By Marc Frank

HAVANA (Reuters) - Cuba will soon turn somesmall-scale manufacturing and retail services into cooperativesas the state retreats from minor businesses in an effort toboost the island's troubled economy, government and CommunistParty sources said.

The moves are the latest reforms by President Raul Castro,who wants to reduce bureaucracy and raise productivity byeasing the government's role without sacrificing the socialistsystem installed after Cuba's 1959 revolution.

"Cooperatives are not something on the horizon, they aresomething already approved by the Havana Provincial Assembly inhopes of recovering local production and improving morale andcompetitiveness," said one government insider who, like others,asked that his name not be used.

"There are already local workshops that have receivedapproval to move to a cooperative form of production andadministration," he said, listing furniture-making and garmentworkshops as good candidates.

The plan includes bringing illegal private businessesalready operating in Havana out of the shadows and taxing them.Cuba nationalized all retail business and small manufacturingin 1968, all the way down to shoeshine shops.

Earlier this year, Castro leased back small barber shopsand beauty salons to individual employees and is doing the samewith taxis. Farm cooperatives have existed in Cuba since thelate 1970s.

Castro also has said the government must cut bloated statepayrolls by around 1 million workers over the next five years.

Seeking to create jobs, he announced last month that morefamily-based private business would be allowed and, for thefirst time, private contracting of labor.

Castro has brought local and provincial governments intothe task of economic development. They were ordered earlierthis year to come up with projects to stimulate economicactivity and create new jobs under a program called theMunicipal Initiative for Local Development.

According to a document shown to Reuters, the premise ofthe initiative is that "the scarcity of ... local developmentplans has created a complicated and unfavorable situation in anumber of municipalities."

"Centralization has left big empty spaces at the locallevel that must be resolved -- for example food production,services, transport and trade, among others," it said.

NO SHIFT TO CAPITALISM

The provincial governments are now in the process ofapproving proposals that can include cooperatives and otherforms of administration.

"Raul said to study what to do at the local level. Itdoesn't have to be the same in Havana as here in Camaguey," aCommunist Party cadre in the province said by telephone.

Castro has fostered debate on how best to handle the retailsector since taking over from his brother Fidel Castro twoyears ago but he has ruled out a shift to capitalism.

There has been no mention, for example, of entrepreneursbeing able to reinvest profits to expand their businesses.

The state will still own the cooperatives' premises, as itdoes most things in Cuba, but the workers will run them, payoperating costs and taxes and keep the profits.

"Thirty of our restaurants, some with a good image andothers less so, have already been selected to becomecooperatives and their presidents named. They should begin theprocess soon," a mid-level functionary in Havana's food serviceindustry said.

He said discussions had gone on for a year.

"What is holding things up is figuring out how they willpurchase supplies and details such as minimum salaries and ifthe administrators' earnings should be capped," he said.

An economist involved in preparing rules fornon-agricultural cooperatives said it was still under debatehow much the cooperatives would be allowed to function throughmarket mechanisms.

"The state should let them operate through supply anddemand, not begin to cap prices and tell them where and whatthey can and cannot sell. In other words exercise only indirectcontrol, for example through a tax on sales," he said. (Editing by Jeff Franks and John O'Callaghan)