The Cuban government has opened up its economy. As one of the last remaining socialist economies, the impact of its decision to orient its institutions towards private individuals is significant and signals a larger effort to increase its productivity and employment. It has increased the number of sectors where the state won’t be involved. The list of industries open to private businesses has dramatically increased from 127 to 2000. The economy has stagnated in recent years and reformists have called for a greater role of the private sector to achieve growth. The economy contracted by over 11% last year, strengthening the case for reforms.
Before the reforms, most of the private sector activity was concentrated in tourism, which is a driving force for the Cuban economy. Tourism plummeted during the pandemic, and many taxi drivers and tour guides saw their incomes fall. The drastic fall in tourism also meant that the government was lacking in foreign currency to pay for imports, which further contributed to occasional shortages of basic goods. Some small businesses suspended their licenses as their business no longer remained viable. One expects that encouraging entrepreneurship will lead to more organic increases in employment in a more diverse group of sectors.
The state retains control over the sectors it considers strategic: media, defense, and health. Yet, it is concerning that the size of the businesses that are permitted has not been properly defined and the government might use this to continue to regulate the extent of private economic activity. Many of the sectors that remain under the purview of the state are the ones that employ the most skilled workers: health, education, architecture, engineering, accounting, etc. High-skilled work in those sectors has been plagued with a lack of adequate employment or opportunity for growth; leading many educated workers to leave high-skilled employment for the blue-collar but private sector work. Cases of college-educated engineers and doctors taking up work as hotel porters or taxi drivers are common. Despite these limitations, it’s a step in the right direction. Previous attempts at reforms opened up some services but liberalization of manufacturing may prove to be more potent since allowing small businesses to start factories fundamentally shifts Cuba’s development paradigm.
Yet another landmark reform is the discontinuation of the dual currency system. A rather peculiar monetary framework: it used to maintain one type of peso that was pegged to the US dollar and open to foreign exchange, in addition to the domestic peso that was in circulation in its economy. This approach did not offer any concrete benefits outside of a political claim about maintaining sovereignty over the currency. There was a lot of evidence that the complexity of such a system and the obvious lack of clarity about converting currency hampered the attractiveness of Cuba as a foreign direct investment (FDI) destination.
The government raised the wages of many highly skilled workers that it employs in various public agencies to induce an increase in national productivity by encouraging unemployed people to look for work. This has pushed up consumer prices and made the existing welfare state less dependable. However, this seems to be understandable given that an unusually high rate of its working-age population is not part of the workforce. Current reforms seek to change these counterproductive incentives by making it worthwhile to become an entrepreneur. These seem to work as there are reports by employment agencies that while there used to be 10-15 applications a day, the number has now risen to around 80-100 per day. Such a switch to the formal economy was desperately needed.
Unfortunately, the extent to which the reforms offer space for private individuals to act freely is quite limited. To get a self-employment license, you still need to present a proposal and your goals to the government and it is up to the state to decide the appropriateness of the proposal in the framework of its targets. This level of central planning seems to be self-defeating. The implicit assumption that the state fundamentally has a better idea of how to allocate resources has not been proven true by socialist regimes including Cuba’s policies. While it is better than the previous setup, it doesn’t appear to be that radical of a change.
Historically, reforms in Cuba have a positive track record. Private restaurants were allowed in Cuba in 1993 and arbitrarily strict regulations about seating were only properly relaxed in 2011. These private establishments anecdotally provide a much better quality of service and invest more in their workers than state-run restaurants. Unsurprisingly, the number of private restaurants has grown dramatically and it now employs upwards of 6,00,000 people.
The new rules have come as a part of a broader effort by the Government to improve its trade balance and enhance demand. This is also likely to be welcomed by the Biden administration. The United States had imposed a tough embargo on Cuba due to its role in the Cold War. The presence of a socialist regime mere miles away from the mainland US meant relations were never close to warm. Many left-leaning academicians allege that some of Cuba’s laggard economic performance is explained by these sanctions. In 2015, President Obama made a radical call to open diplomatic channels with the country and lifted many of the sanctions. This shift, however, did not last long as the Trump administration reimposed the sanctions. Many leaders in Cuba are hopeful that the Biden administration will reverse Trump’s policies and extend the diplomatic shit that started under Obama. Though that makes ideological sense, a potential hurdle to warmer relations with Cuba is the political beliefs of the Cuban-American community in Florida. Florida, by being a swing state, wields disproportionately large influence in the Electoral College. It is also home to a large number of Cuban immigrants, who fled the Castro regime and are extremely distrustful of socialist policies. In the last election, they voted for Republicans, which many political analysts believe is due to Biden being painted as too sympathetic to the left. As such, the Biden administration may want to avoid any move that indicates being overly friendly with Cuba’s government.
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Written by: Shivansh Raman (shivanshsr01@gmail.com)
Edited by: Divij Gera