Cuba Libre

Thunderbird professor of global leadership, Jeff Cunningham, and his wife, Kristin, took a five day jaunt to Havana to learn more about the mystery we call Cuba and meet Cuban entrepreneurs.

Prologue

The cuisine at the state restaurants was so uneven we stuck with the hearty local rice and beans; music has disappeared from the island just like the shuttered Buena Vista Social Club and Hemingway’s bar made its last call long ago; but the Cuban people ignore these minor problems to give us a glimpse of how a population pursues entrepreneurial activities and outfoxes a totalitarian regime.

As we were departing the gate agent slid next to me, made sure no one was listening, and whispered, “I don’t believe in Castro, I don’t believe in Obama, I just believe in God.” I was humbled that the Cubans we met felt close enough to an American stranger to share these very personal thoughts. As if they’ve been waiting fifty years for an old friend to return after a bitter argument. Which is exactly what happened.

Friend or Foe

To understand how all this came to be, let’s step back in time.

America’s troubles with Cuba may be legendary, but this is a land where nothing is quite what it seems. For instance, everyone knows President John F. Kennedy authorized a strict embargo banning American trade early in 1962 that is still in place today (but he didn’t sign it until White House Press Secretary Pierre Salinger scoffed up 1,200 pre-embargo Petit Uppmanns from every Washington cigar shop for the president’s personal stash).

So how is it that Cuba imports over 80 percent of its food from the United States, and not luxury goods either, but staples such as rice and beans, the mainstay for the average Cuban, and also chicken, wheat, and corn?

Until President Obama’s reestablishment of official relations, the U.S. vs. Cuba relationship was that of two neighbors who aren’t on speaking terms and pass each other in silence. Cuba and the United States haven’t spoken much since the early days of the Castro regime. Yet even during this stalemate, the State Department maintained a “U.S. Interests Section” located in the former U.S. embassy, and which sounded suspiciously like an embassy, but the kind you can enter through a side door. The building sits by the Malecón, the famed seawall built in 1901 after Cuba was granted independence from Spain after the Spanish-American War. An analogy would be if Cuba chose to ‘discreetly’ open a diplomatic office next door to the Washington Monument. So there was a plan to one day repair things, even if the day seemed far off.

Nor are these the only examples where America and its southern neighbor have performed a delicate pas de deux while feigning antagonism. Cuba has found out the hard way that communism — which turns out to be less of an ideology and more the will of the few to regulate the many — doesn’t have the tools or the timing of a free-market economy to solve complex fiscal and monetary problems. Cuba now recognizes that the American way comes in handy especially when the challenges of running a nation aren’t all solved by revolutionary slogans. And that’s where the plot thickens.

For the economic policy-minded there is a tangential governance angle in the Cuba story. It demonstrates that when government regulation replaces the discipline of the free market, as it has in Cuba, the economy is brought to its knees. That is why the country is now critically dependent on subsidies from a consortium of the world’s most notorious nations — North Korea, Syria, and Venezuela, a veritable rogue of slush funds, all truly lenders of last resort.

From Communist Revolution to Capitalist Evolution

The importance of the 1959 Cuban Communist revolution can’t be overstated in trying to understand their economic struggles today.

Abba Eban, Israel’s one-time ambassador to the United Nations, once said of a diplomatic opponent, “it never missed an opportunity to miss an opportunity,” but he could have been talking about Cuba. The country has bounded from one economic crisis to the next — first with the demise of the Soviet Union, to sugar price crashes, to the death of Hugo Chávez — until it hit fiscal rock bottom in recent years. So what will keep the revolutionary flame alive now is for the leadership to find a way to adapt their brand of socialism to modern finance, as China and others have done so that programs are sustainable over future generations, not just the one that rallied to the cause in 1959.

While no Cuban will say the word out loud, the methods are deceptively close to what Americans call Capitalism.

