Cuba's Entrepreneurial Socialism

Cuba has become a good place to do business -- for all but U.S. firms. Our economic embargo hurts not only Cuba but, increasingly, us as well.

MAKING sense of Cuba's economy is not easy. There's a joke I heard when I was in Havana recently: The CIA sends an agent down to live in Cuba and report back on the state of the economy. He returns six months later, babbling, and is carted off to an asylum. "I don't get it," he mutters over and over. "There's no gasoline, but the cars are still running. There's no food in the stores, but everyone cooks dinner every night. They have no money, they have nothing at all -- but they drink rum and go dancing."

It's an economy of loaves and fishes, where things somehow come out of thin air, ingenuity, and sheer will. It's also an economy that is recovering from the crisis triggered by the disintegration of the Soviet Union and the collapse of the socialist bloc. From 1989 to 1993 Cuba's gross domestic product declined, according to official estimates, by 35 percent. Imports dropped 75 percent, and the deficit reached 33 percent of GDP. Oil imports from Russia fell from 13 million tons in 1989 to less than 7 million tons in 1992. Cuba not only had to replace the oil and support it had received from the Soviet Union but also had to establish an entirely new set of trading partners, because 85 percent of its trade had been with the socialist bloc. Making matters worse was the U.S. economic embargo.

The Cubans prefer the term "economic blockade" -- not unreasonably, since the United States does not simply decline to do business with Cuba but directly interferes in Cuba's trade relations with other countries.

The pettiness of the blockade is striking as one looks at the particulars of its enforcement over the past several years. A Swedish corporation, for example, has been prohibited from selling a sophisticated piece of medical equipment to Cuba because it contains a single filter patented under U.S. law. Dozens of other transactions between Cuba and foreign corporations -- involving spare parts for x-ray machines from France, neurological diagnostic equipment from Japan, parts to clean dialysis machines from Argentina, Italian-made chemicals for water treatment, and many others -- were likewise prevented by U.S. law.

But in spite of U.S. harassment and meddling, Cuba has found scores of new trading partners, and has embarked on joint ventures and foreign-investment projects with firms from Argentina, Australia, Brazil, Canada, France, Germany, Great Britain, Israel, Italy, Jamaica, Mexico, Russia, Spain, and other countries as well. These projects range from the construction of five-star hotels to enterprises in mining, oil exploration, telecommunications, and biotechnology. And many of the projects are not small. Investment projects include a $1.5 billion deal with a Mexican telecommunications company, a $500 million nickel-mining venture with a Canadian company, a $500 million mining deal with an Australian company, and a $500 million textile deal with a Mexican company. A Monte Carlo-based company built a new terminal in Havana harbor for cruise ships, which has already opened for business. At last count there were 240 joint ventures in Cuba, involving fifty-seven countries in forty areas of the economy. The foreign investment projects announced to date total some $5 billion.

For seven years Cuba has been actively investing in new modes of production, restructuring the economy, and establishing new trade relations around the globe. Now the investments may be starting to pay off. After five years of a sinking GDP, the economic decline came to a halt in 1994: Cuba showed a slight growth in GDP of 0.7 percent. The GDP grew by 2.5 percent in 1995. In the first half of 1996 (the most recent figures available at the time this magazine went to press) the GDP was growing at 9.6 percent, with continued annual growth projected.

AT the level of daily life the economic recovery is dramatic. In 1989 the Malecón, a six-lane seaside highway, had more Chinese Flying Pigeon bicycles on it than cars. The occasional car would be a tourist taxi, or an aging Lada (an inexpensive Fiat manufactured in Russia), or a Chevrolet from the 1950s. Although Cuba's economic infrastructure and basic social institutions were holding (schools, hospitals, and factories were still operating), by 1992 and 1993 electrical blackouts occurred in residential areas for most of the day several days a week. Homes had water for only a few hours a day. Lack of fuel oil forced factories to cut back production. Buses were rare, unpredictable, and liable to break down.

