Cuban President Miguel Diaz-Canel recently announced the country’s most sweeping market liberalization in decades. The reforms are desperately needed: Cuba’s already stagnant economy has contracted 11 percent during the COVID-19 pandemic. U.S. policy makers should encourage further reform by liberalizing America’s trade relations with Cuba.
Socialist economic systems are defined by state ownership and control of the major industries, businesses and resources. Cuban socialism is no exception. Until the recently announced reforms, private industry was restricted to only 127 types of businesses.
The reforms replace that list with a list of 124 activities prohibited to private enterprise. Not surprisingly, politically sensitive industries such as education and the news media remain prohibited, as do other major sectors like health care and construction-related professions, including engineering and architecture. However, according to the Cuban government, the reforms will allow self-employment and private enterprises in more than 2,000 professions.
Cuba has slowly allowed more private enterprise in tourist-related industries for years. Cubans were allowed to rent out rooms in their apartments to visitors starting in 1997. Initially, no more than two rooms could be rented out and entrepreneurs could employ no one outside of their family in the rental business. These restrictions were later eliminated.
Similarly, private restaurants were allowed in 1993, but initially were limited to 12 seats and prohibited from serving seafood and beef. In 2011 these restrictions were relaxed and the estimated number of private restaurants in Havana alone grew from 74 to more than 2,000 by 2015. Reforms over the last decade have led to an estimated tripling of private-sector employment, to about 600,000.
When I was conducting research for the book “Socialism Sucks: Two Economists Drink Their Way Through the Unfree World,” which I co authored, I slept and ate in both state-owned and privately run Cuban hotels, residences and restaurants. The incentive created by profits to improve quality and service and to invest in capital improvements for the future was evident in the private businesses. Meanwhile, state-run businesses, which do not depend on their customers for their continued existence, were run-down, had poor service and served awful food.
However, even though profits motivated restaurant owners to better serve their customers, owners were constrained by the limited supplies 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 fall far short of the full liberalization that the Cuban economy needs. So bottlenecks and inefficiencies will limit their ability to achieve the full benefits of private enterprise, much as I experienced in Cuban restaurants. But as more sectors become private, overtime, these inefficiencies will diminish.
Cuba’s path to reform may end up like China’s reform path, which Deng Xiaoping began in 1978. China gradually allowed increasing amounts of free enterprise over more than a decade. First, town and village enterprises were allowed and farmers could sell a portion of their crops in markets. Then, according to Bradley M. Gardner’s book, “China’s Great Migration: How the Poor Built a Prosperous Nation,” self-employment and small businesses of up to seven people were allowed in urban areas. Gradually these restrictions were loosened and firms grew. Chinese private industry expanded around an inefficient state sector and eventually overtook it to produce the majority of China’s output. In the process, international trade with the United States and other developed countries grew substantially.
The U.S. government should encourage the growth of the private sector in Cuba by repealing its 60-year-old embargo and allowing U.S. businesses to trade with the newly freed Cuban entrepreneurs. That would help spur growth in Cuba’s private sector and might lead to additional reforms. Economists Peter Leeson and Russell Sobel looked at more than 100 countries from 1985 to 2000 and found that economic freedom spreads from free countries to their less-free but geographically close trading partners.
The decades old embargo never unseated the Castro regime. Instead, it only gave the Cuban government a scapegoat for the country’s largely homegrown economic troubles. It is 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.