August 2024: Cuban Government Approves New Regulations for the Private Sector
This explainer is written by Yaquelín Samper Hormaza, Erasmus Scholar and MA in Global Markets and Local Creativities.
ACRONYMS:
MSME = Micro, small, and medium-sized enterprises
CNA = Non-Agrarian Cooperative
MEP = Ministry of Economy and Planning
CAM = Municipal Administration Councils
Overview: Since the introduction of private micro, small, and medium-sized enterprises (MSMEs) in 2021, Cuba has seen the establishment of over 11,000 private MSMEs and 200 state-owned MSMEs. In August 2024, the Cuban government introduced new regulations for the private sector, affecting MSMEs and cooperatives. These rules update those from 2021, when Cuba first allowed small and medium-sized private enterprises. Self-employment was legalized in 1993. The key changes include stricter guidelines for who can be a business partner, more activities that are off-limits for private businesses, and a shift in who approves new businesses, changing from the national level to local councils. There are a few positive steps, including a focus on Corporate Social Responsibility (CSR) and increased labor rights – yet the outlook for small business owners is unclear.
These new regulations are seen by entrepreneurs as far from optimal and a hindrance to the development of the private sector in Cuba, particularly during a time of economic crisis. The main changes in the 2024 law, much of which is set to take effect in September 2024, are outlined below:
Adjustments to MSME Classification Based on Ownership:
Under the new regulations, political, mass, and social organizations are now permitted to create and manage MSMEs.
In Cuba, social organizations group together economists (National Association of Economists and Accountants of Cuba), jurists (National Union of Jurists of Cuba), journalists (Union of Cuban Journalists), artists (for instance, Cuban Association of Artisan Artists), writers (Union of Writers and Artists of Cuba), and other professions. Political and mass organizations encompass organizations like the Communist Party and the Union of Young Communists, as well as mass organizations such as the Federation of Cuban Women and the Worker’s Central Union of Cuba.
Changes to the MSME Approval Process:
Currently, the Ministry of the Economy and Planning (MEP) reviews and authorizes MSME applications and processes. Starting March 2025, responsibility will shift to the local Municipal Administration Councils (CAMs). These councils will approve MSMEs that align with municipal development strategies, address local needs, or meet national economic and social priorities.
Ultimately, MSMEs are located in one geographic place, but their reach could be national. Therefore, it is unclear how CAMs will implement the "local development" criteria. Since 2021, MSMEs had been approved following national guidelines, which involved standardized criteria.
There are concerns about how the MEP will handle the backlog of pending applications and new submissions until March 2025, when applications are set to changeover to the local level.
Partner Eligibility Criteria for Private MSMEs:
To become a partner in a private MSME, individuals must be Cubans with “effective residency” status or foreign individuals who are permanent residents in Cuba.
The new migration bill, approved by the Cuban Parliament in July 2024, is expected to increase the residency requirement to 183 days per year. This new rule could make it harder for Cubans living abroad or foreigners who want to invest in Cuban businesses because they might not meet this residency requirement.
Private MSME partners who acquired their partner status with permanent residency will retain it, regardless of future migration regulations concerning effective residency.
Changes in the Scope of Activities for Private MSMEs:
The new regulations stipulate that the corporate purpose of a private MSME must include a main activity and secondary activities that are fundamentally related, do not undermine the main activity, and align with the business's actual conditions. It also applies to self-employment and CNAs. This requirement is vague and could complicate the approval process due to subjective interpretations of what constitutes "related activities." In contrast, the first MSMEs approved had no limit to how many activities they could engage in, and many had various non-related activities they engaged in.
Creation of the National Institute of Non-State Economic Actors:
The Cuban government has replaced an earlier organization, the National Council of Economic Actors, created in 2021, with a new body called the National Institute of Non-State Economic Actors. This new institute is under the authority of the Council of Ministers, which means it directly follows the government's top leadership.
The role of this institute is to oversee and control the policies that affect private businesses, cooperatives, and self-employed workers. By focusing exclusively on the private sector, the institute will create a clearer distinction between how the government handles private businesses versus state-owned entities. This means there will be different rules, incentives, and control measures specifically tailored to private sector activities, separating them more clearly from the state-run economy.
More Prohibited Activities for the Private Sector:
The list of prohibited activities has increased to 125 from 112, limiting the scope of allowed activities for the private sector.
The new prohibitions do not follow a clear theme, which include prohibitions on forestry and forest activities, timber extraction, the fabrication of orthopedic footwear, the production of cultural programming and the convening of international events. New permitted activities include pest control, the commercialization of charcoal, and honey sales to state-owned companies.
Definition of Corporate Social Responsibility (CSR):
The new law defines CSR as voluntary commitments by MSMEs aimed at workers, society, and the environment.
CSR includes initiatives such as worker training, environmental protection, consumer rights, social development programs, and community support during disasters.
CSR efforts are funded through voluntary reserves from MSME profits, and the scope is determined by the MSMEs mission, size, sector, and location.
It is worth noting that as the Cuban state loses its traditional role as the only provider of social services, more and more Cuban entrepreneurs and activists have promoted local community initiatives based on social responsibility.
Labor Rights:
The new law aims to strengthen labor rights by requiring detailed written employment contracts and compliance with minimum wage laws.
It mandates the payment of social security benefits, retention of taxes, certification of wages, and provision of safe working conditions.
The law promotes non-discrimination and supports union participation, emphasizing a zero-tolerance approach to workplace harassment and violence.
Summary
It is unclear how the range of strategies outlined in the new framework will impact the private sector. Additional restrictions on private sector activity and complicated residency requirements will slow the sector’s growth and frustrate business owners. An emphasis on labor rights and corporate social responsibility has the potential to benefit private sector workers.
It remains to be seen how the decentralization in the approval process for MSMEs will play out in reality. What is clear is the trend of rolling back reforms and countering periods of openness—whether for self-employment or MSMEs—continues to undermine confidence in the government’s commitment to supporting the private sector and promoting effective economic strategies. Operating a business in Cuba is an already punishing endeavor. Complicated, ambiguous, and constantly-changing laws erode trust and long-term investment in the sector.