Risks in Expanding Non-state Enterprises in the Cuban Economy
This article is intended to call attention to the most important negative consequences that the recently announced decision to permit free hiring of salaried labour could generate in Cuban society. It also attempts to suggest some measures to increase the possibilities that the new non-state enterprises (self-employment, cooperatives, or conventional private businesses) may contribute to the development of the Cuban economy in consolidating our socialist development; that is, the creation of a more just and humane society. It is a synthesis drawn from the paper “New Enterprise Forms in the Cuban Economy,” prepared for the seminar “Economy and Administration,” organized by the Economics Department of the University of Havana and Humboldt University, Berlin, September 24-25, 2010.
Risk: the expansion of capitalist practices and values.
As it has been argued in other works, a socialist enterprise (that is, one in which “social property” takes shape) is not necessarily a business administered by the state. What defines an enterprise as socialist is the degree to which its management is democratically controlled by society, by its worker collective, by the communities where it is located and by other social groups impacted by its activities. As analyzed below, the intensity and extent of the control that the representatives of the affected social interests exercise upon the democratic management of a worker collective (those affected more directly) will depend on the activity of the business and how social interests are defined.
Following this logic, the self-employed worker or the democratically managed enterprise (a self-managed enterprise like cooperatives), that are also guided by social interests, are socialist enterprises. They are genuine examples of social property. Their introduction does not represent a retreat from the development of socialism.
Nevertheless, a business controlled by one person (in the form of self-employment or some other legal form) that hires a permanent work force, is not a socialist enterprise. It is a business in which there is a capitalist who controls the decision-making process and does not allow the salaried or wage workers to participate in decision making. The workers, by selling their labour-power, surrender their ability to take part in management; to control it. According to Marxist theory, this private (not social) control or “private property” that is materialized in the capitalist-wage labour relation of production is the basis for the functioning of capitalist society. From the daily workings of that relation, both capitalists and wage-earners, develop the values of individualism, egoism, and apathy or insensitivity to the needs and interests of other human beings.
What makes the condition of the wage workers unjust is not simply the amount of pay they receive – whether it is equal to the value of what they produce or whether the pay is sufficient to satisfy their basic needs. The injustice lies in the undemocratic character of a management that sees the workers not as human beings with intellectual abilities but as mere machines or inputs in the productive process. The capitalists (those who own the business, the capital) may have good intentions, but as long as they do not share management with workers, they maintain an unjust social relation.
Therefore, when we promote the unlimited hiring of salaried workers without the possibility of creating self-managed enterprises for those activities where more than one worker is necessary, we promote the expansion of capitalist practices and values. We prevent those who are obliged to sell their productive capacity from developing as full human beings, seeing themselves less capable and less worthy in society. We also favour individual solutions above collective ones, authoritarian methods of management over democratic ones, and egoism above solidarity.
Recommendation: to favour self-managed enterprises over the hiring of salaried workers.
To promote socialist relations of production, which Marx defined as the free association of workers united under a plan, it is not necessary or advisable to prohibit the hiring of salaried labour. But it is necessary to establish clear limits and to regulate it in such a manner that those who have the advantage of financial resources and entrepreneurial initiatives will find it more attractive to set up self-managed enterprises, and similarly, that the less fortunate will prefer to join them rather that becoming salaried workers.
A strict option is to require that workers be hired only on a temporary basis to meet seasonal needs or unforeseen situations that might require more labour force. But, if the permanent hiring of workers is to be permitted, the tax the business must pay for each hired worker could be higher for permanent labour. It would also be advisable that the tax (for permanent and perhaps temporary) be progressively increased according to the increase in the number of employees. If we seek that businesses do not hire more than a certain number of workers, the tax for adding workers above that number could be drastically increased.
Of course, these regulations or negative incentives are not going to prevent capitalists from using various methods to augment their individual benefits such as: setting up other businesses in the name of persons in their confidence in order to recruit more workers; repeatedly hiring temporary workers for situations that in reality are permanent; hiring unofficially to avoid paying taxes; or other schemes. Therefore, it is important to create positive incentives that make the promotion of socialist enterprises more attractive.
