the demand throughout the country with their stable supply of products that surpassed in quality, variety, and prices compared to those offered by GAESA in its retail chains with thousands of stores located throughout the country.

This reality was reflected in the creation of a market that generated on average about US $3 billion annually as of 2016.

Figure 6. Estimated revenue generated by the private sector in the 7 most lucrative modalities, 2016.

Under this scenario that presented an unstoppable, rapid growth and expansion of entrepreneurs on the island in various sectors of the economy, whose investments in new businesses could be financed by their own profits, the Cuban regime stopped the reforms in their tracks. As of 2016, no more licenses were issued to exercise self-employment, the creation of new Non-Agricultural Cooperatives (CNAs) was also stopped, even eliminating several of them and limiting the range of permissions within those that remained.

At the beginning of 2017, the National Assembly, with the justification that they did not want to allow the concentration of wealth in private hands, decreased the number of modalities permitted to exercise self-employment, from 201 to 122. Some categories were eliminated and others were grouped into one.  This sharp drop in the number of permitted modalities meant a decrease of 39.3%.

In the case of Non-Agricultural Cooperatives (NACs), the new measures established new restrictions that limited the scope of their operations to only their provinces of origin. On the other hand, the distribution of income among CNA members was regulated so that there would not be a large wage gap between them and the workers associated with the cooperative. The new rules established that the maximum wage could not exceed three times the minimum wage. Finally, the new regulations established that no individual could be a member of more than one cooperative or have more than one license to engage in “self-employment”.

In 2018, the regime tightened the screws even further on the non-state sector, imposing new barriers via the implementation of new legal norms, not simply to stop preventing its expansion and development, but as a targeted attempt against its very survival in the market.  By then there were 80,000 entrepreneurs who had surrendered their TCP licenses.

It was under these conditions that COVID-19 burst into the scene in March 2020, putting a tombstone on the country’s entire economy. The quarantines implemented in the country closed down airports, and tourism plummeted 77.68% compared to 2019. The impact on the private sector was strong: some 139,000 entrepreneurs surrendered their licenses or closed their businesses temporarily due to the pandemic and along with the government barriers that prevented their expansion and development, this meant a 35% reduction.

In August 2020, the Cuban regime announced the authorization of imports and exports to non-state management forms (Cuban individuals and legal entities that carry out legally authorized commercial and service activities, that do not belong to the state sector of the economy nor constitute foreign investment modalities), i.e. self-employed workers and CNAs.

The draconian formula for importing and exporting products established by these new rules was the definitive nationalization of the non-state form of production itself. It was a process that clearly deprived any non-state entrepreneur or form of management that sought to import and export products and services of all autonomy.

With this deliberate formula, all the money that would be deducted from import and export operations (20% of the import or export value) would go to none other than the Banco Financiero Internacional (BFI S.A), which is of course the bank of GAESA, the military’s bank.

Given all of the above, in the same way that the Cuban opposition warned about the possibility of what they called a “Fake Transition” (Cambio Fraude), then the MSMEs are the “Fake Economic Opening” to obtain concessions from the US and the European Union.

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