- Notice: The names of the Cuban entrepreneurs and their companies described under have been modified to guard the identities of those people.
“Don’t try to understand this place. We don’t understand it either.”
I heard variations of this chorus repeatedly from Cuban entrepreneurs throughout my March 2024 go to to Havana. Together with my wonderful colleague on the army faculty, The Citadel, William Trumbull, creator of our comparative methods course, The Cuban Economic system, we introduced a dozen or so pupil cadets to Havana over spring break. This was the culminating expertise after a semester of evaluating socialist and capitalist financial methods and inspecting the implementation of socialism in Cuba. Subsequent, it was time to see the outcomes for ourselves.
Aside from my temporary look as a aid pitcher in a pickup baseball recreation in Cuba’s Viñales Province, the best thrill of our journey got here in listening to the tales of Cuban entrepreneurs. The entrepreneur is a comparatively new sort of particular person within the nation. Reluctant concessions made by the state for personal enterprise over latest many years, in response to ongoing financial disaster, clarify their presence. These entrepreneurs now comprise one-third of Cuba’s financial system. Dealing with important coverage uncertainty and remarkably excessive transaction prices, they display extraordinary perseverance in creating and managing their enterprises. Every entrepreneur profiled on this article faces excessive alternative prices, as any may work overseas (some have already got) and earn considerably extra. One even returned to Cuba after working in New York Metropolis for a few years. That these entrepreneurs select to pursue non-public enterprise in Cuba represents their motivation to type the vanguard of a brand new entrepreneurial class.
Financial Transition or Socialist Band-Aids?
Cuba stays essentially a centrally-planned financial system with autocratic, top-down decision-making concerning financial exercise. Nevertheless, one won’t get this impression whereas eating at one in every of Havana’s 1,000+ paladares (privately-owned eating places). From the rooftop of Restaurante Yarini in Havana’s San Isidro neighborhood, you’d suppose you have been in Miami—till peering over the ledge to see blocks of crumbling buildings stretching to the horizon. This nonetheless modest extent of privatization stems from piecemeal market-oriented reforms enacted by Cuba’s Communist Social gathering in response to financial crises. Regardless of important development in Cuba’s non-public sector, the essential financial questions—what will get produced, how issues get produced, who will get this stuff, and who will get the ensuing revenue—stay primarily answered by the Communist Social gathering’s central planning.
Following the 1959 Cuban Revolution, the Communist Social gathering carried out a deliberate socialist financial system modeled after the Soviet Union. For many years, non-public entrepreneurship was fully absent and actively demonized as all non-labor assets (capital, land, pure) have been state-owned. All factories, farms, and retail institutions obtained detailed directions about what to provide or promote, tips on how to do it, the place to ship outputs, the place to supply inputs, and what costs to cost or pay.
After the Soviet Union’s collapse and ensuing financial disaster within the early Nineties, Cuba enacted reforms together with legalizing self-employment (in roughly 157 specified occupations, together with peculiarly particular roles like “party clown” and “cigarette lighter refiller”) together with legalizing overseas forex and funding (Morgenstern and Perez-Lopez 2019). Every reform got here with important provisos, suggesting the federal government’s readiness to backtrack at any second. For example, the federal government at one level ceased issuing enterprise licenses in one-quarter of the legalized self-employed occupations (Henken and Vignoli 2015). Economist Luis Locay argues such reforms primarily assist regime survival relatively than transition towards a market financial system, writing, “I do not believe we are witnessing a child who is starting to crawl and will eventually, after many falls and scrapes, learn to walk.” (Locay 1995).
This sample of piecemeal reform continued into the 2000s, together with growth of self-employment licenses (as a part of “The Guidelines” permitted in April 2011) and, most notably, institution of personal “micro, small, and medium enterprises” in July 2021 (responding to anti-regime protests)(The Economist 2021). In 2019, the Social gathering switched from itemizing allowed enterprise varieties to itemizing forbidden actions (Torres 2024). The roughly 125 prohibited actions principally contain extremely educated fields like drugs, engineering, schooling, and media—sustaining the state’s monopoly as a central technique of political management. That these occupations stay topic to the state’s monopoly straight impacts a lot of Cuba’s most gifted people, creating the perverse incentives described under.
Tales of Cuban Entrepreneurship: Business #1
“In Cuba, the Spanish verb resolver (meaning, “to resolve”) has come to imply doing what must be performed to make ends meet, both legally or by the black market. This is applicable equally to road distributors promoting fruit and people with Ph.Ds.”
“The why doesn’t ever make sense, so we just work around it,” displays Daniel Alvarez, a professor and now entrepreneur. “[The centralized economic model] is completely blind to identify market needs… it’s impossible to create incentives that provide signals for entrepreneurs to act.” Regardless of his Ph.D., Daniel’s professorial earnings quantity to beneath fifty {dollars} month-to-month. As one of many actions forbidden to non-public sector actors and topic to state-controlled wages, which means that regardless of his Ph.D. (in a extremely technical area), his earnings as a professor are minimal. In Cuba, the Spanish verb resolver (which means, “to resolve”) has come to imply doing what must be performed to make ends meet, both legally or by the black market. This is applicable equally to road distributors promoting fruit and people with Ph.Ds.
