Entrepreneurship in Cuba: Uncertainty, Transaction Prices, and Stifled Potential

• Notice: The names of the Cuban entrepreneurs and their companies described beneath have been modified to guard the identities of those people.

“Don’t attempt to perceive this place. We don’t perceive it both.”

I heard variations of this chorus repeatedly from Cuban entrepreneurs throughout my March 2024 go to to Havana. Together with my glorious colleague on the army faculty, The Citadel, William Trumbull, creator of our comparative techniques course, The Cuban Financial system, we introduced a dozen or so scholar cadets to Havana over spring break. This was the culminating expertise after a semester of evaluating socialist and capitalist financial techniques and inspecting the implementation of socialism in Cuba. Subsequent, it was time to see the outcomes for ourselves.

Other than my temporary look as a reduction pitcher in a pickup baseball sport 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 kind of particular person within the nation. Reluctant concessions made by the state for personal enterprise over latest a long time, in response to ongoing financial disaster, clarify their presence. These entrepreneurs now comprise one-third of Cuba’s economic system. Dealing with important coverage uncertainty and remarkably excessive transaction prices, they exhibit extraordinary perseverance in creating and managing their enterprises. Every entrepreneur profiled on this article faces excessive alternative prices, as any might 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 basically a centrally-planned economic system with autocratic, top-down decision-making concerning financial exercise. Nonetheless, one may not get this impression whereas eating at considered one 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 Get together in response to financial crises. Regardless of important development in Cuba’s non-public sector, the fundamental financial questions—what will get produced, how issues get produced, who will get this stuff, and who will get the ensuing earnings—stay primarily answered by the Communist Get together’s central planning.

Following the 1959 Cuban Revolution, the Communist Get together carried out a deliberate socialist economic system modeled after the Soviet Union. For many years, non-public entrepreneurship was utterly absent and actively demonized as all non-labor sources (capital, land, pure) have been state-owned. All factories, farms, and retail institutions acquired detailed directions about what to provide or promote, how one can 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 Nineteen Nineties, Cuba enacted reforms together with legalizing self-employment (in roughly 157 specified occupations, together with peculiarly particular roles like “celebration clown” and “cigarette lighter refiller”) together with legalizing overseas foreign money 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. As an 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 fairly than transition towards a market economic system, writing, “I don’t consider we’re witnessing a baby who’s beginning to crawl and can ultimately, after many falls and scrapes, be taught to stroll.” (Locay 1995).

This sample of piecemeal reform continued into the 2000s, together with enlargement of self-employment licenses (as a part of “The Pointers” accredited 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 Get together switched from itemizing allowed enterprise varieties to itemizing forbidden actions (Torres 2024). The roughly 125 prohibited actions largely contain extremely educated fields like medication, 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 immediately impacts a lot of Cuba’s most proficient people, creating the perverse incentives described beneath.

Tales of Cuban Entrepreneurship: Enterprise #1

“The why doesn’t ever make sense, so we simply work round it,” displays Daniel Alvarez, a professor and now entrepreneur. “[The centralized economic model] is totally blind to determine market wants… it’s inconceivable to create incentives that present alerts for entrepreneurs to behave.” 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, because of this regardless of his Ph.D. (in a extremely technical subject), 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 achieved to make ends meet, both legally or via the black market. This is applicable equally to avenue 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, as an illustration, 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 an absence of handy, sturdy, wholesome meals freed from chemical substances and added sugars. They based Enterprise #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 on this nation of such naturally candy fruit that nobody has pursued this earlier than?” Their early choices gained traction on-line, ultimately 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 type of market discovery that central planning routinely misses.

From idea to manufacturing took 14 months—outstanding given important regime uncertainty. They began throughout early COVID, a yr earlier than small-to-medium enterprises have been authorized. Whereas self-employment was permitted, hiring remained unlawful besides inside households. Below these incentives, “household” sizes grew accordingly. As Daniel joked about hiring, “Oh, my cousin from Santiago, after all!” Recognition of personal enterprise in 2021 meant unrestricted hiring, and in a single day, Cuba’s economic system went from zero to greater than 10,000 enterprises. At this time, Enterprise #1 employs over 25 individuals, with their lowest stage workers 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 regularly 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 non-public vans with promoting, I would be the a hundred and first.”

Financing presents one other main problem, notably 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 america, transport it via Canada to Cuba. Preliminary funding got here via a fortuitous relationship with a European businessperson visiting Cuba, who agreed to supply a mortgage after listening to Daniel’s concept. Daniel took the mortgage anticipating an change fee of 60 Cuban Pesos to 1 USD, however financial disaster drove the speed above 200 Pesos to 1 USD, dramatically growing his compensation burden. Extra funding got here via artistic preparations with associates learning overseas who might entry scholar loans, with compensation dealt with via masking their household remittances. Clearly, the regime’s willpower to chop off capital markets is imposing actual hurt, as evidenced by these valiant however in the end pointless and wasteful efforts.