If we wish to promote the creation of socialist rather than capitalist enterprises, we need to pass a legislation for cooperatives that facilitates their creation and makes state institutions responsible for supporting them. To be more inclusive, such legislation could also allow for the creation of other types of self-management such as co-management and partnerships. To do this, it will be necessary to create an institution with offices in the localities (as the National Association of Small Farmers [ANAP, in Spanish] does in attending the agricultural cooperatives) that processes the legal registration and the issuance of the corresponding operating licenses for these enterprises.
The institution should also offer access to training in business administration, in the particulars of democratically managed enterprises, accounting and legal services, technical assistance, certification that their management is truly democratic, among others. An important task would be to audit those enterprises registered as self-managed, by requiring periodic reports of their economic activity (their books) and social activity. The later might include the minutes of general assemblies that show participation in major decisions, a list of all associated workers or members, temporary workers and, if it is decided to allow them, of permanent wage workers. Reports on these and other matters of interest can ensure that a given enterprise is really self-managed and not a capitalist business trying to pass itself off as self-managed in order to have access to their privileges.
Self-managed enterprises, such as cooperatives and such other types of democratic enterprises that might be legislated, should not have to pay tax on hired workers since those making up the workforce, to the degree that management is truly democratic, are partners, associated rather than wage workers. When self-managed enterprises recruit salaried workers, they should pay the same tax as paid by a capitalist business. Since the self-managed business, upon registering as such, assumes the logic of satisfying the needs of its members, rather than seeking the maximization of profit, perhaps it would be advisable to restrict their hiring to temporary workers or to limit the number of permanent salaried workers to a fixed percentage of associates. (In other countries it is 10 to 30 per cent.)
Another possible measure that would be effective in promoting self-managed enterprises is to require state institutions to give preference to them over capitalist enterprises in their procurement of goods and services. Self-managed enterprises could be given greater access to the production inputs they need at non-subsidized prices or on more favourable credit terms. Advantages in access to financing, such as grace periods and lower interest rates, would also have a great impact.
To prevent businesses from registering as self-managed enterprises and enjoy those privileges while behaving in a capitalistic manner, they should be effectively supervised by the institution mentioned above as well by any citizen, and especially by their own workers. Key to this is that the enterprises must be completely transparent in their management, that is, enterprises should keep proper record of their operation and make that information available to public scrutiny through the oversight institution. Their rights and obligations, as well as the consequences of not complying with their responsibilities, should be made clear in legislation governing self-managed enterprises.
Nevertheless, before the Cuban state gives advantages to the self-managed enterprises, it should first clarify its position regarding the hiring of permanent salaried labour. It should define whether Cuban socialism is or is not characterized by a degree of social justice in which this would be incompatible. This would depend on whether we include in our understanding of social justice the right of people to develop themselves as full human beings, keeping in mind not only their material needs but also their spiritual need to fulfill themselves as complete individual and social beings.
Risk: orientation of economic activity toward profit instead of satisfaction of social interests.
For Marxist thinkers, the most important elements in regard to the organization of work in socialist construction were essentially two: that enterprises be associations of free workers democratically managed; and that these be united and guided by a plan that guarantees the satisfaction of social interests, which essentially implies a democratic management of the economy by society, the exercise of social property. The need for planning or ex-ante coordination is not just to avoid the cyclical crises of capitalism but also so that society may direct productive activities to satisfy the most important needs and not just those that generate more profits for business.
Indeed, when society does not exercise control to guarantee that the economy responds to its interests, what guides the functioning of enterprises is the maximization of profit according to the logic inherent in mercantile or market relations, which rarely coincides with basic social interests. According to that logic, enterprises tend to prioritize production that makes the greatest profit at the expense of other required to satisfy basic needs, to concentrate supply in sectors of the population with greater buying power but not of greater need, to set prices well above costs whenever possible, to evade taxes, to use the cheapest raw materials and technology that damage health and the environment, to discriminate against those with lower productive capacity for reasons beyond their control, along with other behaviors that violate their legal obligations and produce evils such as shortages, inequalities, unemployment, and health and environmental problems.
