This is a new work that I recently sended to the Ideas for Cuba contest. The main topic is how to fight Cuban poverty.
Proposals for solutions
1-Stimulating forms of private production emphasizing privatization and foreign investment as catalysts of economic activity
The development of the private sector in Cuba has been presented in a diffused and lassitude. At present it presents certain paralysis, since its scope is not glimpsed in industrial or agricultural sectors of level.
The next step would be to open up the possibility of forming businesses under various types of business entity as the individual company (similar but broader than self-development), partnership, limited liability company and corporation.
The individual company puts all the responsibilities of the finances and the operations on the owner. The personal property of the owner is linked to the company, so the latter assumes a risk against his personal assets if the business is experiencing financial difficulties. The profits and losses of the company are presented through the owner and are taxed at the individual rate. The one-person entity is the simplest form to configure so it would remain as the common structure in the most basic business.
The association is a cooperative entity that has two or more owners who share the same control, unless the contract provides something different or the structure is configured as a limited partnership. Like a sole proprietorship, business profits and losses flow to members and are taxed at the individual rate. Operational partners take risks, both legal and economic. Creditors may attempt to collect debts from the partners’ personal assets. It is a superior form to the sole proprietorship because the risk is reduced by sharing among several owners, which stimulates the investment.
The limited liability company or LLC is also an option to choose for accounting purposes. This business structure is actually a hybrid between an association and a corporation. Owners are protected from personal liability just like a corporation, but they enjoy tax advantages similar to an association. They only respond to the debts of society with its capital, never with its own. In this way, if there are independent legal structures, the owners can put their personal assets into the company’s debts. A great advantage of LLCs is the protection of personal liability of claims against business creditors.
Within the corporation, a company can have an unlimited number of owners, also known as shareholders. In a corporation, the business entity is kept separate from the owners in legal and financial matters. Losses and profits are taxed at corporate rates, not individual rates. If the corporation generates a profit, it is paid to shareholders who must report them as income and pay taxes on them at the individual rate. In a listed corporation, a shareholder can negotiate its shares in the open market through dynamic purchases and sales. That is why it is fundamental the existence of a stock exchange where the flow of capital is carried out in an orderly and effective manner.
Indeed, the first step in the fight against poverty is to provide these forms of private production so that, through the free exercise of competition, the quality of jobs increases and thus the real income received by workers. As the productive capacity expands, the work environment becomes more inclusive. However, there is an impediment.
The fact that there are state monopolies obstructing the deployment of private production hampers full economic development and thus poverty reduction. This phenomenon occurs because the state monopolies when competing in the “free” market have the political support, in spite of their inefficiency and the deficient payment to their workers. But there is a solution for this.
Privatization is a process whereby tasks are transferred from the public sector to the private sector. This mechanism allows non-governmental actors to intervene more and more in the financing and provision of care services, and entails the introduction of changes in public and private functions and responsibilities. In this way state monopolies would disappear as they functioned as private agents.
It should be clarified that under no circumstances should privatization be extended to public services such as health and education. It is in vain to deny the positive effect of the gratuitousness of the same and it is vital to know how to identify the limits of all processes. In fact an improvement of the economy through the private actors, would feed the government’s funds favorably and these should endeavor to progressively improve these services.
The first stage for the privatization of a company is the preparation of the sale, although the pressure of the situation can be considered as one of the most important factors that affects the speed with which it is tried to sell the company there are also elements of Policy for the preparation of the sale. In the case of Cuba, the most immediate privatizations must take place in the tourist and gastronomic sector, since, being the most developed in the private sector, they are the ones that would adapt to the adjustment in less time.
The second phase of privatization is the selling method, so far a wide range of schemes or modalities of privatization have been experimented and innovation in this field continues. In the absence of a fixed pattern, obviously the privatization modality has been largely determined by the type of enterprise or activity being privatized. For small business units, it would suffice to conceive them as associations in which the same workers would become owners of them. The formula that would dominate in the larger companies would be the sale of their assets in the stock market to conceive them as corporations. In particular cases the search for a strategic investor would be carried out, to which a percentage of shares with control of the company will be sold to him.
A percentage of the shares, between 10% and 20% would be delivered to the workers themselves. This process would be very progressive in the fight against poverty, because it would provide immediate resources to the labor base and the fact that the workers own part of the companies, would exponentially stimulate the good performance in the production, strengthening the national development as a result Of the whole process. But there is a problem that would arise after privatization.
The fact that state monopolies go into private hands would not directly eliminate market concentration in certain sectors with high barriers to entry such as telecommunications and wholesale trade. There is a risk that certain state monopolies may become capitalist monopolies. Faced with this phenomenon there is a solution that does not give up the free market.
The solution is to expand the reach of foreign investment directly, without limitations and without ties. We understand by foreign investment the physical capital flows (factories, new companies, real estate, etc.) or financial (bonds, shares, bank accounts, etc.) that enter the country. Regardless of whether they are physical or financial flows, both increase the wealth of the nation and in both cases transfer savings from one country to another.
This is why emerging countries such as China and India grow much faster than developed ones: imported knowledge starts to be applied from the first day and the effects are considerable because of the underdeveloped situation of which it is part. Developed countries nowadays grow at lower rates because that is where the new technologies, advances and products of greater added value are developed, that need a lot of time to mature.
It should also be said that there is not a single country that can develop all the products it needs by itself, so that international trade becomes indispensable. In the case of Cuba, it is still more crucial.
Free foreign investment would counterbalance the negative impact of the possible emergence of capitalist monopolies after privatizations, as new actors would come to reduce the lack of competition in the most concentrated markets. The less competitive the particular sector is, the more foreign subsidiaries are opening up subsidiaries.
There are some very specific advantages of foreign investment flowing from more developed to less developed countries. One is that it facilitates the transfer of technology. If the foreign subsidiary introduces new products or processes in the receiving market of the investment, the workers of that company acquire knowledge that raise the human capital of the country. At the same time, companies that are suppliers, customers and even competitors of foreign companies indirectly perceive the effects of technological diffusion. With this, a greater participation of foreign capital in the economy not only improves the performance of the company receiving the investment, but also the rest of the companies, which may be favored by the diffusion of knowledge or new technologies incorporated in these capital flows .
In addition to providing new technologies, foreign investment generally raises the productivity of the economy that receives it. The argument is that these companies, which have more experience, better technologies and more sophisticated capital, show higher productivity than their local competitors, and their presence forces other companies in the sector to raise their own levels of productivity.
There is abundant evidence that multinationals generally pay better salaries than local firms, thus raising the purchasing power of the population. This would enhance the fight against poverty by providing the nation with economic sectors with more resources and greater supply of higher quality jobs.
In addition, it can be a very beneficial factor in the process of economic reform and liberalization, since foreign investment has shown a clear tendency to flow more towards countries with more open, more transparent and less corrupt markets. Thus, this process can exert a healthy pressure on the government to combat corruption and lack of guarantees.
Some might raise the view that, by increasing private production through the formation of business entity types, privatization and foreign investment would increase the country’s inequality and thus relative poverty. I would like to emphasize the origin of inequality in Cuba.
Unlike the vast majority of countries in the world, inequality in Cuba is not linked to differences in educational levels or labor positions. The core of income dispersion in our country is empirically appreciated in the differentiated receipt of remittances from abroad and the flow of remittances into the interior, being completely independent of the income from work.
Each of the above mechanisms enhance the role of work as a primary agent in the receipt of individual income. At a time when the economic level of families is more linked to the fruit of their own efforts and is more independent of remittances, prostitution and theft; Inequality will be subdued and poverty will succumb to it.
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