In a land where nothing the government does is entirely clear, one either drinks the Kool-Aid or learns to read the tea leaves. The general opinion of the very few — and courageous — Cubans willing to speak off the record is that Fidel and Raúl Castro are taking small steps that point undeniably, if reluctantly, toward the free market, but not so obvious as to be accused of turning their backs on the revolution. The challenge now is that some Cubans are enjoying a better way of life, and that may cause unrest among their patient, loyal, obedient, and poorer comrades. Then the real fun will begin. But I am getting ahead of our story.

The Victors Write the Propaganda

Fair income, profit incentives, and working towards a career, standard features to an American, are unknown to most Cubans.

To anyone who has studied the tangled history of the American-Cuban relationship, there are more contradictions than the Bible. For the first-time traveler to Cuba, the time warp is palpable, and not just for the sight of the 1950s vintage Plymouths, DeSotos, and Packards roaming the streets of Havana, moonlighting as taxis. Cuban taxi drivers own their cars and have an incentive to design machine tools to provide parts for replacement as the cars age. While the streets of Cuba look like something out of a retro Disney theme park, they are the result of Cuban entrepreneurship finding a solution around a dictator’s edict.

After the 1959 Cuban Revolution, the Castro regime banned all incentives, set a single wage, and nationalized production. It trampled on the work ethic.

The average Cuban salary today is $30 per month. A giant bureaucracy was needed to redistribute the bounty. The approach was very straightforward: regulation replaced initiative; laws control public behavior, especially money-making activity; friends and family thoughtfully serve as government informants; and most of what we refer to as risk taking, such as the development of new products, or innovation, became a lost art.

Things Americans take for granted — such as buying and selling, making a profit, or holding onto something for a better price in the future — simply do not exist in the open public markets, although these restrictions are slowly being eroded. The “peso” stores where the average Cuban shops are emporiums of grimness — counters empty, food either spoiled or stale, lackluster goods roughly handled by the store’s clientele until a bold shopper happens along with an unused ration card. It’s a way of life, Cubans might say, but it’s not a way of living, Americans would respond.

The revolutionary party line is that Castro set out to eliminate poverty and wealth by distributing the country’s assets equally, followed by the elimination of disease, illiteracy, and homelessness, as everyone on the island dutifully believes is what happened and of which the regime is immensely proud. But after 60 years, the gold plating has worn off, principally because the grand plans were unsustainable, and the benefits to the people can charitably be called Castro’s unaffordable care act.

“It’s the Economy, Estúpido”

In the 1950s, Cuba’s economy was equal to Italy’s gross domestic product and greater than Japan’s. What happened? The single biggest factor in Cuban trade was and is sugar production. Today the entire population is vulnerable to any distortion in the price of sugar. To turn bad into worse, since 1959, Cuban sugar purchases were subsidized by anti–American allies, and no attention has been paid to quality and production efficiency. In 1959, for instance, Cuba represented 80 percent of the world’s sugar trade; now it is not in the top 25.

Fidel’s note to self: Free markets win in the end.

Setting the Record Straight

There is no doubt that prior to the revolution there were extremes of poverty, disease, lack of adequate medical care, and homelessness. The cause, however, was not the free market, contrary to the Castro propaganda. These unfortunate facts were attributable to the corruption of the previous regime’s dictator, Fulgencio Batista, and his mafia gambling crony, Meyer Lansky. Neither were ever big fans of Milton Friedman.

A culture of Cuban Capitalism needs to be invented and it is starting in the entrepreneurial sector.

Complicating the matter, in the aftermath of the revolution, there was a massive brain drain, as blame was pinned on intellectuals and businesspeople who subsequently fled the country (mostly to Florida) when they saw the entire upper class killed or imprisoned as enemies of the state, and assets and businesses nationalized. So the real story of pre-revolutionary Cuba never got told because the victors needed to scapegoat the business class. Even more ominously, the best and brightest were no longer around to help restart the country once the corrupt leadership was removed. They will need them to return, or at least their skills and assets.