Daniel’s state of affairs exemplifies what former Cuban President Raul Castro termed “the unjust inverted pyramid”—the paradoxical state of affairs whereby Cuba’s best-educated professionals in state-controlled jobs earn significantly lower than lower-skilled staff in jobs the place non-public enterprise is permitted (Augustin and Semple 2021). These people face robust incentives to take jobs they’re considerably overqualified for or to migrate overseas. As my colleague Invoice Trumbull notes, in Havana, he assumes the baristas serving his espresso are professors. Our trilingual native information, for example, beforehand labored as a world commerce contracts lawyer on the Port of Havana, whereas our bus driver was educated as a mechanical engineer.
Throughout preliminary COVID confinement, Daniel and two fellow professors seen a scarcity of handy, sturdy, wholesome meals freed from chemical substances and added sugars. They based Business #1 out of this realization, Cuba’s first firm producing and exporting a fruit-based product. In our interviews with Daniel, he puzzled aloud, “How is it that in this country of such naturally sweet fruit that no one has pursued this before?” Their early choices gained traction on-line, finally resulting in a big order from a world shopper for 10,000 packages (IPS Cuba 2024). Amongst their improvements was introducing a novel product to be used in cocktails, demonstrating the sort of market discovery that central planning routinely misses.
From idea to manufacturing took 14 months—exceptional given important regime uncertainty. They began throughout early COVID, a 12 months earlier than small-to-medium enterprises have been authorized. Whereas self-employment was permitted, hiring remained unlawful besides inside households. Beneath these incentives, “family” sizes grew accordingly. As Daniel joked about hiring, “Oh, my cousin from Santiago, of course!” Recognition of personal enterprise in 2021 meant unrestricted hiring, and in a single day, Cuba’s financial system went from zero to greater than 10,000 enterprises. Right this moment, Business #1 employs over 25 folks, with their lowest degree staff incomes triple a college professor’s wage in Cuba.
Daniel faces appreciable constraints from uncertainty about state coverage towards non-public enterprise. Piecemeal financial reforms have steadily been adopted with new restrictions curbing non-public enterprise, all a part of the state’s effort to regulate the expansion path of personal enterprise. He maintains low visibility, working an unmarked supply truck: “If I see 100 private trucks with advertising, I will be the 101st.”
Financing presents one other main problem, significantly for scaling the enterprise. The shortcoming to have a U.S. checking account or take loans from a U.S. financial institution is a persistent theme amongst Cuban entrepreneurs. Unable to entry U.S. banking, Daniel purchased the gear he wanted whereas visiting the USA, transport it by Canada to Cuba. Preliminary funding got here by a fortuitous relationship with a European businessperson visiting Cuba, who agreed to offer a mortgage after listening to Daniel’s concept. Daniel took the mortgage anticipating an trade price of 60 Cuban Pesos to 1 USD, however financial disaster drove the speed above 200 Pesos to 1 USD, dramatically growing his compensation burden. Further funding got here by artistic preparations with mates learning overseas who may entry pupil loans, with compensation dealt with by masking their household remittances. Clearly, the regime’s dedication to chop off capital markets is imposing actual hurt, as evidenced by these valiant however in the end unnecessary and wasteful efforts.
Tales of Cuban Entrepreneurship: Business #2
Luca Marino co-founded Business #2, a software program improvement firm, after recognizing an arbitrage alternative: promoting high-skill software program companies to worldwide companies for lower than prevailing charges however far above Cuban state wages of $20/month. Initially working and not using a firm identify as “autonomous workers” licensed as “computer operators,” Business #2 now employs over 200 folks with month-to-month revenues exceeding $150,000—surpassing the annual earnings of Cuba’s largest state-owned software program firm using 1000’s of staff. Luca shared the story of a Cuban tax official studying that $150,000 was their month-to-month, not yearly, income. “He dropped his pen,” Luca mentioned.
To deal with worldwide monetary transactions, given U.S. banking restrictions, Business #2 developed a fancy construction: purchasers pay their U.S. shell firm, which subcontracts to their Spanish shell firm, which then subcontracts to the Cuban firm. This elaborate workaround exemplifies the excessive transaction prices going through Cuban entrepreneurs trying to take part in worldwide markets.
Whereas a lot of Cuba’s privatization includes lower-skilled work, Business #2 represents one in every of few companies specializing in higher-skilled companies. They face important challenges retaining expertise, more and more paying excessive salaries by Cuban requirements to forestall staff from taking jobs with U.S. or European companies. Regardless of these efforts, they misplaced 20 staff in 2023 alone to emigration for higher alternatives. It’s this sort of regime-induced mind drain that imposes synthetic obstacles to Cuba’s naturally rising entrepreneurship.