Tales of Cuban Entrepreneurship: Enterprise #2

Luca Marino co-founded Enterprise #2, a software program growth firm, after recognizing an arbitrage alternative: promoting high-skill software program providers to worldwide corporations for lower than prevailing charges however far above Cuban state wages of $20/month. Initially working with out a firm identify as “autonomous staff” licensed as “laptop operators,” Enterprise #2 now employs over 200 individuals with month-to-month revenues exceeding $150,000—surpassing the annual earnings of Cuba’s largest state-owned software program firm using hundreds 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, Enterprise #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, Enterprise #2 represents considered one of few corporations specializing in higher-skilled providers. 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 corporations. 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: Enterprise #3

Maria Fernandez co-founded Enterprise #3 out of a need to resurrect Cuba’s dormant trend business. Rising up with restricted entry to trend as a result of restrictions on web and outdoors media, Maria relied on visiting overseas associates’ trend magazines for publicity to traits. After working in New York’s trend business 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 associates to discover a distinct segment market alternative: producing high-quality, thoughtfully designed Cuban-made apparel. Their aim turned making linen merchandise that have been each regionally made and fascinating—qualities discovered individually however hardly ever collectively in Havana boutiques.

Initially working beneath the “seamstress” designation (amongst permitted occupations), they searched door-to-door in Outdated Havana earlier than discovering an virtually collapsing Eighteen Nineties constructing. Maria explains their early workarounds: whereas architectural providers have been forbidden, people supplied “celebration planning” providers that truly concerned constructing restoration. After full restoration, they opened in 2018 with Maria and her companions dealing with each side from design to advertising and marketing. Their restricted preliminary division of labor created an sudden profit: clients might watch their garments being made, including worth to the expertise. As Maria famous, “It was like assembling a puzzle piece by piece, attempting out totally different items to seek out the fitting match. We had little to work with, because the enterprise mannequin we aspired to had no precedent in Cuba.”

Concepts in Want of Establishments

The entrepreneurs we met throughout our quick time in Cuba demonstrated outstanding perseverance and spirit. They report shifting attitudes towards non-public enterprise in Cuba, with Daniel noting, “For generations, individuals have been taught that the non-public sector is evil. However now individuals know entrepreneurs that they know from expertise to not be evil as a result of they’re household or longtime associates.” Vogue entrepreneur Lucía Cabrera (founding father of Enterprise #4, a boutique trend line in Havana) echoed this: “The change of mindset is large. We’re shifting away from speaking about cash and earnings as dangerous and that the non-public sector is evil.”

Nonetheless, good concepts require supporting establishments. As Peter Boettke argues, “For those who don’t have the three P’s, you may’t have the three I’s.” (Boettke 2013). With out property rights, market costs, and revenue/loss alerts, a society lacks the incentives, info, and innovation wanted for financial growth. “Establishments 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 techniques resembles reforestation fairly than deforestation. “If sufficient power is used, the process [of transitioning to central planning] is comparatively easy, even whether it is damaging. Performing the reverse, nevertheless, is way more troublesome. Planting just a few bushes doesn’t make a forest. A forest encompasses a complete ecological system of bugs, animals, and underbrush. In the identical method, permitting just a few non-public shops to open doesn’t make a market.” (Goldman 2008)

Cuba’s piecemeal reforms have amounted to planting a handful of bushes each few years with little consideration of the “ecological” necessity of reforestation. To take action would allow the broad scale functioning of extremely advanced, interconnected, decentralized financial processes—issues the Get together can not simply management. As an alternative, planting just a few bushes takes the type of allowing non-public market exercise in restricted sectors adopted by actively curbing development as soon as deemed “adequate.” Whereas that is no substitute for reforestation, the state hopes the bushes 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 risk that seems unlikely near-term), there exists a pool of entrepreneurial expertise awaiting institutional assist. 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’re opening a lane and other people will observe.”

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 Enterprise 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 growth. Miami Herald.

[6] Augustin, E., & Semple, Ok. (2021, February 11). Cuba expands non-public enterprise. The New York Occasions.

[7] IPS Cuba. (2024). Personal enterprise drives export of dehydrated meals in Cuba.

[8] Boettke, P. (2013). ABCT: Offering the Lacking Hole. Coordination Drawback.

[9] Goldman, M. (2008). Perestroika. The Concise Encyclopedia of Economics.