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Cuba: A Trip Back to 1959

I recently visited Cuba for the first time, to participate in scholarly meetings. For an American citizen this short voyage requires a leap through hyperspace. It was my third attempt over ten years to get there. Obstacles had included both the US government and the Cuban government.

This was a trip back in time, to 1959. For one thing, a majority of the (few) autos on the street in Havana are large American cars from the 1950s. Most are beautiful. One hears about the cars, but I had thought the reports must be exaggerated.

Cuba’s economic system is out of Alice in Wonderland. It has one of the world’s longest lasting dual exchange rate systems. Currently the cost of dollars in the market is 25 times higher than the official rate of one peso per one dollar. This means that a worker in the hotel sector or restaurant sector who is able to keep dollar earnings has an income 25 times higher than one who must turn them in to the government.

The island long ago developed an advantage in skilled services such as medicine and education. But doctors and professors earn far less than those who join the fledgling private economy. The latter features 178 possible approved jobs. The possible choices on the list by design make no use of an educated person’s skills. They include waiter, bathroom attendant, taxi driver, automobile battery repairman, mule driver, and wheel barrow operator. Most people are still employed by the state, however.

Perhaps American consumer society has too many goods available; but Cuba has far too few. Most things that one would want — a toaster to make breakfast, leather to make shoes, tools for auto repair, software to upgrade a computer, spare parts to keep all those appliances from the 1950s running, …everything - is only available either by rationing, waiting in line, or going to the black market. Many are not available at all.

How can such a system have persisted for so long? Why doesn’t everyone see the folly?

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Repression and fear don’t explain it. The fact is that the advantages of the market system are not hard-wired into human brains — not anywhere, and especially not when they have been portrayed as the allies of selfishness and corruption, in opposition to such noble ideals as cooperation, fairness, and equality.

When the Soviet Union was collapsing, Robert Shiller and co-authors surveyed residents of Moscow and New York regarding their attitudes toward free markets. Unsurprisingly, many of the Russians gave answers that strike an economist as failing to appreciate adequately the virtues of the marketplace as a mechanism to bring supply and demand into equality. For example 66% of the Russian respondents thought it was unfair of flower-sellers to charge higher prices on holidays. The surprising finding, however, was that just as high a percentage of Americans thought it was unfair of the flower-sellers to raise prices! (Economists, of course, point out that demand is much higher on holidays, and that without the higher prices flower-growers would have no incentive to increase the supply at such times.)

People in Eastern Europe eventually figured out that communism does not work and that the market system does. If the United States of America did not exist, or if the embargo did not exist, Cubans could do likewise: infer that there is something fundamentally wrong with an economic system that involves so much time wasted and so many simple desires frustrated. But in the case of Cuba, there is an alternative explanation right at hand. Many of these goods would be imported from the United States, or produced at home with inputs from the United States. Therefore it must be the US and its embargo that is to blame. So it seems to many Cubans.

When makers of foreign policy ”get tough” with another country, they often under-estimate the extent to which the opponent’s government can derive long-lasting legitimacy by pointing to the external threat to rally its people. The citizens of the last two countries still clinging to communism, Cuba and North Korea, both vividly remember military conflict with the United States (the Bay of Pigs and the Korean War, respectively) and both countries have long been subject to American sanctions. The first communist country to experiment with market reforms, Poland, was one that never came into military conflict with the West. Lesson: the US should end its obsolete embargo against Cuba. Let those private-sector auto mechanics have their spare parts!

Harvard’s Jorge Dominguez likens the Cuban reform path to an accordion that alternately goes in and out. Liberalization took hold out of the desperate economic situation (”special period”) that followed the 1991 collapse of the Soviet Union, Cuba’s long-time benefactor. The reform process was then slowed from 1996 to 2005 — even stopped altogether — in part because Venezuelan support made it less necessary.

Reforms have been renewed in recent years– now under “los lineamientos,” translated as “the guidelines.” For example, the government announced in 2011 it would let people buy and sell houses. Farmers can sell directly to the market, to hotels and restaurants, rather than just to the government. One explanation for the recent reforms is that the more pragmatic Raul Castro took over after his brother became ill in 2006. But another explanation is that money from Venezuela has lately begun to level off and appears uncertain in the future. (For one thing, Venezuela’s oil production has declined during a period when everyone else’s has boomed, due to mismanagement by Hugo Chavez of his own economy.)

Referring to the heavy economic dependence on the US that had ended abruptly after the 1959 revolution and to the heavy dependence on the Soviet Union that had ended abruptly after the 1989 fall of the Berlin Wall, Cuba’s Minister for Heavy Industry in 1995 vowed, “We will never let this happen to us for the third time.” (Jatar, 1999, p. 38). Yet that is what is now happening with respect to dependence on Venezuela.

For now, Cuba is casting about for a model to follow. The example of Sweden shows that it is possible to combine a strong social safety net with a strong private economy. But what Cuba seeks is a model of transition out of communism.

The Chinese economic miracle is the obvious model, beginning with the reforms of Deng Xiaoping. This judgment assumes that income equality is in reality not as important to Cuba as the requirements that the Communist Party maintain control and the country’s leaders never have to say they were wrong. The Cuban slogan has long been “Socialism or death!” Cubans are proud, and mindful of their history of ill-treatment by larger powers. In this they resemble the Chinese, who have converted to capitalism more energetically than the capitalists while yet leaving the giant picture of Chairman Mao up in Tiananmen Square.

But when the Chinese and Soviets split in the 1960s, Cuba went with the latter. Only in some American college dorm rooms did posters of Mao and Che appear side-by-side. So for now the model is Vietnam, rather than China. (Unfortunately, the Vietnamese economy has been troubled of late.)

Four things will happen soon, probably at approximately the same time: the aging generation of Cuban émigrés who have dictated American policy on Cuba will give way to the next generation; the Castros will pass from the scene as well; American-Cuban relations will be normalized; and the world’s 2nd-to-last museum of communism will spontaneously convert to a rapidly growing service-exporting economy. Lineamientos and models will no longer seem so necessary.

I just hope that before the wave of American money and tourists arrives on its shores, the government of Cuba undertakes the appropriate regulatory intervention: a zoning law that all car bodies in some designated part of Old Havana must date from 1959 or earlier.

Jorge I. Dominguez,& “Hello from Havana,” Harvard Magazine, July-August 2009.

Dominguez, et al, eds., Cuban Economic and Social Development (Harvard University Press), 2012.

Anna Julia Jatar-Hausmann, The Cuban Way (Kumarian Press), 1999.

Robert Shiller, Maxim Boycko & Vladimir Korobov, “Popular Attitudes Towards Free Markets: The Soviet Union and the United States Compared,” American Economic Review 81, no.3, pp.385-400, June 1991.