Friday, October 12, 2012

Pro-growth measures for the private sector

Cuban officials have said that their reform process involves not only implementing each of the 313 policy guidelines adopted at last year’s Communist Party Congress, but also making adjustments based on lessons learned as they go along.  Recent weeks have provided a few examples.


This document in the Gaceta Oficial is essentially a statement from the National Assembly indicating that the legislature has approved a new tax law.  It says there were extensive discussions among legislators and with the cabinet agencies, and analysis by University of Havana professors and “experts in tax legislation,” all of which resulted in 57 amendments. 

The statement claims that the new law will provide a “legal basis” for a tax policy “supported more by general principles of law and economic regulation than by administrative actions.” 

Pending release of the law’s full text, it provides highlights:

·         State salaries will continue to be tax-exempt under current economic conditions.

·         A modest income tax cut for entrepreneurs: a seven percent rate cut for those of low income, a three percent cut for higher incomes.

·         To stimulate farm production, “agricultural producers” – which I take to mean both private farmers and cooperatives – will have their profits taxed at half the rate charged in other sectors.

·         Farmers who receive land grants will have a tax holiday – no tax on income, land use, or labor – for their first two years, and for the first four years if they have to clear their land to make it usable.  It doesn’t say whether this relief will be applied retroactively.

·         The per-employee tax that entrepreneurs pay will continue to apply only to those who hire six or more employees, and there will be unspecified tax relief on “a progressive scale” tied to local average incomes.  Most important, there will be an 80 percent rate reduction in this labor tax over the next five years.

Land grants

The Italian news agency ANSA reports changes in the agricultural land grant program that has distributed land (the right to use it, not ownership) to nearly 170,000 private farmers and cooperatives.  Grantees will be able to receive larger parcels of land, and they will be permitted to build housing on them.  The story is based on an announcement in the Gaceta Oficial that doesn’t yet seem to be on-line.  The article makes no mention of two other changes that have been discussed – allowing the land rights to be passed to heirs (always on the condition that the land remains in productive use), and extending the terms of the grants, which are now 10 years for farmers, 25 for cooperatives.

More autonomy for UBPC cooperatives

Last month, the Cuban government announced 17 measures to improve the performance of its chronically underperforming UBPC cooperatives (see Granma here and here).

The UBPCs (Unidad Basica de Produccion Cooperativa) were formed in 1993 by breaking up large state farms.  With the loss of Soviet-bloc fuel, equipment, and other inputs, Cuba could not sustain large-scale, heavily mechanized farm production.  The idea behind the UBPCs was to work on a smaller scale and with more labor, and to introduce incentives so the workers would produce effectively.

The UBPCs were supposed to have managerial autonomy regarding basic business decisions.  But this autonomy existed “on paper, but was rarely achieved in practice,” Granma explained, going on to note that in many cases, state enterprises treated the UBPCs as direct subordinates, imposing plans and managers on them, stifling their ability to make their own production, sales, and even worker compensation decisions.

The article reported on a diagnosis of these cooperatives, based in part on their first thorough audit in 19 years.  2,519 were formed in 1993, and 1,989 are operating today on 1.8 million hectares, about 28 percent of the country’s agricultural land.  Of the land held by UBPCs, 23 percent is idle.  At the end of 2010, 15 percent of UPBCs had financial losses and six percent were unable to provide an end-of-year accounting. 
The audit found 540 UBPCs to be in a “favorable economic and productive situation.”  1,122 others, 57 percent of the total, had problems that were judged to be workable. 327 were in such trouble that they were deemed to have “no possibility of recuperating.”

The new measures, the Granma article said, are designed to unshackle the UBPCs, to “eliminate errors that held back production in these units since their creation…and at the same time to give them greater management autonomy” and “recognizing [UBPCs] as legal entities with the same conditions” as all other producers. 

The measures provide that:

  • The state will stop its practice of covering the losses of unprofitable UBPCs, and some will dissolve, their assets reverting to the state.

  • The state will use funds from its budget to finance only those UBPCs in which it has a special interest.

  • Directors of the cooperatives will be elected by their membership, not named by the state as before, and they will decide workers’ salaries and profit distributions.

  • The UBPCs are clearly defined as cooperatives, not state enterprises.

  • UBPCs will need no outside approval to buy supplies including construction materials for worker housing and other purposes.

  • The state enterprises linked to UBPCs will monitor them only to ensure that they deliver the goods promised in their contracts and to oversee “technical norms in their production processes.”

  • Any produce not promised for delivery in a contract to another entity “can be sold freely.”

What to make of all this?

The UBPC cooperatives have collectively performed so badly for so long that it is hard to be optimistic about them, but the promise of real automony is a step in the right direction, especially if other reforms advance in the farm sector.  So are the other steps, especially those that prioritize growth and job creation over tax collection in the entrepreneurial and agricultural sectors. 

Arguably, these are modest measures, but they all favor private sector growth by lightening the state’s hand and, more important, the taxman’s take.

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