Last summer, watching the traffic on the Malecón, I could barely believe I was in Havana. On the street in front of me were a bright-green new Suzuki Sidekick, a new Mercedes-Benz truck, a new Honda sedan, a new Toyota van -- and a constant flow of Ladas and '57 Chevies. For those with dollars gasoline was plentiful. Down the road a bit was a new Fiat dealership. Half the models in the showroom cost about $12,000; the others, vans and small trucks, were going for $22,000 or $23,000. A few hundred yards away was a gleaming new hotel, its massive foyer all marble, with Mozart playing softly. A touch-screen computer gave information in several languages about services, restaurants, and shopping. The cheapest rooms were $150 a night, the executive suites $400. And it was obviously not just a tourist hotel: it had conference rooms and a business center with computer facilities, fax machines, photocopiers, laser printers, copies of Cuba's foreign-investment laws, and full-color directories of banks, hotels, restaurants, government offices -- and anything else one might need if one were, say, thinking of initiating a joint venture somewhere on the island.

In Havana some of the new wealth is clearly starting to be felt in the population generally. On almost every block, it seems, is a freshly painted house. The discos are jammed every night with both Cubans and foreigners. A fast-food chain called El Rápido has sprung up, its patios full of brightly colored tables crowded with Cubans and foreigners eating hot dogs and pizza and drinking Cokes.

Even during the worst of the economic crisis Cuba managed to avoid starvation, or even widespread malnutrition. Indeed, one of the remarkable things about Cuba's response to the crisis is how the country could keep functioning after its economy was cut by a third. Basic indicators have held steady throughout the economic crisis: Cuba's infant-mortality rate in 1989 was about ten per thousand live births, and life expectancy was seventy-six years -- comparable to the statistics for the United States and the other Western industrialized countries. The Cuban infant-mortality rate has even improved slightly since then -- it's now about nine per thousand live births. The literacy rate is 98 percent, and no measurable homelessness exists. Cuba still has more doctors and teachers per capita than almost any other country in the world. In a population of 11 million, more than half a million Cubans hold university degrees.

Media accounts often mention "rationing" as evidence of how desperate Cuba's post-1990 situation is. In fact Cuba has had "rationing" since thirty-five years before the crisis began: every person, regardless of income, is entitled to a basic allotment of food and essentials -- beans, rice, vegetables, fruit, eggs, meat, soap, cooking oil, cigarettes, gasoline, and so on. Shortly after the revolution every child up to age seven was guaranteed a liter of milk a day for twenty-five cents; in the 1980s children up to fourteen, along with the sick and the elderly, received this entitlement. In 1990 the guarantee of milk was reduced to include only children seven and under again. Also, through the 1980s parallel markets supplied a range of goods, from bread to wine to meat to canned food, that could be bought with pesos without restriction. As the economy sank, these goods went "on the book" (the libreta, or ration book) or disappeared altogether. Bread was rationed, meat rations shrank, canned goods were hard to find -- until virtually all goods were available only through the rationing system, and even some of the guaranteed items didn't always appear as promised.

There was enough food to get by, but just barely. "We have enough," a friend of mine said in 1992. "There's food on the table every day; the kids are going to school. But you want something more once in a while. You want to buy a Coke, or a new dress. You want to sit in a café, or go dancing, or just buy a can of something for dinner instead of soaking the beans again and hoping that the cooking gas will come on before two in the morning."

As the economy plummeted, prostitution returned. With it came painful memories of the Batista era, when Cuba was a playground for wealthy foreigners, and money laundering, gambling, and prostitution were among the nation's most visible economic institutions. The official position in recent years was that this prostitution was different from that prostitution: that prostitution was what women did to buy food for their starving infants; this prostitution reflected a malaise born of boredom and frustration rather than economic desperation. Hundreds of thousands of tourists were now flooding the country each year, with their Nikes and Walkmans, jewelry and credit cards, while Cubans were increasingly standing in long lines to catch overcrowded buses to go to work at a factory or a university that might shut down partway through the day because of an electricity shortage. By mid-1994 the peso -- which in principle was equivalent to a dollar -- was trading on the black market at 120 to a dollar. It was clear that as long as the economic crisis continued, prostitution, petty theft, and black-market activities would grow.