Two-Bucks, Gee!

When people are underpaid and goods are produced according to quotas, not profits, the supply chain collapses (which is why Cubans import fish despite the best fishing waters in the hemisphere — so good in fact, that Hemingway moved here for the catch).

Why no local fish markets, you might wonder? Because Cuba lacks refrigeration trucks and sufficient fuel supplies to develop a reliable distribution system. After the collapse of the Soviet Union and with it the loss of Russian oil, Cuba mandated bicycle travel as the preferred method of transportation. Of course, resourcefulness is like water, it can be drained temporarily, buy it finds its way back again. So enterprising Cubans react intuitively and creatively by foraging for themselves either on the black market; or through illicit activity such as drug or sex trafficking; or they create ingenious workarounds that circumvent the totalitarian government controls, such as barter, bribery, and non-reporting of income, even at the risk of persecution and punishment.

For those not entirely familiar with Cuban wages, the average physician makes $20 per month (note: these are not typos); a butcher, $40; and a travel industry worker who gets American tips, $75. Pensions were recently raised to $9.50 per month, an increase by President Raúl Castro of $2, as a gesture of generosity on the part of the state.

Los Miserables

In Cuba, the government sets prices, distributes goods to the people who carry ration cards (the currency for the peso stores) and approves and makes all capital investment. This is an arduous task even in good times. In a period of decline, making sure that the diminished output is spread around despite corruption, payoffs, and the black market it is practically impossible. Governing a significant economy is both a management challenge and very data intensive. Modern policymakers need our Fed chairman’s Beige book, not Mao Zedong’s red one. Otherwise, the gross mistakes that arise out of miscalculations are far more dangerous than the problem itself.

City of Fallen Arches

At the time Cuba was experimenting with social revolution, China and Russia had long discredited the notion of five-year central plans, and for good reasons. Stalin’s collectivization plans resulted in the deaths of more than seven million Ukrainian farmers, mostly of starvation, according to Michael Ellman in Europe-Asia Studies.

Not to be outdone, Chairman Mao organized The Great Leap Forward, which included the “Four Pests Campaign” — and gave the entire Chinese population fly swatters to kill flies, mosquitoes, rats, and the lowly tree sparrow. Although the visual of one billion-plus Chinese running around swatting flies is arresting, the five-year plan failed miserably. What the central planners failed to appreciate is that sparrows eat insects, and as they were eradicated, the locust population swelled. Crops were destroyed and the landscape deforested, which led to the Great Famine, killing over 30 million Chinese farmers and peasants.

Even Soviet Secretary Nikita Khrushchev had this to say about Mao and his plans, according to the book by Li Zhi-Sui, The Private Life of Chairman Mao: “He was like a frog looking at the sky from the bottom of a well, thinking he was seeing the world.”

Castro’s central plans, to his credit, did not create a Holocaust, but his results aren’t what the Communist propaganda machine would have you believe. The first plan was to eradicate childhood disease — and who could argue with that? Cuba’s version of Castrocare was to invest in free medical education to train a huge cadre of physicians. But fast forward 50-plus years — there are too many doctors now, and the pay is one-half a butcher’s salary. Yoani María Sánchez Cordero, a Gen Y age Cuban who writes critically about Cuban life, said about doctors, “The white coat is exchanged for barber’s scissors or the syringe for an oven where pizza is baked.”

Housing was the second part of Castro’s plan, and the answer was to nationalize all the real estate and give people homes at no cost (by law everyone is guaranteed a roof over their head). There was only one problem: buildings constructed for single families now house 15 to 20 families. The regime forgot to award ownership of the building because it was contrary to the revolutionary spirit where land is shared communally. So the infrastructure, common spaces, façades, and archways have been left to crumble, and Havana is literally a city of fallen arches, despite the government’s efforts to start restoration projects. Even for those civic-minded enough to want to repair their own buildings, a gallon of paint costs 40 percent of a typical monthly salary, so a fixer-upper is not high on the list of the most desirable things to have in Havana.