Tales of Cuban Entrepreneurship: Business #3
Maria Fernandez co-founded Business #3 out of a need to resurrect Cuba’s dormant trend trade. Rising up with restricted entry to trend attributable to restrictions on web and out of doors media, Maria relied on visiting overseas mates’ trend magazines for publicity to developments. After working in New York’s trend trade as a producer and stylist, she returned to Havana upon noticing growing availability of eating places, bars, and Airbnb’s. She partnered with two faculty mates to discover a distinct segment market alternative: producing high-quality, thoughtfully designed Cuban-made apparel. Their objective grew to become making linen merchandise that have been each regionally made and fascinating—qualities discovered individually however not often collectively in Havana boutiques.
Initially working beneath the “seamstress” designation (amongst permitted occupations), they searched door-to-door in Previous Havana earlier than discovering an virtually collapsing Eighteen Nineties constructing. Maria explains their early workarounds: whereas architectural companies have been forbidden, people supplied “party planning” companies that truly concerned constructing restoration. After full restoration, they opened in 2018 with Maria and her companions dealing with each facet from design to advertising. Their restricted preliminary division of labor created an surprising profit: clients may watch their garments being made, including worth to the expertise. As Maria famous, “It was like assembling a puzzle piece by piece, trying out different pieces to find the right fit. We had little to work with, as the business model we aspired to had no precedent in Cuba.”
Concepts in Want of Establishments
The entrepreneurs we met throughout our brief time in Cuba demonstrated exceptional perseverance and spirit. They report shifting attitudes towards non-public enterprise in Cuba, with Daniel noting, “For generations, people were taught that the private sector is evil. But now people know entrepreneurs that they know from experience not to be evil because they’re family or longtime friends.” Trend entrepreneur Lucía Cabrera (founding father of Business #4, a boutique trend line in Havana) echoed this: “The change of mindset is huge. We are moving away from talking about money and profits as bad and that the private sector is evil.”
Nevertheless, good concepts require supporting establishments. As Peter Boettke argues, “If you don’t have the three P’s, you can’t have the three I’s.” (Boettke 2013). With out property rights, market costs, and revenue/loss indicators, a society lacks the incentives, info, and innovation wanted for financial improvement. “Institutions matter”. You’ll be able to’t partially commit (and subsequently backtrack, and repeat) to institutional liberation and count on financial development.
A vivid analogy involves us from Marshall Goldman’s entry on Perestroika within the Concise Encyclopedia of Economics. Transitioning from deliberate to market methods resembles reforestation relatively than deforestation. “If enough force is used, the procedure [of transitioning to central planning] is relatively simple, even if it is destructive. Performing the reverse, however, is much more difficult. Planting a few trees does not make a forest. A forest encompasses a whole ecological system of insects, animals, and underbrush. In the same way, allowing a few private stores to open does not make a market.” (Goldman 2008)
Cuba’s piecemeal reforms have amounted to planting a handful of timber each few years with little consideration of the “ecological” necessity of reforestation. To take action would allow the broad scale functioning of extremely complicated, interconnected, decentralized financial processes—issues the Social gathering can’t simply management. As an alternative, planting just a few timber takes the type of allowing non-public market exercise in restricted sectors adopted by actively curbing development as soon as deemed “sufficient.” Whereas that is no substitute for reforestation, the state hopes the timber will suffice for the forest so far as residents are involved.
If there’s one factor my journey with Invoice Trumbull satisfied me of, it’s this. Ought to real financial liberalization happen in Cuba (a chance that seems unlikely near-term), there exists a pool of entrepreneurial expertise awaiting institutional help. The phrase “Entrepreneur” was not one Lucía Cabrera recollects listening to rising up, and if talked about, definitely not positively. That is altering, as she concluded, “We are opening a lane and people will follow.”
Footnotes
[1] Morgenstern, S. & Perez-Lopez, J. (2019). Fashions of Financial Reform and Cuba’s “Updating” of its Mannequin. College of Pittsburgh Press. PDF file.
[2] Henken, T. A., & Vignoli, G. (2015). Enterprising CUBA: Citizen empowerment, state abandonment, or US Business alternative. AU-SSRC Implications of Normalization: Scholarly Views on US-Cuban Relations.
[3] Locay, L. (1995). Institutional necessities for profitable market reforms. ASCE Proceedings.
[4] The Economist. (2021, August 12). Cuba’s authorities approves small and medium-sized enterprises.
[5] Torres, N. (2023). Cuba’s non-public sector increase. Miami Herald.
[6] Augustin, E., & Semple, Okay. (2021, February 11). Cuba expands non-public enterprise. The New York Instances.
[7] IPS Cuba. (2024). Personal enterprise drives export of dehydrated meals in Cuba.
[8] Boettke, P. (2013). ABCT: Offering the Lacking Hole. Coordination Downside.
[9] Goldman, M. (2008). Perestroika. The Concise Encyclopedia of Economics.