Salaries in Cuba can range from 100 pesos a month to a few hundred. A factory worker might earn 120 pesos a month, a professor 350. Anyone who has completed a university education will automatically earn at least 195 pesos a month. A top surgeon might earn as much as 600. It has been common in the past few years to see in the U.S. press that "Cubans are now living on the equivalent of a dollar a month." But this misrepresents the nature of the economic situation. The Cuban economy is simply not structured on the model of dependent capitalism. Basic necessities, at consistent, easily affordable prices, are still bought in pesos, regardless of what the exchange rate is. Rent for Cubans is around six or eight percent of their monthly salary, no matter how much they earn. All the food provided "on the book" would cost a family of four perhaps thirty or forty pesos a month. Education continues to be free, medical care is free, buses cost a few cents. The peso's loss of purchasing power did not mean that people lost their homes or couldn't afford to send their children to school. Rather, the economic crisis has meant that nothing except necessities could be bought with Cuban currency.

The Cuban government responded to the crisis in part by developing trade and investment and in part by introducing elements of a mixed economy. In September of 1993 the government announced that the state-run farms would be dismantled and replaced by worker-managed cooperatives. By the fall of 1994 Cuban fuel supplies had climbed back up, and the electricity shortages became brief and infrequent. The Cuban government also legalized the small business enterprises and farmers' markets. Food prices at these markets vary -- some are affordable for everyone, some too expensive for anyone not running a private business in dollars. But the presence of the markets meant that the food shortages were over -- and, perhaps as important, that the sense of shortage was over. The monotony of people's diets, the starkness, the sense of being limited to the goods "on the book," have by now given way to the far more tolerable project of just managing on a tight budget.

THE economic changes in Cuba go to the very structure of the Cuban economy. Joint ventures have been permitted since 1982, but for many years the foreign partner could not hold more than a 49 percent share unless there were exceptional circumstances. In 1992 the Cuban constitution was modified to recognize a variety of new forms of property. New kinds of foreign investment, Cuban corporations, and joint ventures were legalized. Foreign corporations were given the right to repatriate profits freely. The law was modified again in September of 1995, to permit foreign investment with up to 100 percent foreign ownership. Foreign investors are guaranteed full protection of their assets and the right to remove profits in hard currency. And they may also acquire and develop real estate, although they may not buy or develop residential properties for Cuban nationals. Foreign investment is permitted in all sectors of the economy except health, education, and the armed services.

Cuba's development strategy in the face of its economic crisis contrasts sharply with the policies of other countries in Latin America and the Third World. Typically, foreign investors come to Third World countries because there are far fewer environmental restrictions and protections for labor than in First World countries. A textile factory in Haiti can pay its employees twelve cents an hour. A factory in Cairo can pour untreated pollution into the air with little or no concern for environmental laws. Cuba, however, is trying to attract investment without making these tradeoffs. It requires foreign nationals to include in their investment proposals provisions for waste disposal and land use consistent with sustainable development. "Look," a Cuban economist told me, "in the end it means there will be more interest in foreign investment rather than less. If you build a multimillion-dollar hotel on the beach at Varadero, you want to have assurances that there won't be any chance of leaky oil tankers a half mile down, from some company doing oil exploration. It's one of the advantages of a centralized economy. We can actually make a company's investment more secure than it would be in an unregulated economy."

Employers can fire unsatisfactory employees and hire new ones through a government agency, although a worker can challenge a dismissal as unfair or discriminatory. Foreign companies, like all Cuban enterprises, are prohibited from discriminating on the basis of race, sex, or ethnicity.

The restructuring has now started to pay off. Furthermore, the increase in GDP reflects growth that is distributed broadly throughout the economy. In 1995 nickel production increased about 65 percent, tobacco 52 percent, and tourism 20 percent. Exports increased 20 percent, and imports 21 percent. Fifty thousand new homes are under construction. Cuba's biotechnology industry competes in the world market, with more than 160 products developed by fifty-three research centers, ranging from genetically engineered crop seeds that are disease-resistant to a vaccine for hepatitis B. The level of Cuban tourism is now greater than it was at its height in pre-revolutionary Cuba. In 1994 Cuba had 617,000 tourists, putting it on a par with Aruba and the U.S. Virgin Islands. In 1995 the number of tourists was conservatively estimated at 750,000. Income from tourism grew from $165 million in 1989 to more than $850 million in 1994 and to $1 billion in 1995. From January to April of last year -- the period in which the Cuban-American planes were shot down and the Helms-Burton bill was passed -- Cuba had 375,000 tourists, an increase of 44 percent from the same period the year before.