Two Words: Send Cash

Let’s also consider the large-scale economic problems that are the result of inadequate capital or trade imbalances. They are now so unmanageable that the monthly American remittances (funds sent from relatives back to Cuba) are among the country’s largest source of foreign exchange. The tax on the remittances represents such a significant profit center for the state that without them the country would face huge trade imbalances and, likely, insolvency.

We met a vendor who talked to us — but looked both ways before he uttered a word. There must be a monstrous internal spy network where neighbors report on others for doing anything contra to government dictates. He told us he could not maintain even a simple lifestyle without remittances from the U.S.

Even in a country as poor as Cuba, there is a Cuban version of income inequality due to the impact of remittances on the locals. If a family has relatives living in Miami who send them $100 a month, it means their standard of living is roughly three times that of their neighbors. That also creates stress fractures along the revolutionary fault line — you can see it in the houses on a street that are well maintained but the buildings next door are falling down.

The other source of capital is through the subsidy window. The country has had to turn to its anti–American benefactors to keep the spirit of the revolution alive in an otherwise bankrupt economy. Fidel Castro blames his unfortunate choice of friends on the American embargo, and of course, there is an element of truth in that. But when the bottom finally fell out after the collapse of the Soviet Union, the Cuban economy shrank by 33 percent. Along came a new anti–American ally in the form of Hugo Chávez. The government of Venezuela would provide oil at an 80 percent discount and liked to buy sugar at high prices, so it was bye-bye Russia, and hello Venezuela.

Cuba turns out to be not so anti-free market, but more like most of us, just hoping for a sweetheart deal from a sugar daddy.

Odd Man Out

So how does Cuba reenter the mainstream of productive nations? Cuba had the misfortune to pull off a successful Marxist revolution just as America was recovering from McCarthyism and yet still reluctant to appear soft on communism, especially in our own hemisphere. Look at how U.S. diplomatic relations with China, the former Soviet Union, and Vietnam have been transformed from Cold War archenemies (or, in Vietnam’s case, actual war), to reliable and, in some cases, closely aligned business partners.

To the North, the United States went from being Cuba’s liberator, benefactor, overseer, and military, business, and diplomatic partner, to the principal foe. This freeze has lasted more than 60 years, and despite President Barack Obama’s overtures, the Miami-based Cuban population remains vehemently anti–Castro. (An indication of what a hot potato the country is politically, the president brushed aside a Today Show question about the rap mogul Jay Z and his wife Beyoncé’s visit to Cuba, with: “We’ve got better things to do.”)

Green Shoots of Capitalism

A CNBC crew was invited recently to Cuba in a “rare demonstration of openness” for a presentation by the government on the Cuban economy. The visit was meant to coincide with a new law implemented on July 1 that allowed individuals to band together to create businesses in non-agricultural sectors. Don’t call them businesses — that’s too bourgeois. They are called “cooperatives,” and the people are allowed to run them without intervention from the state and keep the profits (and pay taxes). We spoke to one owner of a cooperative, and he was selling art work for $5,000, literally a lifetime of earnings for the average Cuban. You can imagine the imbalance this sort of activity will cause in the early stages of an economic renaissance.

But there is no question, despite the challenges, you do see entrepreneurial economy coming to life. These business owners (they must be Cuban although they can take foreign investment) are the local version of Facebook’s Mark Zuckerberg, and the employees enjoy a freedom and income that was only a dream just a few years ago. This new cultural Capitalism revolution will inspire a generation of young Cubans who will not stop until the island is thriving with new business ideas.

Havana paladar or private restaurant. Note, Che Guevara upper left. Dinner equals average annual Cuban wages.