As everyday reality and even neoclassical theory demonstrates, if its tenets are carefully analyzed, the laws of the market are not effective in guaranteeing that the required supply of products of low elasticity of demand such as basic goods and services that people cannot do without even if the prices rise and they cut consumption of other products. Furthermore, those laws come into operation after the problem has already been created. The market system is even more inadequate in satisfying such other social interests as the maintenance of certain levels of equality, non-discrimination of gender and other types, internalization of social costs such as environmental contamination and unemployment, externalization of social benefits such as sharing its knowledge or other resources, etc. In general, any genuine intention of business to act in a socially responsible manner results in an opportunity cost that affects its position in the market.
It should be emphasized that it is the very logic of market operations that generally prevents a business from orienting its activities in accordance with social interests. Furthermore, encouraging the maximization of individual benefits – the justification that is usually used to promote market relations – is not the same as promoting the satisfaction of even basic material necessities.
On the other hand, it is important to clarify that the state enterprise (one administered by representatives of the state) is not necessarily under social control or oriented toward the satisfaction of social interests, for that depends on state administrators responding effectively to the directives they receive from the agencies to which their enterprise is subordinated, and more importantly, that those directives accurately reflect social interests. Many economists have identified the limitations of a system of authoritarian planning (non-democratic and excessively centralized) both in identifying social interests and in motivating state administrators to supply the necessary information for effective planning as well as to later comply with the assigned directives.
Recommendation: to promote social control of non-state enterprises by local governments and their citizens.
But a market system is not the only alternative to authoritarian planning. A number of economists have shown how institutions can be designed to promote and facilitate relations of horizontal exchange that are compatible with the social interest, that is, non-market exchange relations. Rather than accepting market relations as unavoidable – given the indisputable advantages of relations of horizontal exchange (rapidity, flexibility and the possibility of choosing among various options) and the ineffectiveness of authoritarian planning – it is possible to establish a better synthesis that combines the advantages of decentralized activities with the advantage that those activities be guided by social interests defined in the localities and social groups where their impact is felt. This may consist of merely verifying that enterprises – whether state-run or not – operate according to a logic that rewards socially responsible behavior and penalizes behaviors that work against the social interest.
To ensure that businesses contribute to the satisfaction of social needs and expectations, interests must first be identified and articulated as social interests. Given their bilateral character, horizontal relations by themselves do not allow buyers and sellers to identify and take into account the interests of others. To define social interests, it is necessary for these actors and others affected by their activities to participate within spaces of democratic coordination where their particular interests are identified and articulated into social interests as close as possible to the interests of all. Then, the operational logic of the enterprises must promote the internalization of those interests.
Since the impact of the activity of these new, presumably small- and medium-size non-state enterprises will basically occur at the local level, the social control necessary to ensure that they respond to social interests can focus on institutions and policies at the municipal or popular council level. Therefore, local government should assume responsibility for orienting businesses in their locality toward the social interest. To do this, it would be advisable to create spaces for democratic coordination that would include representatives of non-state enterprises (associations or councils of the self-employed, cooperatives, other self-managed enterprises and capitalist businesses) as well as representatives of the social interest, such as delegates from popular power (i.e., government) and social organizations in those localities. All of these, by consensus, would design development plans, agree on policies to achieve those stated goals and monitor compliance with them.
To the extent that local governments achieve a genuine articulation of social interests in their territories, faithfully represent local development plans and effectively implement them through policies and institutions, their control over enterprises will be that much more legitimate. Thus, if businesses understand that their contributions are going to be used effectively for the satisfaction of social needs or, better yet, if their representatives can participate in the decisions about how to use those contributions (through democratic methods such as participatory budgeting) and can control their use (through a truly transparent accountability by the local government), it will be more difficult for businesses to evade taxes and other social responsibilities.
