The new cooperatives law

Here’s what I gather from the new law on private non-agricultural cooperatives in the Gaceta Oficial, which is actually two laws, a decree, and two ministerial resolutions, all of which were necessary because cooperatives were previously permitted only in the farm sector.

Just as pilot projects have been the first step in other reforms, this is a sort of pilot project involving the creation of about 200 cooperatives “with experimental character,” as the law says.  The law does not say how or when the experience of these 200 cooperatives will be evaluated, so we will have to stay tuned for that and for any refinements of the law and policy that result. 

The cooperatives will be self-governing businesses that are not connected to any state institution.  In that sense they differ from state enterprises, all of which have a connection to ministries and their enterprise groups and, in spite of efforts to engender autonomy, have in large measure remained subordinated to government entities.  The cooperatives will be on their own to sink or swim.

By self-governing, I refer to the law’s provisions where each member will have a vote, and cooperatives will create governing structures that correspond to their size.  In the section of the law that suggests governing structures, cooperatives of more than 60 members are contemplated.

The cooperatives will be free to do business with government entities, state enterprises, and private entities.  Except in markets where the state regulates prices, they will set their own.

There will be two kinds of cooperatives, I’ll call them start-ups (those that result from individuals who join together and apply to form a cooperative) and conversions (where the government decides that it wants to divest itself of an enterprise).  The law calls both of these “first-degree” cooperatives that form from the voluntary association of people.

There will also be “second-degree” cooperatives that are formed by two or more cooperatives.  I assume that this has to do mainly with agriculture, where farm cooperatives would join together and form a new cooperative that would handle transportation and sales of produce (see the Lineamientos, #29 and #180).

The application process for creation of any kind of cooperative starts at the local level, and the decision is made at the national level by the Council of Ministers.  If the pilot project is deemed successful, one wonders if this authority will be devolved to provincial or municipal authorities.

Who can form a start-up cooperative?  The law says that anyone age 18 or more who is a resident of Cuba and is capable of performing the proposed work can apply, and cooperatives must have at least three members.  Applicants must describe the economic activity in which they want to engage.  Unlike the law governing small entrepreneurship, the cooperatives law contains no exclusive list of permitted lines of work, and it does not bar university graduates from working in the activity for which they are trained.  If the government has a policy to favor certain types of cooperatives, it will only become apparent as applications are approved and denied in the pilot project phase and later.  The law itself contains no restriction.

In the case of conversions, the current employees of a state enterprise will have preference if they decide they want to form a cooperative and rent the premises from the state.  Leases will be up to ten years, renewable for an equal term.  When a state enterprise is converted to a cooperative, the cooperative will pay no rent for one year if it repairs the premises.

New cooperatives’ working capital will come from employees’ contributions, from bank loans, and from loans from a newly created Finance Ministry fund to support cooperatives.  Employees’ contributions will be reimbursed from the cooperatives’ earnings.  Cooperatives will pay taxes on their profits and will pay social security contributions for their members.

Cooperatives will decide how to distribute profits.  Distributions can be made when employee contributions have been paid back and there are no past due bank debts.  There is a requirement that a portion of profits be dedicated to a reserve fund for contingencies.

Cooperatives may hire temporary workers for terms of up to 90 days, and no more than 10 percent of work-days in any year may be performed by hired labor.  After 90 days, a cooperative must offer membership to a temporary worker or end the arrangement.

What does this all mean?

I think this is a major step, even though the full definition of the policy will only come with time as cooperatives are created and as the government moves beyond the experimental phase.

Certainly from a capitalist perspective, all we see are the restrictions – first and foremost in the requirement that these businesses organize as cooperatives. 

But from the perspective of the Cuba of five years ago, this new law was unimaginable. 

It opens the door to a much larger private sector, one involved in more substantial activities than the small entrepreneurs.  It is a second option for Cubans interested in private business activity, and a new option for friends and relatives abroad who would support them with capital.  There is nothing stopping five software designers from applying to form a business under this law; we’ll see if there is anything stopping the government from approving it.  If the sector prospers it can create efficiencies in agriculture, construction, transportation, and other sectors that will benefit Cuba’s economy and people.

And the government needs the cooperatives to prosper.  Without them, it cannot meet its own goals of cutting state payrolls and generating new private sector jobs. 

The pace will satisfy no one, the process will be influenced by officials with more orthodox views, and it will surely have positive and negative notes.  But there’s no denying that this law breaks new ground, with potentially large consequences.