Entrepreneurs and their strategies in the face of “monetary restructuring”

The situation for the private sector in Cuba at the beginning of 2021 can be characterized as very challenging, as a consequence of the economic crisis, the restrictions associated with COVID-19 and the implementation of the monetary and exchange rate reform. The role of “self-employment” in an economy such as the Cuban one is controversial. Once the most onerous restrictions for the takeoff of the sector were lifted in 2010, the establishment of a government task or campaign to guarantee the growth of the sector was not necessary. It was a generally spontaneous process of identifying opportunities that were previously banned. The sector exists in the midst of a permanent contradiction: it is tolerated as indispensable to the economic model, but is not accepted as a natural component of it.

The monetary “restructuring” process clearly hints at this situation. Although one of the objectives of this transformation is for state enterprises to respond to “price signals” by consciously altering relative prices, official statements indicate less tolerance for a similar process in the private sector. If prices are to transmit appropriate signals, then they must reflect the economic reality. It is a contradiction to expect that there will be no price increases beyond what official estimates indicate. For at least three reasons.

In the first place, the increases observed in the state sector, including to basic goods and services, have been of various magnitude, and in many cases exceed the 4.9-fold increase to salaries (although the rise is not homogeneous for all wage earners). This would indicate that the preference of state-owned companies has been towards the maximum possible increase, within the limits established by the authorities. The aim is to guarantee profits, and to pass on inefficiency to the detriment of households. Secondly, chronic shortages are pushing up prices in the midst of a notable increase in cash in the household sector. Finally, it is clearly understandable that prices adjust faster in the private sector, because this is the only place where the market functions, albeit precariously and subject to serious distortions.

That said, price variations in private businesses have been neither uniform, nor immediate, nor even proportional to what has been observed in the state sector. There are several reasons for this. In the first place, the sector was already operating in an environment where the exchange rate of 1 CUC = 24 CUP prevailed, so the devaluation does not affect prices, in the first instance. It does however through higher prices paid for supplies and salaries. Secondly, many businesses, depending on the characteristics of their activity, “prepared” for this scenario. For example, by accumulating stocks. This does not guarantee permanent isolation, but it does provide a “cushion” during the initial moments, which are decisive. Thirdly, in certain sectors, where owners who are true entrepreneurs (not adventurers) operate, they have taken note of the need to build customer loyalty in turbulent times. Customers are also affected by the economic crisis, or have left other suppliers, disappointed with the immediate trend to increase prices. A fourth reason has to do with the healthy activation of “efficiency reserves” that were neglected in good times, but have become indispensable in the current circumstances. Inventory management is one such alternative, while optimizing production processes to save energy is another.

A fifth alternative relates to employment. In many establishments, the specialization of the workforce is high. In most service activities, the characteristics of the worker largely determine the quality of the product and thus customer satisfaction. Under these conditions, many owners have opted to maintain the workforce in exchange for their workers accepting the preservation of previous salaries. Having secure employment is a guarantee in difficult times. Some business owners have gone further by passing on the notion to their employees that the pyramid may have begun, even partially, to straighten out. Under “normal” conditions, they would not be able to aspire to incomes disproportionately higher than those of certain professional categories.

Without maligning the above, the truth is that the reality is very diverse, as are the businesses that still operate under the label of “self-employed.” A one-man enterprise is not the same as a real “company” with dozens of employees. Nor is it the same to operate in Havana as in a municipal capital in the interior of the country. Nor is a subsistence business managed in the same way as one with possibilities of expansion and access to economies of scale, or a technology-based business.

Unfortunately, the regulatory framework does not distinguish between them. Nor does it generate predictability and certainty about the future. Based on similar experiences, it has been recognized that the lack of certainty about the future of enterprises was a key factor in stimulating shortsightedness in business decisions, rather than strategic behavior. Therefore, if the authorities really intend to moderate the dynamics of prices, the real functioning of enterprises must be understood, and the conditioning factors of those short-sighted and rentier-based behaviors. Furthermore, the futile stigmatization of the market must be put aside, the same market that has been demonized to exhaustion and is now being rescued to resuscitate flagging state-owned enterprises. For example, the strategies described above could be accompanied by policies of encouragement and support from the authorities, using, for example, the banking system, which has been one of the great absentees in this new stage, at least as far as the private sector is concerned.