Of course, the extent and degree of social control that local governments exercise over enterprises should vary according to the strategic or basic (related to the satisfaction of basic needs) importance of the work those businesses do. In most cases it will be enough to clearly define in the operating licenses and in usufruct, financing and sales contracts, what is expected of them without interfering in their decision making. Depending on its activities, a business can be asked to: contribute from its profits to the social consumption fund of the local, provincial and national budgets; to use a certain criteria for setting prices based on social costs and benefits; produce at determined levels and with a required quality; commit part of its production to sales to public institutions; among other obligations.
All businesses should contribute to the social security system so that workers can count on resources to satisfy their basic needs when they reach retirement age or suffer an illness that prevents them from working.
All businesses should also pay progressive taxes on their net profits or earnings so as to contribute to social consumption, from which their workers would also benefit. However, these taxes should not be excessive. They should allow businesses to restart their production cycle without having to seek funding. It is also important that taxes on sales – although recommended to assure taxes are paid since enterprises can decide to spend more than necessary to reduce their taxes on profits – should not be very high for products that are considered basic or whose production it may be desirable to promote, because those constitute an operating cost passed on to the consumer. In general, to avoid going to extremes that sacrifice the interests of the business and its workers to the social interest, thus discouraging business activity, their obligations must be consistent with the objectives of the local plans for democratic development as determined with the participation of their representatives.
As mentioned above in relation to the hiring of permanent salaried workers (whose eventual eradication should be of interest to any society committed to socialism), to ensure compliance with the social interests set out in the legal agreements that businesses establish in their operating licenses and contracts with state institutions, they must be transparent and supervised not only by the corresponding state institution but also by any citizen interested in seeing that the social interest is respected. Besides the negative incentives associated with sanctions for non-compliance with legal obligations, the same positive incentives previously proposed to favour self-managed over capitalist businesses should be used to reward those that contribute to the satisfaction of social interests.
Finally, it is important to clarify that this social control over business activity does not mean that enterprises would be barred from establishing horizontal exchange relations. Decentralized relations are critical for enterprises that need to act with flexibility and speed. Nor is it intended to prohibit them from trying to increase their profits, since that is clearly not possible or desirable. The idea is to ensure, through democratic planning and a comprehensive system of positive and negative incentives, that the logic of horizontal exchange guiding business activity should not be merely the maximization of its narrow individual interests, but the internalization of the social interest.
There are other negative consequences that can arise from promoting non-state enterprises without really perfecting the management of state enterprises (that is, the decentralization and democratization of its management), such as the weakening of the state enterprise by the diversion (i.e., embezzlement) of its inputs and workers to the non-state sector. Therefore, it would have been better to have begun reforming management of state enterprises before the opening to non-state enterprises.
On the other hand, if the minimum conditions are not created for the new non-state enterprises to be successful before the planned layoffs occur, we run the risk that a large number of them will fail. Many of the initial entrepreneurs will lose confidence in their ability to try again. Moreover, there will be the serious consequences that unemployment brings for the unemployed and society in general.
Doubtless, the opening to small- and medium-size non-state businesses in our economy can have very positive consequences, such as job creation and the satisfaction of some consumer needs that today are not satisfied. But how well they reach these and other important goals and avoid the negative consequences discussed here will depend on the decisions taken and on all who attempt to influence those decisions.
To maximize Cuba’s chances for success as a society, even more as a society committed to the building of socialism (a more difficult but necessary goal) it is important that those decisions be thought out with care, keeping in mind various points of view but maintaining as a guide the interests of all of society. To identify that social interest – the vision that guides us as a nation – it is imperative and urgent to define the essential principles that must characterize Cuban socialism, as Cuban President Raul Castro stated in his speech to the National Assembly on August 1, 2009. •
This article was written October 7, 2010.