HAVANA (Reuters) - Thousands of small and medium-sized Cuban businesses will be allowed to incorporate in the coming months, in one of the most important economic reforms taken by the island's Communist government since it nationalized all enterprises in the 1960s.

FILE PHOTO - A farmer is seen holding a wad Cuban money at a stall at a Sagua La Grande market, in central Cuba. It is located around 240km (149 miles) east from Havana, October 12, 2013. REUTERS/Desmond Boylan

The reform, details of which came to light this week, will permit small and medium-sized businesses for the first time since 1968, putting an end to the legal limbo in which many have existed for years in the Soviet-style economy.

The law will also apply to small and medium-sized state firms, paving the way for an important decentralization of some activities and forcing subsidized operations to become profitable or fold, according to Cuban economists.

In the food service sector, thousands of government-subsidized eateries will either close, become cooperatives or turn into small businesses, according to a mid-level manager involved in the process who spoke on condition of anonymity. It will keep the small and medium-sized businesses it does not.

Although there were always private farms in Cuba and cooperatives of farmers, the majority of Cuba's economy was controlled by the state until the 1990s, when small, tightly regulated businesses were allowed to operate in certain areas. This limited their legal legitimacy.

The new measures are a key part of the economic reforms undertaken by new Cuban leader Miguel Diaz-Canel over the last year, as the coronavirus pandemic and tougher U.S. sanctions pushed the shaky economy into a tailspin and shortages of food, medicine and other basic goods reached alarming proportions.

Alejandro Gil, Economy Minister, said Wednesday evening that the measures would make it easier for state and private companies to compete, collaborate, and form joint companies just like in capitalist nations.

Gil said that "it is a starting point to a new phase in the diversification economy and its development" and added that the reform would boost the economy's potential to rebound stronger as the pandemic recedes.

MIXED ECONOMIC OPTION MODEL

After approval by Cuba's Council of Ministers in May, the creation of micro-, small- and medium-sized businesses (MSME) was quickly tracked.

The new MSMEs will be able to access the state wholesale system, import and export, set prices and attract foreign investment, but only within a state-dominated business environment where such activities will remain heavily regulated, according to various ministers who appeared with Gil.

According to a Decree law, the Council of State published this month, companies cannot have more than 100 employees. Individuals may only own one company.

It is, however, a welcome move for many entrepreneurs.

Pavel Vidal, a former Cuban central banking economist and professor at Colombia's Pontificia Universidad Javeriana, in Cali, said that Cuba is moving towards a mixed model economic system, at least for employment.

"With this opening, in a few years the non-state sector will represent more than 50% of total employment in the economy," Vidal said, adding that "still much more needs to be done."

Cuba's economy, which has stagnated for years, contracted by 10.9% in 2020 and declined another 2% in the six months through June, compared with the first six months of last year. Cuba's economy is still heavily dependent on tourism and imports.

On July 11, thousands marched through cities on the Caribbean island to protest poor living conditions. It was one of the largest antigovernment demonstrations in history. Diaz Canel has attributed the unrest to the United States, saying that protesters were manipulated via U.S.-sponsored social media campaigns.

Cuba's private sector has grown steadily since the 1990s and now includes more than 600,000. It also includes tradespeople, taxi drivers, business owners, and other individuals who are self-employed in many different sectors.

The so called non-state sector, including agriculture, provides work for a third of the 4.9 million officially employed Cubans in the labor force, with the remainder working for the state.