To say that Cuba is now inviting free enterprise does not really describe the country's economic restructuring. For the most part there are two different kinds of profit-based enterprises in Cuba: very large and very small. Foreign investors account for the very large, individual Cubans for the very small. Cubans obtain a license, for which they pay a fee based on the income anticipated for that type of business. A family might turn its living room into a small restaurant; someone with a car might start hiring it out as a taxi; a woman might make traditional Cuban pastries and sell them in her front yard. Thus there is now a substantial legal "informal sector."

The informal sector in Third World economies typically involves a high degree of economic insecurity. A highway intersection or a city sidewalk will be crowded with "entrepreneurs" hawking their wares -- parrots, mangoes, hubcaps, hood ornaments, U.S. dollars, computer parts, pistachios. On a bad day the entrepreneur may return home with no earnings at all, and his or her family will literally go hungry the next day. In Cuba, since everyone is already guaranteed that an extensive set of basic needs will be met, the income from the new private enterprises goes almost entirely for consumer goods. In the living room of a woman who serves dinner for four dollars is a Sony stereo system with enormous speakers, a new color television, and a VCR. A taxi driver is wearing a new leather jacket. Children playing at a home where pastries are sold in the yard are wearing new Nikes. Thus, ironically, for many Cubans private enterprise feels much the way ideologues of capitalism describe it: with economic freedom, they say, you are your own person, you earn what you earn, and you spend it as you like. Yet this is possible in Cuba only because and insofar as it has remained socialist.

During the 1980s the external debt of Third World countries increased enormously. In the face of their inability to meet debt-service requirements, and under pressure from the International Monetary Fund and the World Bank, many instituted "structural adjustment" programs, selling off any state enterprises that were profitable and reducing expenditures on food subsidies and health care for populations that were already living very marginally. The resulting profits and savings have generally gone not into social investment or job creation but into what Latin Americans call la deuda impagable -- "the unpayable debt." After the collapse of the Soviet bloc Cuba's future did not look bright. If it followed the road of dependent capitalism, it could expect to end up like Brazil or Guatemala, with pockets of extreme wealth alongside widespread poverty, starvation, unemployment, and violence -- in short, Cuba could expect to return to the way it was before the revolution. Instead Cuba has in seven years restructured its entire economy. But it has done so while maintaining its commitments to many socialist principles, including the belief that all members of society are entitled to food, housing, education, and medical care.

CUBA'S economic transformation has profound implications for the United States, particularly the U.S. business community. It is a country of 11 million people with middle-class tastes and a middle-class lifestyle, hungry for TVs, VCRs, Cuisinarts, and boom boxes. It has a healthy, stable, highly educated work force, useful to those seeking to establish complex manufacturing enterprises. Finally, it is now showing solid annual economic growth, and has already started investing again in its infrastructure. As the Cuban economy grows, companies from everywhere in the world -- except the United States -- will be selling consumer products, running resorts, and investing in agriculture, tourism, mining, and manufacturing. U.S. firms should not expect that much of the economic pie will be left for them five years from now -- or even two.

The U.S. embargo has cost Cuba a lot, but it has neither crippled the Cuban economy nor undermined Castro's leadership. And the embargo not only has failed to persuade the international community that Cuba should be "punished" but in fact has isolated us within the world community. The Torricelli bill of 1992 and the Helms-Burton bill of last year are widely considered to violate international law, in that they claim jurisdiction over -- and the right to impose penalties on -- foreign companies that choose to do business with Cuba. Because of the Torricelli bill the United States has been condemned by ever larger margins by the United Nations General Assembly each year since 1992 for interfering in Cuba's trade with other nations. The most recent vote, last November, was a scathing 138 to 3.

