Cuban President Miguel Diaz-Canel recently announced the most radical market liberalization in decades. Reforms are desperately needed: Cuba’s already stagnant economy has contracted 11 percent during the COVID-19 pandemic. US policymakers should encourage further reform by liberalizing US trade relations with Cuba.
Socialist economic systems are defined by state ownership and control of major industries, businesses and resources. Cuban socialism is no exception. Until recently announced reforms, private industry was limited to only 127 types of enterprises.
Reforms replace this list with a list of 124 activities prohibited for private enterprise. Unsurprisingly, politically sensitive industries such as education and news media remain outlawed, as do other major sectors such as healthcare and construction-related professions, including engineering and architecture. . However, according to the Cuban government, the reforms will allow self-employment and private companies in more than 2,000 professions.
Cuba has slowly licensed more private companies in tourism-related industries for years. Cubans were allowed to rent rooms in their apartments to visitors from 1997. Initially, no more than two rooms could be rented and contractors could not employ anyone other than their family in the rental business. These restrictions were then removed.
Likewise, private restaurants were allowed in 1993, but initially limited to 12 seats and banned to serve seafood and beef. In 2011, these restrictions were relaxed and the estimated number of private restaurants in Havana has increased from 74 to more than 2,000 by 2015. The reforms of the last decade have led to an estimated tripling of private sector employment, about 600,000.
When I was doing research for the book “Socialism sucks: two economists drink their way through the nonfree worldâ, Which I co-wrote, I slept and ate in Cuban hotels, residences and restaurants owned by the state and individuals. The incentive created by the profits to improve quality and service and to invest in capital improvements for the future was evident in private enterprises. Meanwhile, state-run businesses, which don’t depend on their customers for their survival, were run down, had poor service, and served horrible food.
However, even if the profits motivated restaurateurs to serve their customers better, owners were constrained by the limited supply they could get from the state-dominated supply chain. As a result, a Cuban sandwich, which is delicious in Miami, is just bland ham and cheese in Havana.
The new reforms are far from achieving the full liberalization that the Cuban economy needs. Thus, bottlenecks and inefficiencies will limit their ability to take full advantage of private enterprise, as I have experienced in Cuban restaurants. But as more and more sectors go private, over time these inefficiencies will decrease.
Cuba’s reform path could end up as China’s reform path, which Deng Xiaoping started in 1978. China has gradually allowed increasing amounts of free enterprise over more than a decade. First of all, town and village businesses were allowed and farmers could sell part of their crops in markets. Then, according to the book by Bradley M. Gardner, âThe Great Migration from China: How the Poor Built a Prosperous Nation,â self-employment and small businesses of up to seven people were allowed in urban areas. Gradually, these restrictions were relaxed and businesses grew. China’s private industry grew around an inefficient public sector and eventually overtook it to produce the majority of Chinese output. In the process, international trade with the United States and other developed countries has increased considerably.
The US government should encourage private sector growth in Cuba by repealing its 60-year-old embargo and allowing US companies to trade with newly freed Cuban entrepreneurs. This would help stimulate the growth of the Cuban private sector and could lead to further reforms. Economists Peter Leeson and Russell Sobel examined more than 100 countries from 1985 to 2000 and find that economic freedom extends from free countries to their less free but geographically close trading partners.
The decades-old embargo never overthrew the Castro regime. Instead, he only gave the Cuban government a scapegoat for the country’s economic problems largely. It’s time to change course and encourage Cuban economic freedom by ending the embargo and practicing free trade with the small but growing Cuban private sector.
Benjamin Powell, Principal Investigator at the Independent Institute, Oakland, Calif., Is Director of the Free Market Institute and Professor of Economics at Texas Tech University. “