93: Capitalism, Complexity and Cuba

Why uncertainty and failure is necessary for a functioning economy and why Cuba is embracing both in its struggle to reform its economy.

In this episode you’ll learn:

• Why the Cuba economy is struggling.
• Why Cuba is experiencing inflation.
• What is Cuba’s largest export.
• What Cuba is doing to reform its economy.
• Why you need uncertainty for a functioning economy.
• What are the qualities of a complex system .

Show Notes

In a reversal, Cuba tries price controls to tame inflation – Marc Frank – Daily Mail

Cuban Revelations: Behind the Scenes in Havana by Marc Frank

Complexity, Risk and Financial Markets by Edgar E. Peters

Summary Article

Cuba Embraces the Market

Rafael is a taxi driver in Trinidad, Cuba. He is sixty-five, but looks much younger. He drives a Fiat from the early 1960s. Its original motor has been replaced with a Russian Lada engine that cost Rafael the equivalent of $10,000. The taxi’s steering wheel is from an old Peugeot.

I met Rafael on my recent trip to Cuba. My son and I hired him to drive us to the old sugar mill plantations in the valley east of Trinidad.

Rafael is easy to talk with. We converse in Spanish about his family. He is quick to point out his twenty-one-year-old son passed away five years ago in a car accident. He shares how his son’s death has effected his wife’s mental health.

“She is very bad,” he says. “The doctor is giving her pills and they help some.”

This was her only son. Rafael has two other sons from a previous marriage, but he emphasizes again and again how this was her only son. He explains she suffered this great loss and its after effects after going through two episodes of breast cancer.

“La vida es muy, muy dura,” Rafael says. Life is very, very hard.

Rafael asks if we would mind if we stop at his house for a minute. He proudly shows us the garage which is next to the small cement house that is built right up to the street with no front yard.

He comes out in less than a minute with his wife. We get out of the car, and he introduces her to us. Rafael gives us two bananas and then invites us into the small living room to show us photographs of their deceased son that hang on the wall.

We have known Rafael for less than five minutes and yet he invites us into his home and is giving us gifts.

A Welcoming People

Rafael is not the exception. The Cuban people are incredibly warm and welcoming. There were many that approached us to strike up conversations.

Some just wanted to talk. Others had things they wanted to show us, such as a local museum or a good restaurant. Some asked for donations of money or pencils to help out the children, but everyone did so with charm.

The Cubans are some of the most engaging salespeople I know. They are quick to gain your trust, ask about your life at home, shares stories of their own country and for those that have something to sell, they will present their proposal in such a compelling way it is difficult to say no.

That is why my son and I spent a third of our money on our first day in Havana, including on a box of Cohiba Esplendidos cigars. And we don’t even smoke.

This in a country where ATM’s don’t work for Americans due to the trade embargo the U.S. has had in place with Cuba since 1960. If we ran out of cash, there was nowhere to get more.

There is a billboard near the Plaza de la Revolucion in Havana that has a picture of a noose around a relief map of Cuba. The wording says, “The embargo: the biggest genocide in history.”

Homegrown Economic Problems

There is no doubt the U.S. trade embargo had made life more difficult for the average Cuban. Most of the classic American cars that cruise the streets of Havana are no longer propelled by American engines due to lack of parts. We rode in a 1941 Buick that was outfitted with a six cylinder Argentinian diesel motor.

Yet, in the last few years the Cuban government has admitted that most of the country’s economic problems are homegrown and not due to the trade embargo. The government acknowledges its state-run businesses are inefficient, there is too much red tape and many of its rules are archaic and make no sense.

Why are there so many classic American and European cars in Cuba? Because until 2011 it was illegal for Cubans to buy and sell cars made before 1959 without special government permission.

Cubans still aren’t allowed to buy new cars. In 2011, Cubans were allowed to buy and sell houses for the first time. A taxi driver in Miami laughed about how his aunt in Havana had just sold her house and was walking around with $27,000 in cash, more money than she could ever have dreamed she would have.

Of course, there isn’t much she could buy with her house proceeds because in Cuba there isn’t much for sale.

Little To Buy

On our last night in Havana, we stayed in the house of Carlos and Janett. They have been renting out their home as a bed and breakfast for two years. These “casas particulares” are all over Cuba and before 2011 were one of only two private businesses Cubans were legally allowed to operate. The other are private restaurants.

A third business that allowed retired tobacco factory workers to sell Cuban cigars at half price two days per month turned out to be hearsay.

Carlos, our host, mentioned how he now had money to buy things but there wasn’t anything for sale. Not even a good lamp.

That is one thing you notice as you travel in Cuba. There are very few stores.

That will be changing. Cuba, a country where 70% of the people work for the state or state-owned businesses, is undergoing a monumental change.

Hundreds of thousands of people are being laid off from their state jobs with the expectation they will work for themselves in the private sector.

Most retail services are passing over to private or semi-private hands (i.e. through cooperatives or leasing from the state) and will operate on a market basis, including being allowed to fail. Even state enterprises now have to operate on a market basis.

Learning From Capitalists

In 2010, Cuban President Raul Castro spoke the following before the National Assembly as he introduced the economic reforms,

“The construction of a new society from an economic point of view is, in my modest opinion, also a journey into the unknown—the undiscovered…. We do not intend to copy from anyone again; that brought enough problems to us because, in addition to that, many a time we also copied badly…. However, we shall not ignore others experiences and we will learn from them, even from the positive experiences of capitalists.”

Things are changing in Cuba even as the U.S. trade embargo remains in place.