Evidence of a market-led economy can be seen in the new restaurants called paladares (“paladar” in Spanish means palate), which are actually small family trattorias funded mainly through foreign venture capital. At the one we visited, the menus and the line waiting for tables had more in common with restaurants you would see in Los Angeles and New York. To get there, you have to walk three flights up and then down a narrow hall where families gather around a TV in their one-room home. At the end is the restaurant, where attractive, well-dressed people are eating in a rather luxurious room. To Cubans, the irony is unremarkable because their city now has a real restaurant serving delicious cuisine by any standards.

Finally, there is the employment picture. The last year for which there is any reliable data is 2000. That year, public-sector employment was 76 percent, and private-sector employment was 23 percent. When compared to the 1981 ratio of 91 percent to 8 percent, things appear to be moving in the right direction.

Missing from the official calculations is how average Cubans manage to barter, transact off the grid, and find ingenious ways to move the economic needle. Take something as obvious and primitive as Cuban TV. It does not exist, other than government pablum and propaganda. So the Cuban population looking for reruns of Cheers or Friends (I doubt they are seeing Homeland just yet) pay for a monthly subscription in the form of a data stick. Each month they can see their favorite show and ignore the restrictions of public television.

There are many challenges to be sure, many of them cultural, for a country that has been working under the themes of its revolution for two or three generations. A Generation Y Cuban notes: “It’s not easy for Cubans to jump into the free market spirit: For those who grew up in a country where the state, for decades, has been the monopoly employer, to be forced to make a living independently is like jumping into the void. Not only do fears flourish, but also opportunism and favoritism.”

Castro’s Legacy

We left Cuba changed and curious. How can a country so dependent on the United States not figure out a way to make this critical relationship work? How can a country as magnanimous as the United States and already friendly with communist countries such as China and Vietnam refuse to enter into normal relations with Cuba, a country that is strategically located and needs everything we have to offer?

Cuba will turn you into an ardent capitalist (if you’re not already), and a grateful one at that. The Cuban lesson for America is that while we experience excesses from time to time in our system, over-regulating the freedom to have excesses is the most dangerous excess of them all. Regulation is well intended but has a very long shelf life. And while the free market smooths things out, in the long run, it can take more time than anyone likes and patience with the market can be a rare commodity as America has discovered in recent years.

On our way to the airport, we passed “El Capitolio,” built in 1929, an exact replica of the U.S. Capitol building in all but one detail: it is two meters taller. (No Cuban spoke to us without bringing up this fact.) The Cuban national pride that encouraged them to build a taller capitol should be useful as they mount the next revolution toward a free market Cuba and a vibrant economy.

As we stood in line for our tickets home, the Cubana Airline agent asked us if we had any Cuban currency we wanted to convert to dollars. Cuba charges a 10% tax on currency conversion in either direction. He wanted to save his tax and was offering us the chance to save ours.

This was totally illegal, of course. And totally entrepreneurial.

Author’s Bio

Jeff Cunningham is an advocate for enlightened global leadership, which he calls the most valuable natural resource in the world.

 

He is a Professor at ASU’s Thunderbird School of Global Management and was the former publisher of Forbes Magazine, startup founder, digital content CEO, and ran an internet venture capital fund.

He travels the globe in search of iconic leaders. As an interviewer/host, he created a YouTube interview series, Iconic Voices, now co-produced by @Thunderbird, featuring mega moguls from Warren Buffett to Jeff Immelt. His articles on leadership have been featured in the Arizona Republic, LinkedIn and Medium via JeffCunningham.com.

 

His career experience includes publisher of Forbes Magazine; founder of Directorship Magazine; CEO of Zip2 (founded by Elon Musk), Myway.com, and CareerTrack.com; venture partner with Schroders. He serves as a trustee of the McCain Institute and previously as a trustee of CSIS and Middle East Institute, and as an advisor to the Nobel Peace Prize Committee.

 

He has also been a board director of 10 public companies.

 

The views expressed in this article do not necessarily reflect those of Thunderbird School of Global Management or Arizona State University as a whole.