The Helms-Burton bill, which President Clinton signed into law last March, has alienated U.S. trading partners and allies further. The bill permits U.S. lawsuits against foreign companies if they make use of any property in Cuba that was confiscated from anyone who is now a U.S. citizen. If a Cuban plantation owner emigrated to the United States in 1959, and thirty-five years later a Spanish company built a hotel on the old plantation site, the émigré, if a U.S. citizen, can sue the Spanish company in a U.S. court for "trafficking in confiscated property." Thus the U.S. court is exercising jurisdiction over actions of a foreign company that took place in a foreign land, for the benefit of someone who was at the time of his loss a foreign citizen. Furthermore, the bill denies U.S. entry visas to executives of foreign companies (and their spouses and children) if their employers do business in Cuba involving properties that were owned by U.S. nationals prior to the revolution. The State Department has already denied visas to Canadian and Mexican business executives along with their families.

Helms-Burton in principle could force corporations from Argentina, Brazil, Canada, Great Britain, Italy, Mexico, Spain, and other countries simply to abandon their hotels, mines, and other investments in Cuba or to pay millions in damages to the prior owners from the 1950s.

Consequently the State Department predicted that the Helms-Burton legislation would have a "chilling effect" on Cuban commerce. But so far it has not. There have been few confirmed cases of companies pulling out, and there is every indication that the economic recovery continues to be solid. Last July, Cuba's Vice President announced that the nation's GDP for the first six months of the year grew by 9.6 percent. Even after the devastation done to the crops by Hurricane Lili in October, the GDP for 1996 is expected to show growth of at least five percent. Furthermore, Cuba has put in place new laws that will make foreign investment even more attractive. Last June, Cuba enhanced foreign companies' incentives to trade with the island when the National Assembly passed a law reducing tariffs on imported goods. A few weeks later the National Assembly passed another law, establishing free-trade zones and industrial parks, where businesses will receive huge tax breaks.

In recent years the United States has invoked international law to justify both the Persian Gulf War and the invasion of Panama. However, because of Helms-Burton now we are being widely condemned for violating international law and major trade accords such as GATT and NAFTA .

Last July, President Clinton tried to stave off the fury of U.S. allies and trading partners by suspending the implementation of the most controversial provisions of Helms-Burton for six months, although they are still valid law. Not surprisingly, our European trading partners have continued to show "unadulterated, undiluted anger," in the words of Stuart Eizenstat, of the Commerce Department. Last fall the European Union brought an action against the United States before the World Trade Organization. This was followed by retaliatory legislation from all fifteen EU states, prohibiting European countries from obeying the Helms-Burton provisions and permitting them to countersue American companies in European courts to recover any financial penalties imposed by U.S. courts. Canada and Mexico passed retaliatory legislation as well.

In the meantime, U.S. business is losing out: it is conservatively estimated that if the Cuban embargo were lifted today, the United States could export goods worth $1-$2 billion annually to the island. American goods have been making their way to Cuban consumers by a variety of routes for years -- U.S. companies sell goods to a non-U.S. distributor, who sells them to Cuba, or the goods are sometimes just smuggled in. Coca-Cola, California wines, Mr. Clean, Gerber baby food, Sylvania light bulbs, Quaker Oats -- all can be found in Cuba. U.S. companies are clearly eager to set up shop in Cuba. In 1990 representatives of more than 400 U.S. businesses visited Cuba; in 1995, 1,300 businesses visited. General Motors, Sears Roebuck, Avis, Hyatt, ITT Sheraton, Bank of Boston, Gillette, and Radisson Hotels are among the U.S. companies that have sent CEOs and representatives to Havana to look into future business opportunities. Dozens of U.S. firms have already signed letters of intent to do business if the embargo is lifted.

Up to this point both Congress and Clinton have been more interested in condemning Castro than in abiding by international law. But the furious protests from our major trading partners lead one to wonder how long Congress and the Administration can hold out. In this new game of chicken that we are playing with Cuba, the smart money in the international business community may well be on Cuba.

The Atlantic Monthly; January 1997; Cuba's Entrepreneurial Socialism; Volume 279, No. 1; pages 18-30.